<PAGE> 1
SCHEDULE 14C INFORMATION
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Check the appropriate box:
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14-c5
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DYNAMIC INTERNATIONAL, LTD.
(Name of Registrant As Specified In Charter)
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DYNAMIC INTERNATIONAL, LTD.
58 Second Avenue
Brooklyn, New York 11215
INFORMATION STATEMENT
This Information Statement is furnished by the Board of Directors of
Dynamic International, Ltd., a Nevada corporation (the "Company"), to inform the
stockholders of the Company of the approval of certain corporate actions. This
Information Statement and the accompanying materials will be mailed on or about
_____________, 1997 to holders of record of Common Stock, par value $.001
("Common Stock") of the Company as of the record date. The record date for
determining stockholders entitled to receive this Information Statement has been
established as the close of business on April 18, 1997. On that date, the
Company had outstanding and entitled to vote 15,993,990 shares of Common Stock.
Specifically, this Information Statement relates to the following corporate
actions:
1. Stockholders' approval of an amendment to the Company's
Certificate of Incorporation effectuating a one for five reverse stock
split of the issued and outstanding shares of Common Stock.
2. Stockholders' approval of an amendment to the Company's
Certificate of Incorporation authorizing the Company to issue
10,000,000 shares of Preferred Stock.
3. Stockholders' ratification of the appointment of Moore
Stephens, P.C. as the Company's independent auditors for the fiscal
year ending April 30, 1997.
During April 1997, holders of 14,880,000 shares of Common
Stock (or 93% of the total entitled to vote on the matters set forth herein)
consented in writing without a meeting to the matters set forth herein. As a
result, the corporate actions were approved by the majority required by law and
no further votes will be needed. Unless expressly stated otherwise, numbers of
shares do not account for the contemplated reverse stock split described herein.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY
<PAGE> 3
THE COMPANY
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged
in the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP.(R) In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH(R) and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Initially, the Company was successful in
marketing these products. For the fiscal year ended April 30, 1995, sales of
these products represented approximately 53% of the Company's gross sales.
However, due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
charge backs by its customers. Although, pursuant to a written agreement, the
manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, they breached this agreement soon
thereafter. The Company suffered severe losses from its venture into this line
of business and in August 1995 was forced to seek protection from its creditors
under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors would receive partial satisfaction of their claims.
MG Holdings Corp., which had purchased a promissory note from the Company's
principal lender, received (without giving effect to the Reverse Stock Split)
14,880,000 shares of Common Stock in full satisfaction of the promissory note,
representing approximately 93% of the issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See "Principal
Stockholders" and "Certain Relationships and Related Transactions." In addition,
as part of the plan of reorganization, the Company, then known under the name
DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of
changing its state of incorporation. See "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCTS
Exercise Equipment
The Company's line of exercise equipment consists primarily of handheld
products, including dumbbells, ankle and wrist weights, hand grips, 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.
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Luggage
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 intends to begin marketing an insulated bag incorporating a
wrap-around gel pack or freeze pack with the ability to cool and preserve food
and other products for an extended period of time. The Company, through a wholly
owned subsidiary, obtained the exclusive rights to the patents underlying the
technology as well as the trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under
which the products are sold. See "Intellectual Property-License Agreements."
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and, with the
assistance of outside consultants, creates its own molds and tooling. Such molds
and tooling are used by the manufacturers to produce the equipment. The Company
retains an ownership interest in the molds which are returned to it upon the
termination of the Company's relationship with a particular manufacturer. The
Company has been granted a number of design patents with respect to certain of
its products. See "Intellectual Property." The Company employs a designer on a
full-time basis for the design of its luggage products. During the most recent
fiscal year the Company spent approximately $102,000 on design activities,
including fees to designers and patent attorneys.
Most of the Company's products are manufactured in the United States,
Philippines, Korea and Taiwan, which in the most recent fiscal year accounted
for approximately 28%, 26%, 17% and 12% of the Company's products, respectively.
In addition, the Company's products are manufactured in the People's Republic of
China, Hong Kong 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 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, 1996 approximately
19%, 18% and 14% of the Company's revenues were derived from sales to Service
Merchandise, K-Mart and Wal- Mart, respectively. No other customer accounted for
more than ten percent of the Company's revenues. For the fiscal year ended April
30, 1996, sales of exercise equipment accounted for approximately 34% of the
Company's revenues while 66% of the Company's revenues were derived from the
sale of luggage.
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The Company sells its products primarily through independent sales
agents on a commission-only basis. The Company currently engages approximately
23 sales agents either on an individual basis or through independent sales
organizations. Although it has written agreements with a number of its agents,
all of such agreements are terminable at will. The Company has no long term
arrangements with any of its agents. The Company usually pays commissions
ranging from 1% to 5% of the net sale price of its products.
The Company 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.
In addition, the Company may commence the marketing of existing
products to retailers for resale under their own private labels. The Company has
already began deliveries to one retailer and has had preliminary talks with at
least one additional retailer who has expressed an interest in an arrangement of
this nature.
COMPETITION
The Company's exercise products compete with products marketed and sold
by a number of companies. The Company believes that its main competitors are
Icon Health and Fitness, Inc. and Bollinger Industries. Both of these companies
possess far greater financial and other resources, including sales forces, than
the Company's. However, the Company believes that as a result of its ability to
use the trademarked names SPALDING(TM) and KATHY IRELAND(TM) it will be able to
retain its share of the market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
The Company's luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
luggage business. Nevertheless, there can be no assurance that the Company will
be able to effectively compete with these companies as well as with other
smaller entities.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH
TRAVEL SYSTEMS & DESIGN and EXER-SLIDE.
License Agreements
The Company sells a number of its products under licensed names. The
Company has entered into licensee agreements which provide for the grant of
licenses to the Company and the payment of royalties by the Company, as follows:
JEEP -- Under an agreement dated January 8, 1993, as amended
by letter amendment dated January 8, 1996, between the Company and the
Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company
was granted the exclusive license to use the names JEEP, WRANGLER and
RENEGADE in connection with the manufacture, sale and distribution of
luggage products. The current expiration date of the Jeep Agreement is
December 31, 1998. The parties have informally agreed to start
negotiations regarding the terms of an extension of the current
agreement.
SPALDING -- Under an agreement between the Company and
Spalding & Evenflo Companies Inc. dated April 1, 1994, the Company was
granted the exclusive right to use the name SPALDING in connection with
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the sale and distribution of a number of products, including weight
bars and large exercise machines. The current expiration date of the
agreement is September 30, 1997. However, the Company is currently
negotiating a renewal of the agreement.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc.,
dated December 22, 1994, Ms. Ireland approves and endorses certain
exercise equipment designed and manufactured by the Company. Under the
agreement, the Company has the right to use her name in connection with
the equipment and Ms. Ireland will make appearances to promote such
equipment. In addition, the Company has the right to use her photograph
and likeness in connection with the sale of the equipment. The
agreement is currently scheduled to expire in June 1998 but is subject,
at the Company's option, to renewal until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated in
November 1, 1996, between New Century Marketing & Distributors, Inc.
and a wholly-owned subsidiary of the Company, the Company obtained the
exclusive rights to a patented technology as well as to the trademarked
names FREEZY-BAG and FREEZYGEL. The technology has the ability to cool
foods and other products and is used in the wrapping of such products.
The agreement has a term of two years but is renewable, at the option
of the Company, for additional one year periods.
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September
1, 1996 (the "Warehousing Agreement") between the Company and Achim Importing
Co., Inc. ("Achim"), Achim performs certain administrative services on behalf of
the Company. Under the Warehousing Agreement, Achim assists, among other things,
in the maintenance of financial and accounting books and records, in the
preparation of monthly financial accounts receivable aging schedules and other
reports and in the performance of credit checks on the Company's customers.
