SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended April 30, 1998 Commission File Number 0-21475
DYNAMIC INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-1215401
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
58 Second Avenue, Brooklyn, New York 11215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (718) 369-4160
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $4,235,518 on July 24, 1998.
The number of shares outstanding of Registrant's Common Stock as of June 30,
1998: 4,418,258
<PAGE>
PART I
ITEM 1. BUSINESS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
General
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the
design, marketing and sale of a diverse line of hand exercise and light exercise
equipment, including hand grips, running weights, jump ropes and aerobic steps
and slides. It markets these products under the licensed trademarks SPALDING(TM)
and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM).
In addition, it designs and markets sports bags and luggage, which are marketed
primarily under the licensed name JEEP(TM) and under its own names Santa Fe(TM),
Polaris Expedition(TM) and SPORTS GEAR(TM). The Company's objective is to become
a designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation,
incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the
successor to a New York company incorporated in 1964. In August 1996, DCL merged
with and into DIL, which had been newly formed for the purpose of this merger.
The objective of the merger was to change the Company's state of incorporation
from Delaware to Nevada.
Plan of Reorganization
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages, alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition requesting relief under Chapter 11
of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a Plan of Reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. MG
Holding Corp. ("MG"), which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock,
representing approximately 93% of the then issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the
Company, then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM 3.
LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Products
Exercise Equipment - The Company's line of exercise equipment consists primarily
of handheld products, including dumbbells, ankle and wrist weights, hand grips,
jump ropes, exercise suits, slimmer belts and strength training products. In
addition, the Company markets light weight equipment such as aerobic steps and
slides and exercise mats. The Company also carries a line of small electronic
devices designed to monitor physical activity such as stopwatches, pedometers,
pulse meters and calorie counters.
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<PAGE>
Sports Bags/Luggage - The Company's line of sports bags/luggage consists
primarily of duffle bags, weekend bags, garment bags, suitcases, pilot cases and
flight attendant wheeled cases. Some of the models are equipped with wheels
and/or retractable handles.
Other Products - The Company, through a wholly-owned subsidiary, has obtained
the exclusive rights to the patents underlying the technology used in an
insulated bag incorporating a wrap-around gel pack or freeze pack with the
ability to cool and preserve food and other products for an extended period of
time. In addition, it obtained the trademarks Polaris Surround Chill(TM)
Freezy Bag(TM) and Polaris Surround Chill(TM) Freezy Gel(TM) under which the
products are sold. See "Intellectual Property--License Agreements".
The Company is currently testing the marketability of these products.
The Company has obtained the exclusive right to manufacture, distribute and
sell a hand held, portable total home gym product. This product will be sold
under the trademark SPALDING(TM) Rotoflex(TM).
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and creates its own molds
and tooling. Such molds and tooling are used by the manufacturers to produce the
equipment. The Company retains an ownership interest in the molds which are
returned to it upon the termination of the Company's relationship with a
particular manufacturer. The Company has been granted a number of design patents
with respect to certain of its products. See "Intellectual Property--License
Agreements". The Company employs a designer on a full-time basis for the design
of its sports bags/luggage products. During the most recent fiscal year the
Company spent approximately $178,000 on design activities, including fees to
designers and patent attorneys. The Company may, from time to time, utilize the
services of consultants for product and package design.
Most of the Company's products are manufactured in the Phillippines, Hong Kong,
and Indonesia, which in the most recent fiscal year accounted for approximately
42%, 17%, and 15%, respectively, of the Company's products. In addition, the
Company's products are manufactured in the United States, Taiwan, Korea, China
and Bangladesh. Exercise equipment is usually shipped by the manufacturers to
the Company within 45 days of the placement of an order. Orders for sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
Sales and Marketing
The Company sells its products on a wholesale basis only. Most of its
products are sold to catalog showrooms, drug chains, discount stores and
sporting goods chains. For the fiscal year ended April 30, 1998, Kmart and
Sears each accounted for 12% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenues. For the fiscal year
ended April 30, 1998, sales of exercise equipment accounted for approximately
45% of the Company's revenues while 55% of the Company's revenues were derived
from the sale of sports bags/luggage.
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<PAGE>
The Company sells its products primarily through independent sales agents on a
commission-only basis. The Company currently engages approximately 22 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 sales price of its products. Although the Company believes that
its sales agents sell products exclusively on behalf of the Company, there are
no agreements that prohibit them from selling competing products.
In addition, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company has begun
deliveries to Service Merchandise Co., Inc. and Kohl's Department Stores.
Although the scope of this marketing effort is currently limited, the Company
intends to expand the number of private label transactions. No assurance can be
given that its efforts in this area will be successful.
The Company currently anticipates that it may increasingly focus its attention
on direct response marketing. The Company believes that its products are
particularly well suited for so-called impulse buys. On February 12, 1998, the
Company entered into an infomercial production agreement with Script to Screen
Inc., to produce a twenty eight minute infomercial designed to sell the
Spalding(TM) Rotoflex(TM) by means of direct response by customers. As of April
30, 1998, payments of $142,000 had been made under the agreement. As of June 30,
1998, the Company had paid $284,000 to Script to Screen Inc. for production of
the infomercial. The payment of $142,000 has been classified as a prepaid
expense as of April 30, 1998. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Competition
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All
of these companies possess far greater financial and other resources, including
sales forces, than the Company's. However, the Company believes that as a result
of its ability to use the trademarked names SPALDING(TM) and KATHY IRELAND(TM)
it will be able to retain its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.
The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
Intellectual Property--License Agreements
The Company owns a number of trademarks, including Shaper Shop RX(TM), Santa
Fe(TM) and Polaris Expedition(TM).
License Agreements - The Company sells a number of its products under
licensed names. The Company has entered into licensee agreements
which provide for the grant of licenses to the Company and the payment of
royalties by the Company, as follows:
Jeep -- Under an agreement dated January 8, 1993, as amended by
letter amendment dated January 8, 1996, between the Company and
the Chrysler Corporation (as so amended, the "Jeep Agreement"), the
Company was granted the exclusive license to use the names JEEP,
WRANGLER and RENEGADE in connection with the manufacture, sale and
distribution of sports bags/luggage products. The current expiration date
of the Jeep Agreement is December 31, 1998. The parties have started
negotiations regarding the terms of an extension of the current
agreement.
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<PAGE>
Spalding --Under an agreement dated October 1, 1997, between the Company
and Spalding & Evenflo Companies Inc., the Company was granted the
exclusive right to use the name Spalding in connection with the sale and
distribution of hand held exercise products. The agreement will expire
September 30, 1999. The Company has the option to renew the agreement
until September 30, 2001.
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, which expired
in June 1998, has been renewed until June 2000.
Freezy-Bag/FreezyGel -- Under an agreement dated November 1, 1996,
between New Century Marketing & Distributors, Inc. and a wholly-owned
subsidiary of the Company, the Company obtained the exclusive rights to a
patented technology as well as to the trademarked names FREEZY-BAG and
FREEZYGEL. The technology has the ability to cool foods and other products
and is used in the wrapping of such products. The agreement has a term of
two years but is renewable, at the option of the Company, for additional
one-year periods.
Rotoflex -- Under an agreement dated December 17, 1997 with Connelly
Synergy Systems LLC, the Company has obtained the exclusive right to
manufacture, distribute and sell a hand held portable total home gym
product to be sold under the trademark Spalding(TM) Rotoflex(TM).
Management Agreement with Achim Importing Co., Inc.
Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers.
In consideration for these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for
sales of $60 million or more. For sales not originating at the warehouse, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1998, the Company accrued approximately $183,095 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
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<PAGE>
In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
will purchase the products directly from the manufacturer and resell them to the
Company in order to accommodate Achim's commercial lenders who often require a
security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement.
Employees
As of June 30, 1998, the Company employed 11 persons, of whom five were
executive officers, two were engaged in administrative and clerical activities,
two were engaged in sales and two were involved in warehousing and shipping.
None of the Company's employees is represented by a union and no work stoppages
have occurred.
ITEM 2. PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. See ITEM
1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3. LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Until 1995, the Company's common stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the
Bankruptcy Code in August 1995, no trading information was available after the
fiscal quarter ended July 31, 1995.
On December 27, 1997, the Company completed a public sale of 1,200,000 units:
each unit consisting of one share of Common Stock, one redeemable Class A
warrant and one redeemable Class B Warrant. The Common Stock and the Warrants
became separately traded on March 12, 1998. The Units, Common Stock, Class A
Warrants and the Class B Warrants are quoted on the OTC Bulletin Board under
the symbols DYNIU, DYNI, DYNIW and DYNIZ, respectively.
The following quotes have been reported by The Nasdaq Stock Market Inc., OTC
Bulletin Board. Such quotations reflect interdealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions
Fiscal High Low
Security/Symbol Quarter Bid Bid
- -----------------------------------------------------------------------
Units/DYNIU January 31, 1998 5.625 5.625
April 30, 1998 5.625 5.625
Common Stock/DYNI (1)
A Warrants/DYNIW (2)
B Warrants/DYNIZ (3)
(1) No quotes were posted to the OTC Bulletin Board for this security until
July 1998.
(2) This security has only one Market Maker. A minimum of two Market Makers
must post both bid and ask quotations to calculate the inside market from
which the summary quote data is derived.
(3) No quotes are available on the OTC Bulletin Board for this security.
The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data that are qualified by the
more detailed financial statements included herein. Effective August 8, 1996,
the Company emerged as the surviving entity in a merger with DCL. The balance
sheet of the combined entity was substantially similar to that of DCL
immediately prior to the merger. As a consequence, the financial data of the
Company for the reporting periods July 31, 1996 and prior consist of those of
DCL.
Due to the reorganization (see Note 2 to the Financial Statements), operating
results of the reorganized company may not be comparable to those of the
predecessor company.
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<PAGE>
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED
COMPANY*(1) COMPANY*(1) PREDECESSOR COMPANY
9 Months Ended 9 Months Ended 3 Months Ended Year Ended April 30
4/30/98 4/30/97 7/31/96 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $8,001,138 $ 7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353
- --------------------------------------------------------------------------------------------------
Income
(Loss)
for Year 128,951 10,082 (76,364) 6,945,299 (11,227,335) 244,308
- --------------------------------------------------------------------------------------------------
Net Income
(Loss)
per Share .03 .003
- --------------------------------------------------------------------------------------------------
<CAPTION>
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working
Capital
(Deficit) 4,919,226 (9,901) (293,884) (7,493,435) 3,094,821
- --------------------------------------------------------------------------------------------------
Total
Assets 5,715,417 4,831,122 4,253,396 6,414,185 16,677,772
- --------------------------------------------------------------------------------------------------
Long Term
Obligations
Including
Capitalized
Lease
Obligations -0- 215,254 23,965 116,124 127,877
- --------------------------------------------------------------------------------------------------
<FN>
*Management's assumptions used in determining the Company's reorganization value are discussed
in Note 2 to the Financial Statements.
</FN>
</TABLE>
(1) Due to the reorganization (see Note 2 to the financial statements),
operating results and earnings per share of the reorganized company may not be
comparable to those of the predecessor company. Management's assumptions used
in determining the Company's reorganization value are discussed in Note 2 to
the financial statements.
(2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996, the Company's Plan was approved by the Bankruptcy Court. During
July and August 1996, the Company satisfied its obligations under the Plan
through cash payments and the issuance of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
General
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below, has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below,
which the Company adopted on July 31, 1996, reporting for the year ended April
30, 1997 is accomplished by combining the financial results for the three-month
period ended July 31, 1996 and those of the nine-month period ended April 30,
1997.
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<PAGE>
Because of the application of fresh-start reporting, the financial statements
for the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization.
Plan of Reorganization
In August 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the Bankruptcy Code.
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. The
amount of claims allowed under the bankruptcy proceedings, aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG, which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock in satisfaction
of such promissory note, representing approximately 93% of the then issued and
outstanding shares thereby gaining absolute control over the Company's affairs.
See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash
and securities distributed under the plan of reorganization aggregated
$531,561. An amount of $16,692,193, representing the difference between the
value of the total distribution and the amount of allowable claims under
the bankruptcy, was recorded as an extraordinary gain.
In addition, under the Plan, the Company merged with a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. The
balance sheet of the combined entity was substantially similar to the balance
sheet of the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start reporting
on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years.
Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.
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<PAGE>
Results of Operations for the Fiscal Year Ended April 30, 1998 Compared to the
Nine Months Ended April 30, 1997 and Three Months Ended July 31, 1996.
Financial results for the nine months ended April 30, 1997 have been restated
for a change in the method of determining the cost of inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Sales of $8,001,000 for the fiscal year ended April 30, 1998 were $1,475,000 or
16% less than combined sales of $9,476,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996 of $7,493,000 and $1,983,000,
respectively. Sales of exercise equipment of $3,578,000 for the fiscal year
ended April 30, 1998 were 1,506,000 or 30% less than combined sales of exercise
equipment of $5,084,000 for the nine months ended April 30, 1997 and three
months ended July 31, 1996 of $4,124,000 and $960,000 respectively. Sales of
sports bags/luggage products of $4,404,000 for the fiscal year ended April 30,
1998 were $13,000 or .3% higher than combined sales of sports bags/luggage
products of $4,391,000 for nine months ended April 30, 1997 and the three months
ended July 31, 1996 of $3,368,000 and $1,023,000, respectively. Sales for the
fiscal year ended April 30, 1998 include sales of insulated bags with a wrap
around gel pack or freeze pack with the ability to cool and preserve food and
other products for and extended period of time of $19,000.
The Company's gross profit of $2,751,000 for the fiscal year ended April 30,
1998 was $376,000 or 12% less than the combined gross profit of $3,127,000 for
the nine months ended April 30,1997 and three months ended July 31, 1996 of
$2,588,000 and $539,000, respectively. The reduced gross profit is the result of
the lower sales for the fiscal year ended April 30, 1998. However, the gross
profit percentage for the fiscal year ended April 30, 1998 of 34.2% was 1.5%
higher than the combined gross profit percentage of 32.7% for the nine months
ended April 30, 1997 and the three months ended July 31, 1996 of 34.2% and
27.0%, respectively.
The Company believes that the decline in sales for the fiscal year is primarily
attributable to a shift in focus from increasing sales revenue to generating
revenues from merchandise that produces a higher gross profit. As a result the
decrease in sales of the Company's products were due to a decrease in sales to
one customer to whom the Company no longer wishes to sell products at prices
that would have an adverse impact on its gross profit percentage. The Company
believes that the decision to shift its focus from emphasis on revenues to
profit as discussed above, represents a positive development. Nevertheless,
there can be no assurance that the Company will continue to be successful in
attaining a higher gross profit percentage.
Operating expenses of $2,349,000 for the fiscal year ended April 30, 1998 were
$435,000 less than combined operating expense of $2,784,000 for the nine months
ended April 30, 1997 and three months ended July 31, 1996 of $2,227,000 and
$557,000, respectively.
Due to the application of fresh start accounting, the financial statements for
the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to reorganization. Therefore, a
discussion of the changes in operating expenses will compare the nine months
ended April 30, 1998 to the nine months ended April 30, 1997. Decreases for the
nine months ended April 30, 1998 compared to the nine months ended April 30,
1997 are represented approximately by net changes in the following expenses:
-10-
<PAGE>
Decrease
(Increase)
Promotional expense ($240,000)
Product development ($40,000)
Shipping fees $244,000
Sales commissions $73,000
Salesman Salaries ($65,000)
Officers' salaries $76,000
Professional fees $221,000
Postage $10,000
Provision for bad debts $28,000
Depreciation $11,000
Promotional expenses increased by $240,000 primarily due to promotional fees
paid to two customers to promote sales of the Company's products. Product
development expenses increased $40,000 because the Company has hired a
consultant to develop new products and to further develop existing product
lines. Shipping fees decreased by $244,000 due to the decrease in sales
and an increase in direct sales to customers from the manufacturer. Sales
commissions decreased by $73,000 due to the decrease in revenues. Salesman
salaries increased by $65,000 due to the hiring of an executive Vice President
of Sales. Officers' salaries decreased by $76,000 due to the departure of the
former president of the Company in March 1997. Professional fees were reduced
by $221,000 due to decreased need for outside legal and accounting fees during
the nine months ended April 30, 1998. Postage decreased by $10,000. Provision
for bad debts decreased by $11,000. Depreciation expense decreased by $27,000.
During the nine months ended April, 30, 1998, the Company reported as prepaid
expenses approximately $480,000 in package design, displays and direct
responses advertising costs for several new products that were not introduced
until after April 30, 1998.
The Company's pretax profit of $268,000 for the fiscal year ended April 30, 1998
was $231,000 or 624% higher than the combined pretax profit of $37,000 which was
comprised of a $76,000 pretax loss for the three months ended July 31, 1996 and
a $113,000 pretax profit for the nine months ended April 30, 1997. During the
fiscal year ended April 30, 1998, the gross profit decreased by $376,000 due to
the decrease in volume. This decrease in gross profit was offset by a
reduction in operating expenses, interest expense and reorganization expenses of
$435,000, $122,000 and $50,000, respectively.
The following table sets forth the results of operations for the periods
discussed above:
<TABLE>
<CAPTION>
Reorganized Reorganized Redecessor
Company Company Company
Fiscal Year Nine Months Three Months
Ended Ended Ended
4/30/98 4/30/97 7/31/96
--------- --------- ---------
<S> <C> <C>
Sales 8,001,000 7,493,000 1,983,000
42,000 55,000 10,000
--------- --------- ---------
8,043,000 7,548,000 1,993,000
Cost of sales 5,292,000 4,959,000 1,454,000
--------- --------- ---------
Gross profit 2,751,000 2,589,000 539,000
Operating expenses 2,349,000 2,227,000 557,000
Interest expense 134,000 199,000 57,000
--------- --------- ---------
2,483,000 2,426,000 614,000
Reorganization expense 0 49,000 1,000
--------- --------- ---------
Pretax income (loss) 268,000 114,000 (76,000)
Tax 139,000 104,000 0
--------- --------- ---------
Net income (loss) 129,000 10,000 (76,000)
</TABLE>
-11-
<PAGE>
Results of Operations for the Nine Months Ended April 30, 1997 and the Three
Months Ended July 31, 1996 Compared to the Fiscal Year Ended April 30, 1996
Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996, respectively, were, on a combined
basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise
equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997,
and the three months ended July 31, 1996, respectively, were $5,084,000, on a
combined basis. These combined sales of exercise products were $532,000 or 9%
less than the previous fiscal year. Sales of sports bags/luggage products of
$3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three
months ended July 31, 1996, respectively, were $4,391,000, on a combined basis.
These combined sales of sports bags/luggage products were 7% less than the
previous fiscal year. Sales for the fiscal year ended April 30, 1996 were
reduced by $3,211,000 of customer credits for a discontinued line of manual
treadmills and ski machines. The Company does not believe that the decrease in
sales of its products represents a material trend. The Company believes that the
decrease is primarily the result of the reorganization proceedings. The Company
will attempt to reverse this trend by expanding its product lines and increasing
the attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended April
30, 1997 and three months ended July 31, 1996, respectively, were, on a combined
basis, $3,899,000 less than the fiscal year ended April 30, 1996, due to the
reorganization.
The following is a discussion of the effect of the Company's reorganization
and adoption of fresh-start reporting on the various income statement line
items during the nine-month period ended April 30, 1997. For this purpose, the
nine months ended April 30, 1997 are compared to the nine months ended April
30, 1996. Decreases for the nine months ended April 30, 1997 compared to the
nine months ended April 30, 1996 are represented approximately by net changes
in the following expenses:
Freight out.......................$ 10,000
Insurance claims..................$ 70,000
Lawsuits..........................$289,000
Showroom rent.....................$319,000
Officers' salaries................$ 81,000
Office salaries...................$262,000
Warehouse salaries................$115,000
Salesmen salaries.................$ 57,000
Payroll taxes.....................$ 45,000
Fringe benefits...................$ 2,000
Repairs & maintenance.............$ 4,000
Travel & Entertainment............$ 30,000
Office equipment rental...........$ 7,000
Miscellaneous.....................$ 8,000
Consultant fees...................$105,000
Promotional material..............$189,000
Pension costs.....................$726,000
Telephone.........................$ 31,000
Data-processing...................$ 6,000
Postage...........................$ 10,000
Bad debt expense..................$666,000
Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000,
respectively, as a result of the accrual of proofs of claim filed during
the bankruptcy proceeding as liabilities subject to compromise during the
nine-month period ended April 30, 1996.
Showroom rent decreased by $319,000 since a proof of claim for the balance of
the lease was recorded during the nine-month period ended April 30, 1996.
The showroom was closed in October 1995.
Officers salaries decreased by $81,000 due to reduction in the salary of the
former President of the Company in September 1995, and the elimination of a
Chief Operating Officer position in December 1995. These changes resulted
in decreases of $37,000 and $44,000, respectively.
Office salaries decreased by $262,000 due primarily to the elimination of the
Vice President of Operations position in June 1996 which accounted for $119,000
of the reduction. In addition, the position of Credit Manager was eliminated in
May 1996 resulting in a savings of $45,000. The balance of $98,000 is due to the
overall reduction of the office staff as a part of the reorganization.
Warehouse salaries decreased by $115,000 due to the elimination of
warehouse employees under the reorganization.
Salesmen salaries decreased by $57,000 due to the elimination of a
sales position in August 1996.
Payroll taxes and fringe benefits decreased by $45,000 and $2,000,
respectively, due primarily to the positions and employees eliminated
during the reorganization.
Repairs and maintenance decreased by $4,000.
Travel and entertainment expenses decreased by $30,000 due to the
decrease in executive and sales personnel.
-12-
<PAGE>
Office equipment rental decreased by $7,000 due to a reduction of the
equipment rented due to the reorganization.
Miscellaneous taxes decreased by $8,000 as a consequence of the change in the
Company's sate of incorporation from Delaware to Nevada which resulted
in the elimination of Delaware franchise taxes.
Consultantfees decreased by $105,000 because the Company did not hire
consultants during the nine months ended April 30, 1997.
Promotional materials decreased by $189,000 due to decreased spending for these
materials.
Pension costs decreased by $726,000 because a proof of claim filed by the
Pension Benefit Guarantee Corp. for this amount was recorded as part of the
reorganization during the nine months ended April 30, 1996.
Telephone expenses decreased by $31,000 due to the closing of the showroom in
October 1995.
Data-processing costs decreased by $6,441 due to the reorganization of the
Company.
Postage decreased by $10,000 due to improved cost management.
Bad debt expense decreased by $666,000 because of improved collections and
decreased sales volume.
Interest expense of $198,800 and $57,300 for the nine months ended April
30, 1997 and July 31, 1996, respectively, were, on a combined basis, $127,400
or 33% lower than the previous fiscal year. This decrease is the result of a
$223,000 decrease in contractual interest which was offset by an increase in
related party interest of $96,000. See ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS.
The Company's pre-tax profits of $147,000 for the fiscal year ended April 30,
1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31,
1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As
a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards
of approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision of $104,000 for
the fiscal year ended April 30, 1997 is based on pretax profits of $223,000 for
the period August 9, 1996 to April 30, 1997. The effective tax rate is 46%
comprised of 26% of federal taxes and 20% of state and local taxes.
