<PAGE>
-----------------
DYNAMIC INTERNATIONAL, LTD.
----------------------
1,200,000 Units
Each Consisting of One Share of Common Stock
One Class A Redeemable Warrant and
One Class B Redeemable Warrant
Dynamic International, Ltd., a Nevada corporation (the "Company"),
hereby offers through Patterson Travis, Inc., the underwriter for the offering
(the "Underwriter") 1,200,000 units ("Units"), each Unit consisting of one share
of Common Stock, $.001 par value (the "Common Stock"), one redeemable Class A
Warrant (the "Class A Warrants) and one redeemable Class B Warrant (the Class B
Warrants, together with the Class A Warrants, the "Warrants") at a price of
$5.00 per Unit. The Units, the Common Stock and the Warrants are herein
sometimes referred to as the "Securities." The Common Stock and the Warrants
will be separately tradable commencing March 12, 1998 (the "Separation Date").
Each Class A Warrant entitles the holder to purchase one share of Common Stock
at $6.00, commencing on the Separation Date until June 12, 1999. Each Class B
Warrant entitles the holder to purchase one share of Common Stock at $10.00,
commencing on the Separation Date until December 12, 2000. The A Warrants and
the B Warrants are redeemable by the Company at $.01 per Warrant on thirty days'
prior written notice at any time provided that the average closing bid price for
the Common Stock is no less than $9.00 per share with respect to the A Warrants
and $15.00 with respect to the B Warrants for any ten trading days within a
period of 30 consecutive trading days as reported on the principal exchange or
market on which the Common Stock is then traded. The Units are quoted in the OTC
Bulletin Board Service (the "Bulletin Board") under the symbol DYNIU. Commencing
on the Separation Date, the Common Stock, Class A Warrants and the Class B
Warrants are expected to be quoted on the Bulletin Board under the sybols. No
assurance can be given that an active trading market will develop, or if
developed, will be sustained. See "Description of Securities."
Currently, no active public market exists for the Units, Common Stock
or Warrants. There can be no assurance that an active public market will develop
after the completion of this offering. See "Risk Factors-No Assurance for Public
Market for the Units, Common Stock or Warrants." The offering price of the Units
and the exercise price of the Warrants have been arbitrarily determined by the
Company and the Underwriter and do not necessarily bear any relationship to the
Company's assets, book value, results of operations or other generally accepted
criteria of value.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 6 AND
12, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
===============================================================================
Price to Public Underwriting Proceeds to
Discount(1) Company
Per Unit (2) $5.00 $0.50 $4.50
Total $6,000,000 $600,000 $5,400,000
===============================================================================
(1) Does not include additional compensation to the Underwriter in the form
of (a) a non-accountable expense allowance of three percent of the
gross proceeds of this offering and (b) warrants, purchasable at a
nominal price, to acquire 120,000 Units at an initial exercise price of
$8.25 per Unit (the "Underwriter's Warrants"), subject to adjustment in
the event of issuances of securities by the Company below the then
current exercise price of the Underwriter's Warrants, or a
reorganization, consolidation, merger or similar corporate transaction
involving the Company. Also, under certain circumstances, in accordance
with NASD rules and regulations, the Underwriter will receive a warrant
solicitation fee equal to 8% of the exercise price of the Warrants it
causes to be exercised (or $1,536,000, assuming exercise of all
Warrants). In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to retain the Underwriter
as a financial consultant for the two years following the closing of
this offering for an aggregate fee of $20,000 payable at closing. See
"Underwriting."
(2) For the purpose of covering over-allotments, if any, the Company has
granted to the Underwriter an option, exercisable within forty five
days of the date hereof, to purchase up to an additional 180,000 Units
upon the same terms and conditions as the Securities offered hereby. If
such over-allotment option is exercised in full, the Total Price to
Public will be $6,900,000, the Total Underwriting Discount will be
$690,000 and the Proceeds to the Company will be $6,210,000. See
"Underwriting."
PATTERSON TRAVIS, INC.
The date of the Prospectus is December 12, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Securities are being offered on a "firm commitment" basis subject
to receipt and acceptance of the Securities by the Underwriter, subject to
approval of certain legal matters by its counsel and subject to prior sale. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities will be made at the offices of the
Underwriter against payment therefor in New York on or about December 22, 1997.
ADDITIONAL INFORMATION
The Company has filed with the headquarters office of the Securities
and Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C.
20549, a Registration Statement on Form S-1 under the Securities Act of 1933
with respect to the Securities offered hereby. This Prospectus filed as part of
such Registration Statement does not contain all the information set forth in,
or annexed as exhibits to, the Registration Statement. For further information
pertaining to the Securities offered hereby and the Company, reference is made
to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits thereto may be inspected at the Headquarters Office of
the Securities and Exchange Commission located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at certain of the Commission's regional offices
at the following addresses: 7 World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may be obtained from the Public Reference Section of the SEC,
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. at prescribed rates. The
Commission also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants such as the
Company, that file electronically with the Commission. This material can be
found at http://www.sec.gov.
2
<PAGE>
PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before
making any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors" and in the financial statements and related notes appearing
elsewhere in this Prospectus. In addition, prospective investors should consult
their own advisors in order to understand fully the consequences of an
investment in the Company. Unless indicated otherwise, the information contained
herein gives effect to a one for five reverse split of the Company's issued and
outstanding Common Stock that was completed in September 1997. The following
summary does not purport to be complete and is qualified by the more detailed
information appearing elsewhere in this Prospectus.
THE COMPANY
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged
in the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP(R). In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Initially, the Company was successful in
marketing these products. For the fiscal year ended April 30, 1995, sales of
these products represented approximately 53% of the Company's gross sales.
However, due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
charge backs by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Reform Act of 1978 (the "Bankruptcy Code").
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors received partial satisfaction of their claims. MG
Holdings Corp. ("MG Holdings"), which had purchased a promissory note from the
Company's principal lender, received 2,976,000 shares of Common Stock in full
satisfaction of the promissory note. The number of shares issued to MG Holdings
represented 93% of the issued and outstanding shares. As a result, MG Holdings
acquired absolute control over the Company's affairs. MG Holdings is
wholly-owned by Marton Grossman, the Company's Chairman and President. See
"Principal Stockholders" and "Certain Relationships and Related Transactions."
In addition, as part of the plan of reorganization, the Company, then known as
DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of
changing its state of incorporation. See "Business--Plan of Reorganization" and
"--Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered .................................. 1,200,000 Units, each consisting of one share of
Common Stock, one Class A Warrant and one Class B
Warrant (1)
Price Per Unit....................................... $5.00
Common Stock Outstanding Before
Offering.................................... 3,198,798 shares
Common Stock Outstanding After
Offering.................................... 4,398,798 shares (2)
Estimated Net Proceeds............................... $4,920,000 ($5,683,000 if the over-allotment option is
exercised in full), after deducting commissions and filing,
printing, legal, accounting and miscellaneous expenses
payable by the Company estimated at $1,080,000.
Use of Proceeds...................................... To purchase inventory, debt repayment, advertising,
marketing and for working capital. See "Use of
Proceeds."
Proposed Symbols
Units...................................... DYNIU
Common Stock................................. DYNI
Class A Warrants............................. DYNIW
Class B Warrants............................. DYNIZ
<FN>
- ------------------------------
(1) The A Warrants will be exercisable at $6.00 per share for a period of 18
months from the date of this Prospectus. The B Warrants will be
exercisable at $10.00 per share for a period of three years from the
date of this Prospectus. The Warrants will be redeemable at $.01 per
Warrant upon the giving of thirty (30) days provided that the price of
the Common Stock has equaled or exceeded $9.00 with respect
to the A Warrants and $15.00 with respect to the B Warrants for any
ten trading days within a period of 30 consecutive trading days.
(2) Assumes the Underwriter's over allotment option for 180,000 Units is not
exercised. See "Underwriting." Excludes (i) up to 2,400,000 shares of
authorized but unissued Common Stock reserved for issuance upon exercise
of the Warrants included in the offering (ii) up to 120,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrants; (iii)
up to 240,000 shares of Common Stock issuable upon exercise of the
Warrants underlying the Underwriter's Warrants; (iv) up to an additional
540,000 shares of Common Stock (including 360,000 shares of Common Stock
underlying warrants) issuable upon exercise of the Underwriter's
over-allotment option; and (v) 2,000,000 shares of Common Stock issuable
to Mr. Grossman, the Company's Chairman and President over a three year
period, provided the Company meets certain earnings criteria. See
"Description of Securities," "Underwriting" and "Management."
</TABLE>
BENEFITS OF OFFERING TO COMPANY'S CHAIRMAN AND PRESIDENT
A portion of the proceeds of this offering will be used for the benefit
of affiliates of the Company. Specifically, approximately $1.2 million will be
paid to MG Holdings, which is wholly owned by the Company's Chairman and
President, in repayment of loans, including accrued interest, made during the
Company's Chapter 11 proceedings. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
Set forth below are selected financial data with respect to the Company
for the three months ended July 31, 1997, the nine months ended April 30, 1997,
the three months ended July 31, 1996, and the years ended April 30, 1996, 1995
and 1994. These data should be read in conjunction with the financial statements
of the Company and the related notes included elsewhere herein. Effective August
8, 1996, the Company emerged as the surviving entity in a merger with DCL. The
balance sheet of the combined entity was substantially similar to that of DCL
immediately prior to the merger. As a consequence, the financial data of the
Company for the reporting periods prior to July 31, 1996 consist of those of
DCL.
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------------- -----------------------------------------------------------------------------
Year ended April 30
-------------------
3 Months
Ended 9 Months Ended 3 Months Ended
July 31, 1997 April 30, 1997 July 31, 1996 1996 1995 1994
------------- ---------------- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $1,834,162 $7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353
Income/(Loss) for
period 38,665 119,399 (76,364) 6,945,299 (11,227,335) 244,308
Net Income per
Share .01 .04
Selected Balance July 31, 1997
Sheet Data: July 31, 1997 As Adjusted(1) April 30, 1997
- ---------- ------------- -------------- --------------
Working Capital
(Deficit) $(221,664) $4,643,901 $(45,789) $(293,884) $(7,493,435) $3,094,821
Total Assets 4,628,741 8,426,657 4,807,062 4,253,396 6,414,185 16,677,772
Long term
obligations,
including
capitalized lease
obligations 54,435 -0- 215,254 23,965 116,124 127,877
<FN>
- ------------------------------------
(1) Gives effect to the application of the net proceeds of this
offering estimated to be $4,920,000. Does not give effect to
(i) up to 2,400,000 shares of authorized but unissued Common
Stock reserved for issuance upon exercise of the Warrants
included in the offering (ii) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants;
(iii) up to 240,000 shares of Common Stock issuable upon
exercise of the Warrants underlying the Underwriter's
Warrants; (iv) up to an additional 540,000 shares of Common
Stock (including 360,000 shares of Common Stock underlying
warrants) issuable upon exercise of the Underwriter's
over-allotment option; and (v) 2,000,000 shares of Common
Stock issuable to Mr. Grossman, the Company's Chairman and
President, over a three year period, provided the Company
meets certain earnings criteria. See "Description of
Securities," "Underwriting" and "Management."
</TABLE>
5
<PAGE>
RISK FACTORS
The purchase of the Securities offered hereby involves a high degree of
risk, including, but not necessarily limited to, the risks described below.
Before subscribing for the Securities offered hereby, each prospective investor
should consider carefully the general investment risks enumerated elsewhere in
this Prospectus and the following risk factors, as well as the other information
contained in this Prospectus.
EMERGENCE FROM BANKRUPTCY. In August 1995, the Company filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In May
1996, the Bankruptcy Court approved a plan of reorganization pursuant to which
creditors received partial satisfaction of their claims. The Company believes
that the losses that led to the bankruptcy proceedings were caused by the
manufacturing defects and poor construction of treadmills and rowing machines
delivered to the Company by its manufacturers. As a result, the Company has
abandoned the sale of these products. Nevertheless, there can be no assurance
that the Company has accurately identified the precise source of its financial
problems and that it has sufficiently addressed such problems. Any failure by
the Company to adequately deal with its financial difficulties may lead to new
problems that, as in the past, may have a material adverse impact on the
condition and prospects of the Company. In addition, there can be no assurance
that the Company will be able to fully recover from the bankruptcy proceedings
and regain acceptance as a reputable company. Further, the Company's bankruptcy
proceedings may hamper its ability to establish new relationships with
commercial lenders and, as a result, complicate its efforts to obtain
financings. See "Business--Plan of Reorganization."
SHIFTING CONSUMER PREFERENCES. The market for exercise and luggage
products is impacted by short-term trends. Therefore, the business of designing,
manufacturing and marketing such products is highly susceptible to fast changing
consumer preferences. The Company's sports bag/luggage business is greatly
affected by demographic trends, frequent shifts in prevailing fashions and
styles and retailer practices. The Company's success in this area is dependent
on its ability to quickly and effectively initiate and/or respond to changes in
market trends and other consumer preferences. The ongoing competitive nature of
the luggage industry presents a continuous risk that new products may emerge and
compete with the Company's existing sports bags/luggage products.
Similarly, the success of the Company's exercise products is mostly a
product of the perceived needs by consumers to improve their health and fitness.
In addition, the type of exercise equipment used by consumers may vary from time
to time based on which part of the body is perceived by consumers to require the
most exercise and how such consumers believe they may attain maximum results
from their efforts to stay fit. Therefore, the Company's ability to market its
exercise equipment will be dependent on its ability to anticipate consumers'
perceived fitness needs.
DEPENDENCE ON AFFILIATED PARTIES. Pursuant to an unwritten
understanding, Achim Importing Co. ("Achim") arranges for the issuance by its
financial lender of letters of credit in favor of the Company's overseas
suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, from time to time, when taking deliveries from domestic
suppliers, Achim purchases products from the manufacturer and resells them to
the Company in order to accommodate Achim's commercial lenders who often require
a security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996
was 9.37%, 9.25% and 11.5%, respectively. Achim is wholly owned by Mr. Marton
Grossman, the Company's Chairman and President. If Achim were to terminate this
arrangement for any reason, the Company would be forced to arrange for its own
commercial financing which would likely result in higher interest rates, fees
and other charges, and which would therefore have a material adverse effect on
the ability of the Company to purchase inventory and finance its operations.
In addition, all of the Company's assets are subject to a lien in favor
of MG Holdings, an entity that is wholly owned by Mr. Grossman, to secure
repayment of a promissory note in the principal amount of approximately
6
<PAGE>
$1,200,000. This sum represents debtor in possession financing advanced by MG
Holdings pursuant to an order by the Bankruptcy Court.
Also, the Company is party to an agreement pursuant to which Achim
assists the Company in the performance of a great number of administrative
functions, including, among other things, the maintenance of financial and
accounting books and records, the preparation of monthly financial accounts
receivable aging schedules and other reports and the performance of credit
checks on the Company's customers. In consideration for these services, Achim
receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and accounts located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment. Achim also provides warehousing services consisting of
receiving, shipping and storing of the Company's merchandise. The Company pays a
monthly fee of 3% of the Company's invoiced sales originating at the warehouse
in connection with the warehousing services performed by Achim under this
agreement. Achim's business is unrelated to the Company's business, and it does
not render to any other entity services similar in nature to the services
performed for the Company.
Further, the Company's offices and warehouse are made available to it
on a rent-free at will basis by Achim which leases the property from Sym
Holding, an entity controlled by Isaac Grossman, the Company's Vice Chairman,
Treasurer and Secretary. See "Business - Management Agreement with Achim
Importing Co.," - Properties" and "Certain Relationships and Related
Transactions."
CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's revenues
are substantially dependent on its sports bag/luggage products. The marketing
success of those products depends, among other things, upon rapidly changing
consumer acceptance, which is difficult to predict and over which the Company
has little, if any, control. In addition, the upscale market for sports
bags/luggage products is dominated by name brands and fashion designers with
wide name recognition and consumer acceptance. As a result, the Company's
ability to market its products and effectively compete is mostly dependent on
its ability to anticipate consumer preferences and design luggage products that
will appeal to its customers. Although the Company believes that it has the
ability and experience to recognize potentially valuable products and to gauge
trends in the sports bags/luggage business, no assurance can be given that the
Company will at all times be able to make accurate predictions as to the
preference of its customers.
RELIANCE ON LICENSES. The market for exercise equipment is dominated by
a number of well known name brands. Although the Company believes that its
licenses with respect to the trademarks SPALDING and KATHY IRELAND provide it
with some of the most prominent names in exercise equipment, the Company's
success in marketing its exercise products will be greatly dependent on its
continuing right to use these trademarks as well as its ability to secure
additional licenses. Any interruption in the Company's rights to use certain
trademarks, including SPALDING and KATHY IRELAND, may have a materially adverse
impact on the Company's revenues. See "Business--Intellectual Property--License
Agreements."
DEPENDENCE ON FOREIGN SUPPLIERS. Approximately 75% of the Company's
products are manufactured overseas, notably in the Far East. The Company's
arrangements with foreign suppliers are subject to the risks of doing business
abroad, including currency fluctuations and revaluations, restrictions on the
transfer of funds and, in certain parts of the world, political instability,
changes in import duties and quotas, disruptions or delays in shipments and
transportation and labor disputes. The Company is also exposed to risks
associated with changes in the laws and policies that govern foreign investment
in countries where it acquires inventory and, to a lesser extent, changes in
U.S. laws and regulations relating to foreign trade and investment. While the
Company believes that alternative sources of supply are available, any serious
disruptions could materially impair the Company's ability to deliver exercise
and sports bag/luggage products in a timely manner. See "Business--Products."