Achim also provides warehousing services consisting of receiving, shipping and
storing of the Company's merchandise. The Warehousing Agreement has a term of
two years and is automatically renewable for additional one year periods unless
written notice of termination is given at least six months prior to the
commencement of a renewal period.
In consideration for the services performed under the Warehousing
Agreement, Achim receives an annual fee, payable monthly, calculated as a
percentage of the Company's invoiced sales ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. In addition, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement.
Achim is controlled by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim makes its
lines of credit available to the Company which will enable it to finance the
purchases of its inventory from its overseas suppliers. Also, from time to time,
Achim will purchase the products directly from the manufacturer and resell them
to the Company without markup. Achim charges the Company interest on the unpaid
outstanding balance of the purchases. As of April 30, 1996, the Company owed an
amount of $2,129,893 under this arrangement. As of February 28, 1997, this sum
had increased to $2,423,714.
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EMPLOYEES
As of March 31, 1997 the Company employed 10 persons, of whom four were
engaged in administrative and clerical activities, four were engaged in sales
and two were involved in warehousing and shipping.
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. The property is leased to
Achim which makes the property available to the Company on an at will basis.
Other than the service fees paid by the Company under the Warehousing Agreement,
the Company pays no rent for the property. See "Certain Relationships and
Related Transactions" and "Management Agreement with Achim Importing Co., Inc."
LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CHANGE IN ACCOUNTANTS
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as
its independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26,
1996, there were no disagreements between the Company and Hoberman on any matter
of accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Board of Directors of the Company appointed Moore
Stephens, P.C. as its independent accountants, subject to ratification by the
Company's shareholders.
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AMENDMENTS TO ARTICLES OF INCORPORATION
The Board of Directors of the Company and the holders of a majority of
the shares entitled to vote thereon have adopted by written consent in lieu of a
meeting a proposal declaring advisable amendments to the Articles of
Incorporation of the Company to (i) effect a one for five reverse stock split of
the Company's currently issued and outstanding Common Stock (the "Reverse Stock
Split") and (ii) authorize the Company to issue 10,000,000 shares of Preferred
Stock. As of the date hereof, there are issued and outstanding 15,993,990 shares
of Common Stock. The Amendments will become effective upon the filing of a
certificate of amendment to the Company's certificate of incorporation with the
Nevada Secretary of State. It is anticipated that the filing will take place on
or about ___________, 1997.
REVERSE STOCK SPLIT
The Board of Directors of the Company and a majority of the Common
Stock entitled to vote thereon have approved a one for five reverse stock split
(the "Reverse Stock Split"). Adoption of the Reverse Stock Split will reduce the
presently issued and outstanding shares of Common Stock from 15,993,990 to
approximately 3,198,798 (as a result of rounding, the actual number may be
slightly higher). The Company believes that the decrease in the number of shares
of Common Stock outstanding as a consequence of the proposed Reverse Stock Split
should increase the per share price of the Common Stock, which may encourage
greater interest in the Common Stock and possibly promote greater liquidity for
the Company's stockholders. It may also facilitate the Company's plan to
undertake a registered public offering of its securities. However, the increase
in the per share price of the Common Stock as a consequence of the proposed
Reverse Stock Split may be proportionately less than the decrease in the number
of shares outstanding. In addition, any increased liquidity due to any increased
per share price could be partially or entirely off-set by the reduced number of
shares outstanding after the proposed Reverse Stock Split. Nevertheless, the
proposed Reverse Stock Split could result in a per share price that adequately
compensates for the adverse impact of the market factors noted above. There can,
however, be no assurance that the favorable effects described above will occur,
or that any increase in per share price of the Common Stock resulting from the
proposed Reverse Stock Split will be maintained for any period of time.
No fractional shares will be issued. All fractional interests resulting
from the Reverse Stock Split will be increased to the next higher whole number
of shares. The Company believes that the approximate total number of beneficial
holders of the Common Stock of the Company is in excess of 600. After the
Reverse Stock Split the Company estimates that it will continue to have
approximately the same number of stockholders.
The number of issued shares after the Reverse Stock Split is
approximate. Except for changes resulting from the Reverse Stock Split, the
rights and privileges of holders of shares of Common Stock will remain the same,
both before and after the proposed Reverse Stock Split.
The Reverse Stock Split will also affect the number of shares of Common
Stock issuable upon conversion of the Preferred Stock and upon exercise of
outstanding warrants.
There can be no assurance that the market price of the Common Stock
after the proposed Reverse Stock Split will be proportionately greater than the
market price before the proposed Reverse Stock Split, or that such price will
either exceed or remain in excess of the current market price.
Federal Income Tax Consequences
The following information is based on discussions with counsel. No
opinion of counsel has been obtained. Stockholders are advised to consult with
their own tax advisors for more detailed information relating to their
individual federal state and local tax circumstances.
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1. The proposed Reverse Stock Split will be a reorganization described
in section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the
"Code").
2. The Company will recognize no gain or loss as a result of the
proposed Reverse Stock Split.
3. Stockholders will recognize no gain or loss to the extent that
currently outstanding shares of Common Stock are exchanged for new shares of
Common Stock pursuant to the proposed Reverse Stock Split.
4. The tax basis of the new Common Stock received in exchange for
Common Stock pursuant to the proposed Reverse Stock Split will be the same as
the stockholders' basis in the stock exchanged. Therefore, the new shares of
Common Stock in the hands of a stockholder will have an aggregate basis for
computing gain or loss equal to the aggregate basis of shares of Common Stock
held by that stockholder immediately prior to the proposed Reverse Stock Split.
AUTHORIZATION TO ISSUE SHARES OF PREFERRED STOCK
The Company is currently not authorized to issue Preferred Stock. If
authorized, shares of Preferred Stock will be readily available for use in any
acquisition or financing or upon the exercise of options, if granted.
Shares of Preferred Stock that will be authorized but not issued 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. This will permit the Company to consider financings,
acquisitions or other transactions which may require the issuance of shares of
Preferred Stock. The Company is not currently considering any financing
transactions which would involve the issuance of Preferred Stock, and the
Company has no commitments which would require the issuance of any shares of
Preferred Stock.
The issuance of preferred stock by the Board of Directors could
adversely affect the rights of the holders of Common Stock. For example, such
issuance could result in a class of securities outstanding that would have
preferences with respect to voting rights and dividends and in liquidation over
the Common Stock, and could (upon conversion or otherwise) enjoy all of the
rights appurtenant to Common Stock. The authority possessed by the Board of
Directors to issue preferred stock could potentially be used to discourage
attempts by others to obtain control of the Company through a merger, tender
offer, proxy contest or otherwise by making such attempts more difficult or more
costly to achieve. There are no issued and outstanding shares of preferred
stock, and there are no agreements or understandings regarding the issuance of
preferred stock.
APPROVAL REQUIRED
The affirmative vote of the majority of the outstanding stock entitled
to vote thereon is required to approve the Amendments. The necessary majority
was obtained during April 1997 and no further vote will therefore be required.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
On July 11, 1996, the Board of Directors appointed Moore Stephens, P.C.
("Moore Stephens") as the new independent auditors of the Company for fiscal
1997, subject to ratification by the Company's stockholders. Moore Stephens was
appointed upon the dismissal of Hoberman, Miller & Co., P.C. ("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.
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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.
APPROVAL REQUIRED
The affirmative vote of the majority of the outstanding stock entitled
to vote thereon is required to ratify the appointment of Moore Stephens. The
necessary majority was obtained during April 1997 and no further vote will
therefore be required.
