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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended April 30, 1999 Commission File Number 0-21475
DYNAMIC INTERNATIONAL, LTD.
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(Exact Name of Registrant as Specified in its Charter)
Nevada 93-1215401
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
58 Second Avenue, Brooklyn, New York 11215
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (718) 369-4160
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant:was $180,266 on July 27 , 1999.
The number of shares outstanding of Registrant's Common Stock as of August 13,
1999: 4,418,258
DYNAMIC INTERNATIONAL, LTD.
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PART I
ITEM 1. BUSINESS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the
design, marketing and sale of hand exercise and light exercise equipment,
including hand grips, running weights, jump ropes and aerobic steps and slides.
It markets these products under the licensed trademarks SPALDING[TM] and KATHY
IRELAND[TM] as well as under its own trademarked name SHAPE SHOP[TM]. In
addition, it designs and markets related sports bags and luggage, which are
marketed primarily under the licensed name JEEP[TM] and under its own names
Santa Fe[TM], Polaris Expedition[TM] and SPORTS GEAR[TM]. The Company's
objective is to become a designer and marketer of goods that are associated with
a free-spirited lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation,
incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the
successor to a New York company incorporated in 1964. In August 1996, DCL merged
with and into DIL, which had been newly formed for the purpose of this merger.
The objective of the merger was to change the Company's state of incorporation
from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages, alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition requesting relief under Chapter 11
of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a Plan of Reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. MG
Holding Corp. ("MG"), which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock,
representing approximately 93% of the then issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the
Company, then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM 3.
LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
-2-
DYNAMIC INTERNATIONAL, LTD.
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PRODUCTS
EXERCISE EQUIPMENT - The Company's exercise equipment consists primarily of hand
held products, including dumbbells, ankle and wrist weights, hand grips, jump
ropes, exercise suits, slimmer belts and strength training products. In
addition, the Company markets light weight equipment such as aerobic steps and
slides and exercise mats. The Company also carries a line of small electronic
devices designed to monitor physical activity such as stopwatches, pedometers,
pulse meters and calorie counters.
SPORTS BAGS/LUGGAGE - The Company's sports bags/luggage consists primarily of
duffle bags, weekend bags, garment bags, suitcases, pilot cases and flight
attendant wheeled cases. Some of the models are equipped with wheels and/or
retractable handles.
OTHER PRODUCTS - The Company, through a wholly-owned subsidiary, has obtained
the exclusive rights to the patents underlying the technology used in an
insulated bag incorporating a wrap-around gel pack or freeze pack with the
ability to cool and preserve food and other products for an extended period of
time. In addition, it obtained the trademarks Polaris Surround Chill[TM] Freezy
Bag[TM] and Polaris Surround Chill[TM] Freezy Gel[TM] under which the products
are sold. See "Intellectual Property--License Agreements".
The Company has obtained the exclusive right to manufacture, distribute and sell
a hand held, portable total home gym product. This product is being sold under
the trademark SPALDING[TM] Rotaflex[TM].
The Company may from time to time manufacture and/or market additional products
under its own names or under licensed names.
DESIGN AND DEVELOPMENT
The Company usually designs its own exercise equipment and creates its own molds
and tooling. Such molds and tooling are used by the manufacturers to produce the
equipment. The Company retains an ownership interest in the molds which are
returned to it upon the termination of the Company's relationship with a
particular manufacturer. The Company has been granted a number of design patents
with respect to certain of its products. See "Intellectual Property--License
Agreements". The Company employs a designer on a full-time basis for the design
of its sports bags/luggage products. During the most recent fiscal year the
Company spent approximately $179,000 on design activities, including fees to
designers and patent attorneys. The Company may, from time to time, utilize the
services of consultants for product and package design.
Most of the Company's products are manufactured in Indonesia, Taiwan and the
United States which in the most recent fiscal year accounted for approximately
40%, 25% and 14%, respectively of the Company's products. In addition the
Company's products are manufactured in the Phillippines, Hong Kong, Sri Lanka
and Pakistan. Exercise equipment is usually shipped by the manufacturers to the
Company within 45 days of the placement of an order. Orders for sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any, additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.
-3-
DYNAMIC INTERNATIONAL, LTD.
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SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its products
are sold to discount stores, mass merchants and sporting goods stores. For the
fiscal year ended April 30, 1999, Sears, Kmart and Kohl's account for 25%, 20%
and 14%, respectively, of the Company's revenue. No other customer accounted for
more than 10% of the Company's revenues. For the fiscal year ended April 30,
1999, sales of the Company's sports bags/luggage products accounted for
approximately 58% of the Company's revenues while approximately 42% of the
Company's revenues were derived from the sales of exercise equipment.
The Company sells its products primarily through independent sales agents on a
commission-only basis. The Company currently engages approximately 19 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such
agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sales price of its products. Although the Company believes that
its sales agents sell products exclusively on behalf of the Company, there are
no agreements that prohibit them from selling competing products.
In addition, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company delivers to
Kohl's Department Stores. Although the scope of this marketing effort is
currently limited, the Company intends to expand the number of private label
transactions. No assurance can be given that its efforts in this area will be
successful.
The Company has made substantial progress with large customers for sales of the
Sports bags/Luggage line. During the fiscal year ended April 30, 1999, sales of
sports bags/luggage products to Sears Roebuck, Kohl's Department Stores and BJ's
Wholesale Club increased by approximately $753,000, $709,000 and $201,000,
respectively. In addition, the Company has been successful in selling a new JEEP
"Extreme Collection" to more exclusive fine luggage specialty stores.
