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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended April 30, 1998 Commission File Number 0-21475
DYNAMIC INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-1215401
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
58 Second Avenue, Brooklyn, New York 11215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (718) 369-4160
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $4,235,518 on July 24, 1998.
The number of shares outstanding of Registrant's Common Stock as of June 30,
1998: 4,418,258
PART I
ITEM 1. BUSINESS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
General
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the
design, marketing and sale of a diverse line of hand exercise and light exercise
equipment, including hand grips, running weights, jump ropes and aerobic steps
and slides. It markets these products under the licensed trademarks SPALDING(TM)
and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM).
In addition, it designs and markets sports bags and luggage, which are marketed
primarily under the licensed name JEEP(TM) and under its own names Santa Fe(TM),
Polaris Expedition(TM) and SPORTS GEAR(TM). The Company's objective is to become
a designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation,
incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the
successor to a New York company incorporated in 1964. In August 1996, DCL merged
with and into DIL, which had been newly formed for the purpose of this merger.
The objective of the merger was to change the Company's state of incorporation
from Delaware to Nevada.
Plan of Reorganization
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages, alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition requesting relief under Chapter 11
of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a Plan of Reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. MG
Holding Corp. ("MG"), which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock,
representing approximately 93% of the then issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the
Company, then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM 3.
LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Products
Exercise Equipment - The Company's line of exercise equipment consists primarily
of handheld products, including dumbbells, ankle and wrist weights, hand grips,
jump ropes, exercise suits, slimmer belts and strength training products. In
addition, the Company markets light weight equipment such as aerobic steps and
slides and exercise mats. The Company also carries a line of small electronic
devices designed to monitor physical activity such as stopwatches, pedometers,
pulse meters and calorie counters.
-2-
Sports Bags/Luggage - The Company's line of sports bags/luggage consists
primarily of duffle bags, weekend bags, garment bags, suitcases, pilot cases and
flight attendant wheeled cases. Some of the models are equipped with wheels
and/or retractable handles.
Other Products - The Company, through a wholly-owned subsidiary, has obtained
the exclusive rights to the patents underlying the technology used in an
insulated bag incorporating a wrap-around gel pack or freeze pack with the
ability to cool and preserve food and other products for an extended period of
time. In addition, it obtained the trademarks Polaris Surround Chill(TM)
Freezy Bag(TM) and Polaris Surround Chill(TM) Freezy Gel(TM) under which the
products are sold. See "Intellectual Property--License Agreements".
The Company is currently testing the marketability of these products.
The Company has obtained the exclusive right to manufacture, distribute and
sell a hand held, portable total home gym product. This product will be sold
under the trademark SPALDING(TM) Rotoflex(TM).
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and creates its own molds
and tooling. Such molds and tooling are used by the manufacturers to produce the
equipment. The Company retains an ownership interest in the molds which are
returned to it upon the termination of the Company's relationship with a
particular manufacturer. The Company has been granted a number of design patents
with respect to certain of its products. See "Intellectual Property--License
Agreements". The Company employs a designer on a full-time basis for the design
of its sports bags/luggage products. During the most recent fiscal year the
Company spent approximately $178,000 on design activities, including fees to
designers and patent attorneys. The Company may, from time to time, utilize the
services of consultants for product and package design.
Most of the Company's products are manufactured in the Phillippines, Hong Kong,
and Indonesia, which in the most recent fiscal year accounted for approximately
42%, 17%, and 15%, respectively, of the Company's products. In addition, the
Company's products are manufactured in the United States, Taiwan, Korea, China
and Bangladesh. Exercise equipment is usually shipped by the manufacturers to
the Company within 45 days of the placement of an order. Orders for sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
Sales and Marketing
The Company sells its products on a wholesale basis only. Most of its
products are sold to catalog showrooms, drug chains, discount stores and
sporting goods chains. For the fiscal year ended April 30, 1998, Kmart and
Sears each accounted for 12% of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenues. For the fiscal year
ended April 30, 1998, sales of exercise equipment accounted for approximately
45% of the Company's revenues while 55% of the Company's revenues were derived
from the sale of sports bags/luggage.
-3-
The Company sells its products primarily through independent sales agents on a
commission-only basis. The Company currently engages approximately 22 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such
agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sales price of its products. Although the Company believes that
its sales agents sell products exclusively on behalf of the Company, there are
no agreements that prohibit them from selling competing products.
In addition, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company has begun
deliveries to Service Merchandise Co., Inc. and Kohl's Department Stores.
Although the scope of this marketing effort is currently limited, the Company
intends to expand the number of private label transactions. No assurance can be
given that its efforts in this area will be successful.
The Company currently anticipates that it may increasingly focus its attention
on direct response marketing. The Company believes that its products are
particularly well suited for so-called impulse buys. On February 12, 1998, the
Company entered into an infomercial production agreement with Script to Screen
Inc., to produce a twenty eight minute infomercial designed to sell the
Spalding(TM) Rotoflex(TM) by means of direct response by customers. As of April
30, 1998, payments of $142,000 had been made under the agreement. As of June 30,
1998, the Company had paid $284,000 to Script to Screen Inc. for production of
the infomercial. The payment of $142,000 has been classified as a prepaid
expense as of April 30, 1998. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Competition
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All
of these companies possess far greater financial and other resources, including
sales forces, than the Company's. However, the Company believes that as a result
of its ability to use the trademarked names SPALDING(TM) and KATHY IRELAND(TM)
it will be able to retain its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.
The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
Intellectual Property--License Agreements
The Company owns a number of trademarks, including Shaper Shop RX(TM), Santa
Fe(TM) and Polaris Expedition(TM).
License Agreements - The Company sells a number of its products under
licensed names. The Company has entered into licensee agreements
which provide for the grant of licenses to the Company and the payment of
royalties by the Company, as follows:
Jeep -- Under an agreement dated January 8, 1993, as amended by
letter amendment dated January 8, 1996, between the Company and
the Chrysler Corporation (as so amended, the "Jeep Agreement"), the
Company was granted the exclusive license to use the names JEEP,
WRANGLER and RENEGADE in connection with the manufacture, sale and
distribution of sports bags/luggage products. The current expiration date
of the Jeep Agreement is December 31, 1998. The parties have started
negotiations regarding the terms of an extension of the current
agreement.
-4-
Spalding --Under an agreement dated October 1, 1997, between the Company
and Spalding & Evenflo Companies Inc., the Company was granted the
exclusive right to use the name Spalding in connection with the sale and
distribution of hand held exercise products. The agreement will expire
September 30, 1999. The Company has the option to renew the agreement
until September 30, 2001.