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SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the Company
for the three months ended July 31, 1996, the nine months ended January 31, 1997
and January 31, 1996 and the years ended April 30, 1996, 1995, 1994, 1993 and
1992. The unaudited financial data for the interim periods reflect, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods. The results of operations for the interim periods are not
necessarily indicative of operating results for the entire year. 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
-------------------
Three Months Nine Months Nine Months
Ended 7/31/96 Ended 1/31/97 Ended 1/31/96 1996 1995 1994 1993 1992
------------- ------------- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 2,161,721 8,376,861 5,205,149 $ 7,151,715 $ 32,533,097 $29,497,353 25,735,479 27,500,376
Net Income/(Loss) from
Continuing Operations (73,749) 83,303 (7,681,518) (2,235,894) (11,227,335) 244,308 (427,409) 317,619
Net Income/(Loss) (73,749) 83,303 (7,681,518) 6,945,299 (11,227,335) 244,308 (427,409) 317,619
Net Income (Loss)
per Share (0.02) 0.03
Selected Balance
Sheet Data:
Working Capital
(Deficit) (343,961) (135,785) (14,965,331) (293,884) (7,493,435) 3,094,821 3,173,751 3,688,385
Total Assets 4,333,260 4,938,224 6,015,521 4,253,396 6,414,185 16,677,772 13,373,816 11,849,748
Total Liabilities 4,313,934 4,761,846 20,689,340 4,300,398 13,406,486 12,442,738 9,383,090 7,431,613
Retained Earnings -0- 157,052 -0- -0- -0- 3,644,799 3,400,491 3,827,900
Accumulated Deficit -0- -0- (15,264,054) (637,237) (7,582,536) -0- -0- -0-
Shareholders' Equity
(Deficit) 19,326 176,378 (14,673,819) (47,002) (6,992,301) 4,235,034 3,990,726 4,418,135
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein. The discharge of claims under the bankruptcy
proceedings described immediately below, has been reflected in the financial
statements for the fiscal year ended April 30, 1996. Effective August 8, 1996,
the Company completed a migratory merger from Delaware to Nevada by merging into
a newly formed Nevada entity, thereby changing its name from Dynamic Classics,
Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was
substantially identical to that of the Company prior to the merger. The Company
and its predecessor are herein together referred to as the "Company."
PLAN OF REORGANIZATION
In August 1995, the Company sought protection from its creditors under
Chapter 11 of the Bankruptcy Code. In May 1996, the Bankruptcy Court approved a
plan of reorganization (the "Plan") pursuant to which creditors would receive
partial satisfaction of their claims. The amount of claims allowed under the
bankruptcy proceedings, aggregated approximately $17,223,800, which exceeded the
assets as recorded immediately subsequent to the confirmation of the Plan by
approximately $12,970,400. Under the Plan, the Company made cash payments in the
amount of approximately $515,800. MG Holdings Corp., which had purchased a
promissory note from the Company's principal financial institution, received
14,880,000 shares of Common Stock in satisfaction of such promissory note,
representing approximately 93% of the issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See "Principal
Stockholders" and "Certain Relationships and Related Transactions." An
additional 800,000 shares and approximately 320,000 shares were issued to the
Company's unsecured creditors and the Company's existing security holders,
respectively. The numbers of shares issued do not account for the Reverse Stock
Split. See "Prospectus Summary." The value of the cash and securities
distributed under the plan of reorganization aggregated $531,600. An amount of
$16,692,200, before income tax provisions, 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.
Pending the resolution of the bankruptcy proceedings, the Company
restructured its operations and relocated its administrative headquarters and
warehouse facilities.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
Sales for the nine months ended January 31, 1997 increased by
$3,172,000 from $5,205,000 to $8,377,000, or 61% from the nine months ended
January 31, 1996. Sales of the Company's exercise equipment line decreased by
$195,000, while sales of the Company's luggage line increased by $148,000, to
$4,285,000 and $4,091,000, respectively. For the period ended January 31, 1996,
sales of the Company's exercise equipment and luggage lines of $4,480,000 and
$3,943,000, respectively, were offset by credits of $3,211,000 issued to
customers in connection with the discontinued line of manual treadmills and ski
machines.
11
<PAGE> 13
The Company's gross profit increased from a gross loss of $1,489,000 to
a gross profit of $2,557,000. This increase is due to the credits of $3,211,000
issued to customers in connection with the discontinued line of manual
treadmills and ski machines which reduced the gross profit for the nine months
ended January 31, 1996.
During the nine months ended January 31, 1997, operating expenses
decreased by approximately $3,440,000. As a result of the Company's
reorganization, the Company had decreases in the following expenses:
<TABLE>
<S> <C>
Officers' Salaries $ 39,800
Office Salaries $596,700
Payroll Taxes $ 59,800
Pension Costs $792,600
Rent $279,200
Insurance $232,500
Insurance Claims $289,400
Professional Fees $ 51,300
Consulting Fees $107,600
Freight Out $224,700
Promotion $119,300
Provision for Bad Debts $493,200
</TABLE>
Interest expense decreased by approximately $63,000 due to decreased
borrowing. Bankruptcy administration costs decreased by $383,000 to $34,000 due
primarily to a decrease of $282,000 in the legal and accounting fees related to
the reorganization. The Company had a pretax profit of $251,000 compared to a
pretax loss of $7,681,000 in the prior year's nine-month period.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its luggage products which lead 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 luggage products
during this period were offset by credits of $3,210,900 issued to customers in
connection with the discontinued line of manual treadmills and ski machines. In
addition, the Company's operating expenses decreased by approximately $1,083,300
to $6,683,200.
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
current fiscal year, the Company would have recorded a net loss of $9,746,900
before the extraordinary gain, or a decrease of $1,562,500 from the prior fiscal
year. This decrease primarily reflected a reduction in the Company's selling and
administrative expenses of approximately $1,083,300 and a reduction in interest
expense of $1,001,400 primarily as a result of the bankruptcy proceedings which
for the most part exempted the Company from making interest payments on
outstanding debt.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
Sales for the year ended April 30, 1995 increased from $29,497,400 to
$32,533,100, totalling $3,035,700, or 10% from the previous fiscal year. This
increase was primarily the result of the introduction of a new line of
12
<PAGE> 14
manual treadmills and ski machines. Sales of these products amounted to
approximately $15,580,000. Sales of the Company's "Jeep" license
sport/bag/luggage increased by approximately $219,000. Increases in these
product lines were offset by declines in all of the Company's other product
lines of approximately $12,763,000.
The Company's gross profit margin declined from approximately
$8,134,000 in fiscal 1994 to a gross loss of approximately $2,158,000 in fiscal
1995. This decrease was due primarily to the disposal of approximately
$1,247,000 of defective manual treadmills and return credits issued to customers
for defective manual treadmills totalling approximately $7,000,000. In addition,
the Company incurred expenses in the amount of $589,200 in connection with the
disposals of other discontinued products. The inventory was further reduced by a
lower cost or market reserve of approximately $705,000.
Operating expenses increased by approximately $902,000. This increase
was due primarily to increases in the provision for bad debts of $474,000, an
increase in officer salaries of $39,800, an increase in office salaries of
$129,000, an increase in severance pay of $71,000 and an increase in legal fees
of $107,600. Interest expense increased by $531,900 due to higher interest
rates.
For the fiscal year ended April 30, 1995, the Company had a pre-tax
operating loss of $11,309,400 as compared to a pre-tax operating income of
$416,400 for the prior fiscal year. The decrease can be attributed to the severe
losses from its venture into a new line of manual treadmills.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to an unwritten understanding, Achim Importing Co., Inc.
("Achim"), an entity owned by Marton B. Grossman, Chairman and President of the
Company, makes its lines of credit available to the Company which enables it to
finance the purchases of its inventory from its overseas suppliers. Also, from
time to time, Achim purchases the products directly from the manufacturer and
resells them to the Company without markup. Achim charges the Company interest
on the unpaid balance of the purchases. As of February 28, 1997, the Company
owed an amount of $2,423,714 to Achim under this arrangement.