SEASONALITY. The Company's business is highly seasonal with higher
sales typically in the second and third quarters of the fiscal year as a result
of shipments of exercise equipment and sports bag/luggage related to the holiday
season. Although the Company does not believe that the effects of seasonality
have had a material impact on the
7
<PAGE>
Company to date, seasonality of the business requires advance planning and other
special preparations to fully benefit from a short period during which most of
the Company's revenues are generated. If the Company fails to generate
sufficient revenues during this period, this may have a material adverse impact
on the Company's business. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations."
POTENTIAL NEED FOR ADDITIONAL FINANCING. The Company anticipates that
the proceeds from this offering together with the projected cash flows from
operations and the availability of the Achim credit line will be sufficient to
fund its contemplated cash requirements for the twelve months following the
consummation of this offering. Nevertheless, significant additional funding may
be required following this offering in order for the Company to further expand
the marketing of its products. Therefore, the Company will likely be required to
raise additional funds through alternative financing methods. There can be no
assurance that the Company will be able to obtain additional funding when
needed, or that such funding, if available, will be obtainable on terms
acceptable to the Company.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends in
part upon the successful performance of the Company's Chairman and President,
who is 66 years old, for the continued marketing and operation of the Company.
The Company does not have an employment agreement with Mr. Grossman, who spends
approximately 20% of his time working for the Company. Although the Company has
employed, and will likely employ in the future, additional qualified employees,
if Mr. Marton Grossman fails to perform his duties for any reason, the ability
of the Company to market, operate and support its products may be adversely
affected. The Company is currently investigating the possibility of obtaining
key-man life insurance on the life of Mr. Grossman. See "Management."
COMPETITION. Although the Company believes that the products it sells
are unique in several ways, there are other companies that have similar
products, many of which companies have substantially greater financial and other
resources than the Company. Moreover, there can be no assurance that there are
no products that would compete effectively with the Company's proposed products
or that other companies, many of which have financial resources, marketing
staffs and facilities greater than those of the Company, are not currently
developing, or in the future will not develop, products that may have advantages
over the Company's proposed products or that may undercut what the Company
believes are the advantages of the Company's products. See "Business -
Competition."
DEPENDENCE ON PRINCIPAL CUSTOMERS. For the year ended April 30,
1997, K-Mart and Service Merchandise accounted for approximately 25% and 13%,
respectively, of the Company's sales. Although the Company intends to diversify
its customer base in the future, any significant decline in sales to the
Company's principal customers could have a material adverse effect on the
Company. The Company has no written agreements with any of its customers. See
"Business."
NEED TO INCREASE MARKETING CAPABILITY. In order to achieve continued
growth following the offering, the Company will need to expand its marketing and
sales and develop a network of marketing and sales representatives. There can be
no assurance that the Company will be able to build such a marketing staff or
sales force, that the cost of establishing such a marketing staff or sales force
will not exceed any product revenues, or that the Company's direct sales and
marketing efforts will be successful. Alternatively, the Company may enter into
co-marketing or other licensing arrangements. To enter into co-marketing or
other licensing arrangements, the Company must establish and maintain corporate
relationships. There can be no assurance that such corporate relationships can
be established or maintained on terms acceptable to the Company, if at all. To
the extent the Company enters into co-marketing or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that such efforts will be successful.
Although the Company believes that future corporate partners, if any, will have
an economic motivation to commercialize any such products, the Company may not
have any direct control over such partners' commercialization efforts. Neither
Achim nor any party related to Messrs. Marton and Isaac Grossman presently
intends to provide marketing services to the Company. See "Business."
LIMITED LIABILITY INSURANCE. The marketing and sale of the Company's
products entails a risk of product liability claims and claims of omission by
consumers and others. The Company has a general policy of disclaiming liability
arising from its products. The Company also maintains liability insurance which
provides for coverage of up to $10,000,000 per occurrence. Nevertheless, in the
event of a successful liability claim against the Company, there can
8
<PAGE>
be no assurance that the current insurance coverage will be adequate. Any
successful liability claim that exceeds the Company's insurance coverage could
have a material adverse effect on the Company.
DILUTION; CHEAP STOCK. Purchasers of the Units offered hereby will
experience immediate and substantial dilution in the net tangible book value of
shares of Common Stock (including the shares underlying the Warrants) included
in the Units in that the net tangible book value of such shares will be
substantially less than the offering price per share of such shares.
Specifically, the investors in this offering will experience immediate dilution
of $3.91 per share of Common Stock, or approximately 78% of the $5.00 offering
price. In addition, since the current stockholders of the Company have acquired
their respective equity interests at a cost substantially below the offering
price, the public investors will bear most of the risk of loss. See "Dilution."
BENEFIT OF THE OFFERING TO AFFILIATES. An aggregate of $1,200,000, or
approximately 24% of the net proceeds of this offering, will be used to repay a
loan provided by MG Holdings, an entity that is wholly owned by the Company's
Chairman and President. As a result, the amount available for expansion of the
Company's business has been reduced to a certain extent. See "Use of Proceeds"
and "Certain Relationships and Related Transactions."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. After the completion of
this offering, the Company's current principal stockholders and the executive
officers and directors of the Company will beneficially own approximately 68% of
the Company's outstanding Common Stock and, accordingly, will be able to
continue to elect all of the directors and, therefore, to absolutely control the
Company's affairs. As a result of the absolute control exercisable by current
management, potential takeover bids for the Company may be deterred. This may
have a depressive effect on the price of the Securities offered hereby. In
addition, the Company has agreed to issue to its Chairman and President an
additional 2,000,000 shares of Common Stock over a three year period if the
Company meets certain earnings criteria. See "Security Ownership of Certain
Beneficial Owners and Management" and "Management."
NO PAYMENT OF DIVIDENDS. The Company has not paid any dividends on
its Common Stock. For the foreseeable future, the Company anticipates that
earnings, if any, that may be generated from the Company's operations will be
used to finance the growth of the Company and that cash dividends will not be
paid to holders of the Common Stock. See "Description of Securities."
ARBITRARY DETERMINATION OF OFFERING PRICE AND WARRANT EXERCISE
PRICE. The offering price of the Units and the exercise price of the Warrants
have been arbitrarily determined by negotiation between the Company and the
Underwriter and do not necessarily bear any relationship to the assets, book
value, operating or financial results or net worth of the Company or other
generally accepted criteria of value and should not be considered as indicating
any intrinsic value for the Securities. See "Underwriting."
NO ASSURANCE OF PUBLIC MARKET FOR THE UNITS, COMMON STOCK OR WARRANTS.
Prior to the Company's filing for protection under the Bankruptcy Code, the
Company's securities were traded on the Nasdaq SmallCap Market ("Nasdaq").
However, immediately prior to this offering, there was no active public market
for the Units, Common Stock or Warrants, and there can be no assurance that such
markets will develop or, if developed, will be sustained after completion of
this offering. While the Underwriter has informed the Company that it will
endeavor to make a market in the Units and, after the Separation Date, the
Common Stock and Warrants, there can be no assurance that a trading market will
develop or be sustained or that the securities offered hereby will be saleable
at or near their offering price. In the event the Underwriter, for any reason,
ceases making a market in the Company's securities, the trading market in the
Company's securities will likely be materially adversely affected. See
"Underwriting."
The Company has been advised by the Underwriter that it has made
application to initiate quotation of the Securities in the OTC Bulletin Board
Service. Currently, no active public market exists for the Units, Common Stock
or Warrants. There can be no assurance that an active public market will develop
after the completion of this offering. In addition, it may be difficult to
obtain adequate quotations with respect to securities quoted on the Bulletin
Board. Lack of information often has a negative impact on the liquidity of
securities. As a result, investors may be limited in their ability to dispose of
the Units, the Common Stock or the Warrants.
9
<PAGE>
EXERCISE OF WARRANTS SUBJECT TO CURRENT EFFECTIVE REGISTRATION AND
QUALIFICATION. Any exercise of the Warrants must be made pursuant to a
prospectus which is current at the time of exercise. The Company has agreed to
use its best efforts to maintain a current effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), relating to
the Common Stock issuable upon exercise of the Warrants. If the Company is
unable to maintain a current registration statement for any reason, the Warrants
may not be exercised. Although the Securities offered hereby will not knowingly
be sold to purchasers in jurisdictions in which they are not registered or
otherwise qualified for sale, purchasers may buy Warrants in the aftermarket
which may develop for the Warrants in, or purchasers of the Warrants may move
to, jurisdictions in which the shares of Common Stock underlying the Warrants
are not registered or qualified during the period when the Warrants are
exercisable. In such event, the Company would be unable to issue shares to those
persons desiring to exercise their Warrants unless and until the shares could be
registered or qualified for sale in jurisdictions in which such purchasers
reside, or an exemption to such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any required
registration or qualifications. See "Description of Securities - Warrants."
POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES. Approximately 2,976,000
shares of Common Stock may be deemed to be "restricted securities" under Rule
144 promulgated under the Securities Act. Under Rule 144, such shares may be
publicly sold immediately, subject to volume restrictions (i.e. during any three
month period an amount equal to the greater of the average weekly trading volume
for the four weeks preceding the date of sale or 1% of the then outstanding
shares). Any such sales could have a depressive effect on the market price for
the Securities being offered hereby. Approximately 93% of the currently issued
and outstanding shares are owned by a series of trusts for the benefit of
relatives of Marton Grossman. Isaac and Sheila Grossman are among the trustees
of these trusts. Although no lockup agreements are in effect with respect to any
of such shares of Common Stock, the Company has been advised that there is no
current intent to resell any of such securities. See "Description of Securities
- - Shares Available for Future Sale" and "Security Ownership of Certain
Beneficial Owners and Management."
Investors should be aware that sales of the Company's Common Stock
pursuant to options and warrants may have a depressive effect on the price of
the Common Stock and the Warrants, and that the issuance of additional shares of
Common Stock upon the exercise of options, warrants, the Warrants and the
Warrants included in the Units underlying the Underwriter's Warrants will also
dilute the proportionate ownership of the then current stockholders of the
Company. See "Description of Securities--Warrants."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. After this offering, the Company will have a large number
of shares of Common Stock authorized but unissued and reserved for issuance
pursuant to (i) exercise of the Warrants being offered hereby, (ii) exercise by
the Underwriter of the Underwriter's Warrants and the exercise of the Warrants
included in the Units underlying the Underwriter's Warrants (the Underwriter's
Warrants, including the underlying Units, the Common Stock and the Warrants
included therein are collectively sometimes referred to herein as the
"Underwriter's Securities"), and (iii) an agreement to issue an aggregate of
2,000,000 shares of Common Stock to the Company's Chairman and President over a
three-year period, provided the Company meets certain earnings criteria. All of
such shares and any additional shares may be issued without any action or
approval by the Company's stockholders. Although, other than as set forth in the
previous sentence, there are no present plans, agreements, commitments or
undertakings with respect to the issuance of additional shares, or securities
convertible into any such shares by the Company, any additional shares issued
would further dilute the percentage ownership of the Company held by the public
stockholders and would likely have an adverse impact on the market price of the
Common Stock. See "Description of Securities."
In addition, the Company is authorized to issue 10,000,000 shares of
Preferred Stock of which, as of the date hereof, none are outstanding. Shares of
Preferred Stock are issuable at any time and from time to time, by action of the
Board of Directors without further authorization from the Company's
stockholders, except as otherwise required by applicable law or rules and
regulations to which the Company may be subject, to such persons and for such
consideration as the Board of Directors determines. The issuance of preferred
stock by the Board of Directors could adversely affect the rights of the holders
of Common Stock. For example, such issuance could result in a class of
securities outstanding that would have preferences with respect to voting rights
and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
10
<PAGE>
The authority possessed by the Board of Directors to issue preferred stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to achieve. There are no agreements
or understandings regarding the issuance of preferred stock.
UNDERWRITER'S WARRANTS. In connection with this offering, the Company
will sell to the Underwriter for a nominal amount, warrants to purchase up to
120,000 Units. The Underwriter's Warrants will be exercisable commencing one
year after the effective date of this Prospectus and will continue to be
exercisable until five years from the date hereof at an exercise price of $8.25
per Unit, with the Class A Warrants and Class B Warrants underlying the Units
included in the Underwriter's Warrants allowing the purchase of Common Stock at
$9.90 and $16.50 per share, respectively. As long as the Underwriter's Warrants
are outstanding, the terms on which the Company could obtain additional capital
may be adversely affected because the holder of the Underwriter's Warrants might
be expected to exercise them if the Company were able to obtain any needed
additional capital in a new offering of securities at a price greater than the
exercise price of the Underwriter's Warrants. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Class A
Warrants and the Class B Warrants are redeemable by the Company at $.01 per
Warrant on thirty day's prior written notice at any time provided that the
average closing bid price for the Common Stock is no less than $9.00 per share
with respect to the Class A Warrants and $15.00 with respect to the Class B
Warrants for any ten trading days within a period of 30 consecutive trading days
as reported on the principal exchange on which the Common Stock is traded.
Notice of redemption of the Warrants could force the Warrant holders to exercise
the Warrants at a time when it might be disadvantageous for the holders to do so
or to sell the Warrants at their then current market price when the holders
might otherwise wish to hold the Warrants for possible appreciation.
Alternatively, the holders may accept the redemption price, when it is likely to
be substantially less than the market value of the Warrants at the time of
redemption. Any holders who do not exercise Warrants prior to their expiration
or redemption, as the case may be, will forfeit the right to purchase the shares
of Common Stock underlying the Warrants. While the Company may legally be
permitted to give notice to redeem the Warrants at a time when a current
prospectus is not available thereby leaving the Warrant holders no opportunity
to exercise their Warrants prior to redemption, the Company does not intend to
redeem the Warrants unless a current prospectus is available at the time of the
redemption. See "Description of Securities - Warrants."
UNDERWRITER'S INFLUENCE ON THE MARKET. A significant amount of the
Securities offered hereby will be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such Securities through or with the Underwriter. Although it has no legal
obligation to do so, the Underwriter has indicated that it intends to act as a
market-maker and otherwise effect transactions in the Securities offered hereby.
To the extent the Underwriter acts as a market-maker in the Common Stock or
Warrants, it may be a dominating influence in those markets. The degree of
participation in those markets by the Underwriter may significantly effect the
price and liquidity of the Securities. The Underwriter may discontinue such
activities at any time or from time to time. Moreover, pursuant to Regulation M,
if the Underwriter solicits exercise of any of the Warrants, including the
Underwriter's Warrants, it will be unable to act as a market-maker with respect
to the Securities for a period of two or nine business days prior to any
solicitation by it of the exercise of any of the Warrants, including the
Underwriter's Warrants, until the termination of such activity. Accordingly, the
Underwriter will not be able to act as a market-maker during certain periods
and, as a result, holders of the Company's Securities may find it more difficult
to sell their holdings. Also, the same restriction may arise if the Underwriter
becomes involved in a distribution of any of the currently restricted
securities.
PENNY STOCK REGULATION. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission (the "Commission"). Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and, if the broker-dealer is the sole
market-maker, the broker-
11
<PAGE>
dealer must disclose this fact and the broker-dealer's presumed control
over the market, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally, those persons with assets in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse), the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. Consequently, these requirements may have the
effect of reducing the level of trading activity, if any, in the secondary
market for a security that becomes subject to the penny stock rules. If the
Securities become subject to the penny stock rules, investors in this offering
may find it more difficult to sell their shares and/or Warrants.
POSSIBLE NON-RENEWAL OF LICENSE AGREEMENTS. The Company is party to two
separate agreements with Spalding & Evenflo Companies Inc. pursuant to which the
Company has the right to use the name SPALDING in connection with the sale and
distribution of a number of products, including small handheld exercise
equipment and large exercise machines. For the fiscal year ended April 30, 1997,
sales of these products represented approximately 6% of the Company's total
revenues. The two agreements expired in September 1997. The Company is currently
negotiating a renewal of the agreement that relates to the small handheld
equipment. In the event that this agreement is not renewed, the Company's
revenues will likely be reduced by approximately 6%. See "Business-Intellectual
Property."
DILUTION
At July 31, 1997, the Company had a net tangible book value deficit of
$(131,753) or $(.04) per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less liabilities, divided
by 3,198,258, the number of shares of Common Stock outstanding. After giving
effect to the sale of the 1,200,000 Units hereby, the pro forma net tangible
book value at July 31, 1997, would have been $4,788,247 or $1.09 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $1.13 per share to the existing stockholders and an immediate
dilution of $3.91 per share to investors in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share $5.00
Net tangible book value per share before offering $(.04)
Increase per share attributable to the sale of the Units offered hereby $1.13
----
Net tangible book value per share after offering (1) $1.09
----
Dilution per share to investors in offering (2) $3.91
====
<FN>
- -----------------
(1) After deduction of underwriting discounts and commissions, the
Underwriter's non-accountable expense allowance and other estimated
expenses of the offering. See "Use of Proceeds" and "Underwriting."
