<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended April 30, 1997 Commission File Number 0-21475
DYNAMIC INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-1215401
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
58 Second Avenue, Brooklyn, New York 11215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (718) 369-4160
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court.
Yes [x] No[ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant: can not be determined because of the absence of an active trading
market for Registrant's securities.
The number of shares outstanding of Registrant's Common Stock as of June 30,
1997: 3,198,258
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
INDEX
Page No.
PART I ITEM 1. BUSINESS..................................................3
General.......................................................3
Plan of Reorganization........................................3
Products......................................................3
Design and Development........................................4
Sales and Marketing...........................................4
Competition...................................................5
Intellectual Property--License Agreements.....................5
Management Agreement with Achim Importing Co., Inc............6
Employees.....................................................7
ITEM 2. PROPERTIES................................................7
ITEM 3. LEGAL PROCEEDINGS.........................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......7
PART II ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..........................8
ITEM 6. SELECTED FINANCIAL DATA...................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................9
General.......................................................9
Plan of Reorganization........................................9
Results of Operations for the Nine Months Ended April 30,
1997 and the Three Months Ended July 31, 1996 Com-
pared to the Fiscal Year Ended April 30, 1996............10
Results of Operations for the Years Ended April 30, 1996
and 1995.................................................12
Liquidity and Capital Resources...............................14
Seasonality and Inflation.....................................15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................16
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........17
Officers and Directors........................................17
Board of Directors............................................17
ITEM 11. EXECUTIVE COMPENSATION....................................17
Compliance with Section 16(a) of the Securities
Exchange Act of 1934.....................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.........................................19
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K..............................22
SIGNATURES.........................................................23
EXHIBITS...........................................................24
FINANCIAL STATEMENTS AND SCHEDULES.................................F-1
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
PART I
ITEM 1. 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(TM)
and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM).
In addition, it designs and markets sports bags and luggage, which are marketed
primarily under the licensed name JEEP(TM) and under its own names PROTECH and
SPORTS GEAR(TM). 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 requesting 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. MG
Holding Corp. ("MG"), which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock,
representing approximately 93% of the issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the
Company, then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM 3.
LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
PRODUCTS
EXERCISE EQUIPMENT - The Company's line of exercise equipment consists
primarily of handheld products, including dumbbells, ankle and wrist
weights, hand grips, jump ropes, exercise suits, slimmer belts and
strength training products. In addition, the Company markets light weight
equipment such as aerobic steps and slides and exercise mats. The Company
also carries a line of small electronic devices designed to monitor
physical activity such as stopwatches, pedometers, pulse meters and
calorie counters.
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
SPORTS BAGS/LUGGAGE - The Company's line of sports bags/luggage consists
primarily of duffle bags, weekend bags, garment bags, suitcases, pilot
cases and flight attendant wheeled cases. Some of the models are equipped
with wheels and/or retractable handles.
OTHER PRODUCTS - The Company, through a wholly-owned subsidiary, has
obtained the exclusive rights to the patents underlying the technology
used in an insulated bag incorporating a wrap-around gel pack or freeze
pack with the ability to cool and preserve food and other products for an
extended period of time. In addition, it obtained the trademarks
FREEZY-BAG(TM) and FREEZYGEL(TM) under which the products are sold. See
"Intellectual Property--License Agreements". The Company is currently
testing the marketability of these products.
The Company may from time to time manufacture and/or market additional products
under its own names or under licensed names.
DESIGN AND DEVELOPMENT
The Company usually designs its own exercise equipment and creates its own molds
and tooling. Such molds and tooling are used by the manufacturers to produce the
equipment. The Company retains an ownership interest in the molds which are
returned to it upon the termination of the Company's relationship with a
particular manufacturer. The Company has been granted a number of design patents
with respect to certain of its products. See "Intellectual Property--License
Agreements". The Company employs a designer on a full-time basis for the design
of its sports bags/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 product 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, 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 sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its products
are sold to catalog showrooms, drug chains, discount stores and sporting goods
chains. For the fiscal year ended April 30, 1997 approximately 25% and 13% of
the Company's revenues were derived from sales to Kmart and Service Merchandise,
respectively. No other customer accounted for more than 10% 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 sports bags/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
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company has begun
deliveries to Service Merchandise Co., Inc. and Kohl's Department Stores.
Although the scope of this marketing effort is currently limited, the Company
intends to expand the number of private label transactions. No assurance can be
given that its efforts in this area will be successful.
The Company currently anticipates that it may increasingly focus its attention
on direct response marketing. The Company believes that its products are
particularly well suited for so-called impulse buys. Therefore, it intends to
develop plans to use infomercials to market its products. To date, no
significant expenditures have been made in connection with this effort.
COMPETITION
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All
of these companies possess far greater financial and other resources, including
sales forces, than the Company's. However, the Company believes that as a result
of its ability to use the trademarked names SPALDING(TM) and KATHY IRELAND(TM)
it will be able to retain its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.