Kathy Ireland -- Under an agreement with Kathy Ireland, Inc., dated
December 22, 1994, Ms. Ireland approves and endorses certain exercise
equipment designed and manufactured by the Company. Under the agreement,
the Company has the right to use her name in connection with the equipment
and Ms. Ireland will make appearances to promote such equipment. In
addition, the Company has the right to use her photograph and likeness in
connection with the sale of the equipment. The agreement, which expired
in June 1998, has been renewed until June 2000.
Freezy-Bag/FreezyGel -- Under an agreement dated November 1, 1996,
between New Century Marketing & Distributors, Inc. and a wholly-owned
subsidiary of the Company, the Company obtained the exclusive rights to a
patented technology as well as to the trademarked names FREEZY-BAG and
FREEZYGEL. The technology has the ability to cool foods and other products
and is used in the wrapping of such products. The agreement has a term of
two years but is renewable, at the option of the Company, for additional
one-year periods.
Rotoflex -- Under an agreement dated December 17, 1997 with Connelly
Synergy Systems LLC, the Company has obtained the exclusive right to
manufacture, distribute and sell a hand held portable total home gym
product to be sold under the trademark Spalding(TM) Rotoflex(TM).
Management Agreement with Achim Importing Co., Inc.
Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers.
In consideration for these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for
sales of $60 million or more. For sales not originating at the warehouse, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1998, the Company accrued approximately $183,095 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
-5-
In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
will purchase the products directly from the manufacturer and resell them to the
Company in order to accommodate Achim's commercial lenders who often require a
security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement.
Employees
As of June 30, 1998, the Company employed 11 persons, of whom five were
executive officers, two were engaged in administrative and clerical activities,
two were engaged in sales and two were involved in warehousing and shipping.
None of the Company's employees is represented by a union and no work stoppages
have occurred.
ITEM 2. PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. See ITEM
1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3. LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-6-
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Until 1995, the Company's common stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the
Bankruptcy Code in August 1995, no trading information was available after the
fiscal quarter ended July 31, 1995.
On December 27, 1997, the Company completed a public sale of 1,200,000 units:
each unit consisting of one share of Common Stock, one redeemable Class A
warrant and one redeemable Class B Warrant. The Common Stock and the Warrants
became separately traded on March 12, 1998. The Units, Common Stock, Class A
Warrants and the Class B Warrants are quoted on the OTC Bulletin Board under
the symbols DYNIU, DYNI, DYNIW and DYNIZ, respectively.
The following quotes have been reported by The Nasdaq Stock Market Inc., OTC
Bulletin Board. Such quotations reflect interdealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions
Fiscal High Low
Security/Symbol Quarter Bid Bid
- -----------------------------------------------------------------------
Units/DYNIU January 31, 1998 5.625 5.625
April 30, 1998 5.625 5.625
Common Stock/DYNI (1)
A Warrants/DYNIW (2)
B Warrants/DYNIZ (3)
(1) No quotes were posted to the OTC Bulletin Board for this security until
July 1998.
(2) This security has only one Market Maker. A minimum of two Market Makers
must post both bid and ask quotations to calculate the inside market from
which the summary quote data is derived.
(3) No quotes are available on the OTC Bulletin Board for this security.
The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data that are qualified by the
more detailed financial statements included herein. Effective August 8, 1996,
the Company emerged as the surviving entity in a merger with DCL. The balance
sheet of the combined entity was substantially similar to that of DCL
immediately prior to the merger. As a consequence, the financial data of the
Company for the reporting periods July 31, 1996 and prior consist of those of
DCL.
Due to the reorganization (see Note 2 to the Financial Statements), operating
results of the reorganized company may not be comparable to those of the
predecessor company.
-7-
REORGANIZED REORGANIZED
COMPANY*(1) COMPANY*(1) PREDECESSOR COMPANY
9 Months Ended 9 Months Ended 3 Months Ended Year Ended April 30
4/30/98 4/30/97 7/31/96 1996 1995 1994
--------------------------------------------------------------------------------------
Net Sales $8,001,138 $ 7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353
- --------------------------------------------------------------------------------------------------
Income
(Loss)
for Year 128,951 10,082 (76,364) 6,945,299 (11,227,335) 244,308
- --------------------------------------------------------------------------------------------------
Net Income
(Loss)
per Share .03 .003
- --------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
Working
Capital
(Deficit) 4,919,226 (9,901) (293,884) (7,493,435) 3,094,821
- --------------------------------------------------------------------------------------------------
Total
Assets 5,715,417 4,831,122 4,253,396 6,414,185 16,677,772
- --------------------------------------------------------------------------------------------------
Long Term
Obligations
Including
Capitalized
Lease
Obligations -0- 215,254 23,965 116,124 127,877
- --------------------------------------------------------------------------------------------------
*Management's assumptions used in determining the Company's reorganization value are discussed
in Note 2 to the Financial Statements.
(1) Due to the reorganization (see Note 2 to the financial statements),
operating results and earnings per share of the reorganized company may not be
comparable to those of the predecessor company. Management's assumptions used
in determining the Company's reorganization value are discussed in Note 2 to
the financial statements.
(2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996, the Company's Plan was approved by the Bankruptcy Court. During
July and August 1996, the Company satisfied its obligations under the Plan
through cash payments and the issuance of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
General
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below, has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below,
which the Company adopted on July 31, 1996, reporting for the year ended April
30, 1997 is accomplished by combining the financial results for the three-month
period ended July 31, 1996 and those of the nine-month period ended April 30,
1997.
-8-
Because of the application of fresh-start reporting, the financial statements
for the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization.
Plan of Reorganization
In August 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the Bankruptcy Code.
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. The
amount of claims allowed under the bankruptcy proceedings, aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG, which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock in satisfaction
of such promissory note, representing approximately 93% of the then issued and
outstanding shares thereby gaining absolute control over the Company's affairs.
See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash
and securities distributed under the plan of reorganization aggregated
$531,561. An amount of $16,692,193, representing the difference between the
value of the total distribution and the amount of allowable claims under
the bankruptcy, was recorded as an extraordinary gain.
In addition, under the Plan, the Company merged with a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. The
balance sheet of the combined entity was substantially similar to the balance
sheet of the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start reporting
on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years.
Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.
-9-
Results of Operations for the Fiscal Year Ended April 30, 1998 Compared to the
Nine Months Ended April 30, 1997 and Three Months Ended July 31, 1996.