-13-
<PAGE>
The following table sets forth the results of operations for the periods
discussed above:
Reorganized
Company Predecessor Company
------------- -------------------------------------
For 9 Months For 3 Months For Fiscal Year
Ended 4/30/97 Ended 7/31/96 Ended 4/30/96
------------- ------------- ---------------
Sales 7,492,700 1,983,200 7,151,700
Other income 54,600 10,200 98,300
--------- --------- ----------
7,547,300 1,993,400 7,250,000
Cost of sales 4,959,300 1,454,600 9,480,500
--------- --------- ----------
Gross profit (loss) 2,588,000 538,800 (2,230,500)
--------- --------- ----------
Operating Expenses 2,226,600 556,500 6,683,200
Interest 198,800 57,300 383,500
--------- --------- ----------
2,425,400 613,800 7,066,700
--------- --------- ----------
Reorganization 48,900 1,300 449,700
--------- --------- ----------
Pretax income (loss) 113,700 (76,300) (9,746,900)
Tax 103,700 --- (7,511,000)
--------- --------- ----------
Income (loss) before
extraordinary item 10,000 (76,300) (2,235,900)
--------- --------- ----------
Extraordinary item
gain on discharge of
pre-petition liabilities --- --- 16,692,200
Tax --- --- 7,511,000
--------- --------- ----------
Extraordinary gain,
net of tax --- --- 9,181,200
--------- --------- ----------
NET INCOME (LOSS) 10,000 (76,300) 6,945,300
--------- --------- ----------
--------- --------- ----------
On July 10, 1997, the Company and MG agreed that no further payments shall be
payable to MG under the Note (see ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS) until the consummation of the Company's contemplated public
offering or at the scheduled maturity of the Note, whichever occurs earlier.
Liquidity and Capital Resources
Fiscal Year Ended April 30, 1998
During the fiscal year April 30, 1998, cash used by operating activies amounted
to $2,090,000. This was the result of increases in prepaid expenses as
discussed above, and decreases in accrued expenses of $609,000 and $2,806,000
respectively, which were offset by net income, decreases in accounts receivable
and due from suppliers, inventory and prepaid and refundable income taxes of
$129,000, $186,000, $967,000 and $14,000 respectively.
Investing activies used cash of $67,900 for molds related to a new product.
Financing activities provided cash of $3,689,000 as proceeds of a stock
offering of approximately $4,800,000, which was completed on December 27, 1997,
were used to pay accounts payable and accrued expenses of approximately
$2,800,000. The use of proceeds in this way produced the use of cash for
operating activities of $2,090,000. An additional $1,059,785 of the proceeds
of the stock offering was used to pay related party debt. The Company had a
positive cash flow of $1,532,000. The Company expects that based upon the cash
flow for the fiscal year ended April 30, 1998 and the anticipated future cash
flows, that the reorganization value in excess of amounts allocable to
identifiable assets of $112,000 as of April 30, 1998 will be fully recoverable.
-14-
<PAGE>
Nine Months Ended April 30, 1997
During the first nine months after the Company's reorganization, cash used in
operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase
inventory by $923,000 during the nine-month period. The increase in
inventory was due to an anticipated increase in sales and the purchase of
larger volumes to take advantage of the decreased costs associated with the
higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254,
prepaid expenses decreased by $122,017, miscellaneous receivables decreased by
$132,379 and prepaid and refundable income taxes decreased by $252,046. These
amounts partially offset expenditures for inventory and payments to credits.
Cash of $332,957 provided by financing activities was primarily the result
of a $600,000 loan from MG Holding and was used to pay the creditors
in accordance with the Company's Plan. Cash provided by financing activities
was used to repay $145,324 of the note payable to MG Holding. In addition,
payments were made for capital leases, insurance notes, and deferred stock
offering costs of $29,656, $62,020, and $30,043, respectively. The Company had
a positive cash flow of $38,586.
Three Months Ended July 31, 1996
During the three months ended July 31, 1996, cash used by operating activities
amounted to $64,800. This was the result of a net loss of $76,400, increases in
accounts receivable and due from supplier, and prepaid expenses of $221,300 and
$100,600, respectively, which were offset by a decrease in inventory and an
increase in accounts payable and accrued expenses of $115,600 and $155,800,
respectively.
Financing activities provided cash of $43,200. Proceeds from insurance notes
payable of $77,200 were offset by repayments of insurance notes payable, and
repayments of capital lease obligation of $15,200 and $18,800, respectively. The
Company had a negative cash flow of $21,600 for the three months ended July 31,
1996.
Current Position
On April 30, 1998 the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in the form of
letters of credit and bankers acceptances. The agreement also provides for a
security interest in the inventory and notes and accounts receivables of the
Company. In addition the agreement provides for the personal guarantee of the
President and major shareholder of the Company in the amount of $250,000. As of
June 30, 1998 the Company's aggregate balance of $1,072,159 consisted of
$500,000 in bankers acceptances and $572,159 in outstanding letters of credit.
Pursuant to an unwritten understanding, Achim arranges for the issuance by its
financial lender of letters of credit in favor of the Company's overseas
suppliers, thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. The weighted average interest rate paid by the Company to Achim at
April 30, 1997 and April 30, 1996 was 9.25% and 11.5%, respectively.
-15-
<PAGE>
The Company believes that the proceeds from the stock offering, the Chase
Manhattan Bank credit line and the availability of Achim's credit line will be
sufficient to finance its operations for the next twelve months.
Seasonality and Inflation
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company's profits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its
independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26, 1996,
there were no disagreements between the Company and Hoberman on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Company's Board of Directors appointed Moore Stephens,
P.C. as its independent accountants.
-16-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Marton B. Grossman 67 Chairman and President
Isaac Grossman 36 Vice Chairman, Treasurer and Secretary
Sheila Grossman 58 Director
William P. Dolan 45 Vice President--Finance
John Holodnicki 45 Vice President--Sales
Harry Braunstein 48 Director*
Bernard Goldman 77 Director*
Gordon Sulltrop 62 Executive Vice President
*Member of the Company's Audit Committee.
Marton B. Grossman has been the Chairman and Chief Executive Officer
of the Company since July 29, 1996. For the past 34 years, he has been
President of Achim, a privately-held company engaged in the import and export
of window coverings and accessories. In addition, he is President of MG
Holding Corp., a privately-held financial holding company. Mr. Grossman is the
father of Isaac Grossman, the Company's Vice Chairman, Treasurer and Secretary.
Mr. Grossman spends approximately 20% of his time working for the Company.
Isaac Grossman has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996, and Vice President of Achim since 1989. He is the
son of Marton B. Grossman, the Company's Chairman and President. Mr. Grossman
spends approximately 20% of his time working for the Company.
Sheila Grossman was elected a director in October 1997. From 1962 to
1987 she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
William P. Dolan has been the Company's Vice President-Finance since
July 1996. Prior thereto, he had been the Company's Treasurer and Secretary
since 1989. Mr. Dolan graduated from the William Paterson College of New
Jersey and is a Certified Public Accountant.
John Holodnicki has been a Vice President--Sales at the Company since
1994. From 1981 to 1994, he was a Vice President--Sales at HIT Industries, an
importer of business computer cases. Mr. Holodnicki earned a degree in Marketing
from the University of Illinois in 1975.
Harry Braunstein was elected a member of the Board in October 1997.
Mr. Braunstein has been a member of Hertzfeld & Rubin, a New York based law
firm, since 1984. He is member of the Board of Directors of Gotham Bank of New
York, Lark Holding Corp., the parent company of WDF, Inc., a privately held
plumbing supply company and Sentery Detection, Inc. a home alarm business. Mr.
Braunstein earned a J.D. degree from Brooklyn Law School in 1974.
Bernard Goldman was elected a member of the board in October 1997.
Mr. Goldman was the Chief Executive Officer of Goldman's Department Store, a
chain consisting of 12 stores, from 1957 to 1979. Mr. Goldman has been and
continues to be a member of the Board of Directors and an executive officer of
a number of community and charitable institutions and organizations.
-17-
<PAGE>
Gordon Sulltrop was appointed Executive Vice President in September 1997.
Prior to joining the Company, from 1988 to 1997, he was employed by Rubbermaid
Specialty Products Division. At that company he acted as National Accounts
Sales Manager from 1996, Central Region Manager from 1991-1995, Military and
Premium Sales Manager from 1990 to 1991 and National Accounts Manager from
1988 to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri Valley
College, Marshall, Missouri.
Board of Directors
Each director is elected at the Company's annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are three directors of the Company.
The bylaws permit the Board of Directors to fill any vacancy and the new
director may serve until the next annual meeting of stockholders or until his
successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board.
The underwriting agreement, for the stock offering completed on December 27,
1997, provides that the underwriter has the right to designate one member of the
Board of Directors for a period of three years following the consummation of the
Company's public offering on December 27, 1997. To date, no person has been
designated by the Underwriter.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
during the three fiscal years ended April 30, 1997 (I) to its Chief Executive
Officer, (ii) its other two Executive Officers and (iii) two additional
non-Executive Officers whose cash compensation exceeded $100,000 per year in any
such year:
SUMMARY COMPENSATION TABLE (1) (2)
----------------------------------
Name/Principal Year Ended Annual Compensation All Other
Position April 30 Salary Bonus Compensation (3)
- --------------------------------------------------------------------------------
Marton B. Grossman 1998 $0 $31,200
Chairman & President 1997 $0 $31,200
1996 $0 $18,200
- --------------------------------------------------------------------------------
Isaac Grossman 1998 $0 $32,240
Director, Treasurer 1997 $0 $32,240
1996 $0 $18,200
- --------------------------------------------------------------------------------
William P. Dolan 1998 $112,976 $0
Vice President-Finance 1997 $100,000 $0
1996 $100,000 $0
- --------------------------------------------------------------------------------
John Holodnicki 1998 $124,538 $0
Vice President 1997 $120,000 $0
1996 $120,000 $0
- --------------------------------------------------------------------------------
Marvin Cooper (4) 1998 $0 $0
Executive Vice President 1997 $128,125 $0
1996 $182,876 $0
- --------------------------------------------------------------------------------
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which does not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or 10%
of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.
(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac Grossman's
activities performed on behalf of the Company. Marton Grossman is the sole
shareholder, and Isaac Grossman is an employee of Achim. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
(4) Mr. Cooper resigned his position in March 1997.
None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.
-18-
<PAGE>
Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares. If the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he will be issued 600,000 shares. If the Company's earnings before
taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he
will be issued 1,000,000 shares. The stated earnings criteria are cumulative so
that in the event of an earnings shortfall during a fiscal year, shares relating
to two fiscal years will be issued provided that the Company, during the
succeeding fiscal year, realizes earnings that in the aggregate are equal to two
years of earnings as set forth in the Agreement. The Agreement also provides for
piggyback registration rights with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock to be issued
to Marton Grossman under the Bonus Agreement:
<TABLE>
<CAPTION>
Performance or Other
Number of Shares, Period Until Estimated Future Payments
Units or Other Maturation or Under Non-Stock
Name Rights Payout Price-Based Plans
---- ----------------- -------------------- -------------------------
Threshold Target Maximum
-------------------------
<S> <C> <C> <C>
Marton B. Grossman 2,000,000 April 30, 2000 * * *
- ----------------------------------------------------------------------------------------------
<FN>
*The number of shares to be issued in a particular fiscal year is based on the
criteria set forth above.
</FN>
</TABLE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 1996 through April 30, 1997, other than Forms 3
that were filed late with respect to Messrs. Marton and Isaac Grossman and
William Dolan and the Marton Grossman Annuity Trust, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
beneficial owners were complied with.
401K Plan
The Company terminated the 401K plan as of December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1998, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (I) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215, unless otherwise
indicated.
-19-
<PAGE>
Shares Owned Beneficially
and of Record (1)
-----------------------------
Name and Address No. of Shares % of Total
---------------- ------------- ----------
Marton B. Grossman (2) 2,976,000 67.3
Isaac Grossman (3) 2,976,000 67.3
Sheila Grossman (2) 2,976,000 67.3
Harry Braunstein
40 Wall Street
New York, NY 10004 -0- *
Bernard Goldman
2100 Boca West Drive
Laurel Oaks, FL -0- *
William P. Dolan 123 *
John Holodnicki 11 *
Gordon Sulltrop -0- *
All Officers and Directors
as a Group (8 persons) 2,976,134 67.3
- --------------------------------------------------------------------------------
* 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 family foundation and a series
of trusts (collectively, the "Grossman Trust") for the benefit of relatives of
Mr. Grossman. Mr. Isaac Grossman and two of his relatives are the trustees of
the Grossman Trusts. Under its terms, the Grossman Trust will return to Mr.
Grossman annually until August 1998 56% of the value of the shares
(payable in cash or in shares) when deposited into each of the Grossman
Trusts. Since the number of shares to be returned to Mr. Grossman is based
on the then current market price of the Common Stock, such number cannot
be determined at the present time. To date, 201,023 shares have been returned
to Mr. Grossman under this arrangement. Mr. Grossman disclaims beneficial
ownership in the shares held by the Grossman Trust that will not be returned
to him.
(3) Consists of shares held by the Grossman Trust of which Mr. Isaac
Grossman is currently a beneficiary as to 464,600 shares. The actual number
of shares held by the Grossman Trust as to which Isaac Grossman is a
beneficiary may be smaller since under the terms of the Grossman Trust, a
portion of the shares may be returned to Marton Grossman as described in
footnote (2). Mr. Grossman is a trustee of the Grossman Trust and in that
capacity shares voting power as to the shares held by the Grossman Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530.
MG is wholly owned by Marton B. Grossman, the Company's Chairman and President.
The note was subsequently repaid by the Company through the issuance of
2,976,000 shares of Common Stock to MG. MG assigned the Common Stock to a
trust for the benefit of members of Mr. Grossman's family.
Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to
the Company to consummate the Plan and for related expenses. The Company issued
a promissory note to MG Holding evidencing the loan and granted it a security
interest in all of the Company's assets. The promissory note is to be paid in 24
monthly installments commencing September 5, 1996. The note accrues interest at
the Citibank prime rate plus 1%. The weighted average interest rate as of the
date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April
30, 1997, the Company had accrued interest in the amount of $37,219 in
connection with this loan. As of June 30, 1997, the amount of interest owed
amounted to $54,197. In July 1997, the Company and MG Holding agreed that no
principal or interest payments under the note would be due until the
consummation of this offering or the scheduled maturity of the note, whichever
occurred earlier. The note and all accrued interest was paid in full on December
23, 1997 with the proceeds of the stock offering.
Pursuant to the Warehousing Agreement, Achim performs certain administrative
services on behalf of the Company. Under the Warehousing Agreement, Achim
assists, among other things, in the maintenance of financial and accounting
books and records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and credit checks on the Company's customers.
In consideration of these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30,000,000 to 3% for
sales of $60,000,000 or more.
-20-
<PAGE>
For sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and account located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1997, the Company accrued approximately $183,095 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
On April 30, 1998 the Company entered into a credit agreement with The
Chase Manhattan bank for maximum borrowings of $1,500,000 in the form of
letters of credit and banker acceptances. The agreement also provides for a
security interest in the inventory and notes and accounts receivable of the
Company. The agreement also provides for the personal guarantee of the
President and major shareholders of the Company in the amount of $250,000.
In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers, thereby enabling the Company to finance the purchases of its
inventory. Also, from time to time, when taking deliveries from domestic
suppliers, Achim purchases products from the manufacturer and resells them to
the Company in order to accommodate Achim's commercial lenders who often require
a security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement. See ITEM 13. CERTAIN RELATIONSHIP AND RELATED
TRANSACTIONS. The weighted average interest rate paid by the Company to Achim at
June 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%,
respectively.
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company. Other than the fees payable by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co.,
Inc" and ITEM 2. PROPERTIES.
-21-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
exhibits which are being filed herewith and the exhibits which are
incorporated herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended April 30, 1998.
-22-
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page to Page
Item 8: Financial Statements
Independent Auditor's Report...................................... F-1..........
Consolidated Balance Sheets as of April 30, 1998 and 1997......... F-2.......F-3
Consolidated Statements of Operations for the year ended April 30, 1998, the
nine months ended April 30, 1997, the three months ended July 31, 1996
and the year ended April 30, 1996................................. F-4.......F-5
Consolidated Statements of Stockholders' Equity for the year ended April 30,
1998, the nine months ended April 30, 1997, the three
months ended July 31, 1996 and the year ended April 30, 1996...... F-6..........
Consolidated Statements of Cash Flows for the year ended April 30, 1998, the
nine months ended April 30, 1997, the three months ended July 31, 1996
and the year ended April 30, 1996................................. F-7.......F-9
Notes to Consolidated Financial Statements........................ F-10.....F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Dynamic International, Ltd.
We have audited the accompanying consolidated balance sheet of
Dynamic International, Ltd. [formerly Dynamic Classics, Ltd., see Note 2] and
its subsidiary as of April 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended April 30, 1998, the nine months ended April 30, 1997, the three months
ended July 31, 1996, and the year ended April 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Dynamic International, Ltd. [formerly Dynamic Classics, Ltd.] and
its subsidiary as of April 30, 1998 and 1997, and the results of their
operations and their cash flows for the year ended April 30, 1998, the nine
months ended April 30, 1997, the three months ended July 31, 1996, and the year
ended April 30, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 3 to the financial statements, the
Company had given retroactive effect to the change in accounting for its
inventories from the LIFO method to the FIFO method
/s/ MOORE STEPHENS, P. C.
MOORE STEPHENS, P. C.
Certified Public Accountants
New York, New York
July 15, 1998
F-1
<PAGE>
Item 8:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30,
---------
1 9 9 8 1 9 9 7
------- -------
[Restated]
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,575,248 $ 43,543
Accounts Receivable - Trade [Net of Allowance for
Doubtful Accounts of $122,685 and $167,000 in 1998
and 1997, Respectively] 810,447 887,089
Due from Suppliers 36,142 65,273
Inventory 2,359,022 3,325,795
Prepaid Expenses 669,133 60,272
Miscellaneous Receivables -- 2,658
Prepaid and Refundable Income Taxes 26,201 39,914
--------------- ---------------
Total Current Assets 5,476,193 4,424,544
--------------- ---------------
Property and Equipment:
Tools and Dies 775,839 707,939
Furniture and Equipment 102,205 102,205
Capitalized Equipment Leases 576,071 576,071
--------------- ---------------
Totals - At Cost 1,454,115 1,386,215
Less: Accumulated Depreciation (1,329,269) (1,260,924)
--------------- ---------------
Property and Equipment - Net 124,846 125,291
--------------- ---------------
Other Assets:
Due from Supplier -- 36,142
Security Deposits 2,050 4,650
Deferred Stock Offering Costs -- 116,023
Reorganization Value in Excess of Amount Allocable
to Identifiable Assets - Net 112,328 124,472
--------------- ---------------
Total Other Assets 114,378 281,287
--------------- ---------------
Total Assets $ 5,715,417 $ 4,831,122
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30,
---------
1 9 9 8 1 9 9 7
------- -------
[Restated]
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses - Non-Related $ 458,359 $ 846,234
Accounts Payable and Accrued Expenses - Related Party 19,186 2,627,580
Capital Lease Obligations - Current -- 24,228
Income Taxes Payable 79,422 91,872
Loan Payable- Related Party -- 844,531
--------------- ---------------
Total Current Liabilities 556,967 4,434,445
--------------- ---------------
Other Liabilities:
Loan Payable- Related Party -- 215,254
--------------- ---------------
Commitment and Contingencies [6] -- --
--------------- ---------------
Stockholders' Equity:
Common Stock - Par Value, $.01 Per Share; Authorized
5,000,000 Shares; No Shares Issued
Common Stock - Par Value $.001 Per Share; Authorized
50,000,000 Shares; Issued 4,418,798 and 3,198,798 Shares 4,419 3,199
Additional Paid-in Capital 4,869,796 22,940
Retained Earnings 284,238 155,287
--------------- ---------------
Totals 5,158,453 181,426
Less: Treasury Stock - At Cost - 540 Shares (3) (3)
--------------- ---------------
Total Stockholders' Equity 5,158,450 181,423
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 5,715,417 $ 4,831,122
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
<S> <C> <C> <C> <C>
Revenues:
Sales $ 8,001,138 $ 7,492,729 $ 1,983,164 $ 7,151,715
Other Income 41,938 54,642 10,201 98,272
------------ ------------ ------------ ------------
Total Revenues 8,043,076 7,547,371 1,993,365 7,249,987
Cost of Sales 5,291,768 4,959,319 1,454,637 9,480,484
------------ ------------ ------------ ------------
Gross Profit 2,751,308 2,588,052 538,728 (2,230,497)
------------ ------------ ------------ ------------
Operating Expenses:
Research and Development 60,493 4,042 -- 101,992
Shipping Expense 273,459 452,093 116,894 738,681
Selling Expense 865,223 686,214 198,993 1,254,006
Advertising and Promotion 413,271 152,563 1,819 389,672
General and Administrative 736,738 931,683 238,791 4,198,800
Interest and Bank Charges - Non-Related
[Contractual Interest of $806,937 for
the year ended April 30, 1996] 8,441 21,462 4,174 248,625
Interest and Bank Charges - Related Party 125,481 177,339 53,096 134,928
------------ ------------ ------------ ------------
Total Operating Expenses 2,483,106 2,425,396 613,767 7,066,704
------------ ------------ ------------ ------------
Reorganization Items:
Bankruptcy Administration Costs -- 48,874 1,325 449,693
------------ ------------ ------------ ------------
Income [Loss] Before Provisions
for Income Taxes 268,202 113,782 (76,364) (9,746,894)
------------ ------------ ------------ ------------
Income Tax Provision [Benefit]:
Current 139,251 103,700 -- --
Deferred -- -- -- (7,511,000)
------------ ------------ ------------ ------------
Total Tax Provision [Benefit] 139,251 103,700 -- (7,511,000)
------------ ------------ ------------ ------------
Income [Loss] Before Extraordinary
Item 128,951 10,082 (76,364) (2,235,894)
------------ ------------ ------------ ------------
Extraordinary Item:
Gain on Discharge of Prepetition
Liabilities -- -- -- 16,692,193
Income Tax Provision -- -- -- (7,511,000)
------------ ------------ ------------ ------------
Extraordinary Gains Net of Income Tax -- -- -- 9,181,193
------------ ------------ ------------ ------------
Net Income [Loss] $ 128,951 $ 10,082 $ (76,364) $ 6,945,299
------------ ------------ ------------ ------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Reorganized
Company Company
For the For the Nine
Year Ended Months Ended
April 30, April 30,
1 9 9 8 1 9 9 7
------- -------
[Restated]
<S> <C> <C>
Income Per Share of Common Shares $ .03 $ --
=============== ===============
Weighted Average Number of Common Shares $ 3,655,758 $ 3,198,258
=============== ===============
The earnings per share as it related to the predecessor company is not
meaningful due to the reorganization.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Treasury Total
Common Paid-in Retained Stock - Stockholder's
Stock Capital Earnings At Cost Equity
------------ --------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance - May 1, 1995 $ 17,444 $ 590,291 $( 7,582,536) $ (17,500) $ (6,992,301)
Net Income -- -- 6,945,299 -- 6,945,299
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002)
Net [Loss] for the three months
ended July 31, 1996 -- -- (76,364) -- (76,364)
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate Predecessor Equity
Accounts and to Reflect
New Issuance of Shares in
Connection with Fresh Start (1,450) (580,146) 713,601 17,497 149,502
------------ --------------- -------------- ------------ --------------
15,994 10,145 -- (3) 26,136
To Reflect 1 for 5 Reverse
Stock Split (12,795) 12,795 -- -- --
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 3,199 22,940 -- (3) 26,136
Adjustment at the Date of the
Implementation of Fresh Start
Accounting for the Cumulative
Effect of Applying Retroactively
the New Method of Valuing
Inventories at August 1, 1996 -- -- 145,205 -- 145,205
Net Income for the nine months
ended April 30, 1997 - Restated -- -- 10,082 -- 10,082
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1997 3,199 22,940 155,287 (3) 181,423
Issuance of 20,000 Shares for
Legal Expenses in Connection
with the Public Offering 20 74,635 -- -- 74,655
Net Proceeds from Issuance of
1,200,000 Shares of Common
Stock [Offering Costs of
$1,251,924] in December 1997 1,200 4,772,221 -- -- 4,773,421
Net Income for the year ended
April 30, 1998 -- -- 128,951 -- 128,951
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1998 $ 4,419 $ 4,869,796 $ 284,238 $ (3) $ 5,158,450
============ =============== ============== ============ ==============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
<S> <C> <C> <C> <C>
Operating Activities:
Net Income [Loss] $ 128,951 $ 10,082 $ (76,364) $ 6,945,299
Adjustments to Reconcile Net Income
[Loss] to Net Cash Provided by
[Used for] Operating Activities:
Depreciation and Amortization 80,489 87,681 26,191 220,400
Reserve for Bad Debt (44,315) -- -- 167,000
Loss on Disposal of Property
and Equipment -- -- -- 71,030
Deferred Income Taxes -- -- -- (7,511,000)
Income on Partial Discharge of
Capital Lease Obligations -- -- -- (77,403)
Interest Converted to Principal -- 11,439 36,670 --
Reorganization Item:
Gain on Discharge of Debt - Net
of Income Tax -- -- -- (9,181,193)
Cash Distribution -- (515,638) -- --
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable and Due
from Suppliers 186,230 482,254 (221,255) 220,882
Inventory 966,773 (923,565) 115,616 1,065,821
Prepaid Expenses (608,861) 122,017 (100,596) 168,856
Miscellaneous Receivables 2,658 132,379 -- (108,179)
Prepaid and Refundable Income Taxes 13,713 252,046 (812) --
Security Deposits 2,600 -- -- 86,858
Increase [Decrease] in:
Prepetition Liabilities -- -- -- 8,614,728
Accounts Payable and
Accrued Expenses (2,805,591) (56,766) 155,784 (1,828,715)
Income Taxes Payable (12,450) 103,700 -- --
---------------- --------------- ---------------- ---------------
Net Cash - Operating Activities -
Forward $ (2,089,803) $ (294,371) $ (64,766) $ (1,145,616)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-7
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
<S> <C> <C> <C> <C>
Net Cash - Operating Activities -
Forwarded $ (2,089,803) $ (294,371) $ (64,766) $ (1,145,616)
---------------- --------------- ---------------- ---------------
Investing Activities:
Purchase of Property and Equipment (67,900) -- -- (47,933)
---------------- --------------- ---------------- ---------------
Financing Activities:
Proceeds from Notes Payable -- -- -- 3,393,628
Repayment of Notes Payable -- -- -- --
Proceeds from Note Payable -
Related Party -- 600,000 -- --
Repayment from Notes Payable -
Related Party -- (145,324) -- --
Proceeds from Loan Payable -
Related Party -- -- -- 557,000
Repayment of Loan Payable - Related Party (1,059,785) -- -- --
Proceeds from Bankers Acceptances -- -- -- 1,118,556
Repayment of Bankers Acceptances -- -- -- (4,127,139)
Repayment of Officers' Loans Payable -- -- -- --
Repayment of Capital Lease Obligations (24,228) (29,656) (18,812) (64,552)
Proceeds from Insurance Note Payable -- -- 77,225 --
Repayment of Insurance Note Payable -- (62,020) (15,205) --
Payment of Deferred Offering Costs -- (30,043) -- --
Net Proceeds from Issuance of 1,200,000
Share Common Stock 4,773,421 -- -- --
---------------- --------------- ---------------- ---------------
Net Cash - Financing Activities 3,689,408 332,957 43,208 877,493
---------------- --------------- ---------------- ---------------
Increase [Decrease] in Cash and
Cash Equivalents 1,531,705 38,586 (21,558) (316,056)
Cash and Cash Equivalents -
Beginning of Periods 43,543 4,957 26,515 342,571
---------------- --------------- ---------------- ---------------
Cash and Cash Equivalents -
End of Periods $ 1,575,248 $ 43,543 $ 4,957 $ 26,515
================ =============== ================ ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 133,922 $ 25,451 $ 1,553 $ 203,964
Income Taxes $ 163,529 $ -- $ -- $ --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------
Supplemental Disclosures of Non-cash Investing And Financing Activities:
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 34,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.