The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
INTELLECTUAL PROPERTY--LICENSE AGREEMENTS
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
sports bags/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 will
expire in September 1997. However, the Company is currently negotiating a
renewal of the agreement relating to the handheld exercise equipment and
it is
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 agreement.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated
December 22, 1994, Ms. Ireland approves and endorses certain exercise
equipment designed and manufactured by the Company. Under the agreement,
the Company has the right to use her name in connection with the equipment
and Ms. Ireland will make appearances to promote such equipment. In
addition, the Company has the right to use her photograph and likeness in
connection with the sale of the equipment. The agreement is currently
scheduled to expire in June 1998 but is subject, at the Company's option,
to renewal until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996,
between New Century Marketing & Distributors, Inc. and a wholly-owned
subsidiary of the Company, the Company obtained the exclusive rights to a
patented technology as well as to the trademarked names FREEZY-BAG and
FREEZYGEL. The technology has the ability to cool foods and other products
and is used in the wrapping of such products. The agreement has a term of
two years but is renewable, at the option of the Company, for additional
one-year periods.
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim, 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 $363,581 for the nine months ended April 30, 1997.
Achim is wholly owned by Marton B. 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
will purchase the products directly from the manufacturer and resell them to the
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 1% on the unpaid
balance of the purchases. As of April 30, 1997, the Company owed an amount of
$2,590,360, including interest of $260,795 under this arrangement. See "Certain
Relationships and Related Transactions". As of June 30, 1997, this sum had
decreased to $1,871,029, including interest of $276,894. The weighted average
interest rate paid by the Company to Achim at June 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.
EMPLOYEES
As of June 30, 1997, the Company employed 12 persons, of whom four 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 is represented by a union and no work
stoppages have occurred.
ITEM 2. 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 Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. See ITEM
1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3. 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 ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Until 1995, the Company's Common Stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the Bankruptcy
Code in August 1995, no trading information is available after the fiscal
quarter ended July 31, 1995. The following table sets forth the high and low bid
quotations for the Company's Common Stock and Warrants through the quarter ended
July 31, 1995. These quotations have been reported by the National Association
of Securities Dealers, Inc. and represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
Fiscal Quarter Common Stock
Ended High Low
----- ---- ---
<S> <C> <C>
April 30, 1995 $2.000 $0.875
July 31, 1995 $1.438 $0.375
</TABLE>
The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The table on the following page summarizes certain financial data that are
qualified by the more detailed financial statements included 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 July 31, 1996 and prior consist of those
of DCL.
The Company has not paid a cash dividend to its public shareholders on its
Common Stock. The Company does not contemplate paying any cash dividends on its
Common Stock in the near future.
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.
<TABLE>
<CAPTION>
REORGANIZED
COMPANY* PREDECESSOR COMPANY
---------------------------------------------------------------------------
9 Months Ended 3 Months Ended Year Ended April 30
-----------------------------------------------------------
4/30/97 7/31/96 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097 $ 29,497,353 $ 25,735,479
- --------------------------------------------------------------------------------------------------------------------------
Income
(Loss)
for Year 119,399 (76,364) 6,945,299 (11,227,335) 244,308 (427,409)
- --------------------------------------------------------------------------------------------------------------------------
Net Income
(Loss)
per Share .04
- --------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
Working
Capital
(Deficit) (45,789) (293,884) (7,493,435) 3,094,821 3,173,751
- --------------------------------------------------------------------------------------------------------------------------
Total
Assets 4,807,062 4,253,396 6,414,185 16,677,772 13,373,816
- --------------------------------------------------------------------------------------------------------------------------
Long Term
Obligations
Including
Capitalized
Lease
Obligations 215,254 23,965 116,124 127,877 92,129
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Management's assumptions used in determining the Company's reorganization value
are discussed in Note 2 to the Financial Statements.
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
(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
chargebacks 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 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below, has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below,
which the Company adopted on July 31, 1996, reporting for the year ended April
30, 1997 is accomplished 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 August 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the Bankruptcy Code.
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.
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10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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, 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 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ITEM 13. 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.
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 reporting 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.
Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND THE THREE
MONTHS ENDED JULY 31, 1996 COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1996
Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996, respectively, were, on a combined
basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise
equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997,
and the three months ended July 31, 1996, respectively, were $5,084,000, on a
combined basis. These combined sales of exercise products were $532,000 or 9%
less than the previous fiscal year. Sales of sports bags/luggage products of
$3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three
months ended July 31, 1996, respectively, were $4,391,000, on a combined basis.
These combined sales of sports bags/luggage products were 7% less than the
previous fiscal year. Sales for the fiscal year ended April 30, 1996 were
reduced by $3,211,000 of customer credits for a discontinued line of manual
treadmills and ski machines.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended April
30, 1997 and 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.
-10-
<PAGE> 11
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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:
<TABLE>
<S> <C>
Freight out ........... $ 10,000
Insurance claims ...... $ 70,000
Lawsuits .............. $289,000
Showroom rent ......... $319,000
Officers' salaries .... $ 81,000
Office salaries ....... $262,000
Warehouse salaries .... $115,000
Salesmen salaries ..... $ 57,000
Payroll taxes ......... $ 45,000
Fringe benefits ....... $ 2,000
Repairs & maintenance . $ 4,000
Travel & entertainment $ 30,000
Office equipment rental $ 7,000
Miscellaneous taxes ... $ 8,000
Consultant fees ....... $105,000
Promotional material .. $189,000
Pension costs ......... $726,000
Telephone ............. $ 31,000
Data-processing fees .. $ 6,000
Postage ............... $ 10,000
Bad debt expense ...... $666,000
</TABLE>
Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000, respectively,
as a result of the accrual of proofs of claim filed during the bankruptcy
proceeding as liabilities subject to compromise during the nine-month
period ended April 30, 1996.