(2) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the
Warrants included in the offering (ii) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to
240,000 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's Warrants; (iv) up to an additional 540,000
shares of Common Stock (including 360,000 shares of Common Stock
underlying warrants) issuable upon exercise of the Underwriter's
over-allotment option; and (v) 2,000,000 shares of Common Stock
issuable to Mr. Grossman, the Company's Chairman and President,
provided the Company meets certain earnings criteria over a three year
period.
</TABLE>
Pursuant to a Bonus Agreement, the Company will issue to Mr. Grossman,
the Company's Chairman and President, an aggregate of 2,000,000 shares of Common
Stock provided the Company meets certain earnings criteria over a three year
period. See "Management." Giving effect to the issuance of such 2,000,000 shares
as of July 31, 1997, and the attainment by the Company of the earnings criteria
required for the issuance of these shares, the pro forma net
12
<PAGE>
tangible book value would have been approximately $1,668,247 or $.32 per share.
After giving effect to the sale of the 1,200,000 Units hereby, the pro forma net
tangible book value at July 31, 1997, would have been approximately $6,588,247
or $1.03 per share of Common Stock. This represents an immediate increase in pro
forma net tangible book value of $.71 per share to the existing stockholders and
an immediate dilution of $3.97 per share to investors in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share $5.00
Net tangible book value per share before offering $.32
Increase per share attributable to the sale of the Units offered hereby $.71
----
Net tangible book value per share after offering (1) $1.03
----
Dilution per share to investors in offering (2) $3.97
====
<FN>
- -----------------
(1) After deduction of underwriting discounts and commissions, the
Underwriter's non-accountable expense allowance and other estimated
expenses of the offering. See "Use of Proceeds" and "Underwriting."
(2) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the
Warrants included in the offering (ii) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to
240,000 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's Warrants; and (iv) up to an additional
540,000 shares of Common Stock (including 360,000 shares of Common
Stock underlying warrants) issuable upon exercise of the Underwriter's
over-allotment option.
</TABLE>
The following table presents as of July 31, 1997, the relative share
purchases, percentages of equity ownership in the Company, total cash paid,
percentage of total cash invested, and the average price per share of Common
Stock to the current and public shareholders after giving effect solely to the
sale of the shares of Common Stock offered hereby:
COMMON STOCK ONLY
<TABLE>
<CAPTION>
Percentage Percentage
Shares of Equity Total of Total Average Price
Purchased Ownership Cash Paid Cash Invested Per Share
--------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Public Investors 1,200,000 27.3% 6,000,000 99.6% $5.00
Current Stockholders 3,198,798 72.7% 26,139 0.4% $0.01
--------- ----- ---------- ------
Total 4,398,798 100.00% 6,026,139 100.00%
========= ======= ========= =======
</TABLE>
13
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering, after deducting discounts and
commissions, the Underwriter's expense allowance and expenses of this offering,
will be approximately $4,920,000 ($5,683,000 if the over-allotment option is
exercised in full). The Company intends to use such net proceeds as follows:
<TABLE>
<CAPTION>
Amount of Percentage of
Proceeds Proceeds
---------- -------------
<S> <C> <C>
Purchase of Inventory $2,100,000 43%
Debt Repayment (1) $1,200,000 24%
Advertising (2) $ 500,000 10%
Marketing (3) $ 800,000 16%
Working Capital $ 320,000 7%
<FN>
- --------------------
(1) The entire amount will be paid to MG Holdings, which is wholly owned
by Marton Grossman, the Company's Chairman and President, in full repayment of a
loan, evidenced by a promissory note, made during the Company's Chapter 11
proceedings. The note accrues interest at the Citibank Prime Rate plus one
percent. The weighted average interest rate at April 30, 1997, and as of the
date hereof was 9.25% and 9.35%, respectively. As of April 30, 1997 the Company
had accrued interest in the amount of $37,219 in connection with this loan. As
of November 3, 1997, the sums owed to MG Holding amounted to $1,059,785 in
principal plus $89,601 in accrued interest. The promissory note is to be paid in
24 monthly installments commencing September 5, 1996. To date, only three
payments have been made. In July 1997, the Company and MG Holdings agreed that
no payments will be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier.
(2) The Company intends to market its products through the placement of
advertisements in various media.
(3) The Company intends to hire a number of marketing professionals who
are expected to be paid a salary as well as commissions.
</TABLE>
The amount of net proceeds to be received by the Company reflects the
Company's best estimate after deducting commissions and the Underwriter's
non-accountable expense allowance in the amount of $780,000 and other expenses
incurred in the offering of approximately $300,000, which either have been paid
already or are to be paid by the Company out of proceeds.
The foregoing table represents the Company's best estimate of the
allocation of the proceeds of this offering based upon the current state of the
Company's development, its current plans and current economic and industry
conditions, and is subject to reapportionment of proceeds among the categories
listed above or to new categories in the event of changes to the current
economic and industry conditions or an entirely unforseen opportunity,
acquisition or otherwise, is presented to the Company. While the Company has no
specific current acquisition plans, it currently intends to simultaneously focus
its energies and assets towards growing its business internally, while at the
same time exploring opportunities to expand its business through acquisitions.
The Company anticipates that the proceeds from this offering together with the
projected cash flows from operations will be sufficient to fund its contemplated
cash requirements for the twelve months following the consummation of this
offering.
Until used, the Company intends to invest the proceeds of this offering
in government securities, certificates of deposit, money market securities,
commercial paper or other top-rated income-producing investments.
DIVIDEND POLICY
The Company has paid no dividends and does not expect to pay dividends
on its Common Stock in the foreseeable future as it intends to retain earnings
to finance the growth of its operations.
14
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
Reorganized Company for the three months ended July 31, 1997, the nine months
ended April 30, 1997, and the three months ended July 31, 1996 and the years
ended April 30, 1996, 1995, 1994 and 1993 for the predecessor company. These
data should be read in conjunction with the financial statements of the Company
and the related notes included elsewhere herein. Effective August 8, 1996, the
Company emerged as the surviving entity in a merger with DCL. The balance sheet
of the combined entity was substantially similar to that of DCL immediately
prior to the merger. As a consequence, the financial data of the Company for the
reporting periods prior to July 31, 1996, consist of those of DCL.
<TABLE>
<CAPTION>
Reorganized Company(1)
-----------------------
Three Months Nine Months
Ended 7/31/97(1) Ended 4/30/97(1)
---------------- ----------------
<S> <C> <C>
Net Sales $1,834,162 $7,492,729
Net Income/ (Loss) from
Continuing Operations 38,665 119,399
Net Income/(Loss) 38,665 119,399
Net Income/(Loss) per .01 0.04
Share
Selected Balance Sheet
Data:
Working Capital (Deficit) $(221,664) $(45,789)
Total Assets 4,628,741 4,807,062
Long term Obligations,
including Capitalized 54,435 215,254
Lease Obligations
Total Liabilities 4,444,541 4,661,527
Retained Earnings 158,064 119,399
Accumulated Deficit -0- -0-
Shareholders' Equity
(Deficit) 184,200 145,535
<CAPTION>
Predecessor Company
---------------------------------------------------------------------------
Year ended April 30
--------------------
Three Months
Ended 7/31/96 1996 1995 1994 1993
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $1,983,164 $7,151,715 $32,533,097 $29,497,353 $25,735,479
Net Income/ (Loss) from
Continuing Operations (76,364) (2,235,894) (11,227,335) 244,308 (427,409)
Net Income/(Loss) (76,364) 6,945,299 (11,227,335) 244,308 (427,409)
Net Income/(Loss) per
Share
Selected Balance Sheet
Data:
Working Capital (Deficit) $(293,884) $(7,493,435) $3,094,821 $3,173,751
Total Assets 4,253,396 6,414,185 16,677,772 13,373,816
Long term Obligations,
including Capitalized 23,965 116,124 127,877 92,129
Lease Obligations
Total Liabilities 4,300,398 13,406,486 12,442,738 9,383,090
Retained Earnings -0- -0- 3,644,799 3,400,491
Accumulated Deficit (637,237) (7,582,536) -0- -0-
Shareholders' Equity
(Deficit) (47,002) (6,992,301) 4,235,034 3,990,726
<FN>
- ------------------
(1) Due to the reorganization (see Note 2 to the financial statements),
operating results of the reorganized company may not be comparable to those of
the predecessor company. Management's assumptions used in determining the
Company's reorganization value are discussed in Note 2 to the financial
statements.
(2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
charge backs by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996 the Company's plan of reorganization was approved by the Bankruptcy
Court. During July and August 1996, the Company satisfied its obligations under
the Plan through cash payments and the issuance of Common Stock
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein. The discharge of claims under the bankruptcy
proceedings described immediately below has been reflected in the financial
statements for the fiscal year ended April 30, 1996. Effective August 8, 1996,
the Company completed a migratory merger from Delaware to Nevada by merging into
a newly-formed Nevada entity, thereby changing its name from Dynamic Classics,
Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was
substantially identical to that of the Company prior to the merger. The Company
and its predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described
below, which the Company adopted effective on July 31, 1996, financial results
for the year ended April 30, 1997, are reported by combining the financial
results for the three-month period ended July 31, 1996, and those of the
nine-month period ended April 30, 1997.
Because of the application of fresh-start reporting, the financial
statements for the periods after reorganization are not comparable in any
respects to the financial statements for the periods prior to the
reorganization.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Initially, the Company was successful in
marketing these products. For the fiscal year ended April 30, 1995, sales of
these products represented approximately 53% of the Company's gross sales.
However, due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the
"Plan") pursuant to which creditors received partial satisfaction of their
claims. The amount of claims allowed under the bankruptcy proceedings aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG Holdings, which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock in
satisfaction of such promissory note, representing approximately 93% of the
issued and outstanding shares, thereby gaining absolute control over the
Company's affairs. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions". An additional
160,000 shares and 62,798 shares were issued to the Company's unsecured
creditors and the Company's existing security holders, respectively. The value
of the cash and securities distributed under the plan of reorganization
aggregated $531,561. An amount of $16,692,193, representing the difference
between the value of the total distribution and the amount of allowable claims
under the bankruptcy, was recorded as an extraordinary gain.
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.
16
<PAGE>
Upon emergence from bankruptcy, the Company adopted fresh-start
accounting on July 31, 1996 (see Note 2 to the Financial Statements). Under
fresh-start accounting, all assets and liabilities were restated to reflect
their reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years. In connection with the bankruptcy
proceedings, the Company restructured its operations and relocated its
administrative headquarters and warehouse facilities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1997, THE NINE MONTHS
ENDED APRIL 30, 1997, THE THREE MONTHS ENDED JULY 31, 1996 AND THE YEARS ENDED
APRIL 30, 1997 AND 1996
Three Months Ended July 31, 1997
Sales for the three months ended July 31, 1997 decreased by $149,000, or
7.5%, from $1,983,000 to $1,834,000, compared to the three months ended July 31,
1996. Sales of the Company's exercise equipment and sports bags/luggage lines
decreased by $75,000 and $74,000, respectively.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses decreased by approximately $120,000 due primarily to
decreases in the following expenses:
Officer salaries $ 38,000
Salesmen salaries $ 23,000
Insurance $ 12,000
Shipping expenses $ 46,000
Officer salaries decreased by $38,000 as a result of the departure by
the former President of the Company in March 1997. Salesman salaries decreased
by $23,000 due to the elimination of a sales position in August 1996. Insurance
expense decreased due to lower product liability premiums. Shipping expenses
decreased due to an increase in the amount of sales which were shipped directly
to customers from the Company's overseas vendors. Interest expense remained
relatively constant. The Company had a pretax profit of $62,000 compared to a
pretax loss of $76,000 in the prior year's corresponding three-month period.
The following table sets forth the results of operations for the periods
discussed above:
17
<PAGE>
<TABLE>
<CAPTION>
Reorganized Company For the Predecessor Company For the
3 Months Ended July 31, 1997 3 Months Ended July 31, 1996
---------------------------- ----------------------------
<S> <C> <C>
Sales $1,834,000 $1,983,000
Other Income 8,000 10,000
---------- ----------
1,842,000 1,993,000
Cost of Sales 1,282,000 1,454,000
---------- ----------
Gross Profit 560,000 539,000
---------- ----------
Operating Expenses 438,000 558,000
Interest 60,000 57,000
---------- ----------
498,000 615,000
---------- ----------
Pretax Income 62,000 (76,000)
Tax Provision 24,000 ---
---------- ----------
Income 38,000 (76,000)
========== ==========
</TABLE>
Nine Months Ended April 30, 1997
Total sales of $7,493,000 and $1,983,000 for the nine months ended April
30, 1997 and the three months ended July 31, 1996, respectively, were, on a
combined basis, $2,324,000, or 32% higher than during the previous fiscal year.
Sales of exercise equipment of $4,124,000 and $960,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$5,084,000, on a combined basis. These combined sales of exercise products were
$532,000 or 9% less than during the previous fiscal year. Sales of sports
bags/luggage products of $3,368,000 and $1,023,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$4,391,000, on a combined basis. These combined sales of sports bags/luggage
products were 7% less than the previous fiscal year. Sales for the fiscal year
ended April 30, 1996 were reduced by $3,211,000 of customer credits for a
discontinued line of manual treadmills and ski machines.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were, on
a combined basis, $3,899,000 less than the fiscal year ended April 30, 1996, due
to the reorganization.
The following is a discussion of the effect of the Company's
reorganization and adoption of fresh-start reporting on the various income
statement line items during the nine-month period ended April 30, 1997. For this
purpose, the nine months ended April 30, 1997 are compared to the nine months
ended April 30, 1996. Decreases for the nine months ended April 30, 1997
compared to the nine months ended April 30, 1996 are represented approximately
by net changes in the following expenses:
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Freight out 10,000 Travel & entertainment 30,000
Insurance claims 70,000 Office equipment rental 7,000
Lawsuits 289,000 Miscellaneous taxes 8,000
Showroom rent 319,000 Consultant fees 105,000
Officers salaries 81,000 Promotional material 189,000
Office salaries 262,000 Pension costs 726,000
Warehouse salaries 115,000 Telephone 31,000
Salesmen salaries 57,000 Data-processing fees 6,000
Payroll taxes 45,000 Postage 10,000
Fringe benefits 2,000 Bad debt expenses 666,000
Repairs & maintenance 4,000
</TABLE>
Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000, respectively,
as a result of the accrual of proofs of claim filed during the bankruptcy
proceeding as liabilities subject to compromise during the nine-month period
ended April 30, 1996. Showroom rent decreased by $319,000 since a proof of claim
for the balance of the lease was recorded during the nine-month period ended
April 30, 1996. The showroom was closed in October 1995. Officers salaries
decreased by $81,000 due to reduction in the salary of the former President of
the Company in September 1995, and the elimination of a Chief Operating Officer
position in December 1995. These changes resulted in decreases of $37,000 and
$44,000, respectively. Office salaries decreased by $262,000 due primarily to
the elimination of the Vice President of Operations position in June 1996 which
accounted for $119,000 of the reduction. In addition, the position of Credit
Manager was eliminated in May 1996 resulting in a savings of $45,000. The
balance of $98,000 is due to the overall reduction of the office staff as a part
of the reorganization. Warehouse salaries decreased by $115,000 due to the
elimination of warehouse employees under the reorganization. Salesmen salaries
decreased by $57,000 due to the elimination of a sales position in August 1996.
Payroll taxes and fringe benefits decreased by $45,000 and $2,000, respectively,
due primarily to the positions and employees eliminated during the
reorganization. Repairs and maintenance decreased by $4,000. Travel and
entertainment expenses decreased by $30,000 due to the decrease in executive and
sales personnel. Office equipment rental decreased by $7,000 due to a reduction
of the equipment rented due to the reorganization. Miscellaneous taxes decreased
by $8,000 as a consequence of the change in the Company's state of incorporation
from Delaware to Nevada which resulted in the elimination of Delaware franchise
taxes. Consulting fees decreased by $105,000 because the Company did not hire
consultants during the nine months ended April 30, 1997. Promotional materials
decreased by $189,000 due to decreased spending for these materials. Pension
costs decreased by $726,000 because a proof of claim filed by the Pension
Benefit Guarantee Corp. for this amount was recorded as part of the
reorganization during the nine months ended April 30, 1996. Telephone expenses
decreased by $31,000 due to the closing of the showroom in October 1995.
Data-processing costs decreased by $6,441 due to the reorganization of the
Company. Postage decreased by $10,000 due to improved cost management. Bad debt
expense decreased by $666,000 because of improved collections and decreased
sales volume.
The Company's pre-tax profit of $147,000 for the fiscal year ended April
30, 1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July
31, 1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997.
As a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards
of approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision of $104,000 for
the fiscal year
19
<PAGE>
ended April 30, 1997 is based on pretax profits of $223,000 for the period
August 9, 1996 to April 30, 1997. The effective tax rate is 46% comprised of 26%
of federal taxes and 20% of state and local taxes.
