<PAGE> 1
As filed with the Securities and Exchange Commission on November 7, 1997
Registration No. 333-25425
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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DYNAMIC INTERNATIONAL, LTD.
(Name of issuer in its charter)
<TABLE>
<S> <C> <C>
Nevada 5099 93-1215401
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code) Identification Number)
</TABLE>
58 Second Avenue Marton Grossman, President
Brooklyn, New York 11215 58 Second Avenue
718-369-4160 Brooklyn, New York 11215
718-369-4160
(Address and telephone number (Name, address and telephone
of registrant's principal executive number of agent for service)
offices and principal place of business)
------------------------------------
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
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
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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
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<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
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Common Stock underlying B Warrants(3) 1,380,000 $10.00 $13,800,000 $4,181.82
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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 ____ ____ ____
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Common Stock underlying A Warrants(3) 120,000 $9.90 $1,188,000 $360.00
included in the Underwriter's Warrants
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Common Stock underlying B Warrants(3) 120,000 $16.50 $1,980,000 $600.00
included in the Underwriter's Warrants
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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
Registration Statement Prospectus Caption
Item and Heading or Location
---------------------- ------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus................................. Inside Front and Outside
Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.................. Prospectus Summary, Risk
Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Cover Page, Risk Factors,
Underwriting
6. Dilution...................................... Dilution
7. Selling Security Holders...................... Not Applicable
8. Plan of Distribution.......................... Underwriting
9. Description of Securities to be Registered.... Description of Securities
10. Interests of Named Experts and Counsel........ Legal Matters; Experts
11. Information With Respect to Registrant........ Business; Selected
Financial Data; Management
Discussion and Analysis of
Financial Condition and
Results of Operations
12. Disclosure of Commission Position
on Indemnification for Securities Act
Liabilities................................... Disclosure of Commission
Position on
Indemnification for
Securities Act Liabilities
3
<PAGE> 4
SUBJECT TO COMPLETION DATED NOVEMBER 7, 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 through Patterson Travis, Inc., the underwriter for the offering (the
"Underwriter") 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] (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 be quoted in the OTC Bulletin Board Service 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. While the Company's application for initial inclusion on the Nasdaq
SmallCap Market ("Nasdaq") was denied, the Company intends to pursue such
application, including a possible appeal of the decision. There can be no
assurance that the Company's securities will be listed on Nasdaq or that an
active public market will develop after the completion of this offering. See
"Risk Factors-No Assurance for Public Market for the Units, Common Stock or
Warrants." The offering price of the Units and the exercise price of the
Warrants have been arbitrarily determined by the Company and the Underwriter and
do not necessarily bear any relationship to the Company's assets, book value,
results of operations or other generally accepted criteria of value.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 6 AND
12, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Public Underwriting Discount(1) Proceeds to Company
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Per Unit $5.00 $0.50 $4.50
(2)
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Total $6,000,000 $600,000 $5,400,000
================================================================================
(1) Does not include additional compensation to the Underwriter in the
form of (a) a non-accountable expense allowance of three percent of the
gross proceeds of this offering and (b) warrants, purchasable at a nominal
price, to acquire 120,000 Units at an initial exercise price of $8.25 per
Unit (the "Underwriter's Warrants"), subject to adjustment in the event of
issuances of securities by the Company below the then current exercise
price of the Underwriter's Warrants, or a reorganization, consolidation,
merger or similar corporate transaction involving the Company. Also, under
certain circumstances, in accordance with NASD rules and regulations, the
Underwriter will receive a warrant solicitation fee equal to 8% of the
exercise price of the Warrants it causes to be exercised (or $1,536,000,
assuming exercise of all Warrants). In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, and to retain
the Underwriter as a financial consultant for the two years following the
closing of this offering for an aggregate fee of $20,000 payable at
closing. See "Underwriting."
(2) For the purpose of covering over-allotments, if any, the Company has
granted to the Underwriter an option, exercisable within forty five days
of the date hereof, to purchase up to an additional 180,000 Units upon the
same terms and conditions as the Securities offered hereby. If such
over-allotment option is exercised in full, the Total Price to Public will
be $6,900,000, the Total Underwriting Discount will be $690,000 and the
Proceeds to the Company will be $6,210,000. See "Underwriting." PATTERSON
TRAVIS, INC. The date of the Prospectus is ________, 1997.
PATTERSON TRAVIS, INC.
The date of the Prospectus is ________, 1997.
<PAGE> 5
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Securities are being offered on a "firm commitment" basis subject to
receipt and acceptance of the Securities by the Underwriter, subject to approval
of certain legal matters by its counsel and subject to prior sale. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities will be made at the offices of the
Underwriter against payment therefor in New York on or about _________, 1997.
ADDITIONAL INFORMATION
The Company has filed with the headquarters office of the Securities and
Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act of 1933 with respect
to the Securities offered hereby. This Prospectus filed as part of such
Registration Statement does not contain all the information set forth in, or
annexed as exhibits to, the Registration Statement. For further information
pertaining to the Securities offered hereby and the Company, reference is made
to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits thereto may be inspected at the Headquarters Office of
the Securities and Exchange Commission located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at certain of the Commission's regional offices
at the following addresses: 7 World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may be obtained from the Public Reference Section of the SEC,
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. at prescribed rates. The
Commission also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants such as the
Company, that file electronically with the Commission. This material can be
found at http://www.sec.gov.
2
<PAGE> 6
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PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before making
any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors" and in the financial statements and related notes appearing
elsewhere in this Prospectus. In addition, prospective investors should consult
their own advisors in order to understand fully the consequences of an
investment in the Company. Unless indicated otherwise, the information contained
herein gives effect to a one for five reverse split of the Company's issued and
outstanding Common Stock that was completed in September 1997 (the "Reverse
Stock Split"). The following summary does not purport to be complete and is
qualified by the more detailed information appearing elsewhere in this
Prospectus.
The Company
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP(R). In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH(R) and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
Plan of Reorganization
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Reform Act of 1978 (the "Bankruptcy Code").
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors received partial satisfaction of their claims. MG
Holdings Corp. ("MG Holdings"), which had purchased a promissory note from the
Company's principal lender, received 2,976,000 shares of Common Stock in full
satisfaction of the promissory note. The number of shares issued to MG Holdings
represented 93% of the issued and outstanding shares. As a result, MG Holdings
acquired absolute control over the Company's affairs. MG Holdings is
wholly-owned by Marton Grossman, the Company's Chairman and President. See
"Principal Stockholders" and "Certain Relationships and Related Transactions."
In addition, as part of the plan of reorganization, the Company, then known as
DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of
changing its state of incorporation. See "Business--Plan of Reorganization" and
"--Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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3
<PAGE> 7
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The Offering
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 Symbols
Units..................... DYNIU
Common Stock............... DYNI
Warrants................... DYNIW
- ----------
(1) The A Warrants will be exercisable at $6.00 per share for a period of 18
months from the date of this Prospectus. The B Warrants will be
exercisable at $10.00 per share for a period of three years from the date
of this Prospectus. The Warrants will be redeemable at $.01 per Warrant
upon the giving of thirty (30) days prior written notice provided that the
price of the Common Stock has equaled or exceeded $9.00 with respect to
the A Warrants and $15.00 with respect to the B Warrants for any ten
trading days within a period of 30 consecutive trading days.
(2) Assumes the Underwriter's over allotment option for 180,000 Units is not
exercised. See "Underwriting." Excludes (i) up to 2,400,000 shares of
authorized but unissued Common Stock reserved for issuance upon exercise
of the Warrants included in the offering (ii) up to 120,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrants; (iii)
up to 240,000 shares of Common Stock issuable upon exercise of the
Warrants underlying the Underwriter's Warrants; (iv) up to an additional
540,000 shares of Common Stock (including 360,000 shares of Common Stock
underlying warrants) issuable upon exercise of the Underwriter's
over-allotment option; and (v) 2,000,000 shares of Common Stock issuable
to Mr. Grossman, the Company's Chairman and President over a three year
period, provided the Company meets certain earnings criteria. See
"Description of Securities," "Underwriting" and "Management."
Benefits of Offering to Company's Chairman and President
A portion of the proceeds of this offering will be used for the benefit of
affiliates of the Company. Specifically, approximately $1.2 million will be paid
to MG Holdings, which is wholly owned by the Company's Chairman and President,
in repayment of loans, including accrued interest, made during the Company's
Chapter 11 proceedings. See "Use of Proceeds" and "Certain Relationships and
Related Transactions."
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4
<PAGE> 8
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Summary Financial Information
Set forth below are selected financial data with respect to the Company
for the three months ended July 31, 1997, the nine months ended April 30, 1997,
the three months ended July 31, 1996, and the years ended April 30, 1996, 1995
and 1994. These data should be read in conjunction with the financial statements
of the Company and the related notes included elsewhere herein. Effective August
8, 1996, the Company emerged as the surviving entity in a merger with DCL. The
balance sheet of the combined entity was substantially similar to that of DCL
immediately prior to the merger. As a consequence, the financial data of the
Company for the reporting periods prior to July 31, 1996 consist of those of
DCL.
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------------------------------- --------------------------------------------------------
Year ended April 30
-------------------
3 Months
Ended 9 Months Ended 3 Months Ended
July 31, 1997 April 30, 1997 July 31, 1996 1996 1995 1994
------------- -------------- -------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $1,834,162 $7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353
Income/(Loss) for
period 38,665 119,399 (76,364) 6,945,299 (11,227,335) 244,308
Net Income per
Share .01 .04
<CAPTION>
Selected Balance July 31, 1997
Sheet Data: July 31, 1997 As Adjusted(1) April 30, 1997
- ---------- ------------- -------------- --------------
Working Capital
(Deficit) $(221,664) $4,823,901 $(45,789) $(293,884) $(7,493,435) $3,094,821
Total Assets 4,628,741 8,606,657 4,807,062 4,253,396 6,414,185 16,677,772
Long term
obligations,
including
capitalized lease
obligations 54,435 -0- 215,254 23,965 116,124 127,877
</TABLE>
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(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."
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5
<PAGE> 9
RISK FACTORS
The purchase of the Securities offered hereby involves a high degree of
risk, including, but not necessarily limited to, the risks described below.
Before subscribing for the Securities offered hereby, each prospective investor
should consider carefully the general investment risks enumerated elsewhere in
this Prospectus and the following risk factors, as well as the other information
contained in this Prospectus.
Emergence from Bankruptcy. In August 1995, the Company filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. In May 1996, the
Bankruptcy Court approved a plan of reorganization pursuant to which creditors
received partial satisfaction of their claims. The Company believes that the
losses that led to the bankruptcy proceedings were caused by the manufacturing
defects and poor construction of treadmills and rowing machines delivered to the
Company by its manufacturers. As a result, the Company has abandoned the sale of
these products. Nevertheless, there can be no assurance that the Company has
accurately identified the precise source of its financial problems and that it
has sufficiently addressed such problems. Any failure by the Company to
adequately deal with its financial difficulties may lead to new problems that,
as in the past, may have a material adverse impact on the condition and
prospects of the Company. In addition, there can be no assurance that the
Company will be able to fully recover from the bankruptcy proceedings and regain
acceptance as a reputable company. Further, the Company's bankruptcy proceedings
may hamper its ability to establish new relationships with commercial lenders
and, as a result, complicate its efforts to obtain financings. See
"Business--Plan of Reorganization."
Shifting Consumer Preferences. The market for exercise and luggage
products is impacted by short-term trends. Therefore, the business of designing,
manufacturing and marketing such products is highly susceptible to fast changing
consumer preferences. The Company's sports bag/luggage business is greatly
affected by demographic trends, frequent shifts in prevailing fashions and
styles and retailer practices. The Company's success in this area is dependent
on its ability to quickly and effectively initiate and/or respond to changes in
market trends and other consumer preferences. The ongoing competitive nature of
the luggage industry presents a continuous risk that new products may emerge and
compete with the Company's existing sports bags/luggage products.
Similarly, the success of the Company's exercise products is mostly a
product of the perceived needs by consumers to improve their health and fitness.
In addition, the type of exercise equipment used by consumers may vary from time
to time based on which part of the body is perceived by consumers to require the
most exercise and how such consumers believe they may attain maximum results
from their efforts to stay fit. Therefore, the Company's ability to market its
exercise equipment will be dependent on its ability to anticipate consumers'
perceived fitness needs.
Dependence on Affiliated Parties. Pursuant to an unwritten understanding,
Achim Importing Co. ("Achim") arranges for the issuance by its financial lender
of letters of credit in favor of the Company's overseas suppliers thereby
enabling the Company to finance the purchases of its inventory. Also, from time
to time, when taking deliveries from domestic suppliers, Achim purchases
products from the manufacturer and resells them to the Company in order to
accommodate Achim's commercial lenders who often require a security interest in
the merchandise until it has been sold and the lender has been repaid. The
Company pays Achim for the amount actually paid to the supplier (including any
applicable discounts) without markup, reimburses Achim for its bank charges and
pays it interest at the prime rate plus one percent on the unpaid balance of the
purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in
principal and interest under this arrangement. As of September 30, 1997, this
sum had decreased to $1,440,476. See "Certain Relationships and Related
Transactions." The weighted average interest rate paid by the Company to Achim
at September 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and
11.5%, respectively. Achim is wholly owned by Mr. Marton Grossman, the Company's
Chairman and President. If Achim were to terminate this arrangement for any
reason, the Company would be forced to arrange for its own commercial financing
which would likely result in higher interest rates, fees and other charges, and
which would therefore have a material adverse effect on the ability of the
Company to purchase inventory and finance its operations.
6
<PAGE> 10
In addition, all of the Company's assets are subject to a lien in favor of
MG Holdings, an entity that is wholly owned by Mr. Grossman, to secure repayment
of a promissory note in the principal amount of approximately $1,200,000. This
sum represents debtor in possession financing advanced by MG Holdings pursuant
to an order by the Bankruptcy Court.
Also, the Company is party to an agreement pursuant to which Achim assists
the Company in the performance of a great number of administrative functions,
including, among other things, the maintenance of financial and accounting books
and records, the preparation of monthly financial accounts receivable aging
schedules and other reports and the performance of credit checks on the
Company's customers. In consideration for these services, Achim receives an
annual fee, payable monthly, calculated as a percentage of the Company's
invoiced sales originating at the warehouse ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. For sales not
originating at the warehouse, Achim receives a service fee in the amount of 1.5%
of the Company's invoiced sales to customers and accounts located in the United
States if payment is made by letter of credit and 1% if such customers and
accounts are located outside the United States, irrespective of manner of
payment. Achim also provides warehousing services consisting of receiving,
shipping and storing of the Company's merchandise. The Company pays a monthly
fee of 3% of the Company's invoiced sales originating at the warehouse in
connection with the warehousing services performed by Achim under this
agreement. Achim's business is unrelated to the Company's business, and it does
not render to any other entity services similar in nature to the services
performed for the Company.
Further, the Company's offices and warehouse are made available to it on a
rent-free at will basis by Achim which leases the property from Sym Holding, an
entity controlled by Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary. See "Business - Management Agreement with Achim Importing Co.,"
Properties" and "Certain Relationships and Related Transactions."
Consumer Acceptance of the Company's Products. The Company's revenues are
substantially dependent on its sports bag/luggage products. The marketing
success of those products depends, among other things, upon rapidly changing
consumer acceptance, which is difficult to predict and over which the Company
has little, if any, control. In addition, the upscale market for sports
bags/luggage products is dominated by name brands and fashion designers with
wide name recognition and consumer acceptance. As a result, the Company's
ability to market its products and effectively compete is mostly dependent on
its ability to anticipate consumer preferences and design luggage products that
will appeal to its customers. Although the Company believes that it has the
ability and experience to recognize potentially valuable products and to gauge
trends in the sports bags/luggage business, no assurance can be given that the
Company will at all times be able to make accurate predictions as to the
preference of its customers.
Reliance on Licenses. The market for exercise equipment is dominated by a
number of well known name brands. Although the Company believes that its
licenses with respect to the trademarks SPALDING and KATHY IRELAND provide it
with some of the most prominent names in exercise equipment, the Company's
success in marketing its exercise products will be greatly dependent on its
continuing right to use these trademarks as well as its ability to secure
additional licenses. Any interruption in the Company's rights to use certain
trademarks, including SPALDING and KATHY IRELAND, may have a materially adverse
impact on the Company's revenues. See "Business--Intellectual Property--License
Agreements."
Dependence on Foreign Suppliers. Approximately 75% of the Company's
products are manufactured overseas, notably in the Far East. The Company's
arrangements with foreign suppliers are subject to the risks of doing business
abroad, including currency fluctuations and revaluations, restrictions on the
transfer of funds and, in certain parts of the world, political instability,
changes in import duties and quotas, disruptions or delays in shipments and
transportation and labor disputes. The Company is also exposed to risks
associated with changes in the laws and policies that govern foreign investment
in countries where it acquires inventory and, to a lesser extent, changes in
U.S. laws and regulations relating to foreign trade and investment. While the
Company believes that alternative sources
7
<PAGE> 11
of supply are available, any serious disruptions could materially impair the
Company's ability to deliver exercise and sports bag/luggage products in a
timely manner. See "Business--Products."
Seasonality. The Company's business is highly seasonal with higher sales
typically in the second and third quarters of the fiscal year as a result of
shipments of exercise equipment and sports bag/luggage related to the holiday
season. Although the Company does not believe that the effects of seasonality
have had a material impact on the Company to date, seasonality of the business
requires advance planning and other special preparations to fully benefit from a
short period during which most of the Company's revenues are generated. If the
Company fails to generate sufficient revenues during this period, this may have
a material adverse impact on the Company's business. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
Potential Need for Additional Financing. The Company anticipates that the
proceeds from this offering together with the projected cash flows from
operations and the availability of the Achim credit line will be sufficient to
fund its contemplated cash requirements for the twelve months following the
consummation of this offering. Nevertheless, significant additional funding may
be required following this offering in order for the Company to further expand
the marketing of its products. Therefore, the Company will likely be required to
raise additional funds through alternative financing methods. There can be no
assurance that the Company will be able to obtain additional funding when
needed, or that such funding, if available, will be obtainable on terms
acceptable to the Company.
Dependence on Key Personnel. The success of the Company depends in part
upon the successful performance of the Company's Chief Executive Officer and
Chairman, who is 66 years old, for the continued marketing and operation of the
Company. The Company does not have an employment agreement with Mr. Grossman,
who spends approximately 20% of his time working for the Company. Although the
Company has employed, and will likely employ in the future, additional qualified
employees, if Mr. Marton Grossman fails to perform his duties for any reason,
the ability of the Company to market, operate and support its products may be
adversely affected. The Company is currently investigating the possibility of
obtaining key-man life insurance on the life of Mr. Grossman. See "Management."
Competition. Although the Company believes that the products it sells are
unique in several ways, there are other companies that have similar products,
many of which companies have substantially greater financial and other resources
than the Company. Moreover, there can be no assurance that there are no products
that would compete effectively with the Company's proposed products or that
other companies, many of which have financial resources, marketing staffs and
facilities greater than those of the Company, are not currently developing, or
in the future will not develop, products that may have advantages over the
Company's proposed products or that may undercut what the Company believes are
the advantages of the Company's products. See "Business - Competition."
Dependence on Principal Customers. For the year ended April 30, 1997,
K-Mart and Service Merchandise accounted for approximately 25% and 13%,
respectively, of the Company's sales. Although the Company intends to diversify
its customer base in the future, any significant decline in sales to the
Company's principal customers could have a material adverse effect on the
Company. The Company has no written agreements with any of its customers. See
"Business."
Need to Increase Marketing Capability. In order to achieve continued
growth following the offering, the Company will need to expand its marketing and
sales and develop a network of marketing and sales representatives. There can be
no assurance that the Company will be able to build such a marketing staff or
sales force, that the cost of establishing such a marketing staff or sales force
will not exceed any product revenues, or that the Company's direct sales and
marketing efforts will be successful. Alternatively, the Company may enter into
co-marketing or other licensing arrangements. To enter into co-marketing or
other licensing arrangements, the Company must establish and maintain corporate
relationships. There can be no assurance that such corporate relationships can
be established or maintained on terms acceptable to the Company, if at all. To
the extent the Company enters into co-marketing or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that such efforts will be successful.
Although the Company believes
8
<PAGE> 12
that future corporate partners, if any, will have an economic motivation to
commercialize any such products, the Company may not have any direct control
over such partners' commercialization efforts. Neither Achim nor any party
related to Messrs. Marton and Isaac Grossman presently intends to provide
marketing services to the Company. See "Business."
Limited Liability Insurance. The marketing and sale of the Company's
products entails a risk of product liability claims and claims of omission by
consumers and others. The Company has a general policy of disclaiming liability
arising from its products. The Company also maintains liability insurance which
provides for coverage of up to $10,000,000 per occurrence. Nevertheless, in the
event of a successful liability claim against the Company, there can be no
assurance that the current insurance coverage will be adequate. Any successful
liability claim that exceeds the Company's insurance coverage could have a
material adverse effect on the Company.
Dilution; Cheap Stock. Purchasers of the Units offered hereby will
experience immediate and substantial dilution in the net tangible book value of
shares of Common Stock (including the shares underlying the Warrants) included
in the Units in that the net tangible book value of such shares will be
substantially less than the offering price per share of such shares.
Specifically, the investors in this offering will experience immediate dilution
of $3.87 per share of Common Stock, or approximately 77% of the $5.00 offering
price. In addition, since the current stockholders of the Company have acquired
their respective equity interests at a cost substantially below the offering
price, the public investors will bear most of the risk of loss. See "Dilution."
Voting Control; Potential Anti-Takeover Effect. After the completion of
this offering, the Company's current principal stockholders and the executive
officers and directors of the Company will beneficially own approximately 68% of
the Company's outstanding Common Stock and, accordingly, will be able to
continue to elect all of the directors and, therefore, to absolutely control the
Company's affairs. As a result of the absolute control exercisable by current
management, potential takeover bids for the Company may be deterred. This may
have a depressive effect on the price of the Securities offered hereby. In
addition, the Company has agreed to issue to its Chairman and President an
additional 2,000,000 shares of Common Stock over a three year period if the
Company meets certain earnings criteria. See "Security Ownership of Certain
Beneficial Owners and Management" and "Management."
No Payment of Dividends. The Company has not paid any dividends on its
Common Stock. For the foreseeable future, the Company anticipates that earnings,
if any, that may be generated from the Company's operations will be used to
finance the growth of the Company and that cash dividends will not be paid to
holders of the Common Stock. See "Description of Securities."
Arbitrary Determination of Offering Price and Warrant Exercise Price. The
offering price of the Units and the exercise price of the Warrants have been
arbitrarily determined by negotiation between the Company and the Underwriter
and do not necessarily bear any relationship to the assets, book value,
operating or financial results or net worth of the Company or other generally
accepted criteria of value and should not be considered as indicating any
intrinsic value for the Securities. See "Underwriting."
No Assurance of Public Market for the Units, Common Stock or Warrants.
Prior to the Company's filing for protection under the Bankruptcy Code, the
Company's securities were traded on Nasdaq. However, immediately prior to this
offering, there was no active public market for the Units, Common Stock or
Warrants, and there can be no assurance that such markets will develop or, if
developed, will be sustained after completion of this offering. While the
Underwriter has informed the Company that it will endeavor to make a market in
the Units and, after the Separation Date, the Common Stock and Warrants, there
can be no assurance that a trading market will develop or be sustained or that
the securities offered hereby will be saleable at or near their offering price.
In the event the Underwriter, for any reason, ceases making a market in the
Company's securities, the trading market in the Company's securities will likely
be materially adversely affected. See "Underwriting."
9
<PAGE> 13
The Company has been advised by the Underwriter that it has made
application to initiate quotation of the Securities in the OTC Bulletin Board
Service. Currently, no active public market exists for the Units, Common Stock
or Warrants. While the Company's application for initial inclusion on the Nasdaq
SmallCap Market was denied, the Company intends to pursue such application,
including a possible appeal of the decision. There can be no assurance that an
active public market will develop after the completion of this offering or that
the Company will be successful in its appeal to have the Securities included on
the Nasdaq.
Exercise of Warrants Subject to Current Effective Registration and
Qualification. Any exercise of the Warrants must be made pursuant to a
prospectus which is current at the time of exercise. The Company has agreed to
use its best efforts to maintain a current effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), relating to
the Common Stock issuable upon exercise of the Warrants. If the Company is
unable to maintain a current registration statement for any reason, the Warrants
may not be exercised. Although the Securities offered hereby will not knowingly
be sold to purchasers in jurisdictions in which they are not registered or
otherwise qualified for sale, purchasers may buy Warrants in the aftermarket
which may develop for the Warrants in, or purchasers of the Warrants may move
to, jurisdictions in which the shares of Common Stock underlying the Warrants
are not registered or qualified during the period when the Warrants are
exercisable. In such event, the Company would be unable to issue shares to those
persons desiring to exercise their Warrants unless and until the shares could be
registered or qualified for sale in jurisdictions in which such purchasers
reside, or an exemption to such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any required
registration or qualifications. See "Description of Securities - Warrants."
Possible Depressive Effect of Rule 144 Sales. Approximately 2,976,000
shares of Common Stock may be deemed to be "restricted securities" under Rule
144 promulgated under the Securities Act. Under Rule 144, such shares may be
publicly sold immediately, subject to volume restrictions (i.e. during any three
month period an amount equal to the greater of the average weekly trading volume
for the four weeks preceding the date of sale or 1% of the then outstanding
shares). Any such sales could have a depressive effect on the market price for
the Securities being offered hereby. Approximately 93% of the currently issued
and outstanding shares are owned by a series of trusts for the benefit of
relatives of Marton Grossman. Isaac and Sheila Grossman are among the trustees
of these trusts. Although no lock-up agreements are in effect with respect to
any of such shares of Common Stock, the Company has been advised that there is
no current intent to resell any of such securities. See "Description of
Securities - Shares Available for Future Sale" and "Security Ownership of
Certain Beneficial Owners and Management."
Investors should be aware that sales of the Company's Common Stock
pursuant to options and warrants may have a depressive effect on the price of
the Common Stock and the Warrants, and that the issuance of additional shares of
Common Stock upon the exercise of options, warrants, the Warrants and the
Warrants included in the Units underlying the Underwriter's Warrants will also
dilute the proportionate ownership of the then current stockholders of the
Company. See "Description of Securities--Warrants."