Financial results for the nine months ended April 30, 1997 have been restated
for a change in the method of determining the cost of inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Sales of $8,001,000 for the fiscal year ended April 30, 1998 were $1,475,000 or
16% less than combined sales of $9,476,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996 of $7,493,000 and $1,983,000,
respectively. Sales of exercise equipment of $3,578,000 for the fiscal year
ended April 30, 1998 were 1,506,000 or 30% less than combined sales of exercise
equipment of $5,084,000 for the nine months ended April 30, 1997 and three
months ended July 31, 1996 of $4,124,000 and $960,000 respectively. Sales of
sports bags/luggage products of $4,404,000 for the fiscal year ended April 30,
1998 were $13,000 or .3% higher than combined sales of sports bags/luggage
products of $4,391,000 for nine months ended April 30, 1997 and the three months
ended July 31, 1996 of $3,368,000 and $1,023,000, respectively. Sales for the
fiscal year ended April 30, 1998 include sales of insulated bags with a wrap
around gel pack or freeze pack with the ability to cool and preserve food and
other products for and extended period of time of $19,000.
The Company's gross profit of $2,751,000 for the fiscal year ended April 30,
1998 was $376,000 or 12% less than the combined gross profit of $3,127,000 for
the nine months ended April 30,1997 and three months ended July 31, 1996 of
$2,588,000 and $539,000, respectively. The reduced gross profit is the result of
the lower sales for the fiscal year ended April 30, 1998. However, the gross
profit percentage for the fiscal year ended April 30, 1998 of 34.2% was 1.5%
higher than the combined gross profit percentage of 32.7% for the nine months
ended April 30, 1997 and the three months ended July 31, 1996 of 34.2% and
27.0%, respectively.
The Company believes that the decline in sales for the fiscal year is primarily
attributable to a shift in focus from increasing sales revenue to generating
revenues from merchandise that produces a higher gross profit. As a result the
decrease in sales of the Company's products were due to a decrease in sales to
one customer to whom the Company no longer wishes to sell products at prices
that would have an adverse impact on its gross profit percentage. The Company
believes that the decision to shift its focus from emphasis on revenues to
profit as discussed above, represents a positive development. Nevertheless,
there can be no assurance that the Company will continue to be successful in
attaining a higher gross profit percentage.
Operating expenses of $2,349,000 for the fiscal year ended April 30, 1998 were
$435,000 less than combined operating expense of $2,784,000 for the nine months
ended April 30, 1997 and three months ended July 31, 1996 of $2,227,000 and
$557,000, respectively.
Due to the application of fresh start accounting, the financial statements for
the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to reorganization. Therefore, a
discussion of the changes in operating expenses will compare the nine months
ended April 30, 1998 to the nine months ended April 30, 1997. Decreases for the
nine months ended April 30, 1998 compared to the nine months ended April 30,
1997 are represented approximately by net changes in the following expenses:
-10-
Decrease
(Increase)
Promotional expense ($240,000)
Product development ($40,000)
Shipping fees $244,000
Sales commissions $73,000
Salesman Salaries ($65,000)
Officers' salaries $76,000
Professional fees $221,000
Postage $10,000
Provision for bad debts $28,000
Depreciation $11,000
Promotional expenses increased by $240,000 primarily due to promotional fees
paid to two customers to promote sales of the Company's products. Product
development expenses increased $40,000 because the Company has hired a
consultant to develop new products and to further develop existing product
lines. Shipping fees decreased by $244,000 due to the decrease in sales
and an increase in direct sales to customers from the manufacturer. Sales
commissions decreased by $73,000 due to the decrease in revenues. Salesman
salaries increased by $65,000 due to the hiring of an executive Vice President
of Sales. Officers' salaries decreased by $76,000 due to the departure of the
former president of the Company in March 1997. Professional fees were reduced
by $221,000 due to decreased need for outside legal and accounting fees during
the nine months ended April 30, 1998. Postage decreased by $10,000. Provision
for bad debts decreased by $11,000. Depreciation expense decreased by $27,000.
During the nine months ended April, 30, 1998, the Company reported as prepaid
expenses approximately $480,000 in package design, displays and direct
responses advertising costs for several new products that were not introduced
until after April 30, 1998.
The Company's pretax profit of $268,000 for the fiscal year ended April 30, 1998
was $231,000 or 624% higher than the combined pretax profit of $37,000 which was
comprised of a $76,000 pretax loss for the three months ended July 31, 1996 and
a $113,000 pretax profit for the nine months ended April 30, 1997. During the
fiscal year ended April 30, 1998, the gross profit decreased by $376,000 due to
the decrease in volume. This decrease in gross profit was offset by a
reduction in operating expenses, interest expense and reorganization expenses of
$435,000, $122,000 and $50,000, respectively.
The following table sets forth the results of operations for the periods
discussed above:
Reorganized Reorganized Redecessor
Company Company Company
Fiscal Year Nine Months Three Months
Ended Ended Ended
4/30/98 4/30/97 7/31/96
--------- --------- ---------
Sales 8,001,000 7,493,000 1,983,000
42,000 55,000 10,000
--------- --------- ---------
8,043,000 7,548,000 1,993,000
Cost of sales 5,292,000 4,959,000 1,454,000
--------- --------- ---------
Gross profit 2,751,000 2,589,000 539,000
Operating expenses 2,349,000 2,227,000 557,000
Interest expense 134,000 199,000 57,000
--------- --------- ---------
2,483,000 2,426,000 614,000
Reorganization expense 0 49,000 1,000
--------- --------- ---------
Pretax income (loss) 268,000 114,000 (76,000)
Tax 139,000 104,000 0
--------- --------- ---------
Net income (loss) 129,000 10,000 (76,000)
-11-
Results of Operations for the Nine Months Ended April 30, 1997 and the Three
Months Ended July 31, 1996 Compared to the Fiscal Year Ended April 30, 1996
Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996, respectively, were, on a combined
basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise
equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997,
and the three months ended July 31, 1996, respectively, were $5,084,000, on a
combined basis. These combined sales of exercise products were $532,000 or 9%
less than the previous fiscal year. Sales of sports bags/luggage products of
$3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three
months ended July 31, 1996, respectively, were $4,391,000, on a combined basis.
These combined sales of sports bags/luggage products were 7% less than the
previous fiscal year. Sales for the fiscal year ended April 30, 1996 were
reduced by $3,211,000 of customer credits for a discontinued line of manual
treadmills and ski machines. The Company does not believe that the decrease in
sales of its products represents a material trend. The Company believes that the
decrease is primarily the result of the reorganization proceedings. The Company
will attempt to reverse this trend by expanding its product lines and increasing
the attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended April
30, 1997 and three months ended July 31, 1996, respectively, were, on a combined
basis, $3,899,000 less than the fiscal year ended April 30, 1996, due to the
reorganization.