Showroom rent decreased by $319,000 since a proof of claim for the balance of
the lease was recorded during the nine-month period ended April 30, 1996.
The showroom was closed in October 1995.
Officers salaries decreased by $81,000 due to reduction in the salary of the
former President of the Company in September 1995, and the elimination of a
Chief Operating Officer position in December 1995. These changes resulted
in decreases of $37,000 and $44,000, respectively.
Office salaries decreased by $262,000 due primarily to the elimination of the
Vice President of Operations position in June 1996 which accounted for
$119,000 of the reduction. In addition, the position of Credit Manager was
eliminated in May 1996 resulting in a savings of $45,000. The balance of
$98,000 is due to the overall reduction of the office staff as a part of
the reorganization.
Warehouse salaries decreased by $115,000 due to the elimination of warehouse
employees under the reorganization.
Salesmen salaries decreased by $57,000 due to the elimination of a sales
position in August 1996.
Payroll taxes and fringe benefits decreased by $45,000 and $2,000, respectively,
due primarily to the positions and employees eliminated during the
reorganization.
Repairs and maintenance decreased by $4,000.
Travel and entertainment expenses decreased by $30,000 due to the decrease in
executive and sales personnel.
Office equipment rental decreased by $7,000 due to a reduction of the equipment
rented due to the reorganization.
Miscellaneous taxes decreased by $8,000 as a consequence of the change in the
Company's state of incorporation from Delaware to Nevada which resulted in
the elimination of Delaware franchise taxes.
Consultant 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.
Interest expense of $198,800 and $57,300 for the nine months ended April 30,
1997 and July 31, 1996, respectively, were, on a combined basis, $127,400 or 33%
lower than the previous fiscal year. This decrease is the result of a $223,000
decrease in contractual interest which was offset by an increase in related
party interest of $96,000. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS.
The Company's pre-tax profits 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
-11-
<PAGE> 12
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 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
------------- ------------------------------
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 ............ 48,900 1,300 449,700
----------- ----------- -----------
Pretax income (loss) ...... 223,000 (76,300) (9,746,900)
Tax ....................... 103,700 -- (7,511,000)
----------- ----------- -----------
Income (loss) before
extraordinary item ..... 119,300 (76,300) (2,235,900)
----------- ----------- -----------
Extraordinary item
gain on discharge of
pre-petition liabilities -- -- 16,692,200
Tax ....................... -- -- 7,511,000
----------- ----------- -----------
Extraordinary gain,
net of tax ............. -- -- 9,181,200
----------- ----------- -----------
NET INCOME (LOSS) ......... 119,300 (76,300) 6,945,300
=========== =========== ===========
</TABLE>
On July 10, 1997, the Company and MG agreed that no further payments shall be
payable to MG under the Note (see ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS) until the consummation of the Company's contemplated public
offering or at the scheduled maturity of the Note, whichever occurs earlier.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its sports bags/luggage products which
led to a decline in sales of $5,334,700 and $1,333,600, respectively, to
$5,615,600 and $4,701,800, respectively. Sales of exercise equipment and sports
bags/luggage products during this period were offset by credits of $3,210,900
issued to customers in connection with the discontinued line of manual
treadmills and ski machines.
-12-
<PAGE> 13
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 our customers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was forced to allow substantial chargebacks by its customers.
Although, pursuant to a written agreement, the manufacturers acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, they breached this agreement soon thereafter. The significance of the
defective problem was evident in April 1995. During this month, 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 manual
treadmills and ski machines for the periods indicated:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
------------- ------------------------------------------------------
For 9 Months For 3 Months For Fiscal Year For Fiscal Year
Ended 7/31/96 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 -- -- -- (1,320,000)
Cost of Sales ... -- -- 156,000 (18,604,000)
--------- --------- ------------ ------------
Gross Loss ...... $ -- $ -- $ (2,457,900) $ (4,156,000)
</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 anticipate that
there will be additional returns of these products or that any claims 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 $160,200
Office salaries $180,100
Salesmen salaries $316,300
Payroll taxes $ 73,500
Fringe benefits $145,400
Travel & entertainment $236,600
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 warehousing 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 warehousing
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. The
Company would have recorded a net loss of $9,746,900 before the extraordinary
gain, or a decrease of $1,562,500 from the prior fiscal year. This decrease
primarily reflected a reduction in the Company's selling and administrative
expenses of approximately
-13-
<PAGE> 14
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
$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 is taxable
in the subsequent fiscal period, as the actual distribution to discharge the
debt occurred in July, 1996. For tax purposes, without the gain on debt
discharge, the Company had an operating loss for the year ended April 30, 1996
which resulted in the Company not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the
Company's pretax loss of $11,309,000 resulted in a federal tax benefit of
$3,845,000 utilizing the statutory rate. As a result of changes to the valuation
allowance, the reversal of previously established deferred tax assets and losses
for which no benefit was provided, the Company's effective tax rate resulted in
a benefit of $82,000.
LIQUIDITY AND CAPITAL RESOURCES
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 credits.
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 supplier, and
prepaid expenses of $221,300 and $100,600, respectively, which were offset
by a decrease in inventory and an increase in accounts payable and accrued
expenses of $115,600 and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance
notes payable of $77,200 were offset by repayments of insurance notes
payable, and repayments of capital lease obligation 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.
-14-
<PAGE> 15
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 1% 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. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. The weighted average interest rate paid by the Company to
Achim at April 30, 1997 and April 30, 1996 was 9.25% and 11.5%,
respectively.