Possible Issuance of Substantial Amounts of Additional Shares Without
Stockholder Approval. After this offering, the Company will have a large number
of shares of Common Stock authorized but unissued and reserved for issuance
pursuant to (i) exercise of the Warrants being offered hereby, (ii) exercise by
the Underwriter of the Underwriter's Warrants and the exercise of the Warrants
included in the Units underlying the Underwriter's Warrants (the Underwriter's
Warrants, including the underlying Units, the Common Stock and the Warrants
included therein are collectively sometimes referred to herein as the
"Underwriter's Securities"), and (iii) an agreement to issue an aggregate of
2,000,000 shares of Common Stock to the Company's Chairman and President over a
three-year period, provided the Company meets certain earnings criteria. All of
such shares and any additional shares may be issued without any action or
approval by the Company's stockholders. Although, other than as set forth in the
previous sentence, there are no present plans, agreements, commitments or
undertakings with respect to the issuance of 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."
10
<PAGE> 14
In addition, the Company is authorized to issue 10,000,000 shares of
Preferred Stock of which, as of the date hereof, none are outstanding. Shares of
Preferred Stock are issuable at any time and from time to time, by action of the
Board of Directors without further authorization from the Company's
stockholders, except as otherwise required by applicable law or rules and
regulations to which the Company may be subject, to such persons and for such
consideration as the Board of Directors determines. The issuance of preferred
stock by the Board of Directors could adversely affect the rights of the holders
of Common Stock. For example, such issuance could result in a class of
securities outstanding that would have preferences with respect to voting rights
and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue preferred stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to achieve. There are no agreements
or understandings regarding the issuance of preferred stock.
Underwriter's Warrants. In connection with this offering, the Company will
sell to the Underwriter for a nominal amount, warrants to purchase up to 120,000
Units. The Underwriter's Warrants will be exercisable commencing one year after
the effective date of this Prospectus and will continue to be exercisable until
five years from the date hereof at an exercise price of $8.25 per Unit, with the
Class A Warrants and Class B Warrants underlying the Units included in the
Underwriter's Warrants allowing the purchase of Common Stock at $9.90 and $16.50
per share, respectively. As long as the Underwriter's Warrants are outstanding,
the terms on which the Company could obtain additional capital may be adversely
affected because the holder of the Underwriter's Warrants might be expected to
exercise them if the Company were able to obtain any needed additional capital
in a new offering of securities at a price greater than the exercise price of
the Underwriter's Warrants. See "Underwriting."
Potential Adverse Effect of Redemption of Warrants. The Class A Warrants
and the Class B Warrants are redeemable by the Company at $.01 per Warrant on
thirty day's prior written notice at any time provided that the average closing
bid price for the Common Stock is no less than $9.00 per share with respect to
the Class A Warrants and $15.00 with respect to the Class B Warrants for any ten
trading days within a period of 30 consecutive trading days as reported on the
principal exchange on which the Common Stock is traded. Notice of redemption of
the Warrants could force the Warrant holders to exercise the Warrants at a time
when it might be disadvantageous for the holders to do so or to sell the
Warrants at their then current market price when the holders might otherwise
wish to hold the Warrants for possible appreciation. Alternatively, the holders
may accept the redemption price, when it is likely to be substantially less than
the market value of the Warrants at the time of redemption. Any holders who do
not exercise Warrants prior to their expiration or redemption, as the case may
be, will forfeit the right to purchase the shares of Common Stock underlying the
Warrants. While the Company may legally be permitted to give notice to redeem
the Warrants at a time when a current prospectus is not available thereby
leaving the Warrant holders no opportunity to exercise their Warrants prior to
redemption, the Company does not intend to redeem the Warrants unless a current
prospectus is available at the time of the redemption. See "Description of
Securities - Warrants."
Underwriter's Influence on the Market. A significant amount of the
Securities offered hereby will be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such Securities through or with the Underwriter. Although it has no legal
obligation to do so, the Underwriter has indicated that it intends to act as a
market-maker and otherwise effect transactions in the Securities offered hereby.
To the extent the Underwriter acts as a market-maker in the Common Stock or
Warrants, it may be a dominating influence in those markets. The degree of
participation in those markets by the Underwriter may significantly effect the
price and liquidity of the Securities. The Underwriter may discontinue such
activities at any time or from time to time. Moreover, pursuant to Regulation M,
if the Underwriter solicits exercise of any of the Warrants, including the
Underwriter's Warrants, it will be unable to act as a market-maker with respect
to the Securities for a period of two or nine business days prior to any
solicitation by it of the exercise of any of the Warrants, including the
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.
11
<PAGE> 15
Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission (the "Commission"). Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, those persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. Consequently, these
requirements may have the effect of reducing the level of trading activity, if
any, in the secondary market for a security that becomes subject to the penny
stock rules. If the Securities become subject to the penny stock rules,
investors in this offering may find it more difficult to sell their shares
and/or Warrants.
Possible Non-renewal of License Agreements. The Company is party to two
separate agreements with Spalding & Evenflo Companies Inc. pursuant to which the
Company has the right to use the name SPALDING in connection with the sale and
distribution of a number of products, including small handheld exercise
equipment and large exercise machines. For the fiscal year ended April 30, 1997,
sales of these products represented approximately 6% of the Company's total
revenues. The two agreements expired in September 1997. The Company is currently
negotiating a renewal of the agreement that relates to the small handheld
equipment. In the event that this agreement is not renewed, the Company's
revenues will likely be reduced by approximately 6%. See "Business-Intellectual
Property."
DILUTION
At July 31, 1997, the Company had a net tangible book value deficit of
$(131,753) or $(.04) per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less liabilities, divided
by 3,198,258, the number of shares of Common Stock outstanding. After giving
effect to the sale of the 1,200,000 Units hereby, the pro forma net tangible
book value at July 31, 1997, would have been $4,968,247 or $1.13 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $1.17 per share to the existing stockholders and an immediate
dilution of $3.87 per share to investors in this offering. The following table
illustrates this per share dilution:
Public offering price per share $5.00
Net tangible book value per share before offering $(.04)
Increase per share attributable to the sale of the
Units offered hereby $1.17
----
Net tangible book value per share after offering (1) $1.13
----
Dilution per share to investors in offering (2) $3.87
====
- ----------
(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.
12
<PAGE> 16
Pursuant to a Bonus Agreement, the Company will issue to Mr. Grossman, the
Company's Chairman and President, an aggregate of 2,000,000 shares of Common
Stock provided the Company meets certain earnings criteria over a three year
period. See "Management." Giving effect to the issuance of such 2,000,000 shares
as of July 31, 1997, and the attainment by the Company of the earnings criteria
required for the issuance of these shares, the pro forma net tangible book value
would have been approximately $1,668,247 or $.32 per share. After giving effect
to the sale of the 1,200,000 Units hereby, the pro forma net tangible book value
at July 31, 1997, would have been approximately $6,768,247 or $1.06 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $.74 per share to the existing stockholders and an immediate
dilution of $3.94 per share to investors in this offering. The following table
illustrates this per share dilution:
Public offering price per share $5.00
Net tangible book value per share before offering $.32
Increase per share attributable to the sale of the
Units offered hereby $.74
----
Net tangible book value per share after offering (1) $1.06
----
Dilution per share to investors in offering (2) $3.94
====
- ----------
(1) After deduction of underwriting discounts and commissions, the
Underwriter's non-accountable expense allowance and other estimated
expenses of the offering. See "Use of Proceeds" and "Underwriting."
(2) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering (ii) up to 120,000 shares of Common Stock
issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000
shares of Common Stock issuable upon exercise of the Warrants underlying
the Underwriter's Warrants; and (iv) up to an additional 540,000 shares of
Common Stock (including 360,000 shares of Common Stock underlying
warrants) issuable upon exercise of the Underwriter's over-allotment
option.
The following table presents as of July 31, 1997, the relative share
purchases, percentages of equity ownership in the Company, total cash paid,
percentage of total cash invested, and the average price per share of Common
Stock to the current and public shareholders after giving effect solely to the
sale of the shares of Common Stock offered hereby:
COMMON STOCK ONLY
<TABLE>
<CAPTION>
Percentage Percentage
Shares of Equity Total of Total Average Price
Purchased Ownership Cash Paid Cash Invested Per Share
--------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Public Investors 1,200,000 27.3% 6,000,000 99.6% $5.00
Current Stockholders 3,198,798 72.7% 26,139 0.4% $0.01
--------- ----- --------- ------
Total 4,398,798 100.00% 6,026,139 100.00%
========= ======= ========= =======
</TABLE>
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds of this offering, after deducting discounts and
commissions, the Underwriter's expense allowance and expenses of this offering,
will be approximately $5,100,000 ($5,890,000 if the over-allotment option is
exercised in full). The Company intends to use such net proceeds as follows:
Amount of Percentage of
Proceeds Proceeds
--------- -------------
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%
- ----------
(1) The entire amount will be paid to MG Holdings, which is wholly owned
by Marton Grossman, the Company's Chairman and President, in full repayment of a
loan, evidenced by a promissory note, made during the Company's Chapter 11
proceedings. The note accrues interest at the Citibank Prime Rate plus one
percent. The weighted average interest rate at April 30, 1997, and as of the
date hereof was 9.25% and 9.35%, respectively. As of April 30, 1997 the Company
had accrued interest in the amount of $37,219 in connection with this loan. As
of November 3, 1997, the sums owed to MG Holding amounted to $1,059,785 in
principal plus $89,601 in accrued interest. The promissory note is to be paid in
24 monthly installments commencing September 5, 1996. To date, only three
payments have been made. In July 1997, the Company and MG Holdings agreed that
no payments will be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier.
(2) The Company intends to market its products through the placement of
advertisements in various media.
(3) The Company intends to hire a number of marketing professionals who
are expected to be paid a salary as well as commissions.
The amount of net proceeds to be received by the Company reflects the
Company's best estimate after deducting commissions in the amount of $600,000
and expenses incurred in the offering of approximately $300,000, which either
have been paid already or are to be paid by the Company out of proceeds.
The foregoing table represents the Company's best estimate of the
allocation of the proceeds of this offering based upon the current state of the
Company's development, its current plans and current economic and industry
conditions, and is subject to reapportionment of proceeds among the categories
listed above or to new categories in the event of changes to the current
economic and industry conditions or an entirely unforseen opportunity,
acquisition or otherwise, is presented to the Company. While the Company has no
specific current acquisition plans, it currently intends to simultaneously focus
its energies and assets towards growing its business internally, while at the
same time exploring opportunities to expand its business through acquisitions.
The Company anticipates that the proceeds from this offering together with the
projected cash flows from operations will be sufficient to fund its contemplated
cash requirements for the twelve months following the consummation of this
offering.
Until used, the Company intends to invest the proceeds of this offering in
government securities, certificates of deposit, money market securities,
commercial paper or other top-rated income-producing investments.
DIVIDEND POLICY
The Company has paid no dividends and does not expect to pay dividends on
its Common Stock in the foreseeable future as it intends to retain earnings to
finance the growth of its operations.
14
<PAGE> 18
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
Reorganized Company for the three months ended July 31, 1997, the nine months
ended April 30, 1997, and the three months ended July 31, 1996 and the years
ended April 30, 1996, 1995, 1994 and 1993 for the predecessor company. These
data should be read in conjunction with the financial statements of the Company
and the related notes included elsewhere herein. Effective August 8, 1996, the
Company emerged as the surviving entity in a merger with DCL. The balance sheet
of the combined entity was substantially similar to that of DCL immediately
prior to the merger. As a consequence, the financial data of the Company for the
reporting periods prior to July 31, 1996, consist of those of DCL.
<TABLE>
<CAPTION>
Reorganized Company(1) Predecessor Company
---------------------- -----------------------------------------------------------------------
Year ended April 30
--------------------
Three Months Nine Months Three Months
Ended 7/31/97(1) Ended 4/30/97(1) Ended 7/31/96 1996 1995 1994 1993
---------------- ---------------- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 1,834,162 $ 7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097 $29,497,353 $ 25,735,479
Net Income/ (Loss) from
Continuing Operations 38,665 119,399 (76,364) (2,235,894) (11,227,335) 244,308 (427,409)
Net Income/(Loss) 38,665 119,399 (76,364) 6,945,299 (11,227,335) 244,308 (427,409)
Net Income/(Loss) per .01 0.04
Share
Selected Balance Sheet
Data:
Working Capital (Deficit) $ (221,664) $ (45,789) $ (293,884) $ (7,493,435) $ 3,094,821 $ 3,173,751
Total Assets 4,628,741 4,807,062 4,253,396 6,414,185 16,677,772 13,373,816
Long term Obligations,
including Capitalized 54,435 215,254 23,965 116,124 127,877 92,129
Lease Obligations
Total Liabilities 4,444,541 4,661,527 4,300,398 13,406,486 12,442,738 9,383,090
Retained Earnings 158,064 119,399 -0- -0- 3,644,799 3,400,491
Accumulated Deficit -0- -0- (637,237) (7,582,536) -0- -0-
Shareholders' Equity
(Deficit) 184,200 145,535 (47,002) (6,992,301) 4,235,034 3,990,726
</TABLE>
- ----------
(1) Due to the reorganization (see Note 2 to the financial
statements), operating results of the reorganized company may not be comparable
to those of the predecessor company. Management's assumptions used in
determining the Company's reorganization value are discussed in Note 2 to the
financial statements.
(2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
charge backs by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996 the Company's plan of reorganization was approved by the Bankruptcy
Court. During July and August 1996, the Company satisfied its obligations under
the Plan through cash payments and the issuance of Common Stock
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
General
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein. The discharge of claims under the bankruptcy
proceedings described immediately below has been reflected in the financial
statements for the fiscal year ended April 30, 1996. Effective August 8, 1996,
the Company completed a migratory merger from Delaware to Nevada by merging into
a newly-formed Nevada entity, thereby changing its name from Dynamic Classics,
Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was
substantially identical to that of the Company prior to the merger. The Company
and its predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described
below, which the Company adopted effective on July 31, 1996, financial results
for the year ended April 30, 1997, are reported by combining the financial
results for the three-month period ended July 31, 1996, and those of the
nine-month period ended April 30, 1997.
Because of the application of fresh-start reporting, the financial
statements for the periods after reorganization are not comparable in any
respects to the financial statements for the periods prior to the
reorganization.
Plan of Reorganization
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the
"Plan") pursuant to which creditors received partial satisfaction of their
claims. The amount of claims allowed under the bankruptcy proceedings aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG Holdings, which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock in
satisfaction of such promissory note, representing approximately 93% of the
issued and outstanding shares, thereby gaining absolute control over the
Company's affairs. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions". An additional
160,000 shares and 62,798 shares were issued to the Company's unsecured
creditors and the Company's existing security holders, respectively. The value
of the cash and securities distributed under the plan of reorganization
aggregated $531,561. An amount of $16,692,193, representing the difference
between the value of the total distribution and the amount of allowable claims
under the bankruptcy, was recorded as an extraordinary gain.
16
<PAGE> 20
In addition, under the Plan, the Company merged with a newly-formed Nevada
corporation for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start accounting
on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years. In connection with the bankruptcy
proceedings, the Company restructured its operations and relocated its
administrative headquarters and warehouse facilities.
Results of Operations for the Three Months Ended July 31, 1997, the Nine Months
Ended April 30, 1997, the three Months Ended July 31, 1996 and the Years Ended
April 30, 1997 and 1996
Three Months Ended July 31, 1997
Sales for the three months ended July 31, 1997 decreased by $149,000, or
7.5%, from $1,983,000 to $1,834,000, compared to the three months ended July 31,
1996. Sales of the Company's exercise equipment and sports bags/luggage lines
decreased by $75,000 and $74,000, respectively.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses decreased by approximately $120,000 due primarily to
decreases in the following expenses:
Officer salaries $ 38,000
Salesmen salaries $ 23,000
Insurance $ 12,000
Shipping expenses $ 46,000
Officer salaries decreased by $38,000 as a result of the departure by the
former President of the Company in March 1997. Salesman salaries decreased by
$23,000 due to the elimination of a sales position in August 1996. Insurance
expense decreased due to lower product liability premiums. Shipping expenses
decreased due to an increase in the amount of sales which were shipped directly
to customers from the Company's overseas vendors. Interest expense remained
relatively constant. The Company had a pretax profit of $62,000 compared to a
pretax loss of $76,000 in the prior year's corresponding three-month period.
The following table sets forth the results of operations for the periods
discussed above:
17
<PAGE> 21
Reorganized Company For the Predecessor Company For the
3 Months Ended July 31, 1997 3 Months Ended July 31, 1996
---------------------------- ----------------------------
Sales $1,834,000 $ 1,983,000
Other Income 8,000 10,000
---------- -----------
1,842,000 1,993,000
Cost of Sales 1,282,000 1,454,000
---------- -----------
Gross Profit 560,000 539,000
---------- -----------
Operating Expenses 438,000 558,000
Interest 60,000 57,000
---------- -----------
498,000 615,000
---------- -----------
Pretax Income 62,000 (76,000)
Tax Provision 24,000 --
---------- -----------
Income 38,000 (76,000)
========== ===========
Nine Months Ended April 30, 1997
Total sales of $7,493,000 and $1,983,000 for the nine months ended April
30, 1997 and the three months ended July 31, 1996, respectively, were, on a
combined basis, $2,324,000, or 32% higher than during the previous fiscal year.
Sales of exercise equipment of $4,124,000 and $960,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$5,084,000, on a combined basis. These combined sales of exercise products were
$532,000 or 9% less than during the previous fiscal year. Sales of sports
bags/luggage products of $3,368,000 and $1,023,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$4,391,000, on a combined basis. These combined sales of sports bags/luggage
products were 7% less than the previous fiscal year. Sales for the fiscal year
ended April 30, 1996 were reduced by $3,211,000 of customer credits for a
discontinued line of manual treadmills and ski machines.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were, on
a combined basis, $3,899,000 less than the fiscal year ended April 30, 1996, due
to the reorganization.
The following is a discussion of the effect of the Company's
reorganization and adoption of fresh-start reporting on the various income
statement line items during the nine-month period ended April 30, 1997. For this
purpose, the nine months ended April 30, 1997 are compared to the nine months
ended April 30, 1996. Decreases for the nine months ended April 30, 1997
compared to the nine months ended April 30, 1996 are represented approximately
by net changes in the following expenses:
18
<PAGE> 22
Freight out 10,000 Travel & entertainment 30,000
Insurance claims 70,000 Office equipment rental 7,000
Lawsuits 289,000 Miscellaneous taxes 8,000
Showroom rent 319,000 Consultant fees 105,000
Officers salaries 81,000 Promotional material 189,000
Office salaries 262,000 Pension costs 726,000
Warehouse salaries 115,000 Telephone 31,000
Salesmen salaries 57,000 Data-processing fees 6,000
Payroll taxes 45,000 Postage 10,000
Fringe benefits 2,000 Bad debt expenses 666,000
Repairs & maintenance 4,000
Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000, respectively,
as a result of the accrual of proofs of claim filed during the bankruptcy
proceeding as liabilities subject to compromise during the nine-month period
ended April 30, 1996. Showroom rent decreased by $319,000 since a proof of claim
for the balance of the lease was recorded during the nine-month period ended
April 30, 1996. The showroom was closed in October 1995. Officers salaries
decreased by $81,000 due to reduction in the salary of the former President of
the Company in September 1995, and the elimination of a Chief Operating Officer
position in December 1995. These changes resulted in decreases of $37,000 and
$44,000, respectively. Office salaries decreased by $262,000 due primarily to
the elimination of the Vice President of Operations position in June 1996 which
accounted for $119,000 of the reduction. In addition, the position of Credit
Manager was eliminated in May 1996 resulting in a savings of $45,000. The
balance of $98,000 is due to the overall reduction of the office staff as a part
of the reorganization. Warehouse salaries decreased by $115,000 due to the
elimination of warehouse employees under the reorganization. Salesmen salaries
decreased by $57,000 due to the elimination of a sales position in August 1996.
Payroll taxes and fringe benefits decreased by $45,000 and $2,000, respectively,
due primarily to the positions and employees eliminated during the
reorganization. Repairs and maintenance decreased by $4,000. Travel and
entertainment expenses decreased by $30,000 due to the decrease in executive and
sales personnel. Office equipment rental decreased by $7,000 due to a reduction
of the equipment rented due to the reorganization. Miscellaneous taxes decreased
by $8,000 as a consequence of the change in the Company's state of incorporation
from Delaware to Nevada which resulted in the elimination of Delaware franchise
taxes. Consulting fees decreased by $105,000 because the Company did not hire
consultants during the nine months ended April 30, 1997. Promotional materials
decreased by $189,000 due to decreased spending for these materials. Pension
costs decreased by $726,000 because a proof of claim filed by the Pension
Benefit Guarantee Corp. for this amount was recorded as part of the
reorganization during the nine months ended April 30, 1996. Telephone expenses
decreased by $31,000 due to the closing of the showroom in October 1995.
Data-processing costs decreased by $6,441 due to the reorganization of the
Company. Postage decreased by $10,000 due to improved cost management. Bad debt
expense decreased by $666,000 because of improved collections and decreased
sales volume.
The Company's pre-tax profit of $147,000 for the fiscal year ended April
30, 1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July
31, 1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997.
As a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards
of approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry- forward not utilized in
the Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision
19
<PAGE> 23
of $104,000 for the fiscal year ended April 30, 1997 is based on pretax profits
of $223,000 for the period August 9, 1996 to April 30, 1997. The effective tax
rate is 46% comprised of 26% of federal taxes and 20% of state and local taxes.
The following table sets forth the results of operations for the periods
discussed above:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 Months for 3 Months for Fiscal Year
Ended 4/30/97 Ended 7/31/96 Ended 4/30/96
------------- ------------- -------------
<S> <C> <C> <C>
Sales $7,492,700 $ 1,983,200 $ 7,151,700
Other income 54,600 10,200 98,300
---------- ----------- ------------
7,547,300 1,993,400 7,250,000
Cost of sales 4,850,000 1,454,600 9,480,500
---------- ----------- ------------
Gross profit (loss) 2,697,300 538,800 (2,230,500)
---------- ----------- ------------
Operating expenses 2,226,600 556,500 6,683,200
Interest 198,800 57,300 383,500
---------- ----------- ------------
2,425,400 613,800 7,066,700
---------- ----------- ------------
Reorganization items 48,900 1,300 449,700
---------- ----------- ------------
48,900 1,300 449,700
---------- ----------- ------------
Pretax income (loss) 223,000 (76,300) (9,746,900)
Tax provision (benefit) 103,700 0 (7,511,000)
---------- ----------- ------------
Income (loss) before
extraordinary item 119,300 (76,300) (2,235,900)
---------- ----------- ------------
Extraordinary item gain
on discharge of
pre-Petition liabilities 0 0 16,692,200
Tax 0 0 (7,511,000)
---------- ----------- ------------
Extraordinary gain,
net of tax 0 0 9,181,200
---------- ----------- ------------
Net income (loss) $ 119,300 $ (76,300) $ 6,945,300
========== =========== ============
</TABLE>
Results of operations for the years ended April 30, 1996 and 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment accounted for approximately $15,580,000 during the fiscal year
ended April 30, 1995. During the fiscal year ended April 30, 1996, as a result
of the Company's bankruptcy proceedings, it was forced to reduce its sales of
other exercise equipment and of its sports bags/luggage products which led to a
decline in sales of $5,334,700 and $1,333,600, respectively, to $5,615,600 and
$4,701,800, respectively. Sales of exercise equipment and sports bags/luggage
products during this period were offset by credits of $3,210,900 issued to
customers in connection with the discontinued line of manual treadmills and ski
machines.
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Sales of the treadmills and ski machines began in
June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to customers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was
20
<PAGE> 24
forced to allow substantial chargebacks by its customers. Although, pursuant to
a written agreement, the manufacturers acknowledged the defects and agreed to
pay for returns and to provide replacement goods at no cost, they breached this
agreement soon thereafter. As a result, during April 1995, the Company issued
credits to customers for approximately $5,000,000 of the $7,487,000 of credits
for the fiscal year then ended.
The following table sets forth the financial statement effect of the
Company's line of treadmills and ski machines for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 months for 3 months for year:
ended 4/30/97 ended 7/31/96 ended 4/30/96 ended 4/30/95
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales -- -- $ 597,000 $ 23,255,000
Credits -- -- (3,210,900) (7,487,000)
------------- ------------- ----------- ------------
Net sales -- -- (2,613,900) 15,768,000
Inventory reserve -- -- -- (1,320,063)
Cost of sales -- -- 156,000 (18,604,172)
------------- ------------- ----------- ------------
Gross Loss -- -- $(2,457,900) $ (4,156,235)
============= ============= =========== ============
</TABLE>
The sale of these products was discontinued in August 1995 and all
inventory was disposed of by October 1995. Currently, the Company does not
believe that there will be additional returns of these products or that any
claims relating thereto remain to be settled.
In addition, the Company's operating expenses decreased by approximately
$1,083,300 to $6,683,200. As a result of the Company's reorganization, the
Company had decreases in the following expenses:
Officers salaries 160,000
Office salaries 180,000
Salesmen salaries 316,000
Payroll taxes 74,000
Fringe benefits 145,000
Travel & entertainment 237,000
Officers salaries decreased by $160,000 as a result of a reduction in the
salary of the Company's former President in September 1995, and the separation
from the Company of the Senior Executive Vice President in January 1995. These
changes accounted for decreases of $67,000 and $73,000, respectively. Office
salaries decreased by $180,000 due to the overall reduction in office personnel
in October 1995 as the operations of the Company were consolidated and Achim
began to supply administrative and warehouse services. Salesmen salaries
decreased by $316,000 because bonuses and overrides were discontinued after
August 1995. Payroll taxes and fringe benefits decreased by $74,000 and
$145,000, respectively, due to the overall reduction in office personnel in
October 1995 as the operations of the Company were consolidated and Achim began
to supply administrative and warehouse services. Travel and entertainment
decreased by $237,000 due to the reduction in executive staff and the cost
containment measures instituted due to the reorganization.
For the fiscal year ended April 30, 1996, after giving effect to an
extraordinary gain as a result of the discharge of pre-Petition liabilities in
the amount of $16,692,200, the Company recorded net income of $6,945,300,
compared to a net loss of $11,227,300 during the previous fiscal year. For the
fiscal year ended April 30, 1996, the Company would have recorded a net loss of
$9,746,900 before the extraordinary gain, or a decrease of $1,562,500 from the
prior fiscal year. This decrease primarily reflected a reduction in the
Company's operating expenses of
21
<PAGE> 25
approximately $1,083,300 and a reduction in interest expense of $1,001,400. This
decrease was due to the Company's exemption from making interest payments of
$558,312 during the reorganization proceedings. In addition, interest expense
decreased by $456,912 due to reduced borrowing for the year ended April 30,
1996.
