-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NCmuYNe3TWRC2mxKIwYq2DStGcpYyra/9XPikv7wGoz0Teefh6m5NmmY0gumzuru zvfv5sGQgrIVBLcK9fF3OQ== 0000950123-97-010100.txt : 19971208 0000950123-97-010100.hdr.sgml : 19971208 ACCESSION NUMBER: 0000950123-97-010100 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971205 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMIC INTERNATIONAL LTD CENTRAL INDEX KEY: 0001021097 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 931215401 STATE OF INCORPORATION: NV FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-25425 FILM NUMBER: 97733245 BUSINESS ADDRESS: STREET 1: 58 SECOND AVE CITY: BROOKLYN STATE: NY ZIP: 11215 BUSINESS PHONE: 7183694160 MAIL ADDRESS: STREET 1: 58 SECOND AVE CITY: BROOKLYN STATE: NY ZIP: 11215 S-1/A 1 DYNAMIC INTERNATIONAL, LTD. 1 As filed with the Securities and Exchange Commission on December 5, 1997 Registration No. 333-25425 ----------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------------------------- DYNAMIC INTERNATIONAL, LTD. (Name of issuer in its charter) NEVADA 5099 93-1215401 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code) Identification Number) 58 SECOND AVENUE MARTON GROSSMAN, PRESIDENT BROOKLYN, NEW YORK 11215 58 SECOND AVENUE 718-369-4160 BROOKLYN, NEW YORK 11215 718-369-4160 (Address and telephone number (Name, address and telephone of registrant's principal executive number of agent for service) offices and principal place of business) ------------------------------------ Copies to: RICHARD F. HOROWITZ, ESQ. LOUIS A. BRILLEMAN, ESQ. GERALD A. KAUFMAN, ESQ. Heller, Horowitz & Feit, P.C. 33 Walt Whitman Road 292 Madison Avenue Huntington Station, New York 11746 New York, New York 10017 Telephone: 516-271-2055 Telephone: (212) 685-7600
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of the registration statement If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Amount To Be Proposed Maximum Offering Proposed Maximum Aggregate Amount of Registered Registered Price Per Security Offering Price(1) Registration Fee - ----------------------------------------------------------------------------------------------------------------------------------- Units 1,380,000 $ 5.00 $ 6,900,000 $ 2,090.91 Common Stock included in the Units 1,380,000 ____ ____ ____ Class A Warrants included in the Units 1,380,000 ____ ____ ____ Class B Warrants included in the Units(2) 1,380,000 ____ ____ ____ - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock underlying A Warrants(3) 1,380,000 $ 6.00 $ 8,280,000 $ 2,509.09 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock underlying B Warrants(3) 1,380,000 $ 10.00 $13,800,000 $ 4,181.82 - ----------------------------------------------------------------------------------------------------------------------------------- Underwriter's Warrants(3) 120,000 $ 0.001 $ 120 $ 0.04 - ----------------------------------------------------------------------------------------------------------------------------------- Units included in Underwriter's Warrants 120,000 $ 8.25 $ 990,000 $ 300.00 Units underlying Underwriter's Warrants 120,000 ____ ____ ____ Common Stock included in the Units 120,000 ____ ____ ____ Class A Warrants included in the Units 120,000 ____ ____ ____ Class B Warrants included in the Units 120,000 ____ ____ ____ - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock underlying A Warrants(3) 120,000 $ 9.90 $ 1,188,000 $ 360.00 included in the Underwriter's Warrants - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock underlying B Warrants(3) 120,000 $ 16.50 $ 1,980,000 $ 600.00 included in the Underwriter's Warrants - ----------------------------------------------------------------------------------------------------------------------------------- Total (4) $33,138,120 $ 10,041.86 - -----------------------------------------------------------------------------------------------------------------------------------
2 (1) Estimated solely for the purpose of calculating the registration fee pursuant to rule 457 promulgated under the Securities Act of 1933. (2) Includes up to 180,000 of each of the listed securities which may be purchased by the Underwriter to cover over-allotments, if any. (3) Pursuant to Rule 416, this Registration Statement also covers any additional shares of Common Stock which may be issuable by virtue of the anti-dilution provisions in the Warrants. (4) Previously paid. THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 3 DYNAMIC INTERNATIONAL, LTD. Cross Reference Sheet Showing Location in Prospectus of Information Required Therein by Items 1 through 12 of Form S-1
REGISTRATION STATEMENT PROSPECTUS CAPTION ITEM AND HEADING OR LOCATION ---------------- ----------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus....................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus..................................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges...................................... Prospectus Summary, Risk Factors 4. Use of Proceeds................................................ Use of Proceeds 5. Determination of Offering Price................................ Cover Page, Risk Factors, Underwriting 6. Dilution....................................................... Dilution 7. Selling Security Holders....................................... Not Applicable 8. Plan of Distribution........................................... Underwriting 9. Description of Securities to be Registered..................... Description of Securities 10. Interests of Named Experts and Counsel......................... Legal Matters; Experts 11. Information With Respect to Registrant......................... Business; Selected Financial Data; Management Discussion and Analysis of Financial Condition and Results of Operations 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................. Disclosure of Commission Position on Indemnification for Securities Act Liabilities
3 4 SUBJECT TO COMPLETION DATED DECEMBER 5, 1997 ----------------- DYNAMIC INTERNATIONAL, LTD. ---------------------- 1,200,000 Units Each Consisting of One Share of Common Stock One Class A Redeemable Warrant and One Class B Redeemable Warrant Dynamic International, Ltd., a Nevada corporation (the "Company"), hereby offers through Patterson Travis, Inc., the underwriter for the offering (the "Underwriter") 1,200,000 units ("Units"), each Unit consisting of one share of Common Stock, $.001 par value (the "Common Stock"), one redeemable Class A Warrant (the "Class A Warrants) and one redeemable Class B Warrant (the Class B Warrants, together with the Class A Warrants, the "Warrants") at a price of $5.00 per Unit. The Units, the Common Stock and the Warrants are herein sometimes referred to as the "Securities." The Common Stock and the Warrants will be separately tradable commencing __________ [90 days after the effective date] (the "Separation Date"). Each Class A Warrant entitles the holder to purchase one share of Common Stock at $6.00, commencing on the Separation Date until [18 months from the date of this Prospectus]. Each Class B Warrant entitles the holder to purchase one share of Common Stock at $10.00, commencing on the Separation Date until [three years from the date of this Prospectus]. The A Warrants and the B Warrants are redeemable by the Company at $.01 per Warrant on thirty days' prior written notice at any time provided that the average closing bid price for the Common Stock is no less than $9.00 per share with respect to the A Warrants and $15.00 with respect to the B Warrants for any ten trading days within a period of 30 consecutive trading days as reported on the principal exchange or market on which the Common Stock is then traded. The Units, and, commencing on the Separation Date, the Common Stock and Warrants are expected to be quoted in the OTC Bulletin Board Service under the symbols DYNIU, DYNI, DYNIW and DYNIZ, respectively. No assurance can be given that an active trading market will develop, or if developed, will be sustained. See "Description of Securities." Currently, no active public market exists for the Units, Common Stock or Warrants. There can be no assurance that an active public market will develop after the completion of this offering. See "Risk Factors-No Assurance for Public Market for the Units, Common Stock or Warrants." The offering price of the Units and the exercise price of the Warrants have been arbitrarily determined by the Company and the Underwriter and do not necessarily bear any relationship to the Company's assets, book value, results of operations or other generally accepted criteria of value. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS DESCRIBED HEREIN. SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 6 AND 12, RESPECTIVELY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================= Price to Public Underwriting Proceeds to Discount(1) Company - --------------------------------------------------------------------------------- Per Unit (2) $5.00 $0.50 $4.50 - --------------------------------------------------------------------------------- Total $6,000,000 $600,000 $5,400,000 =================================================================================
(1) Does not include additional compensation to the Underwriter in the form of (a) a non-accountable expense allowance of three percent of the gross proceeds of this offering and (b) warrants, purchasable at a nominal price, to acquire 120,000 Units at an initial exercise price of $8.25 per Unit (the "Underwriter's Warrants"), subject to adjustment in the event of issuances of securities by the Company below the then current exercise price of the Underwriter's Warrants, or a reorganization, consolidation, merger or similar corporate transaction involving the Company. Also, under certain circumstances, in accordance with NASD rules and regulations, the Underwriter will receive a warrant solicitation fee equal to 8% of the exercise price of the Warrants it causes to be exercised (or $1,536,000, assuming exercise of all Warrants). In addition, the Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to retain the Underwriter as a financial consultant for the two years following the closing of this offering for an aggregate fee of $20,000 payable at closing. See "Underwriting." (2) For the purpose of covering over-allotments, if any, the Company has granted to the Underwriter an option, exercisable within forty five days of the date hereof, to purchase up to an additional 180,000 Units upon the same terms and conditions as the Securities offered hereby. If such over- allotment option is exercised in full, the Total Price to Public will be $6,900,000, the Total Underwriting Discount will be $690,000 and the Proceeds to the Company will be $6,210,000. See "Underwriting." PATTERSON TRAVIS, INC. The date of the Prospectus is December ____, 1997. 5 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Securities are being offered on a "firm commitment" basis subject to receipt and acceptance of the Securities by the Underwriter, subject to approval of certain legal matters by its counsel and subject to prior sale. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the Securities will be made at the offices of the Underwriter against payment therefor in New York on or about _________, 1997. ADDITIONAL INFORMATION The Company has filed with the headquarters office of the Securities and Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act of 1933 with respect to the Securities offered hereby. This Prospectus filed as part of such Registration Statement does not contain all the information set forth in, or annexed as exhibits to, the Registration Statement. For further information pertaining to the Securities offered hereby and the Company, reference is made to the Registration Statement and the exhibits thereto. The Registration Statement and exhibits thereto may be inspected at the Headquarters Office of the Securities and Exchange Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the Commission's regional offices at the following addresses: 7 World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the SEC, at 450 Fifth Street, N.W., Room 1024, Washington, D.C. at prescribed rates. The Commission also maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants such as the Company, that file electronically with the Commission. This material can be found at http://www.sec.gov. 2 6 PROSPECTUS SUMMARY Prospective investors should read this Prospectus carefully before making any investment decision regarding the Company, and should pay particular attention to the information contained in this Prospectus under the heading "Risk Factors" and in the financial statements and related notes appearing elsewhere in this Prospectus. In addition, prospective investors should consult their own advisors in order to understand fully the consequences of an investment in the Company. Unless indicated otherwise, the information contained herein gives effect to a one for five reverse split of the Company's issued and outstanding Common Stock that was completed in September 1997 (the "Reverse Stock Split"). The following summary does not purport to be complete and is qualified by the more detailed information appearing elsewhere in this Prospectus. THE COMPANY Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the design, marketing and sale of a diverse line of hand exercise and light exercise equipment, including hand grips, running weights, jump ropes and aerobic steps and slides. It markets these products under the licensed trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked name SHAPE SHOP(R). In addition, it designs and markets sports bags and luggage, which are marketed primarily under the licensed name JEEP(R) and under its own names PROTECH and SPORTS GEAR(R). The Company's objective is to become a designer and marketer of goods that are associated with a free-spirited lifestyle and leisure time. The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the successor to a New York company incorporated in 1964. In August 1996, DCL merged with and into DIL, which had been newly formed for the purpose of this merger. The objective of the merger was to change the Company's state of incorporation from Delaware to Nevada. PLAN OF REORGANIZATION In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. For the fiscal year ended April 30, 1995, sales of these products represented approximately 53% of the Company's gross sales. However, due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial charge backs by its customers. Although, pursuant to a written agreement, one of the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. In March 1995, CNM sued the Company for monetary damages alleging, among other things, breach of contract. The Company and CNM subsequently settled the matter by releasing each other from any claims and allowing CNM to collect an aggregate of $15,000 from the Company. The Company suffered severe losses from its venture into this line of business and in August 1995 filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Reform Act of 1978 (the "Bankruptcy Code"). In May 1996, the Bankruptcy Court approved a plan of reorganization pursuant to which creditors received partial satisfaction of their claims. MG Holdings Corp. ("MG Holdings"), which had purchased a promissory note from the Company's principal lender, received 2,976,000 shares of Common Stock in full satisfaction of the promissory note. The number of shares issued to MG Holdings represented 93% of the issued and outstanding shares. As a result, MG Holdings acquired absolute control over the Company's affairs. MG Holdings is wholly-owned by Marton Grossman, the Company's Chairman and President. See "Principal Stockholders" and "Certain Relationships and Related Transactions." In addition, as part of the plan of reorganization, the Company, then known as DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of changing its state of incorporation. See "Business--Plan of Reorganization" and "--Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 7 THE OFFERING Securities Offered ...................... 1,200,000 Units, each consisting of one share of Common Stock, one Class A Warrant and one Class B Warrant (1) Price Per Unit........................... $5.00 Common Stock Outstanding Before Offering..................... 3,198,798 shares Common Stock Outstanding After Offering..................... 4,398,798 shares (2) Estimated Net Proceeds................... $4,920,000 ($5,683,000 if the over-allotment option is exercised in full), after deducting commissions and filing, printing, legal, accounting and miscellaneous expenses payable by the Company estimated at $1,080,000. Use of Proceeds.......................... To purchase inventory, debt repayment, advertising, marketing and for working capital. See "Use of Proceeds." Proposed Symbols Units.......................... DYNIU Common Stock................. DYNI Class A Warrants............. DYNIW Class B Warrants............. DYNIZ
- ------------------------------ (1) The A Warrants will be exercisable at $6.00 per share for a period of 18 months from the date of this Prospectus. The B Warrants will be exercisable at $10.00 per share for a period of three years from the date of this Prospectus. The Warrants will be redeemable at $.01 per Warrant upon the giving of thirty (30) days provided that the price of the Common Stock has equaled or exceeded $9.00 with respect to the A Warrants and $15.00 with respect to the B Warrants for any ten trading days within a period of 30 consecutive trading days. (2) Assumes the Underwriter's over allotment option for 180,000 Units is not exercised. See "Underwriting." Excludes (i) up to 2,400,000 shares of authorized but unissued Common Stock reserved for issuance upon exercise of the Warrants included in the offering (ii) up to 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Warrants; (iv) up to an additional 540,000 shares of Common Stock (including 360,000 shares of Common Stock underlying warrants) issuable upon exercise of the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common Stock issuable to Mr. Grossman, the Company's Chairman and President over a three year period, provided the Company meets certain earnings criteria. See "Description of Securities," "Underwriting" and "Management." BENEFITS OF OFFERING TO COMPANY'S CHAIRMAN AND PRESIDENT A portion of the proceeds of this offering will be used for the benefit of affiliates of the Company. Specifically, approximately $1.2 million will be paid to MG Holdings, which is wholly owned by the Company's Chairman and President, in repayment of loans, including accrued interest, made during the Company's Chapter 11 proceedings. See "Use of Proceeds" and "Certain Relationships and Related Transactions." 4 8 5 9 SUMMARY FINANCIAL INFORMATION Set forth below are selected financial data with respect to the Company for the three months ended July 31, 1997, the nine months ended April 30, 1997, the three months ended July 31, 1996, and the years ended April 30, 1996, 1995 and 1994. These data should be read in conjunction with the financial statements of the Company and the related notes included elsewhere herein. Effective August 8, 1996, the Company emerged as the surviving entity in a merger with DCL. The balance sheet of the combined entity was substantially similar to that of DCL immediately prior to the merger. As a consequence, the financial data of the Company for the reporting periods prior to July 31, 1996 consist of those of DCL.
Reorganized Company Predecessor Company ------------------- ----------------------------------------------------------------------------------- Year ended April 30 ------------------- 3 Months Ended 9 Months Ended 3 Months Ended July 31, 1997 April 30, 1997 July 31, 1996 1996 1995 1994 ------------- ---------------- -------------- ---- ---- ---- Net Sales $1,834,162 $7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353 Income/(Loss) for period 38,665 119,399 (76,364) 6,945,299 (11,227,335) 244,308 Net Income per Share .01 .04
Selected Balance July 31, 1997 Sheet Data: July 31, 1997 As Adjusted(1) April 30, 1997 - ---------- ------------- -------------- -------------- Working Capital (Deficit) $(221,664) $4,643,901 $ (45,789) $ (293,884) $(7,493,435) $ 3,094,821 Total Assets 4,628,741 8,426,657 4,807,062 4,253,396 6,414,185 16,677,772 Long term obligations, including capitalized lease obligations 54,435 -0- 215,254 23,965 116,124 127,877
- ------------------ (1) Gives effect to the application of the net proceeds of this offering estimated to be $4,920,000. Does not give effect to (i) up to 2,400,000 shares of authorized but unissued Common Stock reserved for issuance upon exercise of the Warrants included in the offering (ii) up to 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Warrants; (iv) up to an additional 540,000 shares of Common Stock (including 360,000 shares of Common Stock underlying warrants) issuable upon exercise of the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common Stock issuable to Mr. Grossman, the Company's Chairman and President, over a three year period, provided the Company meets certain earnings criteria. See "Description of Securities," "Underwriting" and "Management." 6 10 RISK FACTORS The purchase of the Securities offered hereby involves a high degree of risk, including, but not necessarily limited to, the risks described below. Before subscribing for the Securities offered hereby, each prospective investor should consider carefully the general investment risks enumerated elsewhere in this Prospectus and the following risk factors, as well as the other information contained in this Prospectus. EMERGENCE FROM BANKRUPTCY. In August 1995, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In May 1996, the Bankruptcy Court approved a plan of reorganization pursuant to which creditors received partial satisfaction of their claims. The Company believes that the losses that led to the bankruptcy proceedings were caused by the manufacturing defects and poor construction of treadmills and rowing machines delivered to the Company by its manufacturers. As a result, the Company has abandoned the sale of these products. Nevertheless, there can be no assurance that the Company has accurately identified the precise source of its financial problems and that it has sufficiently addressed such problems. Any failure by the Company to adequately deal with its financial difficulties may lead to new problems that, as in the past, may have a material adverse impact on the condition and prospects of the Company. In addition, there can be no assurance that the Company will be able to fully recover from the bankruptcy proceedings and regain acceptance as a reputable company. Further, the Company's bankruptcy proceedings may hamper its ability to establish new relationships with commercial lenders and, as a result, complicate its efforts to obtain financings. See "Business--Plan of Reorganization." SHIFTING CONSUMER PREFERENCES. The market for exercise and luggage products is impacted by short-term trends. Therefore, the business of designing, manufacturing and marketing such products is highly susceptible to fast changing consumer preferences. The Company's sports bag/luggage business is greatly affected by demographic trends, frequent shifts in prevailing fashions and styles and retailer practices. The Company's success in this area is dependent on its ability to quickly and effectively initiate and/or respond to changes in market trends and other consumer preferences. The ongoing competitive nature of the luggage industry presents a continuous risk that new products may emerge and compete with the Company's existing sports bags/luggage products. Similarly, the success of the Company's exercise products is mostly a product of the perceived needs by consumers to improve their health and fitness. In addition, the type of exercise equipment used by consumers may vary from time to time based on which part of the body is perceived by consumers to require the most exercise and how such consumers believe they may attain maximum results from their efforts to stay fit. Therefore, the Company's ability to market its exercise equipment will be dependent on its ability to anticipate consumers' perceived fitness needs. DEPENDENCE ON AFFILIATED PARTIES. Pursuant to an unwritten understanding, Achim Importing Co. ("Achim") arranges for the issuance by its financial lender of letters of credit in favor of the Company's overseas suppliers thereby enabling the Company to finance the purchases of its inventory. Also, from time to time, when taking deliveries from domestic suppliers, Achim purchases products from the manufacturer and resells them to the Company in order to accommodate Achim's commercial lenders who often require a security interest in the merchandise until it has been sold and the lender has been repaid. The Company pays Achim for the amount actually paid to the supplier (including any applicable discounts) without markup, reimburses Achim for its bank charges and pays it interest at the prime rate plus one percent on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in principal and interest under this arrangement. As of September 30, 1997, this sum had decreased to $1,440,476. See "Certain Relationships and Related Transactions." The weighted average interest rate paid by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively. Achim is wholly owned by Mr. Marton Grossman, the Company's Chairman and President. If Achim were to terminate this arrangement for any reason, the Company would be forced to arrange for its own commercial financing which would likely result in higher interest rates, fees and other charges, and which would therefore have a material adverse effect on the ability of the Company to purchase inventory and finance its operations. In addition, all of the Company's assets are subject to a lien in favor of MG Holdings, an entity that is wholly owned by Mr. Grossman, to secure repayment of a promissory note in the principal amount of approximately 7 11 $1,200,000. This sum represents debtor in possession financing advanced by MG Holdings pursuant to an order by the Bankruptcy Court. Also, the Company is party to an agreement pursuant to which Achim assists the Company in the performance of a great number of administrative functions, including, among other things, the maintenance of financial and accounting books and records, the preparation of monthly financial accounts receivable aging schedules and other reports and the performance of credit checks on the Company's customers. In consideration for these services, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment. Achim also provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Company pays a monthly fee of 3% of the Company's invoiced sales originating at the warehouse in connection with the warehousing services performed by Achim under this agreement. Achim's business is unrelated to the Company's business, and it does not render to any other entity services similar in nature to the services performed for the Company. Further, the Company's offices and warehouse are made available to it on a rent-free at will basis by Achim which leases the property from Sym Holding, an entity controlled by Isaac Grossman, the Company's Vice Chairman, Treasurer and Secretary. See "Business - Management Agreement with Achim Importing Co.," - Properties" and "Certain Relationships and Related Transactions." CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's revenues are substantially dependent on its sports bag/luggage products. The marketing success of those products depends, among other things, upon rapidly changing consumer acceptance, which is difficult to predict and over which the Company has little, if any, control. In addition, the upscale market for sports bags/luggage products is dominated by name brands and fashion designers with wide name recognition and consumer acceptance. As a result, the Company's ability to market its products and effectively compete is mostly dependent on its ability to anticipate consumer preferences and design luggage products that will appeal to its customers. Although the Company believes that it has the ability and experience to recognize potentially valuable products and to gauge trends in the sports bags/luggage business, no assurance can be given that the Company will at all times be able to make accurate predictions as to the preference of its customers. RELIANCE ON LICENSES. The market for exercise equipment is dominated by a number of well known name brands. Although the Company believes that its licenses with respect to the trademarks SPALDING and KATHY IRELAND provide it with some of the most prominent names in exercise equipment, the Company's success in marketing its exercise products will be greatly dependent on its continuing right to use these trademarks as well as its ability to secure additional licenses. Any interruption in the Company's rights to use certain trademarks, including SPALDING and KATHY IRELAND, may have a materially adverse impact on the Company's revenues. See "Business--Intellectual Property--License Agreements." DEPENDENCE ON FOREIGN SUPPLIERS. Approximately 75% of the Company's products are manufactured overseas, notably in the Far East. The Company's arrangements with foreign suppliers are subject to the risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds and, in certain parts of the world, political instability, changes in import duties and quotas, disruptions or delays in shipments and transportation and labor disputes. The Company is also exposed to risks associated with changes in the laws and policies that govern foreign investment in countries where it acquires inventory and, to a lesser extent, changes in U.S. laws and regulations relating to foreign trade and investment. While the Company believes that alternative sources of supply are available, any serious disruptions could materially impair the Company's ability to deliver exercise and sports bag/luggage products in a timely manner. See "Business--Products." SEASONALITY. The Company's business is highly seasonal with higher sales typically in the second and third quarters of the fiscal year as a result of shipments of exercise equipment and sports bag/luggage related to the holiday 8 12 season. Although the Company does not believe that the effects of seasonality have had a material impact on the Company to date, seasonality of the business requires advance planning and other special preparations to fully benefit from a short period during which most of the Company's revenues are generated. If the Company fails to generate sufficient revenues during this period, this may have a material adverse impact on the Company's business. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." POTENTIAL NEED FOR ADDITIONAL FINANCING. The Company anticipates that the proceeds from this offering together with the projected cash flows from operations and the availability of the Achim credit line will be sufficient to fund its contemplated cash requirements for the twelve months following the consummation of this offering. Nevertheless, significant additional funding may be required following this offering in order for the Company to further expand the marketing of its products. Therefore, the Company will likely be required to raise additional funds through alternative financing methods. There can be no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, will be obtainable on terms acceptable to the Company. DEPENDENCE ON KEY PERSONNEL. The success of the Company depends in part upon the successful performance of the Company's Chief Executive Officer and Chairman, who is 66 years old, for the continued marketing and operation of the Company. The Company does not have an employment agreement with Mr. Grossman, who spends approximately 20% of his time working for the Company. Although the Company has employed, and will likely employ in the future, additional qualified employees, if Mr. Marton Grossman fails to perform his duties for any reason, the ability of the Company to market, operate and support its products may be adversely affected. The Company is currently investigating the possibility of obtaining key-man life insurance on the life of Mr. Grossman. See "Management." COMPETITION. Although the Company believes that the products it sells are unique in several ways, there are other companies that have similar products, many of which companies have substantially greater financial and other resources than the Company. Moreover, there can be no assurance that there are no products that would compete effectively with the Company's proposed products or that other companies, many of which have financial resources, marketing staffs and facilities greater than those of the Company, are not currently developing, or in the future will not develop, products that may have advantages over the Company's proposed products or that may undercut what the Company believes are the advantages of the Company's products. See "Business - Competition." DEPENDENCE ON PRINCIPAL CUSTOMERS. For the year ended April 30, 1997, K-Mart and Service Merchandise accounted for approximately 25% and 13%, respectively, of the Company's sales. Although the Company intends to diversify its customer base in the future, any significant decline in sales to the Company's principal customers could have a material adverse effect on the Company. The Company has no written agreements with any of its customers. See "Business." NEED TO INCREASE MARKETING CAPABILITY. In order to achieve continued growth following the offering, the Company will need to expand its marketing and sales and develop a network of marketing and sales representatives. There can be no assurance that the Company will be able to build such a marketing staff or sales force, that the cost of establishing such a marketing staff or sales force will not exceed any product revenues, or that the Company's direct sales and marketing efforts will be successful. Alternatively, the Company may enter into co-marketing or other licensing arrangements. To enter into co-marketing or other licensing arrangements, the Company must establish and maintain corporate relationships. There can be no assurance that such corporate relationships can be established or maintained on terms acceptable to the Company, if at all. To the extent the Company enters into co-marketing or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that such efforts will be successful. Although the Company believes that future corporate partners, if any, will have an economic motivation to commercialize any such products, the Company may not have any direct control over such partners' commercialization efforts. Neither Achim nor any party related to Messrs. Marton and Isaac Grossman presently intends to provide marketing services to the Company. See "Business." 9 13 LIMITED LIABILITY INSURANCE. The marketing and sale of the Company's products entails a risk of product liability claims and claims of omission by consumers and others. The Company has a general policy of disclaiming liability arising from its products. The Company also maintains liability insurance which provides for coverage of up to $10,000,000 per occurrence. Nevertheless, in the event of a successful liability claim against the Company, there can be no assurance that the current insurance coverage will be adequate. Any successful liability claim that exceeds the Company's insurance coverage could have a material adverse effect on the Company. DILUTION; CHEAP STOCK. Purchasers of the Units offered hereby will experience immediate and substantial dilution in the net tangible book value of shares of Common Stock (including the shares underlying the Warrants) included in the Units in that the net tangible book value of such shares will be substantially less than the offering price per share of such shares. Specifically, the investors in this offering will experience immediate dilution of $3.91 per share of Common Stock, or approximately 78% of the $5.00 offering price. In addition, since the current stockholders of the Company have acquired their respective equity interests at a cost substantially below the offering price, the public investors will bear most of the risk of loss. See "Dilution." BENEFIT OF THE OFFERING TO AFFILIATES. An aggregate of $1,200,000, or approximately 24% of the net proceeds of this offering, will be used to repay a loan provided by MG Holdings, an entity that is wholly owned by the Company's Chairman and President. As a result, the amount available for expansion of the Company's business has been reduced to a certain extent. See "Use of Proceeds" and "Certain Relationships and Related Transactions." VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. After the completion of this offering, the Company's current principal stockholders and the executive officers and directors of the Company will beneficially own approximately 68% of the Company's outstanding Common Stock and, accordingly, will be able to continue to elect all of the directors and, therefore, to absolutely control the Company's affairs. As a result of the absolute control exercisable by current management, potential takeover bids for the Company may be deterred. This may have a depressive effect on the price of the Securities offered hereby. In addition, the Company has agreed to issue to its Chairman and President an additional 2,000,000 shares of Common Stock over a three year period if the Company meets certain earnings criteria. See "Security Ownership of Certain Beneficial Owners and Management" and "Management." NO PAYMENT OF DIVIDENDS. The Company has not paid any dividends on its Common Stock. For the foreseeable future, the Company anticipates that earnings, if any, that may be generated from the Company's operations will be used to finance the growth of the Company and that cash dividends will not be paid to holders of the Common Stock. See "Description of Securities." ARBITRARY DETERMINATION OF OFFERING PRICE AND WARRANT EXERCISE PRICE. The offering price of the Units and the exercise price of the Warrants have been arbitrarily determined by negotiation between the Company and the Underwriter and do not necessarily bear any relationship to the assets, book value, operating or financial results or net worth of the Company or other generally accepted criteria of value and should not be considered as indicating any intrinsic value for the Securities. See "Underwriting." NO ASSURANCE OF PUBLIC MARKET FOR THE UNITS, COMMON STOCK OR WARRANTS. Prior to the Company's filing for protection under the Bankruptcy Code, the Company's securities were traded on the Nasdaq SmallCap Market ("Nasdaq"). However, immediately prior to this offering, there was no active public market for the Units, Common Stock or Warrants, and there can be no assurance that such markets will develop or, if developed, will be sustained after completion of this offering. While the Underwriter has informed the Company that it will endeavor to make a market in the Units and, after the Separation Date, the Common Stock and Warrants, there can be no assurance that a trading market will develop or be sustained or that the securities offered hereby will be saleable at or near their offering price. In the event the Underwriter, for any reason, ceases making a market in the Company's securities, the trading market in the Company's securities will likely be materially adversely affected. See "Underwriting." The Company has been advised by the Underwriter that it has made application to initiate quotation of the Securities in the OTC Bulletin Board Service. Currently, no active public market exists for the Units, Common Stock 10 14 or Warrants. There can be no assurance that an active public market will develop after the completion of this offering. In addition, it may be difficult to obtain adequate quotations with respect to securities quoted on the Bulletin Board. Lack of information often has a negative impact on the liquidity of securities. As a result, investors may be limited in their ability to dispose of the Units, the Common Stock or the Warrants. EXERCISE OF WARRANTS SUBJECT TO CURRENT EFFECTIVE REGISTRATION AND QUALIFICATION. Any exercise of the Warrants must be made pursuant to a prospectus which is current at the time of exercise. The Company has agreed to use its best efforts to maintain a current effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), relating to the Common Stock issuable upon exercise of the Warrants. If the Company is unable to maintain a current registration statement for any reason, the Warrants may not be exercised. Although the Securities offered hereby will not knowingly be sold to purchasers in jurisdictions in which they are not registered or otherwise qualified for sale, purchasers may buy Warrants in the aftermarket which may develop for the Warrants in, or purchasers of the Warrants may move to, jurisdictions in which the shares of Common Stock underlying the Warrants are not registered or qualified during the period when the Warrants are exercisable. In such event, the Company would be unable to issue shares to those persons desiring to exercise their Warrants unless and until the shares could be registered or qualified for sale in jurisdictions in which such purchasers reside, or an exemption to such qualification exists in such jurisdictions. No assurance can be given that the Company will be able to effect any required registration or qualifications. See "Description of Securities - Warrants." POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES. Approximately 2,976,000 shares of Common Stock may be deemed to be "restricted securities" under Rule 144 promulgated under the Securities Act. Under Rule 144, such shares may be publicly sold immediately, subject to volume restrictions (i.e. during any three month period an amount equal to the greater of the average weekly trading volume for the four weeks preceding the date of sale or 1% of the then outstanding shares). Any such sales could have a depressive effect on the market price for the Securities being offered hereby. Approximately 93% of the currently issued and outstanding shares are owned by a series of trusts for the benefit of relatives of Marton Grossman. Isaac and Sheila Grossman are among the trustees of these trusts. Although no lockup agreements are in effect with respect to any of such shares of Common Stock, the Company has been advised that there is no current intent to resell any of such securities. See "Description of Securities - - Shares Available for Future Sale" and "Security Ownership of Certain Beneficial Owners and Management." Investors should be aware that sales of the Company's Common Stock pursuant to options and warrants may have a depressive effect on the price of the Common Stock and the Warrants, and that the issuance of additional shares of Common Stock upon the exercise of options, warrants, the Warrants and the Warrants included in the Units underlying the Underwriter's Warrants will also dilute the proportionate ownership of the then current stockholders of the Company. See "Description of Securities--Warrants." POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT STOCKHOLDER APPROVAL. After this offering, the Company will have a large number of shares of Common Stock authorized but unissued and reserved for issuance pursuant to (i) exercise of the Warrants being offered hereby, (ii) exercise by the Underwriter of the Underwriter's Warrants and the exercise of the Warrants included in the Units underlying the Underwriter's Warrants (the Underwriter's Warrants, including the underlying Units, the Common Stock and the Warrants included therein are collectively sometimes referred to herein as the "Underwriter's Securities"), and (iii) an agreement to issue an aggregate of 2,000,000 shares of Common Stock to the Company's Chairman and President over a three-year period, provided the Company meets certain earnings criteria. All of such shares and any additional shares may be issued without any action or approval by the Company's stockholders. Although, other than as set forth in the previous sentence, there are no present plans, agreements, commitments or undertakings with respect to the issuance of additional shares, or securities convertible into any such shares by the Company, any additional shares issued would further dilute the percentage ownership of the Company held by the public stockholders and would likely have an adverse impact on the market price of the Common Stock. See "Description of Securities." In addition, the Company is authorized to issue 10,000,000 shares of Preferred Stock of which, as of the date hereof, none are outstanding. Shares of Preferred Stock are issuable at any time and from time to time, by action of the 11 15 Board of Directors without further authorization from the Company's stockholders, except as otherwise required by applicable law or rules and regulations to which the Company may be subject, to such persons and for such consideration as the Board of Directors determines. The issuance of preferred stock by the Board of Directors could adversely affect the rights of the holders of Common Stock. For example, such issuance could result in a class of securities outstanding that would have preferences with respect to voting rights and dividends and in liquidation over the Common Stock, and could (upon conversion or otherwise) enjoy all of the rights appurtenant to Common Stock. The authority possessed by the Board of Directors to issue preferred stock could potentially be used to discourage attempts by others to obtain control of the Company through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly to achieve. There are no agreements or understandings regarding the issuance of preferred stock. UNDERWRITER'S WARRANTS. In connection with this offering, the Company will sell to the Underwriter for a nominal amount, warrants to purchase up to 120,000 Units. The Underwriter's Warrants will be exercisable commencing one year after the effective date of this Prospectus and will continue to be exercisable until five years from the date hereof at an exercise price of $8.25 per Unit, with the Class A Warrants and Class B Warrants underlying the Units included in the Underwriter's Warrants allowing the purchase of Common Stock at $9.90 and $16.50 per share, respectively. As long as the Underwriter's Warrants are outstanding, the terms on which the Company could obtain additional capital may be adversely affected because the holder of the Underwriter's Warrants might be expected to exercise them if the Company were able to obtain any needed additional capital in a new offering of securities at a price greater than the exercise price of the Underwriter's Warrants. See "Underwriting." POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Class A Warrants and the Class B Warrants are redeemable by the Company at $.01 per Warrant on thirty day's prior written notice at any time provided that the average closing bid price for the Common Stock is no less than $9.00 per share with respect to the Class A Warrants and $15.00 with respect to the Class B Warrants for any ten trading days within a period of 30 consecutive trading days as reported on the principal exchange on which the Common Stock is traded. Notice of redemption of the Warrants could force the Warrant holders to exercise the Warrants at a time when it might be disadvantageous for the holders to do so or to sell the Warrants at their then current market price when the holders might otherwise wish to hold the Warrants for possible appreciation. Alternatively, the holders may accept the redemption price, when it is likely to be substantially less than the market value of the Warrants at the time of redemption. Any holders who do not exercise Warrants prior to their expiration or redemption, as the case may be, will forfeit the right to purchase the shares of Common Stock underlying the Warrants. While the Company may legally be permitted to give notice to redeem the Warrants at a time when a current prospectus is not available thereby leaving the Warrant holders no opportunity to exercise their Warrants prior to redemption, the Company does not intend to redeem the Warrants unless a current prospectus is available at the time of the redemption. See "Description of Securities - Warrants." UNDERWRITER'S INFLUENCE ON THE MARKET. A significant amount of the Securities offered hereby will be sold to customers of the Underwriter. Such customers subsequently may engage in transactions for the sale or purchase of such Securities through or with the Underwriter. Although it has no legal obligation to do so, the Underwriter has indicated that it intends to act as a market-maker and otherwise effect transactions in the Securities offered hereby. To the extent the Underwriter acts as a market-maker in the Common Stock or Warrants, it may be a dominating influence in those markets. The degree of participation in those markets by the Underwriter may significantly effect the price and liquidity of the Securities. The Underwriter may discontinue such activities at any time or from time to time. Moreover, pursuant to Regulation M, if the Underwriter solicits exercise of any of the Warrants, including the Underwriter's Warrants, it will be unable to act as a market-maker with respect to the Securities for a period of two or nine business days prior to any solicitation by it of the exercise of any of the Warrants, including the Underwriter's Warrants, until the termination of such activity. Accordingly, the Underwriter will not be able to act as a market-maker during certain periods and, as a result, holders of the Company's Securities may find it more difficult to sell their holdings. Also, the same restriction may arise if the Underwriter becomes involved in a distribution of any of the currently restricted securities. 12 16 PENNY STOCK REGULATION. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Securities and Exchange Commission (the "Commission"). Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse), the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. If the Securities become subject to the penny stock rules, investors in this offering may find it more difficult to sell their shares and/or Warrants. POSSIBLE NON-RENEWAL OF LICENSE AGREEMENTS. The Company is party to two separate agreements with Spalding & Evenflo Companies Inc. pursuant to which the Company has the right to use the name SPALDING in connection with the sale and distribution of a number of products, including small handheld exercise equipment and large exercise machines. For the fiscal year ended April 30, 1997, sales of these products represented approximately 6% of the Company's total revenues. The two agreements expired in September 1997. The Company is currently negotiating a renewal of the agreement that relates to the small handheld equipment. In the event that this agreement is not renewed, the Company's revenues will likely be reduced by approximately 6%. See "Business-Intellectual Property." DILUTION At July 31, 1997, the Company had a net tangible book value deficit of $(131,753) or $(.04) per share of Common Stock. Net tangible book value per share represents the amount of total tangible assets less liabilities, divided by 3,198,258, the number of shares of Common Stock outstanding. After giving effect to the sale of the 1,200,000 Units hereby, the pro forma net tangible book value at July 31, 1997, would have been $4,788,247 or $1.09 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $1.13 per share to the existing stockholders and an immediate dilution of $3.91 per share to investors in this offering. The following table illustrates this per share dilution: Public offering price per share $5.00 Net tangible book value per share before offering $(.04) Increase per share attributable to the sale of the Units offered hereby $1.13 ---- Net tangible book value per share after offering (1) $1.09 ---- Dilution per share to investors in offering (2) $3.91 ====
- ----------------- (1) After deduction of underwriting discounts and commissions, the Underwriter's non-accountable expense allowance and other estimated expenses of the offering. See "Use of Proceeds" and "Underwriting." (2) Does not give effect to (i) up to 2,400,000 shares of authorized but unissued Common Stock reserved for issuance upon exercise of the Warrants included in the offering (ii) up to 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Warrants; (iv) up to an additional 540,000 shares 13 17 of Common Stock (including 360,000 shares of Common Stock underlying warrants) issuable upon exercise of the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common Stock issuable to Mr. Grossman, the Company's Chairman and President, provided the Company meets certain earnings criteria over a three year period. Pursuant to a Bonus Agreement, the Company will issue to Mr. Grossman, the Company's Chairman and President, an aggregate of 2,000,000 shares of Common Stock provided the Company meets certain earnings criteria over a three year period. See "Management." Giving effect to the issuance of such 2,000,000 shares as of July 31, 1997, and the attainment by the Company of the earnings criteria required for the issuance of these shares, the pro forma net tangible book value would have been approximately $1,668,247 or $.32 per share. After giving effect to the sale of the 1,200,000 Units hereby, the pro forma net tangible book value at July 31, 1997, would have been approximately $6,588,247 or $1.03 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $.71 per share to the existing stockholders and an immediate dilution of $3.97 per share to investors in this offering. The following table illustrates this per share dilution: Public offering price per share $5.00 Net tangible book value per share before offering $.32 Increase per share attributable to the sale of the Units offered hereby $.71 ---- Net tangible book value per share after offering (1) $1.03 ---- Dilution per share to investors in offering (2) $3.97 ====
- ----------------- (1) After deduction of underwriting discounts and commissions, the Underwriter's non-accountable expense allowance and other estimated expenses of the offering. See "Use of Proceeds" and "Underwriting." (2) Does not give effect to (i) up to 2,400,000 shares of authorized but unissued Common Stock reserved for issuance upon exercise of the Warrants included in the offering (ii) up to 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Warrants; and (iv) up to an additional 540,000 shares of Common Stock (including 360,000 shares of Common Stock underlying warrants) issuable upon exercise of the Underwriter's over-allotment option. The following table presents as of July 31, 1997, the relative share purchases, percentages of equity ownership in the Company, total cash paid, percentage of total cash invested, and the average price per share of Common Stock to the current and public shareholders after giving effect solely to the sale of the shares of Common Stock offered hereby: COMMON STOCK ONLY
Percentage Percentage Shares of Equity Total of Total Average Price Purchased Ownership Cash Paid Cash Invested Per Share --------- --------- --------- ------------- --------- Public Investors 1,200,000 27.3% 6,000,000 99.6% $ 5.00 Current Stockholders 3,198,798 72.7% 26,139 0.4% $ 0.01 --------- ------ --------- ------ Total 4,398,798 100.00% 6,026,139 100.00% ========= ====== ========= ======
14 18 USE OF PROCEEDS The net proceeds of this offering, after deducting discounts and commissions, the Underwriter's expense allowance and expenses of this offering, will be approximately $4,920,000 ($5,683,000 if the over-allotment option is exercised in full). The Company intends to use such net proceeds as follows:
Amount of Percentage of Proceeds Proceeds -------- -------- Purchase of Inventory $2,100,000 43% Debt Repayment (1) $1,200,000 24% Advertising (2) $ 500,000 10% Marketing (3) $ 800,000 16% Working Capital $ 320,000 7%
(1) The entire amount will be paid to MG Holdings, which is wholly owned by Marton Grossman, the Company's Chairman and President, in full repayment of a loan, evidenced by a promissory note, made during the Company's Chapter 11 proceedings. The note accrues interest at the Citibank Prime Rate plus one percent. The weighted average interest rate at April 30, 1997, and as of the date hereof was 9.25% and 9.35%, respectively. As of April 30, 1997 the Company had accrued interest in the amount of $37,219 in connection with this loan. As of November 3, 1997, the sums owed to MG Holding amounted to $1,059,785 in principal plus $89,601 in accrued interest. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. To date, only three payments have been made. In July 1997, the Company and MG Holdings agreed that no payments will be due until the consummation of this offering or the scheduled maturity of the note, whichever occurs earlier. (2) The Company intends to market its products through the placement of advertisements in various media. (3) The Company intends to hire a number of marketing professionals who are expected to be paid a salary as well as commissions. The amount of net proceeds to be received by the Company reflects the Company's best estimate after deducting commissions and the Underwriter's non-accountable expense allowance in the amount of $780,000 and other expenses incurred in the offering of approximately $300,000, which either have been paid already or are to be paid by the Company out of proceeds. The foregoing table represents the Company's best estimate of the allocation of the proceeds of this offering based upon the current state of the Company's development, its current plans and current economic and industry conditions, and is subject to reapportionment of proceeds among the categories listed above or to new categories in the event of changes to the current economic and industry conditions or an entirely unforeseen opportunity, acquisition or otherwise, is presented to the Company. While the Company has no specific current acquisition plans, it currently intends to simultaneously focus its energies and assets towards growing its business internally, while at the same time exploring opportunities to expand its business through acquisitions. The Company anticipates that the proceeds from this offering together with the projected cash flows from operations will be sufficient to fund its contemplated cash requirements for the twelve months following the consummation of this offering. Until used, the Company intends to invest the proceeds of this offering in government securities, certificates of deposit, money market securities, commercial paper or other top-rated income-producing investments. DIVIDEND POLICY The Company has paid no dividends and does not expect to pay dividends on its Common Stock in the foreseeable future as it intends to retain earnings to finance the growth of its operations. 15 19 SELECTED FINANCIAL DATA Set forth below are selected financial data with respect to the Reorganized Company for the three months ended July 31, 1997, the nine months ended April 30, 1997, and the three months ended July 31, 1996 and the years ended April 30, 1996, 1995, 1994 and 1993 for the predecessor company. These data should be read in conjunction with the financial statements of the Company and the related notes included elsewhere herein. Effective August 8, 1996, the Company emerged as the surviving entity in a merger with DCL. The balance sheet of the combined entity was substantially similar to that of DCL immediately prior to the merger. As a consequence, the financial data of the Company for the reporting periods prior to July 31, 1996, consist of those of DCL.
