BIO DYNE CORP /GA, 10KSB, 1996-07-23

BIO DYNE CORP /GA
10KSB, 1996-07-23
SPORTING & ATHLETIC GOODS, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-KSB

(Mark One)

[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 31, 1996 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____________ to
____________

Commission file number 0-19562

Bio-Dyne Corporation

Georgia 58-1659037
(State or Other Jurisdictional of (I.R.S. Employer
Incorporation or Organization) IdentificationNo.)

5400 Bucknell Drive, Atlanta, Georgia 30336
(Address of Principal Executive Office) (Zip Code)

(404) 346-3100
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered

None None

Securities registered pursuant to Section 12(g) of the Act:

Units
(Title of Class)

Common Stock
(Title of Class)

Warrants
(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 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 past 90 days. Yes X No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Consolidated revenues were $17,648,280 for the year ended March 31, 1996.
The information required by Part III will be contained in the definitive proxy
statement of the Company for the 1996 Annual Meeting of Stockholders and is
incorporated here in by reference.

As of July 17, 1996, 10,313,529 of the registrant's Common Stock were
outstanding and the aggregate market value of the Common Stock held by
nonaffiliates was approximately $ 3,532,619 based on the last sale price of the
Common Stock as quoted on the automated quotation system of the National
Association of Securities Dealers, Inc. on such date. (The officers and
directors of the registrant, and owners of over 10% of the registrant's Common
Stock, are considered affiliates for purposes of this calculation).

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BIO-DYNE CORPORATION
FORM 10-KSB
FISCAL YEAR ENDED MARCH 31, 1996

INDEX

PART I
<TABLE>
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Page

<S> <C>
Item 1. Description of Business ...................................................................... 3

Item 2. Description of Properties ................................................................... 11

Item 3. Legal Proceedings ............................................................................ 11

Item 4. Submission of Matters to a Vote of Security Holders .......................................... 11

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 12

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................................. 14

Item 7. Financial Statements and Supplementary Data .................................................. 19

Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosures.................................................................................. 45

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act....................................................... 45

Item 10. Executive Compensation ........................................................................ 45

Item 11. Security Ownership of Certain Beneficial Owners and Management................................. 45

Item 12. Certain Relationships and Related Transactions................................................. 45

PART IV

Item 13. Exhibits and Reports on Form 8-K............................................................... 46
</TABLE>

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

The Company

Bio-Dyne Corporation (the "Company") is engaged in the business of retail sales
of a wide range of high quality fitness equipment for home and commercial use
and in the business of manufacturing, marketing and distributing fitness
equipment under the Bio-Dyne name. The Company presently operates seventeen
retail facilities in four eastern states and manufactures its own products at
its facility in Georgia. The Company's retail merchandise includes treadmills,
stairclimbers, stationary bikes and a broad variety of multi-station and single
purpose exercise equipment and weight benches along with other small equipment
and accessories to accommodate all levels of fitness training. The Company also
manufactures over thirty fitness equipment products for distribution in its
retail stores and through a network of approximately 100 unaffiliated dealers
in the United States, Canada, Mexico and Japan.

History of the Company

The Company was incorporated in October 1989 under the laws of the State of
Georgia under the name William E. York, Inc. for the purpose of acquiring
Bio-Dyne Corporation, a Georgia corporation formed in 1986 ("Bio-Dyne") and
ECBB Body Building, Ltd., a New York corporation formed in 1979 ("ECBB"), which
collectively manufactured, marketed and distributed multi-station home gyms,
exercise machines, weight benches and specialty free weight equipment.

In November 1989, the Company acquired all of the issued and outstanding shares
of capital stock of Bio-Dyne and ECBB. Following the closing of the
transaction, Bio-Dyne was formally dissolved and a Certificate of Dissolution
of ECBB was filed with the Department of State of New York. Thereafter, the
Company used the trade name Bio-Dyne and in January 1991, changed its name from
William E. York, Inc. to Bio-Dyne Corporation.

The Company has formed Bio-Dyne North Corporation ("BDNC") under the laws of
the State of North Carolina as a wholly-owned subsidiary. On February 10, 1994
pursuant to a Stock Purchase Agreement of even date, BDNC acquired all the
capital stock (the "Carolina Shares") of Carolina Fitness Equipment, Inc., a
North Carolina corporation ("Carolina"), from James H. Heafner ("Heafner"), its
sole stockholder, for a purchase price of $100 and an obligation to obtain the
releases of Heafner from certain guarantees of obligations of Carolina or hold
Heafner harmless from all reasonable costs and expenses incurred from Heafner
performing under any of such guarantees not released. BDNC reserved the right
to rescind the purchase of the shares until June 10, 1994.

On April 19, 1994, Carolina filed a voluntary pre-packaged Chapter 11 petition
under the United States Bankruptcy Code to seek confirmation of a Plan of
Reorganization, which had already been approved by its creditors. The petition
was filed with the United States Bankruptcy Court for the Western District of
North Carolina. The court confirmed the Plan of Reorganization on May 26, 1994.
As part of the Plan of Reorganization Bio-Dyne provided $500,000 of debtor-in-
possession financing including $250,000 which was converted into equity in

Carolina.

As a result of the Court's confirmation of the Plan of Reorganization on May
26, 1994, the Company did not exercise its right of rescission to rescind its
purchase of Carolina on or before

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June 10, 1994. Accordingly, the Company considers its purchase of Carolina to
have been consummated on May 26, 1994.

On April 18, 1994, the Company acquired all of the outstanding stock of H.F.S.
Acquisition Co., Inc. and its subsidiaries Home Fitness Studios, Inc. and Home
Fitness Studios of Florida, Inc. in exchange for 1,200,082 shares of Common
Stock of the Company. Following the merger, H.F.S. Acquisition Co., Inc.
changed it name to Home Fitness Studios Inc. ("HFS") and the original Home
Fitness Studios Inc. changed its name to Home Fitness Studios North, Inc. As
part of the purchase, the Company entered into a three year employment
agreement with Edward B. Beam Jr. that appoints Mr. Beam as President and Chief
Operating Officer of the Company. Since April 14, 1995, Mr. Beam has also
served as Chairman of the Board and Chief Executive Officer of the Company. As
explained more fully in Certain Transactions, Mr. Beam resigned as an officer
and director of the Company on May 31, 1996.

The Company is structured so that Bio-Dyne Corporation owns 100% of Bio-Dyne
North Corporation and HFS. Bio-Dyne North Corporation owns 100% of Carolina
Fitness Equipment Inc. ("Carolina") and HFS owns 100% of each of Home Fitness
Studios of Florida, Inc. and Home Fitness Studios North, Inc.

The Company's principal offices are located at 5400 Bucknell Drive, Atlanta,
Georgia 30336 (telephone number 404-346-3100) and 3883 Pembroke Road,
Hollywood, Florida 33021 (telephone number 954-963-2900).

Manufacturing Operations

Products

The Company currently manufactures and distributes over thirty products through
its dealer network. The Company has two primary product lines - multi-station
home gyms and free weight equipment. The Company offers five models of
multi-station home gyms featuring single and multiple-stations which
accommodate up to four individuals and have as many as 29 different exercise
options. The Company's home gyms feature a patented linear bearing system which
the Company believes allows users to perform several exercises that are not
possible on other manufactured single stack home gyms.

The Company markets its home gyms under the name Dyna-Pak, EuroGym, Euro Elite
Bio-dyne F-14 and A/B-1 Abdominal/Back Conditioning Machine. The suggested
retail price for the Company's home gyms ranges between $600 and $3,000 for
standard units, and up to $4,000 depending upon the number of options
purchased.

The Company also markets a quality line of free weight benches. This line was

developed to fill the void between bulky institutional benches and flimsy
department store benches. A significant feature of the Company's free weight
benches is the patented seat slide which allows the seat to be adjusted more
quickly and easily than other competing free weight benches. The Company
manufactures additional exercise equipment including the pro ab chair,
hyper-extension/roman chair, butterfly bench, free standing lat machine, power
lat, free standing leg extension/leg curl, leg press, free standing pro
preacher, free standing vertical knee/dip, chin attachment for vertical
knee/dip, plate rack, dumbbell rack, ab/back trainer, abdominal board, XP-12
flat/incline combo bench, flat/incline/decline bench, power rack, accessory
stand, and handle bar dips.

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During the first and second quarters ending June 30 and September 30 of each
year, the Company's manufacturing sales are slow. The Company is presently
seeking to acquire another product line or contract manufacturing work to
augment its manufacturing schedule all year round. As of March 31, 1996, it has
received contract orders for approximately $70,000.

Manufacturing and Suppliers

The manufacturing process consists of four major activities:

Metal Fabrication. Metal fabrication involves processing steel square tubing,
cast steel and alloy materials by cutting, bending, drilling and welding steel
components into frames for the Company's products. The Company has installed
specialized material handling equipment and automated machines in order to
automate much of the manual processing. The Company also has its own powder
coat paint system. The Company believes that the powder coating operation
provides the equipment with one of the finest and most durable finishes in the
industry at a lower cost than much of its competition since many of the
Company's competitors must send their parts to other vendors to have them
coated. The Company believes it is one of the few manufacturers that owns its
own powder coating system and hydraulic bending machines. The bending machines
allow the Company's products to be designed to use fewer bolts and as a result
the equipment is stronger and easier to assemble.

Upholstery Fabrication. All of the seats, benches and pressure cushions which
are used for the Company's products are fabricated by the Company at its
manufacturing facility.

Preparation and Painting. All of the metallic components of the company's
products are finished with a dry powder coat.

Assembling and Packaging. As a quality control measure, frames are assembled
prior to packaging. Precise packaging lists are checked and rechecked by a
packager and supervisor. Completed products are shipped by land, sea or air
according to instructions by the Company.

Suppliers. The variety of components required in the manufacture of the
Company's products are purchased by the Company from independent vendors
located primarily in the southeastern United States. The Company has no

material purchase contracts with any of its vendors and its vendors are not
obligated to supply products to the Company at any specified quantity or price
levels. If the Company were unable to obtain components from these vendors on
satisfactory terms, Management believes that alternative suppliers are
available. However, there can be no assurance that such alternative sources
would produce components of comparable quality, or sell products to the Company
on prices and terms as favorable as those presently available from its current
vendors.

Backlog of Orders and Major Customer

The Company generally ships its products as soon as practicable upon receipt of
an order. The Company has not entered into any contracts involving standing
orders or fixed production schedules. The Company's practice has been to
manufacture products based upon orders received from its current dealer network
and its major customers. As of March 31, 1996, the Company had a backlog of
orders for its home gyms and specialty free weight equipment of approximately
$137,000 as compared to approximately $157,000 as of March 31, 1995.

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Champs Sports is a national sporting goods retailer that is owned by
Woolworth's and has approximately 350 stores. Sales to Champs for the fiscal
year ended March 31, 1995 accounted for approximately 14% of net sales and
totaled approximately $2.8 million. In the past, Champs has allowed the Company
to start shipping Fall and Christmas orders during the Summer. Champs is in an
inventory reduction program and has delayed receipt of Fall and Christmas
goods. Champs purchases of the Company's product in fiscal 1996 were reduced to
approximately $750,000. Partially offsetting the sales decline to Champs, the
Company's manufacturing operation has continued to successfully increase its
sales to Sports & Recreation, a rapidly growing chain of sporting goods
superstores. For the fiscal years ended March 31, 1995 and 1996, the Company
had sales to Sports and Recreation of approximately $400,000 and $1.1 million.
Sports & Recreation has supplanted Champs as the Company's largest customer,
with an expected volume of approximately $1.5 to $1.7 million for the fiscal
year ending March 31, 1997. While the Company believes that Champs will
continue to be a customer of the Company, no assurances can be given in this
regard.