The extraordinary gain on debt discharge of pre-Petition liabilities,
which is recorded on the Company's books in fiscal year ended April 30, 1996,
was taxable in the subsequent fiscal period, as the actual distribution to
discharge the debt occurred in July 1996. For tax purposes, without the gain on
debt discharge, the Company had an operating loss for the year ended April 30,
1996 which resulted in the Company's not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the
Company's pretax loss of $11,309,000 resulted in a federal tax benefit of
$3,845,000 utilizing the statutory rate. As a result of changes to the valuation
allowance, the reversal of previously established deferred tax assets and losses
for which no benefit was provided, the Company's effective tax rate resulted in
a benefit of $82,000.
Liquidity and Capital Resources
Three Months Ended July 31, 1997
Cash flow provided by operations increased to $95,513 compared to the
prior year's quarter under the predecessor Company which used cash of $64,766.
Net income of $38,665, along with a decrease in inventory of $515,399, due to
lower purchases, were the primary providers of cash from operations during the
quarter ended July 1997.
Net income and inventory reductions were offset by increased accounts
receivable and amounts due from suppliers of $156,220 due to stronger sales in
the last month of the quarter. In addition, cash was used in operations to pay
for increases in prepaid expenses, decreases in accounts payable and accrued
expenses, and income taxes payable of $95,346, $107,320, and $103,700,
respectively.
Financing activities used cash of $79,811 due to an increase in costs
related to this stock offering of $73,844 and the repayment of capital lease
obligations of $5,967. The Company had a positive cash flow for the period of
$15,702.
Nine Months Ended April 30, 1997
During the first nine months after the Company's reorganization, cash used
in operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase inventory by
$1,032,882 during the nine-month period. The increase in inventory was due to an
anticipated increase in sales and the purchase of larger volumes to take
advantage of the decreased costs associated with the higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254,
prepaid expenses decreased by 122,017, miscellaneous receivables decreased by
$132,379 and prepaid and refundable income taxes decreased by $252,046. These
amounts partially offset expenditures for inventory and payments to creditors.
22
<PAGE> 26
Cash of $332,957 provided by financing activities was primarily the result
of a $600,000 loan from MG Holding and was used to pay the creditors in
accordance with the Company's Plan. Cash provided by financing activities was
used to repay $145,324 of the note payable to MG Holding. In addition, payments
were made for capital leases, insurance notes, and deferred stock offering costs
of $29,656, $62,020, and $30,043, respectively. The Company had a positive cash
flow of $38,586.
Three Months Ended July 31, 1996
During the three months ended July 31, 1996, cash used by operating
activities amounted to $64,800. This was the result of a net loss of $76,400,
increases in accounts receivable and due from suppliers, and prepaid expenses of
$221,300 and $100,600, respectively, which were offset by a decrease in
inventory and an increase in accounts payable and accrued expenses of $115,600
and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance
notes payable of $77,200 were offset by repayments of insurance notes payable,
and repayments of capital lease obligations of $15,200 and $18,800,
respectively. The Company had a negative cash flow of $21,600 for the three
months ended July 31, 1996.
Fiscal Year Ended April 30, 1996
During the fiscal year ended April 30, 1996, cash used by operating
activities amounted to $1,145,616. This was primarily the result of temporary
benefits received by the Company under the bankruptcy and subsequent
reorganization. Net income of $6,945,299 and the increase in pre-Petition
liabilities of $8,614,728 were offset by the gain of debt discharge under the
Plan of $16,692,193. In addition, the Company was not required to pay interest
on most of its debt during the bankruptcy period. Future cash flows will no
longer receive these benefits. Cash of $47,933 was used primarily to purchase
equipment for the manufacture of two exercise products as well as computer
hardware and software.
Financing activities generated cash in the amount of $877,493. Proceeds
from bank notes payable, bankers acceptances, and a loan from MG Holding were
$3,393,628, $1,118,556, and $557,000, respectively. These proceeds were offset
by repayments of bankers acceptances and capital leases of $4,127,139 and
$64,552, respectively. The Company had a negative cash flow of $316,056 for this
period.
Current Position
Pursuant to an unwritten understanding, Achim arranges for the issuance by
its financial lender of letters of credit in favor of the Company's overseas
suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996
was 9.37%, 9.25% and 11.5%, respectively.
The Company owes an aggregate of approximately $1,200,000 to MG Holdings,
which is wholly owned by Marton B. Grossman, the Company's Chairman and
President, under a note evidencing debtor-in-possession financing provided by MG
Holdings. The note accrues interest at the Citibank Prime Rate plus 1%. As of
April 30, 1997, the Company had accrued interest in the amount of $34,219 in
connection with this loan. The promissory note is to be
23
<PAGE> 27
paid in 24 monthly installments commencing September 5, 1996. To date, three
payments have been made. In July 1997, the Company and MG Holdings agreed that
no payments will be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier. The Company intends to repay the
note from the proceeds of this offering.
The Company believes that cash generated by operations, the availability
of Achim's credit line to finance the Company's purchase of inventory, and the
proceeds from this offering will be sufficient to finance its operations for the
next twelve months.
Seasonality and Inflation
The Company's business is highly seasonal with higher sales typically in
the second and third quarters of the fiscal year as a result of shipments of
exercise equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company.
24
<PAGE> 28
CAPITALIZATION
The following table sets forth the capitalization of the Company at July
31, 1997, and as adjusted to reflect receipt of the net proceeds from this
offering:
<TABLE>
<CAPTION>
July 31, 1997
---------------------------------
Actual(1) As Adjusted(1)(2)
--------- -----------------
<S> <C> <C>
Short Term Debt 1,085,910(3) 18,261
========= =========
Long Term Debt 54,435 -0-
--------- ---------
Stockholders' Equity:
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized;
Issued 3,198,798 at April 30, 1997, and 4,398,798 As Adjusted 3,199 4,399
Preferred Stock, $.001 Par Value, 10,000,000 shares authorized;
None Outstanding
Additional Paid-In Capital 22,940 5,121,740
Retained Earnings 158,064 158,064
Less: Treasury Stock (3) (3)
--------- ---------
Total Stockholders' Equity 184,200 5,284,200
--------- ---------
Capitalization Total 238,635 5,284,200
========= =========
</TABLE>
- ----------
(1) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering; (ii) up to 120,000 shares of Common Stock issuable
upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of
Common Stock issuable upon exercise of the Warrants underlying the Underwriter's
Warrants; (iv) up to an additional 540,000 shares of Common Stock (including
360,000 shares of Common Stock underlying Warrants) issuable upon exercise of
the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common
Stock issuable to Mr. Marton B. Grossman, the Company's Chairman and President
over a three-year period, provided the Company meets certain earnings criteria.
See "Description of Securities", "Underwriting" and "Management".
(2) Gives effect to the issuance and sale of the Units and the anticipated
application of the net proceeds of this offering.
(3) Includes loan payable--related party, accrued interest payable of $62,299
on such debt, and capital lease obligations of $18,261.
25
<PAGE> 29
BUSINESS
General
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP.(R) In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH(R) and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
Plan of Reorganization
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, CNM, acknowledged the defects and agreed to pay for returns and
to provide replacement goods at no cost, it breached this agreement soon
thereafter. In March 1995, CNM sued the Company for monetary damages alleging,
among other things, breach of contract. The Company and CNM subsequently settled
the matter by releasing each other from any claims and allowing CNM to collect
an aggregate of $15,000 from the Company. The Company suffered severe losses
from its venture into this line of business and in August 1995 filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors received partial satisfaction of their claims. MG
Holdings, which had purchased a promissory note from the Company's principal
lender, received 2,976,000 shares of Common Stock in full satisfaction of the
promissory note. The number of shares issued to MG Holdings represented 93% of
the issued and outstanding shares. As a result, MG Holdings acquired absolute
control over the Company's affairs. MG Holdings is wholly-owned by Marton
Grossman, the Company's Chairman and President. See "Principal Stockholders" and
"Certain Relationships and Related Transactions." In addition, as part of the
plan of reorganization, the Company, then known as DCL, merged into DIL, a newly
formed Nevada corporation, for the purpose of changing its state of
incorporation. See "Legal Proceedings" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
26
<PAGE> 30
Products
Exercise Equipment
The Company's line of exercise equipment consists primarily of handheld
products, including dumbbells, ankle and wrist weights, hand grips, jumpropes,
exercise suits, slimmer belts and strength training products. In addition, the
Company markets light weight equipment such as aerobic steps and slides and
exercise mats. The Company also carries a line of small electronic devices
designed to monitor physical activity such as stopwatches, pedometers, pulse
meters and calorie counters.
Luggage/Sports Bags
The Company's line of luggage consists primarily of duffle bags, weekend
bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases.
Some of the models are equipped with wheels and/or retractable handles.
Other Products
The Company, through a wholly owned subsidiary, has obtained the exclusive
rights to the patents underlying the technology used in an insulated bag
incorporating a wrap-around gel pack or freeze pack with the ability to cool and
preserve food and other products for an extended period of time. In addition, it
obtained the trademarks FREEZY-BAGTM and FREEZYGELTM under which the products
are sold. See "Intellectual Property- License Agreements." The Company is
currently testing the marketability of these products.
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and creates its own
molds and tooling. Such molds and tooling are used by the manufacturers to
produce the equipment. The Company retains an ownership interest in the molds
which are returned to it upon the termination of the Company's relationship with
a particular manufacturer. The Company has been granted a number of design
patents with respect to certain of its products. None of these patents are
currently used by the Company. 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
27
<PAGE> 31
at little if any additional expense. As a consequence, the Company believes that
an interruption in deliveries by a manufacturer located in a particular country
will not have a material adverse impact on the business of the Company.
Nevertheless, because of political instability in a number of the supply
countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
Sales and Marketing
The Company sells its products on a wholesale basis only. Most of its
products are sold to catalog showrooms, drug chains, discount stores and
sporting goods chains. For the fiscal year ended April 30, 1997 approximately
25% and 13% of the Company's revenues were derived from sales to K-Mart and
Service Merchandise, respectively. No other customer accounted for more than ten
percent of the Company's revenues. For the fiscal year ended April 30, 1997,
sales of exercise equipment accounted for approximately 53% of the Company's
revenues while 47% of the Company's revenues were derived from the sale of
luggage.
The Company sells its products primarily through independent sales agents
on a commission-only basis. The Company currently engages approximately 23 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such
agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sale price of its products. Although the Company believes that its
sales agents sell products exclusively on behalf of the Company, there are no
agreements that prohibit them from selling competing products.
In addition, the Company on a small scale markets existing products to
retailers for resale under their own private labels. The Company has began
deliveries to Service Merchandise, Inc. and Kohl's Department Stores. The
Company has no written agreements with these customers. Although the scope of
this marketing effort is currently limited, the Company intends to expand the
number of private label transactions. No assurance can be given that its efforts
in this area will be successful.
The Company currently anticipates that it may increasingly focus its
attention on direct response marketing. The Company believes that its products
are particularly well suited for so-called impulse buys. Therefore, it intends
to develop plans to use infomercials to market its products. To date, no
significant expenditures have been made in connection with this effort.
Competition
The Company's exercise products compete with products marketed and sold by
a number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc. and Bollinger Industries. Both of these companies
possess far greater financial and other resources, including sales forces, than
the Company's. However, the Company believes that as a result of its ability to
use the trademarked names SPALDINGTM and KATHY IRELANDTM it will be able to
retain its share of the market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
The Company's sports bag/luggage products compete with products designed
by a number of the largest companies in the industry, including Samsonite, Sky
Way and American Tourister. The Company believes that because of its
concentration on the upscale lifestyle and more specialized leisure market that
are associated with the trademark JEEPTM the Company will be able to continue to
grow its sports bag/luggage business. Nevertheless, there
28
<PAGE> 32
can be no assurance that the Company will be able to effectively compete with
these companies as well as with other smaller entities.
Intellectual Property
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH
TRAVEL SYSTEMS & DESIGN and EXER-SLIDE.
License Agreements
The Company sells a number of its products under licensed names. The
Company has entered into licensee agreements which provide for the grant of
licenses to the Company and the payment of royalties by the Company, as follows:
JEEP -- Under an agreement dated January 8, 1993, as amended by
letter amendment dated January 8, 1996, between the Company and the
Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company
was granted the exclusive license to use the names JEEP, WRANGLER and
RENEGADE in connection with the manufacture, sale and distribution of
luggage products. The current expiration date of the Jeep Agreement is
December 31, 1998. The parties have informally agreed to start
negotiations regarding the terms of an extension of the current agreement.
SPALDING -- Pursuant to two separate agreements between the Company
and Spalding & Evenflo Companies Inc. dated November 1, 1992, and April 1,
1994, the Company was granted the exclusive right to use the name SPALDING
in connection with the sale and distribution of a number of products,
including weight bars and large exercise machines. The agreements expired
in September 1997. However, the Company is currently negotiating a renewal
of the agreement relating to the handheld exercise equipment, and it is
confident that it will be able to negotiate such renewal. Nevertheless, no
assurance can be given that the Company will be successful in negotiating
a renewal of the agreements.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated
December 22, 1994, Ms. Ireland approves and endorses certain exercise
equipment designed and manufactured by the Company. Under the agreement,
the Company has the right to use her name in connection with the equipment
and Ms. Ireland will make appearances to promote such equipment. In
addition, the Company has the right to use her photograph and likeness in
connection with the sale of the equipment. The agreement is currently
scheduled to expire in June 1998 but is subject, at the Company's option,
to renewal until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996,
between New Century Marketing & Distributors, Inc. and a wholly-owned
subsidiary of the Company, the Company obtained the exclusive rights to a
patented technology as well as to the trademarked names FREEZY-BAG and
FREEZYGEL. The technology has the ability to cool foods and other products
and is used in the wrapping of such products. The agreement has a term of
two years but is renewable, at the option of the Company, for additional
one year periods.
29
<PAGE> 33
Management Agreement with Achim Importing Co., Inc.
Pursuant to a Warehousing and Service Agreement dated as of September 1,
1996 (the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and accounts located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically
renewable for additional one year periods unless written notice of termination
is given at least six months prior to the commencement of a renewal period.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997.
Achim is wholly-owned by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim arranges for
the issuance by its financial lender of letters of credit in favor of the
Company's overseas suppliers thereby enabling the Company to finance the
purchases of its inventory. Also, in the event of domestic suppliers, from time
to time, Achim purchases products from the manufacturer and resells them to the
Company in order to accommodate Achim's commercial lenders who often require a
security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, April 30, 1997 and April 30, 1996 was
9.37%, 9.25% and 11.5%, respectively.
Employees
As of September 30, 1997 the Company employed 13 persons, of whom five
were executive officers, three were engaged in administrative and clerical
activities, three were engaged in sales and two were involved in warehousing and
shipping. None of the Company's employees are represented by a union and no work
stoppages have occurred.
30
<PAGE> 34
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 a rent-free at will basis.
See "Certain Relationships and Related Transactions" and "Management Agreement
with Achim Importing Co., Inc."
Legal Proceedings
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Change in Accountants
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as
its independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26,
1996, there were no disagreements between the Company and Hoberman on any matter
of accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Board of Directors of the Company appointed Moore
Stephens, P.C. as its independent accountants, subject to ratification by the
Company's shareholders.
31
<PAGE> 35
MANAGEMENT
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
- ---- --- --------
Marton Grossman 66 Chairman and President
Isaac Grossman 34 Vice Chairman, Treasurer and Secretary
Sheila Grossman 58 Director
Harry P. Braunstein 48 Director*
Bernard Goldman 77 Director*
William Dolan 44 Vice President--Finance
John Holodnicki 44 Vice President-Sales
Gordon Sulltrop 62 Executive Vice President
- ----------
* Member of the Company's Audit Committee.
Marton Grossman has been the Chairman and President of the Company since
July 29, 1996. For the past 34 years, he has been President of Achim Importing
Co., a privately held company engaged in the import and export of window
coverings and accessories ("Achim"). In addition, he has been President of MG
Holding Co., Inc., a privately held financial holding company. Mr. Grossman is
the father of Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary. Mr. Grossman spends approximately 20% of his time working for the
Company.
Isaac Grossman has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996. He has been Vice President of Achim since 1989. Prior
thereto, Mr. Grossman worked in various positions at Achim, including in sales
and marketing and warehousing. Mr. Grossman is the son of Marton Grossman, the
Company's Chairman and President. Mr. Grossman spends approximately 20% of his
time working for the Company.
Sheila Grossman was elected a director in October 1997. From 1962 to 1987
she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
Harry Braunstein was elected a member of the Board in October 1997. Mr.
Braunstein has been a member of Hertzfeld & Rubin, a New York based law firm,
since 1984. He is member of the Board of Directors of Gotham
32
<PAGE> 36
Bank of New York, Lark Holding Corp., the parent company of WDF, Inc., a
privately held plumbing supply company and Sentery Detection, Inc., a home alarm
business. Mr. Braunstein earned a J.D. degree from Brooklyn Law School in 1974.
Bernard Goldman was elected a member of the Board in October 1997. Mr.
Goldman was the Chief Executive Officer of Goldman's Department Store, a chain
consisting of 12 stores, from 1957 to 1997. Mr Goldman has been and continues to
be a member of the Board of Directors and an executive officer of a number of
community and charitable institutions and organizations.
William Dolan has been the Company's Vice President-Finance since July
1996. Prior thereto, he had been the Company's Treasurer and Secretary since
1989. Mr. Dolan graduated from the William Paterson College of New Jersey. Mr.
Dolan is a certified public accountant.
John Holodnicki has been a Vice President-Sales at the Company since 1994.
From 1981 to 1994 he was a Vice President-Sales at HIT Industries, an importer
of business computer cases. Mr. Holodnicki earned a degree in Marketing from the
University of Illinois in 1975.
Gordon Sulltrop was appointed Executive Vice President in September 1997.
Prior to joining the Company, from 1988 to 1997, he was employed by Rubbermaid
Specialty Products Division. At that company he acted as National Accounts Sales
Manager from 1996, Central Region Manager from 1991 to 1995, Military and
Premium Sales Manager from 1990 to 1991 and National Accounts Manager from 1988
to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri Valley College,
Marshall, Missouri.
Board of Directors
Each director is elected at the Company's annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are two directors of the Company. The
bylaws permit the Board of Directors to fill any vacancy and the new director
may serve until the next annual meeting of stockholders or until his successor
is elected and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by employment
contracts, at the discretion of the Board.
The underwriting agreement provides that the underwriter for this offering
shall have the right to designate one member of the Board of Directors for a
period of three years following the date hereof. To date, no person has been
designated by the Underwriter. See "Underwriting."
Audit Committee
The Company's Board has designated Bernard Goldman and Harry Braunstein as
members of the Audit Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1997 (i) to its Chief
Executive Officer, and (ii) the Company's other four executive officers:
33
<PAGE> 37
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)(2)
==============================================================================================
Annual Compensation
- ----------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------
Year Ended
Name/Principal Position April 30 Salary ($) Bonus ($) All Other Compensation (3)
- ----------------------------------------------------------------------------------------------
==============================================================================================
<S> <C> <C> <C> <C>
Marton Grossman 1997 -0- 31,200
Chairman and President 1996 -0- 18,200
1995 -0- -0-
- ----------------------------------------------------------------------------------------------
Isaac Grossman 1997 -0- 32,240
Director, Treasurer 1996 -0- 13,043
1995 -0- -0-
- ----------------------------------------------------------------------------------------------
William P. Dolan 1997 100,000
Vice President-Finance 1996 100,000
1995 97,691
- ----------------------------------------------------------------------------------------------
Marvin Cooper, 1997 128,125
President and Director(4) 1996 182,176
1995 250,099
- ----------------------------------------------------------------------------------------------
John Holodnicki 1997 120,000
Vice President 1996 120,000
1995 97,046
==============================================================================================
</TABLE>
- ----------
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which do not exceed as to any named
officer or director or group of executive officers the lesser of $50,000
or 10% of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Commission, the table omits
columns reserved for types of compensation not applicable to the Company.
(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac
Grossman's activities performed on behalf of the Company. Marton Grossman
is the sole shareholder, and Isaac Grossman is an employee of Achim. See
"Certain Relationships and Related Transactions."
(4) Mr. Cooper resigned his positions from the Company in March 1997.
None of the individuals listed in the table above received any long-term
incentive plan awards during the fiscal year.
Marton Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997 the
Company entered into a Bonus Agreement (the "Bonus Agreement") with Mr. Grossman
which provides for the issuance to Mr. Grossman of an aggregate of 2,000,000
shares of Common Stock if the Company reaches certain earnings milestones, as
follows: if the Company's earnings
34
<PAGE> 38
before taxes for the fiscal year ending April 30, 1998, are no less than
$500,000, he will be issued 400,000 shares; if the Company's earnings before
taxes for the fiscal year ending April 30, 1999, are no less than $1,000,000, he
will be issued 600,000 shares; and if the Company's earnings before taxes for
the fiscal year ending April 30, 2000, are no less than $1,500,000, he will be
issued 1,000,000 shares. The stated earnings criteria are cumulative so that in
the event of an earnings shortfall during a fiscal year, such shortfall may be
compensated by earnings during a subsequent year, as a result of which Mr.
Grossman will be issued shares that, in the aggregate, equal the number of
shares issuable during these two years if the Company had reached earnings for
each year as required under the Bonus Agreement. The Bonus Agreement also
provides for piggyback registration rights with respect to the Common Stock to
be issued.
The following table sets forth the number of shares of Common Stock to be
issued to Mr. Marton Grossman under the Bonus Agreement:
<TABLE>
<CAPTION>
LONG TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
==========================================================================================================
Estimated Future Payouts Under
Name Performance or Other Non-stock Price based Plans
Number of Shares, Period Until =========================================
Units or Other Rights Maturation or Payout Threshold Target Maximum
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marton Grossman 2,000,000 April 30, 2000 * * *
==========================================================================================================
</TABLE>
- ----------
* The number of shares to be issued in a particular fiscal year is
based on the criteria set forth above.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from May 1, 1996 through April 30, 1997 other
than Forms 3 that were filed late with respect to Messrs. Marton and Isaac
Grossman and William Dolan and the Marton Grossman Annuity Trust, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG Holdings purchased from
the Company's principal lender a note in the principal amount of approximately
$6,822,530. MG Holdings is wholly owned by Marton Grossman, the Company's
Chairman and President. The note was repaid by the Company through the issuance
of 2,976,000 shares of Common Stock to MG Holdings. MG Holdings subsequently
assigned the Common Stock to a trust for the benefit of members of Mr.
Grossman's family.
35
<PAGE> 39
Also in connection with the plan of reorganization, MG Holdings loaned
approximately $1,205,000 to the Company to consummate the plan and for related
expenses. The Company issued a promissory note to MG Holdings evidencing the
loan and granted it a security interest in all of the Company's assets. The
promissory note is to be paid in 24 monthly installments commencing September 5,
1996. The note accrues interest at the Citibank Prime Rate plus one percent. The
weighted average interest rate as of the date hereof and at April 30, 1997 was
9.35% and 9.25%, respectively. As of April 30, 1997 the Company had accrued
interest in the amount of $37,219 in connection with this loan. As of October
14, 1997, the amount of interest owed amounted to $84,244. In July 1997 the
Company and MG Holding agreed that no principal or interest payments under the
note would be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier. The Company intends to repay
this note from the proceeds of this offering.
Pursuant to the Warehousing Agreement, Achim performs certain
administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and accounts located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically
renewable for additional one year periods unless written notice of termination
is given at least six months prior to the commencement of a renewal period.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997. To date, none of these fees have been paid. Achim does not charge the
Company interest on the unpaid portion of the fees payable under the Warehousing
Agreement.
Achim is wholly-owned by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim arranges for
the issuance by its financial lender of letters of credit in favor of the
Company's overseas suppliers thereby enabling the Company to finance the
purchases of its inventory. Also, from time to time, when taking deliveries from
domestic suppliers, Achim purchases products from the manufacturer and resells
them to the Company in order to accommodate Achim's commercial lenders who often
require a security interest in the merchandise until it has been sold and the
lender has been repaid. The Company pays Achim for the amount actually paid to
the supplier (including any applicable discounts) without markup, reimburses
Achim for its bank charges and pays it interest at the prime rate plus one
percent on the unpaid balance of the purchases. As of April 30, 1997, the
Company owed an amount of $2,590,360 in principal and interest under this
arrangement. As of September 30, 1997, this sum had decreased to $1,440,476. See
"Certain Relationships and Related Transactions." The weighted average interest
rate paid by the Company to Achim at September 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.
36
<PAGE> 40
The Company occupies a warehouse consisting of approximately 54,400 square
feet, of which 4,500 square feet are dedicated to office space, located at 58
Second Avenue, Brooklyn, New York. The property is owned by Sym Holding which is
owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company on a rent-free at will basis. See
"Business-Management Agreement with Achim Importing Co., Inc." and
"-Properties."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes the
Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 10 of the Company's Bylaws contains provisions
relating to the indemnification of directors and officers.
The Company may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
37
<PAGE> 41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 9, 1997, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 58 Second Avenue,
Brooklyn, New York 11215.
Shares Owned Beneficially
and of Record (1)
-------------------------
Name and Address No. of Shares % of Total
- ---------------- ------------- ----------
Marton Grossman (2) 2,976,000 93.0
Isaac Grossman (3) 2,976,000 93.0
Sheila Grossman (2) 2,976,000 93.0
Harry Braunstein
40 Wall Street
New York, NY 10004 -0- *
Bernard Goldman
2100 Boca West Drive
Laurel Oaks, OH -0- *
William P. Dolan 123 *
John Holodnicki 11 *
Gordon Sulltrop -0- *
All Officers and Directors as a Group (8 2,976,134 93.0
persons)
- ----------
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all
options and warrants. Shares issuable under options or warrants are owned
beneficially but not of record.
(2) Consists of shares of Common Stock held by a series of trusts
(collectively, the "Grossman Trust") for the benefit of relatives of Mr.