The following is a discussion of the effect of the Company's reorganization
and adoption of fresh-start reporting on the various income statement line
items during the nine-month period ended April 30, 1997. For this purpose, the
nine months ended April 30, 1997 are compared to the nine months ended April
30, 1996. Decreases for the nine months ended April 30, 1997 compared to the
nine months ended April 30, 1996 are represented approximately by net changes
in the following expenses:
Freight out.......................$ 10,000
Insurance claims..................$ 70,000
Lawsuits..........................$289,000
Showroom rent.....................$319,000
Officers' salaries................$ 81,000
Office salaries...................$262,000
Warehouse salaries................$115,000
Salesmen salaries.................$ 57,000
Payroll taxes.....................$ 45,000
Fringe benefits...................$ 2,000
Repairs & maintenance.............$ 4,000
Travel & Entertainment............$ 30,000
Office equipment rental...........$ 7,000
Miscellaneous.....................$ 8,000
Consultant fees...................$105,000
Promotional material..............$189,000
Pension costs.....................$726,000
Telephone.........................$ 31,000
Data-processing...................$ 6,000
Postage...........................$ 10,000
Bad debt expense..................$666,000
Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000,
respectively, as a result of the accrual of proofs of claim filed during
the bankruptcy proceeding as liabilities subject to compromise during the
nine-month period ended April 30, 1996.
Showroom rent decreased by $319,000 since a proof of claim for the balance of
the lease was recorded during the nine-month period ended April 30, 1996.
The showroom was closed in October 1995.
Officers salaries decreased by $81,000 due to reduction in the salary of the
former President of the Company in September 1995, and the elimination of a
Chief Operating Officer position in December 1995. These changes resulted
in decreases of $37,000 and $44,000, respectively.
Office salaries decreased by $262,000 due primarily to the elimination of the
Vice President of Operations position in June 1996 which accounted for $119,000
of the reduction. In addition, the position of Credit Manager was eliminated in
May 1996 resulting in a savings of $45,000. The balance of $98,000 is due to the
overall reduction of the office staff as a part of the reorganization.
Warehouse salaries decreased by $115,000 due to the elimination of
warehouse employees under the reorganization.
Salesmen salaries decreased by $57,000 due to the elimination of a
sales position in August 1996.
Payroll taxes and fringe benefits decreased by $45,000 and $2,000,
respectively, due primarily to the positions and employees eliminated
during the reorganization.
Repairs and maintenance decreased by $4,000.
Travel and entertainment expenses decreased by $30,000 due to the
decrease in executive and sales personnel.
-12-
Office equipment rental decreased by $7,000 due to a reduction of the
equipment rented due to the reorganization.
Miscellaneous taxes decreased by $8,000 as a consequence of the change in the
Company's sate of incorporation from Delaware to Nevada which resulted
in the elimination of Delaware franchise taxes.
Consultantfees decreased by $105,000 because the Company did not hire
consultants during the nine months ended April 30, 1997.
Promotional materials decreased by $189,000 due to decreased spending for these
materials.
Pension costs decreased by $726,000 because a proof of claim filed by the
Pension Benefit Guarantee Corp. for this amount was recorded as part of the
reorganization during the nine months ended April 30, 1996.
Telephone expenses decreased by $31,000 due to the closing of the showroom in
October 1995.
Data-processing costs decreased by $6,441 due to the reorganization of the
Company.
Postage decreased by $10,000 due to improved cost management.
Bad debt expense decreased by $666,000 because of improved collections and
decreased sales volume.
Interest expense of $198,800 and $57,300 for the nine months ended April
30, 1997 and July 31, 1996, respectively, were, on a combined basis, $127,400
or 33% lower than the previous fiscal year. This decrease is the result of a
$223,000 decrease in contractual interest which was offset by an increase in
related party interest of $96,000. See ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS.
The Company's pre-tax profits of $147,000 for the fiscal year ended April 30,
1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31,
1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As
a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards
of approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision of $104,000 for
the fiscal year ended April 30, 1997 is based on pretax profits of $223,000 for
the period August 9, 1996 to April 30, 1997. The effective tax rate is 46%
comprised of 26% of federal taxes and 20% of state and local taxes.
-13-
The following table sets forth the results of operations for the periods
discussed above:
Reorganized
Company Predecessor Company
------------- -------------------------------------
For 9 Months For 3 Months For Fiscal Year
Ended 4/30/97 Ended 7/31/96 Ended 4/30/96
------------- ------------- ---------------
Sales 7,492,700 1,983,200 7,151,700
Other income 54,600 10,200 98,300
--------- --------- ----------
7,547,300 1,993,400 7,250,000
Cost of sales 4,959,300 1,454,600 9,480,500
--------- --------- ----------
Gross profit (loss) 2,588,000 538,800 (2,230,500)
--------- --------- ----------
Operating Expenses 2,226,600 556,500 6,683,200
Interest 198,800 57,300 383,500
--------- --------- ----------
2,425,400 613,800 7,066,700
--------- --------- ----------
Reorganization 48,900 1,300 449,700
--------- --------- ----------
Pretax income (loss) 113,700 (76,300) (9,746,900)
Tax 103,700 --- (7,511,000)
--------- --------- ----------
Income (loss) before
extraordinary item 10,000 (76,300) (2,235,900)
--------- --------- ----------
Extraordinary item
gain on discharge of
pre-petition liabilities --- --- 16,692,200
Tax --- --- 7,511,000
--------- --------- ----------
Extraordinary gain,
net of tax --- --- 9,181,200
--------- --------- ----------
NET INCOME (LOSS) 10,000 (76,300) 6,945,300
--------- --------- ----------
--------- --------- ----------
On July 10, 1997, the Company and MG agreed that no further payments shall be
payable to MG under the Note (see ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS) until the consummation of the Company's contemplated public
offering or at the scheduled maturity of the Note, whichever occurs earlier.
Liquidity and Capital Resources
Fiscal Year Ended April 30, 1998
During the fiscal year April 30, 1998, cash used by operating activies amounted
to $2,090,000. This was the result of increases in prepaid expenses as
discussed above, and decreases in accrued expenses of $609,000 and $2,806,000
respectively, which were offset by net income, decreases in accounts receivable
and due from suppliers, inventory and prepaid and refundable income taxes of
$129,000, $186,000, $967,000 and $14,000 respectively.
Investing activies used cash of $67,900 for molds related to a new product.
Financing activities provided cash of $3,689,000 as proceeds of a stock
offering of approximately $4,800,000, which was completed on December 27, 1997,
were used to pay accounts payable and accrued expenses of approximately
$2,800,000. The use of proceeds in this way produced the use of cash for
operating activities of $2,090,000. An additional $1,059,785 of the proceeds
of the stock offering was used to pay related party debt. The Company had a
positive cash flow of $1,532,000. The Company expects that based upon the cash
flow for the fiscal year ended April 30, 1998 and the anticipated future cash
flows, that the reorganization value in excess of amounts allocable to
identifiable assets of $112,000 as of April 30, 1998 will be fully recoverable.