The following table sets forth the results of operations for the periods
discussed above:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 Months for 3 Months for Fiscal Year
Ended 4/30/97 Ended 7/31/96 Ended 4/30/96
------------------- ------------------- --------------------
<S> <C> <C> <C>
Sales $7,492,700 $1,983,200 7,151,700
Other income 54,600 10,200 98,300
------------- ----------- ----------
7,547,300 1,993,400 7,250,000
Cost of sales 4,850,000 1,454,600 9,480,500
----------- ----------- ----------
Gross profit (loss) 2,697,300 538,800 (2,230,500)
----------- ----------- ----------
Operating expenses 2,226,600 556,500 6,683,200
Interest 198,800 57,300 383,500
----------- ----------- ----------
2,425,400 613,800 7,066,700
----------- ----------- ----------
Reorganization items 48,900 1,300 449,700
----------- ----------- ----------
48,900 1,300 449,700
----------- ----------- ----------
Pretax income (loss) 223,000 (76,300) (9,746,900)
Tax provision (benefit) 103,700 0 (7,511,000)
----------- ----------- ---------
Income (loss) before
extraordinary item 119,300 (76,300) (2,235,900)
----------- ----------- ---------
Extraordinary item gain
on discharge of
pre-Petition liabilities 0 0 16,692,200
Tax 0 0 (7,511,000)
----------- ----------- ---------
Extraordinary gain,
net of tax 0 0 9,181,200
----------- ----------- ---------
Net income (loss) $119,300 $(76,300) $6,945,300
=========== =========== ==========
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment accounted for approximately $15,580,000 during the fiscal year
ended April 30, 1995. During the fiscal year ended April 30, 1996, as a result
of the Company's bankruptcy proceedings, it was forced to reduce its sales of
other exercise equipment and of its sports bags/luggage products which led to a
decline in sales of $5,334,700 and $1,333,600, respectively, to $5,615,600 and
$4,701,800, respectively. Sales of exercise equipment and sports bags/luggage
products during this period were offset by credits of $3,210,900 issued to
customers in connection with the discontinued line of manual treadmills and ski
machines.
20
<PAGE>
In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Sales of the treadmills and ski machines began
in June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to customers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was forced to allow substantial chargebacks by its customers.
Although, pursuant to a written agreement, the manufacturers acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, they breached this agreement soon thereafter. As a result, during April
1995, the Company issued credits to customers for approximately $5,000,000 of
the $7,487,000 of credits for the fiscal year then ended.
The following table sets forth the financial statement effect of the
Company's line of treadmills and ski machines for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 months for 3 months for year:
ended 4/30/97 ended 7/31/96 ended 4/30/96 ended 4/30/95
<S> <C> <C> <C> <C>
Sales --- --- $597,000 $23,255,000
Credits --- --- (3,210,900) (7,487,000)
------------------ ------------------ ------------- --------------
Net sales --- --- (2,613,900) 15,768,000
Inventory reserve --- --- --- (1,320,063)
Cost of sales --- --- 156,000 (18,604,172)
------------------ ------------------ ------------- --------------
Gross Loss --- --- $(2,457,900) $(4,156,235)
================== ================== ============= ==============
</TABLE>
The sale of these products was discontinued in August 1995 and all
inventory was disposed of by October 1995. Currently, the Company does not
believe that there will be additional returns of these products or that any
claims relating thereto remain to be settled.
In addition, the Company's operating expenses decreased by approximately
$1,083,300 to $6,683,200. As a result of the Company's reorganization, the
Company had decreases in the following expenses:
Officers salaries 160,000
Office salaries 180,000
Salesmen salaries 316,000
Payroll taxes 74,000
Fringe benefits 145,000
Travel & entertainment 237,000
Officers salaries decreased by $160,000 as a result of a reduction in
the salary of the Company's former President in September 1995, and the
separation from the Company of the Senior Executive Vice President in January
1995. These changes accounted for decreases of $67,000 and $73,000,
respectively. Office salaries decreased by $180,000 due to the overall reduction
in office personnel in October 1995 as the operations of the Company were
consolidated and Achim began to supply administrative and warehouse services.
Salesmen salaries decreased by $316,000 because bonuses and overrides were
discontinued after August 1995. Payroll taxes and fringe benefits decreased by
$74,000 and $145,000, respectively, due to the overall reduction in office
personnel in October 1995 as the operations of the Company were consolidated and
Achim began to supply administrative and warehouse services. Travel and
entertainment decreased by $237,000 due to the reduction in executive staff and
the cost containment measures instituted due to the reorganization.
21
<PAGE>
For the fiscal year ended April 30, 1996, after giving effect to an
extraordinary gain as a result of the discharge of pre-Petition liabilities in
the amount of $16,692,200, the Company recorded net income of $6,945,300,
compared to a net loss of $11,227,300 during the previous fiscal year. For the
fiscal year ended April 30, 1996, the Company would have recorded a net loss of
$9,746,900 before the extraordinary gain, or a decrease of $1,562,500 from the
prior fiscal year. This decrease primarily reflected a reduction in the
Company's operating expenses of approximately $1,083,300 and a reduction in
interest expense of $1,001,400. This decrease was due to the Company's exemption
from making interest payments of $558,312 during the reorganization proceedings.
In addition, interest expense decreased by $456,912 due to reduced borrowing for
the year ended April 30, 1996.
The extraordinary gain on debt discharge of pre-Petition liabilities,
which is recorded on the Company's books in fiscal year ended April 30, 1996,
was taxable in the subsequent fiscal period, as the actual distribution to
discharge the debt occurred in July 1996. For tax purposes, without the gain on
debt discharge, the Company had an operating loss for the year ended April 30,
1996 which resulted in the Company's not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the
Company's pretax loss of $11,309,000 resulted in a federal tax benefit of
$3,845,000 utilizing the statutory rate. As a result of changes to the valuation
allowance, the reversal of previously established deferred tax assets and losses
for which no benefit was provided, the Company's effective tax rate resulted in
a benefit of $82,000.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended July 31, 1997
Cash flow provided by operations increased to $95,513 compared to the
prior year's quarter under the predecessor Company which used cash of $64,766.
Net income of $38,665, along with a decrease in inventory of $515,399, due to
lower purchases, were the primary providers of cash from operations during the
quarter ended July 1997.
Net income and inventory reductions were offset by increased accounts
receivable and amounts due from suppliers of $156,220 due to stronger sales in
the last month of the quarter. In addition, cash was used in operations to pay
for increases in prepaid expenses, decreases in accounts payable and accrued
expenses, and income taxes payable of $95,346, $107,320, and $103,700,
respectively.
Financing activities used cash of $79,811 due to an increase in costs
related to this stock offering of $73,844 and the repayment of capital lease
obligations of $5,967. The Company had a positive cash flow for the period of
$15,702.
Nine Months Ended April 30, 1997
During the first nine months after the Company's reorganization, cash
used in operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase inventory by
$1,032,882 during the nine-month period. The increase in inventory was due to an
anticipated increase in sales and the purchase of larger volumes to take
advantage of the decreased costs associated with the higher-volume purchases.
22
<PAGE>
Accounts receivable and amounts due from suppliers decreased by
$482,254, prepaid expenses decreased by 122,017, miscellaneous receivables
decreased by $132,379 and prepaid and refundable income taxes decreased by
$252,046. These amounts partially offset expenditures for inventory and payments
to creditors.
Cash of $332,957 provided by financing activities was primarily the
result of a $600,000 loan from MG Holding and was used to pay the creditors in
accordance with the Company's Plan. Cash provided by financing activities was
used to repay $145,324 of the note payable to MG Holding. In addition, payments
were made for capital leases, insurance notes, and deferred stock offering costs
of $29,656, $62,020, and $30,043, respectively. The Company had a positive cash
flow of $38,586.
Three Months Ended July 31, 1996
During the three months ended July 31, 1996, cash used by operating
activities amounted to $64,800. This was the result of a net loss of $76,400,
increases in accounts receivable and due from suppliers, and prepaid expenses of
$221,300 and $100,600, respectively, which were offset by a decrease in
inventory and an increase in accounts payable and accrued expenses of $115,600
and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance
notes payable of $77,200 were offset by repayments of insurance notes payable,
and repayments of capital lease obligations of $15,200 and $18,800,
respectively. The Company had a negative cash flow of $21,600 for the three
months ended July 31, 1996.
Fiscal Year Ended April 30, 1996
During the fiscal year ended April 30, 1996, cash used by operating
activities amounted to $1,145,616. This was primarily the result of temporary
benefits received by the Company under the bankruptcy and subsequent
reorganization. Net income of $6,945,299 and the increase in pre-Petition
liabilities of $8,614,728 were offset by the gain of debt discharge under the
Plan of $16,692,193. In addition, the Company was not required to pay interest
on most of its debt during the bankruptcy period. Future cash flows will no
longer receive these benefits. Cash of $47,933 was used primarily to purchase
equipment for the manufacture of two exercise products as well as computer
hardware and software.
Financing activities generated cash in the amount of $877,493. Proceeds
from bank notes payable, bankers acceptances, and a loan from MG Holding were
$3,393,628, $1,118,556, and $557,000, respectively. These proceeds were offset
by repayments of bankers acceptances and capital leases of $4,127,139 and
$64,552, respectively. The Company had a negative cash flow of $316,056 for this
period.
Current Position
Pursuant to an unwritten understanding, Achim arranges for the issuance
by its financial lender of letters of credit in favor of the Company's overseas
suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996
was 9.37%, 9.25% and 11.5%, respectively.
23
<PAGE>
The Company owes an aggregate of approximately $1,200,000 to MG
Holdings, which is wholly owned by Marton B. Grossman, the Company's Chairman
and President, under a note evidencing debtor-in-possession financing provided
by MG Holdings. The note accrues interest at the Citibank Prime Rate plus 1%. As
of April 30, 1997, the Company had accrued interest in the amount of $34,219 in
connection with this loan. The promissory note is to be paid in 24 monthly
installments commencing September 5, 1996. To date, three payments have been
made. In July 1997, the Company and MG Holdings agreed that no payments will be
due until the consummation of this offering or the scheduled maturity of the
note, whichever occurs earlier. The Company intends to repay the note from the
proceeds of this offering.
The Company believes that cash generated by operations, the availability
of Achim's credit line to finance the Company's purchase of inventory, and the
proceeds from this offering will be sufficient to finance its operations for the
next twelve months.
SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically in
the second and third quarters of the fiscal year as a result of shipments of
exercise equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at July
31, 1997, and as adjusted to reflect receipt of the net proceeds from this
offering:
<TABLE>
<CAPTION>
July 31, 1997
---------------------------------
Actual(1) As Adjusted(1)(2)
------------ ------------------
<S> <C> <C>
Short Term Debt 1,085,910(3) 18,261
========= ===========
Long Term Debt 54,435 -0-
--------- -----------
Stockholders' Equity:
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized;
Issued 3,198,798 at April 30, 1997, and 4,398,798 As Adjusted 3,199 4,399
Preferred Stock, $.001 Par Value, 10,000,000 shares authorized;
None Outstanding
Additional Paid-In Capital 22,940 4,941,740
Retained Earnings 158,064 158,064
Less: Treasury Stock (3) (3)
---------- ------------
Total Stockholders' Equity 184,200 5,104,200
---------- ------------
Capitalization Total 238,635 5,104,200
========== ============
<FN>
- -----
(1) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering; (ii) up to 120,000 shares of Common Stock issuable
upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of
Common Stock issuable upon exercise of the Warrants underlying the Underwriter's
Warrants; (iv) up to an additional 540,000 shares of Common Stock (including
360,000 shares of Common Stock underlying Warrants) issuable upon exercise of
the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common
Stock issuable to Mr. Marton B. Grossman, the Company's Chairman and President
over a three-year period, provided the Company meets certain earnings criteria.
See "Description of Securities", "Underwriting" and "Management".
(2) Gives effect to the issuance and sale of the Units and the anticipated
application of the net proceeds of this offering.
(3) Includes loan payable--related party, accrued interest payable of $62,299 on
such debt, and capital lease obligations of $18,261.
</TABLE>
25
<PAGE>
BUSINESS
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP.(R) In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Initially, the Company was successful in
marketing these products. For the fiscal year ended April 30, 1995, sales of
these products represented approximately 53% of the Company's gross sales.
However, due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
charge backs by its customers. Although, pursuant to a written agreement, one of
the manufacturers, CNM, acknowledged the defects and agreed to pay for returns
and to provide replacement goods at no cost, it breached this agreement soon
thereafter. In March 1995, CNM sued the Company for monetary damages alleging,
among other things, breach of contract. The Company and CNM subsequently settled
the matter by releasing each other from any claims and allowing CNM to collect
an aggregate of $15,000 from the Company. The Company suffered severe losses
from its venture into this line of business and in August 1995 filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors received partial satisfaction of their claims. MG
Holdings, which had purchased a promissory note from the Company's principal
lender, received 2,976,000 shares of Common Stock in full satisfaction of the
promissory note. The number of shares issued to MG Holdings represented 93% of
the issued and outstanding shares. As a result, MG Holdings acquired absolute
control over the Company's affairs. MG Holdings is wholly-owned by Marton
Grossman, the Company's Chairman and President. See "Principal Stockholders" and
"Certain Relationships and Related Transactions." In addition, as part of the
plan of reorganization, the Company, then known as DCL, merged into DIL, a newly
formed Nevada corporation, for the purpose of changing its state of
incorporation. See "Legal Proceedings" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
26
<PAGE>
PRODUCTS
Exercise Equipment
The Company's line of exercise equipment consists primarily of handheld
products, including dumbbells, ankle and wrist weights, hand grips, jumpropes,
exercise suits, slimmer belts and strength training products. In addition, the
Company markets light weight equipment such as aerobic steps and slides and
exercise mats. The Company also carries a line of small electronic devices
designed to monitor physical activity such as stopwatches, pedometers, pulse
meters and calorie counters.
Luggage/Sports Bags
The Company's line of luggage consists primarily of duffle bags, weekend
bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases.
Some of the models are equipped with wheels and/or retractable handles.
Other Products
The Company, through a wholly owned subsidiary, has obtained the
exclusive rights to the patents underlying the technology used in an insulated
bag incorporating a wrap-around gel pack or freeze pack with the ability to cool
and preserve food and other products for an extended period of time. In
addition, it obtained the trademarks FREEZY- BAGTM and FREEZYGELTM under which
the products are sold. See "Intellectual Property-License Agreements." The
Company is currently testing the marketability of these products.
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and creates its
own molds and tooling. Such molds and tooling are used by the manufacturers to
produce the equipment. The Company retains an ownership interest in the molds
which are returned to it upon the termination of the Company's relationship with
a particular manufacturer. The Company has been granted a number of design
patents with respect to certain of its products. None of these patents are
currently used by the Company. See "Intellectual Property." The Company employs
a designer on a full-time basis for the design of its luggage products. During
the most recent fiscal year the Company spent approximately $102,000 on design
activities, including fees to designers and patent attorneys. The Company may
from time to time utilize the services of consultants for products and package
design.
Most of the Company's products are manufactured in the Philippines,
Taiwan and Hong Kong, which in the most recent fiscal year accounted for
approximately 38%, 27% and 10% of the Company's products, respectively. In
addition, the Company's products are manufactured in the United States, the
People's Republic of China and Indonesia. Exercise equipment is usually shipped
by the manufacturers to the Company within 45 days of the placement of an order.
Orders for luggage and sports bags, which for the most part are produced in the
Philippines and China, usually require a period of 90 to 120 days before they
are shipped. The Company ordinarily has its products manufactured based on
purchase orders and it has no long term relationships with any of its
manufacturers. The Company believes that, if necessary, it will be able to
obtain its products from firms located in other countries at little if any
additional expense. As a consequence, the Company believes that an interruption
in deliveries by a manufacturer located in a
27
<PAGE>
particular country will not have a material adverse impact on the business
of the Company. Nevertheless, because of political instability in a number of
the supply countries, occasional import quotas and other restrictions on trade
or otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its
products are sold to catalog showrooms, drug chains, discount stores and
sporting goods chains. For the fiscal year ended April 30, 1997 approximately
25% and 13% of the Company's revenues were derived from sales to K-Mart and
Service Merchandise, respectively. No other customer accounted for more than ten
percent of the Company's revenues. For the fiscal year ended April 30, 1997,
sales of exercise equipment accounted for approximately 53% of the Company's
revenues while 47% of the Company's revenues were derived from the sale of
luggage.
The Company sells its products primarily through independent sales
agents on a commission-only basis. The Company currently engages approximately
23 sales agents either on an individual basis or through independent sales
organizations. Although it has written agreements with a number of its agents,
all of such agreements are terminable at will. The Company has no long term
arrangements with any of its agents. The Company usually pays commissions
ranging from 1% to 5% of the net sale price of its products. Although the
Company believes that its sales agents sell products exclusively on behalf of
the Company, there are no agreements that prohibit them from selling competing
products.
In addition, the Company on a small scale markets existing products to
retailers for resale under their own private labels. The Company has began
deliveries to Service Merchandise, Inc. and Kohl's Department Stores. The
Company has no written agreements with these customers. Although the scope of
this marketing effort is currently limited, the Company intends to expand the
number of private label transactions. No assurance can be given that its efforts
in this area will be successful.
The Company currently anticipates that it may increasingly focus its
attention on direct response marketing. The Company believes that its products
are particularly well suited for so-called impulse buys. Therefore, it intends
to develop plans to use infomercials to market its products. To date, no
significant expenditures have been made in connection with this effort.