The Company owes an aggregate of approximately $1,200,000 to MG Holding,
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 Holding. 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 paid
in 24 monthly installments commencing September 5, 1996. To date, three
payments have been made. In July 1997, the Company and MG Holding 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 and the
availability of Achim's credit line to finance the Company's purchase of
inventory will be sufficient to finance its operations for the next twelve
months.
SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and 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 registrant.
-15-
<PAGE> 16
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 Company's Board of Directors appointed Moore Stephens, P.C.
as its independent accountants.
-16-
<PAGE> 17
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Marton B. Grossman 67 Chairman and President
Isaac Grossman 35 Vice Chairman, Treasurer and Secretary
William P. Dolan 44 Vice President--Finance
John Holodnicki 44 Vice President--Sales
MARTON B. GROSSMAN has been the Chairman and Chief Executive Officer of
the Company since July 29, 1996. For the past 34 years, he has been President of
Achim, a privately-held company engaged in the import and export of window
coverings and accessories. In addition, he is President of MG Holding Corp., 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, and Vice President of Achim since 1989. He is the son
of Marton B. Grossman, the Company's Chairman and President. Mr. Grossman spends
approximately 20% of his time working for the Company.
WILLIAM P. 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
and 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.
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.
ITEM 11. 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, (ii) its other two Executive Officers and (iii) two additional
non-Executive Officers whose cash compensation exceeded $100,000 per year in any
such year:
-17-
<PAGE> 18
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1) (2)
Name/Principal Year Ended Annual Compensation All Other
Position April 30 Salary Bonus Compensation (3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marton B. Grossman 1997 $0 $31,200
President & Director 1996 $0 $18,200
1995 $0 $0
- ------------------------------------------------------------------------------------------------------------
Isaac Grossman 1997 $0 $32,240
Director, Treasurer 1996 $0 $18,200
1995 $0 $0
- ------------------------------------------------------------------------------------------------------------
William P. Dolan 1997 $100,000 $0
Vice President-Finance 1996 $100,000 $0
1995 $ 97,691 $0
- ------------------------------------------------------------------------------------------------------------
John Holodnicki 1997 $120,000 $0
Vice President 1996 $120,000 $0
1995 $ 97,046 $0
- ------------------------------------------------------------------------------------------------------------
Marvin Cooper (4) 1997 $128,125 $0
Executive Vice President 1996 $182,876 $0
1995 $250,099 $0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which does not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or 10%
of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.
(3) 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 ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
(4) Mr. Cooper resigned his position in March 1997.
None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.
Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares. If the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he will be issued 600,000 shares. If the Company's earnings before
taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he
will be issued 1,000,000 shares. The stated earnings criteria are cumulative so
that in the event of an earnings shortfall during a fiscal year, shares relating
to two fiscal years will be issued provided that the Company, during the
succeeding fiscal year, realizes earnings that in the aggregate are equal to two
years of earnings as set forth in the Agreement. The Agreement also provides for
piggyback registration rights with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock to be issued
to Marton Grossman under the Bonus Agreement:
<TABLE>
<CAPTION>
Estimated Future Payments
Performance or Other Under Non-Stock
Number of Shares, Period Until Price-Based Plans
Units or Other Maturation or --------------------------
Name Rights Payout Threshold Target Maximum
- ---- ----------------- --------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Marton B. 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.
-18-
<PAGE> 19
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 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-10%
beneficial owners were complied with.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1997, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (i) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215.
<TABLE>
<CAPTION>
Shares Owned Beneficially
and of Record (1)
-----------------
Name and Address No. of Shares % of Total
---------------- ------------- ----------
<S> <C> <C>
Marton B. Grossman (2) 2,976,000 93.0
Isaac Grossman (3) 2,976,000 93.0
William P. Dolan 123 *
John Holodnicki 11 *
All Officers and Directors
as a Group (3 persons) 2,976,134 93.0
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all
options and warrants. Shares issuable under options or warrants are
owned beneficially but not of record.
(2) Consists of shares of Common Stock held by a series of trusts
(collectively, the "Grossman Trust") for the benefit of relatives of
Mr. Grossman. Mr. Isaac Grossman and two of his relatives are the
trustees of the Grossman Trusts. Under its terms, the Grossman Trust
will return to Mr. Grossman annually until August 1998 56% of the value
of the shares (payable in cash or in shares) when deposited into each
of the Grossman Trusts. Since the number of shares to be returned to
Mr. Grossman is based on the then current market price of the Common
Stock, such number cannot be determined at the present time. To date,
no shares have been returned to Mr. Grossman under this arrangement.
Mr. Grossman disclaims beneficial ownership in the shares held by the
Grossman Trust that will not be returned to him.
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530. MG
is wholly owned by Marton B. Grossman, the Company's Chairman and President. The
note was subsequently repaid by the Company through the issuance of 2,976,000
shares of Common Stock to MG. MG assigned the Common Stock to a trust for the
benefit of members of Mr. Grossman's family.
-19-
<PAGE> 20
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to
the Company to consummate the Plan and for related expenses. The Company issued
a promissory note to MG Holding 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 1%. 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 June 30, 1997, the amount of interest owed
amounted to $54,197. In July 1997, the Company and MG Holding agreed that no
principal or interest payments under the note would be due until the
consummation of this offering or the scheduled maturity of the note, whichever
occurs earlier.