The Company expects to fill substantially all of its current backlog orders at
March 31, 1996 within fiscal 1997. These orders are cancelable by the Company's
customers without penalty.

Product Warranty

The Company provides a lifetime warranty, on the products it manufactures, to
original purchasers against defects in material and workmanship under which the
Company agrees to repair or replace defective products or components. Defective
products and/or components are returned by the purchaser either to the point of
purchase for return to the Company for repair or are returned directly to the
Company. To date, warranty expenses have not been significant.

Retail Operations

The Company operates seventeen retail and institutional high performance
fitness equipment sales centers in four states (North Carolina, South Carolina,
Virginia, and Florida) which sell equipment manufactured by various companies
including Precor, Life Fitness, Aerobics Treadmills, Parabody, and Bio-Dyne.
The stores sell treadmills, stationary bicycles, stairclimbers, home gyms,
weight benches and other equipment and accessories to retail customers and to
commercial customers such as spas, gyms, hotels, corporations and government
agencies.

Marketing and Distribution

Manufacturing Operations

The Company markets its products primarily through its network of approximately
100 unaffiliated dealers and by participation in industry trade shows. The
dealer network is located primarily along the eastern seaboard and in the
midwest, with a lesser number of dealers on the west coast, and in Canada,
Mexico and Japan. Each independent dealer is generally assigned an exclusive
distribution territory. The Company's dealers have no obligation to purchase
products from the Company, and such dealers may sell products of the Company's
competitors. The Company's products are sold to the public by independent and
chain specialty fitness retailers and sporting goods stores.

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Retail Operations

The Company markets its retail products through a comprehensive promotional
program which includes yellow pages, newspapers, television, and direct mail.
The Company also markets itself to its existing customer base through follow-up
campaigns conducted by its sales people and its service staff. These campaigns
are designed to generate new revenues from the Company's existing customer base
and to develop new customers through favorable word of mouth. Commercial sales
are generated through direct sales calls, supported by yellow pages, direct
mail, and lead generation programs designed in cooperation with the Company's
key vendors.

Competition

Manufacturing Operations

The market for multi-station home gyms, exercise machines, weight benches and
specialty free weight equipment is highly competitive. At least six companies -
Parabody, Inc., Diversified Products, Paramount Fitness Equipment Corp.,
Pacific Fitness, Hoist Fitness Systems and Spirit Fitness Products manufacture
exercise equipment similar to the Company. Some of these companies possess
greater financial and other resources than the Company and have greater product
name recognition. The Company also believes it is possible for other companies,
both new enterprises and established members of the sporting goods industry, to
enter the multi-station home gym, exercise machines and specialty free weight
equipment market. The Company believes that the quality of its products and its
ability to provide features that its competitors do not, such as unique design

and adjustability, will enable the Company to compete successfully in the
market for home exercise equipment. No assurance can be given, however, that
the Company can or will be able to compete effectively with its competitors.

Retail Operations

The Company experiences substantial competition in the retail segment of its
business from other specialty fitness equipment dealers, from general sporting
goods stores, and on the low end of the category, from mass merchants and
warehouse clubs. A substantial amount of exercise equipment is also sold via
direct mail and by infomercials. Virtually all commercial product is sold
through direct representational selling. Most of the product lines sold by the
Company are considered within the industry to be the most technologically
advanced lines available. When subjected to heavy use, such equipment requires
frequent preventive maintenance service and periodic replacement of key moving
parts. To support the Company's customer base, the Company maintains a trained
staff of service technicians who provide both warranty and out-of-warranty
service. As an inducement for the Company to provide this level of service for
their customers a number of the Company's vendors maintain controlled
distribution policies within the Company's territories. This gives the Company
exclusive or near exclusive marketing rights in its markets for many of the
products it sells. The Company believes that the high level of support and
service it provides in its territories give it a competitive advantage on the
high end of the marketplace. In the lower tiers of the market the Company has
successfully gone to a strategy of every day low prices combined with selective
promotions and a 30-day low price guarantee.

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Patents and Trademarks

The Company owns two United States patents which were acquired in November 1989
from the previous owners of Bio-Dyne. One patent covers the seat slide for the
Company's free weight bench which the Company believes allows the seat to be
adjusted more quickly and easily than other similar free weight benches. The
other patent relates to a linear bearing system that allows users of the
Company's multi-station home gyms to perform several exercises that the Company
believes are not possible on other manufactured single stack home gyms. The
patents expire on June 26, 2007 and September 11, 2001, respectively.

The Company has registered the trademarks "DYNA-FLEX" and "DYNA-PAK 2000" in
the United States. Management believes that protection of these trademarks is
important to the ongoing success of the Company through its customers'
affiliation of such marks with its current and future products.

Product Development

The Company has introduced various new products to increase its production and
sales in its manufacturing operations. While these products met with favorable
reception at the Sporting Goods Manufacturers Association Supershow in Atlanta
in February, 1996, the depressed retail marketplace has made it difficult for
the Company to open significant new accounts. Retailers, in the current
environment, are reluctant to make the cash outlay to replace an existing

product line in their stores with a new one, which would require purchasing a
whole new line of floor models and stock.

During fiscal 1996 and 1995, the Company incurred approximately $130,000 and
$122,000 in product development activities in its manufacturing operations. The
Company intends to continue these development activities to develop
enhancements and modifications to its current products and to develop new
products and new product lines. Ronald Desiderio, a former principal of
Bio-Dyne and the designer of the Company's patented seat slide and linear
bearing system, continues to work in the Company's new product development
department.

Government Regulation

The Company's manufactured products are subject to the provisions of the
Federal Consumer Product Safety Act (the "FCPSA"), among other laws. The FCPSA
empowers the Consumer Product Safety Commission (the "CPSC") to protect
consumers from hazardous consumer goods. The CPSC has the authority to exclude
from the market certain articles which are found to be hazardous, and can
require a manufacturer to repurchase products that are banned. Similar laws
exist in some states and cities in the United States. The Company has not been
the subject of any regulatory actions to date. There are various federal and
state laws protecting consumers who purchase products from the Company's retail
operations. The Company believes that it is in compliance with all applicable
consumer protection laws.

Product Liability

Because of the nature of the Company's products, the Company may be subject
from time to time to product liability claims associated with personal
injuries. Significantly increased product liability claims continue to be
asserted successfully against manufacturers throughout the United States
resulting in general uncertainty as to the nature and extent of manufacturers'
and distributors' liability for personal injuries. The Company currently
carries a product liability

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insurance policy which provides annual coverage of up to $1 million per
occurrence and $1 million in the aggregate. The Company is required to pay a
$5,000 deductible for each claim.

The Company is aware of four claims for injuries arising out of the use of its
equipment. In one claim, a lawsuit has been instituted seeking $75,000 in
damages. In the second, a lawsuit has been filed without a specified claim, but
a claim letter has been received asking $45,000 in damages. In the third claim,
no lawsuit has yet been instituted, but a claim letter has been received
alleging very serious injuries and claiming $20 million in damages. In the
fourth claim, no lawsuit has been filed nor has any monetary claim yet been
asserted. The Company is and intends to continue to vigorously defend all four
claims. At this time, no assurances can be given as to the outcome of any of
the actions.

Due to the uncertainty as to the nature and extent of manufacturers' and
distributors liability for personal injuries, there can be no assurance that
the product liability insurance maintained by the Company is or will be
sufficient to cover any claims. The successful assertion or settlement of an
uninsured claim, or a claim exceeding the Company's insurance coverage, could
have a material adverse effect on the Company's results of operations and
financial condition. In addition, there can be no assurance that insurance will
remain available, or if available, that it will not be prohibitively expensive.
Prior to receiving notice of the aforesaid $20 million claim, the Company has
not been the subject or any material suits or legal proceedings relating to its
products.

Employees

Manufacturing Operations

As of June 30, 1996, the Company's manufacturing operations employed a total of
42 full-time employees. The Company's employees are not covered by any
collective bargaining agreements and management believes its employee relations
to be good.

Retail Operations

As of June 30, 1996, the Company's retail operations employed a total of 87
employees. The employees are not covered by any collective bargaining
agreements and management believes its employee relations to be good.

Recent Developments

On May 23, 1996, the Company entered into a two year, $1,000,000 Revolving
Credit Agreement with Continental American Transportation, Inc. (Lender). The
Agreement calls for Loans to the Company up to $1,000,000 in aggregate
principal amount at any one time, with interest on the outstanding balance at
12% per annum, payable quarterly. The Company can prepay any part of the
outstanding balance at any time with no prepayment penalty, with the full
outstanding balance due on the termination date two years from May 23, 1996.
Lender is obligated to provide funds five business days after so requested by
the Company.

The Agreement provides for an Initial Advance of $300,000, which was made on
May 23, 1996, and a Subsequent Advance of $150,000, which was made on May 31,
1996. Concurrent with the Subsequent Advance on May 31, 1996, five members of
the Company's seven member Board of Directors resigned, namely Edward B. Beam,
Jr., Edward B. Beam, Sr., L. Clark Brand, William C. Buck and Harvey Miller.
Edward B. Beam, Jr. also resigned as Chairman, President, Chief

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Executive Officer and Chief Operating Officer, and Harvey Miller also resigned
as Executive Vice President, Chief Financial Officer, Chief Accounting Officer,
Secretary and Treasurer. David H. York, who remains as a Director, resigned as
Assistant Secretary and Assistant Treasurer.

In accordance with the Company's by-laws, the two remaining Board members
appointed three new Board members, namely Timothy Holstein to fill the Board
seat vacated by Edward B. Beam, Sr. as a Class A director and to serve the
remainder of his term until the 1998 Annual Meeting, Erik Bailey to fill the
Board seat vacated by William A. Buck as a Class A director and to serve the
remainder of his term until the 1998 Annual Meeting, and Brian Henninger to
fill the Board seat vacated by Harvey Miller as a Class C Director to serve the
remainder of his term until the 1997 Annual Meeting. The remaining two Board
seats remain vacant. In addition, the Board appointed Timothy Holstein as
Chairman and Chief Executive Officer, Erik Bailey as Chief Financial Officer
and Brian Henninger as Secretary and Treasurer of the Company. The three new
officers hold similar positions as directors and officers of the Lender.

Neither the Lender nor any of the new directors and officers have any
beneficial ownership in the Company's capital stock.

Edward B. Beam, Jr. and Harvey Miller entered into amendments to their
Employment Agreements on May 31, 1996, the date of the Subsequent Advance and
of their resignations as directors and officers of the Company. The amendments
provide for the termination date of each agreement to be changed to November
30, 1996, from April 18, 1997, salary of each to be increased to $15,000 per
month from $12,500 per month, and provides that each employee must continue
full time activities for the Company until June 30, 1996. In addition, both Mr.
Beam Jr. and Mr. Miller entered into Amendments to Non-Qualified Stock Option
Agreements on May 31, 1996 under the April 1994 Stock Option Plan of the
Company, which allows both to exercise their previously granted stock options
for 36 months from May 31, 1996. Mr. Beam, Jr. holds a grant for 100,000 stock
options and Mr. Miller holds a grant for 250,000 stock options.