The Company issued 20,000 shares for legal services valued at $74,655 in
connection with the Company's public offering.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-9
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
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, and sports bags/luggage which are distributed throughout the United
States.
Revenue - Revenue is recognized when the goods are shipped to the customer.
Fresh Start Reporting - Financial accounting during a Chapter 11 proceeding is
prescribed in "Statement of Position 90-7 of the American Institute of Certified
Public Accountants," titled "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ["SOP 90-7"], which the Company adopted effective
July 31, 1996. The emergence from the Chapter 11 proceeding resulted in the
creation of a new reporting entity without any accumulated deficit and with the
Company's assets and liabilities restated at their estimated fair values [also
see Note 2 Reorganization and Management Plan]. Because of the application of
fresh start reporting, the financial statements for periods after reorganization
are not comparable in all respects to the financial statements for periods prior
to reorganization.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the wholly owned inactive subsidiary. All
significant intercompany accounts and transactions have been eliminated.
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.
Inventories - Inventories consist principally of finished goods and are stated
at the lower of cost; first-in, first-out method, ["FIFO"] or market.
Property, Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is provided generally by accelerated methods over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are charged against income. Estimated useful lives used in calculating
depreciation are as follows:
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
Capitalized Equipment Leases 5 years to 7 years
Deferred Offering Costs - Legal and accounting costs incurred in connection with
the public offering of the Company's common stock were charged to additional
paid-in capital upon completion of the public offering.
Advertising and Promotion - Advertising and promotion expense, primarily
comprised of print media distributed to current and potential customers, is
expensed as incurred.
Prepaid Expenses - The Company has deferred certain packaging design, displays,
and direct response advertising costs for several new products that were not
introduced as of April 30, 1998. These costs of approximately $480,000 will be
amortized over a period of twelve months from the introduction of each product
and are classified as prepaid expenses at April 30, 1998.
Loss Per Share - The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share"; which
is effective for financial statements issued for periods ending after December
15, 1997. Accordingly, earnings per share data in the financial statements for
the year ended April 30, 1998, have been calculated in accordance with SFAS No.
128. Prior periods earnings per share data have been recalculated as necessary
to conform prior years data to SFAS No. 128. Prior periods' earnings per share
data have been restated to give retroactive effect for the one for five reverse
stock split in September of 1997.
F-10
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- -------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Loss Per Share [Continued] - SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15, "Earnings per Share," and replaces its primary earnings per
share with a new basic earnings per share representing the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period. SFAS No. 128 also requires a dual presentation of basic and
diluted earnings per share on the face of the statement of operations for all
companies with complex capital structures. Diluted earnings per share reflects
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period, such as common
shares that could result from the potential exercise or conversion of securities
into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Potential common shares of 4,640,000 are not currently dilutive, but may be in
the future.
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.
Stock Options and Similar Equity Instruments Issued to Employees - The Financial
Accounting Standards Board ["FASB"] issued Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," in
October 1995. SFAS No. 123 uses a fair value based method of accounting for
stock options and similar equity instruments as contrasted to the intrinsic
value based method of accounting prescribed by Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
adopted SFAS No. 123 on April 1, 1996 for financial note disclosure purposes and
will continue to apply APB Opinion No. 25 for financial reporting purposes.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets - The
excess reorganization value is amortized over a period of eleven years on the
straight line basis [see Note 2]. Management re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. If impairment is deemed to exist, the excess
reorganization value will be written down to fair value or projected discounted
cash flows from related operations. As of April 30, 1998, management expects the
asset to be fully recoverable.
[2] Reorganization and Management Plan
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.
F-11
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Reorganization and Management Plan [Continued]
As contemplated by the Plan, a new company, Dynamic International, Ltd. was
formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic
International, Ltd. The capital structure and the balance sheet of the combined
entity, immediately after the merger, were substantially the same as those of
the company prior to the merger. The "new common stock" is referred to below as
the common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the
bankruptcy proceeding totaled approximately $17.2 million. The Plan discharged
such claims through distributions of cash of approximately $515,000 and issuance
of shares of new common stock. The cash distributions were paid in August 1996.
A total of 3,198,798 shares of new common stock were issued on July 25, 1996 out
of which 2,976,000 shares were issued to one secured creditor, which also
satisfied $15,923 of loans made by the chief executive officer of the Company to
the Company (see Note 4); 160,000 shares were issued to unsecured creditors, and
62,798 shares were issued to the reconfirmation common stock equity interest
holders.
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the reorganization value of
the Company determined by projecting cash flows over an eleven year period and
discounting such cash flows at a cost of capital rate of 15% and the statutory
federal, state and local tax rates currently in effect. The discounted residual
value at the end of the forecast period is based on the capitalized cash flows
for the last year of that period. Cash distributions and the estimated stock
distribution value totaling $531,561 has been recorded as other liabilities as
of April 30, 1996. The gain of approximately $16.7 million resulting from the
excess of the allowed claims over the total value of the cash and the common
stock distributed to the secured and unsecured creditors has been recorded as an
extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and assumptions.
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. Management believes it can
increase revenues by increasing its focus on direct response marketing by
developing 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, could be effectively implemented within the a twelve
month period. The Company adopted "fresh-start reporting" in accordance with
Statement of Position ["SOP"] 90-7 issued by the American Institute of Certified
Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption of
"fresh-start reporting" if the reorganization value of the emerging entity
immediately before the date of confirmation is less than the total of all
postpetition and allowed claims, and if holders of existing voting shares
immediately before confirmation receive less than 50 percent of the voting
shares of the emerging entity, both conditions of which were satisfied by the
Company. Although the confirmation date was May 23, 1996, fresh-start reporting
was adopted on July 31, 1996. There were no material fresh-start related
adjustments during the period May 23, 1996 to July 31, 1996.
F-12
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[2] Reorganization and Management Plan [Continued]
Under fresh start accounting, all assets and liabilities are restated to reflect
their reorganization value, which approximates book value at date of
reorganization. Therefore, no reorganization value has been allocated to the
assets and liabilities. In addition, the accumulated deficit of the predecessor
company at July 31, 1996 totaling $713,601 was eliminated, and at August 1,
1996, the reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of amounts
allocable to identifiable assets is being amortized over an eleven year period
on the straight line method. Amortization expense for the nine months ended
April 30, 1997, and the year ended April 30, 1998 was $9,108 and $12,144,
respectively.
[3] Inventories/Change in Method of Accounting for Inventory
The inventories consist of finished goods. During the three month period ended
January 31, 1998, the Company changed its method of determining the cost of
inventories from the LIFO method to the FIFO method. Under the current economic
environment of low inflation, the Company believes that the FIFO method will
result in a better measurement of operating results. This change has been
applied by retroactively restating the accompanying consolidated financial
statements. This change increased net income for the six months ended January
31,1 997 by $8,655 or .002 cents per share. The balance of retained earnings as
of August 1, 1997 [see note 2 reorganization and management plan] and April 30,
1997 have been adjusted for the effect [net of taxes] of applying retroactively
the new method of valuing inventories. The effect of the accounting change on
income for the year ended April 30, 1998 was an increase of $214,000.
If the first-in, first-out ["FIFO"] method of accounting had been used by the
Company, reported net income would have been decreased by $294,000 in fiscal
1997. Net income would have been increased by $263,000 in fiscal 1996, and the
net loss would have been increased by $246,000 in fiscal 1995. On a FIFO basis,
reported year end inventories would have increased by $24,000 in 1997, $318,000
in 1996 and $55,000 in 1995.
[4] Related Party Transactions
Pursuant to a Warehouse and Service Agreement dated as of September 1, 1996 [the
"Warehousing Agreement"] between the Company and an entity ["Related Party"]
wholly owned by a major stockholder, the entity performs certain administrative
services on behalf of the Company. Under the Warehousing Agreement, the entity
assists, among other things, in the maintenance of financial and accounting
books and records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and in the performance of credit checks on the
Company's customers. In consideration for these services, Achim receives an
annual fee, payable monthly, calculated at a percentage of the Company's
invoiced sales originating at the warehouse ranging from 4% of the invoiced
sales under $30 million to 3% of sales of $60 million or more. For sales not
originating at the warehouse, Achim receives a service fee in the amount of 1.5%
of the Company's invoiced sales to customers and accounts located in the United
States if payment is made by letter of credit and 1% is such customers and
accounts are located outside the United States, irrespective of manner of
payment. In addition, under the Warehousing Agreement, the entity provides
warehousing services consisting of receiving, shipping, and storing of the
Company's merchandise. The Company pays Achim a monthly fee of 3% of its
invoiced sales originating at the warehouse in connection with these warehousing
services performed by Achim under the Warehousing Agreement.
F-13
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- -------------------------------------------------------------------------------
[4] Related Party Transactions [Continued]
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal years ended April 30, 1998 and 1997, the Company accrued approximately
$183,095 and $458,488 in fees under the Warehousing Agreement. Total warehousing
and administrative expenses charged to operations for the year ended April 30,
1998 were $183,095 of which $19,186 was the balance due at April 30, 1998, for
the nine months ended April 30, 1997 were approximately $364,000, for the three
months ended July 31, 1996 were approximately $95,000 and for the year ended
April 30, 1996 were approximately $164,000.
The related party has purchased inventory for the Company and has charged the
Company for the invoiced amount of the inventory. In addition, pursuant to an
unwritten understanding, the related party arranges for the issuance by its
financial lender of letters of credit in favor of the Company's oversea supplier
thereby enabling the Company to finance the purchases of its inventory.
Loan payable to the related party totaled $-0- and $1,059,785 at April 30, 1998
and 1997, respectively. Such note was secured by all of the Company's assets. In
August 30, 1996, loans and other payables, including accrued interest totaling
$1,205,109, were converted into the note payable. Interest was charged at the
Citibank prime rate plus 1%. This note was payable in 24 equal installments of
principal and interest through August 5, 1998. On July 10, 1997, the note was
amended to allow the arrears and note payments to be deferred until the
consummation of the Company's contemplated public offering [see Note 11] or the
scheduled maturity of the note, whichever is earlier. The note was paid in full
in December 1997 following the Company's public offering.
Interest expense charged to operations for the year ended April 30, 1998 was
$65,568, for the nine months ended April 30, 1997 was $67,898, for the three
months ended July 31, 1996 was $16,746 and $19,924 for the year ended April 30,
1996.
Other amounts payable to the related party totaled $19,186 and $2,627,580,
respectively, at April 30, 1998 and 1997. Such amounts represent unpaid
inventory purchases and various fees due to the related party. The amounts
payable for the purchase of inventory bears interest at the Citibank prime rate
plus 1% from September 1996 to April, 1997 and the Citibank prime rate plus 3%
prior to September 1996. The prime rate used was 8.25% for the period September
1996 to April 1998 and 8.5% for the period prior to September 1996 . Interest
expense charged to operations was $59,913 for the year ended April 30, 1998,
$111,411 for the nine months ended April 30, 1997, $34,380 for the three months
ended July 31, 1996 and $115,004 for the year ended April 30, 1996. The weighted
average interest rate at April 30, 1998 and 1997 was 9.25%.
[5] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement No. 109, "Accounting for
Income Taxes" of the Financial Accounting Standards Board. This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
F-14
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[5] Income Taxes [Continued]
Income tax liabilities at April 30, 1998 and 1997 included in income taxes
payable consist of the following:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Current taxes $ 79,422 $ 103,700
Deferred taxes:
Federal -- --
Other income and franchise taxes -- --
-------------- --------------
Total Income Tax Liability $ 79,422 $ 103,700
============== ==============
</TABLE>
At April 30, 1998 and 1997, there are no temporary differences that would result
in a deferred tax asset or liability. The deferred income tax assets and
liabilities at April 30, 1996 consist of the following:
<TABLE>
<S> <C>
Deferred Tax Assets:
Bad debt reserves $ 75,000
Difference in book and tax treatment
for advertising costs 16,000
Net operating loss carryforwards 8,783,000
Other deferred tax assets 50,000
---------------
Total Deferred Tax Assets 8,924,000
Deferred Tax Liability [allocated to extraordinary gain]:
Gain on discharge of prepetition liabilities (7,511,000)
Valuation allowance for deferred tax assets (1,413,000)
---------------
Net $ --
--- ===============
</TABLE>
A summary of the provision [credit] for income taxes is as follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
Nine months
Year ended ended Year ended
April 30, April 30, April 30,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 51,490 $ 59,000 $ --
State and Local 27,932 44,700 --
--------------- -------------- --------------
79,422 103,700 --
--------------- -------------- --------------
Deferred:
Federal -- -- (5,675,000)
State and Local -- -- (1,836,000)
--------------- -------------- --------------
-- -- (7,511,000)
--------------- -------------- --------------
$ 79,422 $ 103,700 $ (7,511,000)
=============== ============== ==============
</TABLE>
F-15
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- -------------------------------------------------------------------------------
[5] Income Taxes [Continued]
The reconciliation of the federal statutory income tax expense [credit] to the
Company's actual income tax [credit] is as follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
Nine months
Year ended ended Years ended
April 30, April 30, April 30,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
U.S. Federal Income Taxes at Statutory Rate $ 91,189 $ 75,900 $ 2,361,000
Losses for which no Benefit was Provided -- -- --
Change in Valuation Allowance -- -- (1,094,000)
Benefit of Surtax Exemption (6,363) -- --
Tax Effect of Permanent Differences 1,020 5,400 8,000
State Income Taxes, Net of Federal Benefit 33,767 25,000 764,000
Benefit of Unused Net Operating Losses -- -- (1,412,000)
Differences Due to Change in Rate -- -- (627,000)
Underaccrual of Prior Year's Federal Income Tax 23,825 -- --
Other (4,187) (2,600) --
--------------- -------------- --------------
$ 139,251 $ 103,700 $ --
=============== ============== ==============
</TABLE>
The Company had a net loss for the three months ended July 31, 1996 and
accordingly, the Company had no income tax provision or liability for the
period.
The Company has a net operating loss for the year ended April 30, 1995 of
approximately $8,400,000 of which $1,200,000 was carried back to prior years.
The Company has filed prior year amended returns to claim the net operating loss
carryback which resulted in refundable income taxes of approximately $287,000.
As of April 30, 1998, the Company received all of the refundable income taxes.
At April 30, 1996, the net operating loss carryforward totaled approximately
$19,500,000 of which approximately $16,700,000 was utilized by the Company in
its final tax return for the period May 1, 1996 to August 8, 1996 [see Note 2
re: merger into Dynamic International, Ltd.]. Based on ownership changes
resulting from the reorganization [see Note 2], the balance of the net operating
loss carryforward was eliminated by the current provision of Section 382 of the
Internal Revenue Code.
[6] Commitments And Contingencies
[A] Capital Leases - The Company was the lessee of equipment under capital
leases which expired in various years through 1998.
In September 1995, the lessor of the Company's capital leases agreed to forgive
the balance of the unpaid lease payments through September 1995 and to accept
60% of the remaining balance of the lease payments. As a result, the Company
recognized $77,403 of income on the adjustment of the lease term.
Such income is included in other income.
[B] Operating Leases - Prior to August, 1995 the Company occupied space for its
sales, executive offices, assembly and storage facilities under long term
operating leases expiring August 1998. The leases provided for additional
payments for insurance, taxes and other charges related to the premises. As part
of the bankruptcy proceeding, the Company was discharged of the obligations of
the leases. In October 1995 the Company relocated its premises, where the
Company is charged warehousing fees and administration fees based on sales
volume [see Note 4].
Rent expense for the year ended April 30, 1996 was $341,427.
F-16
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- -------------------------------------------------------------------------------
[6] Commitments And Contingencies [Continued]
[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 year ended
April 30, 1998 was approximately $426,000, for the nine months ended April 30,
1997 was approximately $353,000, for the three months ended July 31, 1996 was
$94,000 and for the year ended April 30, 1996 was approximately $275,000.
[D] Defined Benefit Pension Plan - On September 26, 1996, the Defined Benefit
Employees Retirement Plan was terminated under a distress termination approved
by the United States Bankruptcy Court. The defined benefit pension obligation
prior to the termination was $860,945. As part of the bankruptcy proceeding, the
obligation was settled for $38,743 resulting in a gain of $822,202 which is
reflected in the extraordinary gain on discharge of prepetition liabilities for
the year ended April 30, 1996.
[E] 401(k) Plan - On January 1, 1990, the Company adopted a 401[k] plan. The
plan covers all eligible employees. Eligible employees may contribute from 1% to
15% of their salaries subject to the statutory maximum of $9,240 for the 1995
and 1994 calendar years. The plan also provided matching contributions by the
Company of 25% of the employees' contributions to a maximum contribution of 1%
of the employees' salaries. On May 31, 1996, the plan's summary plan description
was modified to make matching contributions discretionary. No matching
contributions were made by the Company for the 1996 calendar year nor will any
be made by the 1997 calendar year. The plan was officially terminated by the
Board of Directors as of December 31, 1997.
The 401[k] expense amounted to $-0- for the year ended April 30, 1998, and for
the period May 1, 1996 to April 30, 1997 and $2,600 for the year ended April 30,
1996.
[F] Litigation - In the normal course of its operations, the Company has been
named as a defendant in several product liability lawsuits that in the opinion
of management are not material to the financial statements taken as a whole and
are substantially covered by the Company's product liability insurance.
[G] Consulting Agreement - The Company has an unwritten agreement for $5,000
month to month for consulting services in connection with new product
development.
[H] Infomercial Production Agreement - On February 12, 1998, the Company entered
into an infomercial production agreement to produce an infomercial for a total
commitment of $284,000. As of April 30, 1998, $142,000 was paid under this
agreement and is classified as a prepaid expense.
[7] Major Customers
During the year ended April 30, 1996, sales to three major customers were
approximately 19%, 18%, and 14% [$1,359,000, $1,287,000 and $1,001,000,
respectively] of the Company's net sales. At April 30, 1996, accounts receivable
from these customers totaled $465,506. There were no material receivables
subject to foreign currency fluctuations.
During the nine months ended April 30, 1997 sales to major customers were
approximately $3,080,180. At April 30, 1997 accounts receivable from these
customers totaled $379,902. During the three months ended July 31, 1996, sales
to major customers were approximately $837,450. At July 31, 1996, accounts
receivable from these customers totaled $548,726.
During the year ended April 30, 1998 sales to major customers were approximately
$2,007,985. At April 30, 1998 accounts receivable from these customers totaled
$262,246.