After deducting expenses, the Company estimates the net proceeds from
this offering to be approximately $5,100,000. It intends to allocate such
proceeds to the purchase of inventory, debt repayment, advertising and
marketing. The Company believes that the proceeds from this offering together
with anticipated cash flows generated by operations and the availability of the
Achim credit line to finance the purchase of inventory are sufficient to
continue its operations for the next twelve months. Thereafter, the Company
expects that it may have to raise additional capital through a private
placement, public offering or otherwise.
The Company intends to utilize approximately $500,000 from the proceeds
of this offering to promote its current product line, primarily by buying
advertisements in various media. In addition, the Company will allocate
approximately $800,000 toward augmenting its sales and marketing staff. The
Company believes that these expenditures will result in a growth of sales and
revenues and in an increased ability to compete more effectively with its
competitors. Nevertheless, there can be no assurance that the Company's focus on
these activities and the allocation of a portion of the proceeds from this
offering to these efforts will result in increased sales and revenues.
SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically
in the second and third quarter of the fiscal year as a result of shipments of
exercise equipment and luggage/sports bag related to the holiday season.
13
<PAGE> 15
Management does not believe that the effects of inflation will have a
material impact on the Company, nor is it aware of changes in prices of material
or other operating costs or in the selling price of its products and services
that will materially effect the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 15, 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
William P. Dolan 123 *
All Officers and Directors as a Group (3 2,976,123 93.0
persons)
</TABLE>
- ----------
* Less than 1%
(1) Includes shares issuable within 60 days upon the
exercise of all options and warrants. Shares issuable
under options or warrants are owned beneficially but
not of record.
(2) Consists of shares of Common Stock held by a series
of trusts (collectively, the "Grossman Trust") for
the benefit of relatives of Mr. Grossman. Under its
terms, the Grossman Trust will return to Mr. Grossman
annually until August 1998, a portion of the shares
held by the Grossman Trust. The number of shares to
be returned to Mr. Grossman is based on the then
current market price of the Common Stock and can
therefore not be determined at the present time. Mr.
Grossman disclaims beneficial ownership in the shares
held by the Grossman Trust that will not be returned
to him.
(3) Consists of shares held by the Grossman Trust of
which Mr. Isaac Grossman is 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.
Dated: Brooklyn, New York
,1997
- -----------------------
14
<PAGE> 16
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 January 31, 1997 (unaudited) and April 30, 1996 and
1995.................................................................... F-3 to F-4
Balance Sheet as of July 31, 1996 (unaudited).............................. F-5 to F-6
Statements of Operations for the nine months ended January 31, 1997 and
1996 (unaudited) and the years ended April 30, 1996, 1995, and 1994..... F-7
Statement of Operations for the three months ended July 31, 1996
(unaudited)............................................................. F-8
Statements of Stockholders' Equity for the nine months ended January 31,
1997 and 1996 (unaudited) and the years ended April 30, 1996, 1995, and
1994.................................................................... F-9
Statements of Cash Flows for the nine months ended January 31, 1997 and
1996 (unaudited) and the years ended April 30, 1996, 1995, and 1994..... F-10 to F-11
Statement of Cash Flows for the three months ended July 31, 1996
(unaudited)............................................................. F-12
Notes to Financial Statements.............................................. F-13 to F-23
Independent Auditors' Reports on Supplemental Schedule....................... F-24 to F-25
Schedule II -- Valuation and Qualifying Accounts........................... F-26
</TABLE>
33
<PAGE> 17
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 11) and its
subsidiary as of April 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 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 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 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 financial position of
Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary
as of April 30, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As discussed more fully in Note 11 to the consolidated financial
statements, on August 23, 1995, the Company filed a voluntary petition
requesting relief under Chapter 11 of the United States Bankruptcy Code. On May
23, 1996, the United States Bankruptcy Court for the Southern District of New
York confirmed the Company's Amended and Modified Plan of Reorganization dated
February 22, 1996.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 30, 1996, except as
to Note 11, for which the
date is October 24, 1996
F-1
<PAGE> 18
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic Classics, Ltd.
We have audited the accompanying consolidated balance sheet of Dynamic
Classics, Ltd. and Subsidiary as of April 30, 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the two-year period 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 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 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 financial position of Dynamic
Classics, Ltd. and Subsidiary as of April 30, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended April 30, 1995 in conformity with generally accepted accounting
principles.
As more fully discussed in Note 11 the Company, on August 23, 1995, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Act.
/s/ Hoberman, Miller & Co., P.C.
New York, New York
June 26, 1996
F-2
<PAGE> 19
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------
APRIL 30,
---------------------------
1996 1995
REORGANIZED ----------- -----------
COMPANY
-----------
JANUARY 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 21,688 $ 26,515 $ 342,571
Accounts receivable -- trade (net of allowance for
doubtful accounts of $167,000 in 1997 and 1996
and $-0- in 1995).............................. 1,666,166 1,036,927 1,424,809
Due from suppliers................................ 55,403 26,760 10,704
Inventory......................................... 2,620,591 2,384,469 3,450,290
Prepaid expenses.................................. 134,470 81,693 250,549
Miscellaneous receivables......................... 3,257 135,039 26,858
Prepaid and refundable income taxes............... 123,043 291,146 291,146
----------- ----------- -----------
Total Current Assets...................... 4,624,618 3,982,549 5,796,927
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies.................................... 707,939 707,939 1,447,257
Furniture and equipment........................... 102,205 102,205 900,437
Leasehold improvements............................ -- -- 111,646
Capitalized equipment leases...................... 576,071 576,071 637,589
Patents and trademarks............................ -- -- 149,982
----------- ----------- -----------
1,386,215 1,386,215 3,246,911
Accumulated depreciation.......................... (1,234,733) (1,156,160) (2,773,359)
----------- ----------- -----------
Total Property and Equipment, net......... 151,482 230,055 473,552
----------- ----------- -----------
OTHER ASSETS
Due from suppliers................................ 36,142 36,142 52,198
Security deposits................................. 4,650 4,650 91,508
Reorganization value in excess of amounts
allocable to identifiable assets............... 121,332 -- --
----------- ----------- -----------
Total Other Assets........................ 162,124 40,792 143,706
----------- ----------- -----------
TOTAL ASSETS........................................ $ 4,938,224 $ 4,253,396 $ 6,414,185
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 20
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSORY COMPANY
--------------------------
APRIL 30,
--------------------------
1996 1995
REORGANIZED ---------- -----------
COMPANY
-----------
JANUARY 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable bank, trade and bankers acceptances
payable.......................................... $ 8,860 $ -- $ 8,191,782
Note payable, officer, current portion.............. -- -- 17,904
Accounts payable and accrued expenses............... 3,517,882 3,139,141 4,967,856
Capital lease obligations -- current................ 28,552 48,731 112,820
Loans payable -- related party...................... 1,205,109 557,000 --
Other liabilities................................... -- 531,561 --
---------- ---------- -----------
Total Current Liabilities................... 4,760,403 4,276,433 13,290,362
---------- ---------- -----------
OTHER LIABILITIES
Capital lease obligations........................... 1,443 23,965 101,832
Note payable, officer............................... -- -- 14,292
---------- ---------- -----------
Total Other Liabilities..................... 1,443 23,965 116,124
---------- ---------- -----------
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 17,444
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares....... 3,199 -- --
Additional paid in capital.......................... 16,130 590,291 590,291
Accumulated deficit................................. -- (637,237) (7,582,536)
Retained Earnings (since July 31, 1996, date of
reorganization, total deficit eliminated was
$710,986)........................................ 157,052 -- --
---------- ---------- -----------
176,381 (29,502) (6,974,801)
Less: Treasury stock, at cost, 15,000 shares........ -- (17,500) (17,500)
Less: Treasury stock, at cost, 540 shares........... (3) -- --
---------- ---------- -----------
Total Stockholders' Equity (Deficit)........ 176,378 (47,002) (6,992,301)
---------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................... $ 4,938,224 $4,253,396 $ 6,414,185
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 21
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
JULY 31,
1996
-----------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 4,951
Accounts receivable -- trade (net of allowance for doubtful accounts of
$167,000).................................................................. 1,412,931
Due from suppliers............................................................ 10,704
Inventory..................................................................... 1,910,525
Prepaid expenses.............................................................. 182,288
Miscellaneous receivables..................................................... 135,037
Prepaid and refundable income taxes........................................... 291,959
-----------
Total Current Assets.................................................. 3,948,395
-----------
PROPERTY AND EQUIPMENT
Tools and dies................................................................ 707,939
Furniture and equipment....................................................... 102,205
Capitalized equipment leases.................................................. 576,071
-----------
1,386,215
Accumulated depreciation...................................................... (1,182,352)
-----------
Total Property and Equipment, net..................................... 203,863
-----------
OTHER ASSETS
Due from suppliers............................................................ 52,198
Security deposits............................................................. 4,650
Reorganization value in excess of amounts allocable to identifiable assets.... 124,154
-----------
Total Other Assets.................................................... 181,002
-----------
TOTAL ASSETS.................................................................... $ 4,333,260
===========
</TABLE>
The July 31, 1995 consolidated balance sheet is not presented as it relates
to the predecessor company which presentation would not be meaningful due to the
reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 22
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
JULY 31,
1996
-----------
(UNAUDITED)
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable bank, trade and bankers acceptances payable...................... $ 62,020
Accounts payable and accrued expenses.......................................... 3,604,440
Capital lease obligations -- current........................................... 32,226
Loans payable -- related party................................................. 593,670
----------
Total Current Liabilities.............................................. 4,292,356
----------
OTHER LIABILITIES
Capital lease obligations...................................................... 21,578
----------
Total Other Liabilities................................................ 21,578
----------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share; authorized 50,000,000 shares; issued
3,198,798 shares............................................................ 3,199
Additional paid in capital..................................................... 16,130
----------
19,329
Less: Treasury stock, 540 shares............................................... (3)
----------
Total Stockholders' Equity............................................. 19,326
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 4,333,260
==========
</TABLE>
The July 31, 1995 consolidated balance sheet is not presented as it relates
to the predecessor company which presentation would not be meaningful due to the
reorganization.