Pursuant to the Warehousing Agreement, 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 credit checks on the Company's customers.
In consideration of 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 $30,000,000 to 3% for
sales of $60,000,000 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 account 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 B. 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 1% 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. See ITEM 13.
CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS. As of June 30, 1997, this sum had
decreased to $1,871,029, including interest of $276,894. The weighted average
interest rate paid by the Company to Achim at June 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.
-20-
<PAGE> 21
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
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 Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company. Other than the fees payable by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS--"Management Agreement with Achim Importing Co.,
Inc" and ITEM 2. PROPERTIES.
-21-
<PAGE> 22
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
exhibits which are being filed herewith and the exhibits which are
incorporated herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended April 30, 1997.
-22-
<PAGE> 23
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
By: /s/ MARTON B. GROSSMAN
-----------------------
Marton B. Grossman
Chairman and President
Dated: 3rd day of December, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below as of the 3rd day of December, 1997 by the following
persons on behalf of Registrant and in the capacities indicated.
By: /s/ MARTON B. GROSSMAN By: /s/ SHEILA GROSSMAN
------------------------------ ------------------------------
Marton B. Grossman Sheila Grossman
Chairman and President Director
By: /s/ ISAAC GROSSMAN By:
------------------------------ ------------------------------
Isaac Grossman Bernard Goldman
Vice Chairman, Treasurer & Secretary Director
By: /s/ WILLIAM P. DOLAN By:
------------------------------ ------------------------------
William P. Dolan Harry P. Braunstein
Vice President--Finance Director
(Chief Financial & Accounting Officer)
-23-
<PAGE> 24
10-K/A FYE 4/30/97 DYNAMIC INTERNATIONAL, LTD.
EXHIBITS
1 Form of Underwriting Agreement (1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic
Classics, Ltd. (2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22,
1996 (the "Plan") (3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated
May 7, 1996 (3)
2.04 Order Confirming the Plan dated May 23, 1996 (3)
3.01 Certificate of Incorporation (2)
3.02 Bylaws (2)
4.02 Form of Common Stock Certificate (2)
10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994
(4)
10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4)
10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with
Achim Importing Co., Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century
Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.
(1)
10.06 Bonus Agreement with Marton Grossman (1)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (5)
- ------------------------------------------------------------------------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-25425).
(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
-24-
<PAGE> 25
DYNAMIC INTERNATIONAL, LTD.
AND SUBSIDIARY
FINANCIAL STATEMENTS
APRIL 30, 1997
<PAGE> 26
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports F-1 to F-2
Consolidated Financial Statements:
Balance Sheets as of April 30, 1997 and 1996 F-3 to F-4
Statements of Operations for the nine months ended April 30, 1997,
three months ended July 31, 1996
and the years ended April 30, 1996 and 1995 F-5
Statements of Stockholders' Equity (Deficit) for the nine months ended
April 30, 1997, three months ended
July 31, 1996 and the years ended April 30, 1996 and 1995 F-6
Statements of Cash Flows for the nine months ended April 30, 1997,
three months ended July 31, 1996
and the years ended April 30, 1996 and 1995 F-7 to F-8
Notes to Financial Statements F-9 to F-24
Independent Auditor's Report on Supplemental Schedule F-25
Schedule II - Valuation and Qualifying Accounts F-26
</TABLE>
<PAGE> 27
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> 28
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic International, Ltd.
We have audited the accompanying statements of operations, stockholders' equity
(deficit) and cash flows of dynamic International, Ltd. (formerly Dynamic
Classics, Ltd., see Note 2) and Subsidiary for the year ended April 30, 1995.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Dynamic International, Ltd. (formerly Dynamic 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 Bankruptcy
Act.
/s/ HOBERMAN, MILLER & CO., P.C.
---------------------------------
Hoberman, Miller & Co., P.C.
New York, New York
June 26, 1996
F-2
<PAGE> 29
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
APRIL 30, APRIL 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 43,543 $ 26,515
Accounts receivable - trade (net of allowance for doubtful
accounts of $167,000 in 1997 and 1996) 887,089 1,036,927
Due from suppliers 65,273 26,760
Inventory 3,301,735 2,384,469
Prepaid expenses 60,272 81,693
Miscellaneous receivables 2,658 135,039
Prepaid and refundable income taxes 39,914 291,146
----------- -----------
Total Current Assets 4,400,484 3,982,549
----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies 707,939 707,939
Furniture and equipment 102,205 102,205
Capitalized equipment leases 576,071 576,071
----------- -----------
1,386,215 1,386,215
Accumulated depreciation (1,260,924) (1,156,160)
----------- -----------
Total Property and Equipment, net 125,291 230,055
----------- -----------
OTHER ASSETS
Due from suppliers 36,142 36,142
Security deposits 4,650 4,650
Deferred stock offering costs 116,023 --
Reorganization value in excess of amounts allocable to
identifiable assets, net 124,472 --
----------- -----------
Total Other Assets 281,287 40,792
----------- -----------
TOTAL ASSETS $ 4,807,062 $ 4,253,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE> 30
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
APRIL 30, APRIL 30,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses - non related $ 846,234 1,009,248
Accounts payable and accrued expenses - related party 2,627,580 2,129,893
Capital lease obligations - current 24,228 48,731
Income taxes payable 103,700 --
Loan payable - related party 844,531 557,000
Other liabilities -- 531,561
----------- -----------
Total Current Liabilities 4,446,273 4,276,433
----------- -----------
OTHER LIABILITIES
Capital lease obligations, net of current portion -- 23,965
Loan payable - related party 215,254 --
----------- -----------
Total Other Liabilities 215,254 23,965
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued 1,744,396 shares -- 17,444
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares 3,199 --
Additional paid in capital 22,940 590,291
Accumulated deficit -- (637,237)
Retained Earnings (since July 31, 1996, date of reorganization,
total deficit eliminated was $713,601) 119,399 --
----------- -----------
145,538 (29,502)
Less: Treasury stock, at cost, 15,000 shares -- (17,500)
Less: Treasury stock, at cost, 540 shares (3) --
----------- -----------
Total Stockholders' Equity (Deficit) 145,535 (47,002)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,807,062 $ 4,253,396
=========== ===========
</TABLE>
All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The discharge of prepetition liabilities including
liabilities subject to compromise has been recorded and the gain on the debt
discharge is reflected in the consolidated statement of operations for the year
ended April 30, 1996.