The Revolving Credit Agreement is secured by secondary security interests in
all the assets of the Company's five wholly owned subsidiaries. In addition,
the Company assigned to the Lender its interest in an existing UCC filing on
the assets of Carolina Fitness Equipment, Inc. (a North Carolina corporation)
(CFE), a wholly owned subsidiary of the Company, which was granted to the
Company to secure a $250,000 advance made to CFE as part of its 1994
bankruptcy.

The Revolving Credit Agreement required that half of the $450,000 Initial and
Subsequent Advances be used to pay down the outstanding balance of the debt due
to Edward B. Beam, Sr. and Carolyn M. Beam, and Edward B. Beam, Jr. (the Beam
notes), leaving a aggregate balance due of $72,293 at May 31, 1996 on the Beam
notes after the payments. On May 31, 1996, the Company entered into amendments
to the Beam notes providing that they are due and payable in full on July 1,
1996. As of July 15, 1996 these payments have not been made. Upon payment in
full, the Beams will cancel their current security interest in the assets of
Home Fitness Studios, Inc. (a Florida corporation), and its two subsidiaries,
which are wholly owned subsidiaries of the Company, leaving the Lender will
sole security rights.

The Company has been informed that its line of credit with a factor is being
reduced from $600,000 to $300,000. The Company is substantially past due in its
obligations to trade creditors and for deposits from customers at March 31,
1996. As a result the Company is experiencing difficulty in obtaining
merchandise to fill orders for which it has received deposits.

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Due to the rapid deterioration of the Company's business resulting from its
inability to purchase merchandise for its customers and material for its
manufacturing operations, the Company must obtain sufficient capital from debt
and/or equity financing in the immediate future. Failure to obtain sufficient
additional capital will in all probability result in discontinuing all or parts
of the Company's present business units in an effort to reduce losses and
reduce the cash requirements of the Company's operations. In the event
management is able to obtain sufficient additional capital to acquire
merchandise to fill existing orders, there can be no assurance that the
business can be profitable.

On May 31, 1996, the Company obtained a line of credit for $1,000,000 which
resulted in a change in management control of the Company. The new management
is attempting to arrange an additional equity investment in the Company, is
negotiating to arrange mergers and contractual relationships with companies to
provide additional business for the manufacturing operations as well as new
lines of products for its retail operations, and is considering the divestiture
of all or part of the Company's business units to reduce continuing losses and
cash requirements. However, there can be no assurance that the Company will
continue as a going concern in the event management elects to discontinue or
sell part or all of its business units due to the deteriorating financial
condition of all the business units. (See Note 2 to consolidated financial
statement).

ITEM 2. PROPERTIES

In March 1992, the Company acquired an industrial building for the purpose of
consolidating its operations to one location and to accommodate the expansion
of the Company's business. The building is located in Atlanta, Georgia and has
approximately 94,000 square feet of usable space. The Company believes that the
manufacturing facility provides the Company with suitable warehouse space. On
September 27, 1995, the Company sold its production facility in Atlanta for
$1.1 million and entered into a ten year lease for the facility. The Company
received net cash proceeds of approximately $433,000 after liquidating the
mortgage on the property and paying related expenses. The transaction resulted
in a profit of approximately $109,000, which will be recognized over the life
of the lease.

The retail operations lease retail, office and warehousing space under
operating leases expiring at various dates from May 1996 through June 2000.
Minimum annual rental commitments under these leases are approximately $736,000
per year.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceeding or
litigation, however, as described under product liability certain claims have
been received by the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended March 31, 1996 through the
solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

In October 1991, the Company completed a public offering of 550,000 units (the
"Units"), with each Unit consisting of two shares of Common Stock and one
redeemable Common Stock Purchase Warrant (the "Warrants"). Each Warrant
entitles the registered holder thereof to purchase one share of Common Stock at
a price of $4 per share on or before October 15, 1993; $5 per share between
October 16,1993 and October 15, 1995; and $6 per share between October 16, 1995
and October 15, 1996. Pursuant to the anti-dilution provisions of the Warrants,
each warrant now entitles the holder to purchase 1.40 shares at an exercise
price of $4.29 until October 15, 1996. As of the date of this report, all
550,000 Warrants were outstanding.

The Company's Common Stock is traded in the over-the-counter market as a small
cap issue under the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") symbols "BODY". The following table sets forth the
high and low bid prices for the Common Stock and Warrants for the period
indicated as reported by NASDAQ. Such amounts are quoted based on the closing
bid prices. Such prices represent prices between dealers without adjustment for
retail mark-ups, mark-downs, or commissions and may not necessarily represent
actual transactions.

<TABLE>
<CAPTION>
Common Stock Warrants
----------------- ----------------
FISCAL YEAR ENDED MARCH 31,1995 High Low High Low

<S> <C> <C> <C> <C>
First quarter ended June 30, 1994 $1.118 $.563 $.094 $.094

Second quarter ended September 30, 1994 $.781 $.438 $.063 $.063

Third quarter ended December 31, 1994 $.844 $.438 $.125 $.063

Fourth quarter ended March 31, 1995 $.750 $.500 $.188* $.031*

FISCAL YEAR ENDED MARCH 31, 1996

First quarter ended June 30, 1995 $.781 $.563

Second quarter ended September 30, 1995 $.813 $.438

Third quarter ended December 31, 1995 $.5625 $.250

Fourth quarter ended March 31, 1996 $.375 $.125
</TABLE>

* In March 1995, the Company's Warrants were removed from NASDAQ due to lack of
activity.

On March 29, 1996, the closing bid price of the Common Stock was 5/32. As of
April 25, 1996, there were approximately 116 holders of record of the Company's
Common Stock. The number of holders of record does not reflect the number of
beneficial owners of the Company's Common Stock for whom shares are held by
Cede & Co., certain brokerage firms and other institutions. As of September 18,
1995, the record date of the last annual meeting, the approximate number of

12
<PAGE>

beneficial owners of the Company's Common Stock was 1,600. The Company has not
paid any dividends since its inception and does not contemplate payment of
dividends in the foreseeable future. The Company does not have a current
Registration Statement on file with the Securities and Exchange Commission
relating to its warrants. The Company intends to file a Registration Statement
with the Securities and Exchange Commission at such time as there is a
reasonable likelihood that the Warrants will be exercised. Until such time as a
Registration Statement is filed with and declared effective by the Securities
and Exchange Commission, the Company's Warrants may not be exercised.

Remainder of page intentionally left blank

<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto.

Results of Operations

All references to operating statement items in the discussion below are to data
shown in the following table. The Company believes that, except as set forth
herein, there are no other material factors affecting comparability of the
periods.

Year ended March 31,
--------------------------------------------
($000 omitted) 1996 1995
--------------------------------------------

Net sales $ 17,648 100.0% $ 20,061 100.0%
Cost of goods sold 13,652 77.4% 14,422 71.9%
-------- ----- -------- -----
Gross margin 3,996 22.6% 5,639 28.1%
Selling, general and
administrative expenses 6,407 36.3% 5,821 29.0%
Depreciation and amortization,
less amortization of goodwill 88 0.5% 90 0.4%
Executixe separation expense 200 1.1% 400 2.0%
Amortization of goodwill 181 1.0% 152 0.8%
-------- ----- -------- -----
Loss from operations (2,880) -16.3% (824) -4.1%
Impairment of Goodwill 325 1.9%
Interest expense, net 145 0.8% 165 0.8%
-------- ----- -------- -----
Net Loss $ (3,350) -19.0% $ (989) -4.9%
======== ===== ======== =====

The operating results for 1996 include the Company's two retail businesses and
its manufacturing business for the entire year. The operating results for 1995
include the Company's two retail acquisitions (business combinations) made
during that year from their date of acquisition, namely Carolina Fitness
Equipment, Inc. (CFE) from May 26, 1994 and Home Fitness Studios, Inc. (HFS)
from April 18, 1994 (see Note 1), as well as the results of the Company's
previously existing manufacturing operations.

Net sales decreased approximately $2,413,000, or 12% compared to 1995 ,
primarily caused by a decrease in sales in the Company's manufacturing
operation of approximately $2,340,000 for the year, or 44%, and a decrease in
retail sales of approximately $73,000, or .5%. The Company's retail sales in
the mid-Atlantic region in fiscal 1996 decreased 9% compared to fiscal 1995,

with the Florida operation showing a 15% increase for the year.

Taking into account the lower sales in 1995 caused by the accounting for the
timing of the retail acquisitions as explained above, total sales for the
fiscal year 1996 on a comparable proforma basis were down approximately
$4,000,000, or 18%, from fiscal year 1995 and retail sales were down
approximately $1,800,000, or 11% on a comparable proforma basis.

14
<PAGE>

The decrease in sales in the Company's manufacturing operations is caused by
several conditions. Champs Sports, a national sporting goods retailer that is
owned by Woolworth and has approximately 350 stores, has been, in the past, the
Company's largest customer. Champs, whose purchases from the Company totaled
approximately $2.8 million in the fiscal year ended March 31, 1995, reduced its
orders from the Company to approximately $750,000 for the current fiscal year.
Recent orders appears to indicate a possible increase in sales to Champs in
fiscal 1997.

Partially offsetting the sales decline to Champs, the Company's manufacturing
operation has continued to successfully increase its sales to Sports &
Recreation, a rapidly growing chain of sporting goods superstores. For the
fiscal years ended March 31, 1996 and 1995, the Company had sales to Sports and
Recreation of approximately $1.1 million and $400,000, respectively. Sports &
Recreation has supplanted Champs as the Company's largest customer, with an
expected volume of approximately $1.5 to $1.7 million for the fiscal year
ending March 31, 1997. While the Company believes that Champs will continue to
be a customer of the Company, no assurances can be given in this regard.

Another factor in the decline of sales in the Company's manufacturing operation
was the very tight labor market in Atlanta, the site of the Company's factory,
during fiscal 1996 caused by the labor demands associated with the summer
Olympics. The Company brought in a large number of new unskilled workers during
the third fiscal quarter ended December 31, 1995, to meet peak demand in a
fitness equipment market that has become much more seasonal in the past year.
As a result, efficiencies were down substantially.

Further magnifying the Company's overall decline in sales from fiscal 1995 has
been the continuing weakness in the market for fitness equipment. After several
years of double digit growth, the market unexpectedly declined by over 15% in
1994, and continued to decline in 1995, even though a rebound was expected. As
a result of this continuing sales decline, the industry is not as healthy as it
once was, and several leading dealers have had to be reorganized, including the
Company's largest customer in the specialty fitness dealer market. This
industry weakness has had a negative impact on manufacturing operation sales,
as key accounts have been put on credit hold or have had reductions made to
their credit lines.

Gross profit decreased approximately $1,643,000, or 29%, in fiscal 1996
compared to 1995, and to 23% as a percentage of sales from 28% in 1995. These
decreases are due to less efficient manufacturing operations in 1996 because of
the significantly smaller throughput in the factory caused by the lower sales,
and a reduction in retail margins of almost 4 percentage points.