The Company has entered into an agreement dated June 15, 1999 with Power Point
International Ltd. to advertise and market the Spalding licensed exercise
products on Latin American television. The main focus will be on Spalding
Rotaflex hand held portable home gym and Spalding Mini Trampoline. The Company
has also hired a consultant to help it to efficiently enter the Latin American
market.
COMPETITION
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All
of these companies possess far greater financial and other resources, including
sales forces, than the Company's. However, the Company believes that as a result
of its ability to use the trademarked names SPALDING[TM] and KATHY IRELAND[TM]
it will be able to retain its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.
The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP[TM] the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
INTELLECTUAL PROPERTY--LICENSE AGREEMENTS
The Company owns a number of trademarks, including Shape Shop RX[TM], Santa
Fe[TM] and Polaris Expedition(TM).
-4-
DYNAMIC INTERNATIONAL, LTD.
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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 amendments
dated January 8, 1996 and July 8, 1998 between the Company and the Chrysler
Corporation (as so amended, the "Jeep Agreement"), the Company was granted the
exclusive license to use the names JEEP, WRANGLER and RENEGADE in connection
with the manufacture, sale and distribution of sports bags/luggage products. The
current expiration date of the Jeep Agreement is December 31, 2002.
SPALDING --Under an agreement dated October 1, 1997, between the Company and
Spalding & Evenflo Companies Inc., the Company was granted the exclusive right
to use the name Spalding in connection with the sale and distribution of hand
held exercise products. The agreement, as renewed will expire September 30,
2001.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated December 22,
1994, Ms. Ireland approves and endorses certain exercise equipment designed and
manufactured by the Company. Under the agreement, the Company has the right to
use her name in connection with the equipment and Ms. Ireland will make
appearances to promote such equipment. In addition, the Company has the right to
use her photograph and likeness in connection with the sale of the equipment.
The agreement, which expired in June 1998, has been renewed until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996, between New
Century Marketing & Distributors, Inc. and a wholly-owned subsidiary of the
Company, the Company obtained the exclusive rights to a patented technology as
well as to the trademarked names FREEZY-BAG and FREEZYGEL. The technology has
the ability to cool foods and other products and is used in the wrapping of such
products. The agreement, as renewed, is scheduled to expire on December 31,
1999. The Company intends to negotiate an extension of the agreement.
ROTAFLEX -- Under an agreement dated December 17, 1997 with Connelly Synergy
Systems LLC, the Company has obtained the exclusive right to manufacture,
distribute and sell a hand held portable total home gym product to be sold under
the trademark Spalding[TM] Rotaflex(TM).
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers.
In consideration for these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for
sales of $60 million or more. For sales not originating at the warehouse, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment.
-5-
DYNAMIC INTERNATIONAL, LTD.
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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 had an initial term of two years which was
subsequently renewed for a one year period. The agreement is subject to
additional one year extension 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, 1999, the Company accrued approximately $289,000 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
EMPLOYEES
As of June 30, 1999, the Company employed 12 persons, of whom five were
executive officers, two 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 is represented by a union and no work stoppages
have occurred.
ITEM 2. PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. See ITEM
1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3. LEGAL PROCEEDINGS
The Company's intellectual property counsel has been advised that on July 29,
1999, Bollinger Industries filed a complaint in the U.S. District for the
Northern District of Texas. To date, the complaint has not been served on the
Company. The complaint alleges infringement of three patents by the Company with
respect to one of its exercise steps. The Company intends to vigorously defend
the claim. The Company has been advised by its intellectual property counsel
that an unfavorable outcome with respect to the claim is unlikely. At the
present time it is not possible to assess the potential loss in the event of an
unfavorable outcome.
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-6-
DYNAMIC INTERNATIONAL, LTD.
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PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Until 1995, the Company's common stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the Bankruptcy
Code in August 1995, no trading information was available after the fiscal
quarter ended July 31, 1995.
On December 27, 1997, the Company completed a public sale of 1,200,000 units:
each unit consisting of one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrant. The Common Stock and the Warrants
became separately traded on March 12, 1998. The Units, Common Stock, Class A
Warrants and the Class B Warrants are quoted on the OTC Bulletin Board under the
symbols DYNIU, DYNI, DYNIW and DYNIZ, respectively.
The following quotes have been reported by the Nasdaq Stock Market Inc., OTC
Bulletin Board. Such quotations reflect interdealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
Fiscal High Low
Security/Symbol Quarter Bid Bid
- --------------- ------- ---- ----
Units/DYNIU January 31, 1998 5.625 5.625
April 30, 1998 5.625 5.625
July 31, 1998 5.625 4.625
October 31, 1998 5.062 0.625
January 31, 1999 1.250 0.438
April 30, 1999 0.438 0.250
Common Stock/DYNI(1) July 31, 1998 2.000 2.000
October 31, 1998 1.000 0.051
January 31, 1999 0.578 0.290
April 30, 1999 0.330 0.125
A Warrants/DYNIW (2) October 31, 1998 0.038 0.013
January 31, 1999 0.013 0.013
April 30, 1999 0.031 0.031
B Warrants/ DYNIZ (3)
(1) No quotes were posted to the OTC Bulletin Board for this security until July
1998.
(2) No quotes were posted to the OTC Bulletin Board for this security until
August 1998. The expiration date of this security has been extended until
June 12, 2000.
(3) No quotes are available on the OTC Bulletin Board for this security.
The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data that are qualified by the
more detailed financial statements included herein. Effective August 8, 1996,
the Company emerged as the surviving entity in a merger with DCL. The balance
sheet of the combined entity was substantially similar to that of DCL
immediately prior to the merger. As a consequence, the financial data of the
Company for the reporting periods July 31, 1996 and prior consist of those of
DCL. Due to the reorganization (see Note 2 to the Financial Statements),
operating results of the reorganized company may not be comparable to those of
the predecessor company.