F-17
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- -------------------------------------------------------------------------------
[8] Credit Risk/financial Instruments
Due to the nature of its business and the volume of sales activity, the
Company's cash balance occasionally exceeds the $100,000 protection of FDIC
insurance. At April 30, 1997, there was no such excess balance. At April 30,
1998 such excess balances totaled approximately $1,518,673. The Company has not
experienced any losses and believes it is not exposed to any significant credit
risk from cash and cash equivalents.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that it
does not have an accounts receivable credit risk exposure beyond the allowance
provided. The Company does not require collateral or other security to support
financial instruments subject to credit risk.
[9] Significant Risks And Uncertainties
[A] The Company's exercise products compete with products marketed and sold by a
number of companies. The Company's main competitors in this area possess far
greater financial and other resources, including sales forces, than the Company.
However, the Company believes that as a result of its ability to use trademark
names for which it pays royalties, it will be able to retain its share of the
market. Nevertheless, there can be no assurance that the Company will be able to
effectively compete with these companies as well as with other smaller entities.
The Company's luggage products compete with products designed by a number of the
largest companies in the industry. The Company believes that because of its
concentration on the upscale lifestyle and more specialized leisure market that
are associated with its use of trademark names, the Company will be able to
continue to grow its luggage business. Nevertheless, there can be no assurance
that the Company will be able to effectively compete with these companies as
well as with other smaller entities.
[B] Most of the Company's exercise products are purchased from the Phillippines,
Hong Kong, and Indonesia. The Company believes that, if necessary, it will be
able to obtain its products from firms located in other countries at little, if
any, additional expense. As a consequence, the Company believes that an
interruption in deliveries by a manufacturer located in a particular country
will not have a material adverse impact on the business of the Company.
Nevertheless, because of political instability in a number of the supply
countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
[10] Discontinued Products
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Sales of the treadmills and ski machines began in
June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to consumers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was forced to allow substantial chargebacks by its customers.
Although, pursuant to a written agreement, the manufacturers acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, they breached this agreement soon thereafter. As a result, during April
1995, the Company issued credits to customers for approximately $5,000,000 of
the $7,487,000 of credits for the fiscal year ended April 30, 1995. The Company
issued another $3,211,000 in credits for defective merchandise during the fiscal
year ended April 30, 1996.
F-18
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[10] Discontinued Products [Continued]
The following table sets forth the financial statement effect of the Company's
line of treadmills and ski machines for the period indicated:
Predecessor Company
For the Year Ended
April 30,
1 9 9 6
-------
Sales $ 597,000
Credits (3,210,900)
-----------------
Net Sales (2,613,900)
Inventory Reserve --
Cost of Sales 156,000
-----------------
Gross Loss $ (2,457,900)
=================
The sale of these products was discontinued in August 1995, and all inventory
was disposed of by October 1995. Currently, the Company does not believe that
there will be additional returns of these products or that any claims relating
thereto remain to be settled.
[11] Capital Stock
[A] Public Offering - On December 22, 1997, the Company completed a public sale
of 1,200,000 units, each consisting of one share of common stock, one Class A
Warrant and one Class B Warrant. Each Class A warrant entitles the holder to
purchase one share of common stock at $6 until June 12, 1999. Each Class B
warrant entitles the holder to purchase one share of common stock at $10 until
December 12, 2000. In addition, the Company entered into a unit purchase option
from the underwriter to purchase an aggregate of 120,000 units at a subscription
price of $8.25 per unit commencing December 12, 1998 and expiring December 11,
2002. Each unit purchase option to the underwriter consists of one share of
common stock, one Class A warrant to purchase one share of common stock at $9.90
per share and one Class B warrant to purchase one share of common stock at
$16.50 per share. The net proceeds of approximately $4,800,000 were being used
for the repayment of related party debt, purchase of inventory, general
corporate services, and working capital.
The Company entered into a two year consulting agreement with the underwriter to
provide financial consulting services for a fee of $20,000.
As part of the consideration of its services in connection with the registration
statement, the Company agreed to issue to the underwriter, for nominal
consideration, warrants to purchase up to 120,000 units at an exercise price of
$8.25 per unit for a period of five years. The Class A Warrants and Class B
Warrants underlying the units included in the underwriter's warrants will be
exercisable at a price of $9.90 and $16.50 per share, respectively, or 165% of
the then exercise price of the warrants offered to the public for a period of
five years commencing with the closing of the registration statement. The
non-cash cost of such warrants, representing a cost of raising capital, will be
recorded as a charge and credit to additional paid-in capital when the warrants
are issued. As capital in nature, they are not compensatory.
The Company issued 20,000 shares for legal services valued at $74,655 in
connection with the Company's public offering.
F-19
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- -------------------------------------------------------------------------------
[11] Capital Stock (Continued)
[B] Earn Out Agreement - In March 1997, the Company entered into an agreement
with Marton Grossman, the Company's chairman and president which provides for
the issuance to Mr. Grossman an aggregate 2,000,000 shares of common stock if
the Company reaches certain earnings criteria as follows:
Earnings Before Shares to
Year Ending Income Tax Be Issued
----------- ---------- ---------
April 30, 1998 $ 500,000 400,000
April 30, 1999 $ 1,000,000 600,000
April 30, 2000 $ 1,500,000 1,000,000
If the earning criteria is not met in any one of the above years, but is
cumulatively met in the subsequent year, then the number of shares to be issued
will be the cumulative number of shares at that year end. Issuance of the shares
will result in compensation expense to the Company. Compensation expense will be
measured based on the fair value of the shares at the time the performance
conditions are achieved. Determination will be based on the best estimate of the
outcome of the performance condition. Compensation will be recognized in the
periods in which the performance conditions are achieved.
[12] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated. SFAS
No. 131 need not be applied to interim financial statements in the initial year
of its application. SFAS No. 131 does not have a material impact on the
Company.
[13] Debt
On April 30, 1998, the Company entered into a credit agreement with The Chase
Manhattan Bank for maximum borrowings of $1,500,000 in the form of letters of
credit and bankers acceptances. The agreement also provides for a security
interest in the inventory and notes and accounts receivable of the Company. The
agreement also provides for the personal guarantee of the President and major
shareholder of the Company in the amount of $250,000.
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders
Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic
International, Ltd and its subsidiary as of April 30, 1998 and 1997, for the
year ended April 30, 1998, the nine months ended April 30, 1997, the three
months ended July 31, 1996, and the year ended April 30, 1996 is included on
page F-1 of this Form S-1. In connection with our audit of such financial
statements, we have also audited the related accompanying financial statement
Schedule II - Valuation and Qualifying Accounts for the year ended April 30,
1998, the nine months ended April 30, 1997, the three months ended July 31,
1996, and the year ended April 30, 1996.
In our opinion, the financial statements schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
/s/ MOORE STEPHENS, P. C.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
July 15, 1998
F-21
<PAGE>
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Balance - Beginning $ 167,000 $ 167,000 $ 167,000 $ --
Additions Charged to Income -- -- 167,000
Recovery of Uncollectible Accounts - Net -- -- --
Writeoffs of Uncollectible Amounts (44,315) -- -- --
---------------- --------------- ---------------- ---------------
Allowance for Doubtful Accounts
Balance - Ending $ 122,685 $ 167,000 $ 167,000 $ 167,000
================ =============== ================ ===============
</TABLE>
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
By: /s/ Marton B. Grossman
Marton B. Grossman
Chairman and President
Dated: 29th day of July, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below as of the 29th of July, 1998 by the following persons on
behalf of Registrant and in the capacities indicated.
/s/ Marton B. Grossman /s/ Sheila Grossman
Marton B. Grossman Sheila Grossman
Chairman and President Director
/s/ Isaac Grossman --------------------------
Isaac Grossman Bernard Goldman
Vice Chairman, Treasurer & Secretary Director
/s/ William P. Dolan --------------------------
William P. Dolan Harry P. Braunstein
Vice President--Finance Director
(Chief Financial & Accounting Officer)
-23-
<PAGE>
EXHIBITS
1 Form of Underwriting Agreement (1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and
Dynamic Classics, Ltd. (2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22,
1996 (the "Plan") (3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated
May 7, 1996 (3)
2.04 Order Confirming the Plan dated May 23, 1996 (3)
3.01 Certificate of Incorporation (2)
3.02 Bylaws (2)
4.01 Revised Form of Warrant Agreement to be entered into between the
Company and American Stock Transfer & Trust Company (1)
4.02 Form of Common Stock Certificate (2)
4.03(a) Form of A Warrant Certificate (1)
4.03(b) Form of B Warrant Certificate (1)
4.04 Form of Unit Certificate (1)
10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4)
10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with
Achim Importing Co., Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century
Marketing & Distributors, Inc. and Dynamic
Insulated Products, Inc. (1)
10.06 Bonus Agreement with Marton Grossman (1)
10.07 License Agreement with Spalding and Evenflo Companies Inc. dated
October 1, 1997.
10.08 License Agreement with Connally Synergy Systems LLC dated December 17,
1997.
10.09 Media Campaign Management Agreement with Script to Screen, Inc. dated
April 13, 1998.
10.10 Infomercial Production Agreement with Script to Screen, Inc. dated
February 12, 1998.
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (5)
- ------------------------------------------------------------------------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-25425).
(2) Incorporated by reference to the Company's Form 8-B filed October
3, 1996.
(3) Incorporated by reference to the Company's Report on Form 8-K
filed October 3, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for
1994 for Dynamic Classics, Ltd. (File No. 0-8376).
(5) Incorporated by reference to the Annual Report on Form 10-K
for 1996.
(6) Incorporated by reference to the Current Report on Form 8-K/A
dated October 23, 1996
-24-
EXHIBIT 10.07
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, made and entered into this 10th day of October
1997 by and between Spalding Sports Worldwide, a division of Spalding & Evenflo
Companies Inc., a corporation organized and existing under the laws of the State
of Delaware, and having its principal place of business at 601 South Harbour
Island, Blvd., Suite 200, Tampa, Florida 33602-3141 (hereinafter refer-red to as
"Spalding") and Dynamic International Ltd., a corporation organized and existing
under the laws of Nevada, and having its principal place of business at 58
Second Avenue, Brooklyn, New York 11215 (hereinafter referred to as "Company").
Section 1. 1: Articles
The term "Articles" shall mean the following items bearing or used in
conjunction with the Trademark: Conventional hand held exercise products. The
Spalding product line must adhere to the product principles in Exhibit A.
Section 1.2: Territory
The term "Territory" shall mean: United States and all its possessions
and all U.S. military posts worldwide.
Section 1.3: Trademark
The term "Trademark" shall mean the trademark Spalding as represented
in the attached Exhibit B: Use: of Trademark shall be only as permitted in the
most current Spalding Identity Manual.
Section 1.4: Net Sales Price
As used herein, the term "Net Sales Price" shall mean the invoice price
charged for Articles sold and shipped by Company to the retail trade, less
allowances, co-op advertising, freight out to customers not billed back by
Company, returns, quantity discounts, trade and cash discounts, and taxes;
provided, however, that in the case of Articles sold by Company to any other
individual, corporation, partnership or association which in the opinion of
Spalding is so closely allied to Company as to prevent arms length bargaining,
the Net Sales Price shall be deemed to be the Net Sales Price charged by Company
for similar articles sold in the same period to similar customers not so closely
allied, If there are no such other sales, then the Net Sales Price shall be the
Net Sales Price of such related customers of Company to its customers. In
computing Net Sales, no direct or indirect expenses or costs incurred in
manufacturing, selling, distributing, or advertising Articles shall be deducted
except as noted above, nor shall any deduction be made for uncollected accounts.
Section 1.5: Effective Date
<PAGE>
The term "Effective Date" of this Agreement shall be October 1, 1997.
Section 2. 1: Grant
Spalding hereby grants to Company the exclusive right and license to
utilize the Trademark solely upon and in conjunction with the sale and
distribution of Articles in the Territory, subject however to the restrictions
and conditions hereinafter set forth. Spalding maintains the right to separately
market a unique sport specific hand held exercise product in authentic sports
channels. Spalding hereby gives Company the Right of First Refusal (the "Right")
in the event Spalding anticipates entering into a third party agreement for the
license of such goods. Upon receipt of such third party offer or proposal,
Spalding shall promptly notify Company and provide Company with a copy of any
written proposal or memoranda regarding the proposed offer. To exercise the
I;Light, Company must then reply within ten (10) days of its receipt of such
notice and agree to compensate Spalding for the license of the goods in an
amount at least equal to the terms proposed by the third party. Failure to
exercise the Right within ten (10) days of receipt of the notification, shall
release Spalding from any further duty to Company under this Section. Nothing
contained in this Section shall result in the imposition or creation of any
liability or constitute a breach hereunder in the event Spalding inadvertently
fails to provide Company with such notification. Company acknowledges Spalding's
exclusive rights in the Trademark and agrees that it will use the same only so
long as and only in the manner authorized by this Agreement. The license granted
herein does not include the right to sublicense the use of the trademark.
Company shall be permitted to have the Articles manufactured solely for
it by a third party upon the prior written approval of Spalding, provided and
upon the express condition that prior to the commencement of such manufacture,
said third party shall duly execute and deliver to Spalding a letter in form and
content as attached hereto as Exhibit C. Company agrees that the utilization of
such a manufacturer shall not in any way reduce its obligations to Spalding
under this Agreement, including but not limited to the quality control and
trademark notice provisions of this Agreement. Any default by said manufacturer
of said letter or the obligations referenced therein shall constitute of this
Agreement by Company.
Section 3. 1: Term
The Term of this Agreement shall be from the Effective Date to September
30, 1999. Company shall have the option of renewing this Agreement for an
additional two year period upon Spalding earning and receiving on Company's
actual net sales the minimum royalties as set forth in Exhibit D for the year
ended September 30, 1999 and further provided that as of July 31, 1999, Spalding
has earned and received on Company's actual net sales seventy-five percent (75%)
of the above referenced minimum to royalties for the year ended September 30,
1999, provided this' agreement has not been terminated in accordance with its
provisions.
In the event Company exercises its right to renew this Agreement
pursuant to the above, Company must so notify Spalding in writing at least
ninety (90) days prior to the date of expiration of this Agreement.
<PAGE>
Section 4. 1: Royalties Payable by Company
For the rights granted to Company hereunder, Company shall pay Spalding
a royalty upon all shipments of all Articles. The rate of royalty shall be in
accordance with Exhibit D and levied on the Net Sales Price of said Articles.
Royalty payments due from Company shall be determined on a quarterly
basis, commencing on the Effective Date. Such royalties will be paid by Company
within twenty-five (25) days following the end of each quarter on all Articles
sold and shipped by Company during said quarter, in accordance with Exhibit E,
accompanied by a complete written report in form and content as shall be
specified by Spalding from time to time.
On September 15 of each contractual year, Company shall pre-pay to
Spalding an estimate of the' royalties that Company reasonably expects to be due
for July/September shipments. The following October 25 Company will report to
Spalding its actual earned royalties during the July/September period and if
actual royalties due Spalding are greater than the estimated amount paid to
Spalding on September 15, then Company will pay the difference to Spalding with
its October 25 statement. If the estimate. was greater than actual royalties,
Spalding will credit the difference to the following quarterly royalties due it.
All royalty payments to be made hereunder by Company shall be paid to
Spalding in United States dollars into an account as and where designated by
Spalding from time to time.
All royalty payments shall be paid without any deduction, set-off or
counterclaim whatsoever. The termination of this Agreement shall not discharge
or release Company from liabilities and responsibility accruing prior to such
termination, including, but not limited to, the payment of royalties in
accordance with this Agreement. Nothing in this Section shall prejudice the
rights of action or remedies which Spalding might otherwise have in connection
with the enforcement or breach of this Agreement.
Section 4.2: Minimum Royalty
Company agrees to pay Spalding a nonrefundable minimum royalty in accordance
with the schedule of Exhibit D.
Commencing on the effective date of this Agreement, and on or before the
25th day of the first month of each quarter of each year (October 25, January
25, April 25, July 25) Company shall pay Spalding twenty five percent (25%) of
the total annual minimum royalty. However if during the course of a particular
year Company's total royalty payments to Spalding (earned and minimum royalties)
exceed the total minimum royalty for that year, then only earned royalties shall
be paid to Spalding by Company during the balance of that year (see Exhibit E).
If the shipments in any specified one-year period are not sufficient to
provide royalties equal to the minimum royalty, credit for the excess of the
minimum royalty over the actual earned royalty shall not be carried forward into
the next period.
Section 4.3: Royalty-Records And Audits
Company shall keep full and accurate records showing the number, Net Sales
Price, and date of
<PAGE>
shipment or other transfer of all Articles shipped or otherwise transferred by
Company.
With each royalty payment, Company shall furnish Spalding a report signed by
a responsible official of Company showing the number and Net Sales of Articles
first shipped during the period covered by the report, and such other
information and detail as shall be requested by Spalding from time to time.
Company shall make its records available for inspection, at reasonable
intervals, upon written request, at Company's place of business during normal
business hours, and on a confidential basis, by Delaitte & Touche, or other
certified public accountant appointed by Spalding or a Spalding financial
employee and at Spaiding's sole expense except as qualified below, who shall
certify to Spalding their opinion of the amount of royalties due for the period
examined, gross and net sales (including itemized deductions), promotional
spending (measured media, point-of-sale, free goods, promotions), reduced margin
goods and current inventory levels.
The findings and ' opinion of said certified public accountant shall be
conclusively binding upon the Company., If the audit shows an underreporting or
under-payment of more than five (50%) percent of royalties for any year, then
the Company shall reimburse Spalding for the cost of the audit.- Such remedy
shall be in addition to Spalding's other remedies under this Agreement,
including termination.
Any adjustments requiring additional payments to Spalding as a result of the
audits will accrue interest from the date originally due at one and one-half
percent (1-1/2%) per month or the highest lawful rate, whichever is lower.
Section 5. 1: Company Relationships
Company represents and warrants that it will not enter into any other
license or distribution arrangement with the major sports brands listed below in
the Territory competitive with the Articles.
Company also represents and warrants that it will not enter or establish a
business directly competitive with Spalding's core businesses (golf, team
sports, or court sports) without prior written consent of Spalding during the
term of this Agreement or during the one-year period subsequent to any
termination of this Agreement.
- Wilson - Prince - Nike
- Rawlings - Dunlop - Reebok
- MacGregor - Titleist
<PAGE>
Section 5.2: Diligence
If in any one-year period during the original term of this Agreement, or in
any renewal period, Spalding does not earn and receive royalties on Company's
sale of Articles equal to the minimum royalties as set forth in Exhibit D, then
Spalding, at its sole discretion, may terminate this Agreement upon notice given
to Company, notwithstanding anything contained in this Agreement to the
contrary.
Company will exercise all possible efforts to exploit and to promote, at its
own expense, the sale and the use of all Articles in the Territory, and to sell
the same as widely as possible and at the best price obtainable. Company will
continuously offer for sale all Articles and distribute to promptly meet orders
for all Articles.
Section 5.3: Marketing Plan
No later than ninety (90) days after the Effective Date of this Agreement,
and no later than ninety (90) days prior to each annual anniversary of this
Agreement, the Company will provide Spalding in accordance with Section 8-3 a
written marketing plan and program for Company's activities with respect to each
category of Articles in the Territory for the coming year in form, content,
detail and substance acceptable to Spalding's sole discretion per the attached
Exhibit "F". Spalding shall notify Company in writing of its approval or
disapproval of said marketing plan within 14 days of its receipt and such
approval shall not be unreasonably withheld. But in the event of said
disapproval, Spalding shall have the right to terminate this Agreement for any
or all Articles and for any or all countries in the Territory upon the giving of
written notice to Company, notwithstanding anything contained in this Agreement
to the contrary unless the plan is modified by Company to cure the reason(s) for
disapproval within 30 days of receipt of Spalding's disapproval. Spalding may,
in its sole discretion, require as a part of said marketing plan and program
that Company, at its sole cost, appoint and continuously maintain one or more of
its executives acceptable to Spalding for the sole or primary purpose of
assuring Company's establishment of, and compliance with, said marketing plan
and program. Company shall diligently use its best efforts to comply with the
provisions of said approved marketing plan and program. Company agrees to attend
Spalding licensing meetings which will be held no more than four times a year.
Section 5.4.- Customer Service
Company acknowledges that the reputation and success of Spalding and the
Trademark are dependent on the excellence in levels of customer service.
Therefore, Company agrees to use best efforts to continuously provide customer
service on Spalding branded business at a high level of quality commensurate
with the excellence normally expected from a well-known, national brand company:
including, but not limited to, the following:
1. Adequate levels of inventory to satisfy customer needs by consistently
shipping orders at a minimum of eighty percent (80%) complete;
2. Timely schedules of shipment against customer requests by consistently
shipping ninety percent
<PAGE>
(901/o) of customer orders within twenty (20) days of the due date; if the
order was placed within lead times.
3. A customer service representative whose principal function is to handle
Spalding customer inquiries and who will consistently answer a minimum of
ninety percent (90%) of customer/consumer inquiries within five (5)
working days of receipt-,
4. An 800 number for customer use.
Section 6. 1 - Licensed Articles Approval
Company shall promptly submit to Spalding's representative first run
specimens of each Article on which the Trademark is used, together with written
specifications for each article in a form satisfactory to Spalding, and a
written request for approval of the specimen and specifications. Thereafter, at
Spalding's request, Company shall submit to Spalding for quality examination two
(2) samples of each of the Articles which are currently being marketed under the
Trademark. Company shall at the same time provide Spalding with results of
quality control testing against specifications in a form satisfactory to
Spalding. Further, at all times, Company's inventory shall be available to
Spalding for random quality control sampling with twenty-four (24) hours'
notice. Within fifteen (15) days after the receipt of the specimens and
specifications or samples, as the case may be, Spalding shall notify Company of
its approval or disapproval thereof, which approval shall not be unreasonably
withheld. The production runs of each of such approved Articles shall be in
accordance with agreed-upon production specifications. Any substantial or
continuing unrectified breach of the quality control provision of this Section
shall be grounds for termination.
Section 6.2: Advertising. Packaging and Labeling
The Company shall submit in writing to Spalding or its authorized
representative for its approval all advertising and packaging and other material
prepared by or for it, during conceptual stages before the same is used,
circulated or displayed. In the event that Spalding does not notify Company in
writing of its disapproval within fifteen (15) days of said submission, such
material shall be deemed to have been approved by Spalding. The foregoing
procedure shall also govern th@ approval of advertising, packaging, promotional
and other graphic material to be utilized in customer cooperative advertising.
Upon approval by Spalding, Company shall be free to utilize such material in its
approved form for the lesser of one (I ) year, or the termination of this
Agreement for any reason. Company shah be solely responsible for monitoring and
maintaining its customers' compliance with the approved material. In this
regard, Company shall submit to Spalding upon request suitable proof (i.e.,
"tear sheets") that said cooperative advertising material is being properly
utilized.
Should the Company grant to a third party permission to publish or air the
Trademark, Company shall be responsible for ensuring compliance with the
aforementioned conditions.
Company further agrees to furnish upon a reasonable request by Spalding,
samples of the Articles for use in any Spalding advertising or any other
Spalding, distributor or licensee advertising, promotion, and presentation at no
cost to Spalding for such purpose.