Reorganized Company(1) ---------------------- Three Months Nine Months Three Months Ended 7/31/97(1) Ended 4/30/97(1) Ended 7/31/96 --------------- ---------------- ------------- Net Sales $ 1,834,162 $ 7,492,729 $ 1,983,164 Net Income/ (Loss) from Continuing Operations 38,665 119,399 (76,364) Net Income/(Loss) 38,665 119,399 (76,364) Net Income/(Loss) per Share .01 0.04 Selected Balance Sheet Data: Working Capital (Deficit) $ (221,664) $ (45,789) Total Assets 4,628,741 4,807,062 Long term Obligations, including Capitalized Lease Obligations 54,435 215,254 Total Liabilities 4,444,541 4,661,527 Retained Earnings 158,064 119,399 Accumulated Deficit -0- -0- Shareholders' Equity (Deficit) 184,200 145,535
Predecessor Company --------------------------------------------------------------------------- Year ended April 30 ---- -------------- 1996 1995 1994 1993 ---- ---- ---- ---- Net Sales $ 7,151,715 $ 32,533,097 $29,497,353 $ 25,735,479 Net Income/ (Loss) from Continuing Operations (2,235,894) (11,227,335) 244,308 (427,409) Net Income/(Loss) 6,945,299 (11,227,335) 244,308 (427,409) Net Income/(Loss) per Share Selected Balance Sheet Data: Working Capital (Deficit) $ (293,884) $ (7,493,435) $ 3,094,821 $ 3,173,751 Total Assets 4,253,396 6,414,185 16,677,772 13,373,816 Long term Obligations, including Capitalized Lease Obligations 23,965 116,124 127,877 92,129 Total Liabilities 4,300,398 13,406,486 12,442,738 9,383,090 Retained Earnings -0- -0- 3,644,799 3,400,491 Accumulated Deficit (637,237) (7,582,536) -0- -0- Shareholders' Equity (Deficit) (47,002) (6,992,301) 4,235,034 3,990,726
- ------------ (1) Due to the reorganization (see Note 2 to the financial statements), operating results of the reorganized company may not be comparable to those of the predecessor company. Management's assumptions used in determining the Company's reorganization value are discussed in Note 2 to the financial statements. (2) In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Sales of these products began in June 1994. Total sales of these products amounted to approximately $24,000,000 from June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11 petition. Approximately 73% of these products were shipped directly to customers. Due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial charge backs by its customers. Although, pursuant to a written agreement, one of the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. As a result, during April 1995, the Company issued credits to customers in the aggregate amount of approximately $5,000,000 for the fiscal year ended April 30, 1995. The Company issued an additional $3,211,000 in credits from defective merchandise during the fiscal year ended April 30, 1996. In May 1996 the Company's plan of reorganization was approved by the Bankruptcy Court. During July and August 1996, the Company satisfied its obligations under the Plan through cash payments and the issuance of Common Stock 16 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. The discharge of claims under the bankruptcy proceedings described immediately below has been reflected in the financial statements for the fiscal year ended April 30, 1996. Effective August 8, 1996, the Company completed a migratory merger from Delaware to Nevada by merging into a newly-formed Nevada entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was substantially identical to that of the Company prior to the merger. The Company and its predecessor are herein together referred to as the "Company." As a consequence of the Company's fresh-start accounting, as described below, which the Company adopted effective on July 31, 1996, financial results for the year ended April 30, 1997, are reported by combining the financial results for the three-month period ended July 31, 1996, and those of the nine-month period ended April 30, 1997. Because of the application of fresh-start reporting, the financial statements for the periods after reorganization are not comparable in any respects to the financial statements for the periods prior to the reorganization. PLAN OF REORGANIZATION In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. For the fiscal year ended April 30, 1995, sales of these products represented approximately 53% of the Company's gross sales. However, due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial chargebacks by its customers. Although, pursuant to a written agreement, one of the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. In March 1995, CNM sued the Company for monetary damages alleging, among other things, breach of contract. The Company and CNM subsequently settled the matter by releasing each other from any claims and allowing CNM to collect an aggregate of $15,000 from the Company. The Company suffered severe losses from its venture into this line of business and in August 1995 filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan") pursuant to which creditors received partial satisfaction of their claims. The amount of claims allowed under the bankruptcy proceedings aggregated approximately $17,223,800, which exceeded the assets as recorded immediately subsequent to the confirmation of the Plan by approximately $12,970,400. Under the Plan, the Company made cash payments in the amount of approximately $515,800. MG Holdings, which had purchased a promissory note from the Company's principal financial institution, received 2,976,000 shares of Common Stock in satisfaction of such promissory note, representing approximately 93% of the issued and outstanding shares, thereby gaining absolute control over the Company's affairs. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions". An additional 160,000 shares and 62,798 shares were issued to the Company's unsecured creditors and the Company's existing security holders, respectively. The value of the cash and securities distributed under the plan of reorganization aggregated $531,561. An amount of $16,692,193, representing the difference between the value of the total distribution and the amount of allowable claims under the bankruptcy, was recorded as an extraordinary gain. 17 21 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 accounting on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start accounting, all assets and liabilities were restated to reflect their reorganization value which approximated book value at July 31, 1996. The reorganization value in excess of amounts allocable to identifiable assets is amortized over a period of eleven years. In connection with the bankruptcy proceedings, the Company restructured its operations and relocated its administrative headquarters and warehouse facilities. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1997, THE NINE MONTHS ENDED APRIL 30, 1997, THE THREE MONTHS ENDED JULY 31, 1996 AND THE YEARS ENDED APRIL 30, 1997 AND 1996 Three Months Ended July 31, 1997 Sales for the three months ended July 31, 1997 decreased by $149,000, or 7.5%, from $1,983,000 to $1,834,000, compared to the three months ended July 31, 1996. Sales of the Company's exercise equipment and sports bags/luggage lines decreased by $75,000 and $74,000, respectively. The Company does not believe that the decrease in sales of its products represents a material trend. The Company believes that the decrease is primarily the result of the reorganization proceedings. The Company will attempt to reverse this trend by expanding its product lines and increasing the attractiveness of its products by developing new packaging. There can be no assurance that the Company will be successful in this effort. Operating expenses decreased by approximately $120,000 due primarily to decreases in the following expenses: Officer salaries $ 38,000 Salesmen salaries $ 23,000 Insurance $ 12,000 Shipping expenses $ 46,000
Officer salaries decreased by $38,000 as a result of the departure by the former President of the Company in March 1997. Salesman salaries decreased by $23,000 due to the elimination of a sales position in August 1996. Insurance expense decreased due to lower product liability premiums. Shipping expenses decreased due to an increase in the amount of sales which were shipped directly to customers from the Company's overseas vendors. Interest expense remained relatively constant. The Company had a pretax profit of $62,000 compared to a pretax loss of $76,000 in the prior year's corresponding three-month period. The following table sets forth the results of operations for the periods discussed above: 18 22
Reorganized Company For the Predecessor Company For the 3 Months Ended July 31, 1997 3 Months Ended July 31, 1996 ---------------------------- ---------------------------- Sales $1,834,000 $ 1,983,000 Other Income 8,000 10,000 ---------- ----------- 1,842,000 1,993,000 Cost of Sales 1,282,000 1,454,000 ---------- ----------- Gross Profit 560,000 539,000 ---------- ----------- Operating Expenses 438,000 558,000 Interest 60,000 57,000 ---------- ----------- 498,000 615,000 ---------- ----------- Pretax Income 62,000 (76,000) Tax Provision 24,000 -- ---------- ----------- Income 38,000 (76,000) ========== ===========
Nine Months Ended April 30, 1997 Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were, on a combined basis, $2,324,000, or 32% higher than during the previous fiscal year. Sales of exercise equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were $5,084,000, on a combined basis. These combined sales of exercise products were $532,000 or 9% less than during the previous fiscal year. Sales of sports bags/luggage products of $3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were $4,391,000, on a combined basis. These combined sales of sports bags/luggage products were 7% less than the previous fiscal year. Sales for the fiscal year ended April 30, 1996 were reduced by $3,211,000 of customer credits for a discontinued line of manual treadmills and ski machines. The Company does not believe that the decrease in sales of its products represents a material trend. The Company believes that the decrease is primarily the result of the reorganization proceedings. The Company will attempt to reverse this trend by expanding its product lines and increasing the attractiveness of its products by developing new packaging. There can be no assurance that the Company will be successful in this effort. Operating expenses of $2,227,000 and $558,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were, on a combined basis, $3,899,000 less than the fiscal year ended April 30, 1996, due to the reorganization. The following is a discussion of the effect of the Company's reorganization and adoption of fresh-start reporting on the various income statement line items during the nine-month period ended April 30, 1997. For this purpose, the nine months ended April 30, 1997 are compared to the nine months ended April 30, 1996. Decreases for the nine months ended April 30, 1997 compared to the nine months ended April 30, 1996 are represented approximately by net changes in the following expenses: 19 23 Freight out 10,000 Travel & entertainment 30,000 Insurance claims 70,000 Office equipment rental 7,000 Lawsuits 289,000 Miscellaneous taxes 8,000 Showroom rent 319,000 Consultant fees 105,000 Officers salaries 81,000 Promotional material 189,000 Office salaries 262,000 Pension costs 726,000 Warehouse salaries 115,000 Telephone 31,000 Salesmen salaries 57,000 Data-processing fees 6,000 Payroll taxes 45,000 Postage 10,000 Fringe benefits 2,000 Bad debt expenses 666,000 Repairs & maintenance 4,000
Freight out decreased by $10,000 due primarily to reduced volume. Insurance claims and lawsuits decreased by $70,000 and $289,000, respectively, as a result of the accrual of proofs of claim filed during the bankruptcy proceeding as liabilities subject to compromise during the nine-month period ended April 30, 1996. Showroom rent decreased by $319,000 since a proof of claim for the balance of the lease was recorded during the nine-month period ended April 30, 1996. The showroom was closed in October 1995. Officers salaries decreased by $81,000 due to reduction in the salary of the former President of the Company in September 1995, and the elimination of a Chief Operating Officer position in December 1995. These changes resulted in decreases of $37,000 and $44,000, respectively. Office salaries decreased by $262,000 due primarily to the elimination of the Vice President of Operations position in June 1996 which accounted for $119,000 of the reduction. In addition, the position of Credit Manager was eliminated in May 1996 resulting in a savings of $45,000. The balance of $98,000 is due to the overall reduction of the office staff as a part of the reorganization. Warehouse salaries decreased by $115,000 due to the elimination of warehouse employees under the reorganization. Salesmen salaries decreased by $57,000 due to the elimination of a sales position in August 1996. Payroll taxes and fringe benefits decreased by $45,000 and $2,000, respectively, due primarily to the positions and employees eliminated during the reorganization. Repairs and maintenance decreased by $4,000. Travel and entertainment expenses decreased by $30,000 due to the decrease in executive and sales personnel. Office equipment rental decreased by $7,000 due to a reduction of the equipment rented due to the reorganization. Miscellaneous taxes decreased by $8,000 as a consequence of the change in the Company's state of incorporation from Delaware to Nevada which resulted in the elimination of Delaware franchise taxes. Consulting fees decreased by $105,000 because the Company did not hire consultants during the nine months ended April 30, 1997. Promotional materials decreased by $189,000 due to decreased spending for these materials. Pension costs decreased by $726,000 because a proof of claim filed by the Pension Benefit Guarantee Corp. for this amount was recorded as part of the reorganization during the nine months ended April 30, 1996. Telephone expenses decreased by $31,000 due to the closing of the showroom in October 1995. Data-processing costs decreased by $6,441 due to the reorganization of the Company. Postage decreased by $10,000 due to improved cost management. Bad debt expense decreased by $666,000 because of improved collections and decreased sales volume. The Company's pre-tax profit of $147,000 for the fiscal year ended April 30, 1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31, 1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As a result of the merger of Dynamic Classics, Ltd. into Dynamic International, Ltd. (see Note 2 to the Financial Statements) and the ownership change due to the reorganization, for tax purposes, the $76,000 loss is reportable in the Company's final tax return (see Note 5 to the Financial Statements). As there is a loss for the period, no current tax provision was recorded for the period May 1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards of approximately $19,500,000, out of which approximately $16,700,000 would be utilized to offset the extraordinary gain on the discharge of pre-Petition liabilities in its final tax return. All deferred taxes arising from the preconfirmation net operating losses were offset entirely by a valuation allowance. Effectively, no deferred tax benefits were realized from preconfirmation net operating losses. Any loss carry-forward not utilized in the Company's final tax return is lost. Accordingly, the Company has no deferred taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997 commenced on August 9, 1996. The current income tax provision of $104,000 for the fiscal year 20 24 ended April 30, 1997 is based on pretax profits of $223,000 for the period August 9, 1996 to April 30, 1997. The effective tax rate is 46% comprised of 26% of federal taxes and 20% of state and local taxes. The following table sets forth the results of operations for the periods discussed above:
Reorganized Company Predecessor Company Predecessor Company for 9 Months for 3 Months for Fiscal Year Ended 4/30/97 Ended 7/31/96 Ended 4/30/96 ------------- ------------- ------------- Sales $7,492,700 $ 1,983,200 $ 7,151,700 Other income 54,600 10,200 98,300 ---------- ----------- ------------ 7,547,300 1,993,400 7,250,000 Cost of sales 4,850,000 1,454,600 9,480,500 ---------- ----------- ------------ Gross profit (loss) 2,697,300 538,800 (2,230,500) ---------- ----------- ------------ Operating expenses 2,226,600 556,500 6,683,200 Interest 198,800 57,300 383,500 ---------- ----------- ------------ 2,425,400 613,800 7,066,700 ---------- ----------- ------------ Reorganization items 48,900 1,300 449,700 ---------- ----------- ------------ 48,900 1,300 449,700 ---------- ----------- ------------ Pretax income (loss) 223,000 (76,300) (9,746,900) Tax provision (benefit) 103,700 0 (7,511,000) ---------- ----------- ------------ Income (loss) before extraordinary item 119,300 (76,300) (2,235,900) ---------- ----------- ------------ Extraordinary item gain on discharge of pre-Petition liabilities 0 0 16,692,200 Tax 0 0 (7,511,000) ---------- ----------- ------------ Extraordinary gain, net of tax 0 0 9,181,200 ---------- ----------- ------------ Net income (loss) $ 119,300 $ (76,300) $ 6,945,300 ========== =========== ============
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995 Sales for the years ended April 30, 1996 were $7,151,700, a decrease of $25,381,400 or 78% from the previous fiscal year. The decrease was primarily due to the discontinuation of a line of manual treadmills and ski machines. Sales of this equipment accounted for approximately $15,580,000 during the fiscal year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a result of the Company's bankruptcy proceedings, it was forced to reduce its sales of other exercise equipment and of its sports bags/luggage products which led to a decline in sales of $5,334,700 and $1,333,600, respectively, to $5,615,600 and $4,701,800, respectively. Sales of exercise equipment and sports bags/luggage products during this period were offset by credits of $3,210,900 issued to customers in connection with the discontinued line of manual treadmills and ski machines. 21 25 In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Sales of the treadmills and ski machines began in June 1994. The Company sold approximately $24,000,000 of these products from June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these products were shipped directly to customers. Due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial chargebacks by its customers. Although, pursuant to a written agreement, the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, they breached this agreement soon thereafter. As a result, during April 1995, the Company issued credits to customers for approximately $5,000,000 of the $7,487,000 of credits for the fiscal year then ended. The following table sets forth the financial statement effect of the Company's line of treadmills and ski machines for the periods indicated:
Reorganized Company Predecessor Company Predecessor Company for 9 months for 3 months for year: ended 4/30/97 ended 7/31/96 ended 4/30/96 ended 4/30/95 ------------- ------------- ------------- ------------- Sales -- -- $ 597,000 $ 23,255,000 Credits -- -- (3,210,900) (7,487,000) --- --- ----------- ------------ Net sales -- -- (2,613,900) 15,768,000 Inventory reserve -- -- -- (1,320,063) Cost of sales -- -- 156,000 (18,604,172) --- --- ----------- ------------ Gross Loss -- -- $(2,457,900) $ (4,156,235) === === =========== ============
The sale of these products was discontinued in August 1995 and all inventory was disposed of by October 1995. Currently, the Company does not believe that there will be additional returns of these products or that any claims relating thereto remain to be settled. In addition, the Company's operating expenses decreased by approximately $1,083,300 to $6,683,200. As a result of the Company's reorganization, the Company had decreases in the following expenses: Officers salaries 160,000 Office salaries 180,000 Salesmen salaries 316,000 Payroll taxes 74,000 Fringe benefits 145,000 Travel & entertainment 237,000
Officers salaries decreased by $160,000 as a result of a reduction in the salary of the Company's former President in September 1995, and the separation from the Company of the Senior Executive Vice President in January 1995. These changes accounted for decreases of $67,000 and $73,000, respectively. Office salaries decreased by $180,000 due to the overall reduction in office personnel in October 1995 as the operations of the Company were consolidated and Achim began to supply administrative and warehouse services. Salesmen salaries decreased by $316,000 because bonuses and overrides were discontinued after August 1995. Payroll taxes and fringe benefits decreased by $74,000 and $145,000, respectively, due to the overall reduction in office personnel in October 1995 as the operations of the Company were consolidated and Achim began to supply administrative and warehouse services. 22 26 Travel and entertainment decreased by $237,000 due to the reduction in executive staff and the cost containment measures instituted due to the reorganization. For the fiscal year ended April 30, 1996, after giving effect to an extraordinary gain as a result of the discharge of pre-Petition liabilities in the amount of $16,692,200, the Company recorded net income of $6,945,300, compared to a net loss of $11,227,300 during the previous fiscal year. For the fiscal year ended April 30, 1996, the Company would have recorded a net loss of $9,746,900 before the extraordinary gain, or a decrease of $1,562,500 from the prior fiscal year. This decrease primarily reflected a reduction in the Company's operating expenses of approximately $1,083,300 and a reduction in interest expense of $1,001,400. This decrease was due to the Company's exemption from making interest payments of $558,312 during the reorganization proceedings. In addition, interest expense decreased by $456,912 due to reduced borrowing for the year ended April 30, 1996. The extraordinary gain on debt discharge of pre-Petition liabilities, which is recorded on the Company's books in fiscal year ended April 30, 1996, was taxable in the subsequent fiscal period, as the actual distribution to discharge the debt occurred in July 1996. For tax purposes, without the gain on debt discharge, the Company had an operating loss for the year ended April 30, 1996 which resulted in the Company's not having any current income tax liability (effective tax rate of 0%). The current operating losses and the prior year loss carry-forwards totaled approximately $19,500,000. Based on ownership changes resulting from the reorganization (see Note 2 to the Financial Statements), approximately $16,700,000 will be utilized to offset the extraordinary gain on debt discharge in its final tax return for the period May 1, 1996 to August 8, 1996. The balance of the net operating loss carry-forward is lost. The deferred tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of 11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the Company's pretax loss of $11,309,000 resulted in a federal tax benefit of $3,845,000 utilizing the statutory rate. As a result of changes to the valuation allowance, the reversal of previously established deferred tax assets and losses for which no benefit was provided, the Company's effective tax rate resulted in a benefit of $82,000. LIQUIDITY AND CAPITAL RESOURCES Three Months Ended July 31, 1997 Cash flow provided by operations increased to $95,513 compared to the prior year's quarter under the predecessor Company which used cash of $64,766. Net income of $38,665, along with a decrease in inventory of $515,399, due to lower purchases, were the primary providers of cash from operations during the quarter ended July 1997. Net income and inventory reductions were offset by increased accounts receivable and amounts due from suppliers of $156,220 due to stronger sales in the last month of the quarter. In addition, cash was used in operations to pay for increases in prepaid expenses, decreases in accounts payable and accrued expenses, and income taxes payable of $95,346, $107,320, and $103,700, respectively. Financing activities used cash of $79,811 due to an increase in costs related to this stock offering of $73,844 and the repayment of capital lease obligations of $5,967. The Company had a positive cash flow for the period of $15,702. Nine Months Ended April 30, 1997 During the first nine months after the Company's reorganization, cash used in operations amounted to $294,371. Cash used to pay creditors during the reorganization amounted to $515,638. Cash was also used to increase inventory by $1,032,882 during the nine-month period. The increase in inventory was due to an anticipated increase 23 27 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 creditors. Cash of $332,957 provided by financing activities was primarily the result of a $600,000 loan from MG Holding and was used to pay the creditors in accordance with the Company's Plan. Cash provided by financing activities was used to repay $145,324 of the note payable to MG Holding. In addition, payments were made for capital leases, insurance notes, and deferred stock offering costs of $29,656, $62,020, and $30,043, respectively. The Company had a positive cash flow of $38,586. Three Months Ended July 31, 1996 During the three months ended July 31, 1996, cash used by operating activities amounted to $64,800. This was the result of a net loss of $76,400, increases in accounts receivable and due from suppliers, and prepaid expenses of $221,300 and $100,600, respectively, which were offset by a decrease in inventory and an increase in accounts payable and accrued expenses of $115,600 and $155,800, respectively. Financing activities provided cash of $43,200. Proceeds from insurance notes payable of $77,200 were offset by repayments of insurance notes payable, and repayments of capital lease obligations of $15,200 and $18,800, respectively. The Company had a negative cash flow of $21,600 for the three months ended July 31, 1996. Fiscal Year Ended April 30, 1996 During the fiscal year ended April 30, 1996, cash used by operating activities amounted to $1,145,616. This was primarily the result of temporary benefits received by the Company under the bankruptcy and subsequent reorganization. Net income of $6,945,299 and the increase in pre-Petition liabilities of $8,614,728 were offset by the gain of debt discharge under the Plan of $16,692,193. In addition, the Company was not required to pay interest on most of its debt during the bankruptcy period. Future cash flows will no longer receive these benefits. Cash of $47,933 was used primarily to purchase equipment for the manufacture of two exercise products as well as computer hardware and software. Financing activities generated cash in the amount of $877,493. Proceeds from bank notes payable, bankers acceptances, and a loan from MG Holding were $3,393,628, $1,118,556, and $557,000, respectively. These proceeds were offset by repayments of bankers acceptances and capital leases of $4,127,139 and $64,552, respectively. The Company had a negative cash flow of $316,056 for this period. Current Position Pursuant to an unwritten understanding, Achim arranges for the issuance by its financial lender of letters of credit in favor of the Company's overseas suppliers thereby enabling the Company to finance the purchases of its inventory. Also, in the event of domestic suppliers, from time to time, Achim purchases products from the manufacturer and resells them to the Company in order to accommodate Achim's commercial lenders who often require a security interest in the merchandise until it has been sold and the lender has been repaid. The Company pays Achim for the amount actually paid to the supplier (including any applicable discounts) without markup, reimburses Achim for its bank charges and pays it interest at the prime rate plus one percent on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in principal and interest under this arrangement. As of September 24 28 30, 1997, this sum had decreased to $1,440,476. See "Certain Relationships and Related Transactions." The weighted average interest rate paid by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively. The Company owes an aggregate of approximately $1,200,000 to MG Holdings, which is wholly owned by Marton B. Grossman, the Company's Chairman and President, under a note evidencing debtor-in-possession financing provided by MG Holdings. The note accrues interest at the Citibank Prime Rate plus 1%. As of April 30, 1997, the Company had accrued interest in the amount of $34,219 in connection with this loan. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. To date, three payments have been made. In July 1997, the Company and MG Holdings agreed that no payments will be due until the consummation of this offering or the scheduled maturity of the note, whichever occurs earlier. The Company intends to repay the note from the proceeds of this offering. The Company believes that cash generated by operations, the availability of Achim's credit line to finance the Company's purchase of inventory, and the proceeds from this offering will be sufficient to finance its operations for the next twelve months. SEASONALITY AND INFLATION The Company's business is highly seasonal with higher sales typically in the second and third quarters of the fiscal year as a result of shipments of exercise equipment and sports bags/luggage related to the holiday season. Management does not believe that the effects of inflation will have a material impact on the Company, nor is it aware of changes in prices of material or other operating costs or in the selling price of its products and services that will materially affect the Company. 25 29 CAPITALIZATION The following table sets forth the capitalization of the Company at July 31, 1997, and as adjusted to reflect receipt of the net proceeds from this offering:
July 31, 1997 ------------------------------------ Actual(1) As Adjusted(1)(2) ------------ ----------------- Short Term Debt 1,085,910(3) 18,261 ========== ========== Long Term Debt 54,435 -0- ---------- ---------- Stockholders' Equity: Common Stock, $.001 Par Value, 50,000,000 Shares Authorized; Issued 3,198,798 at April 30, 1997, and 4,398,798 As Adjusted 3,199 4,399 Preferred Stock, $.001 Par Value, 10,000,000 shares authorized; None Outstanding Additional Paid-In Capital 22,940 4,941,740 Retained Earnings 158,064 158,064 Less: Treasury Stock (3) (3) ---------- ---------- Total Stockholders' Equity 184,200 5,104,200 ---------- ---------- Capitalization Total 238,635 5,104,200 ========== ==========