Grossman. Mr. Isaac Grossman and Sheila Grossman and one of their relatives are
the trustees of the Grossman Trusts. Under its terms, the Grossman Trust will
return to Mr. Grossman annually until August 1998 56% of the value of the shares
(payable in cash or in shares) when deposited into each of the Grossman Trusts.
Since the number of shares to be returned to Mr. Grossman is based on the then
current market price of the Common Stock, such number can not be determined at
the present time. To date, no shares have been returned to
38
<PAGE> 42
Mr. Grossman under this arrangement. Mr. Grossman disclaims beneficial ownership
in the shares held by the Grossman Trust that will not be returned to him.
(3) Consists of shares held by the Grossman Trust of which Mr. Isaac
Grossman is currently a beneficiary as to 464,600 shares. The actual number of
shares held by the Grossman Trust as to which Isaac Grossman is a beneficiary
may be smaller since under the terms of the Grossman Trust, a portion of the
shares may be returned to Marton Grossman as described in footnote 2. Mr.
Grossman is a trustee of the Grossman Trust and in that capacity shares voting
power as to the shares held by the Grossman Trust.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.001 per share. As of the date of this Prospectus, 3,198,258 shares of
Common Stock are issued and outstanding.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's Certificate of
Incorporation, the Company's Bylaws and Nevada Law. The following statements do
not purport to be complete or give full effect to statutory or common law, and
are subject in all respects to the applicable provisions of the Certificate of
Incorporation, Bylaws and state law.
Units
The Company is hereby offering 1,200,000 Units, each Unit consisting of
one share of Common Stock, one Class A Warrant and one Class B Warrant. The
Common Stock and the Warrants will be separately tradable commencing __________
[90 days after the effective date].
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
39
<PAGE> 43
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 transferable commencing on the Separation Date and
will entitle the registered holder thereof to purchase one share of Common Stock
at $10.00 (subject to adjustment as described below) for a period of three years
commencing on the date of this Prospectus. Holders of Warrants may exercise such
Warrants by surrendering the certificate evidencing such Warrants to the Warrant
Agent, together with the form of election to purchase on the reverse side of
such certificate attached thereto properly completed and executed and the
payment of the exercise price and any transfer tax. If less than all of the
Warrants evidenced by a Warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants. See "Underwriting."
The Warrants may not be exercised unless a current registration statement
is on file with the Commission and various state securities commissions. The
Company has agreed to use its best efforts to maintain a current effective
registration statement under the Securities Act. While it is the Company's
intention to file post-effective amendments when necessary and to take
appropriate action under state securities laws, there is no assurance that the
registration statement will be kept effective or that such appropriate action
under state securities laws will be effected. If the registration statement is
not kept current for any reason, the Warrants will not be exercisable, and
holders thereof may be deprived of value.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon exercise of the Warrants, each share of Common Stock will be fully
paid and nonassessable. Warrant holders will not have any voting or other rights
as shareholders of the Company unless and until Warrants are exercised and
shares issued pursuant thereto. The exercise price and the number of shares of
Common Stock issuable upon the exercise of each Warrant are subject to
adjustment. Generally, the exercise price of the Warrants will be adjusted if
the Company issues and sells shares of Common Stock (or issue securities
convertible into Common Stock options, warrants and other similar rights) at a
price less than the exercise price of the Warrants in effect at the time of such
issuance. Upon each adjustment in the exercise price, corresponding adjustments
will be made in the number of shares of Common Stock issuable upon exercise of
the Warrants. In addition, in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or similar corporate transactions
involving the Company, the then holders of the Warrants will receive the right
to purchase the kind and amount of securities (subject to adjustment as set
forth above) they would have been entitled to receive had they exercised the
Warrants immediately prior to any such corporate transaction. The foregoing does
not purport to be a complete description of the anti-dilution provisions of the
Warrants. The complete terms are set forth in the Warrant Agreement which has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part.
At any time, The Class A Warrants and the Class B Warrants are redeemable
by the Company at $.01 per Warrant on thirty day's prior written notice at any
time provided that the average closing bid price for the Common Stock is no less
than $9.00 per share with respect to the Class A Warrants and $15.00 with
respect to the Class B Warrants for any ten trading days within a period of 30
consecutive trading days as reported on the principal exchange or market on
which the Common Stock is traded. The right to purchase the Common Stock
issuable upon exercise by the Warrants noticed for redemption will be forfeited
unless the Warrants are exercised prior to the date specified in the notice of
redemption. While the Company may legally be permitted to give notice to redeem
the Warrants at a time when a current prospectus is not available thereby
leaving the Warrant holders no opportunity to exercise their Warrants prior to
redemption, the Company does not intend to redeem the Warrants unless a current
prospectus is available at the time of redemption.
40
<PAGE> 44
Shares Available for Future Sale
Upon completion of this offering, the Company will have 4,398,798 shares
of Common Stock outstanding (4,578,798 shares if the Underwriter's
over-allotment option is exercised in full). Of these shares, the shares
included in the Units and 224,000 shares held by existing security holders will
be freely tradeable without restriction or further registration under the
Securities Act except for any shares purchased by an "affiliate" of the Company
(in general, a person who has a control relationship with the Company) which
will be subject to the limitations of Rule 144 adopted under the Securities Act.
Except as described below, all of the remaining shares of Common Stock may be
deemed "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. Such shares may be sold to the public
immediately, subject to volume restrictions, as described below.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate of the
Company), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or the average weekly trading volume of the Company's
Common Stock on all exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
Approximately 93% of the currently issued and outstanding shares are owned
by a series of trusts for the benefit of relatives of Marton Grossman. Isaac and
Sheila Grossman are among the trustees of these trusts. Although no lock-up
agreements are in effect with respect to any of such shares of Common Stock, the
Company has been advised that there is no current intent to resell any of such
securities. See "Security Ownership of Certain Beneficial Owners and
Management."
Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005, acts as Transfer Agent for the Company's Common Stock and Warrants.
Market for the Company's Securities
The Company believes that there are currently in excess of 1,000
registered holders of the Company's Common Stock Prior to the Company's filing
of a petition for protection under the Bankruptcy Code in 1995, the Company's
securities were traded on the Nasdaq There currently exists no active trading
market for the Company's securities and, therefore, no current pricing
information is available for the Common Stock. It is anticipated that the
Securities will be quoted on the OTC Bulletin Board upon completion of this
offering.
41
<PAGE> 45
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and Patterson Travis, Inc. (the "Underwriter") (a
copy of which agreement is filed as an exhibit to the Registration Statement of
which this prospectus forms a part), the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase, the Units offered
hereby. All 1,200,000 Units offered must be purchased by the Underwriter if any
are purchased. The Units are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Units to the public at the offering prices set forth on the cover page of this
Prospectus and that the Underwriter may allow to certain dealers who are members
in good standing of the National Association of Securities Dealers, Inc.
("NASD") concessions of $___ per Unit. Upon completion of the sale of all
Securities offered hereby, the public offering price and concessions may be
changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable for 45 days
from the date of this Prospectus, to purchase from it up to 180,000 Units at the
public offering prices less the underwriting discounts set forth on the cover
page of this Prospectus. The Underwriter may exercise this option solely to
cover over-allotments in the sale of the Units offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds to the Company of the Units sold in the
offering (including the over-allotment option).
The Underwriter will (i) receive a Warrant solicitation fee equal to 8%
(or the maximum amount permissible under NASD rules) of the exercise price of
all Warrants it causes to be exercised (or $1,536,000, assuming exercise of all
Warrants) commencing one year from the date hereof, if (a) the market price of
the Company's Common Stock on the date the Warrant is exercised is greater than
the exercise price of the Warrant, (b) the exercise of the Warrant was solicited
by the Underwriter, (c) the Warrant is not held in a discretionary account, (d)
disclosure of the compensation arrangement is made upon the sale and exercise of
the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6
under the Exchange Act, and (f) solicitation of the exercise is otherwise in
compliance with the applicable NASD rules. The Warrant solicitation fee will be
payable only after one year from the date hereof.
Under the underwriting agreement, the Underwriter has the right to
designate one member of the Board of Directors for a period of three years from
the date hereof. The agreement also provides for reciprocal indemnification
between the Company and the Underwriter against certain civil liabilities,
including liabilities under the Securities Act.
The Company has agreed to sell to the Underwriter or its designees, at a
price of $120, 120,000 warrants to purchase 120,000 Units (the "Underwriter's
Warrants"). Other than a one-year restriction on transferability and
exercisability and a higher exercise price of the Warrants included in the
Units, the Units underlying the Underwriter's Warrants are identical in all
respects to the Units offered to the public hereby. The Warrants will be
exercisable at a price of $8.25 per Unit for a period of five years. The Class A
Warrants and Class B Warrants underlying the Units included in the Underwriter's
Warrants will be exercisable at a price of $9.90 and $16.50, respectively, or
165% of the then exercise price of the Warrants offered to the public, for a
period of five years commencing on the date hereof (unless redeemed earlier).
The Underwriter's Securities may not be exercised or sold, transferred, assigned
or hypothecated for one year from the date hereof except to officers of the
Underwriter. Any profit realized upon a resale of the Underwriter's Securities
may be deemed to be additional underwriter's compensation. The Company has
agreed to register, or file a post-effective amendment with respect to any
registration statement registering, the Underwriter's Securities under the
Securities Act at its expense on one occasion during the five years following
the date of this Prospectus and at the expense of the holders thereof on another
occasion, upon the request of a majority
42
<PAGE> 46
of the holders thereof. The Company has also agreed to "piggy- back"
registration rights for the holders of the Underwriter's Securities at the
Company's expense during the five years following the date of this Prospectus.
The Company has agreed to retain the Underwriter as a financial consultant
for the two years following the closing of this offering for an aggregate fee of
$20,000 payable at the closing of this offering.
The Underwriter has informed the Company that it does not expect sales of
Units to be made to discretionary accounts.
Pricing of the Offering
Immediately prior to this offering, there has been no active public
trading market for any of the Company's securities. Consequently, the initial
offering prices of the Units and the exercise prices of the Warrants have been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in determining the offering prices were the Company's
financial condition and prospects, the industry in which the Company is engaged,
certain financial and operating information of companies engaged in activities
similar to those of the Company and the general market condition of the
securities markets. The offering prices do not necessarily bear any relationship
to any established standard or criteria of value based upon assets, earnings,
book value or other objective measures.
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York,
New York. Gerald A. Kaufman, Esq., Huntington Station, New York, will pass on
certain aspects of this offering on behalf of the Underwriter.
EXPERTS
The audited financial statements of the Company as of April 30, 1995, 1996
and 1997 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the reports of Moore Stephens, P.C., and
Hoberman, Miller & Co., P.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
43
<PAGE> 47
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> 48
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic International, Ltd.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Dynamic International, Ltd.
(formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended
April 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on those
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Dynamic International, Ltd. (formerly Dynamic
Classics, Ltd.) and Subsidiary for the year ended April 30, 1995 in conformity
with generally accepted accounting principles.
As more fully discussed in Note 2 the Company, on August 23, 1995,
filed a voluntary petition for relief under Chapter 11 of the United States
Bandruptcy Act.
HOBERMAN, MILLER & CO., P.C.
New York, New York
June 26, 1996
F-2
<PAGE> 49
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 59,245 $ 43,543 $ 26,515
Accounts receivable - trade (net of allowance for doubtful
accounts of $167,000 in 1997 and 1996) 1,063,147 887,089 1,036,927
Due from suppliers 45,435 65,273 26,760
Inventory 2,786,336 3,301,735 2,384,469
Prepaid expenses 155,618 60,272 81,693
Miscellaneous receivables 2,658 2,658 135,039
Prepaid and refundable income taxes 56,003 39,914 291,146
----------- ----------- -----------
Total Current Assets 4,168,442 4,400,484 3,982,549
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies 707,939 707,939 707,939
Furniture and equipment 102,205 102,205 102,205
Capitalized equipment leases 576,071 576,071 576,071
----------- ----------- -----------
1,386,215 1,386,215 1,386,215
Accumulated depreciation (1,278,011) (1,260,924) (1,156,160)
----------- ----------- -----------
Total Property and Equipment, net 108,204 125,291 230,055
----------- ----------- -----------
OTHER ASSETS
Due from suppliers 36,142 36,142 36,142
Security deposits 4,650 4,650 4,650
Deferred stock offering costs 189,867 116,023 --
Reorganization value in excess of amounts allocable to
identifiable assets, net 121,436 124,472 --
----------- ----------- -----------
Total Other Assets 352,095 281,287 40,792
----------- ----------- -----------
TOTAL ASSETS $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 50
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses - non related $ 710,549 $ 846,234 1,009,248
Accounts payable and accrued expenses - related party 2,655,946 2,627,580 2,129,893
Capital lease obligations - current 18,261 24,228 48,731
Income taxes payable -- 103,700 --
Loan payable - related party 1,005,350 844,531 557,000
Other liabilities -- -- 531,561
----------- ----------- -----------
Total Current Liabilities 4,390,106 4,446,273 4,276,433
----------- ----------- -----------
OTHER LIABILITIES
Capital lease obligations, net of current portion -- -- 23,965
Loan payable - related party 54,435 215,254 --
----------- ----------- -----------
Total Other Liabilities 54,435 215,254 23,965
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued 1,744,396 shares -- -- 17,444
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares 3,199 3,199 --
Additional paid in capital 22,940 22,940 590,291
Accumulated deficit -- -- (637,237)
Retained Earnings (since July 31, 1996, date of reorganization,
total deficit eliminated was $713,601) 158,064 119,399 --
----------- ----------- -----------
184,203 145,538 (29,502)
Less: Treasury stock, at cost, 15,000 shares -- -- (17,500)
Less: Treasury stock, at cost, 540 shares (3) (3) --
----------- ----------- -----------
Total Stockholders' Equity (Deficit) 184,200 145,535 (47,002)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The dischcharge of prepetition liabilities including
liabilities subject to compromise has been recorded and the gain on the debt
discharge is reflected in the consolidated statement of operations for the year
ended April 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 51
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales $1,834,162 $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097
Other income 7,959 54,642 10,201 98,272 70,638
---------- ---------- ----------- ------------ ------------
1,842,121 7,547,371 1,993,365 7,249,987 32,603,735
COST OF SALES 1,282,334 4,850,002 1,454,637 9,480,484 34,761,846
---------- ---------- ----------- ------------ ------------
GROSS PROFIT (LOSS) 559,787 2,697,369 538,728 (2,230,497) (2,158,111)
---------- ---------- ----------- ------------ ------------
OPERATING EXPENSES
Research and development 14,420 4,042 -- 101,992 44,962
Shipping expenses 67,864 452,093 116,894 738,681 1,198,563
Selling expenses 179,824 686,214 198,993 1,254,006 2,455,493
Advertising and promotion 2,493 152,563 1,819 389,672 346,400
General and administrative 172,545 931,683 238,791 4,198,800 3,720,998
Interest and bank charges - non related
(Contractual interest of $806,937 for
the year ended April 30, 1996) 7,017 21,462 4,174 248,625 1,384,898
Interest and bank charges - related party 52,909 177,339 53,096 134,928 --
---------- ---------- ----------- ------------ ------------
497,072 2,425,396 613,767 7,066,704 9,151,314
---------- ---------- ----------- ------------ ------------
REORGANIZATION ITEMS:
Bankruptcy administration costs -- 48,874 1,325 449,693 --
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 62,715 223,099 (76,364) (9,746,894) (11,309,425)
---------- ---------- ----------- ------------ ------------
INCOME TAX PROVISION (BENEFIT)
Current -- 103,700 -- -- (396,143)
Deferred 24,050 -- -- (7,511,000) 314,053
---------- ---------- ----------- ------------ ------------
24,050 103,700 -- (7,511,000) (82,090)
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 38,665 119,399 (76,364) (2,235,894) (11,227,335)
---------- ---------- ----------- ------------ ------------
EXTRAORDINARY ITEM:
Gain on discharge of prepetition liabilities -- -- -- 16,692,193 --
Income tax provision -- -- -- 7,511,000 --
---------- ---------- ----------- ------------ ------------
Extraordinary gain net of income tax -- -- -- 9,181,193 --
---------- ---------- ----------- ------------ ------------
NET INCOME (LOSS) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
========== ========== =========== ============ ============
INCOME PER SHARE OF COMMON
SHARES $ 0.01 $ 0.04
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 3,198,258 3,198,258
</TABLE>
The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 52
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Retained Treasury Stockholders'
Common Paid in Earnings Stock Equity
Stock Capital (Deficit) at Cost (Deficit)
----- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance - May 1, 1994 $ 17,444 $ 590,291 $ 3,644,799 $(17,500) $ 4,235,034
Net Loss - - (11,227,335) - (11,227,335)
-------- --------- ----------- -------- ------------
Balance - April 30, 1995 17,444 590,291 (7,582,536) (17,500) (6,992,301)
Net Income - - 6,945,299 - 6,945,299
-------- --------- ----------- -------- ------------
Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002)
Net Loss for the Three Months Ended
July 31, 1996 - - (76,364) - (76,364)
-------- --------- ----------- -------- ------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate predecessor equity accounts and
to reflect new issuance of shares in
connection with fresh start (1,450) (580,146) 713,601 17,497 149,502
-------- --------- ----------- -------- ------------
15,994 10,145 - (3) 26,136
To reflect 1 for 5 reverse stock split (12,795) 12,795 - - -
-------- --------- ----------- -------- ------------
Balance - July 31, 1996 3,199 22,940 - (3) 26,136
Net income for the Nine Months Ended
April 30, 1997 - - 119,399 - 119,399
-------- --------- ----------- -------- ------------
Balance - April 30, 1997 3,199 22,940 119,399 (3) 145,535
Net income for the Three Months Ended
July 31, 1997 (Unaudited) - - 38,665 - 38,665
-------- --------- ----------- -------- ------------
Balance - July 31, 1997 (Unaudited) $ 3,199 $ 22,940 $ 158,064 $ (3) $ 184,200
======== ========= =========== ======== ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 53
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 20,124 87,681 26,191 220,400 268,148
Amortization of deferred interest under
capital leases - - - - 17,979
Reserve for bad debts - - - 167,000 -
Loss on disposal of property
and equipment - - - 71,030 -
Deferred income taxes - - - (7,511,000) 314,053
Income on partial discharge of
capital lease obligations - - - (77,403) -
Interest converted to principal - 11,439 36,670 - -
Reorganization item:
Gain on discharge of debt, net
of income tax - - - (9,181,193) -
Cash distribution - (515,638) - - -
Changes in operating assets and liabilities:
(Increase) Decrease in operating
assets:
Accounts receivable and due
from suppliers (156,220) 482,254 (221,255) 220,882 6,843,636
Inventory 515,399 (1,032,882) 115,616 1,065,821 3,260,017
Prepaid expenses (95,346) 122,017 (100,596) 168,856 (183,186)
Miscellaneous receivables - 132,379 - (108,179) 51,352
Prepaid and refundable income taxes (16,089) 252,046 (812) - (291,146)
Security deposits - - - 86,858 (3,537)
Increase (Decrease) in operating liabilities:
Prepetition liabilities - - - 8,614,728 -
Accounts payable and accrued expenses (107,320) (56,766) 155,784 (1,828,715) 1,949,987
Income taxes payable (103,700) 103,700 - - (200,770)
--------- ----------- --------- ----------- ------------
Net Cash Provided (Used) by
Operating Activities $ 95,513 $ (294,371) $ (64,766) $(1,145,616) $ 799,198
--------- ----------- --------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - - - (47,933) (143,995)
--------- ----------- --------- ----------- ------------
Net Cash Used by Investing Activities $ - $ - $ - $ (47,933) $ (143,995)
--------- ----------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 54
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable $ - $ - $ - $ 3,393,628 $ 24,250,741
Repayment of notes payable - - - (26,460,130)
Proceeds from notes payable - related party - 600,000 - - -
Repayment of notes payable - related party - (145,324) - - -
Proceeds from loan payable - related party - - - 557,000 -
Proceeds from bankers acceptances - - - 1,118,556 9,321,558
Repayment of bankers acceptances - - - (4,127,139) (7,876,394)
Repayment of officer's loans payable - - - - (2,373)
Repayment of capital lease obligations (5,967) (29,656) (18,812) (64,552) (109,308)
Proceeds from insurance note payable - - 77,225 - -
Repayment of insurance note payable - (62,020) (15,205) - -
Payment of deferred offering costs (73,844) (30,043) - - -
----------- ---------- -------- ----------- ------------
Net Cash Provided (Used) by
Financing Activities (79,811) 332,957 43,208 877,493 (875,906)
----------- ---------- -------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 15,702 38,586 (21,558) (316,056) (220,703)
Cash and Cash Equivalents, beginning of period 43,543 4,957 26,515 342,571 563,274
----------- ---------- -------- ----------- ------------
Cash and Cash Equivalents, end of period $ 59,245 $ 43,543 $ 4,957 $ 26,515 $ 342,571
=========== ========== ======== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 1,575 $ 25,451 $ 1,553 $ 203,964 $ 1,196,322
Income tax $ 163,534 $ - $ - $ - $ 116,319
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1995 the Company incurred capital lease
obligations of $143,855 in connection with lease agreements to acquire
equipment.
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 3,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 55
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
Dynamic International, Ltd. (the "Company") is engaged in
the sale and distribution of a diverse line of hand
exercise and light exercise equipment, sports bags/luggage
and gift products which are distributed throughout the
United States.
b. Revenue
Revenue is recognized when the goods are shipped to the
customer.
c. Fresh Start Reporting
Financial accounting during a Chapter 11 proceeding is
prescribed in "Statement of Position 90-7 of the American
Institute of Certified Public Accountants," titled
"Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("SOP 90-7"), which the Company
adopted effective July 31, 1996. The emergence from the
Chapter 11 proceeding resulted in the creation of a new
reporting entity without any accumulated deficit and with
the Company's assets and liabilities restated at their
estimated fair values (also see Note 2 Reorganization and
Management Plan). Because of the application of fresh start
reporting, the financial statements for periods after
reorganization are not comparable in all respects to the
financial statements for periods prior to reorganization.
d. Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and the wholly owned inactive subsidiary.
All significant intercompany accounts and transactions have
been eliminated.
e. Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
f. Inventories
Inventories consist principally of finished goods and are
stated at the lower of cost; last-in, first-out method,
(LIFO) or market.
g. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
provided generally by accelerated methods over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs are charged against income.
Estimated useful lives used in calculating depreciation are
as follows:
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
F-9
<PAGE> 56
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h. Deferred Offering Costs
Legal and accounting costs incurred in connection with the
proposed public offering of the Company's common stock will
be charged to additional paid-in capital upon completion of
the proposed public offering. If the offering is not
consummated, these costs will be expensed.
i. Advertising and Promotion
Advertising and promotion expense, primarily comprised of
print media distributed to current and potential customers,
is expensed as incurred.
j. Earnings Per Share
Earnings (loss) per share are based on the weighted average
number of shares outstanding as adjusted for the 1 for 5
reverse split. Common stock equivalents are included in the
calculation if they are dilutive. Amounts for the
predecessor company (see Note 2) are not presented as they
are not meaningful.
k. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
l. Stock Options and Similar Equity Instruments
On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity
instruments (collectively, "Options") issued to employees;
however, the Company will continue to apply the intrinsic
value based method of accounting for options issued to
employees prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issues to Employees,"
rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity
instruments to acquire goods or services from
non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever
is more reliably measurable.
m. Reorganization value in excess of amounts allocable to
identifiable assets
The excess reorganization value is amortized over a period
of eleven years on the straight line basis (see Note 2).
Management re-evaluates the periods of amortization to
F-10
<PAGE> 57
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m. determine whether subsequent events and circumstances
warrant revised estimates of useful lives. If impairment is
deemed to exist, the excess reorganization value will be
written down to fair value or projected discounted cash
flows from related operations. As of April 30, 1997,
management expects the asset to be fully recoverable.
2. REORGANIZATION AND MANAGEMENT PLAN
In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Initially, the Company was
successful in marketing these products. However, due to defective
products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow
substantial returns by its customers. Although pursuant to a written
agreement, the manufacturers acknowledged the defects and agreed to
pay for returns and to provide replacement goods at no cost, they
breached this agreement soon thereafter. For the year ended April 30,
1996, the Company suffered significant losses in the amount of
approximately $3,700,000 from its venture into this line of business.
At April 30, 1995, the Company was not in compliance with certain of
the financial covenants which enabled the bank to declare the
outstanding balances of all amounts due the bank to be immediately
due and payable. In July 1995, the lender bank effectively terminated
its relationship with the Company as it experienced difficulty in
complying with the terms of the loans. As a result, certain
collateral was liquidated by the lender bank. On August 22, 1995, the
lender bank sold and assigned the loan balance of $6.8 million. The
assigned loan was secured by a security interest in substantially all
of the Company's assets. As discussed below, the assignor was issued
2,976,000 shares of new common stock in consideration of forgiving
the $6.8 million outstanding loan.
On August 23, 1995, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. A Plan of
Reorganization was filed by the Company on October 30, 1995 and
subsequently amended and modified on February 22, 1996. On April 5,
1996, the creditors voted to accept the amended and modified Plan
(the "Plan"), and on May 23, 1996, the court confirmed the Plan. The
Plan was substantially consummated in August 1996. For accounting
purposes, the Company assumed that the Plan was consummated on July
31, 1996.
As contemplated by the Plan, a new company, Dynamic International,
Ltd. was formed on July 29, 1996. On August 8, 1996, the Company
merged into Dynamic International, Ltd. The capital structure and the
balance sheet of the combined entity, immediately after the merger,
were substantially the same as those of the company prior to the
merger. The "new common stock" is referred to below as the common
stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed
in the bankruptcy proceeding totaled approximately $17.2 million. The
Plan discharged such claims through distributions of cash of
approximately $515,000 and issuance of shares of new common stock.
The cash distributions were paid in August 1996. A total of 3,198,798
shares of new common stock were issued on July 25, 1996 out of which
2,976,000 shares were issued to one secured creditor, which also
satisfied $15,923 of loans made by the chief executive officer of the
Company to the Company (see Note 4); 160,000 shares were issued to
unsecured creditors, and
F-11
<PAGE> 58
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
62,798 shares were issued to the reconfirmation common stock equity
interest holders.