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 31
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Sales $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097
Other income 54,642 10,201 98,272 70,638
---------- ----------- ------------ ------------
7,547,371 1,993,365 7,249,987 32,603,735
COST OF SALES 4,850,002 1,454,637 9,480,484 34,761,846
---------- ----------- ------------ ------------
GROSS PROFIT (LOSS) 2,697,369 538,728 (2,230,497) (2,158,111)
---------- ----------- ------------ ------------
OPERATING EXPENSES
Research and development 4,042 -- 101,992 44,962
Shipping expenses 452,093 116,894 738,681 1,198,563
Selling expenses 686,214 198,993 1,254,006 2,455,493
Advertising and promotion 152,563 1,819 389,672 346,400
General and administrative 931,683 238,791 4,198,800 3,720,998
Interest and bank charges - non related
(Contractual interest of $806,937 for
the year ended April 30, 1996) 21,462 4,174 248,625 1,384,898
Interest and bank charges - related party 177,339 53,096 134,928 --
---------- ----------- ------------ ------------
2,425,396 613,767 7,066,704 9,151,314
---------- ----------- ------------ ------------
REORGANIZATION ITEMS:
Bankruptcy administration costs 48,874 1,325 449,693 --
---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 223,099 (76,364) (9,746,894) (11,309,425)
---------- ----------- ------------ ------------
INCOME TAX PROVISION (BENEFIT)
Current 103,700 -- -- (396,143)
Deferred -- -- (7,511,000) 314,053
---------- ----------- ------------ ------------
103,700 -- (7,511,000) (82,090)
---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 119,399 (76,364) (2,235,894) (11,227,335)
---------- ----------- ------------ ------------
EXTRAORDINARY ITEM:
Gain on discharge of prepetition liabilities -- -- 16,692,193 --
Income tax provision -- -- 7,511,000 --
---------- ----------- ------------ ------------
Extraordinary gain net of income tax -- -- 9,181,193 --
---------- ----------- ------------ ------------
NET INCOME (LOSS) $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
========== =========== ============ ============
INCOME PER SHARE OF COMMON
SHARES $ 0.04
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 3,198,258
</TABLE>
The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 32
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Retained Treasury Stockholders'
Common Paid in Earnings Stock Equity
Stock Capital (Deficit) at Cost (Deficit)
-------- --------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Balance - May 1, 1994 $ 17,444 $ 590,291 $ 3,644,799 $(17,500) $ 4,235,034
Net Loss -- -- (11,227,335) -- (11,227,335)
-------- --------- ------------ -------- ------------
Balance - April 30, 1995 17,444 590,291 (7,582,536) (17,500) (6,992,301)
Net Income -- -- 6,945,299 -- 6,945,299
-------- --------- ------------ -------- ------------
Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002)
Net Loss for the Three Months Ended
July 31, 1996 -- -- (76,364) -- (76,364)
-------- --------- ------------ -------- ------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate predecessor equity accounts and
to reflect new issuance of shares in
connection with fresh start (1,450) (580,146) 713,601 17,497 149,502
-------- --------- ------------ -------- ------------
15,994 10,145 -- (3) 26,136
To reflect 1 for 5 reverse stock split (12,795) 12,795 -- -- --
-------- --------- ------------ -------- ------------
Balance - July 31, 1996 3,199 22,940 -- (3) 26,136
Net income for the Nine Months Ended
April 30, 1997 -- -- 119,399 -- 119,399
-------- --------- ------------ -------- ------------
Balance - April 30, 1997 $ 3,199 $ 22,940 $ 119,399 $ (3) $ 145,535
======== ========= ============ ======== ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 33
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 87,681 26,191 220,400 268,148
Amortization of deferred interest under
capital leases -- -- -- 17,979
Reserve for bad debts -- -- 167,000 --
Loss on disposal of property
and equipment -- -- 71,030 --
Deferred income taxes -- -- (7,511,000) 314,053
Income on partial discharge of
capital lease obligations -- -- (77,403) --
Interest converted to principal 11,439 36,670 -- --
Reorganization item:
Gain on discharge of debt, net
of income tax -- -- (9,181,193) --
Cash distribution (515,638) -- -- --
Changes in operating assets and liabilities:
(Increase) Decrease in operating assets:
Accounts receivable and due
from suppliers 482,254 (221,255) 220,882 6,843,636
Inventory (1,032,882) 115,616 1,065,821 3,260,017
Prepaid expenses 122,017 (100,596) 168,856 (183,186)
Miscellaneous receivables 132,379 -- (108,179) 51,352
Prepaid and refundable income taxes 252,046 (812) -- (291,146)
Security deposits -- -- 86,858 (3,537)
Increase (Decrease) in operating liabilities:
Prepetition liabilities -- -- 8,614,728 --
Accounts payable and accrued expenses (56,766) 155,784 (1,828,715) 1,949,987
Income taxes payable 103,700 -- -- (200,770)
----------- --------- ----------- ------------
Net Cash Provided (Used) by
Operating Activities $ (294,371) $ (64,766) $(1,145,616) $ 799,198
----------- --------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- -- (47,933) (143,995)
----------- --------- ----------- ------------
Net Cash Used by Investing Activities $ -- $ -- $ (47,933) $ (143,995)
----------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE> 34
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable $ -- $ -- $ 3,393,628 $ 24,250,741
Repayment of notes payable -- -- -- (26,460,130)
Proceeds from notes payable - related party 600,000 -- -- --
Repayment of notes payable - related party (145,324) -- -- --
Proceeds from loan payable - related party -- -- 557,000 --
Proceeds from bankers acceptances -- -- 1,118,556 9,321,558