-7-
DYNAMIC INTERNATIONAL, LTD.
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REORGANIZED REORGANIZED REORGANIZED PREDECESSOR COMPANY
COMPANY*(1) COMPANY*(1) COMPANY
12 Months 12 Months 9 Months 3 Months Years Ended April 30
Ended Ended Ended Ended --------------------------
4/30/99 4/30/98 4/30/97 7/31/96 1996 1995
---------- ---------- ---------- ---------- ---------- -----------
Net Sales $6,632,837 $8,001,138 $7,492,729 $1,983,164 $7,151,715 $32,553,097
Income (Loss)
for Year ($3,333,725) 128,951 10.082 (76,364) 6,945,299 (11,227,335)
Net Income
(Loss)
per Share (.75) .03 .003
Selected Balance Sheet Data:
Working Capital
(Deficit) 1,764,280 4,919,226 (9,901) (293,884) (7,493,435)
Total
Assets 4,023,975 5,715,417 4,831,122 4,253,396 6,414,185
Long Term
Obligations
Including
Capitalized
Lease Obligations -0- -0- 215,254 23,965 116,124
*Management's assumptions used in determining the Company's reorganization value
are discussed in Note 2 to the Financial Statements.
(1) Due to the reorganization (see Note 2 to the financial statements),
operating results and earnings per share of the reorganized company may not be
comparable to those of the predecessor company. Management's assumptions used in
determining the Company's reorganization value are discussed in Note 2 to the
financial statements.
(2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996, the Company's Reorganization Plan was approved by the Bankruptcy
Court. During July and August 1996, the Company satisfied its obligations under
the Plan through cash payments and the issuance of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
-8-
DYNAMIC INTERNATIONAL, LTD.
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GENERAL
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below, has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below,
which the Company adopted on July 31, 1996, reporting for the year ended April
30, 1997 is accomplished by combining the financial results for the three-month
period ended July 31, 1996 and those of the nine-month period ended April 30,
1997.
Because of the application of fresh-start reporting, the financial statements
for the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization.
PLAN OF REORGANIZATION
In August 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the Bankruptcy Code.
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. The
amount of claims allowed under the bankruptcy proceedings, aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG, which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock in satisfaction
of such promissory note, representing approximately 93% of the then issued and
outstanding shares thereby gaining absolute control over the Company's affairs.
See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash and
securities distributed under the plan of reorganization aggregated $531,561. An
amount of $16,692,193, representing the difference between the value of the
total distribution and the amount of allowable claims under the bankruptcy, was
recorded as an extraordinary gain.
-9-
DYNAMIC INTERNATIONAL, LTD.
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In addition, under the Plan, the Company merged with a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start reporting on
July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years.
Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.
-10-
DYNAMIC INTERNATIONAL, LTD.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED APRIL 30, 1999 COMPARED TO THE
FISCAL YEAR ENDED APRIL 30, 1997.
Sales for the fiscal year ended April 30, 1999, decreased by $1,368,000 or 17%
to $6,633,000 from $8,001,000 for the fiscal year ended April 30, 1999. During
the fiscal year ended April 30, 1999, sales to Service Merchandise Co., Price
Costco and Caldor Corp. decreased by approximately $569,000, $83,000 and
$390,000, respectively. Service Merchandise sales decreased due to that
company's reorganization under Chapter 11 bankruptcy while an annual large
promotion sale was not given to the Company by Price Costco as in prior two
fiscal years. Sales to Caldor Corp. decreased due to that company's dissolution.
However, the Company has made substantial progress with large customers which it
believes will have a favorable impact on fiscal year 2000. During the fiscal
year ended April 30, 1999 sales to Sears Roebuck, Kohl's Department Stores and
BJ's Wholesale Club increased by approximately $753,000, $709,000 ans $201,000,
respectively. In addition, the Company has been successful in selling new Jeep
"Extreme Collection" to more exclusive fine luggage specialty stores.
The Company has entered into an agreement dated June 15, 1999, with Power Point
International, Ltd. to advertise and market the Spalding licensed exercise
products on Latin American television. The main focus will be on the Spalding
Rotaflex hand held portable home gym and Spalding Mini Trampoline. The Company
has also hired a consultant to help it to efficiently enter Latin American
market.
There can be assurance that the Company will be successful in achieving its
anticipated increases in revenues or in its efforts to enter the Latin American
market.
The Company's gross profit of $273,000 for the fiscal year ended April 30, 1999
was $2,478,000 less than the gross profit of $2,751,000 for the fiscal year
ended April 30, 1998. This was primarily the result of net changes in the
following items:
Increase
(Decrease)
Lower gross profit due to decreased volume $491,000
Lower gross profit due to the price mix
of merchandise sold $701,000
Sales allowances and discounts $270,000
Necessary inventory adjustments $451,000
Package design $ 21,000
New product design $ 24,000
Royalties $362,000
Overseas agent $ 60,000
Luggage stuffing labor and materials $ 58,000
Air freight in $ 46,000
Other Income ($ 6,000)
----------
$2,478,000
The lower sales volume reduced the gross profit by $491,000. The price mix of
the products sold, which compares the gross margins of products sold to the
prior fiscal year, accounted for approximately $701,000 of the reduction in the
gross profit. Sales allowances and discounts increased by $270,000 due to
increased demands by customers. Inventory adjustments increased due to obsolete
ans slow moving items of approximately $439,000. Package design expense
increased by $21,000 due to changes in packaging for new and existing products.