Selling, general and administrative expenses (SG&A) increased approximately
$586,000, or 10% in fiscal 1996 compared to fiscal 1995, due to the exclusion
of approximately $700,000 of SG&A expenses of the retail companies in fiscal
1995 that occurred during the period prior to their acquisitions by the
Company, as explained above.

Executive separation expense is down to $200,000 in 1996 from $400,000 in 1995.
The 1995 expense was the compensation of the former Chairman from April 18,
1994 to March 31, 1995 and cost of the settlement with him. The 1996 expense is
for the cost of the settlement with two executives that left the Company during
fiscal 1997.

Loss from operations and net loss increased approximately $2,056,000 and
$2,361,000, respectively, in fiscal 1996 compared to 1995, due to the reduced
volume, lower margin and

15
<PAGE>

exclusion of expenses in fiscal 1995 incurred prior to the retail acquisitions
and the writedown of goodwill.

Through March 31, 1996, the Company has completed annualized cost savings of
approximately $560,000, consisting of approximately $160,000 of reductions in
executive headcount, $275,000 of reductions of store, warehouse and accounting
personnel, $100,000 by closing three marginal or unprofitable stores and
$25,000 by merging two stores in one market. The store closings were all
effected at the lease termination dates. At June 30, 1996, the Company effected
an additional $400,000 of annualized cost savings. The June 30, 1996 savings
are approximately $270,000 in executive headcount and $130,000 in associated
expenses.

Liquidity and Capital Resources

The Company had a line of credit with a bank, collateralized by the
manufacturing accounts receivable, inventory and machinery and equipment, to
provide loans up to an aggregate amount of $600,000, which expired on September
1, 1995 and was not renewed or extended by the bank.

security interest in all of the assets of its manufacturing operation,
including inventory and equipment. In addition, the Company's two retail
subsidiaries have guaranteed payment of the loan. The factoring agreement can
be terminated by either party upon 30 days prior written notice, and presently
has a $300,000 cap.

In March and June, 1995 the Company completed a private placement for the sale
of 2,501,587 shares of its unregistered common stock to a group of investors.
The Company received net proceeds of $632,000 .

The Company sold its production facility in Atlanta in late September, 1995,
for $1,100,000 and has entered into a ten year lease for the facility. The sale
generated net cash of $433,000 after liquidating the mortgage on the property
and paying related expenses. The transaction resulted in a profit of $109,000
which is being amortized over the life of the lease. The Company's expense and
cash outlay under the lease is not significantly different than the costs of
ownership.

16
<PAGE>

Advance of $300,000, which was made on May 23, 1996, and a Subsequent Advance
of $150,000, which was made on May 31, 1996. A further advance of $150,000 was
made on June 25, 1996.

During the year ended March 31, 1996, the Company experienced a net decrease in
cash of approximately $656,000, ending with a balance of approximately $286,000
at March 31, 1996. Cash was used to fund operating activities in the amount of
approximately $790,000, primarily to fund the net loss of $3,002,000 after
reducing it by the non-cash items of depreciation and amortization, offset by
cash generated by a net decrease in current assets of $703,000 and a net
increase in current liabilities of $1,101,000. The Company used approximately
$321,000 of cash in investing activities, primarily to fund the reserve
established as part of the Company's recent acquisitions. Financing activities
generated approximately $455,000 of cash, approximately $296,000 by selling
common stock in a private placement, borrowing approximately $156,000 from its
factor and approximately $433,000 in net proceeds from the sales of its Atlanta
facility, offset by repayments of $169,000 of its former line of credit and
$261,000 of other debt.

The Company's cash increased by approximately $457,000 in 1995, ending with a
balance of approximately $942,000 at March 31, 1995. The total amount included
$822,000 generated from financing activities, primarily from the issuance of
common stock to foreign and domestic investors of $1,815,000 offset by
reductions in borrowings under the Line of Credit by $442,000, payments of
notes payable of $351,000 and a payment in the bankruptcy settlement of
Carolina of $200,000. Investing activities provided approximately $272,000 of
cash, primarily from receipt of $860,000 of cash in the two new subsidiaries at
the time of acquisitions offset by $506,000 to fund the reserves established as
part of the Company's recent acquisitions. Cash of $637,000 was used in
operating activities of the company, primarily for the following: $474,000 to
fund an increase in current assets, $615,000 to fund the net loss after
reducing it by the non-cash items of depreciation and amortization and offset
by a net reduction of approximately $452,000 in current liabilities.

Due to the rapid deterioration of the Company's business resulting from its
inability to purchase merchandise for its customers and material for its
manufacturing operations, the Company must

17
<PAGE>

obtain sufficient capital from debt and/or equity financing in the immediate
future. Failure to obtain sufficient additional capital will in all probability
result in discontinuing all or parts of the Company's present business units in
an effort to reduce losses and reduce the cash requirements of the Company's
operations. In the event management is able to obtain sufficient additional
capital to acquire merchandise to fill existing orders, there can be no
assurance that the business can be profitable.

Management of the Company is reviewing the possibility of discontinuing all or
parts of the Company's present business units in an effort to reduce losses and

reduce the cash requirements of the Company's operations.

Inflation

Inflation has not had a significant impact on the Company's results of
operations to date.

Remainder of page intentionally left blank

<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index To Financial Statements and Schedules

Page

BIO-DYNE CORPORATION AND SUBSIDIARIES

Reports of Independent Auditors ............................................20

Consolidated Balance Sheets at March 31, 1996 and 1995 .....................21

Consolidated Statements of Operations for the years ended
March 31, 1996 and 1995...................................................23

Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1996 and 1995 ......................................24

Consolidated Statements of Cash Flows
for the years ended March 31, 1996 and 1995...............................25

Notes to Consolidated Financial Statements .................................26

Schedule V - Property, Plant and Equipment -
For the years ended March 31, 1996 and 1995 ..............................42

Schedule VI - Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment -
For the years ended March 31, 1996 and 1995 ..............................43

Schedule IX - Short-Term Borrowings -
For the years ended March 31, 1996 and 1995...............................44

19
<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of Bio-Dyne Corporation
Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of Bio-Dyne
Corporation and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years then ended and the financial statement schedules listed
under item 7. These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules 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 financial statements and schedules are

free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements refered to above present
fairly, in all material respects, the financial position of Bio-Dyne
Corporation and subsidiaries as of March 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years then ended, in
conformity with generally accepted accounting principles. Further, in our
opinion, the financial statement schedules referred to above present fairly, in
all material respects, the information set forth therein, when considered in
relation to the consolidated financial statements taken as a whole.

As discussed in Note 2 to the consolidated financial statements, the Company
has incurred recurring losses and negative cash fows from operations, and has
working capital and net tangible equity deficiencies at March 31, 1996. The
Company also has insufficient working capital to satisfy its obligations to
trade creditors and deposits from customers. These conditions and events raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Gleiberman Spears Shepherd & Menaker, P.A.

Charlotte, North Carolina
July 18, 1996

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
($000 omitted)

ASSETS 1996 1995

CURRENT ASSETS:
Cash $ 286 $ 942

Due from factor 239 --

Accounts receivable, net of allowance for
doubtful accounts of $ 159 and $91 564 1,001

Inventories 2,095 2,662

Prepaid expenses and other current assets 174 219
------- -------
Total current assets 3,358 4,824

PROPERTY, PLANT AND EQUIPMENT, net 499 1,526

DEPOSITS AND OTHER ASSETS 113 92

GOODWILL, net of accumulated amortization
of $333 and $152 2,064 2,570
------- -------

$ 6,034 $ 9,012
======= =======

See accompanying notes to consolidated financial statements

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995 (continued)
(000 omitted)

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,432 $ 1,963
Accrued expenses 686 492
Current portion of notes payable and capital lease obligations 437 819
Due to factor 156 --
Line of credit -- 169
Customer deposits 756 258
Current portion of reserve for acquisition costs 186 347
Current portion of deferred gain on sale of building 10 --
------- -------
Total current liabilities 4,663 4,048

NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS,
net of current portion 271 743

CAROLINA FITNESS EQUIPMENT CREDITORS SETTLEMENT 450 450

RESERVE FOR ACQUISITION COSTS, net of current portion -- 103

ACCRUED EXECUTIVE SEPERATION EXPENSE,
net of current portion 56 116

DEFERRED GAIN ON SALE OF BUILDING, net of current portion 96 --
------- -------
Total liabilities 5,536 5,460
------- -------

STOCKHOLDERS' EQUITY:
Common stock, 100,000,000 shares authorized, $.01 par
value, 10,313,529 and 7,420,442 issued and outstanding,
net of treasury stock 103 75
Common stock subscribed, 1,301,587 shares -- 13
Additional paid in capital 9,729 9,536
Accumulated deficit (9,334) (5,984)
------- -------
498 3,640

Less: Treasury stock, 85,106 shares, at cost -- (88)
------- -------
Total stockholders' equity 498 3,552
------- -------
$ 6,034 $ 9,012
======= =======
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(000 omitted, except per share data)

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1995

<S> <C> <C>
Net sales $ 17,648 $ 20,061

Cost of goods sold 13,652 14,422
----------- -----------

Gross margin 3,996 5,639

Selling, general and administrative expenses 6,407 5,821

Depreciation and amortization, less amortization
of goodwill 88 90

Executive separation expense 200 400

Amortization of goodwill 181 152
----------- -----------

Loss from operations (2,880) (824)

Impairment of Goodwill 325

Interest expense, net of $17 and $25
of interest income 145 165
----------- -----------

Net loss $ (3,350) $ (989)
=========== ===========

Net loss per common share (.36) (.14)
=========== ===========

Weighted average shares outstanding 9,374,276 6,694,028
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000 omitted)

<TABLE>
<CAPTION>
Common Common Additional Accumulated Treasury Total
Stock Stock Paid-in Deficit Stock
Subscribed Capital

<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 $ 36 $ -- $ 6,594 $(4,995) $ -- $ 1,635

Issuance of 2,001,279 shares
under Regulation S offering 20 -- 1,170 -- -- 1,190

Issuance of 468,770 shares
in private placements 5 -- 229 -- -- 234

Issuance of 1,200,082 shares
for purchase of Home Fitness
Studios, Inc. and affiliates 12 -- 1,188 -- -- 1,200

Issuance of 80,000 shares
for consulting services 1 -- 28 -- -- 29

Exercise of 160,000 stock options 1 -- -- -- -- 1

Subscription of 1,301,587
shares in a private placement -- 13 327 -- -- 340

Purchase of 85,106 shares -- -- -- -- (88) (88)

Net loss -- -- -- (989) -- (989)
------- ------- ------- ------- ------- -------

BALANCE, MARCH 31, 1995 75 13 9,536 (5,984) (88) 3,552

Issuance of 1,301,587 subscribed shares 13 (13) -- -- -- --

Issuance of 1,200,000 shares
in a private placement 12 -- 280 -- -- 292

Exercise of 391,500 stock
options 3 -- 1 -- -- 4

Cancellation of Treasury Stock -- -- (88) -- 88 --

Net loss -- -- -- (3,350) -- (3,350)
------- ------- ------- ------- ------- -------

BALANCE, MARCH 31, 1996 $ 103 $ -- $ 9,729 $(9,334) $ -- $ 498
======= ======= ======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 omitted)