Repayment of bankers acceptances -- -- (4,127,139) (7,876,394)
Repayment of officer's loans payable -- -- -- (2,373)
Repayment of capital lease obligations (29,656) (18,812) (64,552) (109,308)
Proceeds from insurance note payable -- 77,225 -- --
Repayment of insurance note payable (62,020) (15,205) -- --
Payment of deferred offering costs (30,043) -- -- --
--------- -------- ----------- ------------
Net Cash Provided (Used) by
Financing Activities 332,957 43,208 877,493 (875,906)
--------- -------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 38,586 (21,558) (316,056) (220,703)
Cash and Cash Equivalents, beginning of period 4,957 26,515 342,571 563,274
--------- -------- ----------- ------------
Cash and Cash Equivalents, end of period $ 43,543 $ 4,957 $ 26,515 $ 342,571
========= ======== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 25,451 $ 1,553 $ 203,964 $ 1,196,322
Income tax $ -- $ -- $ -- $ 116,319
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the 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> 35
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
Dynamic International, Ltd. (the "Company") is engaged in the sale
and distribution of a diverse line of hand exercise and light
exercise equipment, sports bags/luggage and gift products which are
distributed throughout the United States.
b. Revenue
Revenue is recognized when the goods are shipped to the customer.
c. Fresh Start Reporting
Financial accounting during a Chapter 11 proceeding is prescribed in
"Statement of Position 90-7 of the American Institute of Certified
Public Accountants," titled "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the
Company adopted effective July 31, 1996. The emergence from the
Chapter 11 proceeding resulted in the creation of a new reporting
entity without any accumulated deficit and with the Company's assets
and liabilities restated at their estimated fair values (also see
Note 2 Reorganization and Management Plan). Because of the
application of fresh start reporting, the financial statements for
periods after reorganization are not comparable in all respects to
the financial statements for periods prior to reorganization.
d. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and the wholly owned inactive subsidiary. All significant
intercompany accounts and transactions have been eliminated.
e. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
f. Inventories
Inventories consist principally of finished goods and are stated at
the lower of cost, last-in, first-out method, (LIFO) or market.
g. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided
generally by accelerated methods over the estimated useful lives of
the assets. Expenditures for maintenance and repairs are charged
against income. Estimated useful lives used in calculating
depreciation are as follows:
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
F-9
<PAGE> 36
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h. Deferred Offering Costs
Legal and accounting costs incurred in connection with the proposed
public offering of the Company's common stock will be charged to
additional paid-in capital upon completion of the proposed public
offering. If the offering is not consummated, these costs will be
expensed.
i. Advertising and Promotion
Advertising and promotion expense, primarily comprised of print
media distributed to current and potential customers, is expensed as
incurred.
j. Earnings Per Share
Earnings (loss) per share are based on the weighted average number
of shares outstanding as adjusted for the 1 for 5 reverse split.
Common stock equivalents are included in the calculation if they are
dilutive. Amounts for the predecessor company (see Note 2) are not
presented as they are not meaningful.
k. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
l. Stock Options and Similar Equity Instruments
On January 1, 1996, the Company adopted the disclosure requirements
of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," for stock options and
similar equity instruments (collectively, "Options") issued to
employees; however, the Company will continue to apply the intrinsic
value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issues to Employees," rather than the fair
value based method of accounting prescribed by SFAS No. 123. SFAS
No. 123 also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of
the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
m. Reorganization value in excess of amounts allocable to identifiable
assets
The excess reorganization value is amortized over a period of eleven
years on the straight line basis (see Note 2). Management
re-evaluates the periods of amortization to
F-10
<PAGE> 37
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 62,798
shares were issued to the reconfirmation common stock equity interest
holders.
F-11
<PAGE> 38
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the reorganization
value of the Company determined by projecting cash flows over an eleven
year period and discounting such cash flows at a cost of capital rate of
15% and the statutory federal, state and local tax rates currently in
effect. The discounted residual value at the end of the forecast period is
based on the capitalized cash flows for the last year of that period. Cash
distributions and the estimated stock distribution value totaling $531,561
has been recorded as other liabilities as of April 30, 1996. The gain of
approximately $16.7 million resulting from the excess of the allowed
claims over the total value of the cash and the common stock distributed
to the secured and unsecured creditors has been recorded as an
extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and
assumptions about circumstances and events that have not yet taken place.