New product samples increased by $24,000 due to primarily to an increase in
samples for newly designed items. Royalties increased by $362,000 due to an
increase royalties paid for our Kathy Ireland exercise products and the Spalding
Rotaflex exerciser.
-11-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
During the fiscal year ended April 30, 1999, the Company hired an overseas agent
to supervise the production of our Sports bag/luggage products at a cost of
$60,000. Luggage stuffing labor materials increased by $58,000 because a larger
portion of the sales of these products were required to be prepared for display
prior to shipment to the customer. Air freight increased by $46,000 as it was
necessary to speed delivery of some products to customers. Other income
decreased due to lower interest income.
The Company anticipates that the gross profit will increase in fiscal 2000 due
primarily to increased sales and improved merchandise purchasing along with a
decreased need for reserves against inventory.
There can be no assurance that the Company will be successful in achieving its
anticipated increases in revenues or in its effort to improve purchasing
methods.
Operating expenses, exclusive of interest expense, of $3,543,000 for the fiscal
year ended April 30, 1999 were $1,194,000 more than operating expenses of
$2,349,000 for the fiscal year ended April 30, 1998. This increase is
represented approximately by changes in the following expenses:
Increase
(Decrease)
Research and Development $251,000
Shipping fees $106,000
Promotional and Selling Materials $593,000
Show Expenses $ 83,000
Trade Advertising $114,000
Telephone $ 13,000
Postage $ 14,000
Research and development cost increased by $251,000 due primarily to the
introduction of new products. Shipping expenses increased by $106,000 because of
a decrease in direct shipments to customers from overseas vendors. Promotional
and selling expenses increased by $593,000 due primarily to the cost of
producing and testing of an infomercial for the Company's Spalding Rotaflex
product. Show expenses increased by $83,000 due to increased costs of the
Company's participation in the Super Show. Trade advertising expenditures
increased by $114,000 because the Company is obligated to pay one percent of
Jeep luggage sales as advertising to Chrysler Corp. under a licensing agreement.
In addition the Company has started to utilize specialty magazines to advertise
the luggage products. Telephone and postage expenses increased by $13,000 and
$14,000, respectively.
The Company anticipates cost reductions in promotional expenses, advertising,
show expenses and research and development in the fiscal year ended April 30,
2000. No assurance can be given that the Company will be successful in its cost
saving efforts.
Interest expense for the fiscal year ended April 30, 1999 decreased by $70,000
from the fiscal year ended April 30, 1998. This reduction was the result of the
partial use of the proceeds of a stock offering, which was completed on December
27, 1997, to payoff current debt.
The Company's net loss $3,334,000 for the fiscal year ended April 30, 1999
represents a $3,602,000 change from a pretax profit of $268,000 for the fiscal
year ended April 30, 1998.
The Company expects a profit for the fiscal year ended April 30, 2000 primarily
as a result of the increased revenues and cost reductions outlined above. No
assurance can be given that the Company will be successful in achieving its
anticipated increases in revenues or in its cost saving efforts.
-12-
DYNAMIC INTERNATIONAL, LTD.
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The following table sets forth the result of operations for the periods
discussed above.
Fiscal Year Fiscal Year
Ended Ended
April 30, 1999 April 30, 1998
---------- ----------
Net Sales $6,633,000 $8,001,000
Other Income 35,000 42,000
---------- ----------
$6,668,000 $8,043,000
Cost of Goods
Sold 6,395,000 5,292,000
---------- ----------
Gross Margin 273,000 2,751,000
4.09% 34.20%
Operating Expenses 3,543,000 2,349,000
Interest 64,000 134,000
---------- ----------
3,607,000 2,483,000
Pretax Income (Loss) (3,334,000) 268,000
-13-
DYNAMIC INTERNATIONAL, LTD.
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RESULTS OF OPERATING FOR THE FISCAL YEAR ENDED APRIL 30, 1998 COMPARED TO THE
NINE MONTHS ENDED APRIL 30, 1997 AND THREE MONTHS ENDED JULY 31, 1996.
Financial results for the nine months ended April 30, 1997 have been restated
for a change in the method of determining the cost of inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Sales of $8,001,000 for the fiscal year ended April 30, 1998 were $1,475,000 or
16% less than combined sales of $9,476,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996 of $7,493,000 and $1,983,000,
respectively.
The Company's gross profit of $2,751,000 for the fiscal year ended April 30,
1998 was $376,000 or 12% less than the combined gross profit of $3,127,000 for
the nine months ended April 30,1997 and three months ended July 31, 1996 of
$2,588,000 and $539,000, respectively. The reduced gross profit is the result of
the lower sales for the fiscal year ended April 30, 1997. However, the gross
profit percentage for the fiscal year ended April 30, 1998 of 34.2% was 1.5%
higher than the combined gross profit percentage of 32.7% for the nine months
ended April 30, 1997 and three months ended July 31, 1996 of 34.2% and 27.0%,
respectively.
The Company believes that the decline in sales for the fiscal year is primarily
attributable to a shift in focus from increasing sales revenue to generating
revenues from merchandise that produces a higher gross profit. As a result the
decrease in sales of the Company's products were due to a decrease in sales to
one customer to whom the Company no longer wishes to sell products at prices
that would have an adverse impact on its gross profit percentage. The Company
believes that the decision to shift its focus from emphasis on revenues to
profit as discussed above, represents a positive development. Nevertheless,
there can be no assurance that the Company will continue to be successful in
attaining a higher gross profit percentage.
Operating expenses of $2,349,000 for the fiscal year ended April 30, 1998 were
$435,000 less than combined operating expense of $2,784,000 for the nine months
ended April 30, 1997 and three months ended July 31, 1996 of $2,227,000 and
$557,000, respectively.