The above common stock issued and outstanding of 3,198,798 shares has been
restated to reflect the 1 for 5 reverse stock split (see Note 12). The common
stock issued and outstanding at July 31, 1996, the date fresh-start reporting
was adopted (see Note 11) was 15,993,991 shares, the par value and additional
paid in capital of which were $15,994 and $3,335, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 23
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
---------- -----------
PREDECESSOR COMPANY
FOR THE NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
-------------------------- --------------------------------------------
1997 1996 1996 1995 1994
---------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales........................... $8,376,861 $ 5,205,149 $ 7,151,715 $ 32,533,097 $29,497,353
Other income.................... -- 85,823 98,272 70,638 35,255
---------- ----------- ----------- ------------ -----------
8,376,861 5,290,972 7,249,987 32,603,735 29,532,608
COST OF SALES..................... 5,819,163 6,780,195 9,480,484 34,761,846 21,398,895
---------- ----------- ----------- ------------ -----------
GROSS PROFIT (LOSS)............... 2,557,698 (1,489,223) (2,230,497) (2,158,111) 8,133,713
---------- ----------- ----------- ------------ -----------
OPERATING EXPENSES
Research and development........ 22,489 101,050 101,992 44,962 35,136
Shipping expenses............... 462,060 641,578 738,681 1,198,563 1,005,593
Selling expenses................ 698,783 949,940 1,254,006 2,455,493 2,380,774
Advertising and promotion....... 57,661 176,988 389,672 346,400 528,927
General and administrative...... 816,890 3,628,093 4,198,800 3,720,998 2,913,960
Interest and bank charges....... 214,257 277,650 383,553 1,384,898 852,954
---------- ----------- ----------- ------------ -----------
2,272,140 5,775,299 7,066,704 9,151,314 7,717,344
---------- ----------- ----------- ------------ -----------
REORGANIZATION ITEMS:
Bankruptcy administration
costs......................... 34,159 416,996 449,693 -- --
---------- ----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.................... 251,399 (7,681,518) (9,746,894) (11,309,425) 416,369
INCOME TAX PROVISION (BENEFIT)
Current......................... 168,096 -- -- (396,143) 244,797
Deferred........................ -- -- (7,511,000) 314,053 (72,736)
---------- ----------- ----------- ------------ -----------
168,096 -- (7,511,000) (82,090) 172,061
---------- ----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM............................ 83,303 (7,681,518) (2,235,894) (11,227,335) 244,308
---------- ----------- ----------- ------------ -----------
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)................. $ 83,303 $(7,681,518) $ 6,945,299 $(11,227,335) $ 244,308
========== =========== =========== ============ ===========
INCOME PER SHARE OF COMMON
STOCK........................... $ 0.03
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES.......................... 3,198,798
</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-7
<PAGE> 24
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
---------------
FOR THE THREE
MONTHS ENDED
JULY 31,
1996
---------------
(UNAUDITED)
<S> <C>
SALES.......................................................................... $ 2,161,721
COST OF SALES.................................................................. 1,624,468
----------
GROSS PROFIT................................................................... 537,253
----------
OPERATING EXPENSES
Shipping expenses............................................................ 116,894
Selling expenses............................................................. 198,993
Advertising and promotion.................................................... 1,819
General and administrative................................................... 234,594
Interest and bank charges.................................................... 57,377
----------
609,677
----------
REORGANIZATION ITEMS........................................................... 1,325
----------
NET LOSS....................................................................... (73,749)
==========
LOSS PER SHARE OF COMMON STOCK................................................. $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES....................................... 3,198,798
</TABLE>
The consolidated statement of operations for the three months ended July
31, 1995 is not presented as it relates to the predecessor company which
presentation would not be meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 25
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, 1993................ $17,444 $ 590,291 $ 3,400,491 $(17,500) $ 3,990,726
Net Income............................ 244,308 244,308
------- -------- ---------- --------- ------------
Balance -- April 30, 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 Period Ended July 31,
1996................................ (73,749) (73,749)
------- -------- ---------- --------- ------------
Balance -- July 31, 1996
(Unaudited)......................... 17,444 590,291 (710,986) (17,500) (120,751)
Eliminate predecessor equity accounts
and to reflect new issuance of
shares in connection with fresh
start............................... (1,450) (586,956) 710,986 17,497 140,077
------- -------- ---------- --------- ------------
15,994 3,335 -- (3) 19,326
To reflect 1 for 5 reverse stock
split............................... (12,795) 12,795 --
------- -------- ---------- --------- ------------
Balance -- July 31, 1996
(Unaudited)......................... 3,199 16,130 -- (3) 19,326
Net Income for Period Ended
January 31, 1997.................... 157,052 157,052
------- -------- ---------- --------- ------------
Balance -- January 31, 1997
(Unaudited)......................... $ 3,199 $ 16,130 $ 157,052 $ (3) $ 176,378
======= ======== ========== ========= ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per
share. The par value of the common stock from July 31, 1996 to January 31, 1997
was $.001 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 26
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
--------- -----------
PREDECESSORY COMPANY
FOR THE -----------------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
----------------------- -----------------------------------------
1997 1996 1996 1995 1994
--------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)...................... $ 83,303 $(7,681,518) $ 6,945,299 $(11,227,335) $ 244,308
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation........................ 78,573 181,186 220,400 268,148 260,677
Amortization of deferred interest
under capital leases.............. -- -- -- 17,979 18,509
Amortization of reorganization
value............................. 2,822 -- -- -- --
Reserve for bad debts............... -- -- 167,000 -- --
Loss on disposal of property and
equipment......................... -- 71,030 71,030 -- --
Deferred income taxes............... -- -- -- 313,039 18,418
Income on partial discharge of
capital lease obligations......... -- (77,403) (77,403) -- --
Reorganization item:
Gain on discharge of debt......... -- -- (16,692,193) -- --
Changes in stockholders' equity... 15,920 -- -- -- --
Changes in operating assets and
liabilities:
(Increase) Decrease in operating
assets:
Accounts receivable and due
from suppliers............... (657,881) (1,644,403) 220,882 6,843,636 (3,351,168)
Inventory...................... (236,122) 1,385,422 1,065,821 3,260,017 (379,281)
Prepaid expenses............... (52,777) 15,074 168,856 (183,186) 400,241
Miscellaneous receivables...... 131,782 24,201 (108,179) 51,352 (71,749)
Prepaid income taxes........... 168,103 -- -- (291,146) 346,140
Security deposits.............. -- 86,858 86,858 (3,537) (13)
Increase (Decrease) in operating
liabilities:
Prepetition liabilities........... -- -- 8,614,728 -- --
Accounts payable and accrued
expenses....................... 379,815 6,284,530 (1,828,715) 1,951,001 1,167,239
Income taxes payable.............. -- -- -- (200,770) 200,770
--------- ----------- ------------ ------------ -----------
Net Cash Provided (Used) by
Operating Activities.............. (86,462) (1,355,023) (1,145,616) 799,198 (1,145,909)