-14-
Nine Months Ended April 30, 1997
During the first nine months after the Company's reorganization, cash used in
operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase
inventory by $923,000 during the nine-month period. The increase in
inventory was due to an anticipated increase in sales and the purchase of
larger volumes to take advantage of the decreased costs associated with the
higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254,
prepaid expenses decreased by $122,017, miscellaneous receivables decreased by
$132,379 and prepaid and refundable income taxes decreased by $252,046. These
amounts partially offset expenditures for inventory and payments to credits.
Cash of $332,957 provided by financing activities was primarily the result
of a $600,000 loan from MG Holding and was used to pay the creditors
in accordance with the Company's Plan. Cash provided by financing activities
was used to repay $145,324 of the note payable to MG Holding. In addition,
payments were made for capital leases, insurance notes, and deferred stock
offering costs of $29,656, $62,020, and $30,043, respectively. The Company had
a positive cash flow of $38,586.
Three Months Ended July 31, 1996
During the three months ended July 31, 1996, cash used by operating activities
amounted to $64,800. This was the result of a net loss of $76,400, increases in
accounts receivable and due from supplier, and prepaid expenses of $221,300 and
$100,600, respectively, which were offset by a decrease in inventory and an
increase in accounts payable and accrued expenses of $115,600 and $155,800,
respectively.
Financing activities provided cash of $43,200. Proceeds from insurance notes
payable of $77,200 were offset by repayments of insurance notes payable, and
repayments of capital lease obligation of $15,200 and $18,800, respectively. The
Company had a negative cash flow of $21,600 for the three months ended July 31,
1996.
Current Position
On April 30, 1998 the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in the form of
letters of credit and bankers acceptances. The agreement also provides for a
security interest in the inventory and notes and accounts receivables of the
Company. In addition the agreement provides for the personal guarantee of the
President and major shareholder of the Company in the amount of $250,000. As of
June 30, 1998 the Company's aggregate balance of $1,072,159 consisted of
$500,000 in bankers acceptances and $572,159 in outstanding letters of credit.
Pursuant to an unwritten understanding, Achim arranges for the issuance by its
financial lender of letters of credit in favor of the Company's overseas
suppliers, thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. The weighted average interest rate paid by the Company to Achim at
April 30, 1997 and April 30, 1996 was 9.25% and 11.5%, respectively.
-15-
The Company believes that the proceeds from the stock offering, the Chase
Manhattan Bank credit line and the availability of Achim's credit line will be
sufficient to finance its operations for the next twelve months.
Seasonality and Inflation
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company's profits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its
independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26, 1996,
there were no disagreements between the Company and Hoberman on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Company's Board of Directors appointed Moore Stephens,
P.C. as its independent accountants.
-16-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Marton B. Grossman 67 Chairman and President
Isaac Grossman 36 Vice Chairman, Treasurer and Secretary
Sheila Grossman 58 Director
William P. Dolan 45 Vice President--Finance
John Holodnicki 45 Vice President--Sales
Harry Braunstein 48 Director*
Bernard Goldman 77 Director*
Gordon Sulltrop 62 Executive Vice President
*Member of the Company's Audit Committee.
Marton B. Grossman has been the Chairman and Chief Executive Officer
of the Company since July 29, 1996. For the past 34 years, he has been
President of Achim, a privately-held company engaged in the import and export
of window coverings and accessories. In addition, he is President of MG
Holding Corp., a privately-held financial holding company. Mr. Grossman is the
father of Isaac Grossman, the Company's Vice Chairman, Treasurer and Secretary.
Mr. Grossman spends approximately 20% of his time working for the Company.
Isaac Grossman has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996, and Vice President of Achim since 1989. He is the
son of Marton B. Grossman, the Company's Chairman and President. Mr. Grossman
spends approximately 20% of his time working for the Company.
Sheila Grossman was elected a director in October 1997. From 1962 to
1987 she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
William P. Dolan has been the Company's Vice President-Finance since
July 1996. Prior thereto, he had been the Company's Treasurer and Secretary
since 1989. Mr. Dolan graduated from the William Paterson College of New
Jersey and is a Certified Public Accountant.
John Holodnicki has been a Vice President--Sales at the Company since
1994. From 1981 to 1994, he was a Vice President--Sales at HIT Industries, an
importer of business computer cases. Mr. Holodnicki earned a degree in Marketing
from the University of Illinois in 1975.
Harry Braunstein was elected a member of the Board in October 1997.
Mr. Braunstein has been a member of Hertzfeld & Rubin, a New York based law
firm, since 1984. He is member of the Board of Directors of Gotham Bank of New
York, Lark Holding Corp., the parent company of WDF, Inc., a privately held
plumbing supply company and Sentery Detection, Inc. a home alarm business. Mr.
Braunstein earned a J.D. degree from Brooklyn Law School in 1974.
Bernard Goldman was elected a member of the board in October 1997.
Mr. Goldman was the Chief Executive Officer of Goldman's Department Store, a
chain consisting of 12 stores, from 1957 to 1979. Mr. Goldman has been and
continues to be a member of the Board of Directors and an executive officer of
a number of community and charitable institutions and organizations.
-17-
Gordon Sulltrop was appointed Executive Vice President in September 1997.
Prior to joining the Company, from 1988 to 1997, he was employed by Rubbermaid
Specialty Products Division. At that company he acted as National Accounts
Sales Manager from 1996, Central Region Manager from 1991-1995, Military and
Premium Sales Manager from 1990 to 1991 and National Accounts Manager from
1988 to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri Valley
College, Marshall, Missouri.
Board of Directors
Each director is elected at the Company's annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are three directors of the Company.
The bylaws permit the Board of Directors to fill any vacancy and the new
director may serve until the next annual meeting of stockholders or until his
successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board.
The underwriting agreement, for the stock offering completed on December 27,
1997, provides that the underwriter has the right to designate one member of the
Board of Directors for a period of three years following the consummation of the
Company's public offering on December 27, 1997. To date, no person has been
designated by the Underwriter.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
during the three fiscal years ended April 30, 1997 (I) to its Chief Executive
Officer, (ii) its other two Executive Officers and (iii) two additional
non-Executive Officers whose cash compensation exceeded $100,000 per year in any
such year:
SUMMARY COMPENSATION TABLE (1) (2)
----------------------------------
Name/Principal Year Ended Annual Compensation All Other
Position April 30 Salary Bonus Compensation (3)
- --------------------------------------------------------------------------------
Marton B. Grossman 1998 $0 $31,200
Chairman & President 1997 $0 $31,200
1996 $0 $18,200
- --------------------------------------------------------------------------------
Isaac Grossman 1998 $0 $32,240
Director, Treasurer 1997 $0 $32,240
1996 $0 $18,200
- --------------------------------------------------------------------------------
William P. Dolan 1998 $112,976 $0
Vice President-Finance 1997 $100,000 $0
1996 $100,000 $0
- --------------------------------------------------------------------------------
John Holodnicki 1998 $124,538 $0
Vice President 1997 $120,000 $0
1996 $120,000 $0
- --------------------------------------------------------------------------------
Marvin Cooper (4) 1998 $0 $0
Executive Vice President 1997 $128,125 $0
1996 $182,876 $0
- --------------------------------------------------------------------------------
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which does not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or 10%
of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.