Company shall annually expend to unrelated third par-ties two percent (2%)
of the Net Sales
<PAGE>
Price upon which royalties are based for advertising displays, promotional
material, and other advertising and co-op advertising of the Articles approved
by Spalding from time to time in writing. Company shall submit proof of such
expenditures as requested by Spalding.
In addition, Company shall pay to Spalding one-half (1/2%) percent on the
net sales of Articles for the promotion of the Spalding brand. Funds are to be
used for a Spalding Corporate Campaign developed and executed solely by
Spalding, however, input for the Campaign will be gathered from licensees and
reasonable attempts will be made to include licensee's products. Payments will
be made as per Exhibit "E".
Section 6.3: Registration and Protection of Trademark
Except as other-wise agreed in writing, in no event shall Company deviate
in any manner in its use of the Trademark from the form of the Trademark set
forth in the attached Exhibit B.
Company agrees to cooperate fully and in good faith with Spalding for the
purpose of securing and preserving Spalding's right(s) in and to the Trademark.
If Spalding requests, Company shall, at Spalding's expense, file and prosecute
one or more applications for trademark registrations in the appropriate
office(s) or class(es) in the name of Spalding, or, if Spalding so requests in
writing, any other name designated by Spalding. It is agreed that nothing
contained in this Agreement shall be construed as an assignment or grant to
Company of any right, title or interest in or to the Trademark, it ' being
understood that all rights relating thereto are reserved by Spalding, except for
the license granted hereunder to Company. Company hereby agrees that upon
expiration or termination of this Agreement for any reason, Company will be
deemed automatically to have assigned, transferred and conveyed to Spalding any
and all copyrights, trademark or service mark rights, equities, goodwill, or
other fight, title or interest in and to the Trademark and any variation thereof
which may have been obtained by Company or which may have vested in Company in
pursuance of any endeavors covered hereby. Company will execute, and, hereby
irrevocably appoints Spalding its attorney-in-fact to execute, if Company
refuses to do so, any documents requested by Spalding to accomplish or confirm
the foregoing. All artwork and designs involving the Trademark, or any
reproduction thereof shall, notwithstanding their invention or use by Company,
be and remain the sole property of Spalding and Spalding shall be entitled to
use the same and to license the use of the same by others. Spalding shall have
the sole right to determine whether or not legal or other action shall be taken
to protect the Trademark, and Spalding shall have sole control over the form of
such action and any settlement of such disputes with third parties with respect
to such action. Company shall cooperate fully in the prosecution of any action
to protect the Trademark at Spalding's expense.
Company agrees that it will not in any way register or use the Trademark
or any similar name alone or in conjunction with any other words as a tradename
or trademark, nor will the Trademark be used by Company in the name of any
corporation, partnership or other business entity.
Section 6.4: Trademark Notice
Company agrees that its name and address must appear on the Articles or
packaging. Whenever the Trademark is used, there shall also be a notice of the
fact that the Trademark is owned
<PAGE>
as follows: "The Trademark is owned by Lisco Inc. a Spalding Company and is sold
under license from Spalding" or such other. notice as specified by Spalding from
time to time in form, size and location approved by Spalding in writing.
Company agrees that as an essential condition hereof, it will cause the
foregoing appropriate notice or any other notice specified by Spalding to so
appear on each and every Article (either tag, label, imprint, or packaging) and
in all advertising prepared by or for Company. All shall be submitted by Company
to Spalding for its written approval prior to use by Company. Approval by
Spalding shall not constitute waiver of Spalding's rights or Company's duties
under any provision under this Agreement.
Section 6.5: Other Trademarks
Company shall not place or use other trademarks, tradenames, designs,
logos or endorsements in conjunction with the Articles, except as specifically
authorized by Spalding in writing before the commencement of such use. In the
event of such authorized use, Company shall, at Spalding's option, assign said
other trademarks, designs, logos, or endorsements to Spalding upon termination
of this Agreement, and in the event of such assignment Company will execute and
deliver to Spalding any documents requested by Spalding necessary to effect such
assignment; except, however, nothing in paragraphs 6.3, 6.4 or elsewhere in the
agreement shall prevent or limit Company's use of the "Dynamic Classic", "Flex
Shop" or "Shape Shop" trademarks related logo or any variation thereof in
conjunction with the sales efforts for the Article hereunder, nor shall any
provision of this Agreement be construed to be a grant or obligation to grant by
Company of any right, title or interest in or to the "Dynamic Classic" "Flex
Shop" or "Shape Shop" trademarks related logo or any variation thereof to
Spalding by virtue of Company's performance under this Agreement.
Section 6.6: Goodwill
Company recognizes the goodwill inherent in the Trademark and
acknowledges that the goodwill attached thereto belongs to Spalding and that
such Trademark has secondary meaning in the minds of the public. Company agrees
that it will not during the term of this Agreement or thereafter attack or
contest property rights of Spalding in and to the Trademark or attack or contest
the validity of the Trademark.
In order to maintain said goodwill, Company will promptly and to the
satisfaction of Spalding resolve any consumer complaints that may arise from
time to time with regard to Articles or any promotion thereof.
<PAGE>
Section 6.7: Premium
Company may not use Articles as prizes or in connection with contests
without prior written approval of Spalding. Company may not use the Trademark on
any Articles involved in any sweepstakes, lotteries, games of chance, or as a
premium except that Articles may be used in the promotion of or as a premium in
the sale of Articles.
Section 7. 1: Default and termination
This Agreement may be terminated by either party upon default or breach of
warranties of the other party, by giving said other party written notice of
intention to so terminate, which notice shall specify the default or breach upon
which the notifying party intends to rely, and such termination shall become
effective thirty (30) days from the receipt of such notice provided such default
or breach is not rectified by the notified party within that time or a time
agreed upon by the par-ties in writing. Additionally, three (3) or more
rectified defaults and/or breaches of the warranties of this Agreement by
Company during any twelve (12) month period shall be grounds for immediate
termination of this Agreement by Spalding. Termination shall be without
prejudice to any rights, remedies or claims Spalding may otherwise have against
Company.
The license herein granted shall terminate immediately if Company ceases
to do business, makes an assignment for the benefit of creditors, enters into a
composition, becomes insolvent, or if a petition in bankruptcy is filed and said
petition is not dismissed within thirty (30) days. Spalding shall have the right
to terminate this Agreement in the event of any substantial change in the
ownership, control, officership or management of Company. Company shall
immediately notify Spalding in writing of any of the events referenced in this
Section.
Notwithstanding anything in this agreement or otherwise to the contrary,
in the event of Company's default, all unpaid royalties due on Company's actual
sales of articles shall become immediately due and payable, and all of the
minimum royalties specified in Section 4.2 and any exhibit hereto shall all
become immediately due and payable as liquidated damages, notwithstanding the
contract year otherwise specified for payment on such exhibit.
Upon termination of this Agreement, all rights of Company to manufacture,
sell and dis tribute Articles shall cease, and all royalties on shipments
theretofore made shall become immediately due to Spalding, notwithstanding
anything herein to the contrary.
Company understands that, in granting this license Spalding has relied u
on the information p provided in the Prospective Licensee Information Form
submitted by Company. if such form contains any material misstatements, Spalding
reserves the right to terminate this Agreement immediately.
Section 7.2: Inventory at Expiration or Termination
Upon termination of this Agreement for any reason, Company shall
immediately discontinue manufacture, advertising, sale and distribution of
Articles or any use of the Trademark (including but not limited to advertising,
signs, letterheads, and packaging materials), except that if because of the
expiration of the term of this Agreement, and not because of Company's default
due to quality problems or non payment of royalties, then in such event Company
shall be permitted to sell or
<PAGE>
otherwise distribute its finished inventory of all Articles at the time of such
termination and such inventory as may be in the process of production, for a
period not to exceed two hundred seventy (270) days after termination of this
Agreement on a non exclusive basis, provided that Company pays all royalties and
submits all reports in connection with such sales as required under the terms of
this Agreement. Within thirty (30) days of receipt of notice of termination,
Company shall furnish Spalding with a written statement of the Articles in
inventory and in the process of production at that point in time and a marketing
plan for the disposal of said inventory.
Section 8.1: Indemnification
Company shall be solely responsible for and agrees to indemnify Spalding,
its officers, directors, agents and employees, and to hold each of them harmless
from any claims, demands, causes of action or damages, including reasonable
attorneys fees, arising out of or in connection with the manufacture, sale,
distribution, advertising, promotion, labeling or use of Articles
notwithstanding any approval which may have been given by Spalding. Each party
will promptly notify the other of any such claim and shall keep the other fully
advised.
Section 8.2: -Insurance
Company agrees that, throughout the term of this Agreement and for not
less than five (5) years following the termination of this Agreement, it will
maintain comprehensive general liability insurance, including blanket
contractual liability and personal injury liability, and insurance against
claims based upon products liability for the Articles and against other claims
covered by the indemnification provision of Section 8. 1, in an amount of not
less than Two Million Dollars ($2,000,000.00) combined single limit. Such
insurance shall be written on an occurrence policy form with an insurance
company with a current Best rating of A, XII or better. Company shall cause its
insurance policies to be in force from the Effective Date of this Agreement and
endorsed to include Spalding, its officers, directors, employees and agents as
additional insureds thereunder. Such endorsement shall stipulate that the
required coverages will not be reduced or cancelled without thirty (30) days
prior written notice to Spalding. Such endorsement shall also stipulate that it
is the primary coverage and any other insurance in force for the additional
insureds shall act as excess coverage only and shall not be required to
contribute in the payment of any claim made hereunder to the extent of the
limits of liability afforded by Company's insurance hereunder.
Evidence of said coverage shall be supplied to Spalding within thirty (30)
days of the Effective Date of this Agreement. If Company faults to comply with
any insurance requirement, Spalding at its election may terminate this Agreement
without further notice. In the event Spalding at any time believes Company's
existing insurance coverage does not provide adequate protection, Spalding may,
in its sole but reasonable discretion, require Company to increase the amount of
coverage required hereunder to a level deemed adequate by Spalding.
<PAGE>
Section 8.3: Notice
All royalty reports and marketing plans and programs to Spalding provided for
herein shall be in writing and mailed to:
SPALDING SPORTS WORLDWIDE a
division of Spalding & Evenflo Companies, Inc.
425 Meadow Street
P.O. Box 901
Chicopee, MA 01021-0901
Attn: Vice President Licensing
or to such other address as shall be designated by Spalding from time to time.
All other notices, statements, and reports required or permitted to be
given under this Agreement shall be in writing and shall be by registered or
certified mail, return receipt requested, addressed to the party to whom such
notice is required to be given. All such notices shall be deemed to have been
given when mailed as evidenced by the postmark at the point of mailing.
All notices to Spalding shall be addressed as follows:
SPALDING SPORTS WORLDWIDE a
division of Spalding & Evenflo Companies, Inc.
425 Meadow Street
P.O. Box 901
Chicopee, MA. 01021-0901
Attn: Vice President Licensing
All notices to Company shall be addressed as follows:
DYNAMIC INTERNATIONAL LTD.
58 Second Avenue
Brooklyn, New York 11215
Attn: President
or to such other address as shall be designated by Company from time to time.
Section 8.4:- Assignment
This Agreement shall be binding upon successors and assigns of the parties
hereto; provided, however, that Company shall not delegate its duty of
performance or assign or other-wise alienate its rights or obligations under
this Agreement without first obtaining the written consent of Spalding,
<PAGE>
which granting or withholding of consent shall be in Spalding's sole discretion,
and any attempted delegation, assignment or alienation without such written
consent shall be a default of this Agreement.
Section 8.5: Confidential Information
The parties agree to keep all confidential information so marked received in
accordance with this Agreement in confidence for the term of this Agreement.
Section 8.6: Governing Law
This Agreement shall be interpreted in accordance with, and governed by the
laws of the State of Florida, United States of America.
Section 8.7 Captions
The captions of the Articles and Sections of this Agreement are for
general information and reference only, and this Agreement shall not be
construed by reference to such captions.
Section 8.8: Independent Parties
Nothing contained in this Agreement shall be construed to place the
parties in the relationship of legal representatives, partners or joint
ventures. Neither Spalding nor Company shall have any power to obligate or bind
the other in any manner whatsoever, other than as per this Agreement.
Section 8.9: Other
Company hereby waives and releases Spalding from any liability or claim
resulting from or in any way relating to either Company's dealings or
relationships with its suppliers of, or customers for Articles, or relating to
the Articles themselves, including but not limited to delays or failure of
delivery, defective or incorrect merchandise, and payment or collection matters.
Company's obligations to Spalding under this Agreement are unconditional,
notwithstanding any claim or controversy which may arise.
Company hereby waives and releases Spalding from any liability or claim
resulting from the termination of or expiration of this Agreement in accordance
with the provisions of the Agreement.
Time shall be of the essence with respect to all of Company's
obligations and duties, all of which shall be performed and honored strictly in
accordance with the terms of this Agreement notwithstanding any prior,
continuing or subsequent course of dealing, custom, or usage in trade. Company
acknowledges and irrevocably agrees that its failure to utilize the Trademark
strictly in accordance with the terms of this Agreement, and to cease the
manufacture, sale and distribution of Articles, advertising material or the
Trademark at the termination or expiration of this Agreement, will result in
immediate and irreparable damages to Spalding and to the rights of any
subsequent
<PAGE>
licensee- Company acknowledges and admits that there is no adequate remedy at
law for such failure or breach; and that in the event of such failure or breach,
Spalding shall be entitled to seek equitable relief by way of temporary and
permanent injunctions, and such other further relief as any court with
jurisdiction may deem just and proper.
Unless otherwise mutually agreed in writing, no departure from, waiver
of, omission to require compliance with any of the terms hereof, approval or
non-approval shall be deemed to authorize any other prior or subsequent
departure, waiver, omission, approval or non-approval, as the case may be.
This Agreement may not be modified orally, and no modifications or any
claimed waiver of any of the provisions hereof shall be binding unless in
writing and signed by the party against whom such modification or waiver is
sought., With respect to any modification specifically requested by Company, the
Company shall pay Spalding an administrative charge as determined by Spalding
and which shall reflect the internal costs necessary to complete any such
modification, but which, in no event, shall be less than $3,000, or more than
$6,000.
This Agreement constitutes the entire agreement between the parties and
supersedes all prior contracts, agreements, and understandings between the
parties relating to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first hereinabove written.
SPALDING & EVENFLO COMPANIES, INC.
By______________________________________
Title_____________________________________
DYNAMIC INTERNATIONAL LTD.
By_________________________________
Authorized Official
Title________________________________
<PAGE>
EXHIBIT "A"
SPALDING
PRODUCT PRINCIPLES
1. HERITAGE
The Spalding brand has meant sport and an active lifestyle to five
generations of active sports participants and enthusiasts. It is not an exotic
name; but rather an authentic one that means performance, quality, durability,
value, etc. Spalding products perform at high levels for their intended purpose
and generally have a reason-for-being related to consumer needs, features, and
benefits. They a-re mainstream products with good utility -- but typically have
that "something extra" to differentiate from the competition and promote
consumer interest. Spalding products appeal to all demographic groups. The
consumer is attracted to the product by features, cosmetics, etc. and buys it
knowing that the firm foundation of Spalding quality and service are present.
2. THE CUSTOMER
The sports participant and enthusiast is educated, reasonably affluent,
and worldly with an active approach to all endeavors. He and she are serious
about their active lifestyle and seek authentic sports products that compliment
their involvement- They view their sports products as necessities and seek
quality, style, and value at high levels. The potential buyer is not fooled by
imitations or cosmetics. He recognizes value, and will reject any brand which
violates his trust.
3. PRODUCT LINE POSITIONING
The natural link between the Spalding sports heritage and the category
is sports participation and an active lifestyle. Whereas the casual purchaser
who is interested in status or value may consider a Spalding product; the
primary impetus for purchase is expected to come from:
A. The 9l% of active sports participants who know Spalding from
their participation in traditional team or individual sports.
B. The casual participant who pursues sport as a lifestyle.
The product line theme should therefore relate to sport and an active lifestyle,
including product styling and collateral elements.
<PAGE>
4. QUALITY LEVEL
The Spalding line will contain sufficient quality and features to
compare favorably with the best competitive entries in the distribution channel.
The line will be sold on the basis of features, quality, and value. Although
models may be offered at different price levels, each entry will have meaningful
features that differentiate it from low priced unbranded products.
<PAGE>
EXHIBIT "B"
SPALDING
<PAGE>
EXHIBIT "C"
Gentlemen:
This letter will serve as notice to you that pursuant to the License
Agreement dated _________,19__, between Spalding & Evenflo Companies, Inc. and
(Company), we have been engaged as the manufacturer for the Company in
connection with the manufacture of the Articles as defined in the aforesaid
License Agreement. We hereby acknowledge that we have received a copy of the
quality, trademark notice, and other relevant terms and conditions set forth in
said License Agreement which are applicable to our function as manufacturer of
the Licensed Article(s), and we agree to dispose of the Articles only to the
above Company. It is understood that this engagement is on a royalty free basis.
<PAGE>
EXHIBIT "D"
Annual Royalty Rates (Section 4.-I)
5% of Net Sales
<TABLE>
<CAPTION>
Annual Minimum Royalty Payments (Section 4.2)
United States Dollars
<S> <C>
October 1, 1997 - September 30, 1998 25,000
October 1, 1998 - September 30, 1999 $125,000
Option Years
October l, 1999 - September 30, 2000 $150,000
October 1, 2000 - September 30, 2001 $175,000
Payment outside the U.S. are to be made by wire transfer
</TABLE>
<PAGE>
EXHIBIT "E"
ROYALTY PAYMENT SCHEDULE
AND
CORPORATE PROMOTION PAYMENT SCHEDULE
(USE SEPARATE CHECKS)
<TABLE>
<CAPTION>
Shipment Due
Month Date
<S> <C> <C>
October/December January 25
January/March April 25
April/June July 25
July/September September 15 Pre-Pay Estimate; Adjust To Actual On
October 25
MINIMUM ROYALTY GUARANTEE PAYMENT SCHEDULE
Fiscal Period Due Date
lst Quarter (10/1-12/3 1) October 25 (25% of Annual Minimum Guarantee)
2nd Quarter (1/1- 3/31) January 25 (25% of Annual Minimum Guarantee)
3rd Quarter (4/1- 6/30) April 25 (25% of Annual Minimum Guarantee)
4th Quarter (7/1- 9/30) July 25 (25% of Annual Minimum Guarantee)
</TABLE>
<PAGE>
EXHIBIT "F"
SPALDING LICENSED PRODUCTS
MARKETING PLAN OUTLINE
Total document can be from 2 to 10 pages; whatever you feel is required.
I. MARKET SIZE AND TRENDS
A wholesale sales estimate by major product class and any relevant
notes on growth, product, distribution, or other trends. Also a recap
of major market opportunities.
II. MAJOR COMPETITORS
A description of the top three competitors and their market shares.
III. SPALDING POSITION
Recap of sales history, market share, competitive advantages,
strengths, weaknesses, etc.
IV. SPALDING STRATEGY
Major strategies to continue growth, attack competition, or exploit
market opportunities.
V. PRODUCT ARRAY
Recap of major products offered plus a brief description.
VI. TRADE CHANNEL DEFINITION
Where will the product be sold.
VII. SALES STRUCTURE
Who will sell it.
VIII. RETAIL PRICE TARGETS
By product type
IX. MARKETING ELEMENT DESCRIPTION AND EXPENSE BUDGET
------------------------------------------------
- - Catalogs/Price Lists
- - Shows
- - Advertising
- - Promotions
- - Display Materials
- - Research
- - Public Relations
<PAGE>
- - Endorsements/Athletes Using Products
X. SALES GOALS BY PRODUCT CLASS AND BY DISTRIBUTION CHANNEL
<PAGE>
EXHIBIT 10.08
LICENSE AGREEMENT
This Agreement made this 17th day of December, 1997, by and among Connelly
Synergy Systems, LLC, a limited liability company organized in the State of AZ ,
and having its principal place of business at 5603 East Hop Toad Road, Kingman,
Arizona 86402 (the "LLC") and William L. Connelly III, an individual residing at
5603 East Hop Toad Road, Kingman, Arizona 86402 ("Connelly") (both the LLC and
Connelly also sometimes hereinafter collectively referred to as the "Licensor")
and Dynamic International, Ltd., a New York corporation, having its principal
place of business at 58 Second Avenue, Brooklyn, New York 11215 (hereinafter
referred to as the "Licensee").
W I T N E S S E T H:
WHEREAS, Licensor has developed, invented, registered and is
the owner of U.S. patent No. Des. 350,997 dated September 27, 1994 (the
"Patent") with the United States Patent and Trademark Office (the "Office"),
true copies of which are annexed hereto and marked Exhibit "A" and the trademark
known as "RotaFlex" (the "Trademark") which was registered under No.
, on with the Office, true copies of which are annexed
hereto and marked Exhibit "B", both of which "marks" relate to the
invention and naming of a certain device for a hand held exercise apparatus as
shown on Exhibit "A" (the "RotaFlex" or the "Device"). The
<PAGE>
Patent and the Trademark are both sometimes hereinafter also referred to as
the "Marks"; and
WHEREAS, Licensee acknowledges the uniqueness of the Marks as well as the
potential benefits to be derived from the manufacture and sale of the RotaFlex
device and further acknowledges that Licensor has warranted the validity and
enforceability of the Patent and Trademark and Licensee desires to obtain from
Licensor the worldwide exclusive right to manufacture, distribute and sell
products designed and sold pursuant to the "Marks" (hereinafter referred to as
the "Licensed Products"); and
WHEREAS, Licensor, by this Agreement, grants to Licensee the exclusive
right during the Term to manufacture and to distribute and sell the Licensed
Product using the Marks in the Territory subject to and in accordance with
the terms and conditions of this Agreement.
NOW, THEREFORE in consideration of the mutual covenants herein
set forth the parties do hereby agree as follows:
1. Defined Terms. The following terms utilized and
capitalized in this Agreement shall have, at all times, the meanings as
hereinafter set forth:
A. TRADEMARK-"ROTA FLEX" is a registered trademark owned by
Licensor. Licensor grants permission to Licensee to print and utilize the
Trademark on the Licensed Products or their
-2-
<PAGE>
packaging or sales literature in any manner in Licensee's sole discretion.
Copies of the Trademark are annexed as Exhibit "B".
B. Licensed Product. A uniquely designed hand held exercise
apparatus, sometimes also hereinafter referred to as a "Device."
C. Patent. Patent No. DES 350,997 dated September 27, 1994
filed in the United States Patent and Trademark Office for the RotaFlex
exercise apparatus, copies of which are annexed as Exhibit "A."
D. Territory. Worldwide. Licensor acknowledges that except
as otherwise hereinafter set forth, it may not manufacture or sell in, to or
from the Territory.
E. Distribution Channels. Sales, shipment and distribution to
retail stores and merchants for direct sale and/or to jobbers, wholesalers and
distributors for sale at wholesale or retail, mail order catalogs, shipment
and distribution to the public and the sale, distribution and shipment of
Licensed Product by any and all other means in, to or from the Territory.
F. (i) Term. The period commencing as of the date of this
Agreement and expiring on December 31, 2007; provided, however, that the Term
may be thereafter extended by the Licensee for an additional five (5) year
period (the "Renewal Term") by the Licensee forwarding a written notice in
the manner as hereinafter provided to the Licensor which notice states the
-3-
<PAGE>
Licensee's intention to renew the Term. The Term and the Renewal Term are
sometimes hereinafter referred to as the "Term".