- ----- (1) Does not give effect to (i) up to 2,400,000 shares of authorized but unissued Common Stock reserved for issuance upon exercise of the Warrants included in the offering; (ii) up to 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Warrants; (iv) up to an additional 540,000 shares of Common Stock (including 360,000 shares of Common Stock underlying Warrants) issuable upon exercise of the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common Stock issuable to Mr. Marton B. Grossman, the Company's Chairman and President over a three-year period, provided the Company meets certain earnings criteria. See "Description of Securities", "Underwriting" and "Management". (2) Gives effect to the issuance and sale of the Units and the anticipated application of the net proceeds of this offering. (3) Includes loan payable--related party, accrued interest payable of $62,299 on such debt, and capital lease obligations of $18,261. 26 30 BUSINESS GENERAL Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the design, marketing and sale of a diverse line of hand exercise and light exercise equipment, including hand grips, running weights, jump ropes and aerobic steps and slides. It markets these products under the licensed trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked name SHAPE SHOP.(R) In addition, it designs and markets sports bags and luggage, which are marketed primarily under the licensed name JEEP(R) and under its own names PROTECH and SPORTS GEAR(R). The Company's objective is to become a designer and marketer of goods that are associated with a free-spirited lifestyle and leisure time. The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the successor to a New York company incorporated in 1964. In August 1996, DCL merged with and into DIL, which had been newly formed for the purpose of this merger. The objective of the merger was to change the Company's state of incorporation from Delaware to Nevada. PLAN OF REORGANIZATION In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. For the fiscal year ended April 30, 1995, sales of these products represented approximately 53% of the Company's gross sales. However, due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial charge backs by its customers. Although, pursuant to a written agreement, one of the manufacturers, CNM, acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. In March 1995, CNM sued the Company for monetary damages alleging, among other things, breach of contract. The Company and CNM subsequently settled the matter by releasing each other from any claims and allowing CNM to collect an aggregate of $15,000 from the Company. The Company suffered severe losses from its venture into this line of business and in August 1995 filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In May 1996, the Bankruptcy Court approved a plan of reorganization pursuant to which creditors received partial satisfaction of their claims. MG Holdings, which had purchased a promissory note from the Company's principal lender, received 2,976,000 shares of Common Stock in full satisfaction of the promissory note. The number of shares issued to MG Holdings represented 93% of the issued and outstanding shares. As a result, MG Holdings acquired absolute control over the Company's affairs. MG Holdings is wholly-owned by Marton Grossman, the Company's Chairman and President. See "Principal Stockholders" and "Certain Relationships and Related Transactions." In addition, as part of the plan of reorganization, the Company, then known as DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of changing its state of incorporation. See "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 27 31 PRODUCTS Exercise Equipment The Company's line of exercise equipment consists primarily of handheld products, including dumbbells, ankle and wrist weights, hand grips, jumpropes, exercise suits, slimmer belts and strength training products. In addition, the Company markets light weight equipment such as aerobic steps and slides and exercise mats. The Company also carries a line of small electronic devices designed to monitor physical activity such as stopwatches, pedometers, pulse meters and calorie counters. Luggage/Sports Bags The Company's line of luggage consists primarily of duffle bags, weekend bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases. Some of the models are equipped with wheels and/or retractable handles. Other Products The Company, through a wholly owned subsidiary, has obtained the exclusive rights to the patents underlying the technology used in an insulated bag incorporating a wrap-around gel pack or freeze pack with the ability to cool and preserve food and other products for an extended period of time. In addition, it obtained the trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under which the products are sold. See "Intellectual Property-License Agreements." The Company is currently testing the marketability of these products. The Company may from time to time manufacture and/or market additional products under its own names or under licensed names. Design and Development The Company usually designs its own exercise equipment and creates its own molds and tooling. Such molds and tooling are used by the manufacturers to produce the equipment. The Company retains an ownership interest in the molds which are returned to it upon the termination of the Company's relationship with a particular manufacturer. The Company has been granted a number of design patents with respect to certain of its products. None of these patents are currently used by the Company. See "Intellectual Property." The Company employs a designer on a full-time basis for the design of its luggage products. During the most recent fiscal year the Company spent approximately $102,000 on design activities, including fees to designers and patent attorneys. The Company may from time to time utilize the services of consultants for products and package design. Most of the Company's products are manufactured in the Philippines, Taiwan and Hong Kong, which in the most recent fiscal year accounted for approximately 38%, 27% and 10% of the Company's products, respectively. In addition, the Company's products are manufactured in the United States, the People's Republic of China and Indonesia. Exercise equipment is usually shipped by the manufacturers to the Company within 45 days of the placement of an order. Orders for luggage and sports bags, which for the most part are produced in the Philippines and China, usually require a period of 90 to 120 days before they are shipped. The Company ordinarily has its products manufactured based on purchase orders and it has no long term relationships with any of its manufacturers. The Company believes that, if necessary, it will be able to obtain its products from firms located in other countries at little if any additional 28 32 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, 1997 approximately 25% and 13% of the Company's revenues were derived from sales to K-Mart and Service Merchandise, respectively. No other customer accounted for more than ten percent of the Company's revenues. For the fiscal year ended April 30, 1997, sales of exercise equipment accounted for approximately 53% of the Company's revenues while 47% of the Company's revenues were derived from the sale of luggage. The Company sells its products primarily through independent sales agents on a commission-only basis. The Company currently engages approximately 23 sales agents either on an individual basis or through independent sales organizations. Although it has written agreements with a number of its agents, all of such agreements are terminable at will. The Company has no long term arrangements with any of its agents. The Company usually pays commissions ranging from 1% to 5% of the net sale price of its products. Although the Company believes that its sales agents sell products exclusively on behalf of the Company, there are no agreements that prohibit them from selling competing products. In addition, the Company on a small scale markets existing products to retailers for resale under their own private labels. The Company has began deliveries to Service Merchandise, Inc. and Kohl's Department Stores. The Company has no written agreements with these customers. Although the scope of this marketing effort is currently limited, the Company intends to expand the number of private label transactions. No assurance can be given that its efforts in this area will be successful. The Company currently anticipates that it may increasingly focus its attention on direct response marketing. The Company believes that its products are particularly well suited for so-called impulse buys. Therefore, it intends to develop plans to use infomercials to market its products. To date, no significant expenditures have been made in connection with this effort. COMPETITION The Company's exercise products compete with products marketed and sold by a number of companies. The Company believes that its main competitors are Icon Health and Fitness, Inc. and Bollinger Industries. Both of these companies possess far greater financial and other resources, including sales forces, than the Company's. However, the Company believes that as a result of its ability to use the trademarked names 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 bag/luggage products compete with products designed by a number of the largest companies in the industry, including Samsonite, Sky Way and American Tourister. The Company believes that because of its concentration on the upscale lifestyle and more specialized leisure market that are associated with the trademark JEEP(TM) the Company will be able to continue to grow its sports bag/luggage business. Nevertheless, there can be no 29 33 assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities. INTELLECTUAL PROPERTY The Company owns a number of trademarks, including POCKETSPLUS, PROTECH TRAVEL SYSTEMS & DESIGN and EXER-SLIDE. License Agreements The Company sells a number of its products under licensed names. The Company has entered into licensee agreements which provide for the grant of licenses to the Company and the payment of royalties by the Company, as follows: JEEP -- Under an agreement dated January 8, 1993, as amended by letter amendment dated January 8, 1996, between the Company and the Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company was granted the exclusive license to use the names JEEP, WRANGLER and RENEGADE in connection with the manufacture, sale and distribution of luggage products. The current expiration date of the Jeep Agreement is December 31, 1998. The parties have informally agreed to start negotiations regarding the terms of an extension of the current agreement. SPALDING -- Pursuant to two separate agreements between the Company and Spalding & Evenflo Companies Inc. dated November 1, 1992, and April 1, 1994, the Company was granted the exclusive right to use the name SPALDING in connection with the sale and distribution of a number of products, including weight bars and large exercise machines. The agreements expired in September 1997. However, the Company is currently negotiating a renewal of the agreement relating to the handheld exercise equipment, and it is confident that it will be able to negotiate such renewal. Nevertheless, no assurance can be given that the Company will be successful in negotiating a renewal of the agreements. KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated December 22, 1994, Ms. Ireland approves and endorses certain exercise equipment designed and manufactured by the Company. Under the agreement, the Company has the right to use her name in connection with the equipment and Ms. Ireland will make appearances to promote such equipment. In addition, the Company has the right to use her photograph and likeness in connection with the sale of the equipment. The agreement is currently scheduled to expire in June 1998 but is subject, at the Company's option, to renewal until June 2000. FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996, between New Century Marketing & Distributors, Inc. and a wholly-owned subsidiary of the Company, the Company obtained the exclusive rights to a patented technology as well as to the trademarked names FREEZY-BAG and FREEZYGEL. The technology has the ability to cool foods and other products and is used in the wrapping of such products. The agreement has a term of two years but is renewable, at the option of the Company, for additional one year periods. 30 34 MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC. Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996 (the "Warehousing Agreement") between the Company and Achim, Achim performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, Achim assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and in the performance of credit checks on the Company's customers. In consideration for these services, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment. In addition, under the Warehousing Agreement, Achim provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by Achim under the Warehousing Agreement. The Warehousing Agreement has a term of two years and is automatically renewable for additional one year periods unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal year ended April 30, 1997, the Company accrued approximately $458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the three months ended July 31, 1996 and $363,580 for the nine months ended April 30, 1997. Achim is wholly-owned by Marton Grossman, the Company's Chairman and President. The Company believes that the terms of the Warehousing Agreement with Achim are at least as favorable as would have been obtained from an unaffiliated third party. In addition, pursuant to an unwritten understanding, Achim arranges for the issuance by its financial lender of letters of credit in favor of the Company's overseas suppliers thereby enabling the Company to finance the purchases of its inventory. Also, in the event of domestic suppliers, from time to time, Achim purchases products from the manufacturer and resells them to the Company in order to accommodate Achim's commercial lenders who often require a security interest in the merchandise until it has been sold and the lender has been repaid. The Company pays Achim for the amount actually paid to the supplier (including any applicable discounts) without markup, reimburses Achim for its bank charges and pays it interest at the prime rate plus one percent on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in principal and interest under this arrangement. As of September 30, 1997, this sum had decreased to $1,440,476. See "Certain Relationships and Related Transactions." The weighted average interest rate paid by the Company to Achim at September 30, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively. EMPLOYEES As of September 30, 1997 the Company employed 13 persons, of whom five were executive officers, three were engaged in administrative and clerical activities, three were engaged in sales and two were involved in warehousing and shipping. None of the Company's employees are represented by a union and no work stoppages have occurred. 31 35 PROPERTIES The Company occupies a warehouse consisting of approximately 54,400 square feet, of which 4,500 square feet are dedicated to office space, located at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding which is owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before it became affiliated with the Company, it remains the lessee under the lease. Achim makes the property available to the Company on a rent-free at will basis. See "Certain Relationships and Related Transactions" and "Management Agreement with Achim Importing Co., Inc." LEGAL PROCEEDINGS On August 23, 1995, the Company filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Court"). On May 23, 1996, the Court entered an Order confirming the Company's plan of reorganization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CHANGE IN ACCOUNTANTS On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its independent accountants ("Hoberman"). This action had been approved by the Company's Board of Directors. During the past two years Hoberman did not issue a report on the Company's financial statements that either contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. During the period of their engagement from June 30, 1973 until June 26, 1996, there were no disagreements between the Company and Hoberman on any matter of accounting principles or practices, financial statement disclosure, or audit scope and procedure, which disagreement, if not resolved to the satisfaction of Hoberman, would have caused them to make reference to the subject matter of the disagreement in connection with any report that was to have been, or will be, prepared for the Company. On July 11, 1996 the Board of Directors of the Company appointed Moore Stephens, P.C. as its independent accountants, subject to ratification by the Company's shareholders. 32 36 MANAGEMENT OFFICERS AND DIRECTORS The officers and directors of the Company are as follows:
Name Age Position - ---- --- -------- Marton Grossman 66 Chairman and President Isaac Grossman 34 Vice Chairman, Treasurer and Secretary Sheila Grossman 58 Director Harry P. Braunstein 48 Director* Bernard Goldman 77 Director* William Dolan 44 Vice President--Finance John Holodnicki 44 Vice President-Sales Gordon Sulltrop 62 Executive Vice President
- ---------------- * Member of the Company's Audit Committee. MARTON GROSSMAN has been the Chairman and President of the Company since July 29, 1996. For the past 34 years, he has been President of Achim Importing Co., a privately held company engaged in the import and export of window coverings and accessories ("Achim"). In addition, he has been President of MG Holding Co., Inc., a privately held financial holding company. Mr. Grossman is the father of Isaac Grossman, the Company's Vice Chairman, Treasurer and Secretary. Mr. Grossman spends approximately 20% of his time working for the Company. ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and Secretary since July 1996. He has been Vice President of Achim since 1989. Prior thereto, Mr. Grossman worked in various positions at Achim, including in sales and marketing and warehousing. Mr. Grossman is the son of Marton Grossman, the Company's Chairman and President. Mr. Grossman spends approximately 20% of his time working for the Company. SHEILA GROSSMAN was elected a director in October 1997. From 1962 to 1987 she was affiliated with Achim where she performed a variety of functions including Secretary to the President. Ms. Grossman is the spouse of Marton Grossman, the Company's Chairman and President. HARRY BRAUNSTEIN was elected a member of the Board in October 1997. Mr. Braunstein has been a member of Hertzfeld & Rubin, a New York based law firm, since 1984. He is member of the Board of Directors of Gotham 33 37 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 1997. Mr Goldman has been and continues to be a member of the Board of Directors and an executive officer of a number of community and charitable institutions and organizations. WILLIAM DOLAN has been the Company's Vice President-Finance since July 1996. Prior thereto, he had been the Company's Treasurer and Secretary since 1989. Mr. Dolan graduated from the William Paterson College of New Jersey. Mr. Dolan is a certified public accountant. JOHN HOLODNICKI has been a Vice President-Sales at the Company since 1994. From 1981 to 1994 he was a Vice President-Sales at HIT Industries, an importer of business computer cases. Mr. Holodnicki earned a degree in Marketing from the University of Illinois in 1975. GORDON SULLTROP was appointed Executive Vice President in September 1997. Prior to joining the Company, from 1988 to 1997, he was employed by Rubbermaid Specialty Products Division. At that company he acted as National Accounts Sales Manager from 1996, Central Region Manager from 1991 to 1995, Military and Premium Sales Manager from 1990 to 1991 and National Accounts Manager from 1988 to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri Valley College, Marshall, Missouri. BOARD OF DIRECTORS Each director is elected at the Company's annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified. At present, the Company's bylaws require no fewer than one director. Currently, there are two directors of the Company. The bylaws permit the Board of Directors to fill any vacancy and the new director may serve until the next annual meeting of stockholders or until his successor is elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contracts, at the discretion of the Board. The underwriting agreement provides that the underwriter for this offering shall have the right to designate one member of the Board of Directors for a period of three years following the date hereof. To date, no person has been designated by the Underwriter. See "Underwriting." AUDIT COMMITTEE The Company's Board has designated Bernard Goldman and Harry Braunstein as members of the Audit Committee. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company during the three fiscal years ended April 30, 1997 (i) to its Chief Executive Officer, and (ii) the Company's other four executive officers: 34 38 SUMMARY COMPENSATION TABLE(1)(2)
- ------------------------------------------------------------------------------------------------------------ Annual Compensation (a) (b) (c) (d) (e) - --------------------------- ----------- ----------- ----------- -------------------------- Year Ended Name/Principal Position April 30 Salary ($) Bonus ($) All Other Compensation (3) =========================== =========== ============ =========== ========================== Marton Grossman 1997 -0- 31,200 Chairman and President 1996 -0- 18,200 1995 -0- -0- - ------------------------------------------------------------------------------------------------------------ Isaac Grossman 1997 -0- 32,240 Director, Treasurer 1996 -0- 13,043 1995 -0- -0- - ------------------------------------------------------------------------------------------------------------ William P. Dolan 1997 100,000 Vice President-Finance 1996 100,000 1995 97,691 - ------------------------------------------------------------------------------------------------------------ Marvin Cooper, 1997 128,125 President and Director (4) 1996 182,176 1995 250,099 - ------------------------------------------------------------------------------------------------------------ John Holodnicki 1997 120,000 Vice President 1996 120,000 1995 97,046 ============================================================================================================
- ------------------------- (1) The above compensation does not include the use of an automobile and other personal benefits, the total value of which do not exceed as to any named officer or director or group of executive officers the lesser of $50,000 or 10% of such person's or persons' cash compensation. (2) Pursuant to the regulations promulgated by the Commission, the table omits columns reserved for types of compensation not applicable to the Company. (3) Consists of estimated portion of the fees payable to Achim under the Warehousing Agreement attributable to Marton Grossman's and Isaac Grossman's activities performed on behalf of the Company. Marton Grossman is the sole shareholder, and Isaac Grossman is an employee of Achim. See "Certain Relationships and Related Transactions." (4) Mr. Cooper resigned his positions from the Company in March 1997. None of the individuals listed in the table above received any long-term incentive plan awards during the fiscal year. Marton Grossman, the Company's Chairman and President, does not have an employment agreement and is not being paid a salary. However, in April 1997 the Company entered into a Bonus Agreement (the "Bonus Agreement") with Mr. Grossman which provides for the issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if the Company reaches certain earnings milestones, as follows: if the Company's earnings before 35 39 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; and if the Company's earnings before taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he will be issued 1,000,000 shares. The stated earnings criteria are cumulative so that in the event of an earnings shortfall during a fiscal year, such shortfall may be compensated by earnings during a subsequent year, as a result of which Mr. Grossman will be issued shares that, in the aggregate, equal the number of shares issuable during these two years if the Company had reached earnings for each year as required under the Bonus Agreement. The Bonus Agreement also provides for piggyback registration rights with respect to the Common Stock to be issued. The following table sets forth the number of shares of Common Stock to be issued to Mr. Marton Grossman under the Bonus Agreement: LONG TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
Performance or Other Number of Shares, Period Until Estimated Future Payouts Under Name Units or Other Rights Maturation or Payout Non-stock Price based Plans - ---- --------------------- -------------------- ------------------------------------------ Threshold Target Maximum Marton 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 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 ten-percent beneficial owners were complied with. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the plan of reorganization, MG Holdings purchased from the Company's principal lender a note in the principal amount of approximately $6,822,530. MG Holdings is wholly owned by Marton Grossman, the Company's Chairman and President. The note was repaid by the Company through the issuance of 2,976,000 shares of Common Stock to MG Holdings. MG Holdings subsequently assigned the Common Stock to a trust for the benefit of members of Mr. Grossman's family. 36 40 Also in connection with the plan of reorganization, MG Holdings loaned approximately $1,205,000 to the Company to consummate the plan and for related expenses. The Company issued a promissory note to MG Holdings evidencing the loan and granted it a security interest in all of the Company's assets. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. The note accrues interest at the Citibank Prime Rate plus one percent. The weighted average interest rate as of the date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April 30, 1997 the Company had accrued interest in the amount of $37,219 in connection with this loan. As of October 14, 1997, the amount of interest owed amounted to $84,244. In July 1997 the Company and MG Holding agreed that no principal or interest payments under the note would be due until the consummation of this offering or the scheduled maturity of the note, whichever occurs earlier. The Company intends to repay this note from the proceeds of this offering. Pursuant to the Warehousing Agreement, Achim performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, Achim assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and in the performance of credit checks on the Company's customers. In consideration for these services, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment. In addition, under the Warehousing Agreement, Achim provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by Achim under the Warehousing Agreement. The Warehousing Agreement has a term of two years and is automatically renewable for additional one year periods unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal year ended April 30, 1997, the Company accrued approximately $458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the three months ended July 31, 1996 and $363,580 for the nine months ended April 30, 1997. To date, none of these fees have been paid. Achim does not charge the Company interest on the unpaid portion of the fees payable under the Warehousing Agreement. Achim is wholly-owned by Marton Grossman, the Company's Chairman and President. The Company believes that the terms of the Warehousing Agreement with Achim are at least as favorable as would have been obtained from an unaffiliated third party. In addition, pursuant to an unwritten understanding, Achim arranges for the issuance by its financial lender of letters of credit in favor of the Company's overseas suppliers thereby enabling the Company to finance the purchases of its inventory. Also, from time to time, when taking deliveries from domestic suppliers, Achim purchases products from the manufacturer and resells them to the Company in order to accommodate Achim's commercial lenders who often require a security interest in the merchandise until it has been sold and the lender has been repaid. The Company pays Achim for the amount actually paid to the supplier (including any applicable discounts) without markup, reimburses Achim for its bank charges and pays it interest at the prime rate plus one percent on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in principal and interest under this arrangement. As of September 30, 1997, this sum had decreased to $1,440,476. See "Certain Relationships and Related Transactions." The weighted average interest rate paid by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively. 37 41 The Company occupies a warehouse consisting of approximately 54,400 square feet, of which 4,500 square feet are dedicated to office space, located at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding which is owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's Vice Chairman, Treasurer and Secretary. The property is leased to Achim which makes the property available to the Company on a rent-free at will basis. See "Business-Management Agreement with Achim Importing Co., Inc." and "-Properties." DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Section 78.751 of the Nevada Revised Statutes, as amended, authorizes the Company to indemnify any director or officer under certain prescribed circumstances and subject to certain limitations against certain costs and expenses, including attorneys' fees actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which such person is a party by reason of being a director or officer of the Company if it is determined that such person acted in accordance with the applicable standard of conduct set forth in such statutory provisions. Article 10 of the Company's Bylaws contains provisions relating to the indemnification of directors and officers. The Company may also purchase and maintain insurance for the benefit of any director or officer which may cover claims for which the Company could not indemnify such person. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 38 42 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of October 9, 1997, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (i) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's officers and directors and (iii) all officers and directors of the Company as a group. Unless otherwise indicated, each stockholder's address is c/o the Company, 58 Second Avenue, Brooklyn, New York 11215.