(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac Grossman's
activities performed on behalf of the Company. Marton Grossman is the sole
shareholder, and Isaac Grossman is an employee of Achim. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
(4) Mr. Cooper resigned his position in March 1997.
None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.
-18-
Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares. If the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he will be issued 600,000 shares. If the Company's earnings before
taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he
will be issued 1,000,000 shares. The stated earnings criteria are cumulative so
that in the event of an earnings shortfall during a fiscal year, shares relating
to two fiscal years will be issued provided that the Company, during the
succeeding fiscal year, realizes earnings that in the aggregate are equal to two
years of earnings as set forth in the Agreement. The Agreement also provides for
piggyback registration rights with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock to be issued
to Marton Grossman under the Bonus Agreement:
Performance or Other
Number of Shares, Period Until Estimated Future Payments
Units or Other Maturation or Under Non-Stock
Name Rights Payout Price-Based Plans
---- ----------------- -------------------- -------------------------
Threshold Target Maximum
-------------------------
Marton B. Grossman 2,000,000 April 30, 2000 * * *
- ----------------------------------------------------------------------------------------------
*The number of shares to be issued in a particular fiscal year is based on the
criteria set forth above.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 1996 through April 30, 1997, other than Forms 3
that were filed late with respect to Messrs. Marton and Isaac Grossman and
William Dolan and the Marton Grossman Annuity Trust, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
beneficial owners were complied with.
401K Plan
The Company terminated the 401K plan as of December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1998, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (I) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215, unless otherwise
indicated.
-19-
Shares Owned Beneficially
and of Record (1)
-----------------------------
Name and Address No. of Shares % of Total
---------------- ------------- ----------
Marton B. Grossman (2) 2,976,000 67.3
Isaac Grossman (3) 2,976,000 67.3
Sheila Grossman (2) 2,976,000 67.3
Harry Braunstein
40 Wall Street
New York, NY 10004 -0- *
Bernard Goldman
2100 Boca West Drive
Laurel Oaks, FL -0- *
William P. Dolan 123 *
John Holodnicki 11 *
Gordon Sulltrop -0- *
All Officers and Directors
as a Group (8 persons) 2,976,134 67.3
- --------------------------------------------------------------------------------
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all
options and warrants. Shares issuable under options or warrants are
owned beneficially but not of record.
(2) Consists of shares of Common Stock held by a family foundation and a series
of trusts (collectively, the "Grossman Trust") for the benefit of relatives of
Mr. Grossman. Mr. Isaac Grossman and two of his relatives are the trustees of
the Grossman Trusts. Under its terms, the Grossman Trust will return to Mr.
Grossman annually until August 1998 56% of the value of the shares
(payable in cash or in shares) when deposited into each of the Grossman
Trusts. Since the number of shares to be returned to Mr. Grossman is based
on the then current market price of the Common Stock, such number cannot
be determined at the present time. To date, 201,023 shares have been returned
to Mr. Grossman under this arrangement. Mr. Grossman disclaims beneficial
ownership in the shares held by the Grossman Trust that will not be returned
to him.
(3) Consists of shares held by the Grossman Trust of which Mr. Isaac
Grossman is currently a beneficiary as to 464,600 shares. The actual number
of shares held by the Grossman Trust as to which Isaac Grossman is a
beneficiary may be smaller since under the terms of the Grossman Trust, a
portion of the shares may be returned to Marton Grossman as described in
footnote (2). Mr. Grossman is a trustee of the Grossman Trust and in that
capacity shares voting power as to the shares held by the Grossman Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530.
MG is wholly owned by Marton B. Grossman, the Company's Chairman and President.
The note was subsequently repaid by the Company through the issuance of
2,976,000 shares of Common Stock to MG. MG assigned the Common Stock to a
trust for the benefit of members of Mr. Grossman's family.
Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to
the Company to consummate the Plan and for related expenses. The Company issued
a promissory note to MG Holding evidencing the loan and granted it a security
interest in all of the Company's assets. The promissory note is to be paid in 24
monthly installments commencing September 5, 1996. The note accrues interest at
the Citibank prime rate plus 1%. The weighted average interest rate as of the
date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April
30, 1997, the Company had accrued interest in the amount of $37,219 in
connection with this loan. As of June 30, 1997, the amount of interest owed
amounted to $54,197. In July 1997, the Company and MG Holding agreed that no
principal or interest payments under the note would be due until the
consummation of this offering or the scheduled maturity of the note, whichever
occurred earlier. The note and all accrued interest was paid in full on December
23, 1997 with the proceeds of the stock offering.
Pursuant to the Warehousing Agreement, Achim performs certain administrative
services on behalf of the Company. Under the Warehousing Agreement, Achim
assists, among other things, in the maintenance of financial and accounting
books and records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and credit checks on the Company's customers.
In consideration of these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30,000,000 to 3% for
sales of $60,000,000 or more.
-20-
For sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and account located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1997, the Company accrued approximately $183,095 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
On April 30, 1998 the Company entered into a credit agreement with The
Chase Manhattan bank for maximum borrowings of $1,500,000 in the form of
letters of credit and banker acceptances. The agreement also provides for a
security interest in the inventory and notes and accounts receivable of the
Company. The agreement also provides for the personal guarantee of the
President and major shareholders of the Company in the amount of $250,000.
In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers, thereby enabling the Company to finance the purchases of its
inventory. Also, from time to time, when taking deliveries from domestic
suppliers, Achim purchases products from the manufacturer and resells them to
the Company in order to accommodate Achim's commercial lenders who often require
a security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1998, no monies were owed to Achim
under this arrangement. See ITEM 13. CERTAIN RELATIONSHIP AND RELATED
TRANSACTIONS. The weighted average interest rate paid by the Company to Achim at
June 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%,
respectively.
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company. Other than the fees payable by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co.,
Inc" and ITEM 2. PROPERTIES.
-21-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
exhibits which are being filed herewith and the exhibits which are
incorporated herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended April 30, 1998.