COMPETITION
The Company's exercise products compete with products marketed and sold
by a number of companies. The Company believes that its main competitors are
Icon Health and Fitness, Inc. and Bollinger Industries. Both of these companies
possess far greater financial and other resources, including sales forces, than
the Company's. However, the Company believes that as a result of its ability to
use the trademarked names SPALDINGTM and KATHY IRELANDTM it will be able to
retain its share of the market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
The Company's sports bag/luggage products compete with products designed
by a number of the largest companies in the industry, including Samsonite, Sky
Way and American Tourister. The Company believes that because of its
concentration on the upscale lifestyle and more specialized leisure market that
are associated with the trademark JEEPTM the Company will be able to continue to
grow its sports bag/luggage business. Nevertheless, there can be no assurance
that the Company will be able to effectively compete with these companies as
well as with other smaller entities.
28
<PAGE>
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH
TRAVEL SYSTEMS & DESIGN and EXER-SLIDE.
License Agreements
The Company sells a number of its products under licensed names. The
Company has entered into licensee agreements which provide for the grant of
licenses to the Company and the payment of royalties by the Company, as follows:
JEEP -- Under an agreement dated January 8, 1993, as amended
by letter amendment dated January 8, 1996, between the Company and the
Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company
was granted the exclusive license to use the names JEEP, WRANGLER and
RENEGADE in connection with the manufacture, sale and distribution of
luggage products. The current expiration date of the Jeep Agreement is
December 31, 1998. The parties have informally agreed to start
negotiations regarding the terms of an extension of the current
agreement.
SPALDING -- Pursuant to two separate agreements between the
Company and Spalding & Evenflo Companies Inc. dated November 1, 1992,
and April 1, 1994, the Company was granted the exclusive right to use
the name SPALDING in connection with the sale and distribution of a
number of products, including weight bars and large exercise machines.
The agreements expired in September 1997. However, the Company is
currently negotiating a renewal of the agreement relating to the
handheld exercise equipment, and it is confident that it will be able to
negotiate such renewal. Nevertheless, no assurance can be given that the
Company will be successful in negotiating a renewal of the agreements.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc.,
dated December 22, 1994, Ms. Ireland approves and endorses certain
exercise equipment designed and manufactured by the Company. Under the
agreement, the Company has the right to use her name in connection with
the equipment and Ms. Ireland will make appearances to promote such
equipment. In addition, the Company has the right to use her photograph
and likeness in connection with the sale of the equipment. The agreement
is currently scheduled to expire in June 1998 but is subject, at the
Company's option, to renewal until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1,
1996, between New Century Marketing & Distributors, Inc. and a
wholly-owned subsidiary of the Company, the Company obtained the
exclusive rights to a patented technology as well as to the trademarked
names FREEZY-BAG and FREEZYGEL. The technology has the ability to cool
foods and other products and is used in the wrapping of such products.
The agreement has a term of two years but is renewable, at the option of
the Company, for additional one year periods.
29
<PAGE>
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September 1,
1996 (the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and accounts located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically
renewable for additional one year periods unless written notice of termination
is given at least six months prior to the commencement of a renewal period.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997.
Achim is wholly-owned by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim arranges for
the issuance by its financial lender of letters of credit in favor of the
Company's overseas suppliers thereby enabling the Company to finance the
purchases of its inventory. Also, in the event of domestic suppliers, from time
to time, Achim purchases products from the manufacturer and resells them to the
Company in order to accommodate Achim's commercial lenders who often require a
security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, April 30, 1997 and April 30, 1996 was
9.37%, 9.25% and 11.5%, respectively.
EMPLOYEES
As of September 30, 1997 the Company employed 13 persons, of whom five
were executive officers, three were engaged in administrative and clerical
activities, three were engaged in sales and two were involved in warehousing and
shipping. None of the Company's employees are represented by a union and no work
stoppages have occurred.
30
<PAGE>
PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400
square feet, of which 4,500 square feet are dedicated to office space, located
at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding
which is owned by Isaac Grossman and one of his siblings. Mr. Grossman is the
Company's Vice Chairman, Treasurer and Secretary. Since Achim occupied the
premises before it became affiliated with the Company, it remains the lessee
under the lease. Achim makes the property available to the Company on a
rent-free at will basis. See "Certain Relationships and Related Transactions"
and "Management Agreement with Achim Importing Co., Inc."
LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CHANGE IN ACCOUNTANTS
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as
its independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26,
1996, there were no disagreements between the Company and Hoberman on any matter
of accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Board of Directors of the Company appointed Moore
Stephens, P.C. as its independent accountants, subject to ratification by the
Company's shareholders.
31
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------ --- -----------
<S> <C> <C>
Marton Grossman 66 Chairman and President
Isaac Grossman 34 Vice Chairman, Treasurer and Secretary
Sheila Grossman 58 Director
Harry P. Braunstein 48 Director*
Bernard Goldman 77 Director*
William Dolan 44 Vice President--Finance
John Holodnicki 44 Vice President-Sales
Gordon Sulltrop 62 Executive Vice President
<FN>
- ----------------
* Member of the Company's Audit Committee.
</TABLE>
MARTON GROSSMAN has been the Chairman and President of the Company since
July 29, 1996. For the past 34 years, he has been President of Achim Importing
Co., a privately held company engaged in the import and export of window
coverings and accessories ("Achim"). In addition, he has been President of MG
Holding Co., Inc., a privately held financial holding company. Mr. Grossman is
the father of Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary. Mr. Grossman spends approximately 20% of his time working for the
Company.
ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996. He has been Vice President of Achim since 1989. Prior
thereto, Mr. Grossman worked in various positions at Achim, including in sales
and marketing and warehousing. Mr. Grossman is the son of Marton Grossman, the
Company's Chairman and President. Mr. Grossman spends approximately 20% of his
time working for the Company.
SHEILA GROSSMAN was elected a director in October 1997. From 1962 to
1987 she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
HARRY BRAUNSTEIN was elected a member of the Board in October 1997. Mr.
Braunstein has been a member of Hertzfeld & Rubin, a New York based law firm,
since 1984. He is member of the Board of Directors of Gotham Bank of New York,
Lark Holding Corp., the parent company of WDF, Inc., a privately held plumbing
supply company
32
<PAGE>
and Sentery Detection, Inc., a home alarm business. Mr. Braunstein earned a
J.D. degree from Brooklyn Law School in 1974.
BERNARD GOLDMAN was elected a member of the Board in October 1997. Mr.
Goldman was the Chief Executive Officer of Goldman's Department Store, a chain
consisting of 12 stores, from 1957 to 1979. Mr Goldman has been and continues to
be a member of the Board of Directors and an executive officer of a number of
community and charitable institutions and organizations.
WILLIAM DOLAN has been the Company's Vice President-Finance since July
1996. Prior thereto, he had been the Company's Treasurer and Secretary since
1989. Mr. Dolan graduated from the William Paterson College of New Jersey.
Mr. Dolan is a certified public accountant.
JOHN HOLODNICKI has been a Vice President-Sales at the Company since
1994. From 1981 to 1994 he was a Vice President-Sales at HIT Industries, an
importer of business computer cases. Mr. Holodnicki earned a degree in Marketing
from the University of Illinois in 1975.
GORDON SULLTROP was appointed Executive Vice President in September
1997. Prior to joining the Company, from 1988 to 1997, he was employed by
Rubbermaid Specialty Products Division. At that company he acted as National
Accounts Sales Manager from 1996, Central Region Manager from 1991 to 1995,
Military and Premium Sales Manager from 1990 to 1991 and National Accounts
Manager from 1988 to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri
Valley College, Marshall, Missouri.
BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are two directors of the Company. The
bylaws permit the Board of Directors to fill any vacancy and the new director
may serve until the next annual meeting of stockholders or until his successor
is elected and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by employment
contracts, at the discretion of the Board.
The underwriting agreement provides that the underwriter for this
offering shall have the right to designate one member of the Board of Directors
for a period of three years following the date hereof. To date, no person has
been designated by the Underwriter. See "Underwriting."
AUDIT COMMITTEE
The Company's Board has designated Bernard Goldman and Harry Braunstein
as members of the Audit Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1997 (i) to its Chief
Executive Officer, and (ii) the Company's other four executive officers:
33
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)(2)
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation
(a) (b) (c) (d) (e)
Year Ended
Name/Principal Position April 30 Salary ($) Bonus ($) All Other Compensation (3)
============================= ================= =============== ============== ==============================
<S> <C> <C> <C> <C>
Marton Grossman 1997 -0- 31,200
Chairman and President 1996 -0- 18,200
1995 -0- -0-
Isaac Grossman 1997 -0- 32,240
Director, Treasurer 1996 -0- 13,043
1995 -0- -0-
William P. Dolan 1997 100,000
Vice President-Finance 1996 100,000
1995 97,691
Marvin Cooper, 1997 128,125
President and Director (4) 1996 182,176
1995 250,099
John Holodnicki 1997 120,000
Vice President 1996 120,000
1995 97,046
<FN>
- -------------------------
(1) The above compensation does not include the use of an automobile and
other personal benefits, the total value of which do not exceed as to
any named officer or director or group of executive officers the lesser
of $50,000 or 10% of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Commission, the table
omits columns reserved for types of compensation not applicable to the
Company.
(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac
Grossman's activities performed on behalf of the Company. Marton
Grossman is the sole shareholder, and Isaac Grossman is an employee of
Achim. See "Certain Relationships and Related Transactions."
(4) Mr. Cooper resigned his positions from the Company in March 1997.
</TABLE>
None of the individuals listed in the table above received any long-term
incentive plan awards during the fiscal year.
Marton Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997 the
Company entered into a Bonus Agreement (the "Bonus Agreement") with Mr. Grossman
which provides for the issuance to Mr. Grossman of an aggregate of 2,000,000
shares of Common Stock if the Company reaches certain earnings milestones, as
follows: if the Company's earnings before taxes for the fiscal year ending April
30, 1998, are no less than $500,000, he will be issued 400,000 shares; if the
Company's earnings
34
<PAGE>
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he will be issued 600,000 shares; and if the Company's earnings
before taxes for the fiscal year ending April 30, 2000, are no less than
$1,500,000, he will be issued 1,000,000 shares. The stated earnings criteria are
cumulative so that in the event of an earnings shortfall during a fiscal year,
such shortfall may be compensated by earnings during a subsequent year, as a
result of which Mr. Grossman will be issued shares that, in the aggregate, equal
the number of shares issuable during these two years if the Company had reached
earnings for each year as required under the Bonus Agreement. The Bonus
Agreement also provides for piggyback registration rights with respect to the
Common Stock to be issued.
The following table sets forth the number of shares of Common Stock to
be issued to Mr. Marton Grossman under the Bonus Agreement:
<TABLE>
<CAPTION>
LONG TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
Estimated Future Payouts Under
Performance or Other Non-stock Price based Plans
Number of Shares, Period Until
Name Units or Other Rights Maturation or Payout
Threshold Target Maximum
=================== ====================== ====================== ===================== ================ ===============
<S> <C> <C> <C> <C> <C>
Marton Grossman 2,000,000 April 30, 2000 * * *
=================== ====================== ====================== ===================== ================ ===============
<FN>
- -------------
* The number of shares to be issued in a particular fiscal year
is based on the criteria set forth above.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Commission. Under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), officers, directors and
greater than ten-percent shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from May 1, 1996 through April 30, 1997 other
than Forms 3 that were filed late with respect to Messrs. Marton and Isaac
Grossman and William Dolan and the Marton Grossman Annuity Trust, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten- percent beneficial owners were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG Holdings purchased
from the Company's principal lender a note in the principal amount of
approximately $6,822,530. MG Holdings is wholly owned by Marton Grossman, the
Company's Chairman and President. The note was repaid by the Company through the
issuance of 2,976,000 shares of Common Stock to MG Holdings. MG Holdings
subsequently assigned the Common Stock to a trust for the benefit of members of
Mr. Grossman's family.
35
<PAGE>
Also in connection with the plan of reorganization, MG Holdings loaned
approximately $1,205,000 to the Company to consummate the plan and for related
expenses. The Company issued a promissory note to MG Holdings evidencing the
loan and granted it a security interest in all of the Company's assets. The
promissory note is to be paid in 24 monthly installments commencing September 5,
1996. The note accrues interest at the Citibank Prime Rate plus one percent. The
weighted average interest rate as of the date hereof and at April 30, 1997 was
9.35% and 9.25%, respectively. As of April 30, 1997 the Company had accrued
interest in the amount of $37,219 in connection with this loan. As of October
14, 1997, the amount of interest owed amounted to $84,244. In July 1997 the
Company and MG Holding agreed that no principal or interest payments under the
note would be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier. The Company intends to repay
this note from the proceeds of this offering.
Pursuant to the Warehousing Agreement, Achim performs certain
administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and accounts located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically
renewable for additional one year periods unless written notice of termination
is given at least six months prior to the commencement of a renewal period.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997. To date, none of these fees have been paid. Achim does not charge the
Company interest on the unpaid portion of the fees payable under the Warehousing
Agreement.
Achim is wholly-owned by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim arranges for
the issuance by its financial lender of letters of credit in favor of the
Company's overseas suppliers thereby enabling the Company to finance the
purchases of its inventory. Also, from time to time, when taking deliveries from
domestic suppliers, Achim purchases products from the manufacturer and resells
them to the Company in order to accommodate Achim's commercial lenders who often
require a security interest in the merchandise until it has been sold and the
lender has been repaid. The Company pays Achim for the amount actually paid to
the supplier (including any applicable discounts) without markup, reimburses
Achim for its bank charges and pays it interest at the prime rate plus one
percent on the unpaid balance of the purchases. As of April 30, 1997, the
Company owed an amount of $2,590,360 in principal and interest under this
arrangement. As of September 30, 1997, this sum had decreased to $1,440,476. See
"Certain Relationships and Related Transactions." The weighted average interest
rate paid by the Company to Achim at September 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.
36
<PAGE>
The Company occupies a warehouse consisting of approximately 54,400
square feet, of which 4,500 square feet are dedicated to office space, located
at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding
which is owned by Isaac Grossman and one of his siblings. Mr. Grossman is the
Company's Vice Chairman, Treasurer and Secretary. The property is leased to
Achim which makes the property available to the Company on a rent- free at will
basis. See "Business-Management Agreement with Achim Importing Co., Inc." and
"-Properties."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 10 of the Company's Bylaws contains provisions
relating to the indemnification of directors and officers.
The Company may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
37
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 10, 1997, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 58 Second Avenue,
Brooklyn, New York 11215.
<TABLE>
<CAPTION>
Shares Owned Beneficially
and of Record (1)
----------------------------------------
Name and Address No. of Shares % of Total
- ---------------- -------------- -----------
<S> <C> <C>
Marton Grossman (2) 2,976,000 93.0
Isaac Grossman (3) 2,976,000 93.0
Sheila Grossman (2) 2,976,000 93.0
Harry Braunstein
40 Wall Street
New York, NY 10004 -0- *
Bernard Goldman
2100 Boca West Drive
Laurel Oaks, FL -0- *
William P. Dolan 123 *
John Holodnicki 11 *
Gordon Sulltrop -0- *
All Officers and Directors as a Group (8 2,976,134 93.0
persons)
<FN>
- ---------------------------
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all
options and warrants. Shares issuable under options or warrants are owned
beneficially but not of record.
(2) Consists of shares of Common Stock held by a series of trusts
(collectively, the "Grossman Trust") for the benefit of relatives of Mr.
Grossman. Mr. Isaac Grossman and Sheila Grossman and one of their relatives are
the trustees of the Grossman Trusts. Under its terms, the Grossman Trust will
return to Mr. Grossman annually until August 1998 56% of the value of the shares
(payable in cash or in shares) when deposited into each of the Grossman Trusts.
Since the number of shares to be returned to Mr. Grossman is based on the then
current market price of the Common Stock, such number can not be determined at
the present time. To date, no shares have been returned to Mr. Grossman under
this arrangement. Mr. Grossman disclaims beneficial ownership in the shares held
by the Grossman Trust that will not be returned to him.
38
<PAGE>
(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.
</TABLE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock,
par value $.001 per share. As of the date of this Prospectus, 3,198,258 shares
of Common Stock are issued and outstanding.
The following are brief descriptions of the securities offered hereby
and other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's Certificate of
Incorporation, the Company's Bylaws and Nevada Law. The following statements do
not purport to be complete or give full effect to statutory or common law, and
are subject in all respects to the applicable provisions of the Certificate of
Incorporation, Bylaws and state law.
UNITS
The Company is hereby offering 1,200,000 Units, each Unit consisting of
one share of Common Stock, one Class A Warrant and one Class B Warrant. The
Common Stock and the Warrants will be separately tradable commencing March 12,
1998.
COMMON STOCK
The holders of Common Stock have no preemptive or subscription rights in
later offerings of Common Stock and are entitled to share ratably (i) in such
dividends as may be declared by the Board of Directors out of funds legally
available for such purpose and (ii) upon liquidation, in all assets of the
Company remaining after payment in full of all debts and obligations of the
Company and any preferences granted in the future to any preferred stock. The
Company has not paid any dividends on the Common Stock.