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the
reorganization value of the Company determined by projecting cash
flows over an eleven year period and discounting such cash flows at a
cost of capital rate of 15% and the statutory federal, state and
local tax rates currently in effect. The discounted residual value at
the end of the forecast period is based on the capitalized cash flows
for the last year of that period. Cash distributions and the
estimated stock distribution value totaling $531,561 has been
recorded as other liabilities as of April 30, 1996. The gain of
approximately $16.7 million resulting from the excess of the allowed
claims over the total value of the cash and the common stock
distributed to the secured and unsecured creditors has been recorded
as an extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and
assumptions about circumstances and events that have not yet taken
place. Such estimates and assumptions are inherently subject to
significant economic and competitive uncertainties and contingencies
beyond the control of the Company, including, but not limited to
those with respect to the future courses of the Company's business
activity. Accordingly, there will usually be differences between
projections and actual results because events and circumstances
frequently do not occur as expected, and those differences may be
material.
As part of the reorganization, the Company will continue to sell hand
exercise, light exercise equipment and luggage and sports bags, all
of which have a proven market acceptance. Management believes it can
increase revenues by increasing its focus on direct response
marketing. Therefore, it intends to develop plans to use infomercials
to market these products. Management believes these increased
marketing efforts, adequate financing through its related entity,
Achim Importing, discontinuance of the unprofitable products, and
sustainable gross profit percentages, can be effectively implemented
within the next twelve months. The Company adopted "fresh-start
reporting" in accordance with Statement of Position ("SOP") 90-7
issued by the American Institute of Certified Public Accountants on
July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start
reporting" if the reorganization value of the emerging entity
immediately before the date of confirmation is less than the total of
all postpetition and allowed claims, and if holders of existing
voting shares immediately before confirmation receive less than 50
percent of the voting shares of the emerging entity, both conditions
of which were satisfied by the Company. Although the confirmation
date was May 23, 1996, fresh-start reporting was adopted on July 31,
1996. There were no material fresh-start related adjustments during
the period May 23, 1996 to July 31, 1996.
Under fresh start accounting, all assets and liabilities are restated
to reflect their reorganization value, which approximates book value
at date of reorganization. Therefore, no reorganization value has
been allocated to the assets and liabilities. In addition, the
accumulated deficit of the predecessor company at July 31, 1996
totaling $713,601 was eliminated, and at August 1, 1996, the
reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of
amounts allocable to identifiable assets is being amortized over an
eleven year period on the straight line method. Amortization expense
for the nine months ended April 30, 1997 was $9,108.
F-12
<PAGE> 59
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The following is a proforma balance sheet of the reorganized Company
based on the discounted cash flows as discussed above.
<TABLE>
<CAPTION>
Balance Reorganized
Sheet Stock Fresh Company
July 31, 1996 Exchange Start July 31, 1996
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 4,957 $ 4,957
Accounts receivable, net 1,258,182 1,258,182
Inventory 2,268,853 2,268,853
Prepaid & refundable
income taxes 291,960 291,960
Other assets 328,030 328,030
----------- -----------
Total Current Assets 4,151,982 4,151,982
Fixed assets, net 203,863 203,863
Other Assets 56,848 56,848
Reorganization value in
excess of amounts allo-
cable to identifiable assets 133,580 133,580
----------- --------- -----------
Total Assets $ 4,412,693 $ 133,580 $ 4,546,273
=========== ========= ===========
Current Liabilities:
Loans payable - MG $ 593,670 $ 593,670
Loans payable - Trade 62,020 62,020
Accounts payable and
accrued expenses 3,294,925 3,294,925
Capital lease obligations 32,226 32,226
Other current liabilities 531,561 (15,923) 515,638
----------- --------- --------- -----------
Total Current Liabilities 4,514,402 (15,923) 0 4,498,479
Other liabilities 21,658 21,658
----------- --------- --------- -----------
Total Liabilities 4,536,060 (15,923) 0 4,520,137
----------- --------- --------- -----------
Common stock par value 17,444 (17,444) 15,994
15,994
Additional paid in capital 590,290 (590,291) (580,021) 10,145
590,167
Accumulated deficit (713,601) 713,601 0
----------- --------- --------- -----------
(105,867) (1,574) 133,580 26,139
Less: treasury stock (17,500) 17,497 (3)
----------- --------- --------- -----------
Total Equity (123,367) 15,923 133,580 26,136
----------- --------- --------- -----------
Total Liabilities and Equity $ 4,412,693 $ 0 $ 133,580 $ 4,546,273
=========== ========= ========= ===========
</TABLE>
F-13
<PAGE> 60
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans
from MG Holdings Corp. to pay creditors pursuant to the
reorganization plan. The liability to the reorganized company is
$515,638.
3. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used
by the Company, reported net income would have been decreased by
$294,000 in fiscal 1997. Net income would have been increased by
$263,000 in fiscal 1996, and the net loss would have been increased
by $246,000 in fiscal 1995. On a FIFO basis, reported year end
inventories would have increased by $24,000 in 1997, $318,000 in 1996
and $55,000 in 1995.
4. RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September
1, 1996 (the "Warehousing Agreement") between the Company and an
entity ("Related Party") owned by a major stockholder, the entity
performs certain administrative services on behalf of the Company.
Under the Warehousing Agreement, the entity assists, among other
things, in the maintenance of financial and accounting books and
records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and in the performance of credit
checks on the Company's customers. In consideration for these
services, Achim receives an annual fee, payable monthly, calculated
at a percentage of the Company's invoiced sales originating at the
warehouse ranging from 4% of the invoiced sales under $30 million to
3% of sales of $60 million or more. For sales not originating at the
warehouse, Achim receives a service fee in the amount of 1.5% of the
Company's invoiced sales to customers and accounts located in the
United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States,
irrespective of manner of payment. In addition, under the Warehousing
Agreement, the entity provides warehousing services consisting of
receiving, shipping, and storing of the Company's merchandise. The
Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing
services performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is
automatically renewable for additional one year periods unless
written notice of termination is given at least six months prior to
the commencement of a renewal period. During the fiscal year ended
April 30, 1997, the Company accrued approximately $458,488 in fees
under the Warehousing Agreement. Total warehousing and administrative
expenses charged to operations for the nine months ended April 30,
1997 were approximately $364,000, for the three months ended July 31,
1996 were approximately $95,000 and for the year ended April 30, 1996
were approximately $164,000.
The Related Party also purchases inventory for the Company and
charges the Company for the invoiced amount of the inventory.
Loan payable to the related party totaled $1,059,785 at April 30,
1997. Such note is secured by all of the Company's assets. On August
30, 1996, loans and other payables, including accrued interest
totaling $1,205,109, were converted into the note payable. Interest
is charged at the
F-14
<PAGE> 61
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
4. RELATED PARTY TRANSACTIONS (cont'd)
Citibank prime rate plus 1%. This note is payable in 24 equal
installments of principal and interest through August 5, 1998. At
April 30, 1997, the Company was in arrears in the amount of $274,273
consisting of principal and interest. On July 10, 1997, the note was
amended to allow the arrears and note payments to be deferred until
the consummation of the Company's contemplated public offering (see
Note 10) or the scheduled maturity of the note, whichever is earlier.
Annual maturities of the note at 9.25% interest per annum is as
follows:
<TABLE>
<CAPTION>
For the Year Ending
-------------------
<S> <C> <C>
April 30,
1997 (in arrears) $ 237,053
1998 607,478
1999 215,254
----------
$1,059,785
==========
</TABLE>
Interest expense charged to operations for the nine months ended
April 30, 1997 was $67,898, for the three months ended July 31, 1996
was $16,746 and $19,924 for the year ended April 30, 1996.
Other amounts payable to the related party totaled $2,627,580 and
$2,129,893, respectively, at April 30, 1997 and 1996. Such amounts
represent unpaid inventory purchases and various fees due to the
related party. The amounts payable for the purchase of inventory
bears interest at the Citibank prime rate plus 1% from September 1996
to April, 1997 and the Citibank prime rate plus 3% prior to September
1996. The prime rate used was 8.25% for the period September 1996 to
April 1997 and 8.5% for the period prior to September 1996 . Interest
expense charged to operations was $111,411 for the nine months ended
April 30, 1997, $34,380 for the three months ended July 31, 1996 and
$115,004 for the year ended April 30, 1996. The weighted average
interest rate at April 30, 1997 and 1996 was 9.25% and 11.5%,
respectively.
5. INCOME TAXES
The Company utilizes an asset and liability approach to determine the
extent of any deferred income taxes, as described in Statement No.
109, "Accounting for Income Taxes" of the Financial Accounting
Standards Board. This method gives consideration to the future tax
consequences associated with differences between financial statement
and tax bases of assets and liabilities.
F-15
<PAGE> 62
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
There were no income tax liabilities at April 30, 1996. Income tax
liabilities at April 30, 1997 included in income taxes payable
consist of the following :
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes $ 103,700
Deferred taxes:
Federal -
Other income and franchise taxes -
---------
Total Income Tax Liability $ 103,700
=========
</TABLE>
At April 30, 1997, there are no temporary differences that would
result in a deferred tax asset or liability. The deferred income tax
assets and liabilities at April 30, 1996 consist of the following:
<TABLE>
<CAPTION>
1996
----
<S> <C>
DEFERRED TAX ASSETS:
Bad debt reserves $ 75,000
Difference in book and tax treatment
for advertising costs 16,000
Net operating loss carryforwards 8,783,000
Other deferred tax assets 50,000
------------
TOTAL DEFERRED TAX ASSETS 8,924,000
------------
DEFERRED TAX LIABILITY (ALLOCATED TO
EXTRAORDINARY GAIN):
Gain on discharge of prepetition
liabilities 7,511,000
------------
7,511,000
------------
Valuation allowance for deferred
tax assets (1,413,000)
------------
$ -0-
============
</TABLE>
The valuation allowance decreased by $1,094,000 in 1996.
F-16
<PAGE> 63
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
A summary of the provision (credit) for income taxes is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -----------------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 59,000 $ -- $(401,529)
State and Local 44,700 -- 5,386
----------- ----------- ---------
103,700 -- (396,143)
----------- ----------- ---------
Deferred:
Federal -- (5,675,000) 313,039
State and Local -- (1,836,000) 1,014
----------- ----------- ---------
-- (7,511,000) 314,053
----------- ----------- ---------
$ 103,700 $(7,511,000) $ ( 82,090)
=========== =========== =========
</TABLE>
The reconciliation of the federal statutory income tax expense
(credit) to the Company's actual income tax (credit) is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -----------------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
U.S. federal income taxes
at statutory rate $ 75,900 $ 2,361,000 $(3,845,205)
Losses for which no benefit
was provided -- -- 982,371
Change in valuation
allowance -- (1,094,000) 2,506,820
Reversal of previously
established tax asset -- -- 313,039
Tax effect of permanent
differences 5,400 8,000 17,035
State income taxes, net of
federal benefit 25,000 764,000 --
Benefit of unused net
operating losses -- (1,412,000) --
Differences due to change in
rate -- (627,000) --
Other (2,600) -- (56,150)
--------- ----------- -----------
$ 103,700 $ -0- $ (82,090)
========= =========== ===========
</TABLE>
F-17
<PAGE> 64
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
The Company had a net loss for the three months ended July 31, 1996
and accordingly, the Company has no income tax provision or liability
for the period.
The Company has a net operating loss for the year ended April 30,
1995 of approximately $8,400,000 of which $1,200,000 was carried back
to prior years. The Company has filed prior year amended returns to
claim the net operating loss carryback which results in refundable
income taxes of approximately $287,000. As of April 30, 1997, the
Company received $251,000 of the refundable income taxes. The balance
of $36,000 is included in prepaid and refundable income taxes at
April 30, 1997.
At April 30, 1996, the net operating loss carryforward totaled
approximately $19,500,000 of which approximately $16,700,000 will be
utilized by the Company in its final tax return for the period May 1,
1996 to August 8, 1996 (see Note 2 re: merger into Dynamic
International, Ltd.). Based on ownership changes resulting from the
reorganization (see Note 2), the balance of the net operating loss
carryforward is expected to be limited by the current provision of
Section 382 of the Internal Revenue Code.
6. COMMITMENTS AND CONTINGENCIES
a. Capital Leases
The Company is the lessee of equipment under capital leases
expiring in various years through 1998.
In September 1995, the lessor of the Company's capital
leases agreed to forgive the balance of the unpaid lease
payments through September 1995 and to accept 60% of the
remaining balance of the lease payments. As a result, the
Company recognized $77,403 of income on the adjustment of
the lease term. Such income is included in other income.
b. Operating Leases
Prior to August, 1995 the Company occupied space for its
sales, executive offices, assembly and storage facilities
under long term operating leases expiring August 1998. The
leases provided for additional payments for insurance,
taxes and other charges related to the premises. As part of
the bankruptcy proceeding, the Company was discharged of
the obligations of the leases. In October 1995 the Company
relocated its premises, where the Company is charged
warehousing fees and administration fees based on sales
volume (see Note 4).
Rent expense for the years ended April 30, 1996 and 1995
was $341,427 and $583,596.
F-18
<PAGE> 65
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
c. Royalty Obligations
The Company has entered into various royalty, licensing,
and commission agreements for products sold by the Company.
These agreements provide for minimum payments and a
percentage of specific product sales, over a period of one
to eight years. Royalty expense for the nine months ended
April 30, 1997 was approximately $353,000, for the three
months ended July 31, 1996 was $94,000 and for the years
ended April 30, 1996 and 1995 was approximately $275,000
and $779,000, respectively.
d. Defined Benefit Pension Plan
On September 26, 1996, the Defined Benefit Employees
Retirement Plan was terminated under a distress termination
approved by the United States Bankruptcy Court. The defined
benefit pension obligation prior to the termination was
$860,945. As part of the bankruptcy proceeding, the
obligation was settled for $38,743 resulting in a gain of
$822,202 which is reflected in the extraordinary gain on
discharge of prepetition liabilities for the year ended
April 30, 1996.
e. 401(k) Plan
On January 1, 1990, the Company adopted a 401(k) plan. The
plan covers all eligible employees. Eligible employees may
contribute from 1% to 15% of their salaries subject to the
statutory maximum of $9,240 for the 1995 and 1994 calendar
years. The plan also provided matching contributions by the
Company of 25% of the employees' contributions to a maximum
contribution of 1% of the employees' salaries. On May 31,
1996, the plan's summary plan description was modified to
make matching contributions discretionary. No matching
contributions were made by the Company for the 1996
calendar year nor will any be made by the 1997 calendar
year.
The 401(k) expense amounted to $0 for the period May 1,
1996 to April 30, 1997 and $2,600 and $9,460 for the years
ended April 30, 1996 and 1995, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer
retirement plan sponsored by their union. The Company is
required to pay seven cents ($.07) per hour per employee to
the plan. The data available from administrators of the
multi-employer plan is not sufficient to determine the
accumulated benefit obligation, nor the net assets
attributable to the multiemployer plan in which Company
employees participate. As of October 1995, the Company no
longer has any union employees. For the years ended April
30, 1996 and 1995 pension expenses for the union employees
were $3,745 and $1,680, respectively.
g. Litigation
In the normal course of its operations, the Company has
been named as a defendant in several product liability
lawsuits that in the opinion of management are not material
to the financial statements taken as a whole and are
substantially covered by the Company's product liability
insurance.
F-19
<PAGE> 66
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
7. MAJOR CUSTOMERS
During the year ended April 30, 1996, sales to three major customers
were approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and
$1,001,000, respectively) of the Company's net sales. At April 30,
1996, accounts receivable from these customers totaled $465,506.
During the year ended April 30, 1995, sales to two major customers
were approximately 26% and 14% ($8,459,000 and $4,555,000,
respectively) of the Company's net sales. At April 30, 1995, there
were no accounts receivable from these customers. The Company sells a
limited amount to foreign customers. There were no material
receivables subject to foreign currency fluctuations.
During the nine months ended April 30, 1997 sales to major customers
were approximately $3,080,180. At April 30, 1997 accounts receivable
from these customers totaled $379,902. During the three months ended
July 31, 1996, sales to major customers were approximately $837,450.
At July 31, 1996, accounts receivable from these customers totaled
$548,726.
8. CREDIT RISK/FINANCIAL INSTRUMENTS
Due to the nature of its business and the volume of sales activity,
the Company's cash balance occasionally exceeds the $100,000
protection of FDIC insurance. At April 30, 1997 there was no such
excess balance. At April 30, 1996 such excess balances totaled
approximately $207,000. The Company has not experienced any losses
and believes it is not exposed to any significant credit risk from
cash and cash equivalents.
The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and,
as a consequence, believes that it does not have an accounts
receivable credit risk exposure beyond the allowance provided. The
Company does not require collateral or other security to support
financial instruments subject to credit risk.
The carrying amounts of short-term debt reported in the balance
sheets approximate fair value. The fair value of the Company's
long-term debt (including the current portion) also approximates its
carrying amount in the balance sheets based on the rates currently
available to the Company for similar debt with similar terms.
9. SIGNIFICANT RISKS AND UNCERTAINTIES
a. The Company's exercise products compete with products
marketed and sold by a number of companies. The Company's
main competitors in this area possess far greater financial
and other resources, including sales forces, than the
Company. However, the Company believes that as a result of
its ability to use trademark names for which it pays
royalties, it will be able to retain its share of the
market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these
companies as well as with other smaller entities.
The Company's luggage products compete with products
designed by a number of the largest companies in the
industry. The Company believes that because of its
concentration on the upscale lifestyle and more specialized
leisure market that are associated with its use of
trademark names, the Company will be able to continue to
grow its luggage business. Nevertheless, there can be no
assurance that the Company will be able to effectively
compete with these companies as well as with other smaller
entities.
F-20
<PAGE> 67
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
9. SIGNIFICANT RISKS AND UNCERTAINTIES (cont'd)
b. Most of the Company's products are purchased from the
Philippines, Taiwan and Hong Kong. The Company believes
that, if necessary, it will be able to obtain its products
from firms located in other countries at little, if any,
additional expense. As a consequence, the Company believes
that an interruption in deliveries by a manufacturer
located in a particular country will not have a material
adverse impact on the business of the Company.
Nevertheless, because of political instability in a number
of the supply countries, occasional import quotas and other
restrictions on trade or otherwise, there can be no
assurance that the Company will at all times have access to
a sufficient supply of merchandise.
10. OTHER ITEMS
a. Discontinued Products
In 1994, the Company added a new line of products
consisting primarily of treadmills and ski machines. Sales
of the treadmills and ski machines began in June 1994. The
Company sold approximately $24,000,000 of these products
from June 1, 1994 to August 23, 1995. Approximately
$17,600,000 or 73% of these products were shipped directly
to consumers. Due to serious manufacturing defects and poor
construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's
Republic of China, the Company was forced to allow
substantial chargebacks by its customers. Although,
pursuant to a written agreement, the manufacturers
acknowledged the defects and agreed to pay for returns and
to provide replacement goods at no cost, they breached this
agreement soon thereafter. As a result, during April 1995,
the Company issued credits to customers for approximately
$5,000,000 of the $7,487,000 of credits for the fiscal year
ended April 30, 1995. The Company issued another $3,211,000
in credits for defective merchandise during the fiscal year
ended April 30, 1996.
The following table sets forth the financial statement
effect of the Company's line of treadmills and ski machines
for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
for the Nine for the Three Predecessor Company
Months Ended Months Ended For the Years Ended
April 30, 1997 July 31, 1996 April 30, 1996 April 30, 1995
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $ -- $ -- $ 597,000 $ 23,255,000
Credits -- -- (3,210,900) (7,487,000)
---- ---- ----------- ------------
Net Sales -- -- (2,613,900) 15,768,000
Inventory
Reserve -- -- -- (1,320,063)
Cost of Sales -- -- 156,000 (18,604,172)
---- ---- ----------- ------------
Gross Loss $ -- $ -- $(2,457,900) $ (4,156,235)
==== ==== =========== ============
</TABLE>
F-21
<PAGE> 68
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
10. OTHER ITEMS (cont'd)
a. Discontinued Products (cont'd)
The sale of these products was discontinued in August 1995,
and all inventory was disposed of by October 1995.
Currently, the Company does not believe that there will be
additional returns of these products or that any claims
relating thereto remain to be settled.
b. Public Offering
The Company is offering for public sale 1,200,000 units,
each consisting of one share of common stock, one Class A
Warrant and one Class B Warrant at $5.00 per unit. Although
no assurance can be given that the sale will be successful,
the Company intends to utilize the net proceeds of
approximately $5,100,000 for the repayment of current debt,
purchase of inventory, general corporate services, and
working capital.
Simultaneous with the public offering, the Company intends
to declare a one for five reverse stock split. All share
data for the reorganized Company has been adjusted for the
split.
The following supplementary earnings per share reflect the
repayment of indebtedness of $1,200,000 and the resulting
reduction of interest expense and increase in net income as
if it had taken place at the beginning of the
reorganization period.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended July 31, 1997 Ended April 30, 1997
------------------- --------------------
<S> <C> <C>
Net Income $ 54,118 $ 155,738
Earnings Per Share .02 .05
Number of Shares 3,438,258 3,438,258
</TABLE>
c. Earn Out Agreement
In March 1997, the Company entered into an agreement with
Marton Grossman, the Company's chairman and president which
provides for the issuance to Mr. Grossman an aggregate
2,000,000 shares of common stock if the Company reaches
certain earnings criteria as follows:
<TABLE>
<CAPTION>
Earnings Before Shares to
Year Ending Income Tax Be Issued
----------- ---------- ---------
<S> <C> <C> <C>
April 30, 1998 $ 500,000 400,000
April 30, 1999 $ 1,000,000 600,000
April 30, 2000 $ 1,500,000 1,000,000
</TABLE>
If the earning criteria is not met in any one of the above
years, but is cumulatively met in the subsequent year, then
the number of shares to be issued will be the cumulative
number of shares at that year end. Issuance of the shares
will result in compensation expense to the Company.
Compensation expense will be measured based on the fair
value of the shares at the time the performance conditions
are achieved. Determination will be based on the best
estimate of the outcome of the performance condition.
Compensation will be recognized in the periods in which the
performance conditions are achieved.
F-22
<PAGE> 69
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS (cont'd
d. Consulting Agreement
The Company anticipates entering into a three year
consulting agreement with the underwriter to provide
financial consulting services for a fee of $20,000.
e. Underwriter's Purchase Warrants
As part of the consideration of its services in connection
with the registration statement, the Company has agreed to
issue to the underwriter, for nominal consideration,
warrants to purchase up to 120,000 units at an exercise
price of $8.25 per unit for a period of five years. The
Class A Warrants and Class B Warrants underlying the units
included in the underwriter's warrants will be exercisable
at a price of $9.90 and $16.50 per share, respectively, or
165% of the then exercise price of the warrants offered to
the public for a period of five years commencing with the
closing of the registration statement. The non-cash cost of
such warrants, representing a cost of raising capital, will
be recorded as a charge and credit to additional paid-in
capital when the warrants are issued. As capital in nature,
they are not compensatory.
f. Underwriter Option
The Company has granted the underwriter an option
exercisable for 45 days from the effective date of the
registration statement to purchase up to 180,000 units at
the public offering price less the underwriting discounts.
11. AUTHORITATIVE PRONOUNCEMENTS
a. The FASB issued SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of
Liabilities" in June of 1996. SFAS No. 125 provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of
liabilities. SFAS No. 125 is effective for financial
statements issued for fiscal years occurring after
December 31, 1996 and is to be applied prospectively. The
Company does not have transactions which come under the
general heading of "Transfers of Servicing of Financial
Assets," and the added refinements for "Extinguishment of
Debt" are not expected to be significant. Therefore, SFAS
125 is not expected to have any effect on the Company.
b. The FASB has issued SFAS No. 128, "Earnings Per Share" and
FASB No. 129, "Disclosure of Information About Capital
Structure." Both are effective for financial statements
issued for periods ending after December 15, 1997. SFAS
No. 128 simplifies the computation of earning per share by
replacing the presentation of primary earnings per share
with a presentation of basic earnings per share. The
statement requires dual presentation of basic and diluted
earnings per share by entities with complex capital
structures. Basic earnings per share include no dilution
and is computed by dividing income available to common
stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities that could
share in the earnings of an entity similar to fully
diluted earnings per share.
F-23
<PAGE> 70
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
11. AUTHORITATIVE PRONOUNCEMENTS (cont'd)
b. While the Company has not analyzed SFAS No. 128
sufficiently to determine its long-term impact on per
share reported amounts, SFAS No. 128 should not have a
significant effect on historically reported per share loss
amounts.
SFAS No. 129 does not change any previous disclosure
requirements but, rather, consolidates existing disclosure
requirements for ease of retrieval.
c. In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income" and SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". Both
are effective for financial statements for fiscal years
beginning after December 15, 1997. The Company will adopt
both statements on May 1, 1998. Adoption is not expected to
have a material impact on the financial position and
results of operations.
12. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of July 31, 1997 and for the three months
ended July 31, 1997 are unaudited. However, in the opinion of
management, all adjustments necessary for a fair presentation of the
financial statements for the interim period have been made. The
results of the interim period are not necessarily indicative of the
results to be obtained for a full fiscal year.
F-24
<PAGE> 71
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Shareholders
Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic International,
Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months
ended April 30, 1997 and three months ended July 31, 1996 is included on page
F-1 of this Form S-1. In connection with our audit of such financial statements,
we have also audited the related accompanying financial statement Schedule II -
Valuation and Qualifying Accounts for the nine months ended April 30, 1997, the
three months ended July 31, 1996, and the year ended April 30, 1996.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
June 27, 1997
F-25
<PAGE> 72
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE NINE FOR THE THREE FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts balance - beginning $167,000 $167,000 $ --
Additions charged to income -- -- 167,000
Recovery of uncollectible accounts - net -- -- --
Writeoffs of uncollectible amounts -- -- --
-------- -------- --------
Allowance for doubtful accounts balance - ending $167,000 $167,000 $167,000
======== ======== ========
</TABLE>
F-26
<PAGE> 73
================================================================================
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> 74
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:
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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:
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<PAGE> 76
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to subsection 2
or for the advancement of expenses made pursuant to subsection 5, may not
be made to or on behalf of any director or officer if a final adjudication
established that his acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to the cause of
action.
(b) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
78.752. Insurance and other financial arrangements against liability of
directors, officers, employees and agents.
1. A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him in his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him
against such liability and expenses.
2. The other financial arrangements made by the corporation pursuant to
subsection 1 may include the following:
(a) The creation of a trust fund.
(b) The establishment of a program of self-insurance.
(c) The securing of its obligation of indemnification by granting a
security interest or other lien on any assets of the corporation.