Due to the application of fresh start accounting, the financial statements for
the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to reorganization. Therefore, a
discussion of the changes in operating expenses will compare the nine months
ended April 30, 1998 to the nine months ended April 30, 1997. Decreases for the
nine months ended April 30, 1998 compared to the nine months ended April 30,
1997 are represented approximately by net changes in the following expenses:
-14-
DYNAMIC INTERNATIONAL, LTD.
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DECREASE
(INCREASE)
Promotional expense ($240,000)
Product development ($40,000)
Shipping fees $244,000
Sales commissions $73,000
Salesman Salaries ($65,000)
Officers' salaries $76,000
Professional fees $221,000
Postage $10,000
Provision for bad debts $28,000
Depreciation $11,000
Promotional expenses increased by $240,000 primarily due to promotional fees
paid to two customers to promote sales of the Company's products. Product
development expenses increased $40,000 because the Company has hired a
consultant to develop new products and to further develop existing product
lines. Shipping fees decreased by $244,000 due to the decrease in sales and an
increase in direct sales to customers from the manufacturer. Sales commissions
decreased by $73,00 do to the decrease in revenues. Salesman salaries increased
by $65,000 due to the hiring of an executive Vice President of Sales. Officers'
salaries decreased by $76,000 due to the departure of the former president of
the Company in March 1997. Professional fees were reduced by $221,000 due to
decreased need for outside legal and accounting fees during the nine months
ended April 30, 1998. Postage decreased by $10,000. Provision for bad debts
decreased by $11,000. Depreciation expense decreased by $27,000. During the nine
months ended April, 30, 1998, the Company reported as prepaid expenses
approximately $480,000 in package design, displays and direct responses
advertising costs for several new products that were not introduced until after
April 30, 1998.
The Company's pretax profit of $268,000 for the fiscal year ended April 30, 1998
was $231,000 or 624% higher than the combined pretax profit of $37,000 which was
comprised of a $76,000 pretax loss for the three months ended July 31, 1996 and
a $113,000 pretax profit for the nine months ended April 30, 1997. During the
fiscal year ended April 30, 1998, the gross profit decreased by $376,00 due to
the decrease in volume. This decrease in gross profit was offset by a reductions
in operating expenses, interest expense and reorganization expenses of $435,000,
$122,000 and $50,000, respectively.
-15-
DYNAMIC INTERNATIONAL, LTD.
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The following table sets forth the results of operations for the periods
discussed above:
Reorganized Reorganized Predecessor
Company Company Company
Fiscal Year Nine Months Three Months
Ended Ended Ended
4/30/98 4/30/97 7/31/96
--------- --------- ---------
Sales 8,001,000 7,493,000 1,983,000
42,000 55,000 10,000
--------- --------- ---------
8,043,000 7,548,000 1,993,000
Cost of sales 5,292,000 4,959,000 1,454,000
--------- --------- ---------
Gross profit 2,751,000 2,589,000 539,000
Operating expenses 2,349,000 2,227,000 557,000
Interest expense 134,000 199,000 57,000
--------- --------- ---------
2,483,000 2,426,000 614,000
Reorganization expense 0 49,000 1,000
--------- --------- ---------
Pretax income(loss) 268,000 114,000 (76,000)
Tax 139,000 104,000 0
--------- --------- ---------
Net income(loss) 129,000 10,000 (76,000)
-16-
DYNAMIC INTERNATIONAL, LTD.
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED APRIL 30, 1999
During the fiscal year ended April 30, 1999, cash used by operating activities
amounted to $2,277,000. This was the result of a net loss and increases in
accounts receivable and due from supplier and inventory and a decrease in income
taxes payable of $3,334,000, $671,000, $85,000 and $79,000, respectively. These
uses of cash were offset by increase in accounts payable and accrued expenses
and reserve for bad debts and a decrease in prepaid expenses of $872,000,
$249,000 and $560,000, respectively.
Financing activies provided cash of $850,000 from banker's acceptances.
On April 30, 1998 the Company entered into an agreement with the Chase Manhattan
Bank ("Chase") for maximum borrowing of $1,500,000 in the form of letters of
credit and banker's acceptances. The agreement also provides for a security
interest in the inventory and notes and accounts receivable of the Company. In
addition, the agreement provides for the personal guarantee of the President and
major shareholder of the Company in the amount of $250,000. As of June 30, 1999
the Company's aggregate balance of $1,041,650 consisted of $850,000 in banker's
acceptances and $191,650 in outstanding letter of credit.
Investing activies used cash of approximately $39,000 for molds used in the
manufacture of products.
The Company anticipates a positive cash flow from operations for the fiscal year
ended April 30, 2000. This positive cash flow will be the result of the
anticipated profit and decreases in inventory, prepaid expenses and increased
accounts payable to be offset by an increase in account receivable. The Company
believes that the projected positive cash flow and the Chase Manhattan credit
line, current levels of inventory and accounts receivable will be sufficient to
sustain operations and working capital needs for the next twelve months. No
assurance can be given that the Company will be successful in achieving its
anticipated increases in revenues and cash flows.
-17-
DYNAMIC INTERNATIONAL, LTD.
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED APRIL 30, 1998
During the fiscal year April 30, 1998, cash used by operating activities
amounted to $2,090,000. This was the result of increases in prepaid expenses, as
discussed above, and decreases in accrued expenses of $609,000 and $2,806,000
respectively, which were offset by net income, decreases in accounts receivable
and due from suppliers, inventory and prepaid and refundable income taxes of
$129,000, $186,000, $967,00 and $14,000 respectively.