Shares Owned Beneficially and of Record (1) ------------------------- Name and Address No. of Shares % of Total - ---------------- ------------- ---------- Marton Grossman (2) 2,976,000 93.0 Isaac Grossman (3) 2,976,000 93.0 Sheila Grossman (2) 2,976,000 93.0 Harry Braunstein 40 Wall Street New York, NY 10004 -0- * Bernard Goldman 2100 Boca West Drive Laurel Oaks, OH -0- * William P. Dolan 123 * John Holodnicki 11 * Gordon Sulltrop -0- * All Officers and Directors as a Group (8 2,976,134 93.0 persons)
- --------------------------- * Less than 1% (1) Includes shares issuable within 60 days upon the exercise of all options and warrants. Shares issuable under options or warrants are owned beneficially but not of record. (2) Consists of shares of Common Stock held by a series of trusts (collectively, the "Grossman Trust") for the benefit of relatives of Mr. Grossman. Mr. Isaac Grossman and Sheila Grossman and one of their relatives are the trustees of the Grossman Trusts. Under its terms, the Grossman Trust will return to Mr. Grossman annually until August 1998 56% of the value of the shares (payable in cash or in shares) when deposited into each of the Grossman Trusts. Since the number of shares to be returned to Mr. Grossman is based on the then current market price of the Common Stock, such number can not be determined at the present time. To date, no shares have been returned to Mr. Grossman under this arrangement. Mr. Grossman disclaims beneficial ownership in the shares held by the Grossman Trust that will not be returned to him. 39 43 (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. DESCRIPTION OF SECURITIES The Company is authorized to issue 50,000,000 shares of Common Stock, par value $.001 per share. As of the date of this Prospectus, 3,198,258 shares of Common Stock are issued and outstanding. The following are brief descriptions of the securities offered hereby and other securities of the Company. The rights of the holders of shares of the Company's capital stock are established by the Company's Certificate of Incorporation, the Company's Bylaws and Nevada Law. The following statements do not purport to be complete or give full effect to statutory or common law, and are subject in all respects to the applicable provisions of the Certificate of Incorporation, Bylaws and state law. UNITS The Company is hereby offering 1,200,000 Units, each Unit consisting of one share of Common Stock, one Class A Warrant and one Class B Warrant. The Common Stock and the Warrants will be separately tradable commencing __________ [90 days after the effective date]. COMMON STOCK The holders of Common Stock have no preemptive or subscription rights in later offerings of Common Stock and are entitled to share ratably (i) in such dividends as may be declared by the Board of Directors out of funds legally available for such purpose and (ii) upon liquidation, in all assets of the Company remaining after payment in full of all debts and obligations of the Company and any preferences granted in the future to any preferred stock. The Company has not paid any dividends on the Common Stock. Holders of Common Stock are entitled to one vote for each share held and have no cumulative voting rights. Accordingly, the holders of more than 50% of the issued and outstanding shares of Common Stock entitled to vote for election of directors can elect all the directors if they choose to do so. After completion of this offering, the current stockholders collectively will continue to own more than 50% of the outstanding shares of Common Stock. All shares of Common Stock now outstanding are fully paid and nonassessable and all shares of Common Stock which are the subject of this offering, when issued, will be fully paid and nonassessable. The Board of Directors is authorized to issue additional shares of Common Stock within the limits authorized by the Company's Certificate of Incorporation without stockholder action. WARRANTS The Warrants offered hereby will be issued in registered form under a Warrant Agreement (the "Warrant Agreement") between the Company and American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). The following summary of the provisions of the Warrants is qualified in its entirety by reference to the Warrant Agreement, a copy of which is filed as an exhibit to the registration statement of which this Prospectus is a part. The Class A Warrants and the Class B Warrants are identical except that (i) each Class A Warrant is exercisable at 40 44 $6.00 and each Class B Warrant is exercisable at $10.00, and (ii) the market price that will allow redemption to take place is $9.00 for the Class A Warrant and $15.00 for the Class B Warrants. Each Class A Warrant will be separately transferable commencing on the Separation Date and will entitle the registered holder thereof to purchase one share of Common Stock at $6.00 per share (subject to adjustment as described below) for a period of 18 months from the date of this Prospectus. Each Class B Warrant will be separately transferable commencing on the Separation Date and will entitle the registered holder thereof to purchase one share of Common Stock at $10.00 (subject to adjustment as described below) for a period of three years commencing on the date of this Prospectus. Holders of Warrants may exercise such Warrants by surrendering the certificate evidencing such Warrants to the Warrant Agent, together with the form of election to purchase on the reverse side of such certificate attached thereto properly completed and executed and the payment of the exercise price and any transfer tax. If less than all of the Warrants evidenced by a Warrant certificate are exercised, a new certificate will be issued for the remaining number of Warrants. See "Underwriting." The Warrants may not be exercised unless a current registration statement is on file with the Commission and various state securities commissions. The Company has agreed to use its best efforts to maintain a current effective registration statement under the Securities Act. While it is the Company's intention to file post-effective amendments when necessary and to take appropriate action under state securities laws, there is no assurance that the registration statement will be kept effective or that such appropriate action under state securities laws will be effected. If the registration statement is not kept current for any reason, the Warrants will not be exercisable, and holders thereof may be deprived of value. The Company has authorized and reserved for issuance a number of shares of Common Stock sufficient to provide for the exercise of the Warrants. When issued, upon exercise of the Warrants, each share of Common Stock will be fully paid and nonassessable. Warrant holders will not have any voting or other rights as shareholders of the Company unless and until Warrants are exercised and shares issued pursuant thereto. The exercise price and the number of shares of Common Stock issuable upon the exercise of each Warrant are subject to adjustment. Generally, the exercise price of the Warrants will be adjusted if the Company issues and sells shares of Common Stock (or issue securities convertible into Common Stock options, warrants and other similar rights) at a price less than the exercise price of the Warrants in effect at the time of such issuance. Upon each adjustment in the exercise price, corresponding adjustments will be made in the number of shares of Common Stock issuable upon exercise of the Warrants. In addition, in the event of a stock split, stock dividend, recapitalization, merger, consolidation or similar corporate transactions involving the Company, the then holders of the Warrants will receive the right to purchase the kind and amount of securities (subject to adjustment as set forth above) they would have been entitled to receive had they exercised the Warrants immediately prior to any such corporate transaction. The foregoing does not purport to be a complete description of the anti-dilution provisions of the Warrants. The complete terms are set forth in the Warrant Agreement which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. At any time, The Class A Warrants and the Class B Warrants are redeemable by the Company at $.01 per Warrant on thirty day's prior written notice at any time provided that the average closing bid price for the Common Stock is no less than $9.00 per share with respect to the Class A Warrants and $15.00 with respect to the Class B Warrants for any ten trading days within a period of 30 consecutive trading days as reported on the principal exchange or market on which the Common Stock is traded. The right to purchase the Common Stock issuable upon exercise by the Warrants noticed for redemption will be forfeited unless the Warrants are exercised prior to the date specified in the notice of redemption. While the Company may legally be permitted to give notice to redeem the Warrants at a time when a current prospectus is not available thereby leaving the Warrant holders no opportunity to exercise their Warrants prior to redemption, the Company does not intend to redeem the Warrants unless a current prospectus is available at the time of redemption. 41 45 SHARES AVAILABLE FOR FUTURE SALE Upon completion of this offering, the Company will have 4,398,798 shares of Common Stock outstanding (4,578,798 shares if the Underwriter's over-allotment option is exercised in full). Of these shares, the shares included in the Units and 224,000 shares held by existing security holders will be freely tradeable without restriction or further registration under the Securities Act except for any shares purchased by an "affiliate" of the Company (in general, a person who has a control relationship with the Company) which will be subject to the limitations of Rule 144 adopted under the Securities Act. Except as described below, all of the remaining shares of Common Stock may be deemed "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act. Such shares may be sold to the public immediately, subject to volume restrictions, as described below. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company (or persons whose shares are aggregated with an affiliate of the Company), who has owned restricted shares of Common Stock beneficially for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class or the average weekly trading volume of the Company's Common Stock on all exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. A person who has not been an affiliate of the Company for at least the three months immediately preceding the sale and who has beneficially owned shares of Common Stock for at least two years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. Approximately 93% of the currently issued and outstanding shares are owned by a series of trusts for the benefit of relatives of Marton Grossman. Isaac and Sheila Grossman are among the trustees of these trusts. Although no lock-up agreements are in effect with respect to any of such shares of Common Stock, the Company has been advised that there is no current intent to resell any of such securities. See "Security Ownership of Certain Beneficial Owners and Management." TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, acts as Transfer Agent for the Company's Common Stock and Warrants. MARKET FOR THE COMPANY'S SECURITIES The Company believes that there are currently in excess of 1,000 registered holders of the Company's Common Stock Prior to the Company's filing of a petition for protection under the Bankruptcy Code in 1995, the Company's securities were traded on the Nasdaq There currently exists no active trading market for the Company's securities and, therefore, no current pricing information is available for the Common Stock. It is anticipated that the Securities will be quoted on the OTC Bulletin Board upon completion of this offering. 42 46 UNDERWRITING Subject to the terms and conditions contained in the underwriting agreement between the Company and Patterson Travis, Inc. (the "Underwriter") (a copy of which agreement is filed as an exhibit to the Registration Statement of which this prospectus forms a part), the Company has agreed to sell to the Underwriter, and the Underwriter has agreed to purchase, the Units offered hereby. All 1,200,000 Units offered must be purchased by the Underwriter if any are purchased. The Units are being offered by the Underwriter subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Units to the public at the offering prices set forth on the cover page of this Prospectus and that the Underwriter may allow to certain dealers who are members in good standing of the National Association of Securities Dealers, Inc. ("NASD") concessions of $___ per Unit. Upon completion of the sale of all Securities offered hereby, the public offering price and concessions may be changed by the Underwriter. The Company has granted the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase from it up to 180,000 Units at the public offering prices less the underwriting discounts set forth on the cover page of this Prospectus. The Underwriter may exercise this option solely to cover over-allotments in the sale of the Units offered hereby. The Company has agreed to pay the Underwriter a non-accountable expense allowance of 3% of the gross proceeds to the Company of the Units sold in the offering (including the over-allotment option). The Underwriter will (i) receive a Warrant solicitation fee equal to 8% (or the maximum amount permissible under NASD rules) of the exercise price of all Warrants it causes to be exercised (or $1,536,000, assuming exercise of all Warrants) commencing one year from the date hereof, if (a) the market price of the Company's Common Stock on the date the Warrant is exercised is greater than the exercise price of the Warrant, (b) the exercise of the Warrant was solicited by the Underwriter, (c) the Warrant is not held in a discretionary account, (d) disclosure of the compensation arrangement is made upon the sale and exercise of the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6 under the Exchange Act, and (f) solicitation of the exercise is otherwise in compliance with the applicable NASD rules. The Warrant solicitation fee will be payable only after one year from the date hereof. Under the underwriting agreement, the Underwriter has the right to designate one member of the Board of Directors for a period of three years from the date hereof. The agreement also provides for reciprocal indemnification between the Company and the Underwriter against certain civil liabilities, including liabilities under the Securities Act. The Company has agreed to sell to the Underwriter or its designees, at a price of $120, 120,000 warrants to purchase 120,000 Units (the "Underwriter's Warrants"). Other than a one-year restriction on transferability and exercisability and a higher exercise price of the Warrants included in the Units, the Units underlying the Underwriter's Warrants are identical in all respects to the Units offered to the public hereby. The Warrants will be exercisable at a price of $8.25 per Unit for a period of five years. The Class A Warrants and Class B Warrants underlying the Units included in the Underwriter's Warrants will be exercisable at a price of $9.90 and $16.50, respectively, or 165% of the then exercise price of the Warrants offered to the public, for a period of five years commencing on the date hereof (unless redeemed earlier). The Underwriter's Securities may not be exercised or sold, transferred, assigned or hypothecated for one year from the date hereof except to officers of the Underwriter. Any profit realized upon a resale of the Underwriter's Securities may be deemed to be additional underwriter's compensation. The Company has agreed to register, or file a post-effective amendment with respect to any registration statement registering, the Underwriter's Securities under the Securities Act at its expense on one occasion during the five years following the date of this Prospectus and at the expense of the holders thereof on another occasion, upon the request of a majority of the holders 43 47 thereof. The Company has also agreed to "piggy-back" registration rights for the holders of the Underwriter's Securities at the Company's expense during the five years following the date of this Prospectus. The Company has agreed to retain the Underwriter as a financial consultant for the two years following the closing of this offering for an aggregate fee of $20,000 payable at the closing of this offering. The Underwriter has informed the Company that it does not expect sales of Units to be made to discretionary accounts. PRICING OF THE OFFERING Immediately prior to this offering, there has been no active public trading market for any of the Company's securities. Consequently, the initial offering prices of the Units and the exercise prices of the Warrants have been determined by negotiations between the Company and the Underwriter. Among the factors considered in determining the offering prices were the Company's financial condition and prospects, the industry in which the Company is engaged, certain financial and operating information of companies engaged in activities similar to those of the Company and the general market condition of the securities markets. The offering prices do not necessarily bear any relationship to any established standard or criteria of value based upon assets, earnings, book value or other objective measures. LEGAL MATTERS The validity of the issuance of the Units offered hereby will be passed upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York, New York. Gerald A. Kaufman, Esq., Huntington Station, New York, will pass on certain aspects of this offering on behalf of the Underwriter. EXPERTS The audited financial statements of the Company as of April 30, 1995, 1996 and 1997 and for the fiscal years then ended are included herein and in the registration statement in reliance upon the reports of Moore Stephens, P.C., and Hoberman, Miller & Co., P.C., independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 44 48 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY FINANCIAL STATEMENTS APRIL 30, 1997 49 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONTENTS
Page ---- Independent Auditors' Reports F-1 to F-2 Consolidated Financial Statements: Balance Sheets as of July 31, 1997 (unaudited), April 30, 1997 and 1996 F-3 to F-4 Statements of Operations for the three months ended July 31, 1997 (unaudited) for the nine months ended April 30, 1997, three months ended July 31, 1996 and the years ended April 30, 1996 and 1995 F-5 Statements of Stockholders' Equity (Deficit) for the three months ended July 31, 1997 (unaudited) for the nine months ended April 30, 1997, three months ended July 31, 1996 and the years ended April 30, 1996 and 1995 F-6 Statements of Cash Flows for the three months ended July 31, 1997 (unaudited) for the nine months ended April 30, 1997, three months ended July 31, 1996 and the years ended April 30, 1996 and 1995 F-7 to F-8 Notes to Financial Statements F-9 to F-24 Independent Auditor's Report on Supplemental Schedule F-25 Schedule II - Valuation and Qualifying Accounts F-26
50 [MOORE STEPHENS LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Dynamic International, Ltd. We have audited the accompanying consolidated balance sheet of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and its subsidiary as of April 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine months ended April 30, 1997, the three months ended July 31, 1996, and the year ended April 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary as of April 30, 1997 and 1996, and the results of their operations and their cash flows for the nine months ended April 30, 1997, the three months ended July 31, 1996, and the year ended April 30, 1996, in conformity with generally accepted accounting principles. As discussed more fully in Note 2 to the consolidated financial statements, on August 23, 1995, the Company filed a voluntary petition requesting relief under Chapter 11 of the United States Bankruptcy Code. On May 23, 1996, the United States Bankruptcy Court for the Southern District of New York confirmed the Company's Amended and Modified Plan of Reorganization dated February 22, 1996. /s/ Moore Stephens, P.C. Moore Stephens, P.C. Certified Public Accountants New York, New York June 27, 1997, except as to Note 4, for which the date is July 10, 1997 F-1 51 INDEPENDENT AUDITOR'S REPORT Board of Directors Dynamic International, Ltd. We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended April 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and Subsidiary for the year ended April 30, 1995 in conformity with generally accepted accounting principles. As more fully discussed in Note 2 the Company, on August 23, 1995, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Act. /s/ Hoberman, Miller & Co., P.C. ------------------------------------- HOBERMAN, MILLER & CO., P.C. New York, New York June 26, 1996 F-2 52 DYNAMIC INTERNATIONAL, LTD., AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
REORGANIZED REORGANIZED PREDECESSOR COMPANY COMPANY COMPANY JULY 31, APRIL 30, APRIL 30, 1997 1997 1996 ---- ---- ---- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 59,245 $ 43,543 $ 26,515 Accounts receivable - trade (net of allowance for doubtful accounts of $167,000 in 1997 and 1996) 1,063,147 887,089 1,036,927 Due from suppliers 45,435 65,273 26,760 Inventory 2,786,336 3,301,735 2,384,469 Prepaid expenses 155,618 60,272 81,693 Miscellaneous receivables 2,658 2,658 135,039 Prepaid and refundable income taxes 56,003 39,914 291,146 ----------- ----------- ----------- Total Current Assets 4,168,442 4,400,484 3,982,549 ----------- ----------- ----------- PROPERTY AND EQUIPMENT Tools and dies 707,939 707,939 707,939 Furniture and equipment 102,205 102,205 102,205 Capitalized equipment leases 576,071 576,071 576,071 ----------- ----------- ----------- 1,386,215 1,386,215 1,386,215 Accumulated depreciation (1,278,011) (1,260,924) (1,156,160) ----------- ----------- ----------- Total Property and Equipment, net 108,204 125,291 230,055 ----------- ----------- ----------- OTHER ASSETS Due from suppliers 36,142 36,142 36,142 Security deposits 4,650 4,650 4,650 Deferred stock offering costs 189,867 116,023 -- Reorganization value in excess of amounts allocable to identifiable assets, net 121,436 124,472 -- ----------- ----------- ----------- Total Other Assets 352,095 281,287 40,792 ----------- ----------- ----------- TOTAL ASSETS $ 4,628,741 $ 4,807,062 $ 4,253,396 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 53 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued)
REORGANIZED REORGANIZED PREDECESSOR COMPANY COMPANY COMPANY JULY 31, APRIL 30, APRIL 30, 1997 1997 1996 ---- ---- ---- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable and accrued expenses - non related $ 710,549 $ 846,234 1,009,248 Accounts payable and accrued expenses - related party 2,655,946 2,627,580 2,129,893 Capital lease obligations - current 18,261 24,228 48,731 Income taxes payable -- 103,700 -- Loan payable - related party 1,005,350 844,531 557,000 Other liabilities -- -- 531,561 ----------- ----------- ----------- Total Current Liabilities 4,390,106 4,446,273 4,276,433 ----------- ----------- ----------- OTHER LIABILITIES Capital lease obligations, net of current portion -- -- 23,965 Loan payable - related party 54,435 215,254 -- ----------- ----------- ----------- Total Other Liabilities 54,435 215,254 23,965 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock, par value $.01 per share; authorized 5,000,000 shares; issued 1,744,396 shares -- -- 17,444 Common stock, par value $.001 per share; authorized 50,000,000 shares; issued 3,198,798 shares 3,199 3,199 -- Additional paid in capital 22,940 22,940 590,291 Accumulated deficit -- -- (637,237) Retained Earnings (since July 31, 1996, date of reorganization, total deficit eliminated was $713,601) 158,064 119,399 -- ----------- ----------- ----------- 184,203 145,538 (29,502) Less: Treasury stock, at cost, 15,000 shares -- -- (17,500) Less: Treasury stock, at cost, 540 shares (3) (3) -- ----------- ----------- ----------- Total Stockholders' Equity (Deficit) 184,200 145,535 (47,002) ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,628,741 $ 4,807,062 $ 4,253,396 =========== =========== ===========
All of the liabilities as stated above at April 30, 1996, the period during which the Company was operating under reorganization proceedings, are post-petition liabilities. The discharge of prepetition liabilities including liabilities subject to compromise has been recorded and the gain on the debt discharge is reflected in the consolidated statement of operations for the year ended April 30, 1996. The accompanying notes are an integral part of these consolidated financial statements. F-4 54 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
REORGANIZED REORGANIZED PREDECESSOR COMPANY COMPANY COMPANY FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED JULY 31, APRIL 30, JULY 31, APRIL 30, 1997 1997 1996 1996 1995 ---- ---- ---- ---- ---- (UNAUDITED) REVENUES Sales $1,834,162 $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097 Other income 7,959 54,642 10,201 98,272 70,638 ---------- ---------- ----------- ------------ ------------ 1,842,121 7,547,371 1,993,365 7,249,987 32,603,735 COST OF SALES 1,282,334 4,850,002 1,454,637 9,480,484 34,761,846 ---------- ---------- ----------- ------------ ------------ GROSS PROFIT (LOSS) 559,787 2,697,369 538,728 (2,230,497) (2,158,111) ---------- ---------- ----------- ------------ ------------ OPERATING EXPENSES Research and development 14,420 4,042 -- 101,992 44,962 Shipping expenses 67,864 452,093 116,894 738,681 1,198,563 Selling expenses 179,824 686,214 198,993 1,254,006 2,455,493 Advertising and promotion 2,493 152,563 1,819 389,672 346,400 General and administrative 172,545 931,683 238,791 4,198,800 3,720,998 Interest and bank charges - non related (Contractual interest of $806,937 for the year ended April 30, 1996) 7,017 21,462 4,174 248,625 1,384,898 Interest and bank charges - related party 52,909 177,339 53,096 134,928 -- ---------- ---------- ----------- ------------ ------------ 497,072 2,425,396 613,767 7,066,704 9,151,314 ---------- ---------- ----------- ------------ ------------ REORGANIZATION ITEMS: Bankruptcy administration costs -- 48,874 1,325 449,693 -- ---------- ---------- ----------- ------------ ------------ INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 62,715 223,099 (76,364) (9,746,894) (11,309,425) ---------- ---------- ----------- ------------ ------------ INCOME TAX PROVISION (BENEFIT) Current -- 103,700 -- -- (396,143) Deferred 24,050 -- -- (7,511,000) 314,053 ---------- ---------- ----------- ------------ ------------ 24,050 103,700 -- (7,511,000) (82,090) ---------- ---------- ----------- ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 38,665 119,399 (76,364) (2,235,894) (11,227,335) ---------- ---------- ----------- ------------ ------------ EXTRAORDINARY ITEM: Gain on discharge of prepetition liabilities -- -- -- 16,692,193 -- Income tax provision -- -- -- 7,511,000 -- ---------- ---------- ----------- ------------ ------------ Extraordinary gain net of income tax -- -- -- 9,181,193 -- ---------- ---------- ----------- ------------ ------------ NET INCOME (LOSS) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335) ========== ========== =========== ============ ============ INCOME PER SHARE OF COMMON SHARES $ 0.01 $ 0.04 WEIGHTED AVERAGE NUMBER OF COMMON SHARES 3,198,258 3,198,258
The earnings per share as it relates to the predecessor company is not meaningful due to the reorganization. The accompanying notes are an integral part of these consolidated financial statements. F-5 55 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Retained Treasury Stockholders' Common Paid in Earnings Stock Equity Stock Capital (Deficit) at Cost (Deficit) ----- ------- --------- ------- --------- Balance - May 1, 1994 $ 17,444 $ 590,291 $ 3,644,799 $(17,500) $ 4,235,034 Net Loss -- -- (11,227,335) -- (11,227,335) -------- --------- ------------ -------- ------------ Balance - April 30, 1995 17,444 590,291 (7,582,536) (17,500) (6,992,301) Net Income -- -- 6,945,299 -- 6,945,299 -------- --------- ------------ -------- ------------ Balance - April 30, 1996 17,444 590,291 (637,237) (17,500) (47,002) Net Loss for the Three Months Ended July 31, 1996 -- -- (76,364) -- (76,364) -------- --------- ------------ -------- ------------ Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366) Eliminate predecessor equity accounts and to reflect new issuance of shares in connection with fresh start (1,450) (580,146) 713,601 17,497 149,502 -------- --------- ------------ -------- ------------ 15,994 10,145 -- (3) 26,136 To reflect 1 for 5 reverse stock split (12,795) 12,795 -- -- -- -------- --------- ------------ -------- ------------ Balance - July 31, 1996 3,199 22,940 -- (3) 26,136 Net income for the Nine Months Ended April 30, 1997 -- -- 119,399 -- 119,399 -------- --------- ------------ -------- ------------ Balance - April 30, 1997 3,199 22,940 119,399 (3) 145,535 Net income for the Three Months Ended July 31, 1997 (Unaudited) -- -- 38,665 -- 38,665 -------- --------- ------------ -------- ------------ Balance - July 31, 1997 (Unaudited) $ 3,199 $ 22,940 $ 158,064 $ (3) $ 184,200 ======== ========= ============ ======== ============
The par value of the common stock prior to July 31, 1996 was $.01 per share. The par value of the common stock of the reorganized company commencing July 31, 1996 is $.001 per share. The accompanying notes are an integral part of these consolidated financial statements. F-6 56 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
REORGANIZED REORGANIZED PREDECESSOR COMPANY COMPANY COMPANY FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED JULY 31, APRIL 30, JULY 31, APRIL 30, 1997 1997 1996 1996 1995 ---- ---- ---- ---- ---- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 20,124 87,681 26,191 220,400 268,148 Amortization of deferred interest under capital leases -- -- -- -- 17,979 Reserve for bad debts -- -- -- 167,000 -- Loss on disposal of property and equipment -- -- -- 71,030 -- Deferred income taxes -- -- -- (7,511,000) 314,053 Income on partial discharge of capital lease obligations -- -- -- (77,403) -- Interest converted to principal -- 11,439 36,670 -- -- Reorganization item: Gain on discharge of debt, net of income tax -- -- -- (9,181,193) -- Cash distribution -- (515,638) -- -- -- Changes in operating assets and liabilities: (Increase) Decrease in operating assets: Accounts receivable and due from suppliers (156,220) 482,254 (221,255) 220,882 6,843,636 Inventory 515,399 (1,032,882) 115,616 1,065,821 3,260,017 Prepaid expenses (95,346) 122,017 (100,596) 168,856 (183,186) Miscellaneous receivables -- 132,379 -- (108,179) 51,352 Prepaid and refundable income taxes (16,089) 252,046 (812) -- (291,146) Security deposits -- -- -- 86,858 (3,537) Increase (Decrease) in operating liabilities: Prepetition liabilities -- -- -- 8,614,728 -- Accounts payable and accrued expenses (107,320) (56,766) 155,784 (1,828,715) 1,949,987 Income taxes payable (103,700) 103,700 -- -- (200,770) --------- ----------- --------- ----------- ------------ Net Cash Provided (Used) by Operating Activities $ 95,513 $ (294,371) $ (64,766) $(1,145,616) $ 799,198 --------- ----------- --------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment -- -- -- (47,933) (143,995) --------- ----------- --------- ----------- ------------ Net Cash Used by Investing Activities $ -- $ -- $ -- $ (47,933) $ (143,995) --------- ----------- --------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 57 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
REORGANIZED REORGANIZED PREDECESSOR COMPANY COMPANY COMPANY FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED JULY 31, APRIL 30, JULY 31, APRIL 30, 1997 1997 1996 1996 1995 ---- ---- ---- ---- ---- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable $ -- $ -- $ -- $ 3,393,628 $ 24,250,741 Repayment of notes payable -- -- -- (26,460,130) Proceeds from notes payable - related party -- 600,000 -- -- -- Repayment of notes payable - related party -- (145,324) -- -- -- Proceeds from loan payable - related party -- -- -- 557,000 -- Proceeds from bankers acceptances -- -- -- 1,118,556 9,321,558 Repayment of bankers acceptances -- -- -- (4,127,139) (7,876,394) Repayment of officer's loans payable -- -- -- -- (2,373) Repayment of capital lease obligations (5,967) (29,656) (18,812) (64,552) (109,308) Proceeds from insurance note payable -- -- 77,225 -- -- Repayment of insurance note payable -- (62,020) (15,205) -- -- Payment of deferred offering costs (73,844) (30,043) -- -- -- --------- --------- -------- ------------ ------------ Net Cash Provided (Used) by Financing Activities (79,811) 332,957 43,208 877,493 (875,906) --------- --------- -------- ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents 15,702 38,586 (21,558) (316,056) (220,703) Cash and Cash Equivalents, beginning of period 43,543 4,957 26,515 342,571 563,274 --------- --------- -------- ------------ ------------ Cash and Cash Equivalents, end of period 59,245 $ 43,543 $ 4,957 $ 26,515 $ 342,571 ========= ========= ======== ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the periods for: Interest $ 1,575 $ 25,451 $ 1,553 $ 203,964 $ 1,196,322 Income tax $ 163,534 $ -- $ -- $ -- $ 116,319
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the years ended April 30, 1995 the Company incurred capital lease obligations of $143,855 in connection with lease agreements to acquire equipment. In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code, the Company discharged approximately $17.2 million of allowed claims including a secured loan in the amount of $6.8 million owed to one creditor. The claims were dicharged by a cash payment of $515,638 and the issuance of 3,198,798 shares of common stock. Of this amount, 2,976,000 shares were issued to one creditor which also satisfied $15,923 of loans made by the chief executive officer of the Company to the Company. The accompanying notes are an integral part of these consolidated financial statements. F-8 58 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. The Company Dynamic International, Ltd. (the "Company") is engaged in the sale and distribution of a diverse line of hand exercise and light exercise equipment, sports bags/luggage and gift products which are distributed throughout the United States. b. Revenue Revenue is recognized when the goods are shipped to the customer. c. Fresh Start Reporting Financial accounting during a Chapter 11 proceeding is prescribed in "Statement of Position 90-7 of the American Institute of Certified Public Accountants," titled "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company adopted effective July 31, 1996. The emergence from the Chapter 11 proceeding resulted in the creation of a new reporting entity without any accumulated deficit and with the Company's assets and liabilities restated at their estimated fair values (also see Note 2 Reorganization and Management Plan). Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable in all respects to the financial statements for periods prior to reorganization. d. Principles of Consolidation The consolidated financial statements include the accounts of the Company and the wholly owned inactive subsidiary. All significant intercompany accounts and transactions have been eliminated. e. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. f. Inventories Inventories consist principally of finished goods and are stated at the lower of cost; last-in, first-out method, (LIFO) or market. g. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation is provided generally by accelerated methods over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against income. Estimated useful lives used in calculating depreciation are as follows:
Tools and dies 5 years Furniture and equipment 5 years to 7 years
F-9 59 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd) h. Deferred Offering Costs Legal and accounting costs incurred in connection with the proposed public offering of the Company's common stock will be charged to additional paid-in capital upon completion of the proposed public offering. If the offering is not consummated, these costs will be expensed. i. Advertising and Promotion Advertising and promotion expense, primarily comprised of print media distributed to current and potential customers, is expensed as incurred. j. Earnings Per Share Earnings (loss) per share are based on the weighted average number of shares outstanding as adjusted for the 1 for 5 reverse split. Common stock equivalents are included in the calculation if they are dilutive. Amounts for the predecessor company (see Note 2) are not presented as they are not meaningful. k. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. l. Stock Options and Similar Equity Instruments On January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," for stock options and similar equity instruments (collectively, "Options") issued to employees; however, the Company will continue to apply the intrinsic value based method of accounting for options issued to employees prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issues to Employees," rather than the fair value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. m. Reorganization value in excess of amounts allocable to identifiable assets The excess reorganization value is amortized over a period of eleven years on the straight line basis (see Note 2). Management re-evaluates the periods of amortization to F-10 60 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd) m. determine whether subsequent events and circumstances warrant revised estimates of useful lives. If impairment is deemed to exist, the excess reorganization value will be written down to fair value or projected discounted cash flows from related operations. As of April 30, 1997, management expects the asset to be fully recoverable. 2. REORGANIZATION AND MANAGEMENT PLAN In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. However, due to defective products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial returns by its customers. Although pursuant to a written agreement, the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, they breached this agreement soon thereafter. For the year ended April 30, 1996, the Company suffered significant losses in the amount of approximately $3,700,000 from its venture into this line of business. At April 30, 1995, the Company was not in compliance with certain of the financial covenants which enabled the bank to declare the outstanding balances of all amounts due the bank to be immediately due and payable. In July 1995, the lender bank effectively terminated its relationship with the Company as it experienced difficulty in complying with the terms of the loans. As a result, certain collateral was liquidated by the lender bank. On August 22, 1995, the lender bank sold and assigned the loan balance of $6.8 million. The assigned loan was secured by a security interest in substantially all of the Company's assets. As discussed below, the assignor was issued 2,976,000 shares of new common stock in consideration of forgiving the $6.8 million outstanding loan. On August 23, 1995, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. A Plan of Reorganization was filed by the Company on October 30, 1995 and subsequently amended and modified on February 22, 1996. On April 5, 1996, the creditors voted to accept the amended and modified Plan (the "Plan"), and on May 23, 1996, the court confirmed the Plan. The Plan was substantially consummated in August 1996. For accounting purposes, the Company assumed that the Plan was consummated on July 31, 1996. As contemplated by the Plan, a new company, Dynamic International, Ltd. was formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic International, Ltd. The capital structure and the balance sheet of the combined entity, immediately after the merger, were substantially the same as those of the company prior to the merger. The "new common stock" is referred to below as the common stock of Dynamic International, Ltd. Chapter 11 claims filed against the Company and subsequently allowed in the bankruptcy proceeding totaled approximately $17.2 million. The Plan discharged such claims through distributions of cash of approximately $515,000 and issuance of shares of new common stock. The cash distributions were paid in August 1996. A total of 3,198,798 shares of new common stock were issued on July 25, 1996 out of which 2,976,000 shares were issued to one secured creditor, which also satisfied $15,923 of loans made by the chief executive officer of the Company to the Company (see Note 4); 160,000 shares were issued to unsecured creditors, and F-11 61 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 2. REORGANIZATION AND MANAGEMENT PLAN (cont'd) 62,798 shares were issued to the reconfirmation common stock equity interest holders. The discharge of claims was reflected in the April 30, 1996 financial statements. The stock distribution value is based on the reorganization value of the Company determined by projecting cash flows over an eleven year period and discounting such cash flows at a cost of capital rate of 15% and the statutory federal, state and local tax rates currently in effect. The discounted residual value at the end of the forecast period is based on the capitalized cash flows for the last year of that period. Cash distributions and the estimated stock distribution value totaling $531,561 has been recorded as other liabilities as of April 30, 1996. The gain of approximately $16.7 million resulting from the excess of the allowed claims over the total value of the cash and the common stock distributed to the secured and unsecured creditors has been recorded as an extraordinary gain for the year ended April 30, 1996. The eleven year cash flow projection was based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company, including, but not limited to those with respect to the future courses of the Company's business activity. Accordingly, there will usually be differences between projections and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. As part of the reorganization, the Company will continue to sell hand exercise, light exercise equipment and luggage and sports bags, all of which have a proven market acceptance. Management believes it can increase revenues by increasing its focus on direct response marketing. Therefore, it intends to develop plans to use infomercials to market these products. Management believes these increased marketing efforts, adequate financing through its related entity, Achim Importing, discontinuance of the unprofitable products, and sustainable gross profit percentages, can be effectively implemented within the next twelve months. The Company adopted "fresh-start reporting" in accordance with Statement of Position ("SOP") 90-7 issued by the American Institute of Certified Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start reporting" if the reorganization value of the emerging entity immediately before the date of confirmation is less than the total of all postpetition and allowed claims, and if holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging entity, both conditions of which were satisfied by the Company. Although the confirmation date was May 23, 1996, fresh-start reporting was adopted on July 31, 1996. There were no material fresh-start related adjustments during the period May 23, 1996 to July 31, 1996. Under fresh start accounting, all assets and liabilities are restated to reflect their reorganization value, which approximates book value at date of reorganization. Therefore, no reorganization value has been allocated to the assets and liabilities. In addition, the accumulated deficit of the predecessor company at July 31, 1996 totaling $713,601 was eliminated, and at August 1, 1996, the reorganized company's financial statements reflected no beginning retained earnings or deficit. The reorganization value in excess of amounts allocable to identifiable assets is being amortized over an eleven year period on the straight line method. Amortization expense for the nine months ended April 30, 1997 was $9,108. F-12 62 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 2. REORGANIZATION AND MANAGEMENT PLAN (cont'd) The following is a proforma balance sheet of the reorganized Company based on the discounted cash flows as discussed above.