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1996 1995

<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(3,350) $ (989)
------- -------
Adjustments to reconcile net loss net cash used in operating
Depreciation and amortization 348 374
Imairment of Goodwill 325
Recognition of deferred gain on sale of building (3) --
Changes in working capital:
Due from factor (239) --
Accounts receivable, trade 437 (205)
Inventory 567 (260)
Prepaid expenses and other assets 24 (9)
Accounts payable 469 786
Customer Deposits 498 (205)
Accrued expenses 134 (129)
------- -------
Total adjustments 2,560 352
------- -------
Net cash used in operating activities (790) (637)

INVESTING ACTIVITIES:
Amount charged to acquisition reserve (264) (506)
Capital expenditures (57) (82)
Acquisition cash -- 860
------- -------
Net cash flows provided by (used in) investing activities (321) 272
------- -------

FINANCING ACTIVITIES:
Net under line of credit (169) (442)
Net borrowing from factor 156 --
Repayment of notes payable (854) (351)
Net proceeds from sale and leaseback of building 1,026 --
Net proceeds from issuance of common stock 296 1,475
Proceeds from private placement of common stock -- 340
Payment of bankruptcy settlement -- (200)
------- -------
Net cash flow provided by financing activities 455 822
------- -------
NET (DECREASE) INCREASE IN CASH (656) 457

CASH, BEGINNING OF PERIOD 942 485
------- -------

CASH, END OF PERIOD 286 942
======= =======
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Formation and Nature of Business - William E. York, Inc. was formed on October
13, 1989 to acquire Bio-Dyne Corporation ("Bio-Dyne") and ECBB Body Building,
Ltd. ("ECBB"), which collectively develop, manufacture, and distribute fitness
equipment. On November, 30, 1989, the Company acquired 100% of the stock of
Bio-Dyne and ECBB for $1,406,000 consisting of $1,350,000 in cash and a $56,000
short-term note for future consulting services.

The Company manufactures and sells physical fitness equipment principally for
resale to retailers throughout the United States. The Company also sells a full
range of physical fitness equipment and accessories of various manufacturers to
retail consumers and to commercial and institutional users through its Carolina
Fitness Equipment, Inc. (Carolina) and Home Fitness Studios, Inc. (HFS) stores
(see Note 3.)

Consolidation Policy - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates- The timely preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Actual results could differ from those estimates. Significant estimates include
the allowance for doubtful accounts receivable, reserve for obsolete inventory,
the measurement and evaluation of goodwill and the liability for the Carolina
Fitness Equipment Creditors Settlement. It is reasonably possible that a change
in one or more of these estimates could occur in the near term due to the
conditions prevalent in the industry, changes in technology and competition and
whether the Company continues as a going concern.

Revenue Recognition - Revenue from product sales is recognized at the time the
product is shipped or sold through retail outlets.

Inventories - Inventories are stated at the lower of first-in, first-out (FIFO)
cost or market.

Property, Plant, Equipment and Depreciation - Property, plant and equipment is
stated at cost less accumulated depreciation. Plant and equipment of Carolina
and HFS were recorded at their estimated fair value. For financial statement
purposes, depreciation is computed on the straight-line method over the
estimated useful lives of the related assets, ranging generally from 5 to 31
years. For income tax purposes, depreciation is computed using straight-line
and accelerated methods over allowable tax lives.

Intangible Assets - Goodwill generated by the acquisitions of Carolina and HFS
is being amortized on a straight line basis over a fifteen year period. At each

balance sheet date, the Company evaluates the realizability of its goodwill to
determine if an impairment has incurred. The Company measures the value of its
goodwill based on the estimated market value of the Company's common stock
outstanding,

26
<PAGE>

at the time of the evaluation, as it relates to the relative value of the
subsidiaries acquired to the Company as a whole. Management believes this
method of evaluating goodwill is a better method than evaluating goodwill
through estimated future undiscounted cash flows, as it is not practicable to
accurately estimate such future cash flows adequately to provide a realistic
valuation of the goodwill. Based on the most recent analysis, the Company
recorded an impairment of goodwill of $325,000 at March 31, 1996.

Deferred financing costs are being amortized over the term of the related debt
agreements, primarily nine to fourteen months.

Patents are amortized on a straight-line basis over their remaining legal
lives.

Supplemental Disclosure of Cash Flow Information:

Year Ended March 31
-------------------
1996 1995

($000 omitted)

Cash paid for interest $ 162 $ 190
Common stock issued in exchange for services -- 28
Deferred gain on sale of building 106 --
Treasury stock acquired for note payable -- 88
Cancellation of treasury stock (88) --

Net Loss Per Common Share - Net loss per common share is computed by dividing
net loss by the weighted average number of common shares outstanding during the
respective periods. Shares subject to the escrow arrangement described in Note
14 have been excluded from the computations of net loss per common share for
all periods presented.

Shares issuable upon the exercise of common stock options are not included in
the computation as their effect is not dilutive.

2. GOING CONCERN BASIS

The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the consolidated
financial statements the Company has suffered recurring losses and negative
cash flows from operations and has working capital and tangible net equity
deficiencies at March 31, 1996. In addition, the Company has been informed that
its line of credit with a factor is being reduced from $600,000 to $300,000.
The Company is substantially past due in its obligations to trade creditors and

for deposits from customers at March 31, 1996. As a result the Company is
experiencing difficulty in obtaining merchandise to fill orders for which is
has received deposits.

These conditions and events create substantial doubt about the Company's
ability to continue as a going concern.

27
<PAGE>

operations. In the event management is able obtain sufficient additional
capital to acquire merchandise to fill existing orders, there can be no
guarantee that the business can be profitable.

Managment of the Company is reviewing the possibility of discontinuing all or
parts of the Company's present business units in an effort to reduce losses and
reduce the cash requirements of the Company's operations, going forward.

On May 31, 1996, the Company obtained a line of credit for $1,000,000 which
resulted in a change in managment control of the Company (See Note 18). The new
management is attempting to arrange an additional equity investment in the
Company, is negotiating to arrange mergers and contractual relationships with
companies to provide additional business for the manufacturing operations as
well as new lines of products for its retail operations, and is considering the
divestiture of all or part of the Company's business units to reduce continuing
losses and cash requirements. However, there can be no assurance that the
Company will continue as a going concern in the event management elects to
discontinue or sell part or all of its business units due to the deteriorating
financial condition of all of the business units.

The consolidated financial statements do not reflect any adjustments that may
be required due to the ultimate outcome of this uncertainty.

3. BUSINESS COMBINATIONS

On February 10, 1994, the Company entered into an agreement to acquire all of
the outstanding stock of Carolina for $100 and an obligation to obtain the
releases of James H. Heafner, its sole stockholder, from certain guarantees of
obligations of Carolina. The Company reserved the right to rescind the purchase
of the shares until June 10, 1994. On April 19, 1994, Carolina filed a
voluntary prepackaged Chapter 11 petition under the United States Bankruptcy
Code to seek confirmation of a Plan of Reorganization. On May 26, 1994,
Carolina's Plan of Reorganization was confirmed by the Court. As part of such
plan, the Company provided $500,000 of debtor-in-possession financing,
including $250,000 which was converted into equity in Carolina. As a result of
the Court's confirmation of the Plan of Reorganization on May 26, 1994, the

Company did not exercise its right to rescind its purchase of Carolina.
Accordingly, the Company considers its purchase of Carolina to have been
consummated on May 26, 1994.

On April 18, 1994, the Company acquired all of the outstanding stock of HFS in
exchange for 1,200,082 shares of the company's common stock. In connection with
the Company's acquisition of HFS, the Company granted to a former shareholder
of HFS, who was now an officer and director of the Company, options to purchase
100,000 shares of the Company's common stock at the then fair market value. In
addition, certain stockholder loans in the aggregate amount of $345,000 that
are owed to former HFS stockholders were assigned to and assumed by the
Company.

Carolina and HFS are each engaged in sales of high performance fitness
equipment and related merchandise in retail stores and to commercial users. The
acquired companies operate nine and eight stores, respectively.

The total purchase price of the acquired companies was approximately
$3,345,000, including approximately $1,111,000 of direct acquisition costs and
approximately $443,000 of liabilities accrued for costs to be incurred in
accordance with a plan to exit certain activities of Carolina and HFS. The
acquisitions have been recorded using the purchase method of accounting.
Accordingly, the purchase

28
<PAGE>

prices were allocated to the assets and liabilities of the acquired companies
based on their estimated fair values as of the dates of the acquisitions. The
cost in excess of the net assets acquired was approximately $2,722,000 and is
being amortized on the straight-line basis over 15 years. Direct acquisition
costs of Carolina include the costs of filing the Chapter 11 bankruptcy
petition and obtaining confirmation of the plan of reorganization .

The Company completed a Regulation S offering of 2,001,270 shares of its common
stock to overseas investors in May 1994 for $1,190,000, which was used to
partially finance the acquisitions.

The unaudited proforma information which follows assumes the acquisitions
described above occurred at the beginning of the respective year presented
after giving effect to certain adjustments. The proforma financial information
does not purport to be indicative of the results of operations that would have
occurred had the transactions taken place at the beginning of the period
presented or of future results of operations.

(Unaudited)
Proforma Results of Operations
Year Ended March 31
------------------------------
1995
($000 omitted, except per share data)

Net sales $21,846
-------
Net Loss $(1,211)
-------
Net loss per share $ ( .17)
-------

Prior to the consummation of the acquisitions management established a plan to
combine the accounting and corporate administrative functions of the combined
company. Subsequent to the effective date of the acquisitions, it was
determined that the combined accounting and corporate administrative
departments would be located in a common facility with the warehouse and
marketing departments of HFS in Hollywood, Florida.

The Plan provided for the termination of all Carolina accounting and corporate
administrative personnel, except certain key personnel who were relocated to
the new corporate office. Liabilities for exit costs assumed and included in
the purchase price allocated to assets and liabilities of the acquired
companies are as follows:

Severance pay to the former stockholder of Carolina $ 85

Cost of closing and relocating Carolina and HFS corporate facilities 236

Relocation costs of key Carolina employees 122
-----
$ 443
=====

A retail store and a service and warehousing facility located in the same
leased building as the Carolina corporate office were moved to other locations
in Charlotte. Of the total liability for exit costs assumed, approximately
$264,000 and $726,000 were paid and charged against the liability during the
years ended March 31, 1996 and 1995 respectively.

<PAGE>

4. INVENTORIES

Inventories consisted of the following:

March 31
--------------------
1996 1995
($000 omitted)

Raw materials $ 459 $ 544
Work in process 43 98
Finished goods 169 184
Retail 1,424 1,836
------ ------
$2,095 $2,662
====== ======

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment was comprised of the following:

March 31
--------------------
1996 1995
($000 omitted)

Building and improvements $ -- $1,037
Machinery and equipment 795 795
Furniture and fixtures 301 235
Autos and trucks 119 131
------ ------
1,215 2,198
Less accumulated depreciation 716 672
------ ------
$ 499 $1,526
====== ======

6. LINE OF CREDIT

The Company had a line of credit with a bank to provide loans up to the
aggregate amount of $700,000 which matured on July 15, 1994 but was extended on
a month to month basis. On November 17, 1994, the Company negotiated an
extension of the credit line to August 1, 1995, subsequently extended to
September 1, 1995 and a change in some of its terms. Under the new arrangement,
the borrowing capacity of the credit line was the lesser of $600,000 or 70% of
eligible accounts receivable with interest payable at prime plus 2% (11% at
March 31, 1995). The credit line was collateralized by a first priority lien on
all tangible assets other than the building and was guaranteed by the prior
chairman.