Investing activities use cash of $67,900 for molds related to a new product.
Financing activities provided cash of $3,689,000 as proceeds from a stock
offering of approximately $4,800,000, which was completed on December 27, 1997,
were used to pay accounts payable and accrued expenses of approximately
$2,800,000. The use of proceeds in this way produced the use of cash for
operating activities of $2,090,000. An additional $1,059,785 of the proceeds of
the stock offering was used to pay related party debt. The Company had a
positive cash flow of $1,532,000. The Company expects that based upon the cash
flow for the fiscal year ended April 30, 1998 and the anticipated future cash
flows, that the reorganization value in excess of amounts allocable to
identifiable assets of $112,000 as April 30, 1998 will be fully recoverable.
NINE MONTHS ENDED APRIL 30, 1997
During the fist nine months after the Company's reorganization, cash used in
operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase inventory by
$923,000 during the nine- month period. The increase in sales and the purchase
of larger volumes to take an anticipated increase in sales and the purchase of
larger volumes to take advantage of the decreased costs associated with the
higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254,
prepaid expenses decreased by $122,017, miscellaneous receivable decreased by
$132,379 and prepaid and refundable income taxes decreased by $252,046. These
amounts partially offset expenditures for inventory and payments to credits.
Cash of $332,957 provided by financing activities was primarily the result of a
$600,000 loan from MG Holding and was to pay the creditors in accordance with
the Company's Plan. Cash provided by financing activities was used to repay
$145,324 of the note payable to MG Holding. In addition, payments were made for
capital leases, insurance notes, and deferred stock offering costs of $29,656,
$62,020 and $30,043, respectively. The Company had a positive cash flow of
$38,586.
THREE MONTHS ENDED JULY 31, 1996
During the three months ended July 31, 1996, cash used by operating activities
amounted to $64,800. This was the result of a net loss of $76,400, increases in
accounts receivable and due from supplier, and prepaid expenses of $221,300 and
$100,600, respectively, which were offset by a decrease in inventory and an
increase in accounts payable and accrued expenses of $115,600 and $155,600 and
$155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance notes
payable of $77,200 were offset by repayments of insurance notes payable, and
repayments of capital lease obligation of $15,200 and $18,800 respectively. The
Company had a negative cash flow if $22,600 for three months ended July 31,1996.
-18-
DYNAMIC INTERNATIONAL, LTD.
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YEAR 2000 COMPLIANCE
Pursuant to a warehouse agreement with Achim Importing Co., Inc. ("Achim") which
is wholly owned by Marton Grossman, the Company's Chairman and President, the
Company relies exclusively on Achim's software and operating systems, financial
accounting systems and various other administrative functions. Achim has assured
the Company that it has reviewed its computer systems to identify those areas
that could be adversely affected by Year 2000 software failures and has taken
the appropriate steps to avoid Year 2000 problems. Currently, the Company cannot
predict the effect of the Year 2000 problem on entities with which it transacts
business and there can be no assurance it will not have a material adverse
impact on the Company's business, financial condition, results of operations or
cash flows.
-19-
DYNAMIC INTERNATIONAL, LTD.
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SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company's profits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
-20-
DYNAMIC INTERNATIONAL, LTD.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Marton B. Grossman 68 Chairman and President
Isaac Grossman 37 Vice Chairman, Treasurer and Secretary
Sheila Grossman 59 Director
William P. Dolan 46 Vice President--Finance
John Holodnicki 46 Vice President--Sales
Jack Pers 52 Vice President--Sales
Bernard Goldman 78 Director*
*Member of the Company's Audit Committee.
MARTON B. GROSSMAN has been the Chairman and Chief Executive Officer of
the Company since July 29, 1996. For the past 34 years, he has been President of
Achim, a privately-held company engaged in the import and export of window
coverings and accessories. In addition, he is President of MG Holding Corp., a
privately-held financial holding company. Mr. Grossman is the father of Isaac
Grossman, the Company's Vice Chairman, Treasurer and Secretary. Mr. Grossman
spends approximately 20% of his time working for the Company.
ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996, and Vice President of Achim since 1989. He is the son
of Marton B. Grossman, the Company's Chairman and President. Mr. Grossman spends
approximately 20% of his time working for the Company.
SHEILA GROSSMAN was elected a director in October 1997. From 1962 to
1987 she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
WILLIAM P. DOLAN has been the Company's Vice President-Finance since
July 1996. Prior thereto, he had been the Company's Treasurer and Secretary
since 1989. Mr. Dolan graduated from the William Paterson College of New Jersey
and is a Certified Public Accountant.
JOHN HOLODNICKI has been a Vice President--Sales at the Company since
1994. From 1981 to 1994, he was a Vice President--Sales at HIT Industries, an
importer of business computer cases. Mr. Holodnicki earned a degree in Marketing
from the University of Illinois in 1975.
JACK PERS has been a Executive Vice President--Sales at the company
since October 1998. He began working for the Company on a consulting basis in
August 1997 as Director of Product Development. His experience includes a Senior
Buyer position at Herman's Sporting Goods from 1973 to 1988, and National Sales
Manager at Marcy Fitness from 1989 - 1995.
BERNARD GOLDMAN was elected a member of the board in October 1997. Mr.
Goldman was the Chief Executive Officer of Goldman's Department Store, a chain
consisting of 12 stores, from 1957 to 1979. Mr. Goldman has been and continues
to be a member of the Board of Directors and an executive officer of a number of
community and charitable institutions and organizations.
-21-
DYNAMIC INTERNATIONAL, LTD.
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BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are three directors of the Company.