Holders of Common Stock are entitled to one vote for each share held and
have no cumulative voting rights. Accordingly, the holders of more than 50% of
the issued and outstanding shares of Common Stock entitled to vote for election
of directors can elect all the directors if they choose to do so. After
completion of this offering, the current stockholders collectively will continue
to own more than 50% of the outstanding shares of Common Stock. All shares of
Common Stock now outstanding are fully paid and nonassessable and all shares of
Common Stock which are the subject of this offering, when issued, will be fully
paid and nonassessable. The Board of Directors is authorized to issue additional
shares of Common Stock within the limits authorized by the Company's Certificate
of Incorporation without stockholder action.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and American
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). The
following summary of the provisions of the Warrants is qualified in its entirety
by reference to the Warrant Agreement, a copy of which is filed as an exhibit to
the registration statement of which this Prospectus is a part. The Class A
Warrants and the Class B Warrants are identical except that (i) each Class A
Warrant is exercisable at $6.00 and each Class B Warrant is exercisable at
$10.00, and (ii) the market price that will allow redemption to take place is
$9.00 for the Class A Warrant and $15.00 for the Class B Warrants.
39
<PAGE>
Each Class A Warrant will be separately transferable commencing on the
Separation Date and will entitle the registered holder thereof to purchase one
share of Common Stock at $6.00 per share (subject to adjustment as described
below) for a period of 18 months from the date of this Prospectus. Each Class B
Warrant will be separately transferable commencing on the Separation Date and
will entitle the registered holder thereof to purchase one share of Common Stock
at $10.00 (subject to adjustment as described below) for a period of three years
commencing on the date of this Prospectus. Holders of Warrants may exercise such
Warrants by surrendering the certificate evidencing such Warrants to the Warrant
Agent, together with the form of election to purchase on the reverse side of
such certificate attached thereto properly completed and executed and the
payment of the exercise price and any transfer tax. If less than all of the
Warrants evidenced by a Warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants. See "Underwriting."
The Warrants may not be exercised unless a current registration
statement is on file with the Commission and various state securities
commissions. The Company has agreed to use its best efforts to maintain a
current effective registration statement under the Securities Act. While it is
the Company's intention to file post-effective amendments when necessary and to
take appropriate action under state securities laws, there is no assurance that
the registration statement will be kept effective or that such appropriate
action under state securities laws will be effected. If the registration
statement is not kept current for any reason, the Warrants will not be
exercisable, and holders thereof may be deprived of value.
The Company has authorized and reserved for issuance a number of shares
of Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon exercise of the Warrants, each share of Common Stock will be fully
paid and nonassessable. Warrant holders will not have any voting or other rights
as shareholders of the Company unless and until Warrants are exercised and
shares issued pursuant thereto. The exercise price and the number of shares of
Common Stock issuable upon the exercise of each Warrant are subject to
adjustment. Generally, the exercise price of the Warrants will be adjusted if
the Company issues and sells shares of Common Stock (or issue securities
convertible into Common Stock options, warrants and other similar rights) at a
price less than the exercise price of the Warrants in effect at the time of such
issuance. Upon each adjustment in the exercise price, corresponding adjustments
will be made in the number of shares of Common Stock issuable upon exercise of
the Warrants. In addition, in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or similar corporate transactions
involving the Company, the then holders of the Warrants will receive the right
to purchase the kind and amount of securities (subject to adjustment as set
forth above) they would have been entitled to receive had they exercised the
Warrants immediately prior to any such corporate transaction. The foregoing does
not purport to be a complete description of the anti-dilution provisions of the
Warrants. The complete terms are set forth in the Warrant Agreement which has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part.
At any time, The Class A Warrants and the Class B Warrants are
redeemable by the Company at $.01 per Warrant on thirty day's prior written
notice at any time provided that the average closing bid price for the Common
Stock is no less than $9.00 per share with respect to the Class A Warrants and
$15.00 with respect to the Class B Warrants for any ten trading days within a
period of 30 consecutive trading days as reported on the principal exchange or
market on which the Common Stock is traded. The right to purchase the Common
Stock issuable upon exercise by the Warrants noticed for redemption will be
forfeited unless the Warrants are exercised prior to the date specified in the
notice of redemption. While the Company may legally be permitted to give notice
to redeem the Warrants at a time when a current prospectus is not available
thereby leaving the Warrant holders no opportunity to exercise their Warrants
prior to redemption, the Company does not intend to redeem the Warrants unless a
current prospectus is available at the time of redemption.
40
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,398,798 shares
of Common Stock outstanding (4,578,798 shares if the Underwriter's
over-allotment option is exercised in full). Of these shares, the shares
included in the Units and 224,000 shares held by existing security holders will
be freely tradeable without restriction or further registration under the
Securities Act except for any shares purchased by an "affiliate" of the Company
(in general, a person who has a control relationship with the Company) which
will be subject to the limitations of Rule 144 adopted under the Securities Act.
Except as described below, all of the remaining shares of Common Stock may be
deemed "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. Such shares may be sold to the public
immediately, subject to volume restrictions, as described below.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate of the
Company), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or the average weekly trading volume of the Company's
Common Stock on all exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
Approximately 93% of the currently issued and outstanding shares are
owned by a series of trusts for the benefit of relatives of Marton Grossman.
Isaac and Sheila Grossman are among the trustees of these trusts. Although no
lockup agreements are in effect with respect to any of such shares of Common
Stock, the Company has been advised that there is no current intent to resell
any of such securities. See "Security Ownership of Certain Beneficial Owners and
Management."
TRANSFER AGENT
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005, acts as Transfer Agent for the Company's Common Stock and Warrants.
MARKET FOR THE COMPANY'S SECURITIES
The Company believes that there are currently in excess of 1,000
registered holders of the Company's Common Stock Prior to the Company's filing
of a petition for protection under the Bankruptcy Code in 1995, the Company's
securities were traded on the Nasdaq There currently exists no active trading
market for the Company's securities and, therefore, no current pricing
information is available for the Common Stock. It is anticipated that the
Securities will be quoted on the OTC Bulletin Board upon completion of this
offering.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and Patterson Travis, Inc. (the "Underwriter") (a
copy of which agreement is filed as an exhibit to the Registration Statement of
which this prospectus forms a part), the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase, the Units offered
hereby. All 1,200,000 Units offered must be purchased by the Underwriter if any
are purchased. The Units are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Units to the public at the offering prices set forth on the cover page of this
Prospectus and that the Underwriter may allow to certain dealers who are members
in good standing of the National Association of Securities Dealers, Inc.
("NASD") concessions of $.25 per Unit. Upon completion of the sale of all
Securities offered hereby, the public offering price and concessions may be
changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase from it up to 180,000 Units
at the public offering prices less the underwriting discounts set forth on the
cover page of this Prospectus. The Underwriter may exercise this option solely
to cover over-allotments in the sale of the Units offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds to the Company of the Units sold in the
offering (including the over-allotment option).
The Underwriter will (i) receive a Warrant solicitation fee equal to 8%
(or the maximum amount permissible under NASD rules) of the exercise price of
all Warrants it causes to be exercised (or $1,536,000, assuming exercise of all
Warrants) commencing one year from the date hereof, if (a) the market price of
the Company's Common Stock on the date the Warrant is exercised is greater than
the exercise price of the Warrant, (b) the exercise of the Warrant was solicited
by the Underwriter, (c) the Warrant is not held in a discretionary account, (d)
disclosure of the compensation arrangement is made upon the sale and exercise of
the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6
under the Exchange Act, and (f) solicitation of the exercise is otherwise in
compliance with the applicable NASD rules. The Warrant solicitation fee will be
payable only after one year from the date hereof.
Under the underwriting agreement, the Underwriter has the right to
designate one member of the Board of Directors for a period of three years from
the date hereof. The agreement also provides for reciprocal indemnification
between the Company and the Underwriter against certain civil liabilities,
including liabilities under the Securities Act.
The Company has agreed to sell to the Underwriter or its designees, at a
price of $120, 120,000 warrants to purchase 120,000 Units (the "Underwriter's
Warrants"). Other than a one-year restriction on transferability and
exercisability and a higher exercise price of the Warrants included in the
Units, the Units underlying the Underwriter's Warrants are identical in all
respects to the Units offered to the public hereby. The Warrants will be
exercisable at a price of $8.25 per Unit for a period of five years. The Class A
Warrants and Class B Warrants underlying the Units included in the Underwriter's
Warrants will be exercisable at a price of $9.90 and $16.50, respectively, or
165% of the then exercise price of the Warrants offered to the public, for a
period of five years commencing on the date hereof (unless redeemed earlier).
The Underwriter's Securities may not be exercised or sold, transferred, assigned
or hypothecated for one year from the date hereof except to officers of the
Underwriter. Any profit realized upon a resale of the Underwriter's Securities
may be deemed to be additional underwriter's compensation. The Company has
agreed to register, or file a post-effective amendment with respect to any
registration statement registering, the Underwriter's Securities under the
Securities Act at its expense on one occasion during the five years following
the date of this Prospectus and at the expense of the holders thereof on another
occasion, upon the request of a majority of the holders thereof. The Company has
also agreed to "piggy-back" registration rights for the holders of the
Underwriter's Securities at the Company's expense during the five years
following the date of this Prospectus.
42
<PAGE>
The Company has agreed to retain the Underwriter as a financial
consultant for the two years following the closing of this offering for an
aggregate fee of $20,000 payable at the closing of this offering.
The Underwriter has informed the Company that it does not expect sales
of Units to be made to discretionary accounts.
PRICING OF THE OFFERING
Immediately prior to this offering, there has been no active public
trading market for any of the Company's securities. Consequently, the initial
offering prices of the Units and the exercise prices of the Warrants have been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in determining the offering prices were the Company's
financial condition and prospects, the industry in which the Company is engaged,
certain financial and operating information of companies engaged in activities
similar to those of the Company and the general market condition of the
securities markets. The offering prices do not necessarily bear any relationship
to any established standard or criteria of value based upon assets, earnings,
book value or other objective measures.
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York,
New York. Gerald A. Kaufman, Esq., Huntington Station, New York, will pass on
certain aspects of this offering on behalf of the Underwriter.
EXPERTS
The audited financial statements of the Company as of April 30, 1995,
1996 and 1997 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the reports of Moore Stephens, P.C., and
Hoberman, Miller & Co., P.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
43
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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 July 31, 1997 (unaudited), April 30, 1997
and 1996 F-3 to F-4
Statements of Operations for the three months ended July 31,
1997 (unaudited) for the nine months ended April 30, 1997,
three months ended July 31, 1996 and the years ended April 30, 1996 and 1995 F-5
Statements of Stockholders' Equity (Deficit) for the three
months ended July 31, 1997 (unaudited) for the nine months
ended April 30, 1997, three months ended July 31, 1996 and
the years ended April 30, 1996
and 1995 F-6
Statements of Cash Flows for the three months ended July 31,
1997 (unaudited) for the nine months ended April 30, 1997,
three months
ended July 31, 1996 and the years ended April 30, 1996 and 1995 F-7 to F-8
Notes to Financial Statements F-9 to F-24
Independent Auditor's Report on Supplemental Schedule F-25
Schedule II - Valuation and Qualifying Accounts F-26
</TABLE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[MOORE STEPHENS LETTERHEAD]
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.
/s/ Moore Stephens, P.C.
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>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic International, Ltd.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Dynamic International, Ltd.
(formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended
April 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Dynamic International, Ltd. (formerly Dynamic 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>
DYNAMIC INTERNATIONAL, LTD., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,245 $ 43,543 $ 26,515
Accounts receivable - trade (net of allowance for doubtful
accounts of $167,000 in 1997 and 1996) 1,063,147 887,089 1,036,927
Due from suppliers 45,435 65,273 26,760
Inventory 2,786,336 3,301,735 2,384,469
Prepaid expenses 155,618 60,272 81,693
Miscellaneous receivables 2,658 2,658 135,039
Prepaid and refundable income taxes 56,003 39,914 291,146
----------- ----------- -----------
Total Current Assets 4,168,442 4,400,484 3,982,549
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies 707,939 707,939 707,939
Furniture and equipment 102,205 102,205 102,205
Capitalized equipment leases 576,071 576,071 576,071
----------- ----------- -----------
1,386,215 1,386,215 1,386,215
Accumulated depreciation (1,278,011) (1,260,924) (1,156,160)
----------- ----------- -----------
Total Property and Equipment, net 108,204 125,291 230,055
----------- ----------- -----------
OTHER ASSETS
Due from suppliers 36,142 36,142 36,142
Security deposits 4,650 4,650 4,650
Deferred stock offering costs 189,867 116,023 --
Reorganization value in excess of amounts allocable to
identifiable assets, net 121,436 124,472 --
----------- ----------- -----------
Total Other Assets 352,095 281,287 40,792
----------- ----------- -----------
TOTAL ASSETS $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses - non related $ 710,549 $ 846,234 1,009,248
Accounts payable and accrued expenses - related party 2,655,946 2,627,580 2,129,893
Capital lease obligations - current 18,261 24,228 48,731
Income taxes payable -- 103,700 --
Loan payable - related party 1,005,350 844,531 557,000
Other liabilities -- -- 531,561
----------- ----------- -----------
Total Current Liabilities 4,390,106 4,446,273 4,276,433
----------- ----------- -----------
OTHER LIABILITIES
Capital lease obligations, net of current portion -- -- 23,965
Loan payable - related party 54,435 215,254 --
----------- ----------- -----------
Total Other Liabilities 54,435 215,254 23,965
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued 1,744,396 shares -- -- 17,444
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares 3,199 3,199 --
Additional paid in capital 22,940 22,940 590,291
Accumulated deficit -- -- (637,237)
Retained Earnings (since July 31, 1996, date of reorganization,
total deficit eliminated was $713,601) 158,064 119,399 --
----------- ----------- -----------
184,203 145,538 (29,502)
Less: Treasury stock, at cost, 15,000 shares -- -- (17,500)
Less: Treasury stock, at cost, 540 shares (3) (3) --
----------- ----------- -----------
Total Stockholders' Equity (Deficit) 184,200 145,535 (47,002)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The 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>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales $1,834,162 $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097
Other income 7,959 54,642 10,201 98,272 70,638
---------- ---------- ----------- ------------ ------------
1,842,121 7,547,371 1,993,365 7,249,987 32,603,735
COST OF SALES 1,282,334 4,850,002 1,454,637 9,480,484 34,761,846
---------- ---------- ----------- ------------ ------------
GROSS PROFIT (LOSS) 559,787 2,697,369 538,728 (2,230,497) (2,158,111)
---------- ---------- ----------- ------------ ------------
OPERATING EXPENSES
Research and development 14,420 4,042 -- 101,992 44,962
Shipping expenses 67,864 452,093 116,894 738,681 1,198,563
Selling expenses 179,824 686,214 198,993 1,254,006 2,455,493
Advertising and promotion 2,493 152,563 1,819 389,672 346,400
General and administrative 172,545 931,683 238,791 4,198,800 3,720,998
Interest and bank charges - non related
(Contractual interest of $806,937 for
the year ended April 30, 1996) 7,017 21,462 4,174 248,625 1,384,898
Interest and bank charges - related party 52,909 177,339 53,096 134,928 --
---------- ---------- ----------- ------------ ------------
497,072 2,425,396 613,767 7,066,704 9,151,314
---------- ---------- ----------- ------------ ------------
REORGANIZATION ITEMS:
Bankruptcy administration costs -- 48,874 1,325 449,693 --
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 62,715 223,099 (76,364) (9,746,894) (11,309,425)
---------- ---------- ----------- ------------ ------------
INCOME TAX PROVISION (BENEFIT)
Current -- 103,700 -- -- (396,143)
Deferred 24,050 -- -- (7,511,000) 314,053
---------- ---------- ----------- ------------ ------------
24,050 103,700 -- (7,511,000) (82,090)
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 38,665 119,399 (76,364) (2,235,894) (11,227,335)
---------- ---------- ----------- ------------ ------------
EXTRAORDINARY ITEM:
Gain on discharge of prepetition liabilities -- -- -- 16,692,193 --
Income tax provision -- -- -- 7,511,000 --
---------- ---------- ----------- ------------ ------------
Extraordinary gain net of income tax -- -- -- 9,181,193 --
---------- ---------- ----------- ------------ ------------
NET INCOME (LOSS) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
========== ========== =========== ============ ============
INCOME PER SHARE OF COMMON
SHARES $ 0.01 $ 0.04
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 3,198,258 3,198,258
</TABLE>
The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Retained Treasury Stockholders'
Common Paid in Earnings Stock Equity
Stock Capital (Deficit) at Cost (Deficit)
----- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance - May 1, 1994 $ 17,444 $ 590,291 $ 3,644,799 $(17,500) $ 4,235,034
Net Loss -- -- (11,227,335) -- (11,227,335)
-------- --------- ------------ -------- ------------
Balance - April 30, 1995 17,444 590,291 (7,582,536) (17,500) (6,992,301)
Net Income -- -- 6,945,299 -- 6,945,299
-------- --------- ------------ -------- ------------
Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002)
Net Loss for the Three Months Ended
July 31, 1996 -- -- (76,364) -- (76,364)
-------- --------- ------------ -------- ------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate predecessor equity accounts and
to reflect new issuance of shares in
connection with fresh start (1,450) (580,146) 713,601 17,497 149,502
-------- --------- ------------ -------- ------------
15,994 10,145 -- (3) 26,136
To reflect 1 for 5 reverse stock split (12,795) 12,795 -- -- --
-------- --------- ------------ -------- ------------
Balance - July 31, 1996 3,199 22,940 -- (3) 26,136
Net income for the Nine Months Ended
April 30, 1997 -- -- 119,399 -- 119,399
-------- --------- ------------ -------- ------------
Balance - April 30, 1997 3,199 22,940 119,399 (3) 145,535
Net income for the Three Months Ended
July 31, 1997 (Unaudited) -- -- 38,665 -- 38,665
-------- --------- ------------ -------- ------------
Balance - July 31, 1997 (Unaudited) $ 3,199 $ 22,940 $ 158,064 $ (3) $ 184,200
======== ========= ============ ======== ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 20,124 87,681 26,191 220,400 268,148
Amortization of deferred interest under
capital leases -- -- -- -- 17,979
Reserve for bad debts -- -- -- 167,000 --
Loss on disposal of property
and equipment -- -- -- 71,030 --
Deferred income taxes -- -- -- (7,511,000) 314,053
Income on partial discharge of
capital lease obligations -- -- -- (77,403) --
Interest converted to principal -- 11,439 36,670 -- --
Reorganization item:
Gain on discharge of debt, net
of income tax -- -- -- (9,181,193) --
Cash distribution -- (515,638) -- -- --
Changes in operating assets and liabilities:
(Increase) Decrease in
operating assets:
Accounts receivable and due
from suppliers (156,220) 482,254 (221,255) 220,882 6,843,636
Inventory 515,399 (1,032,882) 115,616 1,065,821 3,260,017
Prepaid expenses (95,346) 122,017 (100,596) 168,856 (183,186)
Miscellaneous receivables -- 132,379 -- (108,179) 51,352
Prepaid and refundable income taxes (16,089) 252,046 (812) -- (291,146)
Security deposits -- -- -- 86,858 (3,537)
Increase (Decrease) in operating liabilities:
Prepetition liabilities -- -- -- 8,614,728 --
Accounts payable and accrued expenses (107,320) (56,766) 155,784 (1,828,715) 1,949,987
Income taxes payable (103,700) 103,700 -- -- (200,770)
--------- ----------- --------- ----------- ------------
Net Cash Provided (Used) by
Operating Activities $ 95,513 $ (294,371) $ (64,766) $(1,145,616) $ 799,198
--------- ----------- --------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- -- -- (47,933) (143,995)
--------- ----------- --------- ----------- ------------
Net Cash Used by Investing Activities $ -- $ -- $ -- $ (47,933) $ (143,995)
--------- ----------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable $ -- $ -- $ -- $ 3,393,628 $ 24,250,741
Repayment of notes payable -- -- -- -- (26,460,130)
Proceeds from notes payable - related party -- 600,000 -- -- --
Repayment of notes payable - related party -- (145,324) -- -- --
Proceeds from loan payable - related party -- -- -- 557,000 --
Proceeds from bankers acceptances -- -- -- 1,118,556 9,321,558
Repayment of bankers acceptances -- -- -- (4,127,139) (7,876,394)
Repayment of officer's loans payable -- -- -- -- (2,373)
Repayment of capital lease obligations (5,967) (29,656) (18,812) (64,552) (109,308)
Proceeds from insurance note payable -- -- 77,225 -- --
Repayment of insurance note payable -- (62,020) (15,205) -- --
Payment of deferred offering costs (73,844) (30,043) -- -- --
--------- --------- -------- ------------ ------------
Net Cash Provided (Used) by
Financing Activities (79,811) 332,957 43,208 877,493 (875,906)
--------- --------- -------- ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 15,702 38,586 (21,558) (316,056) (220,703)
Cash and Cash Equivalents, beginning of period 43,543 4,957 26,515 342,571 563,274
--------- --------- -------- ------------ ------------
Cash and Cash Equivalents, end of period 59,245 $ 43,543 $ 4,957 $ 26,515 $ 342,571
========= ========= ======== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 1,575 $ 25,451 $ 1,553 $ 203,964 $ 1,196,322
Income tax $ 163,534 $ -- $ -- $ -- $ 116,319
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1995 the Company incurred capital lease
obligations of $143,855 in connection with lease agreements to acquire
equipment.