Balance Reorganized Sheet Stock Fresh Company July 31, 1996 Exchange Start July 31, 1996 ------------- -------- ----- ------------- Current Assets: Cash $ 4,957 $ 4,957 Accounts receivable, net 1,258,182 1,258,182 Inventory 2,268,853 2,268,853 Prepaid & refundable income taxes 291,960 291,960 Other assets 328,030 328,030 ----------- ----------- Total Current Assets 4,151,982 4,151,982 Fixed assets, net 203,863 203,863 Other Assets 56,848 56,848 Reorganization value in excess of amounts allo- cable to identifiable assets 133,580 133,580 ----------- --------- ----------- Total Assets $ 4,412,693 $ 133,580 $ 4,546,273 ======== ========= =========== Current Liabilities: Loans payable - MG $ 593,670 $ 593,670 Loans payable - Trade 62,020 62,020 Accounts payable and accrued expenses 3,294,925 3,294,925 Capital lease obligations 32,226 32,226 Other current liabilities 531,561 ( 15,923) 515,638 ----------- --------- --------- ----------- Total Current Liabilities 4,514,402 ( 15,923) 0 4,498,479 Other liabilities 21,658 21,658 ----------- --------- --------- ----------- Total Liabilities 4,536,060 ( 15,923) 0 4,520,137 ----------- --------- --------- ----------- Common stock par value 17,444 ( 17,444) 15,994 15,994 Additional paid in capital 590,290 (590,291) (580,021) 10,145 590,167 Accumulated deficit ( 713,601) 713,601 0 ----------- --------- --------- ----------- ( 105,867) ( 1,574) 133,580 26,139 Less: treasury stock ( 17,500) 17,497 ( 3) ----------- --------- --------- ----------- Total Equity ( 123,367) 15,923 133,580 26,136 ----------- --------- --------- ----------- Total Liabilities and Equity $ 4,412,693 $ 0 $ 133,580 $ 4,546,273 ============ ========= ========= ============
F-13 63 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 2. REORGANIZATION AND MANAGEMENT PLAN (cont'd) The other current liabilities adjustment is all comprised of loans from MG Holdings Corp. to pay creditors pursuant to the reorganization plan. The liability to the reorganized company is $515,638. 3. INVENTORIES If the first-in, first-out (FIFO) method of accounting had been used by the Company, reported net income would have been decreased by $294,000 in fiscal 1997. Net income would have been increased by $263,000 in fiscal 1996, and the net loss would have been increased by $246,000 in fiscal 1995. On a FIFO basis, reported year end inventories would have increased by $24,000 in 1997, $318,000 in 1996 and $55,000 in 1995. 4. RELATED PARTY TRANSACTIONS Pursuant to a Warehouse and Service Agreement dated as of September 1, 1996 (the "Warehousing Agreement") between the Company and an entity ("Related Party") owned by a major stockholder, the entity performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, the entity assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and in the performance of credit checks on the Company's customers. In consideration for these services, Achim receives an annual fee, payable monthly, calculated at a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of the invoiced sales under $30 million to 3% of sales of $60 million or more. For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment. In addition, under the Warehousing Agreement, the entity provides warehousing services consisting of receiving, shipping, and storing of the Company's merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by Achim under the Warehousing Agreement. The Warehousing Agreement has a term of two years and is automatically renewable for additional one year periods unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal year ended April 30, 1997, the Company accrued approximately $458,488 in fees under the Warehousing Agreement. Total warehousing and administrative expenses charged to operations for the nine months ended April 30, 1997 were approximately $364,000, for the three months ended July 31, 1996 were approximately $95,000 and for the year ended April 30, 1996 were approximately $164,000. The Related Party also purchases inventory for the Company and charges the Company for the invoiced amount of the inventory. Loan payable to the related party totaled $1,059,785 at April 30, 1997. Such note is secured by all of the Company's assets. On August 30, 1996, loans and other payables, including accrued interest totaling $1,205,109, were converted into the note payable. Interest is charged at the F-14 64 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 4. RELATED PARTY TRANSACTIONS (cont'd) Citibank prime rate plus 1%. This note is payable in 24 equal installments of principal and interest through August 5, 1998. At April 30, 1997, the Company was in arrears in the amount of $274,273 consisting of principal and interest. On July 10, 1997, the note was amended to allow the arrears and note payments to be deferred until the consummation of the Company's contemplated public offering (see Note 10) or the scheduled maturity of the note, whichever is earlier. Annual maturities of the note at 9.25% interest per annum is as follows:
For the Year Ending April 30, --------- 1997 (in arrears) $ 237,053 1998 607,478 1999 215,254 ---------- $1,059,785 ==========
Interest expense charged to operations for the nine months ended April 30, 1997 was $67,898, for the three months ended July 31, 1996 was $16,746 and $19,924 for the year ended April 30, 1996. Other amounts payable to the related party totaled $2,627,580 and $2,129,893, respectively, at April 30, 1997 and 1996. Such amounts represent unpaid inventory purchases and various fees due to the related party. The amounts payable for the purchase of inventory bears interest at the Citibank prime rate plus 1% from September 1996 to April, 1997 and the Citibank prime rate plus 3% prior to September 1996. The prime rate used was 8.25% for the period September 1996 to April 1997 and 8.5% for the period prior to September 1996 . Interest expense charged to operations was $111,411 for the nine months ended April 30, 1997, $34,380 for the three months ended July 31, 1996 and $115,004 for the year ended April 30, 1996. The weighted average interest rate at April 30, 1997 and 1996 was 9.25% and 11.5%, respectively. 5. INCOME TAXES The Company utilizes an asset and liability approach to determine the extent of any deferred income taxes, as described in Statement No. 109, "Accounting for Income Taxes" of the Financial Accounting Standards Board. This method gives consideration to the future tax consequences associated with differences between financial statement and tax bases of assets and liabilities. F-15 65 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 5. INCOME TAXES (cont'd) There were no income tax liabilities at April 30, 1996. Income tax liabilities at April 30, 1997 included in income taxes payable consist of the following :
1997 ---- Current taxes $103,700 Deferred taxes: Federal -- Other income and franchise taxes -- -------- Total Income Tax Liability $103,700 ========
At April 30, 1997, there are no temporary differences that would result in a deferred tax asset or liability. The deferred income tax assets and liabilities at April 30, 1996 consist of the following:
1996 ---- DEFERRED TAX ASSETS: Bad debt reserves $ 75,000 Difference in book and tax treatment for advertising costs 16,000 Net operating loss carryforwards 8,783,000 Other deferred tax assets 50,000 ----------- TOTAL DEFERRED TAX ASSETS 8,924,000 ----------- DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN): Gain on discharge of prepetition liabilities 7,511,000 ----------- 7,511,000 ----------- Valuation allowance for deferred tax assets (1,413,000) ----------- $ -0- ===========
The valuation allowance decreased by $1,094,000 in 1996. F-16 66 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 5. INCOME TAXES (cont'd) A summary of the provision (credit) for income taxes is as follows:
Reorganized Predecessor Company Company -------------- ----------------------------------- Nine Months Ended Year Ended Year Ended April 30, 1997 April 30, 1996 April 30, 1995 -------------- -------------- -------------- Current: Federal $ 59,000 $ -- $(401,529) State and Local 44,700 -- 5,386 ----------- ----------- --------- 103,700 -- (396,143) ----------- ----------- --------- Deferred: Federal -- (5,675,000) 313,039 State and Local -- (1,836,000) 1,014 ----------- ----------- --------- -- (7,511,000) 314,053 ----------- ----------- --------- $ 103,700 $(7,511,000) $ ( 82,090) =========== =========== =========
The reconciliation of the federal statutory income tax expense (credit) to the Company's actual income tax (credit) is as follows:
Reorganized Predecessor Company Company -------------- ------------------------------------- Nine Months Ended Year Ended Year Ended April 30, 1997 April 30, 1996 April 30, 1995 -------------- -------------- -------------- U.S. federal income taxes at statutory rate $ 75,900 $ 2,361,000 $(3,845,205) Losses for which no benefit was provided -- -- 982,371 Change in valuation allowance -- (1,094,000) 2,506,820 Reversal of previously established tax asset -- -- 313,039 Tax effect of permanent differences 5,400 8,000 17,035 State income taxes, net of federal benefit 25,000 764,000 -- Benefit of unused net operating losses -- (1,412,000) -- Differences due to change in rate -- ( 627,000) -- Other (2,600) -- ( 56,150) --------- ----------- ----------- $ 103,700 $ -0- $ (82,090) ========= =========== ==========
F-17 67 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 5. INCOME TAXES (cont'd) The Company had a net loss for the three months ended July 31, 1996 and accordingly, the Company has no income tax provision or liability for the period. The Company has a net operating loss for the year ended April 30, 1995 of approximately $8,400,000 of which $1,200,000 was carried back to prior years. The Company has filed prior year amended returns to claim the net operating loss carryback which results in refundable income taxes of approximately $287,000. As of April 30, 1997, the Company received $251,000 of the refundable income taxes. The balance of $36,000 is included in prepaid and refundable income taxes at April 30, 1997. At April 30, 1996, the net operating loss carryforward totaled approximately $19,500,000 of which approximately $16,700,000 will be utilized by the Company in its final tax return for the period May 1, 1996 to August 8, 1996 (see Note 2 re: merger into Dynamic International, Ltd.). Based on ownership changes resulting from the reorganization (see Note 2), the balance of the net operating loss carryforward is expected to be limited by the current provision of Section 382 of the Internal Revenue Code. 6. COMMITMENTS AND CONTINGENCIES a. Capital Leases The Company is the lessee of equipment under capital leases expiring in various years through 1998. In September 1995, the lessor of the Company's capital leases agreed to forgive the balance of the unpaid lease payments through September 1995 and to accept 60% of the remaining balance of the lease payments. As a result, the Company recognized $77,403 of income on the adjustment of the lease term. Such income is included in other income. b. Operating Leases Prior to August, 1995 the Company occupied space for its sales, executive offices, assembly and storage facilities under long term operating leases expiring August 1998. The leases provided for additional payments for insurance, taxes and other charges related to the premises. As part of the bankruptcy proceeding, the Company was discharged of the obligations of the leases. In October 1995 the Company relocated its premises, where the Company is charged warehousing fees and administration fees based on sales volume (see Note 4). Rent expense for the years ended April 30, 1996 and 1995 was $341,427 and $583,596. F-18 68 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 6. COMMITMENTS AND CONTINGENCIES (cont'd) c. Royalty Obligations The Company has entered into various royalty, licensing, and commission agreements for products sold by the Company. These agreements provide for minimum payments and a percentage of specific product sales, over a period of one to eight years. Royalty expense for the nine months ended April 30, 1997 was approximately $353,000, for the three months ended July 31, 1996 was $94,000 and for the years ended April 30, 1996 and 1995 was approximately $275,000 and $779,000, respectively. d. Defined Benefit Pension Plan On September 26, 1996, the Defined Benefit Employees Retirement Plan was terminated under a distress termination approved by the United States Bankruptcy Court. The defined benefit pension obligation prior to the termination was $860,945. As part of the bankruptcy proceeding, the obligation was settled for $38,743 resulting in a gain of $822,202 which is reflected in the extraordinary gain on discharge of prepetition liabilities for the year ended April 30, 1996. e. 401(k) Plan On January 1, 1990, the Company adopted a 401(k) plan. The plan covers all eligible employees. Eligible employees may contribute from 1% to 15% of their salaries subject to the statutory maximum of $9,240 for the 1995 and 1994 calendar years. The plan also provided matching contributions by the Company of 25% of the employees' contributions to a maximum contribution of 1% of the employees' salaries. On May 31, 1996, the plan's summary plan description was modified to make matching contributions discretionary. No matching contributions were made by the Company for the 1996 calendar year nor will any be made by the 1997 calendar year. The 401(k) expense amounted to $0 for the period May 1, 1996 to April 30, 1997 and $2,600 and $9,460 for the years ended April 30, 1996 and 1995, respectively. f. Union Pension Plan Certain union employees participate in a multiemployer retirement plan sponsored by their union. The Company is required to pay seven cents ($.07) per hour per employee to the plan. The data available from administrators of the multi- employer plan is not sufficient to determine the accumulated benefit obligation, nor the net assets attributable to the multiemployer plan in which Company employees participate. As of October 1995, the Company no longer has any union employees. For the years ended April 30, 1996 and 1995 pension expenses for the union employees were $3,745 and $1,680, respectively. g. Litigation In the normal course of its operations, the Company has been named as a defendant in several product liability lawsuits that in the opinion of management are not material to the financial statements taken as a whole and are substantially covered by the Company's product liability insurance. F-19 69 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 7. MAJOR CUSTOMERS During the year ended April 30, 1996, sales to three major customers were approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and $1,001,000, respectively) of the Company's net sales. At April 30, 1996, accounts receivable from these customers totaled $465,506. During the year ended April 30, 1995, sales to two major customers were approximately 26% and 14% ($8,459,000 and $4,555,000, respectively) of the Company's net sales. At April 30, 1995, there were no accounts receivable from these customers. The Company sells a limited amount to foreign customers. There were no material receivables subject to foreign currency fluctuations. During the nine months ended April 30, 1997 sales to major customers were approximately $3,080,180. At April 30, 1997 accounts receivable from these customers totaled $379,902. During the three months ended July 31, 1996, sales to major customers were approximately $837,450. At July 31, 1996, accounts receivable from these customers totaled $548,726. 8. CREDIT RISK/FINANCIAL INSTRUMENTS Due to the nature of its business and the volume of sales activity, the Company's cash balance occasionally exceeds the $100,000 protection of FDIC insurance. At April 30, 1997 there was no such excess balance. At April 30, 1996 such excess balances totaled approximately $207,000. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash and cash equivalents. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that it does not have an accounts receivable credit risk exposure beyond the allowance provided. The Company does not require collateral or other security to support financial instruments subject to credit risk. The carrying amounts of short-term debt reported in the balance sheets approximate fair value. The fair value of the Company's long-term debt (including the current portion) also approximates its carrying amount in the balance sheets based on the rates currently available to the Company for similar debt with similar terms. 9. SIGNIFICANT RISKS AND UNCERTAINTIES a. The Company's exercise products compete with products marketed and sold by a number of companies. The Company's main competitors in this area possess far greater financial and other resources, including sales forces, than the Company. However, the Company believes that as a result of its ability to use trademark names for which it pays royalties, it will be able to retain its share of the market. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities. The Company's luggage products compete with products designed by a number of the largest companies in the industry. The Company believes that because of its concentration on the upscale lifestyle and more specialized leisure market that are associated with its use of trademark names, the Company will be able to continue to grow its luggage business. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities. F-20 70 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 9. SIGNIFICANT RISKS AND UNCERTAINTIES (cont'd) b. Most of the Company's products are purchased from the Philippines, Taiwan and Hong Kong. The Company believes that, if necessary, it will be able to obtain its products from firms located in other countries at little, if any, additional expense. As a consequence, the Company believes that an interruption in deliveries by a manufacturer located in a particular country will not have a material adverse impact on the business of the Company. Nevertheless, because of political instability in a number of the supply countries, occasional import quotas and other restrictions on trade or otherwise, there can be no assurance that the Company will at all times have access to a sufficient supply of merchandise. 10. OTHER ITEMS a. Discontinued Products In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Sales of the treadmills and ski machines began in June 1994. The Company sold approximately $24,000,000 of these products from June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these products were shipped directly to consumers. Due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial chargebacks by its customers. Although, pursuant to a written agreement, the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, they breached this agreement soon thereafter. As a result, during April 1995, the Company issued credits to customers for approximately $5,000,000 of the $7,487,000 of credits for the fiscal year ended April 30, 1995. The Company issued another $3,211,000 in credits for defective merchandise during the fiscal year ended April 30, 1996. The following table sets forth the financial statement effect of the Company's line of treadmills and ski machines for the periods indicated:
Reorganized Predecessor Company Company for the Nine for the Three Predecessor Company Months Ended Months Ended For the Years Ended April 30, 1997 July 31, 1996 April 30, 1996 April 30, 1995 -------------- ------------- -------------- -------------- Sales $-- $-- $ 597,000 $ 23,255,000 Credits -- -- (3,210,900) ( 7,487,000) --- --- ------------ ------------ Net Sales -- -- (2,613,900) 15,768,000 Inventory Reserve -- -- -- ( 1,320,063) Cost of Sales -- -- 156,000 (18,604,172) --- --- ------------ ------------ Gross Loss $-- $-- $ (2,457,900) $ (4,156,235) === === ============ ============
F-21 71 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED) (continued) 10. OTHER ITEMS (cont'd) a. Discontinued Products (cont'd) The sale of these products was discontinued in August 1995, and all inventory was disposed of by October 1995. Currently, the Company does not believe that there will be additional returns of these products or that any claims relating thereto remain to be settled. b. Public Offering The Company is offering for public sale 1,200,000 units, each consisting of one share of common stock, one Class A Warrant and one Class B Warrant at $5.00 per unit. Although no assurance can be given that the sale will be successful, the Company intends to utilize the net proceeds of approximately $4,920,000 for the repayment of current debt, purchase of inventory, general corporate services, and working capital. Simultaneous with the public offering, the Company intends to declare a one for five reverse stock split. All share data for the reorganized Company has been adjusted for the split. The following supplementary earnings per share reflect the repayment of indebtedness of $1,200,000 and the resulting reduction of interest expense and increase in net income as if it had taken place at the beginning of the reorganization period.