--------- ----------- ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment..... -- (37,272) (47,933) (143,995) (93,993)
--------- ----------- ------------ ------------ -----------
Net Cash Used by Investing
Activities........................ $ -- $ (37,272) $ (47,933) $ (143,995) $ (93,993)
--------- ----------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 27
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- -----------
PREDECESSOR COMPANY
FOR THE -----------------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
--------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from notes
payable.................. $ -- $ 3,393,628 $ 3,393,628 $ 24,250,741 $ 10,136,006
Repayment of notes
payable.................. -- -- -- (26,460,130) (6,311,012)
Proceeds from loans
payable.................. -- -- 557,000 -- --
Proceeds from bankers
acceptances.............. -- 1,118,516 1,118,556 9,321,558 8,853,407
Repayment of bankers
acceptances.............. -- (4,127,139) (4,127,139) (7,876,394) (11,068,227)
Repayment of officer's loans
payable.................. (32,196) -- (2,373) (8,600)
Repayment of capital lease
obligations.............. (42,702) (46,504) (64,552) (109,308) (87,830)
Increase in insurance note
payable.................. 7,788 26,124 -- -- --
Increase in note payable to
related party............ 116,549 743,298 -- -- --
--------- ----------- ----------- ------------ ------------
Net Cash Provided (Used)
by Financing
Activities............. 81,635 1,075,727 877,493 (875,906) 1,513,744
--------- ----------- ----------- ------------ ------------
Net Increase (Decrease) in
Cash and Cash Equivalents... (4,827) (316,568) (316,056) (220,703) 273,842
Cash and Cash Equivalents,
beginning of period......... 26,515 342,571 342,571 563,274 289,432
--------- ----------- ----------- ------------ ------------
Cash and Cash Equivalents, end
of period................... $ 21,688 $ 26,003 $ 26,515 $ 342,571 $ 563,274
========= =========== =========== ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid during the periods
for:
Interest.................... $ -- $ 203,964 $ 203,964 $ 1,196,322 $ 807,131
Income tax.................. $ -- $ -- $ -- $ 116,319 $ 7,120
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1995 and 1994 the Company incurred capital
lease obligations of $143,855 and $177,696, respectively, in connection with
lease agreements to acquire equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 28
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------
FOR THE
THREE MONTHS
ENDED
JULY 31,
1996
------------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................................... $ (73,749)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation............................................................... 26,192
Reorganization item:
Changes in stockholders' equity.......................................... 15,920
Changes in operating assets and liabilities:
(Increase) Decrease in operating assets:
Accounts receivable and due from suppliers............................ (376,005)
Inventory............................................................. 473,944
Prepaid expenses...................................................... (100,595)
Miscellaneous receivables............................................. 2
Prepaid income taxes.................................................. (813)
Decrease in operating liabilities:
Accounts payable and accrued expenses.................................... (66,338)
---------
Net cash used by operating activities...................................... (101,442)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligations........................................ (18,811)
Increase in insurance note payable............................................ 62,020
Increase in note payable to related party..................................... 36,669
---------
Net cash provided by financing activities............................. 79,878
---------
Net decrease in cash and cash equivalents....................................... (21,564)
Cash and cash equivalents, beginning of period.................................. 26,515
---------
Cash and cash equivalents, end of period........................................ $ 4,951
=========
</TABLE>
The consolidated statement of cash flows for the three months ended July
31, 1995 is not presented as it relates to the predecessor company which
presentation would not be meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 29
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIODS ENDED JANUARY 31, 1997 AND 1996 ARE
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 nationwide.
b. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned inactive subsidiary. All significant intercompany accounts
and transactions have been eliminated.
c. 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.
d. Inventories
Inventories consist principally of finished goods and are stated at the
lower of cost (last-in, first-out method) or market.
e. 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>
<S> <C>
Tools and dies................................. 5 years
Furniture and equipment........................ 5 to 7 years
Leasehold improvements......................... Life of lease
Patents and trademarks......................... 2 years
</TABLE>
f. 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. Amounts for the
predecessor company (see Note 11) are not presented as they are not meaningful.
g. Reclassification
Certain 1994 account balances have been reclassified to conform to the 1995
presentation.
h. 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.
F-13
<PAGE> 30
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used by the
Company, reported net income would have been increased by $263,000 in fiscal
1996. The net loss would have been increased by $246,000 in fiscal 1995 and the
net income would have been decreased by $40,000 in fiscal 1994. On a FIFO basis,
reported year end inventories would have increased by $318,180 in 1996, $55,000
in 1995 and $428,000 in 1994.
3. CREDIT FACILITIES
Notes payable, bank, trade and bankers acceptances payable consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
1995
----------
<S> <C>
Notes payable, bank.............................. $ 766,684
Notes payable, bank.............................. 1,107,197
Bankers' acceptances payable..................... 6,317,901
----------
$8,191,782
==========
</TABLE>
The weighted average interest rate at April 30, 1995 was 9%.
On April 29, 1994, the Company restructured its then existing credit
facility with a bank, providing for maximum borrowings of $7,500,000 in the form
of notes payable, letters of credit and bankers' acceptances, expiring on
September 30, 1994.
The agreement with the bank was extended on a month to month basis until
such time as a new agreement was signed. Advances were made on a revolving basis
based on a percentage of eligible accounts receivable and inventory, as defined.
Interest was charged at the bank's "base" rate plus 1.25% on notes payable, the
bank's prevailing discount rate plus 2.5% on time letters of credit and the
bank's prevailing discount rate plus 2% on bankers' acceptances. The base rate
and discount rate were 9.00% and 6.85%, respectively, at April 30, 1995. The
agreement also provided for a security interest in all of the assets of the
Company, the personal guarantee of the Company's president and major shareholder
in the amount of $250,000, the assignment of an existing life insurance policy
to the bank in the name of the president and major shareholder in the amount of
$2,000,000, the maintenance of certificates of deposit in an amount not less
than $350,000 and the maintenance of compensating balances equal to 6% of the
average monthly outstanding balance of notes payable and bankers' acceptances.
The terms of the agreement also provided for certain restrictive covenants with
respect to borrowing limitations, maintenance of tangible net worth and working
capital, debt to tangible net worth and inventory ratios.
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.
The Company was contingently liable under outstanding letters of credit in
the amount of approximately $242,000 at April 30, 1995.