(ii) The Renewal Term as above set forth shall be in
Licensee's discretion. Licensee shall, at least 180 days prior to the end of
the initial ten year Term, notify Licensor in writing if it elects to renew
this Agreement. If such notice is given, then the Agreement shall be deemed
automatically renewed for the next five (5) years (the "Renewal Term").
G. (a) Royalties. A sum to be paid in the manner provided
for payment in Section 9 of this Agreement by Licensee to Licensor throughout
the Term as follows:
(i) One ($1) Dollar of the Net Invoice Amount for each Device
sold (and for which sale Licensee has received full payment) bearing the
Marks for the first one million (1,000,000) Devices sold hereunder;
(ii) Seventy-five (75(cent)) cents of the Net Invoice Amount
for each Device sold (and for which sale Licensee has received full payment)
bearing the Marks for the second million Devices sold hereunder; and
(iii) Fifty (50(cents)) cents of the Net Invoice Amount
for each Device sold (and for which sale Licensee has received full payment)
bearing the Marks over three million (3,000,000) Devices.
(iv) Additional Royalties: 4% on all sales of any ancillary
products or accessories developed for the Rotaflex
-4-
<PAGE>
Exercise system, using the Rotafelx or Dynaflex technologies, as well as
licensed products and sportswear.
(b) Notwithstanding the foregoing however, provided that this
agreement is in full force and effect and that Licensor is not in default of
any of the terms hereof, minimum royalty payments shall be due each year
hereunder by Licensee to Licensor in the sum of $50,000 payable in equal
quarterly installments of $12,500 within thirty (30) days after the end of
each calendar quarter during the term hereof with such payments being
credited against actual royalties due pursuant to G(a) above).
H. Net Invoice Amount. The sales price of Licensed Product
charged by Licensee to wholesalers, retailers or any other third party, as
reflected on an invoice evidencing such Sales, less however: actual returns,
credits, advertising or promotional allowances or rebates; provided,
however, that Royalties shall be due and payable hereunder only for and with
respect to Devices sold for which payment has been received by Licensee.
2. Artwork and Packaging. Licensee shall, in its discretion,
develop such Packaging, informative booklets, sales catalogues and/or sales
sheets or material as it deems necessary in order to promote and sell the
Licensed Product. Licensor shall provide Licensee with ArtWork and Packaging
already developed and prepared by Licensor, if any.
-5-
<PAGE>
3. Product Development. Licensor has already incurred the
expenses necessary, in its opinion, for the development and manufacture of the
Licensed Product. All future modifications or further developments, if any, are
desired by Licensee, Licensee shall be deemed the responsibility of the
Licensee.
4. Licensee Warranties. Licensee warrants and represents that
the Licensed Product will be distributed, advertised, promoted and sold in
accordance with all applicable laws, rules and regulations. Licensee is
entitled during the Term or any renewals to use the Marks as it sees fit
in advertising material or otherwise to promote the sale and distribution of
the Licensed Product.
5. Sublicense. Licensee may sublicense, assign or encumber
the rights granted to it hereunder or delegate its obligations hereunder,
in whole or in part without Licensor's prior approval, but upon notice to
Licensor.
6. Governing Law. This Agreement shall be governed by the
laws of New York, applicable to agreements made and to be wholly performed
therein.
7. (i) Expiration. Upon expiration of the Term and
Licensee's right to sell Licensed Product, or upon earlier termination for
any reason, Licensee agrees that Licensor shall have the right (but not the
obligation) to purchase from Licensee all or part of Licensee's then
existing inventory of Licensed Product at Licensee's actual manufacturing
cost therefor plus
-6-
<PAGE>
20%. If Licensor elects not to so purchase all or part of such inventory
within ten (10) days following expiration or termination, Licensee shall
thereupon be free to sell said Licensed Product in any manner and at any
price. No Royalties shall be due Licensor on such sales.
(ii) Upon the expiration or termination of this Agreement,
the rights granted to Licensee hereunder shall revert to Licensor, except as
provided in Paragraph 7(i) and Licensee shall return all other materials
which may have been used or created by Licensee in connection with this
Agreement. Upon expiration of this Agreement, Licensee agrees that Licensor
shall also have the right (but not the obligation) within ten (10) days after
the end of the Term, to purchase the following items from Licensee if same
are owned by Licensee: Licensed Product molds, clips, plates, tools,
silkscreens and/or other technical materials relating to and/or embodying
any of the Licensed Marks at their actual cost.
8. Obligation of Performance. Licensee shall manufacture and
distribute the Licensed Product in accordance with customary business practice
and shall always maintain adequate inventory of the Licensed Product as
necessary in its sole discretion.
-7-
<PAGE>
9. Accounting and Payment.
(i) All payments of Royalties shall be deemed earned and
shall be due quarterly within (30) days after the end of each calendar quarter
hereunder and shall apply only to the sale of Devices for which Licensee has
received payment for a Net Invoiced Amount during the prior quarter.
All amounts payable hereunder shall be paid by check or wire transfer to:
Connelly Synergy Sytems. LLC
5603 E. Hop Toad Rd., Kingman, AZ 86401.
Payment shall be due for Devices for which Licensee receives payment, within
thirty (30) days after the quarter, with respect to for the shipments made
during the prior calendar quarter.
(ii) Payment and Records. For the purpose of computing
the royalties referred to in paragraph G of this Agreement, payment will be
dispensed to licensor monthly beginning Feb 1st until June 1st, at which
point thereafter quarterly (Oct. 1st, Jan. 1st, April 1st, July 1st). Within
thirty (30) days after the end of each quarter, reports shall be made by
Licensee to Licensor setting forth the number of RotaFlex units which have
been sold and for which payment has been received during the preceding
quarter. Licensee's remittance for the full amount of royalties due for such
period shall accompany such reports commencing in the second calendar quarter
and thereafter, if payment is received for units shipped in a prior period,
Licensee shall account for such payments received on a
-8-
<PAGE>
cash basis of accounting and pay those funds received over to the Licensor
within thirty (30) days following the close of the calendar quarter in which
such funds are received. Licensee's remittance for the full amount of
royalties due for such quarter shall accompany such reports. Licensee agrees
to keep complete and correct books and records of the number, sales price and
amounts received for RotaFlex unites sold under the license herein
granted. Licensor or its representative shall have the right to examine
Licensee's books and records at all reasonable times on at least ten (10)
days prior written notice, during business hours at Licensee's place of
business, to the extent and in so far as is necessary to verify the accuracy
of the above-referenced reports.
(iii) The statements of account shall be reasonably
detailed and contain information relevant to the computation of payments to
Licensor. Licensee shall keep and preserve for at least two (2) years after the
expiration of this Agreement accurate records of all transactions
relating to this Agreement. Licensor, or a representative as Licensor shall
designate, shall at any time during business hours, at Licensee's office, on
at least ten (10) days' prior written notice to Licensee, be entitled to
inspect Licensee's books and records pertaining to the Licensed Product and
the manufacture and distribution thereof and the computation of Royalties
hereunder.
-9-
<PAGE>
(iv) If Licensee is in default with the payment of any
Royalties, then without limiting any of Licensor's rights or remedies,
Licensee shall pay Licensor interest on such unpaid amount at the lesser rate
of two percent (2%) above the then current "prime" rate quoted by the Chase
Manhattan Bank, in New York, or the highest interest rate allowed by law.
10. Licensor Warranties. Licensor represents and warrants
that it has the right to enter into this Agreement and to grant the rights
herein granted to Licensee in connection with the Marks, subject to the terms
hereof. Licensor also represents that: it owns the Marks free and clear of any
liens or encumbrances; it has full right to enter into and comply with this
Agreement in all respects and it is not a party to any agreement which might
impair or effect such right or the terms hereof; no actions are pending or
threatened against it which in any manner affect its rights hereunder or which
in any way adversely impair same; it will and hereby does indemnify
Licensee against all claims of any kind relating to ownership of the
rights which are the subject of this License Agreement.
11. Infringements. Licensee shall promptly notify Licensor,
in writing, of any imitations or infringements of the Marks or the rights
licensed hereunder which may come to Licensee's attention. Licensee and
Licensor shall endeavor to jointly determine whether or not any demand, suit
or other action shall be taken on account of or with reference to any such
-10-
<PAGE>
infringements or limitations. Licensee however shall have the right (but not
the obligation) to commence or prosecute any suits or make any such demands
in its own name or in the name of Licensor or join Licensor as a party
thereto. Licensor shall cooperate with Licensee as a party thereto and/or
in any manner that Licensee may request in connection with any such
demand, suits, claims or other actions. Any infringement or imitation
action, claim or suit brought by Licensee against a third party shall be at
Licensee's cost and any recoveries therefrom shall belong to Licensee. No
Royalty fees shall be due with respect to any recoveries which result from such
an action or claim. With respect to all claims and suits, including suits in
which Licensee is joined as a party, Licensee shall have the sole right to
employ counsel of its choosing, at Licensee's exclusive cost, and to direct
the handling of the litigation and any settlement thereof. In the event
Licensee decides not to take action hereunder, then Licensor shall be free to
do so at its expense and any recovery in that case shall belong to Licensor.
12. Rights in the Marks Retained by Licensor.
Except as otherwise set forth herein, Licensee shall not
be entitled to have design patents, trademarks, or any other rights in
connection with the Devices registered nor to claim any such rights
without the prior written consent of Licensor.
-11-
<PAGE>
(i) Without limiting the other provisions hereof, Licensor
hereby reserves for itself, the right to manufacture, advertise, promote,
distribute and otherwise exploit the Licensed Product for sale solely in and
to the Archery Industry and to physical therapists directly (as opposed to
sales by Licensor to the Physical Therapy Industry which are not permitted
hereunder); provided, however, that (i) such sales and promotion is limited
strictly to retail or wholesale outlets which deal exclusively in and to the
Archery Industry and to individual physical therapists and which are not
engaged, alone or with affiliates, in sales to any other industries,
outlets, sources of distribution or for any other purposes; and (ii) all of
such sales and promotions by Licensor are subject to prior notice to
Licensee identifying the Purchaser and details of such sale; and (iii) all
records of Licensor relating to such sales are open to the inspection of
Licensee or its representatives during business hours at Licensor's
regular place of business on at least ten (10) days prior written notice.
(ii) Licensee acknowledges that Licensor has represented that
it is the owner of all right, title and interest in and to the Marks and
all other rights associated therewith, and the goodwill pertaining
thereto. Licensee hereby acknowledges that based upon such representation,
Licensor is the owner of all right, title and interest in all patents,
trademarks and renewals and extensions thereof, and warrants that Licensor
-12-
<PAGE>
will have the right to use and exploit and authorize the exploitation of such
materials in any manner as Licensor elects without obligation to Licensee
or any other entity whatsoever except as otherwise provided in this
Agreement. Licensee will not during or after the Term attack the validity of
the license granted hereunder, or do or cause to be done any act which
impairs or tends to impair Licensor's right and title to the Marks.
13. Termination of this Agreement.
(i) In the event of a material default by either party
hereunder, the aggrieved party may forward written notice specifying such
default to the defaulting party. The defaulting party shall thereupon have
ninety (90) days within which to cure such default or, if the default is not
capable of a cure within such time, to commence such cure and continue such
cure diligently until completion. If not cured or if such cure is not
thereafter commenced and diligently pursued, the aggrieved party may
thereafter terminate this agreement by sending a further ten (10) day
notice, in writing sent by certified mail,return receipt requested to the
defaulting party at its address first above mentioned.
(ii) In the event of termination, without limiting
any of Licensor's rights or remedies including, without limitation, Licensor's
right to injunctive or other equitable relief, any and all Royalty payments
shall become immediately due
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<PAGE>
and payable to Licensor upon such termination, and the rights granted
hereunder shall automatically terminate and revert immediately to
Licensor.
14. Notice. Any notice hereunder, if mailed by certified
mail, return receipt requested, shall be deemed given and received two (2)
business days after mailing, and if sent by professional express service,
notice shall be deemed given and received at the time of actual delivery.
Notices shall be sent to the following addresses, or such other addresses as
the parties shall designate in writing from time to time:
Connelly Synergy Systems LLC
P.O. Box 3542
Kingman, Arizona 86402
Attn: William L. Connelly III
Dynamic International, Ltd.
58 Second Avenue
Brooklyn, New York 11215
Attn: Marton B. Grossman
15. Entire Agreement. This Agreement constitutes the entire
understanding and agreement between the parties. Any amendments to this
Agreement must be in writing and signed by a duly authorized officer of each
party hereto.
16. Severability. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed
-14-
<PAGE>
as if such invalid, illegal, or unenforceable provision had never been contained
herein.
17. Existing Devices - Sales Exception. The parties
acknowledge that the Licensor currently has on hand Devices not exceeding 350
in number. The Licensor hereby grants Licensee the first option to
purchase these Devices for the sum of $ 21.00 per Device. Notwithstanding
anything contained herein to the contrary, in the event the Licensor does not
exercise its option to purchase said Devices within thirty (30) days from the
date hereof then Licensor shall be permitted to sell said Devices (and only
said Devices) to such third parties as it deems appropriate. Licensee also
agrees to purchase all inventory items videos, manuals, lube samples and
boxes at cost within 30 days.
18. Future Improvements. Licensor agrees that in the event he
should make any improvements in the RotaFlex unit, he shall communicate the
same to Licensee and Licensee shall have the right to use such improvements
and provided that in the event Licensor should secure the grant of any
future patent on any such improvement, he will notify Licensee, who shall
have the right at its option to include the same within the terms of the
present Agreement.
IN WITNESS WHEREOF the parties have hereto set their hand on
the date first above written.
By: Dynamic International, Ltd.
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<PAGE>
By: -------------------------------
By: CONNELLY SYNERGY SYSTEMS, LLC
------------------------------
William L. Connelly, III
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<PAGE>
EXHIBIT 10.09
CAMPAIGN MANAGEMENT AGREEMENT
THIS AGREEMENT is entered into as of the Thirteenth day of April, 1998
("Effective Date") by and between SCRIPT TO SCREEN, INC., 200 North Tustin
Avenue, Suite 200, Santa Ana, California 92705, a California Corporation,
(herein after referred to as Campaign Manager) and, DYNAMIC INTERNATIONAL, LTD.,
a New York Corporation, 58 Second Avenue, Brooklyn, New York, 11215 (hereinafter
referred to as Client).
RECITALS
WHEREAS, Campaign Manager is in the Direct Response Television ("DRTV")
production management business.
WHEREAS, Client desires to utilize the services of Campaign Manager to manage
the DRTV Campaigns for an Infomercial produced for Client.
NOW THEREFORE, in consideration of the mutual promises, and upon the terms and
subject to the conditions set forth herein, the parties hereto agree as follows:
AGREEMENT
1. Definitions.
(a) "Infomercial" shall mean the infomercial produced by
Campaign Manager for the Spalding Rotaflex, manufactured
or distributed by Client.
(b) "Vendors" shall mean vendors in the following businesses:
* Telemarketing (inbound) and/or outbound
* Media Buying
* All Home Shopping Opportunities
* Fulfillment
(c) "Term" of this agreement shall mean the period commencing on
the Effective Date, and continuing until either party notifies
the other party of its intent to terminate this Agreement
pursuant to Section 4 herein.
(d) "DRTV Campaigns" shall mean Direct Response Television
Campaigns to be utilized in connection with the Infomercial.
<PAGE>
(e) "Territory" shall mean the U.S.A.
2. Project.
Client hereby retains Campaign Manager and Campaign Manager agrees,
subject to Client's right of approval, that it is responsible in good
faith, to the best of its ability, to manage Client's DRTV Campaign
utilizing the Infomercial and to identify and select Vendors, negotiate
fees in the best interest of the Client, manage Vendors, and report
progress and results to Client promptly.
3. Testing of Infomercial.
Client retains the right to determine the final media agency selection,
including the right to select a media agency other than those
recommended by Campaign Manager herein. Client is under no obligation
to roll-out (the mass-market airing following the conclusion of the
initial testing) the Infomercial if it is not satisfied with the
results of the test broadcast of the Infomercial or for other reasons.
Client shall have exclusive control over the broadcast, performance and
transmission of the Infomercial after completion of the initial testing
thereof.
4. Project Fees.
Client agrees to pay Campaign Manager the fee of $5,000 per month,
payable on or before the first business day of each month, during each
month of the Term of this Agreement, commencing with the month that
Campaign Manager initiates its performance in connection with the
project. The month this Agreement is executed, the $5,000 fee shall be
prorated for that month based on the number of days remaining in the
first month.
In addition to monthly management fee, Client shall pay all reasonable
and actual hard costs that Campaign Manager must pay to outside vendors
in association with the project. Campaign Manager shall not incur such
costs without prior consent of Client.
Campaign Manager acknowledges that Client retains the right to select
Vendors hereunder and to approve the terms and conditions of any
agreements or proposals with such Vendors. Campaign Manager shall not
be constituted the agent or legal representative of Client for any
purpose whatsoever. Campaign Manager is not granted any express or
implied right or authority to assume or create any obligation or
responsibility on behalf of or in the name of Client or to bind Client
in any manner. All persons employed or otherwise engaged by Campaign
Manager shall be deemed to be the agents, employees or representatives
of Campaign
<PAGE>
Manager and Campaign Manager shall be solely responsible for the acts or
omissions of such persons.
5. Termination and Damages.
This Agreement is non-cancelable within the first sixty (60) days.
After the first sixty (60) days, either party may cancel by providing a
fifteen (15) day written notice to the other party consistent with the
method as described in Paragraph 9, "Notices" which notice may be sent
with or without cause. It shall be a breach of this Agreement if Client
unreasonably prevents completion of the Project. If such a breach
occurs, Client shall pay Campaign Manager's actual damages, including,
but not limited to, compensation for time and effort expended, and the
actual amount of any expenses incurred.
6. Further Documentation.
The parties hereto agree to take all actions and execute all documents
reasonably necessary to effectuate the terms and intent of this
Agreement.
7. Binding Effect/Assignment.
This Agreement shall be binding upon and inure to the benefit of the
parties and their successors and assigns. This Agreement is not
assignable without the prior written consent of the parties.
8. Invalidity of Provisions and Jurisdiction.
If any provision of this Agreement shall be adjudged by a court to be
void and unenforceable, the same shall in no way affect any other
provision of this Agreement, or the validity or enforceability of the
Agreement as a whole. This Agreement shall be enforced in accordance
with the laws of the State of California.
9. Notices.
All notices permitted or required under this Agreement shall be sent
and deemed given upon (i) personal delivery (ii) 48 hours after having
been dispatched by telegram, or (iii) five (5) days after having been
deposited in the United States mail, certified, postage prepaid, return
receipt requested, and addressed to the respective parties as follows
(or at such other address as may hereafter be given by one party to the
other party as provided by this Paragraph 9):
If to Client: DYNAMIC INTERNATIONAL, LTD.
58 Second Avenue
<PAGE>
Brooklyn, New York, 11215
If to Campaign Manager: SCRIPT TO SCREEN, INC.
200 North Tustin Avenue, Suite 200
Santa Ana, California 92705
10. Modification.
All modifications to this Agreement must be in writing and signed by
each of the parties.
11. Counterparts.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original Agreement, and all of which shall
constitute one Agreement to be effective as of the Effective Date.
12. Attorneys' Fees.
Should any dispute arise as a result of this Agreement, each party
hereby agrees to have the matter settled by the "under the rules" of
the American Arbitration Association, without the necessity of a court
order. All rights of discovery allowed by law may be utilized and the
prevailing party shall be entitled to an award of reasonable attorneys'
fees and costs in addition to any other relief. Any decision by
arbitration shall be final and binding upon the parties hereto.
13. Miscellaneous.
All negotiations are merged into this Agreement. This Agreement
constitutes the entire understanding of the parties. There are no oral
or other written agreements between the parties concerning the subject
of this Agreement. This Agreement shall constitute a binding obligation
between the parties and shall be applicable beyond the term of this
Agreement. The agreement is established upon execution.
14. Direct Response Industry.
Client acknowledges and agrees that it is well-informed about the
financial risks associated with the Direct Response television
advertising industry and that Campaign Manager makes no warranty,
expressed or implied, as to the degree of success to be achieved by
reason of the televising of the Infomercial, nor shall Client seek to
hold Campaign Manager liable with the respect thereto. Campaign Manager
has not made, and does not hereby
<PAGE>
make, any representation or warranty with respect to the level of sales
and revenue to be derived as a result of the televising of the
Infomercial. Client recognizes and acknowledges that the level of
revenues from sales of the Products of any kind contemplated by this
Agreement is speculative. Client agrees that it shall not make any
claim, nor shall it seek to impose any liability upon Campaign Manager
based upon any claim that more sales, revenues, media exposure, or
customers could have been obtained or better business could have been
done than was actually made or done by Campaign Manager or its
successors, licensees and assigns, or that better business terms,
prices or opportunities could have been obtained. Notwithstanding the
foregoing; however, Campaign Manager represents and warrants that it
has the knowledge, experience, staff and financial capability to
effectively carry out its obligations hereunder.
15. Representation by Counsel.
Each party hereby represents that it has consulted, or has knowingly
waived consulting, its own legal and tax counsel, accountants, or
advisors concerning the tax and legal consequences of this transaction
contemplated by this Agreement. Each party represents that it has
relied solely upon the advice of its own advisors and not on any
representations or warranties of the other party in connection with
such consequences.
16. Confidentiality.
Campaign Manager agrees that all financial, marketing, sales, operation
and other commercially sensitive information, materials and knowledge
acquired or learned from Client in connection with this Agreement will
be held as confidential, not disclosed and preserved by Campaign
Manager in strictest confidence. Campaign Manager further agrees that
such information will be imparted to its employees, agents, or third
parties only on a "need to know" basis and that Campaign Manager will
inform each such employee, agents, or third parties of his or her
confidentiality obligations hereunder. Campaign Manager will return all
information provided by Client upon Completion/Termination of this
Agreement.
The obligations of this paragraph do not apply to information which:
(a) At the time of disclosure was previously known or in the
public domain;
(b) Subsequent to the time of disclosure became part of the
public domain through no fault of Campaign Manager, its
agents, third parties, or employee;
<PAGE>
(c) Is obtained by Campaign Manager from a third party not under
obligation to Client; or
(d) Client, in writing, authorized Campaign Manager to release it.
<PAGE>
Each party represents and warrants the authority of the undersigned to enter
into this Agreement and bind the respective parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
SCRIPT TO SCREEN, INC. By:
A California Corporation Title: COO
Date: 4/17/98
DYNAMIC INTERNATIONAL, LTD. By: Marton B. Grossman
A New York Corporation Title: Chairman President
Date: 4/16/98
<PAGE>
EXHIBIT 10.10
INFOMERCIAL PRODUCTION AGREEMENT
AGREEMENT made this twelfth day of February, 1998 (the "Effective Date"), by and
between SCRIPT TO SCREEN, INC., a California Corporation, 200 North Tustin
Avenue, Suite 200, Santa Ana, California 92705 (hereinafter referred to as
"Producer") DYNAMIC INTERNATIONAL, LTD., a New York Corporation, 58 Second
Avenue, Brooklyn, New York 11215 (hereinafter referred to as "Client").