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were dicharged 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>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
Dynamic International, Ltd. (the "Company") is engaged
in the sale and distribution of a diverse line of hand
exercise and light exercise equipment, sports
bags/luggage and gift products which are distributed
throughout the United States.
b. Revenue
Revenue is recognized when the goods are shipped to the
customer.
c. Fresh Start Reporting
Financial accounting during a Chapter 11 proceeding is
prescribed in "Statement of Position 90-7 of the
American Institute of Certified Public Accountants,"
titled "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
which the Company adopted effective July 31, 1996. The
emergence from the Chapter 11 proceeding resulted in the
creation of a new reporting entity without any
accumulated deficit and with the Company's assets and
liabilities restated at their estimated fair values
(also see Note 2 Reorganization and Management Plan).
Because of the application of fresh start reporting, the
financial statements for periods after reorganization
are not comparable in all respects to the financial
statements for periods prior to reorganization.
d. Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and the wholly owned inactive
subsidiary. All significant intercompany accounts and
transactions have been eliminated.
e. Cash and Cash Equivalents
The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be
cash equivalents.
f. Inventories
Inventories consist principally of finished goods and
are stated at the lower of cost; last-in, first-out
method, (LIFO) or market.
g. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation
is provided generally by accelerated methods over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs are charged against income.
Estimated useful lives used in calculating depreciation
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
</TABLE>
F-9
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h. Deferred Offering Costs
Legal and accounting costs incurred in connection with
the proposed public offering of the Company's common
stock will be charged to additional paid-in capital upon
completion of the proposed public offering. If the
offering is not consummated, these costs will be
expensed.
i. Advertising and Promotion
Advertising and promotion expense, primarily comprised
of print media distributed to current and potential
customers, is expensed as incurred.
j. Earnings Per Share
Earnings (loss) per share are based on the weighted
average number of shares outstanding as adjusted for the
1 for 5 reverse split. Common stock equivalents are
included in the calculation if they are dilutive.
Amounts for the predecessor company (see Note 2) are not
presented as they are not meaningful.
k. Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
l. Stock Options and Similar Equity Instruments
On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity
instruments (collectively, "Options") issued to
employees; however, the Company will continue to apply
the intrinsic value based method of accounting for
options issued to employees prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issues to Employees," rather than the fair value
based method of accounting prescribed by SFAS No. 123.
SFAS No. 123 also applies to transactions in which an
entity issues its equity instruments to acquire goods or
services from non-employees. Those transactions must be
accounted for based on the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably
measurable.
m. Reorganization value in excess of amounts allocable to
identifiable assets
The excess reorganization value is amortized over a
period of eleven years on the straight line basis (see
Note 2). Management re-evaluates the periods of
amortization to
F-10
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m. determine whether subsequent events and circumstances
warrant revised estimates of useful lives. If impairment
is deemed to exist, the excess reorganization value will
be written down to fair value or projected discounted
cash flows from related operations. As of April 30,
1997, management expects the asset to be fully
recoverable.
2. REORGANIZATION AND MANAGEMENT PLAN
In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Initially, the Company was
successful in marketing these products. However, due to defective
products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow
substantial returns by its customers. Although pursuant to a written
agreement, the manufacturers acknowledged the defects and agreed to
pay for returns and to provide replacement goods at no cost, they
breached this agreement soon thereafter. For the year ended April
30, 1996, the Company suffered significant losses in the amount of
approximately $3,700,000 from its venture into this line of
business.
At April 30, 1995, the Company was not in compliance with certain of
the financial covenants which enabled the bank to declare the
outstanding balances of all amounts due the bank to be immediately
due and payable. In July 1995, the lender bank effectively
terminated its relationship with the Company as it experienced
difficulty in complying with the terms of the loans. As a result,
certain collateral was liquidated by the lender bank. On August 22,
1995, the lender bank sold and assigned the loan balance of $6.8
million. The assigned loan was secured by a security interest in
substantially all of the Company's assets. As discussed below, the
assignor was issued 2,976,000 shares of new common stock in
consideration of forgiving the $6.8 million outstanding loan.
On August 23, 1995, the Company filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. A Plan
of Reorganization was filed by the Company on October 30, 1995 and
subsequently amended and modified on February 22, 1996. On April 5,
1996, the creditors voted to accept the amended and modified Plan
(the "Plan"), and on May 23, 1996, the court confirmed the Plan. The
Plan was substantially consummated in August 1996. For accounting
purposes, the Company assumed that the Plan was consummated on July
31, 1996.
As contemplated by the Plan, a new company, Dynamic International,
Ltd. was formed on July 29, 1996. On August 8, 1996, the Company
merged into Dynamic International, Ltd. The capital structure and
the balance sheet of the combined entity, immediately after the
merger, were substantially the same as those of the company prior to
the merger. The "new common stock" is referred to below as the
common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed
in the bankruptcy proceeding totaled approximately $17.2 million.
The Plan discharged such claims through distributions of cash of
approximately $515,000 and issuance of shares of new common stock.
The cash distributions were paid in August 1996. A total of
3,198,798 shares of new common stock were issued on July 25, 1996
out of which 2,976,000 shares were issued to one secured creditor,
which also satisfied $15,923 of loans made by the chief executive
officer of the Company to the Company (see Note 4); 160,000 shares
were issued to unsecured creditors, and
F-11
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
62,798 shares were issued to the reconfirmation common stock equity
interest holders.
The discharge of claims was reflected in the April 30, 1996
financial statements. The stock distribution value is based on the
reorganization value of the Company determined by projecting cash
flows over an eleven year period and discounting such cash flows at
a cost of capital rate of 15% and the statutory federal, state and
local tax rates currently in effect. The discounted residual value
at the end of the forecast period is based on the capitalized cash
flows for the last year of that period. Cash distributions and the
estimated stock distribution value totaling $531,561 has been
recorded as other liabilities as of April 30, 1996. The gain of
approximately $16.7 million resulting from the excess of the allowed
claims over the total value of the cash and the common stock
distributed to the secured and unsecured creditors has been recorded
as an extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and
assumptions about circumstances and events that have not yet taken
place. Such estimates and assumptions are inherently subject to
significant economic and competitive uncertainties and contingencies
beyond the control of the Company, including, but not limited to
those with respect to the future courses of the Company's business
activity. Accordingly, there will usually be differences between
projections and actual results because events and circumstances
frequently do not occur as expected, and those differences may be
material.
As part of the reorganization, the Company will continue to sell
hand exercise, light exercise equipment and luggage and sports bags,
all of which have a proven market acceptance. Management believes it
can increase revenues by increasing its focus on direct response
marketing. Therefore, it intends to develop plans to use
infomercials to market these products. Management believes these
increased marketing efforts, adequate financing through its related
entity, Achim Importing, discontinuance of the unprofitable
products, and sustainable gross profit percentages, can be
effectively implemented within the next twelve months. The Company
adopted "fresh-start reporting" in accordance with Statement of
Position ("SOP") 90-7 issued by the American Institute of Certified
Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption
of "fresh-start reporting" if the reorganization value of the
emerging entity immediately before the date of confirmation is less
than the total of all postpetition and allowed claims, and if
holders of existing voting shares immediately before confirmation
receive less than 50 percent of the voting shares of the emerging
entity, both conditions of which were satisfied by the Company.
Although the confirmation date was May 23, 1996, fresh-start
reporting was adopted on July 31, 1996. There were no material
fresh-start related adjustments during the period May 23, 1996 to
July 31, 1996.
Under fresh start accounting, all assets and liabilities are
restated to reflect their reorganization value, which approximates
book value at date of reorganization. Therefore, no reorganization
value has been allocated to the assets and liabilities. In addition,
the accumulated deficit of the predecessor company at July 31, 1996
totaling $713,601 was eliminated, and at August 1, 1996, the
reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of
amounts allocable to identifiable assets is being amortized over an
eleven year period on the straight line method. Amortization expense
for the nine months ended April 30, 1997 was $9,108.
F-12
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The following is a proforma balance sheet of the reorganized Company
based on the discounted cash flows as discussed above.
<TABLE>
<CAPTION>
Balance Reorganized
Sheet Stock Fresh Company
July 31, 1996 Exchange Start July 31, 1996
------------- -------- ----- -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 4,957 $ 4,957
Accounts receivable, net 1,258,182 1,258,182
Inventory 2,268,853 2,268,853
Prepaid & refundable
income taxes 291,960 291,960
Other assets 328,030 328,030
----------- -----------
Total Current Assets 4,151,982 4,151,982
Fixed assets, net 203,863 203,863
Other Assets 56,848 56,848
Reorganization value in
excess of amounts allo-
cable to identifiable assets 133,580 133,580
----------- --------- -----------
Total Assets $ 4,412,693 $ 133,580 $ 4,546,273
======== ========= ===========
Current Liabilities:
Loans payable - MG $ 593,670 $ 593,670
Loans payable - Trade 62,020 62,020
Accounts payable and
accrued expenses 3,294,925 3,294,925
Capital lease obligations 32,226 32,226
Other current liabilities 531,561 ( 15,923) 515,638
----------- --------- --------- -----------
Total Current Liabilities 4,514,402 ( 15,923) 0 4,498,479
Other liabilities 21,658 21,658
----------- --------- --------- -----------
Total Liabilities 4,536,060 ( 15,923) 0 4,520,137
----------- --------- --------- -----------
Common stock par value 17,444 ( 17,444) 15,994
15,994
Additional paid in capital 590,290 (590,291) (580,021) 10,145
590,167
Accumulated deficit ( 713,601) 713,601 0
----------- --------- --------- -----------
( 105,867) ( 1,574) 133,580 26,139
Less: treasury stock ( 17,500) 17,497 ( 3)
----------- --------- --------- -----------
Total Equity ( 123,367) 15,923 133,580 26,136
----------- --------- --------- -----------
Total Liabilities and Equity $ 4,412,693 $ 0 $ 133,580 $ 4,546,273
============ ========= ========= ============
</TABLE>
F-13
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans
from MG Holdings Corp. to pay creditors pursuant to the
reorganization plan. The liability to the reorganized company is
$515,638.
3. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used
by the Company, reported net income would have been decreased by
$294,000 in fiscal 1997. Net income would have been increased by
$263,000 in fiscal 1996, and the net loss would have been increased
by $246,000 in fiscal 1995. On a FIFO basis, reported year end
inventories would have increased by $24,000 in 1997, $318,000 in
1996 and $55,000 in 1995.
4. RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September
1, 1996 (the "Warehousing Agreement") between the Company and an
entity ("Related Party") owned by a major stockholder, the entity
performs certain administrative services on behalf of the Company.
Under the Warehousing Agreement, the entity assists, among other
things, in the maintenance of financial and accounting books and
records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and in the performance of credit
checks on the Company's customers. In consideration for these
services, Achim receives an annual fee, payable monthly, calculated
at a percentage of the Company's invoiced sales originating at the
warehouse ranging from 4% of the invoiced sales under $30 million to
3% of sales of $60 million or more. For sales not originating at the
warehouse, Achim receives a service fee in the amount of 1.5% of the
Company's invoiced sales to customers and accounts located in the
United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States,
irrespective of manner of payment. In addition, under the
Warehousing Agreement, the entity provides warehousing services
consisting of receiving, shipping, and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its
invoiced sales originating at the warehouse in connection with these
warehousing services performed by Achim under the Warehousing
Agreement.
The Warehousing Agreement has a term of two years and is
automatically renewable for additional one year periods unless
written notice of termination is given at least six months prior to
the commencement of a renewal period. During the fiscal year ended
April 30, 1997, the Company accrued approximately $458,488 in fees
under the Warehousing Agreement. Total warehousing and
administrative expenses charged to operations for the nine months
ended April 30, 1997 were approximately $364,000, for the three
months ended July 31, 1996 were approximately $95,000 and for the
year ended April 30, 1996 were approximately $164,000.
The Related Party also purchases inventory for the Company and
charges the Company for the invoiced amount of the inventory.
Loan payable to the related party totaled $1,059,785 at April 30,
1997. Such note is secured by all of the Company's assets. On August
30, 1996, loans and other payables, including accrued interest
totaling $1,205,109, were converted into the note payable. Interest
is charged at the
F-14
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
4. RELATED PARTY TRANSACTIONS (cont'd)
Citibank prime rate plus 1%. This note is payable in 24 equal
installments of principal and interest through August 5, 1998. At
April 30, 1997, the Company was in arrears in the amount of $274,273
consisting of principal and interest. On July 10, 1997, the note was
amended to allow the arrears and note payments to be deferred until
the consummation of the Company's contemplated public offering (see
Note 10) or the scheduled maturity of the note, whichever is
earlier. Annual maturities of the note at 9.25% interest per annum
is as follows:
<TABLE>
<CAPTION>
For the Year Ending
April 30,
---------
<S> <C> <C>
1997 (in arrears) $ 237,053
1998 607,478
1999 215,254
----------
$1,059,785
==========
</TABLE>
Interest expense charged to operations for the nine months ended
April 30, 1997 was $67,898, for the three months ended July 31, 1996
was $16,746 and $19,924 for the year ended April 30, 1996.