The Company was also party to various credit arrangements with certain of
the suppliers in the form of letter of credit and draft acceptance agreements
for the purchase of inventory. The agreements are generally for periods of 90 to
120 days, are unsecured, and bear interest at rates ranging from 5% to 13.5%.
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
F-14
<PAGE> 31
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Pursuant to the reorganization as discussed in Note 11, the assignor was
issued 14,880,000 shares of new common stock in consideration of forgiving the
$6.8 million outstanding loan.
4. INCOME TAXES
The provision (benefit) for income taxes for the years ended April 30 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- --------
<S> <C> <C> <C>
CURRENT:
Federal............................................... $ -- $(401,529) $215,513
State and local....................................... -- 5,386 29,284
----------- --------- --------
-- (396,143) 244,797
----------- --------- --------
DEFERRED:
Federal............................................... (5,675,000) 313,039 (68,549)
State and local....................................... (1,836,000) 1,014 (4,187)
----------- --------- --------
(7,511,000) 314,053 (72,736)
----------- --------- --------
$(7,511,000) $ (82,090) $172,061
=========== ========= ========
</TABLE>
The deferred income tax assets and liabilities at April 30 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Bad debt reserves............................................... $ 75,000 $ -0-
Difference in book and tax treatment for advertising costs...... 16,000 59,000
Net operating loss carryforwards................................ 8,783,000 2,448,000
Other deferred tax assets....................................... 50,000 -0-
---------- -----------
Total Deferred Tax Assets............................... 8,924,000 2,507,000
---------- -----------
DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):
Gain on discharge of prepetition liabilities.................... 7,511,000 -0-
---------- -----------
7,511,000 -0-
---------- -----------
Valuation allowance for deferred tax assets..................... (1,413,000) (2,507,000)
---------- -----------
$ -0- $ -0-
========== ===========
</TABLE>
The reconciliation of the federal statutory income tax to the Company's
effective income tax for the years ended April 30 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
U.S. federal income taxes at statutory rate................. $(3,845,205) $141,565
Losses for which no benefit was provided.................... 982,371 -0-
Change in valuation allowance............................... 2,506,820 -0-
Reversal of previously established tax asset................ 313,039 -0-
Tax effect of permanent differences......................... 17,035 9,537
Other....................................................... (56,150) 20,959
----------- --------
$ (82,090) $172,061
=========== ========
</TABLE>
F-15
<PAGE> 32
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had 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.
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 11 re: merger into Dynamic International, Ltd.). Based on ownership
changes resulting from the reorganization (see Note 11), the balance of the net
operating loss carryforward is expected to be limited by the current provisions
of Section 382 of the Internal Revenue Code.
5. 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.
Minimum future lease payments due under the revised capital leases in the
aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
--------------------------------------------------
<S> <C>
1997......................................... $ 54,943
1998......................................... 28,654
--------
$ 83,597
Less: interest portion............................ (10,901)
--------
$ 72,696
========
</TABLE>
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 6).
Rent expense for the years ended April 30, 1996, 1995, and 1994 was
$341,427, $583,596, and $435,209, respectively.
c. Royalty Obligations
The Company has entered into various royalty, licensing, and commission
agreements for products sold by the Company. These agreements provide for
minimum payments and a percentage of specific product sales, over a period of
one to eight years. Royalty expense for the years ended April 30, 1996, 1995,
and 1994 was approximately $275,000, $779,000, and $524,000, 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
F-16
<PAGE> 33
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
will be made by the Company for the 1996 calendar year.
The 401(K) expense amounted to $2,600, $9,460 and $6,260 for the years
ended April 30, 1996, 1995 and 1994, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer retirement plan
sponsored by their union. The Company is required to pay seven cents ($.07) per
hour per employee to the plan. Pension expense for the union employees for the
years ended April 30, 1996, 1995, and 1994 was $3,745, $1,680, and $3,957,
respectively. The data available from administrators of the multiemployer 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.
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 and are substantially covered by the Company's
product liability insurance.
6. RELATED PARTY TRANSACTIONS
The Company has an agreement with an entity ("Related Party") owned by a
major shareholder whereby the entity agreed to provide warehousing and general
administrative services to the Company. The agreement is for a period of two
years with automatic year to year renewals.
The monthly fee for the warehousing services is 3% of monthly sales. The
fee for general administrative services is payable monthly and is based on
annual sales in percentages ranging from 3% to 4% of invoiced sales. Total
warehousing and administrative expenses charged to operations for the 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.
Interest is chargeable at an annual rate of prime plus 3% of the balance
owing on inventory purchases, warehousing fees, and general administrative fees
and is payable monthly. Total interest charged on such balances was $115,004 for
fiscal 1996.
At April 30, 1996, the balance owed to the Related Party was $2,129,893 and
is included in accounts payable and accrued expenses.
The Company also has loans outstanding with the Related Party totaling
$557,000 at April 30, 1996. The loan is secured by all of the Company's assets.
Interest at Citibank prime rate plus three percent is payable
F-17
<PAGE> 34
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monthly. The prime rate used in fiscal 1996 was 8.5 percent. Interest charged to
operations for the year ended April 30, 1996 was $19,924.
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. 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. During the year ended
April 30, 1994, sales to three major customers were 16%, 16% and 10%
($4,720,000, $4,719,000 and $2,950,000, respectively) of the Company's net
sales. The Company sells a limited amount to foreign customers. There were
no material receivables subject to foreign currency fluctuations.
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, 1996 and 1995, such excess balances totaled
approximately $207,000 and $398,000, respectively.
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 its
accounts receivable credit risk exposure beyond such allowances is limited. The
Company provides credit to customers under standard terms without requiring
collateral.
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. AUTHORITATIVE PRONOUNCEMENTS
a. The Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
The Company adopted SFAS 121 on May 1, 1996. In light of the reorganization as
discussed in Note 11, the Company expects to recover the carrying amount of its
long-lived assets and adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
b. The FASB issued SFAS No. 125, "Accounting for Transfers 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. SFAS No. 125 is not expected to have an
impact on the Company.
c. The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure" in February 1997.
SFAS No. 129 does not change any previous disclosure requirements, but
rather consolidates existing disclosure requirements for ease of retrieval.
F-18
<PAGE> 35
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 128 simplifies the earnings per share (EPS) calculations required
by Accounting Principles Board (APB) Opinion No. 15, and related
interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company expects that adoption of SFAS No. 128 will not have a
material impact on the financial statements.
10. SIGNIFICANT RISKS AND UNCERTAINTIES
a. The Company's exercise products compete with products marketed and sold
by a number of companies. The Company's main competitors in this area possess
far greater financial and other resources, including sales forces, than the
Company. However, the Company believes that as a result of its ability to use
trademark names for which it pays royalties, it will be able to retain its share
of the market. Nevertheless, there can be no assurance that the Company will be
able to effectively compete with these companies as well as with other smaller
entities.
The Company's luggage products compete with products designed by a number
of the largest companies in the industry. The Company believes that because of
its concentration on the upscale lifestyle and more specialized leisure market
that are associated with its use of trademark names, the Company will be able to
continue to grow its luggage business. Nevertheless, there can be no assurance
that the Company will be able to effectively compete with these companies as
well as with other smaller entities.
b. Most of the Company's exercise products are purchased from Philippines,
Korea, and Taiwan. The Company believes that, if necessary, it will be able to
obtain its products from firms located in other countries at little, if any,
additional expense. As a consequence, the Company believes that an interruption
in deliveries by a manufacturer located in a particular country will not have a
material adverse impact on the business of the Company. Nevertheless, because of
political instability in a number of the supply countries, occasional import
quotas and other restrictions on trade or otherwise, there can be no assurance
that the Company will at all times have access to a sufficient supply of
merchandise.
11. 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.