Such estimates and assumptions are inherently subject to significant
economic and competitive uncertainties and contingencies beyond the
control of the Company, including, but not limited to those with respect
to the future courses of the Company's business activity. Accordingly,
there will usually be differences between projections and actual results
because events and circumstances frequently do not occur as expected, and
those differences may be material.
As part of the reorganization, the Company will continue to sell hand
exercise, light exercise equipment and luggage and sports bags, all of
which have a proven market acceptance. Management believes it can increase
revenues by increasing its focus on direct response marketing. Therefore,
it intends to develop plans to use infomercials to market these products.
Management believes these increased marketing efforts, adequate financing
through its related entity, Achim Importing, discontinuance of the
unprofitable products, and sustainable gross profit percentages, can be
effectively implemented within the next twelve months. The Company adopted
"fresh-start reporting" in accordance with Statement of Position ("SOP")
90-7 issued by the American Institute of Certified Public Accountants on
July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start reporting"
if the reorganization value of the emerging entity immediately before the
date of confirmation is less than the total of all postpetition and
allowed claims, and if holders of existing voting shares immediately
before confirmation receive less than 50 percent of the voting shares of
the emerging entity, both conditions of which were satisfied by the
Company. Although the confirmation date was May 23, 1996, fresh-start
reporting was adopted on July 31, 1996. There were no material fresh-start
related adjustments during the period May 23, 1996 to July 31, 1996.
Under fresh start accounting, all assets and liabilities are restated to
reflect their reorganization value, which approximates book value at date
of reorganization. Therefore, no reorganization value has been allocated
to the assets and liabilities. In addition, the accumulated deficit of the
predecessor company at July 31, 1996 totaling $713,601 was eliminated, and
at August 1, 1996, the reorganized company's financial statements
reflected no beginning retained earnings or deficit. The reorganization
value in excess of amounts allocable to identifiable assets is being
amortized over an eleven year period on the straight line method.
Amortization expense for the nine months ended April 30, 1997 was $9,108.
F-12
<PAGE> 39
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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> 40
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans from MG
Holding Corp. to pay creditors pursuant to the reorganization plan. The
liability to the reorganized company is $515,638.
3. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used by
the Company, reported net income would have been decreased by $294,000 in
fiscal 1997. Net income would have been increased by $263,000 in fiscal
1996, and the net loss would have been increased by $246,000 in fiscal
1995. On a FIFO basis, reported year end inventories would have increased
by $24,000 in 1997, $318,000 in 1996 and $55,000 in 1995.
4. RELATED PARTY TRANSACTIONS
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> 41
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
<S> <C>
For the Year Ending
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.
There was no income tax liabilities at April 30, 1996. Income tax
liabilities at April 30, 1997 included in income taxes payable consist of
the following :
F-15
<PAGE> 42
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. INCOME TAXES (cont'd)
<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> 43
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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> 44
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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.
F-18
<PAGE> 45
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
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.
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 10% limited amount to foreign customers. There were no
material receivables subject to foreign currency fluctuations.
F-19
<PAGE> 46
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. MAJOR CUSTOMERS (cont'd)
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.
b. Most of the Company's exercise products are purchased from
Phillippines, Korea, and Taiwan. The Company believes that, if
necessary, it will be able to obtain its products from firms located
in other countries at little, if any, additional expense. As a
consequence, the Company believes that an interruption in deliveries
by a manufacturer located in a particular country will not have a
material adverse impact on the business of the Company.
Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on
trade or otherwise, there can be no assurance that the Company will
at all times have access to a sufficient supply of merchandise.
F-20
<PAGE> 47
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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>
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.
F-21
<PAGE> 48
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS (cont'd)
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 $4,920,000 for the
repayment of current debt, purchase of inventory, general corporate
services, and working capital.
Simultaneous with the public offering, the Company intends to
declare a one for five reverse stock split. All share data for the
reorganized Company has been adjusted for the split.
The following supplementary earnings per share reflect the repayment
of indebtedness of $1,300,000 and the resulting reduction of
interest expense and increase in net income as if it had taken place
at the beginning of the reorganization period.
<TABLE>
<CAPTION>
For the Nine Months
Ended April 30, 1997
--------------------
<S> <C>
Net Income 155,738
Earnings Per Share .05
Number of Shares 3,458,258
</TABLE>
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> 49
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS (cont'd)
d. Consulting Agreement
The Company anticipates entering into a two 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> 50
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. AUTHORITATIVE PRONOUNCEMENTS (cont'd)
b. While the Company has not analyzed SFAS No. 128 sufficiently to
determine its long-term impact on per share reported amounts, SFAS
No. 128 should not have a significant effect on historically
reported per share loss amounts.
SFAS No. 129 does not change any previous disclosure requirements
but, rather, consolidates existing disclosure requirements for ease
of retrieval.
c. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income" and SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information". Both are effective for financial
statements for fiscal years beginning after December 15, 1997. The
Company will adopt both statements on May 1, 1998. Adoption is not
expected to have a material impact on the financial position and
results of operations.
F-24
<PAGE> 51
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> 52
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
MONTH ENDED MONTH 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