Other amounts payable to the related party totaled $2,627,580 and
$2,129,893, respectively, at April 30, 1997 and 1996. Such amounts
represent unpaid inventory purchases and various fees due to the
related party. The amounts payable for the purchase of inventory
bears interest at the Citibank prime rate plus 1% from September
1996 to April, 1997 and the Citibank prime rate plus 3% prior to
September 1996. The prime rate used was 8.25% for the period
September 1996 to April 1997 and 8.5% for the period prior to
September 1996 . Interest expense charged to operations was $111,411
for the nine months ended April 30, 1997, $34,380 for the three
months ended July 31, 1996 and $115,004 for the year ended April 30,
1996. The weighted average interest rate at April 30, 1997 and 1996
was 9.25% and 11.5%, respectively.
5. INCOME TAXES
The Company utilizes an asset and liability approach to determine
the extent of any deferred income taxes, as described in Statement
No. 109, "Accounting for Income Taxes" of the Financial Accounting
Standards Board. This method gives consideration to the future tax
consequences associated with differences between financial statement
and tax bases of assets and liabilities.
F-15
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
There were no income tax liabilities at April 30, 1996. Income tax
liabilities at April 30, 1997 included in income taxes payable
consist of the following :
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes $103,700
Deferred taxes:
Federal --
Other income and franchise taxes --
--------
Total Income Tax Liability $103,700
========
</TABLE>
At April 30, 1997, there are no temporary differences that would
result in a deferred tax asset or liability. The deferred income tax
assets and liabilities at April 30, 1996 consist of the following:
<TABLE>
<CAPTION>
1996
----
<S> <C>
DEFERRED TAX ASSETS:
Bad debt reserves $ 75,000
Difference in book and tax treatment
for advertising costs 16,000
Net operating loss carryforwards 8,783,000
Other deferred tax assets 50,000
-----------
TOTAL DEFERRED TAX ASSETS 8,924,000
-----------
DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):
Gain on discharge of prepetition
liabilities 7,511,000
-----------
7,511,000
-----------
Valuation allowance for deferred
tax assets (1,413,000)
-----------
$ -0-
===========
</TABLE>
The valuation allowance decreased by $1,094,000 in 1996.
F-16
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
A summary of the provision (credit) for income taxes is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -----------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 59,000 $ -- $(401,529)
State and Local 44,700 -- 5,386
----------- ----------- ---------
103,700 -- (396,143)
----------- ----------- ---------
Deferred:
Federal -- (5,675,000) 313,039
State and Local -- (1,836,000) 1,014
----------- ----------- ---------
-- (7,511,000) 314,053
----------- ----------- ---------
$ 103,700 $(7,511,000) $ ( 82,090)
=========== =========== =========
</TABLE>
The reconciliation of the federal statutory income tax expense
(credit) to the Company's actual income tax (credit) is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -------------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
U.S. federal income taxes
at statutory rate $ 75,900 $ 2,361,000 $(3,845,205)
Losses for which no benefit
was provided -- -- 982,371
Change in valuation
allowance -- (1,094,000) 2,506,820
Reversal of previously
established tax asset -- -- 313,039
Tax effect of permanent
differences 5,400 8,000 17,035
State income taxes, net of
federal benefit 25,000 764,000 --
Benefit of unused net
operating losses -- (1,412,000) --
Differences due to change in
rate -- ( 627,000) --
Other (2,600) -- ( 56,150)
--------- ----------- -----------
$ 103,700 $ -0- $ (82,090)
========= =========== ==========
</TABLE>
F-17
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
The Company had a net loss for the three months ended July 31, 1996
and accordingly, the Company has no income tax provision or
liability for the period.
The Company has a net operating loss for the year ended April 30,
1995 of approximately $8,400,000 of which $1,200,000 was carried
back to prior years. The Company has filed prior year amended
returns to claim the net operating loss carryback which results in
refundable income taxes of approximately $287,000. As of April 30,
1997, the Company received $251,000 of the refundable income taxes.
The balance of $36,000 is included in prepaid and refundable income
taxes at April 30, 1997.
At April 30, 1996, the net operating loss carryforward totaled
approximately $19,500,000 of which approximately $16,700,000 will be
utilized by the Company in its final tax return for the period May
1, 1996 to August 8, 1996 (see Note 2 re: merger into Dynamic
International, Ltd.). Based on ownership changes resulting from the
reorganization (see Note 2), the balance of the net operating loss
carryforward is expected to be limited by the current provision of
Section 382 of the Internal Revenue Code.
6. COMMITMENTS AND CONTINGENCIES
a. Capital Leases
The Company is the lessee of equipment under capital
leases expiring in various years through 1998.
In September 1995, the lessor of the Company's capital
leases agreed to forgive the balance of the unpaid lease
payments through September 1995 and to accept 60% of the
remaining balance of the lease payments. As a result,
the Company recognized $77,403 of income on the
adjustment of the lease term. Such income is included in
other income.
b. Operating Leases
Prior to August, 1995 the Company occupied space for its
sales, executive offices, assembly and storage
facilities under long term operating leases expiring
August 1998. The leases provided for additional payments
for insurance, taxes and other charges related to the
premises. As part of the bankruptcy proceeding, the
Company was discharged of the obligations of the leases.
In October 1995 the Company relocated its premises,
where the Company is charged warehousing fees and
administration fees based on sales volume (see Note 4).
Rent expense for the years ended April 30, 1996 and 1995
was $341,427 and $583,596.
F-18
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
c. Royalty Obligations
The Company has entered into various royalty, licensing,
and commission agreements for products sold by the
Company. These agreements provide for minimum payments
and a percentage of specific product sales, over a
period of one to eight years. Royalty expense for the
nine months ended April 30, 1997 was approximately
$353,000, for the three months ended July 31, 1996 was
$94,000 and for the years ended April 30, 1996 and 1995
was approximately $275,000 and $779,000, respectively.
d. Defined Benefit Pension Plan
On September 26, 1996, the Defined Benefit Employees
Retirement Plan was terminated under a distress
termination approved by the United States Bankruptcy
Court. The defined benefit pension obligation prior to
the termination was $860,945. As part of the bankruptcy
proceeding, the obligation was settled for $38,743
resulting in a gain of $822,202 which is reflected in
the extraordinary gain on discharge of prepetition
liabilities for the year ended April 30, 1996.
e. 401(k) Plan
On January 1, 1990, the Company adopted a 401(k) plan.
The plan covers all eligible employees. Eligible
employees may contribute from 1% to 15% of their
salaries subject to the statutory maximum of $9,240 for
the 1995 and 1994 calendar years. The plan also provided
matching contributions by the Company of 25% of the
employees' contributions to a maximum contribution of 1%
of the employees' salaries. On May 31, 1996, the plan's
summary plan description was modified to make matching
contributions discretionary. No matching contributions
were made by the Company for the 1996 calendar year nor
will any be made by the 1997 calendar year.
The 401(k) expense amounted to $0 for the period May 1,
1996 to April 30, 1997 and $2,600 and $9,460 for the
years ended April 30, 1996 and 1995, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer
retirement plan sponsored by their union. The Company is
required to pay seven cents ($.07) per hour per employee
to the plan. The data available from administrators of
the multi- employer plan is not sufficient to determine
the accumulated benefit obligation, nor the net assets
attributable to the multiemployer plan in which Company
employees participate. As of October 1995, the Company
no longer has any union employees. For the years ended
April 30, 1996 and 1995 pension expenses for the union
employees were $3,745 and $1,680, respectively.
g. Litigation
In the normal course of its operations, the Company has
been named as a defendant in several product liability
lawsuits that in the opinion of management are not
material to the financial statements taken as a whole
and are substantially covered by the Company's product
liability insurance.
F-19
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
7. MAJOR CUSTOMERS
During the year ended April 30, 1996, sales to three major customers
were approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and
$1,001,000, respectively) of the Company's net sales. At April 30,
1996, accounts receivable from these customers totaled $465,506.
During the year ended April 30, 1995, sales to two major customers
were approximately 26% and 14% ($8,459,000 and $4,555,000,
respectively) of the Company's net sales. At April 30, 1995, there
were no accounts receivable from these customers. The Company sells
a limited amount to foreign customers. There were no material
receivables subject to foreign currency fluctuations.
During the nine months ended April 30, 1997 sales to major customers
were approximately $3,080,180. At April 30, 1997 accounts receivable
from these customers totaled $379,902. During the three months ended
July 31, 1996, sales to major customers were approximately $837,450.
At July 31, 1996, accounts receivable from these customers totaled
$548,726.
8. CREDIT RISK/FINANCIAL INSTRUMENTS
Due to the nature of its business and the volume of sales activity,
the Company's cash balance occasionally exceeds the $100,000
protection of FDIC insurance. At April 30, 1997 there was no such
excess balance. At April 30, 1996 such excess balances totaled
approximately $207,000. The Company has not experienced any losses
and believes it is not exposed to any significant credit risk from
cash and cash equivalents.
The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and,
as a consequence, believes that it does not have an accounts
receivable credit risk exposure beyond the allowance provided. The
Company does not require collateral or other security to support
financial instruments subject to credit risk.
The carrying amounts of short-term debt reported in the balance
sheets approximate fair value. The fair value of the Company's
long-term debt (including the current portion) also approximates its
carrying amount in the balance sheets based on the rates currently
available to the Company for similar debt with similar terms.
9. SIGNIFICANT RISKS AND UNCERTAINTIES
a. The Company's exercise products compete with products
marketed and sold by a number of companies. The
Company's main competitors in this area possess far
greater financial and other resources, including sales
forces, than the Company. However, the Company believes
that as a result of its ability to use trademark names
for which it pays royalties, it will be able to retain
its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively
compete with these companies as well as with other
smaller entities.
The Company's luggage products compete with products
designed by a number of the largest companies in the
industry. The Company believes that because of its
concentration on the upscale lifestyle and more
specialized leisure market that are associated with its
use of trademark names, the Company will be able to
continue to grow its luggage business. Nevertheless,
there can be no assurance that the Company will be able
to effectively compete with these companies as well as
with other smaller entities.
F-20
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
9. SIGNIFICANT RISKS AND UNCERTAINTIES (cont'd)
b. Most of the Company's products are purchased from the
Philippines, Taiwan and Hong Kong. The Company believes
that, if necessary, it will be able to obtain its
products from firms located in other countries at
little, if any, additional expense. As a consequence,
the Company believes that an interruption in deliveries
by a manufacturer located in a particular country will
not have a material adverse impact on the business of
the Company. Nevertheless, because of political
instability in a number of the supply countries,
occasional import quotas and other restrictions on trade
or otherwise, there can be no assurance that the Company
will at all times have access to a sufficient supply of
merchandise.
10. OTHER ITEMS
a. Discontinued Products
In 1994, the Company added a new line of products
consisting primarily of treadmills and ski machines.
Sales of the treadmills and ski machines began in June
1994. The Company sold approximately $24,000,000 of
these products from June 1, 1994 to August 23, 1995.
Approximately $17,600,000 or 73% of these products were
shipped directly to consumers. Due to serious
manufacturing defects and poor construction of the
Company's products delivered by the Company's
manufacturers, primarily located in the People's
Republic of China, the Company was forced to allow
substantial chargebacks by its customers. Although,
pursuant to a written agreement, the manufacturers
acknowledged the defects and agreed to pay for returns
and to provide replacement goods at no cost, they
breached this agreement soon thereafter. As a result,
during April 1995, the Company issued credits to
customers for approximately $5,000,000 of the $7,487,000
of credits for the fiscal year ended April 30, 1995. The
Company issued another $3,211,000 in credits for
defective merchandise during the fiscal year ended April
30, 1996.
The following table sets forth the financial statement
effect of the Company's line of treadmills and ski
machines for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
for the Nine for the Three Predecessor Company
Months Ended Months Ended For the Years Ended
April 30, 1997 July 31, 1996 April 30, 1996 April 30, 1995
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $-- $-- $ 597,000 $ 23,255,000
Credits -- -- (3,210,900) ( 7,487,000)
--- --- ------------ ------------
Net Sales -- -- (2,613,900) 15,768,000
Inventory
Reserve -- -- -- ( 1,320,063)
Cost of Sales -- -- 156,000 (18,604,172)
--- --- ------------ ------------
Gross Loss $-- $-- $ (2,457,900) $ (4,156,235)
=== === ============ ============
</TABLE>
F-21
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
10. OTHER ITEMS (cont'd)
a. Discontinued Products (cont'd)
The sale of these products was discontinued in August
1995, and all inventory was disposed of by October 1995.
Currently, the Company does not believe that there will
be additional returns of these products or that any
claims relating thereto remain to be settled.
b. Public Offering
The Company is offering for public sale 1,200,000 units,
each consisting of one share of common stock, one Class
A Warrant and one Class B Warrant at $5.00 per unit.
Although no assurance can be given that the sale will be
successful, the Company intends to utilize the net
proceeds of approximately $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 $1,200,000 and the
resulting reduction of interest expense and increase in
net income as if it had taken place at the beginning of
the reorganization period.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended July 31, 1997 Ended April 30, 1997
------------------- --------------------
<S> <C> <C> <C>
Net Income $ 54,118 $ 155,738
Earnings Per Share .02 .05
Number of Shares 3,438,258 3,438,258
</TABLE>
c. Earn Out Agreement
In March 1997, the Company entered into an agreement
with Marton Grossman, the Company's chairman and
president which provides for the issuance to Mr.
Grossman an aggregate 2,000,000 shares of common stock
if the Company reaches certain earnings criteria as
follows:
<TABLE>
<CAPTION>
Earnings Before Shares to
Year Ending Income Tax Be Issued
----------- ---------- ---------
<S> <C> <C> <C>
April 30, 1998 $ 500,000 400,000
April 30, 1999 $ 1,000,000 600,000
April 30, 2000 $ 1,500,000 1,000,000
</TABLE>
If the earning criteria is not met in any one of the
above years, but is cumulatively met in the subsequent
year, then the number of shares to be issued will be the
cumulative number of shares at that year end. Issuance
of the shares will result in compensation expense to the
Company. Compensation expense will be measured based on
the fair value of the shares at the time the performance
conditions are achieved. Determination will be based on
the best estimate of the outcome of the performance
condition. Compensation will be recognized in the
periods in which the performance conditions are
achieved.
F-22
<PAGE>
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>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
11. AUTHORITATIVE PRONOUNCEMENTS (cont'd)
b. While the Company has not analyzed SFAS No. 128
sufficiently to determine its long- term impact on per
share reported amounts, SFAS No. 128 should not have a
significant effect on historically reported per share
loss amounts.
SFAS No. 129 does not change any previous disclosure
requirements but, rather, consolidates existing
disclosure requirements for ease of retrieval.
c. In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income" and SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". Both
are effective for financial statements for fiscal years
beginning after December 15, 1997. The Company will
adopt both statements on May 1, 1998. Adoption is not
expected to have a material impact on the financial
position and results of operations.
12. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of July 31, 1997 and for the three
months ended July 31, 1997 are unaudited. However, in the opinion of
management, all adjustments necessary for a fair presentation of the
financial statements for the interim period have been made. The
results of the interim period are not necessarily indicative of the
results to be obtained for a full fiscal year.
F-24
<PAGE>
[MOORE STEPHENS, P.C. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Shareholders
Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic International,
Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months
ended April 30, 1997 and three months ended July 31, 1996 is included on page
F-1 of this Form S-1. In connection with our audit of such financial statements,
we have also audited the related accompanying financial statement Schedule II -
Valuation and Qualifying Accounts for the nine months ended April 30, 1997, the
three months ended July 31, 1996, and the year ended April 30, 1996.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Moore Stephens, P.C.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
June 27, 1997
F-25
<PAGE>
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE NINE FOR THE THREE FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996
--------- -------- ---------
<S> <C> <C> <C>
Allowance for doubtful accounts balance - beginning $167,000 $167,000 $ -
Additions charged to income - - 167,000
Recovery of uncollectible accounts - net - - -
Writeoffs of uncollectible amounts - - -
-------- -------- --------
Allowance for doubtful accounts balance - ending $167,000 $167,000 $167,000
======== ======== ========
</TABLE>
F-26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
TABLE OF CONTENTS
Page
Additional Information........................... 2
Prospectus Summary............................... 3
Risk Factors.................................... 6
Dilution.........................................12
Use of Proceeds..................................14
Dividend Policy..................................14
Selected Financial Data..........................15
Management's Discussion and Analysis
of Financial Conditions and
Results of Operations..........................16
Capitalization...................................25
Business.........................................26
Management.......................................32
Executive Compensation...........................33
Certain Relationships and
Related Transactions...........................35
Disclosure of Commission Position on
Indemnification For Securities
Act Liability..................................37
Security Ownership of Certain
Beneficial Owners and
Management.....................................38
Description of Securities........................39
Underwriting.....................................42
Legal Matters....................................43
Experts..........................................43
Index to Financial Statements...................F-1
UNTIL JANUARY 6, 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,200,000 UNITS
DYNAMIC INTERNATIONAL, LTD.
----------------
PROSPECTUS
----------------
PATTERSON TRAVIS, INC.
DECEMBER 12, 1997
================================================================================