W I T N E S S E T H:
WHEREAS, Client has the right to cause to be produced an Infomercial, as defined
herein, designed to advertise the Product, as defined herein;
WHEREAS, Producer is in the business of producing television Infomercials,
including scripting, pre-production, production and post-production thereof, and
has the ability, experience and relationships needed to produce Infomercials
specially created to advertise and sell the Product; and
WHEREAS, Client desires to utilize the services of Producer to produce an
Infomercial designed to advertise and sell the Product;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
1. Definitions.
The following terms as used herein shall have the following
meanings:
(a) "Infomercial" shall mean one (1) 28 minute, 30 second
(28:30), broadcast quality, videotape, fully-edited,
generic (i.e., without product ordering information)
television Infomercial designed to sell the Product
by means of direct response by the customer, and any
parts thereof. Producer will provide up to two
different bluescreen price point or premium offers as
required by Client, as per Client request.
(b) "Product" shall mean that certain fitness product
currently entitled Spalding Rotaflex, and all
components thereof (collectively and/or individually)
and such other goods and services (collectively
and/or individually) as are advertised and offered
for sale in the Infomercial produced hereunder.
(c) "Upsell" shall mean any products, other than the
Product, that are offered for sale following the
televising of the Infomercial.
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(d) "Term" of this Agreement shall mean the period
commencing on the Effective Date and continuing for
as long as the infomercial/commercial airs.
(e) "Territory" shall mean the universe.
2. The Infomercial.
Subject to the provisions hereof, and commencing upon
Producer's receipt of the first payment due to Producer
hereunder, Producer shall write the script for, produce and
direct the Infomercial and generally do all things necessary
and desirable to produce and deliver a first class,
professional Infomercial in all respects.
(a) The production schedule shall be determined by the
mutual agreement of the parties, such agreement not
to be unreasonably withheld or delayed and such
schedule not to exceed one hundred and fifty (150)
days in total starting from date of first payment
subject to delays beyond Producer's control. Producer
shall not be liable to Client for expenses incurred
or losses suffered by Client by reason of delays
resulting from causes not fully within Producer's
control. Client shall reimburse Producer for expenses
incurred or losses suffered by Producer as a result
of delays caused by Client. Notwithstanding anything
contained herein to the contrary, however, Producer
shall deliver a script within twenty one (21) days
after receipt of first payment.
(b) The Budget for the Infomercial is set forth in
Exhibit "A," annexed hereto and made a part hereof,
and shall be paid as set forth in Paragraph 3 below.
(c) Client shall provide all samples of Product to be
used in the Infomercial, including mockups, product
photos, and TV-ready comps of the Product, if
necessary, to be used for shooting purposes.
(d) With respect to persons appearing in the
Infomercial on-screen:
(i) As provided for in the Budget, Producer
shall furnish and pay from the Budget any
noncelebrity, nonexpert, and nonunion talent
appearing in the Infomercial, furnish and
reimburse the expenses of any persons giving
testimonials in the Infomercial, and obtain
from all the aforesaid persons all necessary
or desirable agreements, permissions and
releases including, without limitation, duly
sworn affidavits attesting to the truth and
accuracy of the individual's testimony, in
substantially the form annexed hereto as
Exhibit "B" and made a part hereof; and
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(ii) Client shall, if approved prior thereto,
furnish and pay all compensation due to any
celebrities, experts, and union talent
appearing in the Infomercial, and shall
obtain from all the aforesaid celebrities,
experts, and union talent all necessary or
desirable agreements, permissions and
releases including, without limitation, duly
sworn affidavits attesting to the truth and
accuracy of the celebrity's, expert's, and
union talent's testimonies, in substantially
the form annexed hereto as Exhibit "B."
(e) Upon payment to Producer of the final payment
required pursuant to Paragraph 3 hereof, the
Infomercial, all videotapes thereof, the script
thereof (collectively, the "Production"), and all
rights in connection therewith, and all other matters
or things relating thereto, with the exception of
music composer and publishing rights, shall be the
exclusive property of Client, provided, however, that
Producer may retain copies of the Production for
archival purposes and for the purposes set forth in
subparagraph 2(f) below. Client shall have the sole
and exclusive right to copyright protection of the
Production, with the exception of Composer's rights,
and Producer shall have no duty with respect to
securing copyright protection therefor. Provided that
Client has paid Producer all sums due to Producer
required pursuant to Paragraph 3 hereof, Client shall
at all times have absolute control over the media
placement and strategy of use of the Infomercial.
(f) Producer shall have the right to use the Infomercial
in Producer's promotional reel and to enter the
Infomercial in industry competitions, festivals and
shows for Producer's publicity and promotional
purposes.
(g) Client acknowledges and agrees that it is
well-informed about the financial risks associated
with the television advertising industry and that
except as otherwise set forth herein Producer makes
no warranty, express or implied, as to the degree of
success to be achieved by reason of the televising of
the Infomercial, nor shall Client seek to hold
Producer liable with respect thereto. Producer has
not made, and does not hereby make, any
representation or warranty with respect to the level
of sales and revenue to be derived as a result of the
televising of the Infomercial. Client recognizes and
acknowledges that the level of revenues from sales of
the Products of any kind contemplated by this
Agreement is speculative. Client agrees that it shall
not make any claim, nor shall it seek to impose any
liability upon Producer based upon any claim that
more sales, revenues, media exposure or customers
could have been obtained or better business could
have been done than was actually made or done by
Client or its successors, licensees and
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<PAGE>
assigns, or that better business terms, prices or
opportunities could have been obtained. Producer,
however, does hereby warrant and represent: (i)
that it has the knowledge, experience, staff, and
financial capability to effectively carry out its
obligations hereunder, and (ii) that it shall
promptly, and in good faith, utilizing its best
commercial efforts, seek to produce promptly and
professionally the Infomercial.
(h) Client shall cause Producer to be afforded on-screen
credit in all versions of the final Infomercial on a
separate card in the end credits as follows:
Produced by Script to Screen
Direct Thinking for Direct Response
3. Budget.
(a) Client agrees to pay to Producer a Production
Budget for the Infomercial ("Budget") in the sum of
Two Hundred Eighty Four Thousand Three Hundred
Twenty Four Dollars ($284,324.00) as set forth in
Exhibit "A" hereof.
Payment of the Budget shall be made as follows:
Twenty-five percent (25%) due upon execution
of this Agreement, less the paid deposit of
Twenty-Five Thousand Dollars ($25,000) per
the Letter of Agreement - $46,081.00
Twenty-five percent (25%) due not less
than three (3) days prior to commencement
of principal videotaping - $71,081.00
Thirty percent (30%) due upon Client's
approval of final off-line and prior to
initiating on-line - $85,297.20
Ten percent (10%) due upon Client's approval
of a "view tape," which means a half-inch
(1/2") videocassette copy of the Infomercial
- $28,432.40
Ten percent (10%) due upon Client's ordering
of a final master to be sent to a
duplication house of Client's choice
- $28,432.40
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<PAGE>
Producer represents that, in its opinion, the aforesaid Budget
is adequate to produce a professional, first class Infomercial
in all respects. It is expressly agreed that no edited or
camera masters will be delivered to Client until after
Producer's receipt in good funds of the final payment due to
Producer pursuant to this Paragraph 3.
(b) Additional production work requested by Client
involving changes to previously approved or
agreed-upon work or Budget items, including, but not
limited to, changes in the Product, final script,
locations, talent, experts, and testimonials, shall
be mutually agreed upon and set forth on Producer's
"Overage Sheet," and appropriate adjustments in the
Budget shall be made with respect thereto. In the
event such adjustments require additional payment to
Producer, Client shall pay agreed upon sums due
promptly upon receipt of Producer's invoice therefor.
(c) In addition to items set forth in the Budget, Client
shall reimburse Producer for all agreed upon bona
fide expenditures incurred by Producer directly in
connection with the Infomercial or in the performance
of Producer's services hereunder which are
substantiated by receipted vouchers or paid bills.
Client understands that it is not always possible or
practical to obtain receipts for expenses and,
therefore, a reasonable amount of unreceipted but
substantiable expenditures by Producer, each of less
than One Hundred Dollars ($100.00) may, nevertheless,
be made by Producer and shall be reimbursed by Client
not to exceed, in total, the sum of $1,000.
(d) Unless other provisions have been made in the Budget,
Client shall reimburse Producer's travel and lodging
expenses away from Santa Ana, California, provided
that Producer will not incur such expenses without
Client's prior consent. Such travel-related expenses
may include meetings requested by Client, and travel
for testimonial shooting beyond that which is
provided for in the current budget estimate.
4. Approvals.
a) Client will have the right and the obligation to
approve in writing the shooting script before the
commencement of principal videotaping or filming, as
the case may be, of the Infomercial. Client's
approval of the shooting script, and any changes made
thereto, shall constitute Client's verification and
representation to Producer of the truth and accuracy
of the statements and claims concerning the Product
made in the script.
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<PAGE>
(b) Client will have the right and the obligation to
approve in writing the rough cut of the Infomercial
(that is, prior to commencement of on-line editing).
Once the off-line is approved, any further changes
desired by Client in on-line will be billed as an
Overage. Client's approval of the rough cut of the
Infomercial shall constitute Client's verification
and representation to Producer of the truth and
accuracy of the statements and claims concerning the
Product made in the rough cut of the Infomercial.
(c) Client will have the right and the obligation to
approve in writing the final "view tape" of the
Infomercial. Once the on-line is approved, any
further changes desired by Client will be billed as
an Overage. Client's approval of the final "view
tape" of the Infomercial, and any changes made
thereto, shall constitute Client's verification and
representation to Producer of the truth and accuracy
of the statements and claims concerning the Product
made in the Infomercial.
(d) Client will respond to written requests for approval
of changes within five (5) business days of
submission by Producer. In the event a request is
rejected, the reasons therefor shall be stated. In
the event Client fails to respond to such requests
within such five (5) business day period, Client's
approval shall be deemed to be given and, if
pertaining to the script or Infomercial, shall
constitute Client's verification and representation
to Producer of the truth and accuracy of the
statements and claims made in the script or
Infomercial as changed, as the case may be.
(e) Client acknowledges and agrees that any legal
opinions regarding the Product and the content of the
Infomercial shall be the sole responsibility of
Client.
5. Additional Warranties and Representations.
(a) Each party, for itself, hereby warrants and
represents to the other party that:
(i) it has been duly incorporated and is validly
existing as a corporation in good standing
under the laws of its respective state of
incorporation and is duly qualified to do
business as a foreign corporation in good
standing in all jurisdictions in which the
nature of its business or the character or
location of its properties or assets
requires such qualifications;
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<PAGE>
(ii) this Agreement has been duly and validly
authorized, executed and delivered by such
party and constitutes a valid, binding and
enforceable agreement of such party;
(iii) such party is not (A) in violation of its
corporate charter of bylaws, or (B) in
default in the performance or observance of
any obligation, agreement, covenant or
condition contained in any instrument to
which it is a party or by which it or any of
its material properties is bound, or in
violation of any law, order, rule,
regulation, writ, injunction or decree of
any governmental authority or court;
(iv) the execution, delivery and performance of
this Agreement by such party will not (A)
conflict with or result in a breach of any
of the terms, conditions or provisions of or
constitute a default under, or result in the
imposition of any lien, charge or
encumbrances upon any of the material
properties or assets of such party pursuant
to any bond, debenture, note or other
evidence of indebtedness or in any material
contract, indenture, mortgage, loan
agreement, lease, joint venture, partnership
or other agreement or instrument to which it
is a party or by which it or any of its
material properties is bound, or (B) result
in the violation by such party of its
corporate charter or bylaws, or any
violation of any law, order, rule,
regulation, writ, injunction or decree of
any governmental instrumentality or court.
No consent, approval, authorization or order
of any governmental agency or court or of
any other person is required for the
execution, delivery or performance of this
Agreement by such party, except for those
which have been heretofore obtained;
(v) there is not now pending or, to the best
knowledge of such party, threatened any
action, suit or proceeding to which such
party is a party before or by any court or
governmental agency or body, which might
result in any material adverse change in the
condition (financial or other), business or
prospects of such party or performance of
this Agreement, or might materially and
adversely affect the properties or assets of
such party or performance of this Agreement;
(vi) such party has the full and complete
authority to enter into this Agreement and
to perform in all respects the obligations
required to be performed by it pursuant to
this Agreement; and
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<PAGE>
(vii) such party is not bound by, nor will it
during the Term enter into any agreement
that would prevent or materially interfere
with the performance by such party of the
material terms and conditions of this
Agreement.
(b) In addition, Client hereby represents and warrants
to Producer that:
(i) it has the full, unrestricted and exclusive
right to acquire, publish, distribute,
license, sell and exploit the Product, and
will continue to possess such rights during
the Term;
(ii) it has not granted any rights that would
conflict with or derogate from the rights
granted to Producer hereunder;
(iii) the Product is safe and efficacious and
Client possesses competent and reliable
evidence to such effect;
(iv) all statements and claims made in the
Infomercial concerning the Product will be
supported by appropriate testing, case
histories and laboratory documentation, if
applicable, all of which are in the
possession of Client;
(v) the Product is currently, and, as advertised
in the Infomercial and sold to customers,
will during the Term comply with all
applicable federal, state and local laws,
rules and regulations;
(vi) it owns or possesses all requisite rights to
use all material patents, patent rights,
inventions, trade secrets, know-how,
processes, technology, trademarks, trade
names, service marks, service names,
copyrights and other intellectual property
rights related to the Product necessary or
desirable for the performance of this
Agreement;
(vii) it has not received any notice of
infringement of or conflict with, and to the
best of its knowledge Client is not
infringing or in conflict with, any
intellectual property or other rights of
others including, but not limited to, rights
in patents, trade secrets, know-how,
trademarks, trade names, service marks,
service names, copyrights, or rights of
privacy or publicity;
(viii) it will do everything reasonably necessary
to ensure that it will at all times be in
full compliance with the agreements
governing its right to manufacture and
distribute the Product; and
8
<PAGE>
(ix) it is in full compliance with all the terms
and conditions of such agreements, is not
aware of any defaults thereunder (or of any
facts or events which, with notice or the
passage of time, or both, could constitute
defaults) nor any basis therefor.
(c) Those representations and warranties made by the
parties herein that by their terms are capable shall
survive the expiration or other termination of the
Term of this Agreement.
(d) Producer hereby further warrants and represents to
Client that:
(i) it will promptly, and in good faith, carry
out its obligations hereunder, and will
cause to be completed and delivered to
Client the final completed, edited camera
masters, and all other versions of the
Infomercial within One Hundred (100) days
following the first payment hereunder,
subject only to delays caused by Client;
(ii) all monies paid hereunder shall be first
utilized in connection with costs
relating to the production of the
Infomercial; and
(iii) Producer will exercise its best good faith
efforts to produce the Infomercial in a
professional, first class and timely manner
within Budget and in accordance with the
Production Schedule.
(e) No substantive noncustomary changes to the
Infomercial content will be made by Producer to the
final, approved by Client, off-line version without
Client's approval other than music, graphics, and
addition of CTAs.
6. Indemnification.
(a) Client agrees to indemnify, defend and hold harmless
Producer, its principals, officers, directors,
employees, independent contractors, agents,
successors, assigns and licensees from all suits,
claims, demands, damages, debt, liability, account
reckoning, obligation, cost, expense, lien, action or
cause of action (including, but not limited to,
actual damages, punitive damages, fines and
attorneys' fees, whether or not litigation is
commenced) arising out of (i) the Product, (ii) the
information, data and material provided by Client to
Producer and all claims made by Client with respect
to the Product, and (iii) any act or omission by
Client in breach by Client of its warranties,
representations, obligations and/or duties hereunder
including, but not limited to, those related to the
Product including, but not limited to, the safety and
efficacy of the Product, compliance with
9
<PAGE>
the rules, regulations and guidelines of the Federal
Trade Commission regarding false and deceptive
advertising practices.
(b) Producer agrees to indemnify and hold Client harmless
from all suits, claims, demands and other liabilities
and expenses (including, but not limited to, actual
damages, punitive damages, fines and attorneys' fees)
arising out of the breach by Producer of, or any
inconsistency with, any warranty, representation,
term or condition made or agreed to herein by
Producer.
(c) Each party shall notify the other of any demand, suit
or claim promptly after the first party has been
formally advised thereof. Producer and Client shall
each have the right to participate in the defense
thereof with an attorney of their choice at their
sole expense.
(d) The provisions of this Paragraph 6 shall survive the
expiration or other termination of the Term of this
Agreement.
7. Termination.
In addition to all other rights of either party, at law or in
equity, resulting from non-compliance by the other party with
this Agreement, (the "Defaulting Party"), the non-Defaulting
Party may terminate the Term of this Agreement upon five (5)
days written notice to the other in the event of any of the
following:
(a) A party defaults in any material respect in the
performance or observance of any term, covenant or
agreement contained in this Agreement (except for
default with respect to Paragraph 6(a)(iii), for
which no notice by Producer shall be required), and
the same continues for a period of five (5) days
following the receipt of said Defaulting Party of
notice from the non-Defaulting Party of such
non-compliance;
(b) Any representation or warranty made by either party
herein or in connection with the execution and
delivery of this Agreement shall prove to have been
incorrect, when made, in any material respect; or
(c) (i) The institution of any proceedings by or against
either party seeking relief, reorganization of such
party or arrangement with its creditors under any
laws relating to insolvency or bankruptcy, (ii) any
general assignment for the benefit of, either party
entering into a composition with, either party's
creditors, (iii) the appointment, or the consenting
to the appointment of, a receiver, liquidator,
trustee or other custodian for all or
10
<PAGE>
substantially all of its assets, (iv) the
liquidation, dissolution or winding up of either
party's business, or (v) the entry of an order by a
court of competent jurisdiction (A) finding either
party to be bankrupt or insolvent, (B) ordering or
approving either party's liquidation, reorganization
or any alteration or modification of the rights of
either party's creditors, or (C) assuming custody of,
or appointing a receiver or other custodian for, all
or a substantial part of either party's property.
(d) Force Majeure events cause a delay in production of
more than 60 days.
In the event of termination hereunder as a result of
Producer's default, in addition to any other damages
at law or equity, Producer shall promptly reimburse
Client for all payments received for which
corresponding Production work plus pro rata
Producer's fee earned had not been completed and all
work product shall be delivered to Client.
8. Confidentiality.
(a) The parties recognize that during the course of
performing their duties hereunder they may become
aware of proprietary, confidential information
concerning the other party, its products, methods,
processes, billing practices, financial condition,
etc., or information the other party designates as
confidential (collectively "Confidential
Information"). Each party agrees that it will
maintain in confidence and not disclose to any third
party at any time any such Confidential Information
and shall not use any such information to the
detriment of the other party or for any purpose not
contemplated by this Agreement.
(b) The obligation of confidentiality set forth above
shall survive the expiration or other termination of
this Agreement, provided, however, that a party (the
"Disclosing Party") may during the Term hereof or
thereafter disclose Confidential Information to the
extent required by applicable law or the order of a
court of competent jurisdiction. In the event the
Disclosing Party is required by applicable law or the
order of a court of competent jurisdiction to
disclose any Confidential Information, such party
agrees to provide the other party with prompt notice
of any such requirement so that the other party may
seek an appropriate protective order. Failing the
entry of a protective order or the receipt of a
waiver hereunder, the Disclosing Party will disclose
only that portion of the Confidential Information
which has been required.
11
<PAGE>
(c) The term "Confidential Information" and the
provisions of this Agreement relating thereto shall
not apply to any information which:
(i) becomes generally available to the public,
other than as a result of a disclosure in
violation of this Agreement;
(ii) was available, or becomes available, on a
non-confidential basis from a source other
than either of the parties hereto, their
clients, or their representatives;
(iii) is developed independently and is not based
upon or derived from Confidential
Information.
9. Force Majeure.
Producer may suspend the performance of its obligations
hereunder in the event of any of the following contingencies,
if by reason of any such contingency, Producer is materially
hampered in the performance of its obligations under this
Agreement or such performance becomes impossible or
commercially impracticable: acts of God, fire, catastrophe,
labor disagreement, acts of government, its agencies or
officers, any order, regulation, ruling or action of any labor
union or association affecting Producer or the industry in
which it is engaged, delays in the delivery of materials and
supplies, delays caused by non-celebrity retained by Client,
persons giving testimonials arranged by Client, or celebrities
(including, but not limited to, failure to timely appear and
failure to perform satisfactorily), or any other cause not
fully within Producer's control; provided however, if such
delay is more than sixty (60) days Client may terminate per
terms in paragraph 7d.
10. Insurance.
Client will obtain and maintain at its sole expense during the
Term hereof and for a period of one (1) year thereafter a
comprehensive general liability and product liability
insurance policy with minimum limits of One Million Dollars
($1,000,000.00) per incident and Two Million Dollars
($2,000,000.00) in the aggregate, with no deductible, naming
Producer and its respective officers, directors, and employees
as additional insured. Such insurance policy shall provide
that it cannot be canceled or modified without the insured
first giving Producer thirty (30) days prior written notice.
Client will furnish Producer with a true and legible copy of
the insurance certificate upon demand. Producer acknowledges
that it will maintain insurance during the term equivalent to
that indicated in Exhibit C.
11. Assignment.
12
<PAGE>
Neither party may assign any right or delegate any duty
hereunder without the express prior written consent of the
other, which consent shall not be unreasonably withheld. The
prohibition shall not prevent any party from contracting with
third parties for services to be provided in furtherance of
the performance required of each under this Agreement. No
assignment shall be valid unless the assignee assumes in
writing all the obligations of the assignor hereunder.
12. Disputes.
All disputes between the parties to this Agreement shall be
settled in the City of Los Angeles, State of California, by a
panel of three (3) arbitrators (one selected by each party and
the third selected by the two selected arbitrators) under the
then-current Commercial Arbitration Rules established by the
American Arbitration Association. Any arbitration award may be
entered as a judgment or order in any court of competent
jurisdiction.
13. Notices.
Any notice required by or provided pursuant to this Agreement
shall be given in writing by Certified Mail, Return Receipt
Requested, or any professional delivery service that requires
a signed, written receipt confirming delivery of the envelope
or package containing the notice. Such notice shall be
addressed to the person signing this Agreement at the address
indicated on the first page of this Agreement, or at such
other address as shall be provided by notice.
14. General Provisions.
(a) This Agreement constitutes the entire understanding
and agreement of the parties with respect to its
subject matter and supersedes any and all prior
understandings and agreements.
(b) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of
California applicable to contracts made in and wholly
to be performed therein.
(c) This Agreement may not be amended or modified except
in a written instrument signed by the party against
whom enforcement is sought.
(d) Subject to any restrictions on transferability
contained in this Agreement, this Agreement shall be
binding upon and inure to the benefit of the parties
and their respective successors-in-
13
<PAGE>
interest and permitted assigns. Nothing contained in
this subparagraph 14(d) shall create any rights
enforceable by any person not a party to this
Agreement, except for the rights of
successors-in-interest and permitted assigns of each
party hereto, unless such rights are expressly
granted in this Agreement to other specifically
identified persons.
(e) Paragraph headings are used for convenience and
are not to be interpreted as part of this Agreement.
(f) The parties to this Agreement are acting as
independent contractors and nothing herein shall be
construed as creating a partnership or other joint
business venture. Neither party has the authority to
act on behalf of or bind the other except as
expressly set forth herein.