For the Three Months For the Nine Months Ended July 31, 1997 Ended April 30, 1997 ------------------- -------------------- Net Income $ 54,118 $ 155,738 Earnings Per Share .02 .05 Number of Shares 3,438,258 3,438,258
c. Earn Out Agreement In March 1997, the Company entered into an agreement with Marton Grossman, the Company's chairman and president which provides for the issuance to Mr. Grossman an aggregate 2,000,000 shares of common stock if the Company reaches certain earnings criteria as follows:
Earnings Before Shares to Year Ending Income Tax Be Issued ----------- ---------- --------- April 30, 1998 $ 500,000 400,000 April 30, 1999 $ 1,000,000 600,000 April 30, 2000 $ 1,500,000 1,000,000
If the earning criteria is not met in any one of the above years, but is cumulatively met in the subsequent year, then the number of shares to be issued will be the cumulative number of shares at that year end. Issuance of the shares will result in compensation expense to the Company. Compensation expense will be measured based on the fair value of the shares at the time the performance conditions are achieved. Determination will be based on the best estimate of the outcome of the performance condition. Compensation will be recognized in the periods in which the performance conditions are achieved. F-22 72 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (continued) 10. OTHER ITEMS (cont'd d. Consulting Agreement The Company anticipates entering into a two year consulting agreement with the underwriter to provide financial consulting services for a fee of $20,000. e. Underwriter's Purchase Warrants As part of the consideration of its services in connection with the registration statement, the Company has agreed to issue to the underwriter, for nominal consideration, warrants to purchase up to 120,000 units at an exercise price of $8.25 per unit for a period of five years. The Class A Warrants and Class B Warrants underlying the units included in the underwriter's warrants will be exercisable at a price of $9.90 and $16.50 per share, respectively, or 165% of the then exercise price of the warrants offered to the public for a period of five years commencing with the closing of the registration statement. The non-cash cost of such warrants, representing a cost of raising capital, will be recorded as a charge and credit to additional paid-in capital when the warrants are issued. As capital in nature, they are not compensatory. f. Underwriter Option The Company has granted the underwriter an option exercisable for 45 days from the effective date of the registration statement to purchase up to 180,000 units at the public offering price less the underwriting discounts. 11. AUTHORITATIVE PRONOUNCEMENTS a. The FASB issued SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities" in June of 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. SFAS No. 125 is effective for financial statements issued for fiscal years occurring after December 31, 1996 and is to be applied prospectively. The Company does not have transactions which come under the general heading of "Transfers of Servicing of Financial Assets," and the added refinements for "Extinguishment of Debt" are not expected to be significant. Therefore, SFAS 125 is not expected to have any effect on the Company. b. The FASB has issued SFAS No. 128, "Earnings Per Share" and FASB No. 129, "Disclosure of Information About Capital Structure." Both are effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 simplifies the computation of earning per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share. The statement requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share include no dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. F-23 73 DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (continued) 11. AUTHORITATIVE PRONOUNCEMENTS (cont'd) b. While the Company has not analyzed SFAS No. 128 sufficiently to determine its long- term impact on per share reported amounts, SFAS No. 128 should not have a significant effect on historically reported per share loss amounts. SFAS No. 129 does not change any previous disclosure requirements but, rather, consolidates existing disclosure requirements for ease of retrieval. c. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". Both are effective for financial statements for fiscal years beginning after December 15, 1997. The Company will adopt both statements on May 1, 1998. Adoption is not expected to have a material impact on the financial position and results of operations. 12. UNAUDITED INTERIM FINANCIAL STATEMENTS The financial statements as of July 31, 1997 and for the three months ended July 31, 1997 are unaudited. However, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the interim period have been made. The results of the interim period are not necessarily indicative of the results to be obtained for a full fiscal year. F-24 74 [MOORE STEPHENS, P.C. LETTERHEAD] INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE To the Board of Directors and Shareholders Dynamic International, Ltd. Our report on the consolidated financial statements of Dynamic International, Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months ended April 30, 1997 and three months ended July 31, 1996 is included on page F-1 of this Form S-1. In connection with our audit of such financial statements, we have also audited the related accompanying financial statement Schedule II - Valuation and Qualifying Accounts for the nine months ended April 30, 1997, the three months ended July 31, 1996, and the year ended April 30, 1996. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Moore Stephens, P.C. Moore Stephens, P.C. Certified Public Accountants New York, New York June 27, 1997 F-25 75 DYNAMIC CLASSICS, LTD. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
REORGANIZED PREDECESSOR PREDECESSOR COMPANY COMPANY COMPANY FOR THE NINE FOR THE THREE FOR THE YEAR MONTHS ENDED MONTHS ENDED ENDED APRIL 30, JULY 31, APRIL 30, 1997 1996 1996 --------- -------- --------- Allowance for doubtful accounts balance - beginning $167,000 $167,000 $ - Additions charged to income - - 167,000 Recovery of uncollectible accounts - net - - - Writeoffs of uncollectible amounts - - - -------- -------- -------- Allowance for doubtful accounts balance - ending $167,000 $167,000 $167,000 ======== ======== ========
F-26 76 NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
Page Additional Information...................... Prospectus Summary.......................... Risk Factors................................ Management's Discussion and Analysis of Financial Conditions and Results of Operations..................... Dilution.................................... Use of Proceeds............................. Capitalization.............................. Business.................................... Management.................................. Executive Compensation...................... Certain Relationships and Related Transactions...................... Disclosure of Commission Position on Indemnification For Securities Act Liability............................. Security Ownership of Certain Beneficial Owners and Management................................ Description of Securities................... Underwriting................................ Legal Matters............................... Experts..................................... Index to Financial Statements............... F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,200,000 UNITS DYNAMIC INTERNATIONAL, LTD. PROSPECTUS _____________ , 1997 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following statement sets forth the estimated expenses in connection with the offering described in the Registration Statement, all of which will be borne by the Registrant.
Securities and Exchange Commission Fee........... $ 10,000 NASD Fee......................................... $ 5,000 NASDAQ Listing Fee............................... $ 10,000 Accountants' Fees................................ $ 50,000 Legal Fees....................................... $130,000 Blue Sky Qualification, Fees and Expenses........ $ 35,000 Company's Administrative Expenses................ $ 20,000 Printing and engraving........................... $ 30,000 Miscellaneous.................................... $ 10,000 TOTAL $300,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Registrant's Articles of Incorporation provide that no officer or director shall have any personal liability for damages as a result of breach of fiduciary duty as a director or officer, except (i) for acts or omissions that involve intentional misconduct, fraud or a knowing violation of law, or (ii) the payment of distributions in violation of law. Article 10 of the Registrant's By-Laws provides that: "(a) Any person made a party to any action, suit or proceeding, by reason of the fact that he, his testator or intestate representative is or was a director, officer or employee of the Corporation, or of any Corporation in which he served as such at the request of the Corporation, shall be indemnified by the Corporation against the reasonable expenses, including attorney's fees, actually and necessarily incurred by him in connection with the defense of such action, suit or proceedings, or in connection with any appeal therein that such officer, director or employee is liable for negligence or misconduct in the performance of his duties. (b) The foregoing right of indemnification shall not be deemed exclusive of any other rights to which any officer or director or employee may be entitled apart from the provisions of this section. (c) The amount of indemnity to which any officer or any director may be entitled shall be fixed by the Board of Directors, except that in any case where there is no disinterested majority of the Board available, the amount shall be fixed by arbitration pursuant to then existing rules of the American Arbitration Association." Sections 78.751 and 78.752 of the Nevada Revised Statutes are set forth below: II-1 78 78.751. Indemnification of officers, directors, employees and agents; advancement of expenses. 1. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that he court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Any indemnification under subsections 1 and 2, unless ordered by a court or advanced pursuant to subsection 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written quorum opinion; or (d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. 2. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and director incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this section: II-2 79 (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to subsection 2 or for the advancement of expenses made pursuant to subsection 5, may not be made to or on behalf of any director or officer if a final adjudication established that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. 78.752. Insurance and other financial arrangements against liability of directors, officers, employees and agents. 1. A corporation may purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses. 2. The other financial arrangements made by the corporation pursuant to subsection 1 may include the following: (a) The creation of a trust fund. (b) The establishment of a program of self-insurance. (c) The securing of its obligation of indemnification by granting a security interest or other lien on any assets of the corporation. (d) The establishment of a letter of credit, guaranty or surety. No financial arrangement made pursuant to this subsection may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeal therefrom, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses or indemnification ordered by a court. 3. Any insurance or other financial arrangement made on behalf of a person pursuant to this section may be provided by the corporation of any other person approved by the board of directors, even if all or part of the other person's stock or other securities is owned by the corporation. 4. In the absence of fraud: (a) The decision of the board of directors as to the propriety of the terms and conditions of any insurance or other financial arrangement made pursuant to this section and the choice of the person to provide the insurance or other financial arrangement is conclusive; and (b) The insurance or other financial arrangement: (1) Is not void or voidable; and II-3 80 (2) Does not subject any director approving it to personal liability for his action, even if a director approving the insurance or other financial arrangement is a beneficiary of the insurance or other financial arrangement. 5. A corporation or its subsidiary which provides self-insurance for itself or for another affiliated corporation pursuant to this section is not subject to the provisions of Title 57 of NRS. The Registrant may also purchase and maintain insurance for the benefit of any director or officer which may cover claims for which the Registrant could not indemnify such persons. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In August and September 1996 Registrant issued an aggregate of approximately 3,200,000 shares of Common Stock to existing shareholders and to its creditors in settlement of claims under the Plan of Reorganization that was confirmed by the Bankruptcy Court in May 1996. The issuances were exempt from registration under Section 1145 of the Bankruptcy Code. Also during August and September 1996, Registrant, in connection with its merger with Dynamic Classics, Ltd., Registrant's predecessor corporation ("DCL"), issued shares of Common Stock in exchange for all issued and outstanding shares of DCL Common Stock. The capital structure and balance sheet of the combined entity were substantially identical to those of the DCL prior to the merger. As a result, the issuances pursuant to this exchange were exempt from registration under Rule 145 promulgated under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. 1 Revised Form of Underwriting Agreement(1) 1.02 Form of Financial Advisory and Consulting Agreement(1) 1.03 Form of Selected Dealers Agreement(1) 1.2 Form of Unit Purchase Option 2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic Classics, Ltd.(2) 2.02 Second Amended and Modified Plan of Reorganization dated February 22, 1996 (the "Plan")(3) 2.03 Errata Sheet and Correction Statement with respect to the Plan dated May 7, 1996(3) 2.04 Order Confirming the Plan dated May 23, 1996(3) 3.01 Certificate of Incorporation(2) 3.01(a) Amendment to Certificate of Incorporation 3.02 By-laws(2) II-4 81 4.01 Revised Form of Warrant Agreement to be entered into between the Company and American Stock Transfer & Trust Company 4.02 Form of Common Stock Certificate(2) 4.03(a) Form of A Warrant Certificate 4.03(b) Form of B Warrant Certificate 4.04 Form of Unit Certificate 5 Legal Opinion of Heller, Horowitz & Feit, P.C.(1) 10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994(4) 10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4) 10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland 10.04 Warehousing and Service Agreement dated as of September 1, 1996 with Achim Importing Inc.(5) 10.04(a) Side Letter dated November 4, 1997 relating to Warehousing and Services Agreement 10.05 License Agreement dated November 1, 1996 by and between New Century Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc. 10.06 Bonus Agreement with Marton Grossman(1) 16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6) 23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit 5) 23.02 Consent by Moore Stephens, P.C. (Included in Part II) 23.03 Consent by Hoberman, Miller, Goldstein & Lesser, P.C. (Included in Part II) (1) Previously filed. (2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996. (3) Incorporated by reference to the Company's Report on Form 8-K filed October 3, 1996. (4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for Dynamic Classics, Ltd. (File No. 0-8376). (5) Incorporated by reference to the Annual Report on Form 10-K for 1996. (6) Incorporated by reference to the Current Report on Form 8-K/A dated October 23, 1996. II-5 82 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereto) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceedings) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-6 83 That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Company will provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-7 84 SIGNATURES In accordance with the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and has authorized this registration statement or amendment to be signed on its behalf by the undersigned, in the City of New York, State of New York on the 4th day of December 1997. DYNAMIC INTERNATIONAL, LTD. By: /s/ Marton Grossman ------------------------------------------ Marton Grossman, Chairman and President In accordance with the requirements of the Securities Act, this registration statement or amendment was signed by the following persons in the capacities and on the dates stated:
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Marton Grossman December 4, 1997 - ----------------------------- Marton Grossman Chairman and President /s/ Isaac Grossman December 4, 1997 - ----------------------------- Isaac Grossman Director /s/ Sheila Grossman December 4, 1997 - ----------------------------- Sheila Grossman Director - ----------------------------- Bernard Goldman Director - ----------------------------- Harry P. Braunstein Director /s/ William P. Dolan December 4, 1997 - ----------------------------- William P. Dolan Vice President Chief Financial and Accounting Officer
II-8 85 Exhibit 23.02 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement on Form S-1 of Dynamic International, Ltd. of our reports dated June 27, 1997, appearing in the Prospectus which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. By: /s/ Moore Stephens, P.C. Moore Stephens, P.C. New York, New York December 4, 1997 II-9 86 Exhibit 23.03 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Amendment No. 4 to the Registration Statement and Prospectus of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) on Form S-1 relating to the offering 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), of our report dated June 26, 1996, on the consolidated financial statements of Dynamic Classics, Ltd. and Subsidiary contained in this Registration Statement, and to the use of our name, and the statements with respect to us, under the heading "Experts" in the Prospectus. By: /s/ HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C. HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C. New York, New York December 4, 1997 II-10 87 EXHIBIT INDEX 1 Revised Form of Underwriting Agreement(1) 1.02 Form of Financial Advisory and Consulting Agreement(1) 1.03 Form of Selected Dealers Agreement(1) 1.2 Form of Unit Purchase Option 2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic Classics, Ltd.(2) [/R] 2.02 Second Amended and Modified Plan of Reorganization dated February 22, 1996 (the "Plan")(3) 2.03 Errata Sheet and Correction Statement with respect to the Plan dated May 7, 1996(3) 2.04 Order Confirming the Plan dated May 23, 1996(3) 3.01 Certificate of Incorporation(2) 3.01(a) Amendment to Certificate of Incorporation(1) 3.02 By-laws(2) 4.01 Revised Form of Warrant Agreement to be entered into between the Company and American Stock Transfer & Trust Company 4.02 Form of Common Stock Certificate(2) 4.03(a) Form of A Warrant Certificate(1) 4.03(b) Form of B Warrant Certificate(1) 4.04 Form of Unit Certificate 5 Legal Opinion of Heller, Horowitz & Feit, P.C.(1) 10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994(4) 10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4) 10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (1) 10.04 Warehousing and Service Agreement dated as of September 1, 1996 with Achim Importing Inc.(5) 10.04(a) Side Letter dated November 4, 1997 relating to Warehousing and Services Agreement 10.05 License Agreement dated November 1, 1996 by and between New Century Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.(1) 10.06 Bonus Agreement with Marton Grossman(1) 16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6) 23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit 5) 23.02 Consent by Moore Stephens, P.C. (Included in Part II) 23.03 Consent by Hoberman, Miller, Goldstein & Lesser, P.C. (Included in Part II) - ---------------------------- (1) Previously filed. (2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996. (3) Incorporated by reference to the Company's Report on Form 8-K filed October 3, 1996. (4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for Dynamic Classics, Ltd. (File No. 0-8376). (5) Incorporated by reference to the Annual Report on Form 10-K for 1996. (6) Incorporated by reference to the Current Report on Form 8-K/A dated October 23, 1996 EX-1.2 2 FINANCIAL ADVISORY AND CONSULTING AGREEMENT 1 Exhibit 1.2 NO SALE, OFFER TO SELL OR TRANSFER OF THE OPTION REPRESENTED BY THIS CERTIFICATE OR OF THE SECURITIES ISSUED ON ACCOUNT OF EXERCISE OF THE OPTION REPRESENTED BY THIS CERTIFICATE SHALL BE MADE UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT TO SUCH OPTION AND/OR SUCH SECURITIES IS THEN IN EFFECT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS THEN IN FACT APPLICABLE TO SUCH OPTION AND/OR SUCH SECURITIES. No. WA-1 Option to Purchase ____________ Units Dated: _________, 1997 (subject to adjustment) VOID AFTER , 2002 DYNAMIC INTERNATIONAL, LTD. UNIT PURCHASE OPTION FOR UNITS (SHARES AND WARRANTS) DYNAMIC INTERNATIONAL, INC. (HEREINAFTER CALLED THE "COMPANY"), A NEVADA CORPORATION, HEREBY CERTIFIES THAT, FOR VALUE RECEIVED, PATTERSON TRAVIS, INC. 12835 E. ARAPAHOE ROAD, #1-700 ENGLEWOOD, COLORADO 80112 or assigns, is entitled to purchase from the Company, at any time or from time to time, subsequent to 9:00 A.M., New York local time on , 1998 and before 3:00 P.M. New York local time on , 2002 an aggregate of _______ Units (the number and character of such Units being subject to adjustment as provided below) of the Company on the payment therefore of $8.25 for each Unit subscribed for and purchased, upon the surrender of this warrant duly signed by the registered holder hereof or assigns at the time of subscription, accompanied by payment of the total subscription price in cash or by certified check or bank draft payable to the order of the Company, upon the terms and subject to the conditions hereinafter set forth. The Units are nonredeemable. Each Unit consists of one (1) share of the Company's stock, one (1) Class A Redeemable Common Stock Purchase Warrant ("Class A Warrants") to purchase one (1) share of Common Stock at an exercise price of $9.90 and one (1) Class B Redeemable Common Stock Purchase Warrant ("Class B Warrants") to purchase one (1) share of Common Stock at an exercise price of $16.50 with the Class A and Class B Warrants being exercisable until , 2002. 1 2 Except as specifically otherwise provided herein, the Common Stock and the Warrants issued pursuant to this Option shall bear the same terms and conditions as described under the caption "Description of Securities" in the Registration Statement (File #333-25425-NY, declared effective , 1997 and the Warrants shall be governed by the terms of the Warrant Agreement dated as of , 1997 executed in connection with such public offering (the "Warrant Agreement"), and except that (i) the holder hereof shall have registration rights under the Securities Act of 1933, as amended (the "Act"), for the Option, the Common Stock and the Warrants included in the Units, and the shares of Common Stock underlying the Warrants, as more fully described in paragraph 6 of this Option, and (ii) the exercise price for the Class A Warrants included in this Option is $9.90 and the exercise price for the Class B Warrants is $16.50 and (iii) the Warrants expire five (5) years from date hereof. In the event of any reduction of the exercise price of the Warrants included in the Public Units, the same changes to the Warrants included in the Option Units shall be simultaneously effected. 1. NOTICE OF EXERCISE. Notice of intention to exercise any of the purchase rights evidenced by this option must be given by written notice addressed to the Company at its principal office or by written notice addressed to its duly designated and acting agent, if any, at least ten (10) days prior to any intended exercise. Such notice shall specify the date on which purchase rights are to be exercised and the number of shares of units to be purchased on that date. 2. EXERCISE OF OPTION. On or before the date of exercise specified in such notice, the holder shall surrender this warrant (in negotiable form, if not surrendered by the holder named above) to the principal office of the Company, or to that of its duly designated and acting agent with the exercise form attached to this duly signed together with the purchase price of the Units represented by certified or official bank check payable to the order of the Company. 3. DELIVERY OF STOCK AND WARRANT CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this option and payment of the purchase price,and in any event no later than ten (10) days thereafter, the Company or its duly designated and acting agent, if any, will cause to be issued in the name of and delivered to the holder hereof, or such holder's nominee or nominees, certificates for the number of full shares of the Common Stock and Warrants of the Company to which such holder shall be entitled upon such exercise. In case, between the date of such exercise and the date on which such certificates are issued, the record holder of the common stock shall become entitled to any dividend or other right, the Company will forthwith pay or cause to be paid in cash to the holder hereof the amount of such dividend, or transfer to the holder hereof such rights, as the case may be. No fraction of a share or scrip certificate for such a fraction shall be issued upon the exercise of this warrant; in lieu thereof, the Company will pay or cause to be paid to such holder cash equal to a like fraction at the then prevailing market price for such share as determined by the Company. 4. PARTIAL EXERCISE OF A WARRANT. In case this option shall be exercised for less than the full number of Units, to which the holder is entitled, the Company at its expense will issue, or will cause to be issued and delivered to the holder hereof, a new 2 3 option of like tenor issued in said holder's name, calling for the number of Units, for which the surrendered option shall not have been exercised. 5. DIVIDENDS IN STOCK, PROPERTY, RECLASSIFICATIONS. In case at any time or from time to time the holders of the common stock of the Company (or any other shares of stock or other securities at that time receivable upon exercise of this option) shall have received, or as of a record date shall have become entitled to receive other or additional or less stock or other securities or property (other than cash) without payment therefore (whether through a dividend in stock of any class of stock of the Company or any other corporation, or a dividend in any securities or property other than cash, or through stock split, spin-off, reclassification, combination of shares or otherwise), then and in each such case the holder of this option upon the exercise thereof and upon the payment of the sum obtained by multiplying (a) the number shares of common stock of the Company issuable upon exercise of this option by (b) the purchase price of $8.25 per Unit stated on the face of this option, shall be entitled to receive, in lieu of the Units called for hereby, the stock or other securities or property which said holder would hold on the date of such exercise, if, from the date hereof to and including such date, he had been the holder of record of the number of shares of the common stock of the Company issuable upon exercise of this option and had retained such shares and all such other or additional or less stock and other securities and property receivable in respect of such shares. In case of the partial exercise of this warrant under such circumstances, the number of shares of stock which would have been receivable upon the full exercise of this warrant, computed as provided above, shall be proportionately reduced. Similar adjustments shall be made for the Warrants. 6. REORGANIZATIONS, CONSOLIDATIONS, MERGERS. In case of any reorganization of the Company, or any other corporation, the stock or securities of which are at the time deliverable on the exercise of this option, or in case the Company or such other corporation shall consolidate with or merge into another corporation, or convey all or substantially all of its assets to another corporation, the holder of this option, upon the exercise hereof and upon the payment of sum obtained by multiplying (a) the number of shares of the Company issuable upon exercise of this warrant by (b) the purchase price of $8.25 per Unit stated on the face of this option, shall be entitled to receive, in lieu of the shares theretofore called for hereby, the stock or other securities or property to which such holder would have been entitled upon the consummation of such reorganization, consolidation, merger or conveyance if he had purchased the shares called for hereby immediately prior thereto; and in such case, the provisions of this option shall be applicable to the shares of stock or other securities or property thereafter deliverable upon the exercise of this option. In the case of the partial exercise of this option under such circumstances, the number of shares of stock or other securities or property which would have been receivable upon the full exercise of this warrant, and the sum payable therefore, shall be proportionately reduced. 7. WARRANT AGENT. Whenever an event occurs which requires an adjustment of the shares of stock, securities or other property which the holder of this option upon the exercise thereof is entitled to receive, the Company will file promptly with the duly designated and acting warrant agent, if any, a certificate signed by the president or a vice president of the Company, and by the secretary or an assistant secretary of the Company, setting forth a brief statement of the facts requiring such adjustment and the number and character of the shares of stock, or other securities or property which the holder of this 3 4 warrant upon the exercise thereof shall be entitled to receive after such adjustment in lieu of each Share called for hereby. The duly designated and acting warrant agent may rely conclusively on such certificates and the correctness of such adjustment without further investigation and shall be under no duty or responsibility with respect to such certificate except to exhibit it from time to time to any warrant holder desiring an inspection thereof. 8. EXCHANGE OF WARRANTS. Upon the surrender by any holder of any option or options at the principal office of the Company or at that of its duly designated and acting warrant agent (in negotiable form if not surrendered by the holder named on the face thereof), the Company or its duly designated warrant agent will issue and deliver to, or on the order of such holder, at the Company's expense, a new option or options in the name of such holder or as such holder (upon the payment of such holder of any applicable transfer tax) may direct, in such authorized denomination or denominations as such holder may request, evidencing the rights to purchase an aggregate amount of units equal to the aggregate amount of Shares which the option or options so surrendered evidenced the right to purchase. 9. LOST, STOLEN, DESTROYED OR MUTILATED OPTIONS. Upon receipt by the Company or its duly designated and acting agent, if any, of evidence satisfactory (in the exercise of reasonable discretion) to each of them of the ownership of and the loss, theft or destruction or mutilation of any Unit Purchase Option and (in the case of loss, theft or destruction) or indemnity satisfactory (in the exercise of reasonable discretion) to each of them, and (in the case of mutilation) upon the surrender and cancellation thereof, the Company or its duly designated and acting agent will issue and deliver, in lieu thereof, a new Unit Purchase Option of like tenor. 10. NEGOTIABILITY. This option is issued upon the following terms and conditions, to all of which each taker or owner hereof consents and agrees (a) title to this option may be transferred by endorsement and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this option properly endorsed is authorized to represent himself as absolute owner hereof and is granted power to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this warrant in favor of each such bona fide purchaser, and every such bona fide purchaser shall acquire absolute title hereof and all rights represented hereof by; and (c) the Company or its duly designated and acting agent, if any, may treat the holder of the warrant properly endorsed as absolute owner hereof for all purposes without being affected by any notice to the contrary. 11. MISCELLANEOUS. This option shall not be valid for any purpose unless signed by an authorized officer of the Company and countersigned by the duly designated and acting agent, if any. This option does not confer upon the holder any right to vote or to consent or to receive notice as a stockholder of the Company. 12. HEADINGS. The headings in this warrant are for purposes of reference only, and shall not limit or otherwise affect the meaning hereof. 4 5 13. EXPIRATION. This option will be wholly void and of no effect after 3:00 PM, New York local time, on , 2002. 14. RESTRICTIONS. This option is originally issued by way of additional underwriting compensation in connection with the public offering of securities of the Company pursuant to a registration statement filed with the Securities and Exchange Commission (File No. 333-25425) (the "Registration Statement") and pursuant to a certain underwriting agreement between the Company and Patterson Travis, Inc. (the "Underwriter") whereby this option: (a) shall not be exercisable in whole or in part for a period of one year from the effective date of said public offering, and (b) shall be restricted from sale, transfer, assignment or hypothecation for a period of one year from the effective date of said public offering, except to officers or partners of the Underwriter and members of the selling group and/or their officers or partners. 15. REGISTRATION RIGHTS. If, at any time, or from time to time, commencing one year after and ending five years after the effective date of the Registration Statement, the Company proposes to file another registration statement with the Commission with respect to the sale of any securities of the Company, the Company will, at least thirty (30) days prior to such filing, give written notice thereof to the holders of this Option and/or the holders of the underlying securities and if, within twenty (20) days after receipt of such notice, such holders request inclusion of this Option and/or any underlying shares in such registration statement, the Company will use its best efforts to include this Option and/or such underlying shares in such registration statement. In addition to the foregoing, one time only, upon the written request of Patterson Travis or its specifically authorized designee or together with its consent or the consent of its authorized designee at the request of the holders of a majority of the Underwriter's Options or underlying shares, for a period of four years commencing one year from the effective date of the Registration Statement, the Company further agrees to register the Underwriter's Options and/or underlying shares and to register and qualify same under applicable blue sky laws. The Company will pay and bear all costs and expenses in connection with registering this Option and/or the underlying securities, except for the fees of the holders' counsel in connection therewith. 