The line of credit contained certain restrictive covenants which include
maintaining a current ratio of 1 to 1, net worth of at least $3,600,000, a
worth/debt ratio of at least .4 to 1, maximum total liabilities of $6,500,000

and restrictions on capital expenditures, payment of dividends, issuance of new
stock or debt, and future acquisitions. The Company was in violation of the net
worth covenant at March 31, 1995, but has received a waiver from the Bank.

30
<PAGE>

As of March 31, 1995 the Company's outstanding balance under the line of credit
was approximately $169,000.

The line of credit expired on September 1, 1995 and was not renewed or extended
by the bank.

7. DUE TO FACTOR

On November 17, 1995, the Company entered into an agreement to factor its
manufacturing receivables on a recourse basis. The agreement calls for advances
of 80% of factored receivables under 90 days old. The Company is paying
interest at 3% over the current prime rate of 8-3/4%. In addition, the Company
pays a fee of 1-1.5% of each invoice factored. The Company has granted a
security interest in all of the assets of its manufacturing operation,
including inventory and equipment. In addition, the Company's two retail
subsidiaries have guaranteed payment of the loan. The factoring agreement can
be terminated by either party upon 30 days prior written notice. Subsequent to
March 31, 1996, the Company was informed that its line of credit with the
factor was being reduced from $600,000 to $300,000.

8. CAROLINA FITNESS EQUIPMENT CREDITORS SETTLEMENT

As part of its confirmed bankruptcy Plan, Carolina provided secured creditors
100% of their recorded claims. The Plan also provides that unsecured claims,
which totaled approximately $3,311,000 at the time of the confirmation, will
receive a maximum aggregate settlement amount approximating $650,000, $200,000
of which was paid by Carolina into a bankruptcy disbursement account for the
benefit of the unsecured creditors on May 26, 1994, the effective date of the
Plan. The remaining $450,000 is scheduled for payout over a three year period
from the May 26, 1994, confirmation date. The Plan calls for a payment of an
amount equal to the lesser of $150,000 or net operating income before taxes in
excess of $250,000 for each year, with the accumulated shortfall, defined as
the amount less than $150,000 each year, carrying over until the third
anniversary date of the confirmation or May 26, 1997, at which time all unpaid
settlement amounts will be discharged.

9. LOANS FROM STOCKHOLDERS

At March 31, 1996 and 1995, the Company owed former owners of HFS, who are now
stockholders of the Company, $300,000 and $335,000, respectively, for unsecured
loans made to HFS and assumed by the Company upon the acquisition of HFS (See
Note 10). One of the stockholders was an officer and director and another was a
director of the Company until May 31, 1996. (See Note 18.) The loans bear
interest at 12% payable monthly and required the Company to issue stock options
at September 1, 1994, April 1, 1995 and September 1, 1995 based upon the amount
of debt outstanding at those dates. The Company has issued options to purchase
67,000 common shares under this provision of the loans through April 1, 1995.

During fiscal 1996, the company renegotiaited the terms of the loans so that
amortization began on September 1, 1996, for a seven year term, with interest
increasing to 15% on September 15, 1995.

Subsequent to year end, the Company renegotiated the terms of the loans in
connection with the change in control of the Company (see note 18) so that the
outstanding principal balance was paid down to $72,000 on May 31, 1996. The
remaining outstanding principal balance shall continue to accrue interest at a
rate of 12% and was due and payable on July 1, 1996. As of July 15, 1996, the
remaining principal balance and any accrued interest had not been paid.

<PAGE>

10. NOTES PAYABLE

Notes payable and capital lease obligations consists of the following:

<TABLE>
<CAPTION>
Year Ended March 31
-------------------
1996 1995
($000 omitted)

<S> <C> <C>
Note payable to an insurance company at 10%, due in monthly
installments of $8,756, with $50,000 due on July 1, 1995 and
the remaining balance payable on March 31, 1996;
collateralized by a building $ -- $ 656

Note payable to stockholders at 12% to August 30, 1995 and
15% thereafter, due in monthly installments of $3,988 starting
September 1, 1996 to 2003 (see Note 9) 300 335

Note payable to a financial institution at interest rates ranging
from zero to prime plus 3% over the life of the note, due in
monthly installments of $2,796 to $8,388 to 1999 232 287

Note payable by Carolina to a bank, without interest, due in
monthly installments of $3,078 to 1999 106 134

Note payable to a bank, with interest rates ranging from zero to
prime plus 3% over the life of the note, due in monthly
installments of $425 to $1,274 to 1999 33 43

Note payable at 7%, due in monthly installments of $7,651 -- 23

Capital lease obligations (see Note 11) 37 84
----- -----
708 1,562
Less current portion 437 819
----- -----

Long-term portion
$ 271 $ 743
===== =====
</TABLE>

Aggregate annual maturities of long-term debt and capital lease obligations at
March 31, 1996 are summarized as follows:

Year ending March 31 Amount
($000 omitted)
1997 $ 437
1998 111
1999 110
2000 50
-----
$ 708
-----

32
<PAGE>

11. LEASE OBLIGATIONS

Capital Leases - The Company has certain assets acquired under capital lease
obligations. The assets under capital leases are recorded at cost and are being
depreciated over the their estimated useful lives. The cost and accumulated
amortization of property and equipment under such capital leases at March 31,
1996 and 1995 are summarized as follows:

1996 1995

($000 Omitted)

Machinery and equipment $ 51 $ 51
Office equipment 9 9
----- -----
60 60
Less accumulated depreciation (30) (20)
----- -----

Total $ 30 $ 40
----- -----

Minimum future payments as of March 31, 1996 under capital lease obligations
are summarized as follows:

Year Ending March 31 Amount
($000 omitted)
1997 $ 30

1998 15
----

Total minimum lease payments 45
Less amount representing interest (8)

Total obligations under capital leases 37

Less current portion of obligations under capital leases (24)
----
Long-term obligations under capital leases $ 13
----

33
<PAGE>

Operating Leases - At March 31, 1996 the Company has commitments for nineteen
separate retail and warehouse/office locations with remaining lease periods
ranging from two months to five years. Certain of the leases provide for
renewal options of up to six years and for contingent rentals based upon sales
over certain levels. On September 27, 1995, the Company sold its production
facility in Atlanta for $1.1 million and entered into a ten year lease for the
facility. Minimum future payments as of March 31, 1996 for non-cancellable
operating lease obligations are summarized as follows:

Year Ending March 31, Amount
($000 omitted)

1997 $ 736
1998 590
1999 458
2000 330
2001 184
Thereafter 730
------
Total minimum lease payments $3,028
------

Rent expense for the years ended March 31, 1996 and 1995, was approximately
$895,000 and $898,000, respectively. The Company incurred no contingent rent
expense in any of the years.

12. EMPLOYEE BENEFIT PLAN

Carolina provides a 401(k) profit sharing plan for all of its employees over 21
years of age with one year of service. Carolina makes matching contributions
equal to 50% of the first 5% of each participant's compensation that is

contributed. Additional contributions to the plan are at the discretion of
Carolina's Board of Directors. Matching contributions under the 401(k) were
approximately $11,000 for the year ended March 31, 1996 and $7,000 for the ten
months ended March 31, 1995. There was no discretionary profit sharing
contribution in 1996 and 1995.

13. INCOME TAXES

The Company records provision for income taxes using the liability method of
accounting for income taxes under SFAS No 109 Accounting for Income Taxes. A
deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting using enacted tax rates. Deferred tax
expense (benefit) results from the change during the year of the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.

The net deferred tax assets at March 31, 1996 and 1995 are as follows:

1996 1995
($000 Omitted)

Deferred Tax Asset 2,651 $1,483
Valuation Allowance (2,651) (1,483)
------ ------
Net Deferred Tax Asset $ -- $ --
------ ------

34
<PAGE>

The net change in the valuation allowance is $1,168,000.

The deferred tax asset results primarily from the future tax benefit of
nondeductible accruals and net operating loss carryforwards totaling
approximately $8,511,000. Included in such net operating loss carryforward is
the recognition of stock option compensation expense for financial statement
purposes of approximately $1,983,000 which is not recognized for income tax
purposes until such options are exercised. The valuation allowance relates
primarily to the uncertainty of the future realization of the benefit from such
net operating loss carryforwards and benefit of currently non-deductible
accruals.

At March 31, 1996, the Company had, for federal income tax purposes, net
operating loss carryforwards of approximately $6,416,812 which if not utilized,
begin to expire in the year 2005.

14. STOCKHOLDERS' EQUITY

Common Stock

Initial Public Offering

In October 1991, the Company successfully completed an initial public offering
of 550,000 units ("Units") consisting of 1,110,000 shares of common stock and

550,000 common stock purchase warrants at $6.00 per Unit. Each Unit consisted
of two shares of the Company's $.01 par value common stock and one stock
purchase warrant (the "Warrant") redeemable at the option of the Company. The
Warrants are subject to redemption by the Company for $.05 per Warrant, on 30
days written notice, at any time commencing 90 days from the date of the
initial public offering.

The Warrants are exercisable and transferable separately from the common stock.
Each Warrant entitles the holder thereof to purchase at any time until the
fifth anniversary of the effective date of the initial public offering, one
share of common stock at a price of $4.00 per share during the first 24 months;
$5.00 per share during the following 24 months; and $6.00 per share during the
remaining 12 months.

In connection with the offering, the Company issued a warrant to the
underwriter to purchase 55,000 Units, exercisable over a period of four years
commencing October 16, 1992 at a price of $7.20 per unit.

In connection with the Regulation S offering of the Company's common stock and
pursuant to the anti-dilution provisions of the warrants, each warrant
currently entitles the holder to purchase 1.18 shares at an exercise price of
$4.22 until October 15, 1995, and thereafter at $5.07 until October 15, 1996.
Similarly, the warrants issued to the underwriter entitle the holder to
purchase 1.18 units at an exercise price of $6.08.

No warrants have been exercised as of March 31, 1996.

Escrow Shares

Prior to the October, 1991 initial public offering, the stockholders of the
Company placed in escrow 150,000 shares of common stock (the "Escrow Shares").
The stockholders whose shares are held in escrow will continue to vote their
respective Escrow Shares; however, the Escrow Shares are not assignable or
transferable.

35
<PAGE>

For any fiscal year during the term of this agreement where after-tax earnings
per share is at least $.75, all Escrow Shares shall be released from escrow and
returned to the stockholders. Finally, if prior to the fifth anniversary of the
date of this agreement, the closing bid price of the Company's common stock, as
reported on NASDAQ, averages in excess of $11.00 during any 30 consecutive
trading periods, the Escrow Agent shall deliver all of the Escrow Shares to the
stockholders of the Company.

In addition, if at any time during the term of the agreement the Company's
officers exercise all, or at least 50,000, of the certain stock options held by
them for the purchase of an aggregate of up to 659,680 shares of common stock,
then an aggregate of 50,000 shares issued upon exercise of such option(s) shall
be placed in escrow pursuant to the agreement.

If the escrow shares are not released in accordance with the agreement, the
Escrow Shares, as well as any related dividends or other distributions, will be

contributed to the capital of the Company.