(d) The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeal therefrom, to be liable for intentional
misconduct, fraud or a knowing violation of law, except with respect to
the advancement of expenses or indemnification ordered by a court.
3. Any insurance or other financial arrangement made on behalf of a person
pursuant to this section may be provided by the corporation of any other person
approved by the board of directors, even if all or part of the other person's
stock or other securities is owned by the corporation.
4. In the absence of fraud:
(a) The decision of the board of directors as to the propriety of the
terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the
insurance or other financial arrangement is conclusive; and
(b) The insurance or other financial arrangement:
(1) Is not void or voidable; and
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<PAGE> 77
(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 3,200,000 shares of Common Stock 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 Revised Form of Underwriting Agreement
1.01 Form of Unit Purchase Option(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
1.03 Form of Selected Dealers Agreement(1)
2.01 Agreement of Merger dated July 19, 1996 between the Company
and Dynamic Classics, Ltd.(2)
2.02 Second Amended and Modified Plan of Reorganization dated
February 22, 1996 (the "Plan")(3)
2.03 Errata Sheet and Correction Statement with respect to the Plan
dated May 7, 1996(3)
2.04 Order Confirming the Plan dated May 23, 1996(3)
3.01 Certificate of Incorporation(2)
3.01(a) Amendment to Certificate of Incorporation
3.02 By-laws(2)
II-4
<PAGE> 78
4.01 Revised 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) Revised Form of A Warrant Certificate
4.03(b) Revised 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
10.04 Warehousing and Service Agreement dated as of September 1,
1996 with Achim Importing Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New
Century Marketing & Distributors, Inc. and Dynamic Insulated
Products, Inc.
10.06 Bonus Agreement with Marton Grossman(1)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit
5)
23.02 Consent by Moore Stephens, P.C. (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
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
II-5
<PAGE> 79
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereto) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act (the "Act") may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceedings) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
That for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Company will provide to the Underwriter at the closing specified in
the Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
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<PAGE> 80
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 6th day of November 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/ November 6, 1997
- -------------------------------
Marton Grossman Chairman and President
/s/ November 6, 1997
- ------------------------------
Isaac Grossman Director
/s/ November 6, 1997
- ------------------------------
Sheila Grossman Director
- ------------------------------
Bernard Goldman Director
- ------------------------------
Harry P. Braunstein Director
/s/ November 6, 1997
- -----------------------------
William P. Dolan Vice President
Chief Financial
and Accounting Officer
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<PAGE> 81
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.
Moore Stephens, P.C.
New York, New York
November 6, 1997
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<PAGE> 82
Exhibit 23.03
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 3 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.
HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C.
New York, New York
November 5, 1997
<PAGE> 83
Exhibit Index
-------------
1 Revised Form of Underwriting Agreement
1.01 Form of Unit Purchase Option(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
1.03 Form of Selected Dealers Agreement(1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and
Dynamic Classics, Ltd.(2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22,
1996 (the "Plan")(3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated
May 7, 1996(3)
2.04 Order Confirming the Plan dated May 23, 1996(3)
3.01 Certificate of Incorporation(2)
3.01(a) Amendment to Certificate of Incorporation
3.02 By-laws(2)
4.01 Revised 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) Revised Form of A Warrant Certificate
4.03(b) Revised 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
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with
Achim Importing Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century
Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.
10.06 Bonus Agreement with Marton Grossman(1)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit 5)
23.02 Consent by Moore Stephens, P.C. (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
II-10
<PAGE> 1
Exhibit 1
1,200,000 Units, Each Unit Consisting of One Share of Common Stock,
One Class A Warrant and One Class B Warrant
DYNAMIC INTERNATIONAL, LTD.
UNDERWRITING AGREEMENT
New York, New York
__________, 1997
PATTERSON TRAVIS, INC.
One Battery Park Plaza
New York, New York 10004
Ladies and Gentlemen:
Dynamic International, Ltd., a Nevada corporation (the "Company")
confirms its agreement with Patterson Travis, Inc. ("Patterson" or the
"Underwriter") with respect to the sale by the Company and the purchase by the
Underwriter of an aggregate of 1,200,000 Units ("Units"), each consisting of one
share of Common Stock, par value $.001 per share, of the Company ("Common
Stock") and one Class A Redeemable Common Stock Purchase Warrant ("Class A
Warrants") and one Class B Redeemable Common Stock Purchase Warrant ("Class B
Warrants" and collectively with the Class A Warrants, the "Warrants"). The Class
A Warrants, upon exercise, entitles the holder thereof to purchase one share of
Common Stock during the eighteen months following the date hereof at a price of
$6.00 per share from the Company. The Class B Warrants, upon exercise, entitles
the holder thereof to purchase one share of Common Stock during the three years
following the date hereof at a price of $10.00 per share from the Company. The
Common Stock and Warrants are hereinafter collectively referred to as the
"Securities."
Upon your request, as provided in Section 2(b) of this Agreement,
the Company shall also sell to the Underwriter up to an aggregate of 180,000
Units (the "Option
1
<PAGE> 2
Securities") for the purpose of covering over-allotments, if any. The Company
also proposes to issue and sell to you warrants (the "Underwriter's Warrants")
pursuant to the Underwriter's Warrant Agreement (the "Underwriter's Warrant
Agreement") for the purchase of an additional 120,000 Units. The Common Stock,
Warrants and Common Stock underlying the Warrants issuable upon exercise of the
Underwriter's Warrants are hereinafter referred to as the "Underwriter's
Securities." The Securities, the Option Securities, the Underwriter's Warrants
and the Underwriter's Securities are more fully described in the Registration
Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter as of the date hereof, and as
of the Closing Date (hereinafter defined) and the Option Closing Date
(hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-25425), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities, the Option Securities, the Underwriter's Warrants and the
Underwriter's Securities (collectively, hereinafter referred to as the
"Securities"), under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the rules and
regulations (the "Rules and Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration statement in
the form heretofore delivered to the Underwriter and will not file any other
amendment thereto to which the Underwriter shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Rules and Regulations), is hereinafter called the "Registration
Statement", and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations, is hereinafter
called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the
rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the
2
<PAGE> 3
Company's securities have been instituted or are pending or threatened. Each of
the Preliminary Prospectus, the Registration Statement and Prospectus at the
time of filing thereof conformed with the requirements of the Act and the Rules
and Regulations, and none of the Preliminary Prospectus, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by or on behalf of the
Underwriter expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriter or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of the Underwriter expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of Nevada. Except as
set forth in the Prospectus, the Company does not own an interest in any
corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations require such qualification or
licensing. The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies, to own or lease its properties
and conduct its business as described in the Prospectus; the Company is and has
been doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits; and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling
3
<PAGE> 4
or finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date based upon the assumptions set forth therein, and
the Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement, the Underwriter's
Warrant Agreement and as described in the Prospectus. The Securities and all
other securities issued or issuable by the Company conform or, when paid for and
issued, will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable and the holders thereof have no
rights of rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company. The Securities
are not and will not be subject to any preemptive or other similar rights of any
shareholder, have been duly authorized and, when paid for, issued and delivered
in accordance with the terms hereof, will be validly issued, fully paid and
non-assessable and will conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities will be in due and proper form. Upon
the issuance and delivery pursuant to the terms hereof of the Securities to be
sold by the Company hereunder, the Underwriter will acquire good and marketable
title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction of any kind whatsoever.
(f) The financial statements of the Company together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in cash flow, changes in shareholders' equity and the
results of operations of the Company at the respective dates and for the
respective periods to which they apply and such financial statements have been
prepared in conformity with generally accepted
4
<PAGE> 5
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no adverse change or development
involving a material prospective change in the condition, financial or
otherwise, or in the earnings, position, prospects, value, operations,
properties, business, or results of operations of the Company whether or not
arising in the ordinary course of business, since the date of the financial
statements included in the Registration Statement and the Prospectus and the
outstanding debt, the property, both tangible and intangible, and the businesses
of the Company conform in all respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set forth
in the Prospectus under the headings "Summary Financial Information," "Selected
Financial Data," "Capitalization," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," fairly present, on the basis
stated in the Prospectus, the information set forth therein, and have been
derived from or compiled on a basis consistent with that of the audited and
unaudited financial statements included in the Prospectus.
(g) The Company (i) has paid, accrued or otherwise reserved for, all
federal, state, local, and foreign taxes required to be paid, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986 (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such Taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriter in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriter of the
Securities from the Company and the purchase by the Underwriter of the
Underwriter's Warrants from the Company, (iii) the consummation by the Company
of any of its obligations under this Agreement, or (iv) resales of the
Securities in connection with the distribution contemplated hereby.
(i) The Company has, including, but not limited to, general
liability, product and property insurance, which insures the Company and its
employees against such losses and risks generally insured against by comparable
businesses. The Company (A) has not failed to give notice or present any
insurance claim with respect to any matter, including but not limited to the
Company's business, property or employees, under the insurance policy or surety
bond in a due and timely manner, (B) has no disputes or claims against any
underwriter of such insurance policies or surety bonds or has failed to pay any
premiums due and payable thereunder, or (C) has not failed to comply with all
conditions contained in such insurance policies and surety bonds. There are no
facts or circumstances under any such insurance policy or surety bond which
would relieve any insurer of its obligation to satisfy in full any valid claim
of the Company.
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<PAGE> 6
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding, domestic or foreign,
pending or, to its knowledge, threatened against (or circumstances that may give
rise to the same), or involving the properties or business of, the Company which
(i) questions the validity of the capital stock of the Company, this Agreement
or the Underwriter's Warrant Agreement, or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement or the
Underwriter's Warrant Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
respects), or (iii) might materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, shareholders'
equity, value, operations, properties, business or results of operations of the
Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, Option Securities,
Underwriter's Warrants, and the Underwriter's Securities, enter into this
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions provided for in such agreements; and this Agreement, and the
Underwriter's Warrant Agreement have each been duly and properly authorized,
executed and delivered by the Company. Each of this Agreement and the
Underwriter's Warrant Agreement constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its terms
subject to bankruptcy, insolvency, and creditor's rights and the application of
equitable principles in any action, legal or equitable, and none of the
Company's issue and sale of the Securities, Option Securities, Underwriter's
Warrants, and the Underwriter's Securities, execution or delivery of this
Agreement or the Underwriter's Warrant Agreement its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the articles of
incorporation or bylaws of the Company, (ii) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, shareholders agreement, note,
loan or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which its properties
or assets (tangible or intangible) is or may be subject, or any indebtedness, or
(iii) any statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
6
<PAGE> 7
(l) Except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, the issuance of the Underwriter's Warrants, the performance of this
Agreement and the Underwriter's Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Securities, or the Underwriter's Warrants,
except such as have been or may be obtained under the Act or may be required
under state securities or Blue Sky laws in connection with the Underwriter'
purchase and distribution of the Securities, and the Underwriter's Warrants to
be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which they may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company, as the case may be, in accordance with their respective
terms. The descriptions in the Registration Statement of agreements, contracts
and other documents are accurate and fairly present the information required to
be shown with respect thereto by Form S-1, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any material change in or affecting the general affairs, management,
financial operations, shareholders equity or results of operations of the
Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, shareholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party
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<PAGE> 8
or by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in material compliance
with all federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours. There are, to the Company's knowledge, no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is, to the Company's
knowledge, no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or to the Company's
knowledge, is imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan."
(r) The Company, nor any of its officers, directors, partners,
"affiliates" or "associates" (as these terms are defined in Rule 405 promulgated
under the Rules and Regulations) has ever taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the
8
<PAGE> 9
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company are in dispute so far as known by the Company or are in any conflict
with the right of any other person or entity. The Company (i) owns or has the
right to use, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, trademarks, service marks, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing; and (ii) except as disclosed in the Prospectus is not obligated
or under any liability whatsoever to make any payment by way of royalties, fees
or otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(t) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees; provided, however, that the possibility
exists that other persons or entities, completely independently of the Company,
as the case may be, or its employees or agents, could have developed trade
secrets or items of technical information similar or identical to those of the
Company. The Company is not aware of any such development of similar or
identical trade secrets or technical information by others.
(u) The Company has taken reasonable security measures to protect
the secrecy, confidentiality and value of all its intellectual property in all
material aspects.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
9
<PAGE> 10
(w) Moore Stephens, P.C. and Hoberman Miller & Co., P.C., whose
reports are filed with the Commission as a part of the Registration Statement,
are independent certified public accountants as required by the Act and the
Rules and Regulations and have been retained by the Company as its auditors.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
with respect to the Company, or any of its officers, directors, shareholders,
partners, employees or affiliates that may affect the Underwriter' compensation,
as determined by the National Association of Securities Dealers, Inc. ("NASD");
additionally, the Company further represents that no payments of consideration
of any type have been made by it over the twelve (12) months prior to the
execution of this letter to any person or entity who has had an affiliation with
an NASD brokerage firm.
(y) To the Company's best knowledge, no funds or assets of the
Company have been used for illegal purposes; no unrecorded funds or assets of
the Company been established for any purpose; no accumulation or use of the
Company's corporate funds or assets have been made without being properly
accounted for in the respective books and records of the Company; all payments
by or on behalf of the Company have been duly and properly recorded and
accounted for in the Company's books and records; no false or artificial entry
has been made in the books and records of the Company for any reason; no payment
has been made by or on behalf of Company with the understanding that any part of
such payment is to be used for any purpose other than that described in the
documents supporting such payments; the Company has not made, directly or
indirectly, any illegal contributions to any political party or candidate. The
Company's internal accounting controls are sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended.
(aa) Except as set forth in the Prospectus, no officer, director,
shareholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company; or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Management" or "Certain
Transactions," there are no existing material agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, Principal Shareholder (as such term is defined in the Prospectus) of
the
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<PAGE> 11
Company, or any partner, affiliate or associate of any of the foregoing persons
or entities.
(bb) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
(cc) The minute book of the Company has been made available to the
Underwriter and contains a complete summary of all meetings and actions of the
directors and shareholders of the Company since the time of its incorporation,
and reflects all transactions referred to in such minutes accurately in all
respects.
(dd) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
2. Purchase, Sale and Delivery of the Securities and Underwriter's
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees
to purchase from the Company at a price of $4.50 (90% of the public offering
price) per Unit, 1,200,000 Units.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Securities (up to an
aggregate of an additional 180,000 Units) at a price of $4.50 (90% of the public
offering price) per Unit. The option granted hereby will expire 45 days after
(i) the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the
date of this Agreement if the Company has elected to rely upon Rule 430A under
the Rules and Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Securities upon notice by
the Underwriter to the Company setting forth the number of Option Securities as
to which the Underwriter is then exercising the option and the time and date of
payment and delivery for any such Option Securities. Any such time and date of
delivery (an "Option
11
<PAGE> 12
Closing Date") shall be determined by the Underwriter, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Date, as hereinafter defined, unless otherwise agreed
upon by the Underwriter and the Company. Nothing herein contained shall obligate
the Underwriter to make any over-allotments. No Option Securities shall be
delivered unless the Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of securities
for, the Securities shall be made at the offices of the Underwriter at One
Battery Park Plaza, New York, New York 10004, or at such other place as shall be
agreed upon by the Underwriter and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York time) on __________, 1997, or at such other time
and date as shall be agreed upon by the Underwriter and the Company, but not
less than three (3) nor more than seven (7) full business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being herein called "Closing Date"). In addition, in the event that any
or all of the Option Securities are purchased by the Underwriter, payment of the
purchase price for and delivery of certificates for, such Option Securities
shall be made at the above-mentioned firm office of the Underwriter or at such
other place as shall be agreed upon by the Underwriter and the Company on the
Option Closing Date as specified in the notice from the Underwriter to the
Company. Delivery of the certificates for the Securities and the Option
Securities, if any, shall be made to the Underwriter against payment by the
Underwriter of the purchase price for the Securities and the Option Securities,
if any, by New York Clearing House funds. Certificates for the Securities and
the Option Securities, if any, shall be in definitive, fully registered form,
shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriter may request in writing at least two
(2) business days prior to the Closing Date or the Option Closing Date, as the
case may be. The certificates for the Securities and the Option Securities, if
any, shall be made available to the Underwriter at such office or such other
place as the Underwriter may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to the Closing Date or the
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriter the Underwriter's Warrants at an aggregate purchase price of $120,
which warrants shall entitle the holders thereof to purchase an aggregate of
120,000 Units. The Underwriter's Warrants shall be exercisable for a period of
five years commencing one year following the effective date of the Registration
Statement at a price equaling one hundred sixty five percent (165%) ($8.25 per
Unit) of the initial public offering price of the Securities. The Underwriter's
Warrant Agreement and form of Warrant Certificate shall be substantially in the
form filed as Exhibit 1.2 to the Registration Statement. Payment for the
Underwriter's Warrants shall be made on the Closing Date.
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<PAGE> 13
3. Public Offering of the Securities. As soon after the Registration
Statement becomes effective as the Underwriter deems advisable, the Underwriter
shall make a public offering of the Securities (other than to residents of or in
any jurisdiction in which qualification of the Securities is required and has
not become effective) at the price and upon the terms set forth in the
Prospectus. The Underwriter may from time to time increase or decrease the
public offering price after distribution of the Securities has been completed to
such extent as the Underwriter, in its sole discretion deems advisable. The
Underwriter may enter into one or more agreements as it, in its sole discretion,
deems advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Securities by the Underwriter of
which the Underwriter shall not previously have been advised and furnished with
a copy, or to which the Underwriter shall have objected or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriter and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
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<PAGE> 14
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Underwriter, pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement; and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Underwriter notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriter in connection with the offering of the Securities which differs from
the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations)
and will furnish the Underwriter with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file any such prospectus to which the Underwriter or its
counsel ("Underwriter's Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation with
the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information; however, the Company shall not be required to
qualify as a foreign corporation or file a general consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable effort to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities or the Underwriter's Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriter's Counsel, the
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<PAGE> 15
Prospectus, as then amended or supplemented, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify the
Underwriter promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be reasonably satisfactory to Underwriter's Counsel,
and the Company will furnish to the Underwriter copies of such amendment or
supplement as soon as available and in such quantities as the Underwriter may
reasonably request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its securityholders, in the manner specified in Rule
158(b) of the Rules and Regulations, and will deliver to the Underwriter, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act, covering a period of at least twelve (12) consecutive months after the
effective date of the Registration Statement.
(h) During a period of three years after the date hereof, the
Company will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
will deliver to the Underwriter:
i) Concurrently with furnishing such quarterly reports to its
shareholders, statements of income of the Company for each quarter in the
form furnished to the Company's shareholders and certified by the
Company's principal financial or accounting officer;
ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
shareholders' equity, and cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate thereon of independent certified
public accountants;
iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders;
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<PAGE> 16
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD,
NASDAQ/SmallCap or any other securities exchange;
v) every press release and every material news item or article
of interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company; and
vi) any additional information of a public nature concerning
the Company or its business which the Underwriter may request.
During such three-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Underwriter may reasonably
request.
(k) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(l) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(m) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any,
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<PAGE> 17
but no later than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company (which in no
event shall be as of a date more than thirty (30) days prior to the date of the
Registration Statement) which have been read by the Company's independent public
accountants, as stated in their letters to be furnished pursuant to Section 7(1)
hereof.
(n) For a period of three years from the Closing Date, the Company
shall furnish to the Underwriter at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock if such transfer
sheets have been furnished to the Company by its transfer agent at no additional
cost, (ii) the list of holders of all of the Company's securities and (iii) a
Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel.
(o) As soon as practicable, but in no event more than 30 days from
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and to continue such inclusion for a period of not less than five
(5) years.
(p) Until the completion of the distribution of the Securities, the
Company shall not without the prior written consent of the Underwriter and
Underwriter's Counsel, issue, directly or indirectly any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(q) For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Underwriter's Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Underwriter's Securities.
(r) For a period of three (3) years after the effective date of the
Registration Statement, the Underwriter shall have the right to designate one
(1) member, reasonably acceptable to the Company, to the Company's Board of
Directors and the Company shall take all necessary and reasonable steps to cause
such person to become a member. In the event the Underwriter elects not to
designate a member, or if for some reason a designee is not a member during such
period, the Company shall timely notify the Underwriter of each meeting of the
Company's Board of Directors (the "Board") and an individual selected by the
Underwriter shall be permitted to attend all meetings of the Board. In addition,
the Company shall send to the Underwriter's designee all notices and other
correspondence and communications sent by Company to members of the Board at
least two (2) days before any meeting, if applicable. The Company shall
reimburse the Underwriter's designee for all reasonable expenses
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<PAGE> 18
incurred in connection with his service on, or attendance of, meetings of the
Board to the same extent as is provided to all non-employee members of the Board
of Directors.
(s) On or before the effective date of the Registration Statement,
the Company shall have an authorized capital stock acceptable to the Underwriter
including, without limitation, any stock option plans of the Company.
(t) On or before the effective date of the Registration Statement,
the Company shall have (i) entered into a bonus agreement with Marton Grossman
in the form filed as Exhibit 10.06 to the Registration Statement, and (ii)
purchased, or will purchase within thirty (30) days of the Closing Date term
keyman life insurance on the life of Marton Grossman. The policy shall provide
for coverage in the amount of $_________, and the policy shall name the Company
as the sole beneficiary thereof.
(u) The Company agrees to pay the Underwriter a warrant solicitation
fee of 8% (or the maximum amount permissible under NASD rules) of the exercise
price of any of the Warrants exercised if (a) the market price of the Company's
Common Stock on the date the Warrant is exercised is greater than the exercise
price of the Warrant, (b) the exercise of the Warrant was solicited by the
Underwriter, (c) the Warrant is not held in a discretionary account, (d)
disclosure of the compensation arrangement is made upon the sale and exercise of
the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6
under the Exchange Act, and (f) solicitation of the exercise is in compliance
with the NASD Notice to Members 81- 38 (September 22, 1981), including without
limitation, the designation of the soliciting agent in writing by a
warrantholder.
(v) The Company shall on the Closing Date, enter into a financial
advisory agreement ("Consulting Agreement") with the Underwriter for a term of
two (2) years commencing on the Effective Date which will provide that the
Underwriter will be paid a consulting fee of $10,000 per annum, payable in full
($20,000) on the Closing Date.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid as fees of Underwriter's
Counsel, except as provided in (iv) below) incident to the performance of the
obligations of the Company under this Agreement and the Underwriter's Warrant
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing and delivery of this Agreement, the Agreement
Among Underwriter, the Selected Dealer Agreements, if any, the Selling
Agreements, if any, and
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<PAGE> 19
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriter and such dealers as the
Underwriter may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the Securities including, but not
limited to, (x) the purchase by the Underwriter of the Securities and the
purchase by the Underwriter of the Underwriter's Warrants from the Company, and
(y) the consummation by the Company of any of its obligations under this
Agreement and the Underwriter's Warrant Agreement, (iv) the qualification of the
Securities under state or foreign securities or "Blue Sky" laws and
determination of the statues of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum," "Legal Investments Survey,"
if any, and the "Final Blue Sky Memorandum" and disbursements and fees of
counsel in connection therewith, it being agreed that Underwriter's Counsel
shall perform the required "Blue Sky" legal services for the account of the
Company, (v) advertising costs and expenses, consisting of the Company's travel
costs and preparation expenses in connection with the "road show," information
meetings and presentations, bound volumes and prospectus memorabilia and one
"tomb-stone" advertisement in The Wall Street Journal, (vi) fees and expenses of
the transfer agent and registrar, (vii) the fees payable to the Commission and
the NASD, and (viii) the fees and expenses incurred in connection with the
listing of the Securities with the NASDAQ/SmallCap or any other exchange.
(b) If this Agreement is terminated by the Underwriter in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
indemnify the Underwriter for all of its actual out-of-pocket expenses,
including the fees and disbursements of Underwriter's Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Underwriter on the Closing Date by deduction from the proceeds of the offering
contemplated herein a non-accountable expense allowance equal to three percent
(3%) of the gross proceeds received by the Company from the sale of the
Securities and Option Securities, if any. The Company also agrees to pay certain
due diligence fees and expenses incurred by the Underwriter in connection with
(i) background investigation of officers, directors and the shareholder of the
Company, pursuant to judgment, UCC and Commission searches and (ii) due
diligence meetings for syndicate members and others.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if they had been made on and as of the Closing Date or each Option
Closing Date, as the case may be;
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<PAGE> 20
the accuracy on and as of the Closing Date of the statements of the officers of
the Company made pursuant to the provisions hereof; and the performance by the
Company and on and as of the Closing Date and each Option Closing Date, if any,
of its covenants and obligations hereunder and to the following further
conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 P.M., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Underwriter, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriter's Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules of Regulations within
the prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Underwriter of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that either
the Registration Statement, or any amendment thereto, or the Prospectus,
contains an untrue statement of fact which, in the Underwriter's opinion, is
material, or omits to state a fact which, in the Underwriter's opinion, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) On or prior to the Closing Date, the Underwriter shall have
received from Company's Counsel (as defined below), and shall have used its best
efforts to cause such counsel to deliver such opinion or opinions with respect
to the organization of the Company, the validity of the Securities, the
Underwriter's Warrants, the Registration Statement, the Prospectus and other
related matters as the Underwriter may request and Underwriter's Counsel shall
have received such papers and information as they request to enable them to pass
upon such matters.