16. LAW GOVERNING. This option shall be construed and enforced in accordance with and governed by the laws of the State of New York. This Option represents _______ Options out of a total of 120,000 Options to be issued. 5 6 DYNAMIC INTERNATIONAL, INC. By: _____________________ President ATTEST: _________________________ Secretary 6 7 ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER TO EFFECT A TRANSFER OF THE WITHIN WARRANT) FOR VALUE RECEIVED, I, _________________________ hereby sell, assign and transfer unto _________________________ this option and the rights hereof, and do hereby irrevocably constitute and appoint ____________________, my attorney, to transfer this said option on the books of the Company, with full power of substitution. DATED: ________________, 19___. SIGNED ______________________ Witness: _____________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within option in every particular, without alteration or enlargement or any change whatever. The signature to the assignment must be guaranteed by a bank or trust company having an office or correspondent in New York City, or by a firm having membership on the New York Stock Exchange or in the American Stock Exchange Clearing Corporation. ELECTION TO PURCHASE (To be executed by the holder desiring to exercise the right to purchase Shares evidenced by the within Warrant) DYNAMIC INTERNATIONAL, INC. The undersigned irrevocably elects to exercise the right to purchase hereunder ________ Units of the Company in accordance with the terms and conditions of this Option, and requests that a certificate for such common shares be issued in the name of the undersigned and be delivered to the undersigned at the address stated below and, if said number of common shares, shall not be all of the shares purchasable hereunder, that a new warrant of like tenor for the balance of the remaining shares and warrants purchasable hereunder be delivered to the undersigned at the address stated below. DATED: _____________________ SIGNED:_____________________________ Address: ___________________________ 7 EX-4.01 3 REVISED FORM OF WARRANT AGREEMENT 1 Exhibit 4.01 COMMON STOCK PURCHASE WARRANT AGREEMENT THIS AGREEMENT, dated as of this ___ day of ________, 1997, is between DYNAMIC INTERNATIONAL, LTD., a Nevada corporation (the "Company"), PATTERSON TRAVIS, INC. (the "Underwriter") and AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent"). RECITALS 1. The Company is issuing, in connection with a public offering, up to 1,200,000 Units ("Units"), each consisting of one share of the Company's common stock, $.001 par value (the "Common Stock"), one Class A Common Stock Purchase Warrant (the "Class A Warrants") and one Class B Common Stock Purchase Warrant (the "Class B Warrants," collectively with the Class A Warrants, the "Public Warrants" or "Warrants"), not including, in both cases, over-allotments. 2. One Warrant entitles the registered holder to purchase one share of Common Stock. 3. The Company desires to provide for the issuance of certificates representing the Warrants. 4. The Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer and exchange of certificates representing the Warrants and the exercise of the Warrants. AGREEMENTS In consideration of the recitals and the mutual agreements set forth below, and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties agree as follows: 5. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require. a. "Common Stock" shall mean common stock of the Company of any class, whether now or hereafter authorized, which has the right to 1 2 participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, and which at the date hereof consists of 50 million shares of authorized Common Stock, $.001 par value per share, and as further defined in section 8(e) below. b. "Warrant Expiration Date" shall mean 5:00 p.m. (New York City time) on __________, 1999 [18 months from IPO] as to the Class A Warrants and _________, 2000 [3 years from IPO] as to the Class B Warrants, or if such a date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York City time) on the next following day which in the State of New York is not a holiday on which banks are authorized to close. Unless exercised during the Warrant Exercise Period, the Warrants will automatically expire. The Warrants may be called for redemption and the expiration date therefor accelerated, on the terms and conditions set forth in sections 4(b) and 4(c) of this Agreement. If so called for redemption, Warrant Certificate holders shall have a period of no less than thirty (30) days after the date of the call notice within which to exercise the Warrants. However, Warrant Certificate holders will receive the redemption price only if such certificates are surrendered to the Corporate Office (defined below) within the redemption period. c. "Warrant Exercise Period" shall mean from __________, 1997 [90 days after IPO Date] until the Warrant Expiration Date. d. "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business is conducted, currently located at 40 Wall Street, New York, New York 10005. e. "Exercise Date" shall mean the date a certificate representing a Warrant is surrendered for exercise. "Surrender" for purposes hereof shall mean in the event of (i) personal delivery by a Registered Holder, the date it is received by the Warrant Agent, (ii) mailing, the postmark date, and (iii) delivery by a messenger or similar service the date of dispatch, as reflected on the delivery receipt. f. "Purchase Price" shall mean $6.00 per share for the Class A Warrants and $10.00 per share for the Class B Warrants, unless such purchase price has been adjusted as hereinafter provided. Each Warrant is exercisable for one share of Common Stock upon payment of the Purchase Price at any time during the Warrant Exercise Period. The Warrants, which are being publicly offered pursuant to a registration statement and prospectus filed by the Company with the Securities and Exchange Commission, will trade, initially, on the Nasdaq SmallCap Market under the symbol _____ after the effective date of such registration statement. 2 3 g. "Registered Holder" shall mean the person or persons in whose name or names any certificates representing the Warrants shall be registered from time to time on the books maintained by the Warrant Agent pursuant to section 6. h. "Subsidiary" or "Subsidiaries" shall mean any corporation or corporations, as the case may be, of which stock having ordinary power to elect a majority of the Board of Directors of such corporation (regardless of whether or not at the time stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. i. "Transfer Agent" shall mean American Stock Transfer & Trust Company or its authorized successor. j. "Warrant Certificate" shall mean a certificate representing Warrants. 6. Warrants and Issuance of Warrant Certificates. a. Each Warrant shall entitle the Registered Holder thereof to purchase one share of Common Stock upon its exercise. The Warrants will be separately transferable commencing 90 days after the effective date of the Registration Statement that includes the Units, the Common Stock and the Warrants. b. Upon closing of the offering, Warrant Certificates representing an aggregate of not more than 1,200,000 Class A Warrants and 1,200,000 Class B Warrants (or up to 1,380,000 of each class in the event the Underwriter's over-allotment option is exercised) to purchase an aggregate of not more than a like number of shares of Common Stock, shall be executed by the Company and delivered to the Warrant Agent and shall be countersigned, issued and delivered by the Warrant Agent upon written order of the Company signed by its President or a Vice President and its Treasurer or an Assistant Treasurer or its Secretary or Assistant Secretary. c. From time to time, up to the Warrant Expiration Date, plus such additional time as may reasonably be required to perform, accomplish and complete necessary administrative functions connected with the exercise of the Warrants, the Warrant Agent, in its capacity as the Company's Transfer Agent, shall countersign and deliver stock certificates representing an aggregate of not more than 2,400,000 shares of Common Stock, or up to an aggregate of 2,760,000 in the event the Underwriters over-allotment option is exercised (subject to adjustment 3 4 pursuant to section 8 of this Agreement), upon the exercise of the Warrants pursuant to the terms of this Agreement. d. From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement. Except as provided in section 7 hereof, no Warrant Certificates shall be issued except (i) Warrant Certificates initially issued hereunder, (ii) upon the exercise of any Warrants, to evidence the unexercised Warrants held by the exercising Registered Holder and (iii) upon any transfer or exchange of Warrants. 7. Form and Execution of Warrant Certificates. a. The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or automated quotation system on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates). Warrant Certificates shall be numbered serially with the letters, "DIW" on Warrant Certificates of all denominations. b. Warrant Certificates shall be executed on behalf of the Company by its President or any Vice President and its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to hold such position with the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. 4 5 8. Exercise; Redemption. a. Each Warrant represented by a Warrant Certificate may be exercised during the Warrant Exercise Period, upon the terms and subject to the conditions set forth herein and in the Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, provided that the Warrant Certificate representing such Warrant, with the appropriate exercise form thereon duly executed by the Registered Holder thereof or his or her attorney duly authorized in writing, together with payment in cash, or by official bank or certified check made payable to the Company, of an amount equal to the Purchase Price has been timely received by the Warrant Agent. Payment must be made in United Sates funds. The person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of such securities as of the close of business on the Exercise Date. The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of any Warrants. Computations resulting in the issuance of fractional shares be rounded to the nearest whole share. As soon as practicable on or after the Exercise Date and in any event within 10 days after having received authorization from the Company, the Warrant Agent, on behalf of the Company, shall cause to be issued to the person or persons entitled to receive the same a certificate or certificates for the shares of Common Stock, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. No adjustment shall be made in respect of cash dividends on any shares delivered upon exercise of any Warrant. Upon the exercise of any Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and shall cause all payments of an amount in cash or check made payable to the order of the Company, equal to the Purchase Price, less any Warrant solicitation fee, as hereinafter described. b. If at any time (i) the market price of the Company's Common Stock is equal to or greater than the then Purchase Price of the Warrant, (ii) the exercise of the Warrant is solicited by the underwriter at such time while the Underwriter is a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary account, (iv) disclosure of the compensation arrangement is made in documents provided to the holders of the Warrants; and (v) the solicitation of the exercise of the Warrant is not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, then the Underwriter shall be entitled to receive from the Company upon exercise of each of the Warrant(s) so exercised a fee of eight percent (8%) of the aggregate price of the Warrants so exercised (the "Exercise Fee"). The procedures for payment of the warrant solicitation fee are set forth in subparagraph (c) below. 5 6 c. (1) Within five (5) days of the last day of each month commencing with ________ 1998 [one year anniversary of IPO month], the Warrant Agent will notify the Underwriter of each Warrant Certificate which has been properly completed for exercise by holders of Warrants during the last month. The Company and Warrant Agent shall determine, in their sole and absolute discretion, whether a Warrant Certificate has been properly completed. The Warrant Agent will provide the Underwriter with such information, in connection with the exercise of each Warrant, as the Underwriter shall reasonably request. (2) The Company hereby authorizes and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after receipt by the Warrant Agent from the Company of a check payable to the order of the Underwriter in the amount of the Exercise Fee. The Warrant Agent shall not issue the shares of Common Stock issuable upon exercise of the Warrants until receipt and forwarding of such check to the Underwriter. In the event that an Exercise Fee is paid to the Underwriter with respect to a Warrant which the Company or the Warrant Agent determines is not properly completed for exercise or in respect of which the Underwriter is not entitled to an Exercise Fee, the Underwriter will promptly return such Exercise Fee to the Warrant Agent which shall forthwith return such fee to the Company. The Underwriter and the Company may at any time, after __________, 1998 [one year anniversary of IPO month], and during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the contrary, the provisions of this paragraph and of subparagraph (b) above may not be modified, amended or deleted without the prior written consent of the Underwriter. d. The Warrants may be redeemed at any time during the exercise period by the Company, on not less than 30 or more than 60 days' prior written notice to all Registered Holders of the Warrants, at a redemption price of $.01 per Warrant, if the last reported sale price, or if not published, the average closing bid price of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ) (or a national securities exchange or the National Quotation Bureau or the OTC Bulletin Board, as the case may be) is at least $9.00 for the Class A Warrants and $15.00 for the Class B Warrants for any 10 trading days within a period of 30 consecutive trading days ending five (5) days prior to the date of the written notice of redemption. All Warrants must be redeemed if any are redeemed. e. If the Company calls the Warrants for redemption, the price at which such Warrants are to be redeemed shall not be paid to any Warrant holder unless the certificates representing such Warrants are surrendered to the 6 7 Corporate Office within the redemption period specified in the Company's notice to Registered Holders. At the end of any such redemption period respecting Warrants called for redemption, any Warrants not exercised or tendered for redemption shall expire and the certificate(s) therefor shall become void. 9. Reservation of Shares; Listing; Payment of Taxes, Etc. a. The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of Warrants shall be duly and validly issued any fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange or automated quotation system, if any, on which the other shares of outstanding Common Stock of the Company are then listed. b. If any Common Stock reserved for issuance upon exercise of Warrants hereunder requires registration with or approval of any governmental authority under any federal or state law, before such securities may be validly issued or delivered upon such exercise, then the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be; provided, however, that the Company need not endeavor to seek such registration or approval in a state in which the Warrants were not sold by the Company pursuant to the registration statement unless an exemption from registration under such state's laws is available; provided, further, that Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. c. The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of Warrants; provided, however, that if shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. d. The Warrant Agent, unless it is acting as such, is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock required upon exercise of the Warrants, and the Company will authorize its Transfer Agent to comply with 7 8 all such requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of its Transfer Agent for shares of Common Stock or other capital stock issuable upon exercise of the Warrants and of each successor Transfer Agent. 10. Exchange and Registration of Transfer. a. Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be so exchanged shall be surrendered to the Warrant Agent at its Corporate Office, accompanied by an Assignment, when necessary, and the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate(s) which the Registered Holder shall be entitled to receive. b. The Warrant Agent shall keep at such office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. c. With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder thereof or his or her attorney duly authorized in writing. d. The Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed upon any exchange, registration or transfer of any Warrant Certificates. e. All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of the agency. f. Prior to due presentment for registration of transfer thereof the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing 8 9 thereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 11. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall countersign and deliver a new Warrant Certificate representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. a. Adjustments to Exercise Price and Number of Securities. b. Computation of Adjusted Exercise Price. Except as hereinafter provided, in case the Company shall at any time after the date hereof issue or sell any shares of Common Stock (other than the issuances or sales referred to in subparagraph (g) of this section 8), including shares held in the Company's treasury and shares of Common Stock issued upon the exercise of any options, rights or warrants to subscribe for shares of Common Stock and shares of Common Stock issued upon the direct or indirect conversion or exchange of securities for shares of Common Stock, for a consideration per share less than the Purchase Price in effect immediately prior to the issuance or sale of such shares, or without consideration, then forthwith upon such issuance or sale, the Purchase Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the quotient derived by dividing (i) an amount equal to the sum of (a) the total number of shares of Common Stock outstanding immediately prior to the issuance or sale of such shares, multiplied by the Purchase Price in effect immediately prior to such issuance or sale, and (b) the aggregate of the amount of all consideration, if any, received by the Company upon such issuance or sale, by (ii) the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided, however, that in no event shall the Purchase Price be adjusted pursuant to this computation to an amount in excess of the Purchase Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock, as provided by subparagraph (c) of this section 8. For the purposes of any computation to be made in accordance with this subparagraph (a), the following provisions shall be applicable: (i) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received 9 10 by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. (ii) In case of the issuance or sale (otherwise than as a dividend or other distribution on any stock of the Company) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company and shall include any amounts payable to security holders or any affiliates thereof, including without limitation, pursuant to any employment agreement, royalty, consulting agreement, covenant not to compete, earnout or contingent payment right or similar arrangement, agreement or understanding, whether oral or written; all such amounts being valued for the purposes hereof at the aggregate amount payable thereunder, whether such payments are absolute or contingent, and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof. (iii) Shares of Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (iv) The reclassification of securities of the Company other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined as provided in subparagraph (a) of this section 8. (v) The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 10 11 c. Options, Rights, Warrants and Convertible and Exchangeable Securities. In case the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock, for a consideration per share less than the Purchase Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, or without consideration, the Purchase Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, as the case may be, shall be reduced to a price determined by making a computation in accordance with the provisions of subparagraph (a) of this section 8., provided that: (i) The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of the Warrants), if any, received by the Company for such options, rights or warrants. (ii) The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of the Warrants) received by the Company for such securities, plus the minimum consideration, if any, receivable by the Company upon the conversion or exchange thereof. (iii) If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in subparagraph (i) of section 8(b), or in the price per share at which the securities referred to in subparagraph (ii) of this section 8(b) are convertible or exchangeable, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued pursuant to the exercise or conversion or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights or warrants or convertible or exchangeable securities at the new price in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities, provided, however, in no 11 12 event shall the adjustment provide the Holder with any greater rights arising from consecutive adjustments than if the last adjustment occurred initially. d. Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Purchase Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. e. Adjustment in Number of Securities. Upon each adjustment of the Purchase Price pursuant to the provisions of this section 8, the number of securities issuable upon the exercise at the adjusted Purchase Price of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Purchase Price in effect immediately prior to such adjustment by the number of securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price. f. Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that the Company shall after the date hereof issue securities with greater or superior voting rights than the shares of Common Stock outstanding as of the date hereof, the Registered Holder, at its option, may receive upon exercise of any Warrant either shares of Common Stock or a like number of such securities with greater or superior voting rights. g. Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Registered Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in this section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. 12 13 h. No Adjustment of Purchase Price in Certain Cases. No adjustment of the Purchase Price shall be made: (i) Upon the issuance or sale of the Warrants, the shares issuable upon the exercise of the Warrants; the securities issuable upon the exercise of the Representative's warrants, and the shares of Common Stock issuable upon the exercise of any of them; (ii) If the amount of said adjustment shall be less than two cents (2(cent)) per security, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents (2(cent)) per security; or (iii) Upon the issuance of shares of Common Stock pursuant to a Bonus Agreement between the Company and Marton Grossman. (h) Dividends and Other Distributions. In the event that the Company shall at any time prior to the exercise of all Warrants fix a record date for the determination of stockholders entitled to receive (including any such distribution made to the stockholders of the Company in connection with consolidation or merger in which the Company is the continuing corporation in a distribution to all holders of Common Stock) evidence of its indebtedness, cash, or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options,or warrants to subscribe for or purchase shares of Common Stock, or securities convertible into, or exchangeable for, shares of Common Stock in a distribution to all holders of Common Stock, then, in each case, the Purchase Price in effect at the time of such record date shall be adjusted by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the market price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidence of indebtedness or assets so to be distributed, or such rights, options, or warrants, or convertible or exchangeable securities, or the amount of cash, applicable to one share of Common Stock, and the denominator of which shall be the market price per share of Common Stock on such record date. Such adjustment shall be made successively whenever any event listed above shall occur and become effective at the close of business on such record date. 13 14 12. Concerning the Warrant Agent. a. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. b. The Warrant Agent shall not at any time (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. c. The Warrant Agent may at any time consult with counsel for the Company and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. d. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by its President, a Vice President, its Treasurer, an Assistant Treasurer, its Secretary, or an Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand. e. The Company agrees to pay the Warrant Agent the usual and customary compensation it normally receives for its services of this nature and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except those arising as a result of the Warrant Agent's negligence or willful misconduct. f. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising 14 15 as a result of the Warrant Agent's own negligence or willful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to each Registered Holder at the Company's expense. Upon such resignation the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then any Registered Holder may apply in any court of competent jurisdiction for the appointment of a new warrant agent. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the warrant agent, without any further assurance, conveyance, act or deed; provided, however, that if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to each Registered Holder. g. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the corporate trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed, at its expense, to the Company and to each Registered Holder. h. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect as though it were not the Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 13. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (a) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (b) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or 15 16 altered in any respect except with the consent in writing of the Registered Holders representing not less than 50% of the Warrants then outstanding; provided, further, that no change shall be made in the terms or provisions of any Warrant which would adversely affect such registered Holders, other than such changes as are expressly permitted by this Agreement as originally executed, without the consent in writing of the Registered Holders of the Warrants affected. 14. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when mailed, first-class postage prepaid, when delivered to a telegraph office for transmission, or when delivered to any commercial overnight air courier service or other commercial messenger or delivery service which regularly retains its receipts; if to a Registered Holder, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company at 58 Second Avenue, Brooklyn, New York 11215, Attention: President, or at such other address as may have been furnished to the Warrant Agent in writing by the Company, with a copy to the Company's counsel, Heller, Horowitz & Feit, 292 Madison Avenue, New York, New York 10017, Attention: Louis A. Brilleman, Esq.; and, if to the Warrant Agent, at the Corporate Office. 15. Governing Law; Section Headings. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section headings in this Agreement appear for convenience of reference only and shall not be used in any interpretation of this Agreement. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns, and the Registered Holders from time to time of Warrant Certificates or any of them. Nothing in this Agreement shall be construed to confer any right, remedy or claim upon any other person. 17. Counterparts. This Agreement may be executed in counterparts, which taken together shall constitute a single document. DYNAMIC INTERNATIONAL, LTD. BY: _________________________ 16 17 AMERICAN STOCK TRANSFER & TRUST COMPANY BY: _________________________ AUTHORIZED OFFICER PATTERSON TRAVIS, INC. BY: _________________________ 17 EX-4.04 4 FORM OF UNIT CERTIFICATE 1 Exhibit 4.04 FORM OF UNIT CERTIFICATE Number Shares D DYNAMIC INTERNATIONAL, LTD. Common Stock $.001 Par Value CUSIP _________ Incorporated under the Laws of the State of Nevada Units consisting of one share of Common Stock, one Class A Common Stock Purchase Warrant and one Class B Common Stock Purchase Warrant THIS CERTIFIES THAT IS THE OWNER OF UNITS Each Unit consists of one share of Common Stock, $.001 par value, one redeemable Class A Warrant to purchase one share of Common Stock at $6.00 until ___________ [18 months from the Effective Date](the "Class A Warrants) and one redeemable Class B Warrant to purchase one share of Common Stock at $9.00 until _____________ [3 years from the Effective Date] (the Class B Warrants, together with the Class A Warrants, the "Warrants"). The Common Stock and the Warrants represented by this certificate are not transferable separately prior to _____________ [90 days from the Effective Date]. The terms of the Warrants are governed by the Warrant Agreement between the Company, American Stock Transfer and Trust Company (the "Warrant Agent") and Patterson Travis,. Inc. dated as of _______, 1997 and are subject to the terms and conditions contained therein, al of which terms and conditions the holder of this certificate consents to by acceptance hereof. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [SEAL] /s/ /s/ Secretary President Countersigned and Registered American Stock Transfer & Trust Company (New York) 1 2 Reverse Side of Certificate Dynamic International, Ltd. The Corporation will furnish to any shareholder a full statement of the powers, designations, limitations and relative participating, optional or other special rights of the shares of each class authorized to be issued, the qualifications, limitations and restrictions of such preferences and rights, the variations in the rights and preferences between the shares of any series of any authorized preferred class so far as they have been fixed and determined, and the authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series of any such preferred class. In addition, it contains the usual information relating to transfer of the stock represented by the certificate and it allows for completion of information required in connection with any such transfer. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF FIT MIN ACT-________Custodian__________ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors JT TEN - as joint tenants with right Act__________________________ of survivorship and not as tenants in (State) common Additional abbreviations may also be used though not in the above list. For Value Received,_____________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE _________________________________ ________________________________________________________________________________ (Please print or typewrite name and address including postal zip code of assignee) ________________________________________________________________________________ ________________________________________________________________________________ ______________________________________________________________________shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _________________________________ Attorney to transfer the said shares on the books of the within Corporation with full power of substitution in the premises. Dated_________________________ ___________________________________________________ NOTICE: The signature to this assignment must correspond with the name as as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. 2 EX-10.04.A 5 SIDE LETTER 1 MARTON B. GROSSMAN EXHIBIT 10.04(a) President November 4, 1997 Dynamic International, Ltd. 58 Second Ave. Brooklyn, NY 11215 RE: WAREHOUSE AND SERVICE AGREEMENT DATED SEPTEMBER 1, 1996 Gentlemen: Both parties understand that letter-of-credit orders are almost exclusively shipped from the manufacturer and are not shipped from any Achim location. This holds true for sales to overseas customers as well. Page 3 of the Agreement: 3. General Services Fee - Should be amended as follows: (i) the percentages of Dynamic "invoices sales" in each year to customers and accounts located within the United States, not originating at the Achim warehouse and with respect to which payment is to be made by letter of credit, as set forth below: (ii) 1.5% of Dynamic's invoiced sales in each year to customers and accounts located within the United States, not originating at the Achim warehouse and with respect to which payment is to be made by letter of credit; plus (iii) 1.0% of Dynamic's invoiced sales in each year to customers and accounts located outside the United States and not originating at the Achim warehouse (irrespective of manner of payments). Page 4 of the Agreement: 5: Warehouse Fee. In consideration for the Warehouse Services, Dynamic shall pay to Achim, only for sales originating at the Achim warehouse, a monthly fee (the "Warehouse Services Fee") equal to three percent (3%) of Dynamic's invoiced sales. Please indicate your consent to the foregoing by countersigning a copy of this letter and returning it to the undersigned. Very truly yours, By:_________________________________ AGREED AND ACCEPTED DYNAMIC INTERNATIONAL, LTD. BY:__________________________________ 1 -----END PRIVACY-ENHANCED MESSAGE-----