Other Stockholders' Equity Transactions

During April and May, 1994, the Company completed a Regulation S offering of
2,001,270 shares of its common stock to foreign investors and received net
proceeds of $1,190,000 from the issuance of such shares.

In August 1994, the Company completed a private placement of 468,770 shares of
its unregistered common stock to a group of officers, directors and third
parties under Rule 144 of the Securities Act of 1933 and received proceeds of
$224,385 and the forgiveness of $10,000 of debt it owed one of its officers.

In March 1995, the Company received proceeds of $340,000 for the sale of
1,301,587 shares of its unregistered common stock in a private placement to a
group of investors under Rule 144 of the Securities Act of 1933. The shares
were issued in June 1995. In June 1995, the Company completed the private
placement by selling an additional 1,200,000 shares of its unregistered common
stock, for which the Company received $175,000 and a secured note for $125,000,
which was paid in July, 1995. These shares were issued in August 1995.

In November, 1993, the Company issued 85,106 shares of unregistered common
stock to one of the Company's attorneys for legal services of $85,106 rendered
for the year ended March 31, 1994. In July 1994, the Company repurchased these
shares for $88,418. In connection with the repurchase, the Company issued a
note which has a remaining balance of approximately $23,000 at March 31, 1995.
The 85,106 shares are included as treasury stock in the financial statements at
March 31, 1995, and were retired by the Company during the fiscal year ended
March 31, 1996.

At the Annual Meeting in September 1994 the Company's shareholders approved an
increase in authorized shares of common stock to 100,000,000 shares.

Stock Options

On November 30, 1989, the Company entered into five-year employment agreements
with two of its officers. Along with other provisions of this agreement, the
Company granted an option to one officer to purchase 60,800 shares of common
stock at a rate of 12,160 shares annually at a purchase price of $.01 per
share, of which 23,320 options were exercised in 1990 and 1991. Furthermore, in
1989 the

36
<PAGE>

Company also granted to these two officers options to purchase up to 399,000
and 224,200 shares of common stock, respectively, based on the levels of annual
earnings during the next five years at a purchase price of $.01 per share.
These stock options became 100% vested upon the initiation of the public
offering of the Company's common stock. During the fiscal years ended March 31,
1996 and 1995, 391,500 and 160,000 of these options were exercised,
respectively. At March 31, 1996, there were 108,180 options outstanding and
exercisable under these stock option agreements.

In November, 1991, the Company adopted a non-qualified stock option plan (the
"1991 Plan") to permit employees to purchase 100,000 shares of the Company's
common stock. Options granted under the Plan are exercisable under terms and
conditions set by the Board of Directors, which state among other things that
employees are 100% vested after two years from the date of grant. No options
have been exercised under the Plan as of March 31, 1996.

Transactions involving the Plan are summarized as follows:

Number Option Price
of Shares Per Share Total

Options outstanding at March 31, 1991 9,500 $2.25 $ 21,375
Granted during 1992
-------- -------- --------

Options outstanding at March 31, 1992 9,500 21,375
Granted during 1993 19,800 2.69 53,262
-------- -------- --------

Options outstanding at March 31, 1993 29,300 74,637
Granted during 1994 20,900 1.25 26,125
-------- -------- --------

Options outstanding at March 31, 1994 50,200 100,762
Granted during 1995 20,000 .125 2500
-------- -------- --------

Options outstanding at March 31, 1995 70,200 103,262
Granted during 1996
-------- --------

Options outstanding at March 31, 1996 70,200 $103,262
======== ========

In April 1994, the Company adopted a non-qualified stock option plan ("the 1994
Plan") to permit officers, directors, consultants, and employees of the Company
to purchase up to 1,000,000 shares of the Company's common stock. Options
granted under the 1994 Plan are exercisable under terms and conditions set by
the Board of Directors, which currently provide, among other things, that the
exercise price shall not be less than the then current fair market value of the
shares of common stock subject to the option on the date of grant. In April
1994, two officers were granted options to purchase an aggregate of 344,914
shares of common stock of the Company pursuant to this Plan at a price of
$1.0625. In April 1995 the Board of Directors authorized a reduction in the
price of these options to $0.6875, the then current market price. An additional
50,000 options were granted in April 1994 at a price of $1.0625 to five
employees of the Company, of which 10,000 were subsequently canceled upon the
termination of one of the recipients.

In September, 1994, 384,500 options were granted under the 1994 Plan at a price
of $0.59375, of which 13,500 were subsequently canceled upon the termination of
several of the recipients.

37
<PAGE>

In March 1996, 155,000 options were granted under the the 1994 plan at a a
price of $0.125, of which 21,500 were subsequently cancelled upon termination
of several of the recipients.

At March 31, 1996 there were 130,586 options available to be granted under the
1994 Plan.

Bridge Loan

In September 1991, the Company obtained bridge loans in the aggregate principal
amount of $150,000 from two unaffiliated lenders for the partial payment of
expenses relating to the initial public offering. The Company repaid these
loans following the closing of the offering in October 1991. The lenders
received warrants to purchase 150,000 shares of common stock at $1.00 per
share. If unexercised, the warrants expire five years from the date of
issuance.

Other Stock Options

During the year ended March 31, 1994, the Company's Board of Directors
authorized the Company to issue to various outside consultants options to
purchase 1,600,000 shares of common stock, in total, at exercise prices ranging
from $.75 to $1.00 per share pursuant to certain consulting agreements. Options
with respect to 1,150,000 shares were exercised during the year ended March 31,
1994, resulting in net proceeds of $950,000. Consulting expense associated with
these options was approximately $453,000 for the year ended March 31, 1994. All
remaining options were terminated prior to March 31, 1994.

During the year ended March 31, 1994, the Company's Board of Directors
authorized the Company to issue to certain shareholders of HFS options to
purchase 55,000 shares of common stock, in total, at $.01 per share pursuant to
certain consulting agreements. One of those HFS shareholders was an officer and
director and another was a director of the Company until May 31, 1996.
Compensation expense associated with these options was approximately $61,000.
These options were exercised in full in May 1994.

15. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

For the year ended March 31, 1996 and 1995, sales to one customer were
approximately $727,000 or 4% and $2,771,000 or 14% of net sales, respectively.
This customer accounted for approximately $18,000, or 2% and $143,000, or 14%,
of acounts receivable at March 31, 1996 and 1995, respectively. The Company has
no other significant concentrations of credit risk.

16. FOURTH QUARTER ADJUSTMENTS

As of March 31, 1996 the Company recorded an adjustment to recognize the
impairment of goodwill of $325,000.

As of March 31, 1995, the Company recorded net adjustments to goodwill related

to its business combinations during the year then ended of approximately
$515,000. The adjustments reflect additional direct acquisition costs of
$121,000, of which $46,000 had previously been charged to expense, and an
increase in the acquisition price of $150,000 to properly reflect the fair
market value of stock exchanged for one of the acquired companies on the date
of acquisition.

38
<PAGE>

The Company also reversed amounts previously recorded as part of the purchase
price of the acquired companies as follows:

Executive separation expense $400

Reduction of the estimate of direct costs of the acquisitions, net 247

Reduction of fair value as of the acquisition date
of acquired inventory determined to be slow moving 79

Stock issuance cost 60
----
$786
----

The Company also recorded an adjustment of $60,000 to reduce legal expenses in
the fourth quarter to properly reflect payments on a note payable to an
attorney previously charged to expense.

The net effect of these adjustments was to increase the net loss in the fourth
quarter of fiscal year 1995 by approximately $285,000, of which approximately
$42,000, $25,000 and $26,000, net, should have been charged to expense in the
first, second and third quarters, respectively.

17. CONTINGENCIES

The Company is subject to a number of lawsuits and claims (some of which
involve sustantial amounts) arising out of the conduct of its business,
including product liablility claims associated with personal injuries.

The Company is aware of 4 claims arising out of the use of its equipment. In
one claim, a lawsuit has been instituted seeking $75,000 in damages. In the
second, a lawsuit has been filed without a specified claim, but a claim letter
has been received asking for $45,000 in damages. In the third claim, no lawsuit
has yet been instituted but a claim letter has been received alleging very
serious injuries and claiming $20 million in damages. In the fourth claim, no
lawsuit has been filed nor has any monetary claim yet been asserted. No minimum
or range of losses associated with the ultimate outcome of these uncertainties
is presently determinable and no provision for such losses have been included
in the consolidated financial statements.

18. SUBSEQUENT EVENTS

On May 23, 1996, the Company entered into a two year, $1,000,000 Revolving

Credit Agreement with Continental American Transportation, Inc. (Lender). The
Agreement calls for Loans to the Company up to $1,000,000 in aggregate
principal amount at any one time, with interest on the outstanding balance at
12% per annum, payable quarterly. The Company can prepay any part of the
outstanding balance at any time with no prepayment penalty, with the full
outstanding balance due on the termination date two years from May 23, 1996.
Lender is obligated to provide funds five business days after being requested
by the Company.

The Agreement provides for an Initial Advance of $300,000, which was made on
May 23, 1996, and a Subsequent Advance of $150,000, which was made on May 31,
1996. Concurrent with the Subsequent Advance on May 31, 1996, five members of
the the Company's seven member Board of Directors resigned, namely Edward B.
Beam, Jr., Edward B. Beam, Sr., L. Clark Brand, William C. Buck and Harvey
Miller.

39
<PAGE>

Edward B. Beam, Jr. also resigned as Chairman, President, Chief Executive
Officer and Chief Operating Officer, and Harvey Miller also resigned as
Executive Vice President, Chief Financial Officer, Chief Accounting Officer,
Secretary and Treasurer. David H. York, who remains as a Director, resigned as
Assistant Secretary and Assistant Treasurer.

In accordance with the Company's by-laws, the two remaining Board members
appointed three new Board members, namely Timothy Holstein to fill the Board
seat vacated by Edward B. Beam, Sr. as a Class A director and to serve the
remainder of his term until the 1998 Annual Meeting, Erik Bailey to fill the
Board seat vacated by William A. Buck as a Class A director and to serve the
remainder of his term until the 1998 Annual Meeting, and Brian Henninger to
fill the Board seat vacated by Harvey Miller as a Class C Director to serve the
remainder of his term until the 1997 Annual Meeting. The remaining two Board
seats remain vacant. In addition, the Board appointed Timothy Holstein as
Chairman and Chief Executive Officer, Erik Bailey as Chief Financial Officer
and Brian Henninger as Secretary and Treasurer of the Registrant. The three new
officers hold similar positions as directors and officers of the Lender.

Neither the Lender nor any of the new directors and officers have any
beneficial ownership in the Company's capital stock.

Edward B. Beam, Jr. and Harvey Miller entered into amendments to their
Employment Agreements on May 31, 1996, the date of the Subsequent Advance and
of their resignations as directors and officers of the Company. The amendments
provide for the termination date of each agreement to be changed to November
30, 1996, from April 18, 1997, salary of each to be increased to $15,000 per
month from $12,500 per month, and provides that each employee must continue
full time activities for the Company until June 30, 1996. In addition, both Mr.
Beam Jr. and Mr. Miller entered into Amendments to Non-Qualified Stock Option
Agreements on May 31, 1996 under the April 1994 Stock Option Plan of the
Registrant, which allows both to exercise their previously granted stock
options for 36 months from May 31, 1996. Mr. Beam, Jr. holds a grant for
100,000 stock options and Mr. Miller holds a grant for 250,000 stock options.