-22-
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page to Page
Item 8: Financial Statements
Independent Auditor's Report...................................... F-1..........
Consolidated Balance Sheets as of April 30, 1998 and 1997......... F-2.......F-3
Consolidated Statements of Operations for the year ended April 30, 1998, the
nine months ended April 30, 1997, the three months ended July 31, 1996
and the year ended April 30, 1996................................. F-4.......F-5
Consolidated Statements of Stockholders' Equity for the year ended April 30,
1998, the nine months ended April 30, 1997, the three
months ended July 31, 1996 and the year ended April 30, 1996...... F-6..........
Consolidated Statements of Cash Flows for the year ended April 30, 1998, the
nine months ended April 30, 1997, the three months ended July 31, 1996
and the year ended April 30, 1996................................. F-7.......F-9
Notes to Consolidated Financial Statements........................ F-10.....F-22
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Dynamic International, Ltd.
We have audited the accompanying consolidated balance sheet of
Dynamic International, Ltd. [formerly Dynamic Classics, Ltd., see Note 2] and
its subsidiary as of April 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended April 30, 1998, the nine months ended April 30, 1997, the three months
ended July 31, 1996, and the year ended April 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Dynamic International, Ltd. [formerly Dynamic Classics, Ltd.] and
its subsidiary as of April 30, 1998 and 1997, and the results of their
operations and their cash flows for the year ended April 30, 1998, the nine
months ended April 30, 1997, the three months ended July 31, 1996, and the year
ended April 30, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 3 to the financial statements, the
Company had given retroactive effect to the change in accounting for its
inventories from the LIFO method to the FIFO method
/s/ MOORE STEPHENS, P. C.
MOORE STEPHENS, P. C.
Certified Public Accountants
New York, New York
July 15, 1998
F-1
Item 8:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
April 30,
---------
1 9 9 8 1 9 9 7
------- -------
[Restated]
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,575,248 $ 43,543
Accounts Receivable - Trade [Net of Allowance for
Doubtful Accounts of $122,685 and $167,000 in 1998
and 1997, Respectively] 810,447 887,089
Due from Suppliers 36,142 65,273
Inventory 2,359,022 3,325,795
Prepaid Expenses 669,133 60,272
Miscellaneous Receivables -- 2,658
Prepaid and Refundable Income Taxes 26,201 39,914
--------------- ---------------
Total Current Assets 5,476,193 4,424,544
--------------- ---------------
Property and Equipment:
Tools and Dies 775,839 707,939
Furniture and Equipment 102,205 102,205
Capitalized Equipment Leases 576,071 576,071
--------------- ---------------
Totals - At Cost 1,454,115 1,386,215
Less: Accumulated Depreciation (1,329,269) (1,260,924)
--------------- ---------------
Property and Equipment - Net 124,846 125,291
--------------- ---------------
Other Assets:
Due from Supplier -- 36,142
Security Deposits 2,050 4,650
Deferred Stock Offering Costs -- 116,023
Reorganization Value in Excess of Amount Allocable
to Identifiable Assets - Net 112,328 124,472
--------------- ---------------
Total Other Assets 114,378 281,287
--------------- ---------------
Total Assets $ 5,715,417 $ 4,831,122
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-2
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
April 30,
---------
1 9 9 8 1 9 9 7
------- -------
[Restated]
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses - Non-Related $ 458,359 $ 846,234
Accounts Payable and Accrued Expenses - Related Party 19,186 2,627,580
Capital Lease Obligations - Current -- 24,228
Income Taxes Payable 79,422 91,872
Loan Payable- Related Party -- 844,531
--------------- ---------------
Total Current Liabilities 556,967 4,434,445
--------------- ---------------
Other Liabilities:
Loan Payable- Related Party -- 215,254
--------------- ---------------
Commitment and Contingencies [6] -- --
--------------- ---------------
Stockholders' Equity:
Common Stock - Par Value, $.01 Per Share; Authorized
5,000,000 Shares; No Shares Issued
Common Stock - Par Value $.001 Per Share; Authorized
50,000,000 Shares; Issued 4,418,798 and 3,198,798 Shares 4,419 3,199
Additional Paid-in Capital 4,869,796 22,940
Retained Earnings 284,238 155,287
--------------- ---------------
Totals 5,158,453 181,426
Less: Treasury Stock - At Cost - 540 Shares (3) (3)
--------------- ---------------
Total Stockholders' Equity 5,158,450 181,423
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 5,715,417 $ 4,831,122
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-3
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
Revenues:
Sales $ 8,001,138 $ 7,492,729 $ 1,983,164 $ 7,151,715
Other Income 41,938 54,642 10,201 98,272
------------ ------------ ------------ ------------
Total Revenues 8,043,076 7,547,371 1,993,365 7,249,987
Cost of Sales 5,291,768 4,959,319 1,454,637 9,480,484
------------ ------------ ------------ ------------
Gross Profit 2,751,308 2,588,052 538,728 (2,230,497)
------------ ------------ ------------ ------------
Operating Expenses:
Research and Development 60,493 4,042 -- 101,992
Shipping Expense 273,459 452,093 116,894 738,681
Selling Expense 865,223 686,214 198,993 1,254,006
Advertising and Promotion 413,271 152,563 1,819 389,672
General and Administrative 736,738 931,683 238,791 4,198,800
Interest and Bank Charges - Non-Related
[Contractual Interest of $806,937 for
the year ended April 30, 1996] 8,441 21,462 4,174 248,625
Interest and Bank Charges - Related Party 125,481 177,339 53,096 134,928
------------ ------------ ------------ ------------
Total Operating Expenses 2,483,106 2,425,396 613,767 7,066,704
------------ ------------ ------------ ------------
Reorganization Items:
Bankruptcy Administration Costs -- 48,874 1,325 449,693
------------ ------------ ------------ ------------
Income [Loss] Before Provisions
for Income Taxes 268,202 113,782 (76,364) (9,746,894)
------------ ------------ ------------ ------------
Income Tax Provision [Benefit]:
Current 139,251 103,700 -- --
Deferred -- -- -- (7,511,000)
------------ ------------ ------------ ------------
Total Tax Provision [Benefit] 139,251 103,700 -- (7,511,000)
------------ ------------ ------------ ------------
Income [Loss] Before Extraordinary
Item 128,951 10,082 (76,364) (2,235,894)
------------ ------------ ------------ ------------
Extraordinary Item:
Gain on Discharge of Prepetition
Liabilities -- -- -- 16,692,193
Income Tax Provision -- -- -- (7,511,000)
------------ ------------ ------------ ------------
Extraordinary Gains Net of Income Tax -- -- -- 9,181,193
------------ ------------ ------------ ------------
Net Income [Loss] $ 128,951 $ 10,082 $ (76,364) $ 6,945,299