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
F-19
<PAGE> 36
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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" as referred to below is 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 15,993,991 shares of new common stock were issued on July 25, 1996
out of which 14,880,000 shares were issued to one secured creditor (see Note 3),
800,000 shares were issued to unsecured creditors, and 313,991 shares were
issued to the reconfirmation common stock equity interest holders.
The discharge of claims has been 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 11.5%. 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 that the total of all postpetitition and
allowed claims, and if holders of existing voting shares immediately before
confirmation receive less that 50 percent of the voting shares of the emerging
entity, both conditions of which were satisfied by the Company.
Under fresh-start accounting, all assets and liabilities are restated to
reflect their reorganization value, which approximates fair value at date of
reorganization. In addition the accumulated deficit of the predecessor company
at July 31, 1996 totaling $710,986 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 six months ended January 31,
1997 was $2,822.
F-20
<PAGE> 37
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a proforma balance sheet of the reorganized Company based
on the projected discounted cash flows as discussed above:
<TABLE>
<CAPTION>
REORGANIZED
BALANCE COMPANY
SHEET STOCK FRESH -------------
JULY 31, 1996 EXCHANGE START JULY 31, 1996
------------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash.................................... $ 4,951 $ 4,951
Accounts receivable, net................ 1,412,931 1,412,931
Inventory............................... 1,910,525 1,910,525
Prepaid & refundable income taxes....... 291,959 291,959
Other assets............................ 328,029 328,029
---------- ----------
Total Current Assets............ 3,948,395 3,948,395
Fixed assets, net......................... 203,863 203,863
Other Assets.............................. 56,848 56,848
Reorganization value in excess of amounts
allocable to Identifiable assets........ 124,154 124,154
---------- --------- ----------
Total Assets.................... $ 4,209,106 $ 124,154 $ 4,333,260
========== ========= ==========
Current liabilities:
Loans Payable -- MG..................... 593,670 593,670
Loans Payable -- Trade.................. 62,020 62,020
Accounts payable and accrued expenses... 3,604,440 3,604,440
Capital Lease Obligations............... 32,226 32,226
Other current liabilities............... 15,923 (15,923) 0
---------- --------- --------- ----------
Total Current Liabilities....... 4,308,279 (15,923) 0 4,292,356
---------- --------- --------- ----------
Other liabilities......................... 21,578 21,578
---------- --------- ----------
Common stock, par value................... 17,444 (17,444) 15,994
15,994
Additional paid in capital................ 590,291 (590,291) (586,832) 3,335
590,167
Accumulated deficit....................... (710,986) 710,986 0
---------- --------- --------- ----------
(103,251) (1,574) 124,154 19,329
Less: Treasury stock...................... (17,500) 17,497 (3)
---------- --------- --------- ----------
Total Equity.................... (120,751) 15,923 124,154 19,326
---------- --------- --------- ----------
Total Liabilities and Equity.............. $ 4,209,106 $ 0 $ 124,154 $ 4,333,260
========== ========= ========= ==========
</TABLE>
F-21
<PAGE> 38
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED)
a. Public Offering
The Company is offering for public sale 1,200,000 units, each consisting of
one share of common stock, one Class A Warrant and one Class B Warrant at $5.00
per unit. Although no assurance can be given that the sale will be successful,
the Company intends to utilize the net proceeds of approximately $5,100,000 for
the repayment of current debt, purchase of inventory, general corporate
services, and working capital.
Simultaneous with the public offering, the Company intends to declare a one
for five reverse stock split. All share data for the reorganized company has
been adjusted for the split.
b. Note Payable
On August 30, 1996, certain payables to a related party (see Note 6) plus
accrued interest totaling $1,205,109 were formalized into a promissory note.
Payments of principal and interest are to be made in 24 equal monthly
installments beginning September 5, 1996. The interest rate is the Citibank
Prime Rate plus one percent (approximately 9.25%). As of January 31, 1997, the
Company was in default in the amount of $274,273 consisting of principal and
interest. The note holder has agreed to defer the arrearage to June 1997, at
which time the Company anticipates making the monthly payments when due.
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 earning criteria as follows:
<TABLE>
<CAPTION>
EARNINGS BEFORE SHARES TO
YEAR ENDING INCOME TAX BE ISSUED
----------------------------------- --------------- ----------
<S> <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.
d. Consulting Agreement
The Company anticipates entering into a three year consulting agreement
with the underwriter to provide financial consulting services for a fee of
$20,000.
e. Underwriter's Purchase Warrants
As part of the consideration of its services in connection with the
registration statement, the Company has agreed to issue to the underwriter, for
nominal consideration, warrants to purchase up to 120,000 units at an exercise
price of $8.25 per unit for a period of five years. The Class A Warrants and
Class B Warrants underlying the units included in the underwriter's warrants
will be exercisable at a price of $9.90 and $16.50 per share, respectively, or
165% of the then exercise price of the warrants offered to the public, for a
period of five years commencing with the closing of the registration statement.
The non-cash cost of such warrants representing a cost of raising capital will
be recorded as a charge and credit to stockholders' equity when the warrants are
issued.
F-22
<PAGE> 39
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
f. Underwriter Option
The Company has granted the underwriter an option exercisable for 45 days
from the registration statement to purchase up to 180,000 units at the public
offering price less the underwriting discounts.
13. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of January 31, 1997 and 1996, July 31, 1996,the
nine months ended January 31, 1997 and 1996, and for the three months ended July
31, 1996 are unaudited; however in the opinion of management all adjustments
necessary for a fair presentation of the financial statements for the interim
periods 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-23
<PAGE> 40
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, 1996 and for the year then ended is
included on page F-1 of this form 10-K. 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 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,
present fairly, in all material respects, the information required to be
included therein.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 30, 1996
F-24
<PAGE> 41
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
Board of Directors
Dynamic Classics, Ltd.
Our report on the consolidated financial statements of Dynamic Classics,
Ltd. and Subsidiary as of April 30, 1995 and for each of the two fiscal years in
the period ended April 30, 1995 is included on page F-2 of this form 10-K. In
connection with our audits of such financial statements, we have also audited
the related accompanying financial statement Schedule II -- Valuation and
Qualifying Accounts for the years ended April 30, 1995 and 1994.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Hoberman, Miller & Co., P.C.
June 26, 1996
F-25
<PAGE> 42
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------- --------
PREDECESSOR COMPANY
FOR THE -------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
--------------------- -------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
balance -- beginning................... $167,000 $ -- $ -- $ 578,119 $417,760
Additions charged to income.............. -- -- 167,000 -- 156,665
Recovery of uncollectible
accounts -- net........................ -- -- -- -- 3,694
Writeoffs of uncollectible amounts....... -- -- -- (578,119) --
-------- -------- -------- --------- --------
Allowance for doubtful accounts
balance -- ending...................... $167,000 $ -- $167,000 $ -- $578,119
======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------
FOR THE
THREE
MONTHS ENDED
JULY 31,
1996
------------
(UNAUDITED)
<S> <C>
Allowance for doubtful accounts balance -- beginning... $167,000
Additions charged to income............................ --
Recovery of uncollectible accounts -- net.............. --
Writeoffs of uncollectible amounts..................... --
--------
Allowance for doubtful accounts balance -- ending...... $167,000
========
</TABLE>
F-26
<PAGE> 43
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Information Statement of Dynamic
International, Ltd. of our report dated August 30, 1996.
/s/ Moore Stephens, P.C.
- ------------------------
Moore Stephens, P.C.
New York, New York
April 16, 1997
<PAGE> 44
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Schedule 14C Information Statement of Dynamic
International Ltd. (formerly Dynamic Classics, Ltd.), of our report dated June
26, 1996 on the consolidated financial statements of Dynamic Classics, Ltd. and
Subsidiary contained in this Information Statement.
/s/ Hoberman, Miller, Goldstein & Lesser, P.C.
----------------------------------------------
HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C.
New York, New York
April 15, 1997