The Revolving Credit Agreement is secured by secondary security interests in
all the assets of Company's five wholly owned subsidiaries. In addition, the
Company assigned to the Lender its interest in an existing UCC filing on the
assets of Carolina, which was granted to the Company to secure a $250,000
advance made to Carolina as part of its 1994 bankruptcy.

The Revolving Credit Agreement required that half of the $450,000 Initial and
Subsequent Advances be used to pay down the outstanding balance of the debt due
to Edward B. Beam, Sr. and Carolyn M. Beam, and Edward B. Beam, Jr. (the Beam
notes), leaving a aggregate balance due of approximately $72,000 at May 31,
1996 on the Beam notes after the payments. On May 31, 1996, Company entered
into amendments to the Beam notes providing that they are due and payable in
full on July 1, 1996. As of July 15, 1996, these payments have not been made.
Upon payment in full, the Beams will cancel their current security interest in
the assets of HFS, leaving the Lender will sole security rights.

19. FAIR VALUE OF FINANCIAL INSTRUMENTS

All financial instruments are held for other than trading purposes.

Management used the following methods and assumptions to estimate the fair
value of financial instruments.

(a) Cash and amounts due to and from factor - Because of the close proximity to
maturity, the carrying amount of cash and amounts due to and from the factor
approximates fair value.

40
<PAGE>

(b) Notes payable to stockholders - Notes payable to stockholders approximates
carrying value because all were paid shortly after the financial statement
date, except for $72,000 which was due July 1, 1996.

(c) Other notes payable - It is not practicable to estimate fair values for
other material notes payable as they are related to the Carolina Fitness
Equipment Bankruptcy. Similar debt is not available and as such there are no
marginal borrowing rates.

(d) Carolina Fitness Equipment Creditors Settlement - Because of the terms of
this settlement the probability that the Company will have to make payments
under it is remote. It is therefore, assumed to have no fair value.

The carrying amounts and fair values of the Company's financial instruments at
March 31, 1996 are as follows:

ASSETS Carrying Amount Fair Value

($000 omitted)

Cash $286 $286
Due From Factor 239 239

LIABILITIES
Due To Factor 156 156
Notes Payable to Shareholders 300 300
Other Notes Payable 371 See (c) above
Carolina Fitness Equipment
Creditors Settlement 450 See (d) above

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARY

SCHEDULE V
PROPERTY, PLANT, AND EQUIPMENT
($000 omitted)

<TABLE>
<CAPTION>
Additions
Balance from Other Balance
at Business Charges at
Beginning Combinations Additions Retire- Add End of
Classification of Period (a) at Cost ments (Deduct) Period
--------- ------------ --------- ------- -------

<S> <C> <C> <C> <C> <C>
Year Ended
March 31, 1995:

Buildings and improvements $1,037 $ $ $ $1,037
Machinery and equipment 776 17 2 795
Furniture and fixtures 50 46 19 4 111
Leasehold improvements 11 22 17 50
Autos and trucks 21 97 36 22 131
Computer Equipment 65 9 74
------ ------ ------ ------ ------
Year Ended $1,895 $ 247 $ 82 $ 26 $2,198
------ ------ ------ ------ ------

Year Ended
March 31, 1996:

Buildings and improvements $1,037 $ $1,037 $
Machinery and equipment 795 795
Furniture and fixtures 111 6 6 111
Leasehold improvements 50 3 53
Autos and trucks 131 12 119
Computer Equipment 74 63 137

------ ------ ------ ------ ------
Year Ended $2,200 $ 70 $ 1,055 $1,215
------ ------ ------ ------ ------
</TABLE>

<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARY

SCHEDULE VI
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORITIZATION OF PROPERTY, PLANT, AND EQUIPMENT

<TABLE>
<CAPTION>
Additions Other Charges
Balance at Charged to Add (Deduct) Balance End of
Beginning Costs and Period
Classification of Period Expenses Retirements
($000 omitted)

<S> <C> <C> <C> <C>
Year Ended March 31, 1995 $470 $220 $18 $672

Year Ended March 31, 1996 $672 $150 $106 $716
</TABLE>

43
<PAGE>

BIO-DYNE CORPORATION AND SUBSIDIARY

SCHEDULE IX
SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>
Weighted
Maximum Amount Average Amount Average
Weighted Outstanding Outstanding Interst Rate
Balance of Average During the During the During the
Category of Aggregate End of Interest Rate Period Period Period
Short-Term Borrowings Period
($000 omitted)

<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1995 $169 10% $600 $485 9%

Year Ended March 31, 1996 $156 11% $512 $256 11%
</TABLE>

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

This information will be contained in the definitive proxy statement of
the Company for the 1996 Annual Meeting of Stockholders under the caption
"Management" and is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

This information will be contained in the definitive proxy statement of
the Company for the 1996 Annual Meeting of Stockholders under the caption
"Compensation of Directors and Executive Officers" and is incorporated herein
by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information will be contained in the definitive proxy statement of
the Company for the 1996 Annual Meeting of Stockholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be contained in the definitive proxy statement of
the Company for the 1996 Annual Meeting of Stockholders under the caption
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.

<PAGE>

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) (1) Exhibits

A list of exhibits required by Item 601 of Regulation S-B and an
index thereto appears as follows:

Exhibit No. Description

3.1 Certificate of Incorporation of the Registrant (1)

3.2 Amendment to Certificate of Incorporation (10)

3.3 Bylaws (9)

10.1 Stock Escrow Agreement dated September 26, 1991, by
and between the Registrant, the Stockholders of the
Company and American Stock Transfer & Trust Company
(3)

10.2 Warrant Agreement dated October 16, 1991 by and
between the Registrant, certain stockholders of the
company and American Stock Transfer & Trust Company.
(10)

10.3 Sale and Lease Agreement (10)

10.4 Factoring Agreement (10)

10.5 Employment Agreement between the Registrant and
Edward B. Beam, Jr.(4)

10.6 Settlement Agreement and General Release by and
between the Registrant and William E. York (5)

10.7 Employment Agreement dated July 12, 1991, by and
between the Registrant and Harvey Miller. (6)

10.8 Agreement and plan of merger, articles of merger and
promissory notes consisting of two $7,500 notes
payable to Edward B. Beam, Sr.; $150,000 note payable
to Edward B. Beam, Jr. and $180,000 note payable to
Edward B. Beam, Sr., and Carolyn M. Beam. (4)

10.9 Stock Purchase Agreement dated February 10, 1994 by
and among Bio-Dyne North Corporation, Carolina
Fitness

<PAGE>

Equipment, Inc., Bio-Dyne Corporation and James H.
Heafner (7)

10.10 Subordination Agreement dated February 10, 1994 by
and between Carolina Fitness Equipment, Inc. and
James H. Heafner (7)

10.11 $1,000,000 Revolving Credit Agreement between
Bio-Dyne Corporation and Continental American
Transportation, Inc. Dated May 23, 1996. (8)

10.12 Promissory Note between Bio-Dyne North Corporation
and Continental American Transportation, Inc. dated
May 23, 1996. (8)

10.13 Security Agreement between Bio-Dyne North
Corporation, Carolina Fitness Equipment, Inc., Home
Fitness Studios, Inc., Home Fitness Studio of
Florida, Inc., Home Fitness Studios North, Inc. and
Continental American Transportation, Inc., dated May
23, 1996. (8)

10.14 Amendment to Promissory Note between Bio-Dyne North
Corporation and Edward B. Beam, Sr. and Carolyn M.
Beam, dated May 31, 1996. (8)

10.15 Amendment to Promissory Note between Bio-Dyne North
Corporation and Edward B. Beam, Jr., dated May 31,
1996. (8)

11.1 Statement regarding computation of share earnings,
see Notes to Consolidated Financial Statements

23.1 Consent of Gleiberman Spears Shepherd & Menaker, P.A.
(2)

99.1 Non- Qualified Stock Option Plan dated April 18,
1994. (4)

99.2 Form of stock option agreement by and among the
Registrant and William E. York (4)

99.3 Form of stock option agreement by and among the
Registrant and Edward B. Beam Jr. (4)

99.4 Securities and Exchange Commission No Action Letter
dated May 27, 1994 (7)

99.5 1991 Stock Option Plan (10)

47
<PAGE>

(1) Incorporated herein by reference from the Form S-18
Registration Statement of Registrant filed with the
Commission on June 7, 1991 (File No. 33-41106-A)

(2) Filed herewith.

(3) Incorporated here in by reference from pre-effective
Amendment No. 1 to the form S-18. Registration
Statement of Registrant filed with the Commission on
September 27, 1991.

(4) Incorporated herein by reference from the Form 8-Ks
filed with the Commission on February 10, 1994, April
18, 1994 and May 26, 1994.

(5) Incorporated herein by reference from the Company's
Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1995.

(6) Incorporated herein by reference from the Company's
Annual Report to Form 10-KSB/A No. 1 for the fiscal
year ended March 31, 1995.

(7) Incorporated by reference from the Registrant's Form
8-Ks filed with the Commission on February 10, 1994
and May 26, 1994.

(8) Incorporated by reference from the Registrant's Form
8-K for dated May 31, 1996.

(9) Incorporated by reference from the Registrant's Form
S-8 Registration Statement, File #33-80905.

(10) Incorporated by reference from the Registrant's Form
SB-2, File # 33-80909.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended March 31, 1996.

Remainder of page intentionally left blank.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

BIO-DYNE CORPORATION
A Georgia Corporation

By: _________________________________________
Timothy Holstein
Chairman of the Board and Chief Executive Officer

By: _________________________________________
Erik Bailey
Chief Financial Officer

By: _________________________________________
Brian Henniger
Secretary and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date

_____________________ Chairman of the Board July 18, 1996
Timothy Holstein and Chief Executive Officer

_____________________ Director, Chief Financial July 18, 1996
Erik Bailey Officer and Secretary

<PAGE>

_____________________ Director, Secretary, and Treasurer July 18, 1996
Brian Henninger

_____________________ Director July 18, 1996
Kenneth M. Jones

_____________________ Director July 18, 1996
David York

<PAGE>

BIO-DYNE CORPORATION

CONSENT OF ACCOUNTANTS

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements No.
33-80905 and No. 33-78750 of Bio-Dyne Corporation on Form S-8 of our report
dated July 18, 1996 appearing in the Annual Report on Form 10-KSB of Bio-Dyne
Corporation for the years ended March 31, 1996 and 1995.

Gleiberman Spears Shepherd & Menaker, P.A.
Charlotte, North Carolina
July 18, 1996

<ARTICLE> 5
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 286
<SECURITIES> 0
<RECEIVABLES> 962
<ALLOWANCES> 159
<INVENTORY> 2,095
<CURRENT-ASSETS> 3,358
<PP&E> 1,215
<DEPRECIATION> 716
<TOTAL-ASSETS> 6,034
<CURRENT-LIABILITIES> 4,663
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,034
<SALES> 17,648
<TOTAL-REVENUES> 17,648
<CGS> 13,652
<TOTAL-COSTS> 13,652
<OTHER-EXPENSES> 7,201
<LOSS-PROVISION> (3,205)
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> (3,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,350)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)

</TABLE>