------------ ------------ ------------ ------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-4
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Reorganized Reorganized
Company Company
For the For the Nine
Year Ended Months Ended
April 30, April 30,
1 9 9 8 1 9 9 7
------- -------
[Restated]
Income Per Share of Common Shares $ .03 $ --
=============== ===============
Weighted Average Number of Common Shares $ 3,655,758 $ 3,198,258
=============== ===============
The earnings per share as it related to the predecessor company is not
meaningful due to the reorganization.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-5
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------
Additional Treasury Total
Common Paid-in Retained Stock - Stockholder's
Stock Capital Earnings At Cost Equity
------------ --------------- -------------- ------------ --------------
Balance - May 1, 1995 $ 17,444 $ 590,291 $( 7,582,536) $ (17,500) $ (6,992,301)
Net Income -- -- 6,945,299 -- 6,945,299
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002)
Net [Loss] for the three months
ended July 31, 1996 -- -- (76,364) -- (76,364)
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate Predecessor Equity
Accounts and to Reflect
New Issuance of Shares in
Connection with Fresh Start (1,450) (580,146) 713,601 17,497 149,502
------------ --------------- -------------- ------------ --------------
15,994 10,145 -- (3) 26,136
To Reflect 1 for 5 Reverse
Stock Split (12,795) 12,795 -- -- --
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 3,199 22,940 -- (3) 26,136
Adjustment at the Date of the
Implementation of Fresh Start
Accounting for the Cumulative
Effect of Applying Retroactively
the New Method of Valuing
Inventories at August 1, 1996 -- -- 145,205 -- 145,205
Net Income for the nine months
ended April 30, 1997 - Restated -- -- 10,082 -- 10,082
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1997 3,199 22,940 155,287 (3) 181,423
Issuance of 20,000 Shares for
Legal Expenses in Connection
with the Public Offering 20 74,635 -- -- 74,655
Net Proceeds from Issuance of
1,200,000 Shares of Common
Stock [Offering Costs of
$1,251,924] in December 1997 1,200 4,772,221 -- -- 4,773,421
Net Income for the year ended
April 30, 1998 -- -- 128,951 -- 128,951
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1998 $ 4,419 $ 4,869,796 $ 284,238 $ (3) $ 5,158,450
============ =============== ============== ============ ==============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-6
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
Operating Activities:
Net Income [Loss] $ 128,951 $ 10,082 $ (76,364) $ 6,945,299
Adjustments to Reconcile Net Income
[Loss] to Net Cash Provided by
[Used for] Operating Activities:
Depreciation and Amortization 80,489 87,681 26,191 220,400
Reserve for Bad Debt (44,315) -- -- 167,000
Loss on Disposal of Property
and Equipment -- -- -- 71,030
Deferred Income Taxes -- -- -- (7,511,000)
Income on Partial Discharge of
Capital Lease Obligations -- -- -- (77,403)
Interest Converted to Principal -- 11,439 36,670 --
Reorganization Item:
Gain on Discharge of Debt - Net
of Income Tax -- -- -- (9,181,193)
Cash Distribution -- (515,638) -- --
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable and Due
from Suppliers 186,230 482,254 (221,255) 220,882
Inventory 966,773 (923,565) 115,616 1,065,821
Prepaid Expenses (608,861) 122,017 (100,596) 168,856
Miscellaneous Receivables 2,658 132,379 -- (108,179)
Prepaid and Refundable Income Taxes 13,713 252,046 (812) --
Security Deposits 2,600 -- -- 86,858
Increase [Decrease] in:
Prepetition Liabilities -- -- -- 8,614,728
Accounts Payable and
Accrued Expenses (2,805,591) (56,766) 155,784 (1,828,715)
Income Taxes Payable (12,450) 103,700 -- --
---------------- --------------- ---------------- ---------------
Net Cash - Operating Activities -
Forward $ (2,089,803) $ (294,371) $ (64,766) $ (1,145,616)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-7
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Reorganized Reorganized Predecessor
Company Company Company Predecessor
For the For the Nine For the Three Company
Year Ended Months Ended Months Ended Year Ended
April 30, April 30, July 31, April 30,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 6
------- ------- ------- -------
[Restated]
Net Cash - Operating Activities -
Forwarded $ (2,089,803) $ (294,371) $ (64,766) $ (1,145,616)
---------------- --------------- ---------------- ---------------
Investing Activities:
Purchase of Property and Equipment (67,900) -- -- (47,933)
---------------- --------------- ---------------- ---------------
Financing Activities:
Proceeds from Notes Payable -- -- -- 3,393,628
Repayment of Notes Payable -- -- -- --
Proceeds from Note Payable -
Related Party -- 600,000 -- --
Repayment from Notes Payable -
Related Party -- (145,324) -- --
Proceeds from Loan Payable -
Related Party -- -- -- 557,000
Repayment of Loan Payable - Related Party (1,059,785) -- -- --
Proceeds from Bankers Acceptances -- -- -- 1,118,556
Repayment of Bankers Acceptances -- -- -- (4,127,139)
Repayment of Officers' Loans Payable -- -- -- --
Repayment of Capital Lease Obligations (24,228) (29,656) (18,812) (64,552)
Proceeds from Insurance Note Payable -- -- 77,225 --
Repayment of Insurance Note Payable -- (62,020) (15,205) --
Payment of Deferred Offering Costs -- (30,043) -- --
Net Proceeds from Issuance of 1,200,000
Share Common Stock 4,773,421 -- -- --
---------------- --------------- ---------------- ---------------
Net Cash - Financing Activities 3,689,408 332,957 43,208 877,493
---------------- --------------- ---------------- ---------------
Increase [Decrease] in Cash and
Cash Equivalents 1,531,705 38,586 (21,558) (316,056)
Cash and Cash Equivalents -
Beginning of Periods 43,543 4,957 26,515 342,571
---------------- --------------- ---------------- ---------------
Cash and Cash Equivalents -
End of Periods $ 1,575,248 $ 43,543 $ 4,957 $ 26,515
================ =============== ================ ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 133,922 $ 25,451 $ 1,553 $ 203,964
Income Taxes $ 163,529 $ -- $ -- $ --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-8
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
- ----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------
Supplemental Disclosures of Non-cash Investing And Financing Activities:
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 34,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.
The Company issued 20,000 shares for legal services valued at $74,655 in
connection with the Company's public offering.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-9
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
The Company - Dynamic International, Ltd. [the "Company"] is engaged in the sale
and distribution of a diverse line of hand exercise and light exercise
equipment, and sports bags/luggage which are distributed throughout the United
States.
Revenue - Revenue is recognized when the go