The bylaws permit the Board of Directors to fill any vacancy and the new
director may serve until the next annual meeting of stockholders or until his
successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board.
The underwriting agreement, for the stock offering completed on December 27,
1997, provides that the underwriter has the right to designate one member of the
Board of Directors for a period of three years following the consummation of the
Company's public offering on December 27, 1997. To date, no person has been
designated by the Underwriter.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
during the three fiscal years ended April 30, 1999 (I) to its Chief Executive
Officer, (ii) its other two Executive Officers and (iii) two additional
non-Executive Officers whose cash compensation exceeded $100,000 per year in any
such year:
SUMMARY COMPENSATION TABLE (1)(2)
NAME/PRINCIPAL YEAR ENDED ANNUAL COMPENSATION ALL OTHER
POSITION APRIL 30 SALARY BONUS COMPENSATION (3)
--------------- ---------- ------ ----- ----------------
MARTON B. GROSSMAN 1999 $0 $31,200
PRESIDENT & CHAIRMAN 1998 $0 $31,200
1997 $0 $31,200
ISAAC GROSSMAN 1999 $0 $32,240
DIRECTOR, TREASURER 1998 $0 $32,240
1997 $0 $32,240
WILLIAM P. DOLAN 1999 $112,249 $0
VICE PRESIDENT-FINANCE 1998 $112,976 $0
1997 $100,000 $0
JOHN HOLODNICKI 1999 $123,769 $0
VICE PRESIDENT 1998 $124,538 $0
1997 $120,000 $0
MARVIN COOPER (4) 1999 $0 $0
EXECUTIVE VICE PRESIDENT 1998 $0 $0
1997 $128,125 $0
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which does not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or 10%
of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.
(3) Consists of estimated portion of the fees payable to Achim under the
warehousing agreement attributable to Marton Grossman's and Isaac Grossman's
activities performed on behalf of the company. Marton Grossman is the sole
shareholder, and Isaac Grossman is an employee of Achim. SEE ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
(4) Mr. Cooper resigned his position in March 1997.
-22-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.
Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, were to have
been no less than $500,000, he would have been issued 400,000 shares. If the
Company's earnings before taxes for the fiscal year ending April 30, 1999, were
to have been no less than $1,000,000, he would have been issued 600,000 shares.
If the Company's earnings before taxes for the fiscal year ending April 30,
2000, are no less than $1,500,000, he will be issued 1,000,000 shares. The
stated earnings criteria are cumulative so that in the event of an earnings
shortfall during a fiscal year, shares relating to two fiscal years will be
issued provided that the Company, during the succeeding fiscal year, realizes
earnings that in the aggregate are equal to two years of earnings as set forth
in the Agreement. The Agreement also provides for piggyback registration rights
with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock that may be
issued to Marton Grossman under the Bonus Agreement:
Performance or Other
Number of Shares, Period Until Estimated Future Payments
Units or Other Maturation or Under Non-Stock
Name Rights Payout Price-Based Plans
---- ----------------- ------------------- -------------------------
Threshold Target Maximum
------------------------
Marton B. Grossman 2,000,000 April 30, 2000 * * *
*The number of shares to be issued in a particular fiscal year is based on the
criteria set forth above.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 1998 through April 30, 1999, other than Forms 4
that were filed late with respect to Messrs. Marton and Isaac Grossman relating
to intra-family stock transfers without consideration, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
beneficial owners were complied with.
401K PLAN
The Company terminated the 401K plan as of December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1999, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (I) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215, unless otherwise indicated.
-23-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
Shares Owned Beneficially
and of Record (1)
-------------------------------------
Name and Address No. of Shares % of Total
---------------- ------------- ----------
Marton B. Grossman (2) 2,842,977 64.4
Isaac Grossman 0 *
Sheila Grossman (2) 2,842,977 64.4
Bernard Goldman 0 *
2100 Boca West Drive
Laurel Oaks, FL
William P. Dolan 123 *
John Holodnicki 11 *
Jack Pers 0 *
All Officers and Directors
as a Group (8 persons) 2,843,111 64.4
* 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 2,516,614 shares registered in the name of Marton B. Grossman
and 326,363 shares held by a charitable family foundation (the "Foundation").
Mr. Marton Grossman and his wife are the directors of the Foundation. Marton and
Sheila Grossman disclaim beneficial ownership in the shares held by the
Foundation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530. MG
is wholly owned by Marton B. Grossman, the Company's Chairman and President. The
note was subsequently repaid by the Company through the issuance of 2,976,000
shares of Common Stock to MG. MG assigned the Common Stock to a trust for the
benefit of members of Mr. Grossman's family.
Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to
the Company to consummate the Plan and for related expenses. The Company issued
a promissory note to MG Holding evidencing the loan and granted it a security
interest in all of the Company's assets. The promissory note is to be paid in 24
monthly installments commencing September 5, 1996. The note accrues interest at
the Citibank prime rate plus 1%. The weighted average interest rate as of the
date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April
30, 1997, the Company had accrued interest in the amount of $37,219 in
connection with this loan. As of June 30, 1997, the amount of interest owed
amounted to $54,197. In July 1997, the Company and MG Holding agreed that no
principal or interest payments under the note would be due until the
consummation of an offering or the scheduled maturity of the note, whichever
occurred earlier. The note and all
-24-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
accrued interest was paid in full on December 23, 1997 with the proceeds of the
stock offering.
Pursuant to the Warehousing Agreement, Achim performs certain administrative
services on behalf of the Company. Under the Warehousing Agreement, Achim
assists, among other things, in the maintenance of financial and accounting
books and records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and credit checks on the Company's customers.