(g) In the event that any provision of this Agreement is
held to be unenforceable or contrary to law, then the
Agreement shall be interpreted, to the extent
possible, without such provision.
(h) Each party shall execute and deliver all instruments
and documents and take all actions as may be
reasonably required to effectuate this Agreement.
(i) In the event of any dispute between the parties to
enforce or interpret the provisions of this
Agreement, the prevailing party in such action shall
be entitled to recover from the other party all
reasonable costs, expenses and attorney's fees, and
costs actually incurred relating to or arising from
such action.
(j) No waiver by a party of any provision of this
Agreement shall operate as, or be deemed to be, a
continuing waiver of such provision or a waiver of
any similar or dissimilar provision, unless such
waiver is contained in a written instrument signed by
the party against whom enforcement is sought.
(k) Time and strict punctual performance are of the
essence with respect to provisions herein concerning
payment and approvals and the Production Schedule and
Producer's efforts.
(l) Each party shall be responsible for the reporting and
payment of its own federal, state, and local taxes
and licenses.
(m) Each of the parties hereto represents and agrees with
the other that (i) it has been represented by
independent counsel of its own choosing, (ii) it has
had the full right and opportunity to consult with
its respective attorneys and other advisers and has
availed itself of this right and opportunity, (iii)
its authorized officers have carefully read and fully
understand this Agreement in its
14
<PAGE>
entirety and have had it fully explained to them by
such party's counsel, (iv) each is fully aware of the
contents hereof and its meaning, intent and legal
effect, and (v) its authorized officer is competent
to execute this Agreement and has executed this
Agreement free from coercion, duress and undue
influence. Each party and its counsel cooperated in
the drafting and preparation of this Agreement, and
the documents referred to herein. Accordingly, any
rule of law, including, but not limited to,
California Civil Code Section 1654, or any legal
decision that would require interpretation of any
ambiguities in this Agreement against the party that
drafted it, is of no application and is hereby
expressly waived. The provisions of this Agreement
shall be interpreted in a reasonable manner to
effectuate the intentions of the parties hereto.
(n) This Agreement shall become effective as of the
Effective Date, provided it has been executed by all
the parties hereto.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
SCRIPT TO SCREEN, INC. DYNAMIC INTERNATIONAL, LTD.
a California Corporation a New York Corporation
"Producer" "Client"
By: By: Marton B. Grossman
Title: Chief Operating Officer Title: President
Date: 5/7/98 Date: 5/7/98
<PAGE>
Exhibit "A"
Budget and Production Schedule
<PAGE>
Rotaflex Production Estimate #1E N/V
March 20, 1998
Script to Screen Host Talent Fees Removed.
200 N. Tustin Avenue Model & Voiceover Talent Fees
Suite #200 Included. Travel to Tucson
Santa Ana, CA 92705 is Included.
Tel: (714) 558-3971 Variance is Removed.
Fax: (714) 558-1759
<TABLE>
<CAPTION>
Acct# Category Title Page Total
<S> <C> <C> <C>
5020-00 Script Development 1 $7,200
5030-00 Producer & Staff 1 $45,700
5040-00 Director & Staff 1 $15,000
5050-00 Talent & Casting 1 $7,293
TOTAL ABOVE-THE-LINE $75,193
5061-00 Testimonial Segments 2 $6,424
5062-00 Expert/Celebrity Testimonials 3 $8,515
5063-00 Sculptor/Product Shoot 3 $12,524
5064-00 B-Roll Segments 4 $8,053
5065-00 Health Club Shoot 5 $5,492
5066-00 Host Shoot 5 $47,054
TOTAL PRODUCTION $88,062
5068-00 Transcriptions & Window Dubs 7 $1,400
5070-00 Show Offline Editing 7 $14,200
5080-00 Show Online Editing 7 $11,130
5081-00 Music 7 $6,000
5082-00 Sound ( Post Production) 7 $2,380
5083-00 Duplication 8 $350
5084-00 Art Direction & Graphics 8 $10,000
TOTAL POST PRODUCTION $45,460
5090-00 Administrative Expenses 8 $1,180
5091-00 Shipping & Customs 8 $675
5092-00 Unit Publicity 8 $40
TOTAL OTHER $1,895
5095 Insurance $6,318
5096 Production Variance $0
4000 Production Fee $67,395
TOTAL ABOVE-THE-LINE $75,193
TOTAL BELOW-THE-LINE $135,417
TOTAL ABOVE & BELOW-THE-LINE $210,610
GRAND TOTAL S284,324
</TABLE>
<PAGE>
Rotaflex Production Estimate #lE N/V
March 20, 1998
Script to Screen Host Talent Fees Removed.
200 N. Tustin Avenue Model & Voiceover Talent Fees
Suite #200 Included. Travel to Tucson
Santa Ana, CA 92705 is Included.
Tel: (714) 558-3971 Variance is Removed.
Fax: (714) 558-1759
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5020-00 Script Development
5020-02 Script Fees
Script Fee (30 Minute show) 1 Flat 7,000 7,000
Script Fee (Spots) 0 Flat 0 2,500 0 $7,000
5020-03 Supplies & Xeroxing
Script copies, disks, etc. Allow 200 200 $200
<CAPTION>
Total For 5020-00 $7,200
<S> <C> <C> <C> <C> <C> <C> <C>
5030-00 Producer & Staff
5030-02 Producer
Producers 4 Weeks 2,500 10,000 $10,000
5030-03 Associate Producer
Associate Producer 1 Total 10,000 10,000 $10,000
5030-05 Line Producer
Line Producer 4 Weeks 1,500 6,000 $6,000
5030-06 Prod. Coordinator
Production Coordinator 6 Weeks 1,000 6,000 $6,000
5030-07 Assist. to Producer/Client Serv.
A.P./Client Services 4 Weeks 750 3,000 $3,000
5030-08 Prod. Assistants
Key Office PA 4 Weeks 750 3,000
Production Assistants 4 Weeks 500 2,000 $5,000
503- Total Fringes
STS PayTx 19.0% 30,000 5,700 $5,700
<CAPTION>
Total For 5030-00 $45,700
<S> <C> <C> <C> <C> <C> <C> <C>
5040-00 Director & Staff
5040-01 Director
Prep/Production Time Allow 15,000 15,000 $15,000
<CAPTION>
Total For 5040-00 $15,000
<S> <C> <C> <C> <C> <C> <C> <C>
5050-00 Talent & Castlng
5050-04 Talent- Models
Model, AFTRA 0 . Days 420 0
Model, Non-Union 1 Day 5 500 2,500
Model, Non-Union 1 Day 5 350 1,750 $4,250
5050-10 Voice Over Artists
Voice Over, AFTRA 1 Session 0 448 0
Voice Over, Non-Union 1 Session 700 700 $700
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5050-00 Talent & Casting (CONT'D)
5050-50 Casting
Casting Director 4 Days 275 1,100
Casting Facilities 1 Day 500 500 $1,600
5050-70 Agents Fee - Commissions
Hosts - Non-union 15 % 0 8,000 0
Guests - Non-union 15 % 0 0 0
Actors - Non-union 15 % 0 0 0
Models - Non-union 15 % 5 500 375
Models- Non-union 15 % 5 350 263
Featured Extras - Non-union 15 % 0 O 0
Extras - Non-union 15 % 0 0 O
Minors - Non-union 15 % 0 O 0
Stunt Players - Non-union 15 % 0 0 0
Stand-ins - Non-union 15 % 0 0 0
V.O. Artist- Non-union 15 % 700 105
Hosts - Union 10 % 0 O 0
Guests - Union 10 % 0 0 0
Actors - Union 10 % 0 896 0
Models - Union 10 % 0 0 0
Featured Extras - Union 10 % 0 0 0
Extras - Union 10 % 0 100 0
Minors - Union 10 % 0 O 0
Stunt Players - Union 10 % 0 0 0
Stand-ins - Union 10 % 0 0 0
V.O. Artist - Union 10 % 0 448 0 $743
<CAPTION>
Total For 5050-00 $7,293
TOTAL ABOVE-THE-LINE $75,193
<S> <C> <C> <C> <C> <C> <C> <C>
5061-00 Testlmonlal Segments
5061-02 Crew
DP/ Camera Operator 1 Day 2 500 1,000
Grip 1 Day 2 350 700
Local Audio 1 Day 400 400
Local Make-up Artist . 1 Day 400 400
Production Assistants 1 Day 2 150 300 $2,800
5061-03 Equipment
Betacam Package 1 Day 600 600
DV Cam Package 1 Day 250 250
Lighting/Grip Equipment 1 Day 400 400
Audio Package for Video 1 Day 200 200 $1,450
5061-04 Locations/Permits
Local Location Fee 1 Flat 1,000 1,000 $1,000
5061-05 Raw Stock, Processing
Betacam-SP 30 Min. Cassettes 10 Rolls 32 320
DV Cam. Cassettes 3 Rolls 25 75 $395
5061-10 Crew Lunch
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5061-00 Testimonial Segments (CONT'D)
5061-10 Crew Lunch (CONT'D)
Local Crew Lunches 12 Each 12 144 $144
5061-15 Craft Services
Craft Services 12 Each 6 72 $72
506- Total Fringes
STS PayTx 19.0% 2,800 532
O.C. SalesTax 7.75% 395 31 $563
<CAPTION>
Total For 5061-00 $6,424
<S> <C> <C> <C> <C> <C> <C> <C>
5062-00 Expert/Celebrity Testimonials
5062-02 Crew
DPI/ Camera Operator 1 Day 400 400
DP/ Camera Operator 1 Day 400 400
Grip 1 Day 2 350 700
Local Audio 1 Day 400 400
Local Make-up Artist 1 Day 400 400
Production Assistants 2 Days 2 150 600 $2,900
5062-03 Equipment
Betacam Package 1 Day 600 600
DV Cam Package 1 Day 250 250
Lighting/Grip Equipment 1 Day 500 500
Audio Package for Video 1 Day 200 200 $1,550
5062-05 Raw Stock, Processing
Betacam-SP 30 Min. Cassettes 10 Rolls 32 320
DV Cam Cassettes 5 Rolls 25 125 $445
5062-08 Travel & Lodging
Airfares (multi-stop) 3 FT 350 1,050
Hotels 3 Nights 3 100 900
Tips 0 Days 25 0
Per Diem 3 Days 3 35 315 $2,265
5062-09 Ground Transportation
Airport Trans. 0 Allow 100 0
Rental Cars 3 Days 70 210
Mileage Allow 200 200 $410
5062-10 Crew Lunch
Local Crew Lunches 10 Each 2 12 240 $240
5062-10 Craft Services
Craft Services 10 Each 2 6 120 $120
506- Total Fringes
STS PayTx 19.0% 2,900 551
O.C. Sales Tax 7.75% 445 34 $585
<CAPTION>
Total For 5062-00 $6,515
<S> <C> <C> <C> <C> <C> <C> <C>
5063-00 Sculptor/Product Shoot
5063-02 Crew
DP/Camera Operator 1 Day 750 750
Gaffer 1 Day 450 450
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5063-00 Sculptor/Product Shoot (CONT'D)
5063-02 Crew (CONT'D)
Gnp 1 Day 2 350 700
Make-up Artist 1 Day 400 400
Wardrobe 1.5 Days 400 600
Prop Master 3 Days 500 1,500
Production Assistants 1 Day 3 150 450 $4,850
5063-03 Equipment
Betacam Package 1 Day 850 850
Jib 1 Day 850 850
Generator 1 Day 750 750
Lighting/Grip Equipment 1 Day 700 700 $3,150
5063-04 Locations/Permits
Local Location Fee 1 Flat 1,500 1,500
Permit 1 Flat 400 400 $1,900
5063-05 Raw Stock, Processing
Betacam-SP 30 Min. Cassettes 4 Rolls 32 128 $128
5063-06 Art/Props Materials
Allowance Each Location 1 Flat 1,000 1,000 $1,000
5063-07 Wardrobe
Wardrobe Allowance Allow 250 250 $250
5063-10 Crew Lunch
Local Crew Lunches 15 Each 15 225 $225
5063-15 Craft Service
Craft Services 15 Each 6 90 $90
506- Total Fringes
STS PayTx 19.0% 4,850 922
O.C. Sales Tax 7.75% 128 10 $931
<CAPTION>
Total For 5063-00 $12,524
<S> <C> <C> <C> <C> <C> <C> <C>
5064-00 B-Roll Scgments
5064-02 Crew
DP/ Camera Operator 1 Day 750 750
Grip 1 Day 2 350 700
Local Make-up Artist 1 Day 400 400
Wardrobe 2 Days 400 800
Production Assistants 1 Day 2 150 300
Art PA 2 Days 200 400 $3,350
5064-03 Equipment
Betacam 1 Day 600 600
Dolly 1 Day 350 350
Lighting/Grip Equipment 1 Day 500 500 $1,450
5064-04 Locations/Permits
Local Location Fee 1 Flat 1,000 1,000 $1,000
5064-05 Raw Sock, Processing
Beta Tapes 10 Rolls 32 320 $320
5064-06 Art/Props Materials
Allowance Each Location 1 Flat 500 500 $500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Dcscription Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5064-00 B-Roll Segments (CONT'D)
5064-07 Wardrobe
Wardrobe Allowance Allow 300 300 $300
5064-09 Ground Transportation
Airport Trans. 0 Allow 100 0
Renlal Cars 0 Cities 70 0
Mileage Allow 200 200 $200
5064-10 Crew Lunch
Local Crew Lunches 15 Each 12 180 $180
5064-15 Craft Services
Craft Services 15 Each 6 90 $90
506- Total Fringes
STS PayTx 19.0% 3,350 637
LA SalesTax 8.25% 320 26 $663
<CAPTION>
Total For 5064-00 $8,053
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5065-02 Crew
DP/ Camera Operator 1 Day 500 500
Grip 1 Day 2 350 700
Local Audio 1 Day 400 400
Local Make-up Artist 1 Day 400 400
Production Assistants 1 Day 2 150 300 $2,300
5065-03 Equipment
Betacam Package 1 Day 600 600
Lighting/Grip Equipment 1 Day 400 400
Audio Package for Video 1 Day 200 200 $1,200
5065-04 LocationslPermits
Local Location Fee 1 Flat 1 000 1,000 $1,000
5065-05 Raw Stock Processing
Betacam-SP 30 Min. Cassettes 10 Rolls 32 320 $320
5065-10 Crew Lunch
Local Crew Lunches 10 Each 15 150 $150
5065-15 Craft Services
Cralt Services 10 Each 6 60 $60
506- Total Fringes
STS PayTx 19.0% 2 300 437
O.C. Sales Tax 7.75% 320 25 $462
<CAPTION>
Total For 5065-00 $5,492
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5066-02 Crew
A.D. 1.5 Days 450 675
Script Supervisor 1.5 Days 450 675
DP 3 Days 750 2,250
Camera Operator Video 1 Day 2 400 800
VC 1 Day 400 400
Gaffer 2 Days 450 900
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5066-00 Host Shoot (CONT'D)
5066-02 Crew (CONT'D)
Best Boy Electric 2 Days 425 850
Electrician 2 Days 375 750
Key Grip 2 Days 450 900
Best Boy Grip 2 Days 425 850
Grip 2 Days 375 750
Swing Grip 2 Days 350 700
Audio Recordist 2 Days 400 800
A-2 1 Day 300 300
Make-up 1 Day 400 400
Wardrobe 3 Days 400 1,200
Production Assistants 2 Days 4 150 1,200
Prop Master 2 Days 500 1,000 $15,400
5066-03 Equipment
BetaCams 1 Day 2 1,000 2,000
Video Equip 1 Day 500 500
Lighting/Grip Equipment 2 Days 2,500 5,000
Grip Truck 2 Days 450 900
Generator 2 Days 750 1,500
Audio Package for Video 2 Days 200 400
Wireless Mics 4 Each 2 60 480
Jib Rental 1 Day 500 500
Media Logger 1 Day 50 50
Radios 2 Days 8 20 320
Teleprompter 1 Day 500 500
Comtex 2 Each 15 30
Lighting Expendables 1 Total 500 500
Audio Expendables 1 Total 50 50 $12,730
5066-05 Raw Stock, Processing
Betacam-SP 30 Min. Cassettes 12 Rolls 2 32 768 $768
5066-06 Art/Props Materials
Prop Rental Allow 5,000 5,000 $5,000
5066-07 Wardrobe
Wardrobe Allowance Allow 1,000 1,000 $1,000
5066-08 Travel Lodging
Airfares (multi-stop) 0 R/T 1,400 0
Hotels 1 Nights 6 150 900
Tips 0 Days 25 0
Traveling Crew Members 0 Days 0 50 0 $900
5066-10 Locations/Permits
Location Scouting 0 Days 450 0
Location Fees 2 Days 2,500 5,000
Permits 1 Day 450 450
Location Expenses 1 Day 500 500
Security 2 Days 200 400 $6,350
5066-80 Crew Lunch
Crew Lunch 2 Days 40 18 1,440 $1,440
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Unlts X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5066-00 Host Shoot (CONT D)
5066-80 Crew Meals
Craft Services 2 Days 40 6 480 $480
506- Total Fringes
STS PayTx 19.0% 15,400 2,926
O.C. Sales Tax 7.75% 768 60 $2,986
<CAPTION>
Total For 5066-00 $47,054
TOTAL PRODUCTION $88,062
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5068-00 Transcriptions & Window Dubs
5068-10 Transcriptions
Transcriber 40 Hours 25 1,000 $1,000
5068-50 VHS Dubs & Viewing Copies
VHS Window Dubbing costs Allow 400 400 $400
<CAPTION>
Total For 5068-00 $l,400
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5070-00 Show Offline Editing
5070-01 Off-Line Editing
AVID Digitzing/Editing 14 Days 1,000 14,000 $14,000
5070-02 Off-Line Tape Stock
Off-line Tape Stock Allow 200 200 $200
<CAPTION>
Total For 5070-00 $14,200
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5080-00 Show Online Editing
5080-11 On-Line Editing
On-line to D-2 Master 7 Days 1,560 10,920 $10,920
5080-12 On-Line Tape Stock
D-2 Blacked & Coded Stock 30 Minutes 4 120
1" Blacked & Coded Stock 30 Minutes 3 90
Beta-SP Blacked & Coded Stock 0 Minutes 2 0 $210
<CAPTION>
Total For 5080-00 $11,130
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5081-00 Music
5081-10 Original Music Score
Estimate Allow 6,000 6,000 $6,000
<CAPTION>
Total For 5081-00 $6,000
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5082-00 Sound ( Post Productlon)
5082-01 Lay Over/Lay Back
D-2 to One-inch 21 Passes 140 280 $280
50B2-10 Sweetening/Mix.
Sweetening/Mix-down 21 Hours 150 1,800 $1,800
5082-60 V.O. Recording Time
Recording Session time 21 Hours 150 300 $300
<CAPTION>
Total For 5082-00 $2,380
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5083-00 Duplication
5083-01 Misc. Duplication
1" Dubs 1 Each 170 170
3/4" Dubs 1 Each 80 80
VHS Dubs 4 Each 25 100 $350
<CAPTION>
Total For 5083-00 $350
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5084-00 Art Direction & Graphics
5084-01 Art Direction Personnel
Art Direction Supervision Allow 5,000 5,000 $5,000
5084-02 Animation
Animation Allow 5,000 5,000 $5,000
<CAPTION>
Total For 5084-00 $10,000
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5090-00 Administrative Expenses
5090-01 Messengers/Couriers
Allowance 6 Runs 30 180 $180
5090-08 Telephone/Fax/Cellular
Telephone / Fax 6 Weeks 100 600
Cellular time 2 Weeks 150 300 $900
5090-50 Office Supplies/Postage
Allowance Total For 5090-0O $1,180
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5091-00 Shipping & Customs
5091-01 Fed Ex
Allowance 30 Packs 22.5 675 $675
<CAPTION>
Total For 5091-00 $675
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
5092-00 Unit Publicity
5092-20 NIMA Copies
NIMA Dubs 1 Each 401 401 $40
<CAPTION>
Total For 5092-00 $40
<S> <C> <C> <C> <C> <C> <C> <C>
5065-00 Health Club Shoot
TOTAL OTHER $1,895
5095 Insurance $6,318
5096 Production Variance $0
4000 Production Fee $67,395
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Acct# Description Amount Units X Rate Subtotal Total
<S> <C> <C>
TOTAL ABOVE-THE-LINE $75,193
TOTAL BELOW-THE-LINE $135,417
TOTAL ABOVE & BELOW-THE-LINE $210,610
GRAND TOTAL $284,324
</TABLE>
<PAGE>
Exhibit "B"
Affidavit
(Testimonial)
For valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, I hereby give Dynamic
International, LTD. and Script to Screen, Inc. their representatives, assigns,
employees, and any person, corporation, or entity acting under their permission
or authority or for whom they might hereafter referenced (collectively the
foregoing are referred to as "Affiliates"), the right and permission to publish,
reproduce, distribute, and /or otherwise use my name, any still or moving
photographic image or sound recording of me or my minor child, in whole or in
part (the "Performance"), and any statement or endorsement (including any letter
or photograph), or any portions thereof (the "Testimonial"), made by me or my
minor child regarding or related to the product known as "Spalding Rotaflex"
(the "Product") in such manner, for such purposes and with such frequency as
they shall determine in their sole discretion without further compensation or
consideration to me and without further authorization by me. I further
acknowledge that the Performance and/or Testimonial shall constitute the sole
property of Dynamic International, LTD.
I also affirm (1) that any statements or endorsement made by me in the
Performance and/or Testimonial are factually accurate and represent my honest
opinions, findings, beliefs, or experiences, (2) that I was not compensated in
exchange for my endorsement but I have received a nominal, if any, reimbursement
for my time and expenses, and (3) that there exists no material connection
between myself and Dynamic International, LTD.
I hereby waive all rights of inspection or approval with regard to any
recording, taping, reproduction, proposed printed, audio or video publication
and/or other use of my name, the Performance and Testimonial. I also hereby
release, discharge and agree to hold harmless Dynamic International, LTD.,
Script to Screen, Inc. and their Affiliates from and against any and all
liability resulting from their use of my name, the Performance, and Testimonial
or related to my use of the Product.
I hereby warrant that I am over eighteen years of age, and competent to contract
in my own name. I have read this release and affidavit before affixing my
signature below, and warrant that I fully understand the contents thereof.
---------------------------------------------------
Name Date
---------------------------------------------------
Address Telephone
---------------------------------------------------
City State Zip
---------------------------------------------------
Social Security Number
18
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,575,248
<SECURITIES> 0
<RECEIVABLES> 810,447
<ALLOWANCES> 122,685
<INVENTORY> 2,359,022
<CURRENT-ASSETS> 5,476,193
<PP&E> 1,454,115
<DEPRECIATION> 1,329,269
<TOTAL-ASSETS> 5,715,417
<CURRENT-LIABILITIES> 556,967
<BONDS> 0
0
0
<COMMON> 4,419
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,715,417
<SALES> 8,001,138
<TOTAL-REVENUES> 8,043,076
<CGS> 5,291,768
<TOTAL-COSTS> 5,291,768
<OTHER-EXPENSES> 2,349,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,922
<INCOME-PRETAX> 268,202
<INCOME-TAX> 139,251
<INCOME-CONTINUING> 128,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,951
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