(d) At the Closing Date, the Underwriter shall have received the
favorable opinion of Heller, Horowitz & Feit, P.C. ("Company's Counsel"), dated
the Closing Date, addressed to the Underwriter and in form and substance
reasonably satisfactory to Underwriter's Counsel, to the effect that:
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<PAGE> 21
i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction where the nature of its
properties or the conduct of its business requires such registration and
the failure to register or so qualify would have a material adverse effect
on the Company, (C) has all requisite corporate power and authority, and
has obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; (D) the Company is and has been doing
business in material compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all federal,
state and local laws, rules and regulations; and, (E) the Company has not
received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license,
certificate, franchise or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially
adversely affect the business, condition, financial or otherwise, or the
earnings, affairs, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects or do
not omit to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances in which
they were made.
ii) the Company does not own an interest in any corporation,
partnership, joint venture, trust or other business entity;
iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization", and to our knowledge, the
Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and the
Underwriter's Warrant Agreement and as described in the Prospectus. The
Securities, the Underwriter's Warrants and all other securities issued or
issuable by the Company conform in all material respects to all statements
with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the holders thereof have no rights to rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and
none of such securities were issued in violation of the preemptive rights
of any holders of any
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<PAGE> 22
security of the Company. The Securities and the Underwriter's Securities
to be sold by the Company hereunder and under the Underwriter's Warrant
Agreement are not and will not be subject to any preemptive or other
similar rights of any shareholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will
be validly issued, fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the holders thereof will
not be subject to any liability solely as such holders; all corporate
action required to be taken for the authorization, issue and sale of the
Securities and the Underwriter's Securities has been duly and validly
taken; and the certificates representing the Securities and the
Underwriter's Warrants are in due and proper form. Subject to compliance
with the registration provisions of the Act and applicable state
registration and qualification provisions, the Underwriter's Warrants
constitute valid and binding obligations of the Company to issue and sell,
upon exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the issuance and
delivery pursuant to this Agreement of the Securities and the
Underwriter's Warrants to be sold by the Company, and upon payment in full
therefor, the Underwriter will acquire good and marketable title to the
Securities and Underwriter Warrants free and clear of any pledge, lien,
charge, claim, encumbrance, security interest, or other restriction
(excluding securities law restrictions) or equity of any kind whatsoever,
except with respect to any actions that may have been taken or omitted to
be taken by the Underwriter after the date hereof. No transfer tax is
payable by or on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by the
Underwriter of the Securities and the Underwriter's Securities, from the
Company, (C) the consummation by the Company of any of its obligations
under this Agreement or the Underwriter's Warrant Agreement, or (D)
resales of the Securities in connection with the distribution contemplated
hereby.
iv) the Registration Statement has become effective under the
Act, and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and no stop order suspending
the use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the best of such
counsel's knowledge, threatened or contemplated under the Act.
v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments a statements or
supplements thereto (other than the financial statements and the notes
thereto and other financial and statistical data included therein, as to
which no opinion
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<PAGE> 23
need be rendered) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and
the exhibits which have been filed are correct copies of the documents of
which they purport to be copies; (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a party or by which
it is bound, including any document to which the Company is a party or by
which it is bound, incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate and fairly represent the
information required to be shown by Form S-1; or (C) there is not pending
or threatened against the Company any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, legal, statutory,
regulatory, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against, or involving
the properties or business of the Company which (x) is required to be
disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (y) questions the validity of the
capital stock of the Company or this Agreement or the Underwriter's
Warrant Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be described in
the Prospectus is not described as required; and (E) there is no action,
suit or proceeding, pending or threatened, against or affecting the
Company before any court or arbitrator or governmental body, agency or
official (or any basis thereof known to such counsel) which in any manner
draws into question the validity or enforceability of this Agreement or
the Underwriter's Warrant Agreement;
vii) the Company has full legal right, power and authority to
enter into each of this Agreement and the Underwriter's Warrant Agreement,
and to consummate the transactions provided for therein; and each of this
Agreement and the Underwriter's Warrant Agreement has been duly
authorized, executed and delivered by the Company. Each of this Agreement
and the Underwriter's Warrant Agreement, assuming due authorization,
execution and delivery by each other party thereto constitutes a legal,
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms (except
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<PAGE> 24
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and
the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by
applicable law), and none of the Company's execution or delivery of this
Agreement and the Underwriter's Warrant Agreement, its performance
hereunder or thereunder, its consummation of the transactions contemplated
herein or therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation
or imposition of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company
pursuant to the terms of, (A) the articles of incorporation or by-laws of
the Company; (B) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, shareholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company
is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
viii) no consent, approval, authorization or order,and no
filing with, any court, regulatory body, government agency or other body
(other than such as may be required under Blue Sky laws, as to which no
opinion need be rendered) is required in connection with the issuance of
the Securities pursuant to the Prospectus, the issuance of the
Underwriter's Warrants, and the Registration Statement, the performance of
this Agreement and the Underwriter's Warrant Agreement, and the
transactions contemplated hereby and thereby;
ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus;
x) the Company is not in breach of, or in default under, any
term or provision of any material license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust agreement,
shareholders' agreement, agreement with any shareholder, partnership
agreement, note, loan or credit agreement or any other material agreement
or instrument evidencing an
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<PAGE> 25
obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which any of the Company
may be bound or to which the property or assets (tangible or intangible)
of any of the Company is subject or affected; and the Company is not in
violation of any term or provision of its Articles of Incorporation or
by-laws or in violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation;
xi) the statements in the Prospectus under "PROSPECTUS SUMMARY
- THE COMPANY," "BUSINESS," "MANAGEMENT," "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT," and "DESCRIPTION OF SECURITIES," and have been reviewed
by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal
conclusions are correct in all material respects;
xii) the person listed under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the Prospectus are the
respective "beneficial owners" (as such phrase is defined in Regulation
13d-3 under the Exchange Act) of the securities set forth opposite their
respective names thereunder as and to the extent set forth therein;
xiii) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the right
to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xiv) except as described in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for services
in the nature of a finder's or origination fee with respect to the sale of
the Securities hereunder or financial consulting arrangement or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriter' compensation, as determined by the NASD;
xv) except as described in the Prospectus, the Company does
not (A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain
or contribute, now or at any time previously, to a defined benefit plan,
as defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multi-employer plan;"
xvi) except as set forth in the Prospectus, no officer,
director of shareholder of the Company, or any "affiliate" or "associate"
(as these terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the
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<PAGE> 26
foregoing persons or entities has or has had, either directly or
indirectly, (A) an interest in the person or entity which (x) furnishes or
sells services or products which are furnished or sold or are proposed to
be furnished or sold by the Company, or (y) purchases from or sells or
furnishes to the Company any goods or services, or (B) a beneficial
interest in any contract or agreement to which the Company is a party or
by which they may be bound or affected. Except as set forth in the
Prospectus under "Management" or "Certain Transactions," there are no
existing material agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer, director, or
Principal Shareholder of the Company, or any affiliate or associate of any
such person or entity.
Such counsel shall state that during the course of its participation in
the preparation of the Registration Statement and the Prospectus and the
amendments thereto, no facts have come to the attention of such counsel which
lead them to believe that either the Registration Statement or any amendment
thereto, at the time such Registration Statement or amendment became effective
or the Preliminary Prospectus or Prospectus or amendment or supplement thereto
as of the date of such opinion contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriter' Counsel) of
other counsel acceptable to Underwriter's Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriter' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Underwriter and they are
justified in relying thereon.
(e) At each Option Closing Date, if any, the Underwriter shall have
received the favorable opinion of Heller, Horowitz & Feit, P.C., counsel to the
Company, dated the Option Closing Date, addressed to the Underwriter and in form
and substance satisfactory to Underwriter's Counsel confirming as of such Option
Closing Date the
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<PAGE> 27
statements made by Heller, Horowitz & Feit, P.C., in the opinion delivered on
the Closing Date with respect to the Option Securities.
(i) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(ii) Prior to each of the Closing and each Option Closing Date, if
any (1) there shall been no adverse change or development involving a
prospective change in the condition, financial or otherwise, prospects,
shareholder's equity with the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (2) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
adverse to the Company; (3) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness; (4) other
than as contemplated in the Prospectus, the Company shall not have issued any
securities (other than Securities and the Underwriter Warrants) or declared or
paid any dividend or made any distribution in respect of its capital stock of
any class and there has not been any change in the capital stock or change in
the debt (long or short term) or liabilities or obligations of the Company
(contingent or otherwise); (5) no material amount of the assets of the Company
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (6) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company or affecting any of its properties or business before
or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (7) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
(f) At each of the Closing Date and each Option Closing Date, if
any, the Underwriter shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
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<PAGE> 28
i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on and
as of the Closing Date or the Option Closing Date, as the case may be, and
the Company has complied with all agreements and covenants and satisfied
all conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as the
case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
iii) Each Preliminary Prospectus, the Registration Statement
and the Prospectus and, if any, each amendment and each supplement
thereto, contain all statements and information required to be included
therein; and
iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (a) the Company
has not incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
(b) the Company has not paid or declared any dividends or other
distributions on its capital stock; (c) the Company has not entered into
any transactions not in the ordinary course of business; (d) there has not
been any change in the capital stock or long-term debt or any increase in
the short-term borrowings (other than any increase in the short-term
borrowings in the ordinary course of business) of the Company; (e) the
Company has not sustained any material loss or damage to its property or
assets, whether or not insured; (f) there is no litigation which is
pending or threatened (or circumstances giving rise to same) against the
Company or any affiliated party of the foregoing which is required to be
set forth in an amended or supplemented Prospectus which has not been set
forth; and (g) there has occurred no event required to be set forth in an
amended or supplemented Prospectus, which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
(g) The Underwriter shall have the obligation to satisfy the
requirements set forth by the rules and regulations of the NASD as to the amount
of compensation allowable or payable to the Underwriter and, accordingly, by the
Closing Date, the Underwriter will have received clearance from the NASD as to
the amount of
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<PAGE> 29
compensation allowable or payable to the Underwriter, as described in the
Registration Statement.
(h) At the time this Agreement is executed, the Underwriter shall
have received a letter, dated such date, addressed to the Underwriter in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriter and Underwriter's Counsel, from Moore Stephens, P.C.;
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and
the applicable Rules and Regulations;
ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Underwriter may rely upon the opinion
of Moore Stephens, P.C. with respect to the financial statements and
supporting schedules included in the Registration Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the shareholders and board of directors and the
various committees of the boards of directors of the Company,
consultations with officers and other employees of the Company responsible
for financial and accounting matters and other specified procedures and
inquiries, nothing has come to its attention which would lead it to
believe that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five days prior to the
effective date of the Registration Statement, there has been any change in
the capital stock or long-term debt of the Company, or any decrease in the
shareholder's equity or net assets of the Company as compared with amounts
shown in the ____________, 1996 balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting forth the
amount of such change or decrease; and (C) during the period from
_________, 1996, to a specified date not more
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<PAGE> 30
than five (5) days prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net earnings or
increase in net earnings per common share of the Company, as compared with
the corresponding period beginning ______________, 1996, other than as set
forth in or contemplated by the Registration Statement, or, if there was
any such decrease, setting forth the amount of such decrease; setting
forth, at a date not later than five (5) days prior to the date of the
Registration Statement, the amount of liabilities of the Company
(including a break-down of commercial paper and notes payable to banks).
iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries and
other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement;
v) stating that they have not during the immediately preceding
five-year period brought to the attention of any of the Company's
management any "weakness," as defined in Statement of Auditing Standard
No. 60 "Communication of Internal Control Structure Related Matters Noted
in an Audit," in any of the Company's internal controls;
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriter may reasonably request.
(i) At Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from Moore Stephens, P.C. a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm those statements made in the letter furnished pursuant to
subsection (l) of this Section, except that the specified date referred to shall
be a date not more than five days prior to Closing Date or the Option Closing
Date, as the case may be, and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in subsection (l) of this Section with respect to
certain amounts, percentages and financial information as specified by the
Underwriter and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such subsection (l).
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<PAGE> 31
(j) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriter the appropriate number of
Securities.
(k) No order suspending the sale of the Securities in any
jurisdiction, which in the judgment of the Underwriter is material to Closing of
the transaction, designated by the Underwriter pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(l) On or before the Closing Date, the Company shall have executed
and delivered to the Underwriter, (i) the Underwriter's Warrant Agreement
substantially in the form filed as Exhibit 1.2 to the Registration Statement in
final form and substance satisfactory to the Underwriter, and (ii) the
Underwriter's Warrants in such denominations and to such designees as shall have
been provided to the Company.
(m) On or before the Closing Date, the Company shall have executed
and delivered to the Underwriter the Consulting Agreement substantially in the
form filed as Exhibit 1.3.
If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 12 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new
31
<PAGE> 32
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, NASDAQ/SmallCap or any other securities
exchange; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriter by or on behalf of the Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition
to any liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, proposed directors, each of its officers who has
signed the Registration Statement, counsel for the Company, and each other
person, if any, who controls the Company within the meaning of the Act, to the
same extent as the foregoing indemnity from the Company to the Underwriter but
only with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any application made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriter in connection with this
Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriter expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriter for inclusion in the
Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the
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<PAGE> 33
extent that it has been prejudiced in any material respect by such failure or
from any liability which it may have otherwise). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or parties will be
entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded, based upon an opinion of counsel, that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel, in addition to any local counsel,
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of this Section 7 provides for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of
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<PAGE> 34
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriter is the indemnified party, the relative
benefits received by the Company on the one hand, and the Underwriter, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Securities (before deducting expenses) bear to the
total underwriting discounts received by the Underwriter hereunder, in each case
as set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d), the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriter hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this subparagraph (d), notify
such party or parties from whom contribution may be sought, but the omission so
to notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), except to the extent that such party
or parties were adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain
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<PAGE> 35
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company or any controlling person of the
Underwriter or the Company, and shall survive termination of this Agreement or
the issuance and delivery of the Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Underwriter, in its discretion, shall release the Securities for the sale to the
public; provided however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Underwriter of telegrams to securities
dealers releasing such shares for offering or the release by the Underwriter for
publication of the first newspaper advertisement which is subsequently published
relating to the Securities.
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<PAGE> 36
10. Termination.
(i) Subject to subsection (b) of this Section 10, the Underwriter
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has disrupted, or in the Underwriter's
opinion will in the immediate future disrupt the financial markets, and such
events have a material and adverse impact on the market for the Securities; or
(ii) any material adverse change in the financial markets shall have occurred;
or (iii) if trading on the New York Stock Exchange, the American Stock Exchange,
or the over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or by order of the Commission or any other government authority having
jurisdiction; or (iv) if the United States shall have become involved in a war
or major hostilities, or if there shall have been an escalation in an existing
war or major hostilities or a national emergency shall have been declared in the
United States; or (v) if a banking moratorium has been declared by a state or
federal authority; or (vi) if the Company shall have sustained a loss material
or substantial to the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Underwriter's opinion, make it
inadvisable to proceed with the delivery of the Securities; or (vii) if there
shall have been such a material adverse change in the conditions or prospects of
the Company as in the Underwriter's judgment would make it inadvisable to
proceed with the offering, sale and/or delivery of the Securities; or (viii) if
there shall have been a material adverse change in the general market, political
or economic conditions, in the United States or elsewhere, that have a material
and adverse impact on the securities market generally
(ii) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Underwriter for all of its actual and reasonable
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriter (less amounts previously paid pursuant to Section 5(c) above).
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Underwriter, by reason of any failure on the
part of the Company to perform any undertaking or satisfy any condition of this
Agreement by it to be performed or satisfied (including, without limitation,
pursuant to Section 6 or Section 11) then, the Company shall promptly reimburse
and indemnify the Underwriter for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriter (less
amounts previously paid pursuant to Section 6(d) above). In addition, the
Company shall remain liable for all reasonable Blue Sky counsel fees and
expenses and Blue Sky filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, and 11
hereof), and
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<PAGE> 37
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Default by the Company. If the Company shall fail at the Closing Date
at any Option Closing Date, to sell and deliver the number of Securities which
it is obligated to sell hereunder on such date, then this Agreement shall
terminate (or, if such default shall occur with respect to any Option Securities
to be purchased on an Option Closing Date, the Underwriter may by notice to the
Company, terminate the Underwriter' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to Patterson
Travis, Inc., One Battery Plaza, New York, New York 10004, Attention: Judah L.
Wernick. Notices to the Company shall be directed to the Company at 58 Second
Avenue, Brooklyn, New York 11215, Attention: Mr. Marton Grossman, President,
with a copy to Heller, Horowitz & Feit, P.C., 292 Madison Avenue, New York, New
York 10017, Attention: Richard F. Horowitz, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles. The parties hereto
agree that any action, proceeding or claim against it arising out of or in any
way related to this Agreement shall be brought and enforced in the courts of the
State of New York or the United States of America for the Southern District of
New York and irrevocably submit to such exclusive jurisdiction, and hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
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<PAGE> 38
16. Entire Agreement; Amendments. This Agreement and the Underwriter's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Underwriter and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DYNAMIC INTERNATIONAL, LTD.
By:
-----------------------------------
Marton B. Grossman, President
Confirmed and accepted as of
the date first above written.
PATTERSON TRAVIS, INC.
By:
-------------------------------
Judah L. Wernick, President
38
<PAGE> 1
Exhibit 4.01
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:
i. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require.
1
<PAGE> 2
(1) "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.
(2) "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.
(3) "Warrant Exercise Period" shall mean from __________, 1997
[IPO Date] until the Warrant Expiration Date.
(4) "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.
(5) "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.
(6) "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.
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(7) "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.
(8) "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 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.
(9) "Transfer Agent" shall mean American Stock Transfer &
Trust Company or its authorized successor.
(10) "Warrant Certificate" shall mean a certificate
representing Warrants.
ii. Warrants and Issuance of Warrant Certificates.
(1) 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.
(2) 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.
(3) 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.
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(4) 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.
iii. Form and Execution of Warrant Certificates.
(1) 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.
(2) 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.
iv. Exercise; Redemption.
(1) 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,
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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 Sates 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 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.
(2) 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.
(3) (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
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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
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.
(4) The Warrants may be redeemed at any time during the
exercise period by the Company, 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 any 10 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.
(5) 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.
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v. Reservation of Shares; Listing; Payment of Taxes, Etc.
(1) 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.
(2) 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.
(3) 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.
(4) 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.
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vi. Exchange and Registration of Transfer.
(1) 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.
(2) 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 shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
vii. Loss or Mutilation. Upon receipt by the Company and the Warrant
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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.
viii. Adjustments to Exercise Price and Number of Securities.
(1) 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 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
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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 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.
(2) 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
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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 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.
(3) 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.
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(4) 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.
(5) 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.
(6) 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 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.
(7) 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;
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(ii) If the amount of said adjustment shall be less than
two cents (2(cents)) 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(cents)) 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 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.
ix. Concerning the Warrant Agent.
(1) 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.
(2) 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
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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.
(3) 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.
(4) 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.
(5) 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 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.
(6) 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
14
<PAGE> 15
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.
(7) 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.
(8) 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.
x. 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.
xi. 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
15
<PAGE> 16
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.
xii. 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.
xiii. 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.
xiv. 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:
-----------------------------
16
<PAGE> 1
Exhibit 4.03(a)
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.
1
<PAGE> 2
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 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 any ten 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,
2
<PAGE> 3
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 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
Exhibit 4.03(b)
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.
1
<PAGE> 2
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 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 any ten 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
2
<PAGE> 3
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 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
Exhibit 10.03
ENDORSEMENT AGREEMENT
This Endorsement Agreement ("Agreement") is made and entered into as
of December 22, 1994, by and among the following parties, with respect to the
services of Kathy Ireland ("KI"):
(a) Kathy Ireland, Inc. ("KI Inc."), furnishing the services
of KI, Federal I.D. #953884612, c/o The Sterling/Winters Co., 1900 Avenue of the
Stars, Suite #16-10, Los Angeles, California 90067;
(b) The Sterling/Winters Co. ("SW"), 1900 Avenue of the Stars,
Suite #640, Los Angeles, California 90067;
(c) Moretz Mills, Inc. ("Moretz"), 514 West 21st Street, P.O.
Box 580, Newton, North Carolina 28658; and
(d) Dynamic Classics, Ltd. ("Dynamic"), 95 Mayhill Street,
Saddlebrook, New Jersey 07662.
xv. Recitals. Dynamic desires to create a brand of exercise
equipment utilizing the name of KI, which is intended to replace its current
Shapeshop and Flexshop brandnames. The brandname for this new brand of exercise
equipment has yet to be determined but, for purposes of this Agreement, it shall
be referred to as the "KI Brand." Dynamic anticipates that sales of the KI Brand
exercise equipment will reach between $8,000,000 to $10,000,000 during the
period commencing 7/1/96 and ending 4/15/97, and $15,000,000 to $20,000,000
during the period commencing 7/1/97 and ending 4/15/98. Dynamic's sales efforts
in connection with the KI Brand exercise equipment will be targeted toward major
mass market retailers, home shopping networks, and other widely-accepted
channels of distribution. KI, Inc. desires to provide the services of KI in
connection with the endorsement of the KI Brand exercise equipment. Therefore,
Dynamic hereby engages the services of KI, and KI Inc. hereby agrees to loan the
services of KI, on all of the terms and conditions set forth herein.
xvi. Term. The term of this Agreement shall commence December 22,
1994 and expire on June 30, 1996 ("the Initial Term"). Dynamic is hereby granted
the following options to renew the term of this Agreement:
(a) One option for an additional two-year period commencing
July 1, 1996 and ending June 30, 1998 ("Option Period #1"); and
1
<PAGE> 2
- ------------------
(b) A second option for an additional two-year period
commencing July 1, 1998 and ending June 30, 2000 ("Option Period #2").
Each option must be exercised by written notice given not less than ninety (90)
days prior to the commencement date of the option period.
xvii. Endorsement. KI Inc. agrees that KI shall endorse Dynamic's KI
Brand of exercise equipment. KI Inc. shall have the absolute right to approve
the brandname for such line of exercise equipment. The brandname for such line
of equipment, once determined, shall be the joint property of Dynamic and KI
Inc., and Dynamic shall have no right to use such brandname beyond the term of
this Agreement, as lawfully extended pursuant to paragraph 2 hereof.
xviii. Personal Appearances.
(a) USA Appearance. KI will make one (1) personal appearance
on behalf of Dynamic within the United States, which shall be at the Dynamic
booth for The Super Show, held on February 5, 1995, at Atlanta, Georgia. Such
appearance shall be for the purpose of signing autographs and shall last for a
period of one (1) hour.
(b) Other Appearance. SW, on behalf of KI Inc. and KI, will
grant Dynamic two (2) additional one-half day appearance by KI on behalf of
Dynamic within the United States. It is contemplated that such appearances will
be on home shopping network programs, or other such channels of distribution as
shall be approved by SW on behalf of KI Inc. and KI. Such appearances shall be
(i) requested by Dynamic upon not less than two (2) weeks prior notice, (ii)
subject to KI's preexisting personal and professional commitments, and (iii)
subject to the approval of SW, on behalf of KI, Inc. and KI.
(c) Travel. Travel expenses of KI in connection with all
scheduled personal appearances under this Agreement, as well the travel expenses
of KI's child's, the child's Nanny and an additional traveling companion of KI's
choosing (collectively referred to as KI's "entourage"), shall be provided by
Dynamic. KI and the members of her entourage shall travel via first class air
and portal to portal limousine ground transportation. In addition, KI and the
members of her entourage shall be lodged in first class hotel accommodations and
all of them shall be reimbursed for all meals and other incidental expenses in
connection with such appearances. All the above travel expenses of KI and the
members of her entourage shall be billed directly to Dynamic. Notwithstanding
the foregoing, if a personal appearance of KI is conducted jointly by Dynamic
and Moretz, then
2
<PAGE> 3
all the above expenses shall be shared by Dynamic and Moretz on a 50/50 basis,
although billed to Dynamic directly.
xix. Photo Session. KI will participate in one (1) photo session at
a mutually acceptable time and place. Said photo session shall be scheduled at
KI's convenience upon not less than two (2) weeks prior notice, and shall be
subject to KI's convenience upon not less than two (2) week prior notice, and
shall be subject to KI's preexisting personal and professional commitments. Such
photo session shall be two (2) consecutive days in duration, each day to consist
of no more than eight (8) working hours; provided, however, that if necessary,
and at Dynamic's option, such photo session may be extended to a third
consecutive day to consist of no more than eight (8) working hours. The above
photo shoot shall be produced by SW and all images produced from the photo shoot
shall be the property of SW. The parties agree that all images from such photo
session must be retouched at the expense of Dynamic.
xx. Videotapes. Dynamic shall have the right to videotape KI's
personal appearances on behalf of Dynamic under this Agreement and to use the
approved videotape or portions thereof only for non commercial, trade consumer
public relations purposes, and for no other purposes. Prior to the use of such
videotape, KI, Inc. shall have the absolute right to approve the videotape.
xxi. Name, Photograph and Likeness. Dynamic shall have the right to
use KI's name, photograph, and likeness only in publicity releases, trade and
consumer advertising and packaging relating to the KI Brand exercise equipment,
subject to the terms of this Agreement, and for no other purpose. All photos,
illustrations or other materials involving the name or likeness of KI which
Dynamic desires to use (including all final retouched versions of photos and the
particular negatives which might be used) shall be submitted to SW, care of Jon
Carrasco, at the address set forth above, for approval on behalf of KI and KI,
Inc., prior to any use of such materials. Any such materials submitted in the
foregoing manner shall be approved or rejected within ten (10) days of its
receipt by SW, and if no reply is received from SW within such ten (10) day
period, then Dynamic shall have the right to assume SW's approval and use the
materials submitted. SW agrees not to unreasonably withhold approval of such
materials. Following approval of such materials, Dynamic shall submit three (3)
units of each of such materials to SW upon their completion and printing. SW, on
behalf of KI and KI, Inc., shall have the further absolute right to approve the
content of the releases and advertising containing KI's photograph or likeness.
xxii. Compensation. KI, Inc. shall be compensated for the services
of KI in the manner set forth on Schedule A of this Agreement, attached hereto
and incorporated herein by this reference.
3
<PAGE> 4
xxiii. Product Approval. In order to ensure the quality of the KI
Brand of exercise equipment prior to any use of KI's name, photograph or
likeness in connection with any such equipment, Dynamic shall submit one (1)
product sample of the proposed equipment to Moretz, care of John Moretz, at the
address set forth above, and one (1) sample of such equipment to SW, care of Jon
Carrasco, at the approval or objection to the sample equipment within a
reasonable time following actual receipt of the sample in question.
xxiv. Account Executive Approval. KI, Inc. shall have the right to
approve the person or persons charged with managing her account with Dynamic.
An, notwithstanding any other provision of this Agreement to the contrary, if
Marvin Cooper of Dynamic should leave Dynamic, KI, Inc. shall have the right to
terminate this Agreement upon ten (10) days notice. If this Agreement is
terminated pursuant to the immediately preceding sentence, all accrued benefits
payable to KI, Inc. under this Agreement shall nevertheless be paid to KI, Inc.
and all royalties due under this Agreement shall be prorated to the effective
date of termination.
xxv. Insurance. During the term of this Agreement, Dynamic shall
maintain in effect, at its sole cost and expense, a comprehensive general
liability and product liability insurance policy, as well as an errors and
omissions policy covering all advertising, with minimum limits of $1,000,000 for
each occurrence and $2,000,000, in the aggregate, naming KI, Inc. and KI as
additional insureds. The carrier providing such coverage shall at all times
maintain at least a B+ rating according to the A.M. Best rating service. Such
insurance policy shall provide that it cannot be canceled or modified without
the insured first giving KI, Inc. and KI at least thirty (30) days written
notice. At the request of KI, Inc., Dynamic shall provide KI, Inc. with a copy
of the applicable policy and a certificate confirming the existence of said
insurance coverage.
xxvi. Representations of Dynamic and Moretz. Dynamic and Moretz
hereby represent to KI, Inc., that they have been and are in compliance with all
licenses, permits and other governmental authorizations required for the conduct
of their business as now being conducted or proposed to be conducted for the
performance of this Agreement.
xxvii. Additional Endorsers. During the term of this Agreement,
Dynamic shall not utilize the services of any person to endorse, sell, market,
or promote the KI Brand exercise equipment without prior written approval of SW,
on behalf of KI, Inc. and KI.
xxviii. Injunctive Relief. In the event of a breach of this
Agreement, each of the parties shall be entitled to all remedies available to
them at law or equity, including, without limitation, injunctive relief.
xxvix. Accounting.
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(a) For as long as Dynamic is obligated to pay royalties to
KI, Inc., and for a period of one year thereafter, Dynamic shall keep separate
true and accurate books and records in accordance with generally accepted
accounting principles consistently applied in which there shall be reflected all
sales of the products carrying the name and/or likeness of KI (the
"Products(s)"), the gross, wholesale and retail selling price of each Product,
and the amount of the royalty payable to KI, Inc. pursuant to this Agreement.
Such books and records shall contain enough detail so as to enable KI, Inc. to
ascertain the amount of all such royalties.
(b) Dynamic agrees to furnish to KI, Inc., within twenty-five
(25) days after the end of each month during which royalties are payable to KI,
Inc., a statement, verified by a duly authorized representative of Dynamic,
showing the computation of the royalty payable to KI, Inc. pursuant to this
Agreement.
(c) For the sole purpose of verifying the figures reported in
any statement or report furnished by Dynamic to KI, Inc. under this Agreement, a
representative or representatives of KI, Inc. may, during the period for which
royalties are payable to KI, Inc. and for a period of one (1) year thereafter,
upon three (3) business days advance notice to Dynamic and not more than twice
in any year, examine any or all of the books and records which Dynamic is
required to maintain pursuant to subparagraph (a) of this paragraph and all
other records, documents, and material in the possession of or under the control
of Dynamic relevant to calculating royalties with respect to the subject matter
of this Agreement. Such books of account, records and inventory records shall be
made available to KI, Inc.'s representatives for examination at the premises of
Dynamic during normal business hours.
xxx. Miscellaneous Provisions.
(a) Merger. This Agreement supersedes any and all prior
written or oral agreements between the parties.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to conflict of law principles.
(c) Attorney's Fees. The prevailing party in any proceeding
brought to enforce any provision of this Agreement shall be entitled to recover
the reasonable fees and costs of its counsel, plus all other costs of such
proceeding.
(d) Notices. All notices required to be given and all
materials required to be submitted pursuant to this Agreement shall be made via
certified or registered mail, postage prepaid, return receipt requested, at the
addresses set forth in the recitals to this Agreement.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first set forth above.
KATHY IRELAND, INC.
By
------------------------------
KATHY IRELAND, President
DYNAMIC CLASSICS, LTD.
By
------------------------------
MARVIN COOPER
MORETZ MILLS, INC.
By
------------------------------
JOHN MORETZ
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SCHEDULE A
COMPENSATION
I. Option to Purchase Common Stock. For and in consideration of the services of
KI, Dynamic shall deliver to KI, Inc., concurrently with the execution of this
Agreement, options to purchase the following shares of the common stock of
Dynamic on the following terms:
A. An option to purchase 25,000 shares of Dynamic common stock, vested as
of December 22, 1994, which shall expire on December 22, 1996, the purchase
price of such shares to be equal to the lowest price at which the common stock
of Dynamic sold during such period prior to the exercise of the option.
B. An option to purchase 25,000 shares of Dynamic common stock, vested as
of January 15, 1996, which shall expire on January 15, 1998, the purchase price
of such shares to be equal to the lowest price at which common stock of Dynamic
sold during such period prior to the exercise of the option.
C. In the event Dynamic renews this Agreement in accordance with the terms
of paragraph 2 of this Agreement, an option to purchase 25,000 shares of Dynamic
common stock, vested as of July 1, 1996, which shall expire on June 30, 1998,
the purchase price of such shares to be equal to the lowest price at which the
common stock of Dynamic sold during such period prior to the exercise of the
option.
D. In the event Dynamic renews this Agreement in accordance with the terms
of paragraph 2 of this Agreement, an option to purchase 25,000 shares of Dynamic
common stock vested as of July 1997, which shall expire on June 30, 1999, the
purchase price of such shares to be equal to the lowest price at which the
common stock of Dynamic sold during such period prior to the exercise of the
option.
II. Royalties. As additional compensation for the services of KI, Dynamic shall
pay KI, Inc. the greater of the "Minimum Royalty Guarantee," set forth below, or
the "Maximum Royalty," set forth below.
A. The minimum Royalty Guarantee shall be the following amount for the
following periods, payable on the dates shown:
1. For the Initial Term of this Agreement, the Minimum Royalty
Guarantee shall be $125,000, payable as follows: $75,000 upon the signing of
this Agreement, $25,000 on 9/15/95 and $25,000 on 1/15/96.
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2. For Option Period #1 of this Agreement, the Minimum Royalty
Guarantee shall be $350,000, payable as follows: $37,500 on each of the
following dates: 7/1/96, 1/15/97 and 4/15/97; and $50,000 on each of the
following dates: 7/1/97, 10/1/97, 1/15/98 and 4/15/98.
3. For Option Period #2 of this Agreement, the Minimum Royalty
Guarantee shall be $462,000, payable as follows: $55,000 on each of the
following dates: 7/1/98, 10/1/98, 1/15/99 and 4/15/99; and $60,500 on each of
the following dates: 7/1/99, 10/1/99, 1/15/2000 and 4/15/2000.
B. The Maximum Royalty shall be as follows:
1. As to hand held or light-weight equipment carrying the name
and/or likeness of KI: 4% of gross sales of such equipment per contract year
during the term of this Agreement; plus
2. As to heavy equipment carrying the name and/or likeness of KI: 4%
of the first three million dollars in gross sales from such equipment per
contract year during the term of this Agreement; 3% of the next $3,000,000 in
gross sales from such equipment per contract year during the term of this
Agreement; and 2% of all gross sales from such equipment per contract year in
excess of $6,000,000 during the term of this Agreement.
In the event the Maximum Royalty payable to KI, Inc. under this subparagraph B
for any particular contract year shall exceed the Minimum Royalty Guarantee
payable to KI, Inc. for such year, the Maximum Royalty payable to KI, Inc. under
this Subparagraph B for such year shall be reduced by the amount of Minimum
Royalty Guarantee payable to KI, Inc. for such year.
C. In consideration of the services provided by Moretz in connection with
this Agreement, KI, Inc. shall pay to Moretz an amount equal to 10% of the
royalty paid to KI, Inc. pursuant to this Section II.
III. Photo Session Fee.
As additional compensation for the services of KI in connection with
paragraph 5 of this Agreement, Dynamic shall pay KI, Inc. a fee of $15,000 per
day for each day (or partial day) of the photo session referred to in such
paragraph. It is understood by the parties that such fee shall include all
expenses required to provide Dynamic with positive film (excluding travel
expenses of KI and her entourage, as set forth in this Agreement), and that such
fee contemplates a typical location for such photo session. If a more elaborate
set-up for such photo session is required, and such set-up is mutually agreed to
by the parties, then the above fee shall be increased to such amount as the
parties shall agree. The above photo fee shall not include retouching images.
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<PAGE> 1
Exhibit 10.05
LICENSE AGREEMENT
This Agreement made this first day of November, 1996, by and between New
Century Marketing & Distributors Inc., a New York corporation, having its
principal place of business at 2262 East 7th Street, Brooklyn, New York 11223
(hereinafter referred to as the "Licensor") and Dynamic Insulated Products, Inc.
a New York corporation, having its principal place of business at 58 Second
Avenue, Brooklyn, New York 11215 (hereinafter referred to as the "Licensee").
W I T N E S S E T H:
WHEREAS, Licensor has developed and is the owner and/or licenses of
certain information, know-how;, techniques, methods, and trade secrets,
including U.S. patent #4,324,111 and Patent applications filed with the United
States Patent and Trademark office, and with the International Patent Office,
copies of which are annexed hereto and marked Exhibit "A", which are proprietary
and which relate to the development, design, operation, and manufacture of the
Licensed Technology. Licensor is also the owner of the Trademarks for use with
the Licensed Products, copies of which are annexed hereto and marked Exhibit
"B". Licensor has also developed a business relationship with a manufacturer of
Soft Sided Coolers and Insulated Bags and is bringing to the attention of
Licensee the opportunity to start a Soft Sided Cooler line and to use such
manufacturer in Licensee's discretion; and
WHEREAS, Licensee acknowledges the uniqueness and advanced design of the
Licensed Technology as well as the benefits of information and expertise
provided by Licensor relating to the manufacture and sale of Soft Sided Coolers/
Insulated Bags and further acknowledges that Licensor has warranted the validity
and enforceability of the Licensed Patents and Trademarks and Licensee desires
to obtain from Licensor the right to manufacture, whether or not utilizing, in
its sole discretion, the manufacturer introduced by Licensor, distribute and
sell the Licensed Products; and
WHEREAS, Licensor, by this Agreement, grants to Licensed the exclusive
right during the Term to manufacture and/or, in Licensee's discretion, utilize
the manufacturer introduced by Licensor to manufacture, and then to distribute
and sell the Licensed Products using the Trademarks through the Distribution
Channels in the Territory subject to and in accordance with the terms and
conditions of this Agreement.
NOW, THEREFORE in consideration of the mutual covenants herein set forth
the parties do hereby agree as follows:
1. Defined Terms. The following terms utilized and capitalized in this
Agreement shall have, at all times, the meanings as hereinafter set forth:
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<PAGE> 2
A. Licensed Technology. The proprietary information, know-how, techniques,
methods and trade secrets relating to the development, design, operation, and
manufacture of an insulated bag incorporating a uniquely designed wrap-around
Gel Pack (Freeze-Pack), for cooling and maintaining products cold for an
extended duration and a sectional wrap-around Gel Pack, Soft Sided
Cooler/Insulated Bag for the purpose of cooling and/or heating products as well
as maintaining their temperature for an extended duration including, but not
limited to Patent No.: 4,324,111. The term Licensed Technology shall not include
any information, know-how, techniques or methods which are otherwise known by or
available to the trade or third parties, or which are not trade secrets or
proprietary information known only to or owned only by the Licensor.
B. TRADEMARKS-"FREEZY-BAG" and "FREEZYGEL, are registered trademarks owned
by Licensor. Licensor grants permission to Licensee to print and utilize these
Trademarks on the Licensed Product or their packaging or sales literature in
accordance with this Agreement. Copies of the Trademarks are annexed as Exhibit
"B".
C. Licensed Products. An insulated bag incorporating a uniquely designed
wrap-around Freeze-Pack for cooling and maintaining products cold for an
extended duration and a flexible wrap-around freeze-pack and/or soft sided
coolers/insulated bags for cooling and/or heating products and/or maintaining
their temperature.
D. Territory. Worldwide, including the United States but excluding only
Israel and Mexico. Licensor acknowledges that it may not manufacture in or sell
to the Territory.
E. Distribution Channels. Sales, shipment and distribution to retail
stores and merchants for direct sale and/or to jobbers, wholesalers and
distributors for sale at wholesale or retail, mail order catalogs, shipment and
distribution to the public and the sale, distribution and shipment of Licensed
Products by any other means in, to or from the Territory.
F. Term. (i) The period commencing as of the date of this Agreement and
expiring on December 31, 1998; provided, however, that the Term shall be deemed
automatically extended each year thereafter if Gross Sales of Licensed Products
during the prior year were at least $2,000,000 up to an initial total period of
5 years ending on December 31, 2001. The Term shall be deemed automatically
extended for each year thereafter if Gross Sales of Licensed Products during the
prior year were at least $3,000,000 up to a total period of an additional 5
years ending on December 31, 2006; thereafter The Term shall be deemed,
automatically extended for each year thereafter if Gross Sales of Licensed
Products during the prior year were at least $4,000,000 up to a total period of
an additional 5 years ending on December 31, 2011; and thereafter The Term shall
be deemed automatically extended for each year thereafter if Gross Sales of
Licensed Products during the prior year were at
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<PAGE> 3
least $5,000,000 up to a total period of an additional 5 period ending on
December 31, 2016; after which date the Term of this Agreement shall be deemed
to expire.
(ii) All Term extensions as above set forth shall be in Licensee's
discretion. Licensee shall, within 30 days following the end of the initial two
year term and at any time during each year thereafter, notify Licensor in
writing if it elects to cancel this Agreement, or if the required Sales were not
reached in the prior year. If no notice of cancellation is given by Licensee, or
if Licensor does not desire to cancel because the required Sales were not
reached during the prior year, then the Agreement shall be deemed automatically
renewed for the next year.
G. Royalties. A sum to be paid in the manner provided for payment in
Section 10 of this Agreement by Licensee to Licensor for each year during the
Term as follows:
(i) Five (5%) percent of the Net Invoice Amount for all "Soft Sided
Coolers/Insulated Bags" sold without wraparound gel-pack;
(ii) Seven (7%) percent of the Net Invoice Amount for all coolers
sold with the wrap-around gel-pack; and
(iii) Ten (10%) percent of the Net Invoice Amount for wrap-around
gel-packs sold separately as to the first 0 units sold, whenever achieved and
five (5%) percent on Net Invoice Amount for sales of said gel-packs sold
separately thereafter.
(iv) Licensee agrees to code or mark License Products so that
identification may be made as to which royalty category The Item sold applies
to.
H. Net Invoice Amount. The sales price of Licensed Products charged by
Licensee to wholesalers, retailers or any other third party, as reflected on an
invoice evidencing such sales, less however: actual returns, credits,
advertising or promotional allowances or rebates. If such returns, credits,
allowances or rebates are charged to or against Licensee after Royalties have
been paid concerning such sale then Licensee shall be entitled to a credit
against the next Royalty payment due. Net Invoice Amount shall not include
shipping/handling charges or sales or any other type of taxes, tariffs or
governmental impositions.
I. Patent, Copyright and Trademark Notices.
(i) Patent Notice: To be furnished by Licensor and approved by
Licensee in a separate writing signed by the parties;
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<PAGE> 4
(ii) Copyright Notice: To be furnished by Licensor and approved by
Licensee in a separate writing signed by the parties;
(iii) Trademark Notice: To be furnished by Licensor and approved by
Licensee in a separate writing signed by the parties;
(iv) The Patent, Copyright and Trademark Notices will appear on all
Licensed Products, artwork, packaging, advertising and promotional materials.
Licensee shall include these notices on all Licensed Products, artwork,
packaging, advertising and promotional materials in a manner selected by
Licensee.
2. Artwork and Packaging. Licensee shall, in its discretion, develop such
Packaging, informative booklets, sales catalogues and/or sales sheets as it
deems necessary in order to promote and sell the Licensed Products. Licensor
shall provide Licensee with ArtWork and Packaging already developed and prepared
by Licensor, if any.
3. Product Development. Licensor shall pay for all expenses necessary, in
its opinion, for the further development of the Licensed Products as opposed to
the manufacture of existing Licensed Technology which shall be Licensee's
responsibility. All modifications or further developments shall be deemed to be
part of the Licensed Technology hereunder.
4. Licensee Warranties. Licensee warrants and represents that the Licensed
Products will be distributed, advertised, promoted and sold in accordance with
all applicable laws, rules and regulations. Licensee is entitled solely during
the Term or any renewals to use the Licensed Technology, Patents and Trademarks
as it sees fit in advertising material or otherwise to promote the sale of the
Licensed Products.
5. Defects. Intentionally omitted.
6. Sublicense. Licensee may sublicense, assign or encumber the rights
granted to it hereunder or delegate its obligations hereunder, in whole or in
part without Licensor's prior approval, but upon notice to Licensor and upon the
understanding that Licensee shall not be relieved of its obligations hereunder
with respect to such sublicense, or assignment.
7. Governing Law. This Agreement shall be governed by the laws of New
York, applicable to agreements made and to be wholly performed therein.
8. Expiration. (i) Upon expiration of the Term and Licensee's right to
sell Licensed Products, or upon earlier termination for any reason, Licensee
agrees that Licensor shall have the right (but not the obligation) to purchase
from Licensee all or part of Licensee's then existing inventory of Licensed
Products at Licensee's
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<PAGE> 5
actual-manufacturing cost therefor plus 50%. If Licensor elects not to so
purchase all or part of such inventory within fifteen (15) days following
expiration or termination, Licensee shall thereupon be free to sell said
Licensed Products in any manner and at any price. Royalties shall be due
Licensor on such sales.
(ii) Upon the expiration or termination of this Agreement, the
rights granted to Licensee hereunder shall revert to Licensor, except as
provided in Paragraph 8(i) and Licensee shall return all other materials which
may have been used or created by Licensee in connection with this Agreement.
Upon expiration of this Agreement, Licensee agrees that Licensor shall also have
the right (but not the obligation) within fifteen (15) days after the end of the
Term, to purchase the following items from Licensee if same are owned by
Licensee: Licensed Products molds, clips, plates, tools, silkscreens and/or
other technical materials relating to and/or embodying any of the Licensed
Technology and Licensed Trademarks at their actual cost.
9. Obligation of Performance. Licensee shall manufacture and distribute
the Licensed Products in accordance with customary business practice and shall
always maintain adequate inventory of the Licensed Products as necessary in its
sole discretion.
10. Accounting and Payment.
(i) All payments of Royalties shall be deemed earned and shall be
due within thirty (30) days after Licensee has received payment for a Net
Invoiced Amount. All amounts payable hereunder shall be paid by check to: New
Century Marketing & Distributors, Inc., c/o Morris I. Douer, 2262 East 7th
Street, Brooklyn, New York 11223. Payment shall be due upon 30 days after
Licensee receives payment of the Net Invoice Amount.
(ii) The Royalties shall be accounted for on not less than a
calendar quarter basis. All payments to Licensor shall be in United States
Dollars. Statements of account accompanied by payments, if any, shown to be due
shall be delivered to Licensor or such party or parties as Licensor shall
designate, no later than thirty (30) days after the end of each calendar
quarter.
(iii) The statements of account shall be reasonably detailed and
contain information relevant to the computation of payments to Licensor.
Licensee shall keep and preserve for at least two (2) years after the expiration
of this Agreement accurate records of all transactions relating to this
Agreement. Licensor, or a representative as Licensor shall designate, shall at
any time during business hours, at Licensee's office, on prior five (5) days,
written notice to Licensee, be entitled to inspect Licensee's books and records
pertaining to the Licensed Products and the manufacture and distribution thereof
and the computation of Royalties hereunder.
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<PAGE> 6
(iv) If Licensee is in default with the payment of any Royalties,
then without limiting any of Licensor's rights or remedies, Licensee shall pay
Licensor interest on such unpaid amount at a rate equal to two percent (2%)
above the then current "prima" rate quoted by the Chase Manhattan Bank, in New
York, or the highest interest rate allowed by law, if less.
11. Licensor Warranties. Licensor represents and warrants that it has the
right to enter into this Agreement and to grant the rights herein granted to
Licensee in connection with the Licensed Technology and Trademarks, subject to
the terms hereof. Licensor also represents that: (a) it owns the Trademarks and
Licensed Technology free and clear of any liens or encumbrances; (b) it has full
right to enter into and comply with this Agreement in all respects and it is not
a party to any agreement which might impair or effect such right or the terms
hereof; (c) no actions are pending or threatened against it which in any manner
affect its rights hereunder or which in any way adversely impair same; (d) it
will and hereby does indemnify Licensee against all claims of any kind relating
to ownership of the rights which are the subject of this License Agreement.
12. Infringements. Licensee shall promptly notify Licensor, in writing, of
any imitations or infringements of the Licensed Technology and Trademarks or the
rights licensed hereunder which may come to Licensee's attention. Licensee and
Licensor shall endeavor to jointly determine whether or not any demand, suit or
other action shall be taken on account of or with reference to any such
infringements or imitations. Licensee however shall have the right (but not the
obligation) to commence or prosecute any suits or make any such demands in its
own name or in the name of Licensor or join Licensor as a party thereto.
Licensor shall cooperate with 'Licensee as a party thereto and/or in any manner
that Licensee may request in connection with any such demand, suits, claims or
other actions. Any infringement or imitation action, claim or suit brought by
Licensee against a third party shall be at Licensee's cost and any recoveries
therefrom shall belong to Licensee. A royalty fee equal to 7% of any recovery,
less legal fees and costs, shall be due to Licenser. With respect to all claims
and suits, including suits in which Licensee is joined as a party, Licensee
shall have the sole right to employ counsel of its choosing, at Licensee's
exclusive cost, and to direct the handling of the litigation and any settlement
thereof. In the event Licensee decides not to take action hereunder, then
Licensor shall be free to do so at its expense and any recovery in that case
shall belong to Licensor.
13. Rights in the Licensed Technology and Trademarks.
(i) All rights not specifically granted to Licensee are hereby
reserved by Licensor. Licensee shall not be entitled to have design patents,
trademarks, or any other rights in connection with the Licensed Products
registered nor to claim any such rights without the prior written consent of
Licensor, which may be withheld in its sole discretion.
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<PAGE> 7
(ii) Without limiting the other provisions hereof, Licenses is not
hereby granted, and Licensor hereby reserves for itself, the right to
manufacture, advertise, promote, distribute and otherwise exploit the Licensed
Products outside the Territory.
(iii) Licensee acknowledges that as between Licensor and Licensee,
Licensor is the owner of all right, title and interest in and to the Licensed
Technology and Trademarks (collectively the "Licensed Property") and in all
patents, copyrights, trademarks, and other rights associated therewith, and the
goodwill pertaining to all of the foregoing. Licensee hereby acknowledges that
Licensor is the owner of all right, title and interest in all patents,
copyrights and renewals and extensions of such patents and copyrights, relating
to the Licensed Technology and Trademarks, and warrants that Licensor will have
the right to use and exploit and authorize the exploitation of such materials in
any manner as Licensor elects without obligation to Licensee or any other entity
whatsoever except as otherwise provided in this Agreement. Licensee will not
during or after the Term attack the validity of the license granted hereunder,
or do or cause to be done any act which impairs or tends to impair Licensor's
right and title to the Licensed Property. Licensee shall not acquire and shall
not claim any title to the Licensed Property by virtue or through the license
granted to Licensee or through Licensee's use thereof.
14. Termination of this Agreement.
(i) In the event of a material default by Licensee hereunder,
Licensor may forward written notice specifying such default to Licensee.
Licensee shall thereupon have thirty (30) days within which to cure such default
or, if the default is not capable of a cure within such time, to commence such
cure and continue such cure diligently until completion. If not cured or if such
cure is not thereafter commenced and diligently pursued, Licensor may thereafter
terminate this agreement by sending a further ten (10) day notice, in writing
sent by certified mail, return receipt requested to Licensee at its address
first above mentioned.
(ii) If proceedings for bankruptcy or insolvency are filed or
instituted by or against Licensee, or if Licensee ceases to be actively involved
in the business of selling or distributing Licensed Products for more than 90
days, Licensor may terminate this Agreement upon fifteen (15) days prior written
notice to Licensee, which termination shall be effective on the date of giving
such notice unless such condition has been cured or a cure commenced by
Licensee.
(iii) In the event of termination, without limiting any of
Licensor's rights or remedies including, without limitation, Licensor's right to
injunctive or other equitable relief, any and all Royalty payments shall become
immediately due and payable to Licensor upon such termination, and the rights
granted hereunder shall automatically terminate and revert immediately to
Licensor.
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<PAGE> 8
15. Confidentiality. Licensee agrees that it will use reasonable efforts
to maintain Licensed Technology in a confidential manner, and will use such
Licensed Technology only in accordance with this Agreement. Any information
otherwise available to the public is not deemed proprietary hereunder and is
excluded from this representation. Licensee shall have no liability for
non-willful breach or unauthorized disclosure to third parties.
16. Licensor's Sales Commissions. Notwithstanding anything to the contrary
contained herein, Licensor shall have the right, to solicit independent sales of
the Licensed Products in the Territory provided such solicitations are not made
to the customers or prospective customers of Licensee or its sales
representatives. Licensor shall notify Licensee in writing in advance of such
solicitations of all parties who it intends to solicit. If Licensor shall obtain
a purchase order for the Licensed Product (the "Purchase order") and forwards
the Purchase Order to Licensee for fulfillment, or shall direct a customer which
it solicits to Licensee and a Purchase Order is established, then, in addition
to Licensor's Royalty on the Net Invoice Amount of the sale resulting from the
Purchase Order, Licensor shall also be entitled to a sales commission in an
amount equal to five (5%) percent of the Net Invoice Amount of the Purchase
Order which shall be payable in accordance with Licensee's payment policy
hereinafter set forth. Licensee may refuse to accept Purchase Orders directed
from Licensor if the Customer does not meet its Credit or other customary
requirements is unwilling to open an L.C. or pay C.O.D. for the Licensed
Products or is already a customer or prospective customer of Licensee.
17. Notice. Any notice hereunder, if mailed by certified mail, return
receipt requested, shall be deemed given and received two (2) business days
after mailing, and if sent by professional express service, notice shall be
deemed given and received at the time of actual delivery. Notices shall be sent
to the following addresses, or such other addresses as the parties shall
designate in writing from time to time:
New Century Marketing and Distributors, Inc.
2262 East 7th Street
Brooklyn, New York 11223
Attn: Morris Douer
Achim Importing Co., Inc.
58 Second Avenue
Brooklyn, New York 11215
Attn: Marton B. Grossman
18. Entire-Agreement. This Agreement constitutes the entire understanding
and agreement between the parties. Any amendments to this Agreement must be in
writing and signed by a duly authorized officer of each party hereto.
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19. Severability . In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
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IN WITNESS WHEREOF the parties have hereto set their hand on the
date first above written.
NEW CENTURY MARKETING AND
DISTRIBUTORS, INC.
By:
------------------------------
President
DYNAMIC INSULATED PRODUCTS, INC.
By:
------------------------------
President
Witnessed by:
- --------------------------
Julia Kraus
10