In consideration of these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30,000,000 to 3% for
sales of $60,000,000 or more.
For sales not originating at the warehouse, Achim receives a service fee in the
amount of 1.5% of the Company's invoiced sales to customers and account located
in the United States if payment is made by letter of credit and 1% if such
customers and accounts are located outside the United States, irrespective of
manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1999, the Company accrued approximately $288,926 in
fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
On April 30, 1998 the Company entered into a credit agreement with The Chase
Manhattan bank for maximum borrowings of $1,500,000 in the form of letters of
credit and banker acceptances. The agreement also provides for a security
interest in the inventory and notes and accounts receivable of the Company. The
agreement also provides for the personal guarantee of the President and major
shareholders of the Company in the amount of $250,000.
The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company. Other than the fees payable by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co.,
Inc" and ITEM 2. PROPERTIES.
-25-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual
report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
exhibits which are being filed herewith and the exhibits which are
incorporated herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the
fiscal year ended April 30, 1999.
-26-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
/S/Marton B. Grossman
By: ____________________________________
Marton B. Grossman
Chairman and President
Dated: 13th day of August, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below as of the 13th of August, 1999 by the
following persons on behalf of Registrant and in the capacities indicated.
/S/Marton B. Grossman /S/Sheila Grossman
- ----------------------------------- -----------------------------------
Marton B. Grossman Sheila Grossman
Chairman Director
/S/Isaac Grossman
- ----------------------------------- -----------------------------------
Isaac Grossman Bernard Goldman
Director Director
/S/William P. Dolan
- -----------------------------------
William P. Dolan
Vice President--Finance
(Chief Financial & Accounting Officer)
-27-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
EXHIBITS
1 Form of Underwriting Agreement (1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and
Dynamic Classics, Ltd. (2)
2.02 Second Amended and Modified Plan of Reorganization dated February
22, 1996 (the "Plan") (3)
2.03 Errata Sheet and Correction Statement with respect to the Plan
dated May 7, 1996 (3)
2.04 Order Confirming the Plan dated May 23, 1996 (3)
3.01 Certificate of Incorporation (2)
3.02 Bylaws (2)
4.01 Revised Form of Warrant Agreement to be entered into between the
Company and American Stock Transfer & Trust Company (1)
4.02 Form of Common Stock Certificate (2)
4.03(a) Form of A Warrant Certificate (1)
4.03(b) Form of B Warrant Certificate (1)
4.04 Form of Unit Certificate (1)
10.01 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
(5)
10.04 Warehousing and Service Agreement dated as of September 1, 1996
with Achim Importing Co., Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New
Century Marketing & Distributors, Inc. and Dynamic Insulated
Products, Inc. (1)
10.06 Bonus Agreement with Marton Grossman (1)
10.07 License Agreement with Spalding and Evenflo Companies Inc. dated
October 1, 1997. (7)
10.08 License Agreement with Connally Synergy Systems LLC dated December
17, 1997. (7)
10.09 Media Campaign Management Agreement with Script to Screen, Inc.
dated April 13, 1998. (7)
10.10 Infomercial Production Agreement with Script to Screen, Inc. dated
February 12, 1998. (7)
10.11 Exclusive Hand Held - Products Sponsorship Agreement with Power
Point Fitness International Ltd. dated July 15, 1999
-28-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
10.12 Consulting Agreement with Andrew Freirich dated July 1, 1999.
10.13 Licensing Agreement with Chrysler Corporation dated July 9, 1998.
10.14 Distribution Agreement with Guthy-Renker dated January 13, 1999.
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (5)
-29-
DYNAMIC INTERNATIONAL, LTD.
- --------------------------------------------------------------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-25425).
(2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996.
(3) Incorporated by reference to the Company's Report on Form 8-K filed October
3, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for
Dynamic Classics, Ltd. (File No. 0-8376).
(5) Incorporated by reference to the Annual Report on Form 10-K for 1996.
(6) Incorporated by reference to the Current Report on Form 8-K/A dated October
23, 1996
(7) Incorporated by reference to the Annual Report of Form 10K for 1998.
-30-
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page to Page
------------
Item 8: Financial Statements
Independent Auditor's Report............................................................. F-1
Consolidated Balance Sheets as of April 30, 1999 and 1998................................ F-2 - F-3
Consolidated Statements of Operations for the years ended April 30, 1999 and
1998, the nine months ended April 30, 1997, and the three
months ended July 31, 1996............................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended April 30,
1999 and 1998, the nine months ended April 30, 1997, and
the three months ended July 31, 1996..................................................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1999 and
1998, the nine months ended April 30, 1997, and the three
months ended July 31, 1996............................................................... F-6 - F-7
Notes to Consolidated Financial Statements............................................... F-8 - F-18
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended, the nine months ended April 30, 1997, and the three months ended
July 31, 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, the nine months ended
April 30, 1997, and the three months ended July 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 10 to the consolidated financial statements, the Company has
suffered a net loss of $3,333,725 and has utilized $2,276,899 in cash for
operating activities for the year ended April 30, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 10. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants
New York, New York
June 30, 1999
F-1
Item 8:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30,
---------------------------
1 9 9 9 1 9 9 8
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 109,514 $ 1,575,248
Accounts Receivable - Trade [Net of Allowance for
Doubtful Accounts of $371,685 and $122,685 in 1999
and 1998, Respectively] 1,268,913 810,447
Due from Suppliers -- 36,142
Inventory 2,444,460 2,359,022
Prepaid Expenses 109,003 669,133
Prepaid and Refundable Income Taxes 31,640 26,201
--------------- ---------------
Total Current Assets 3,963,530 5,476,193
--------------- ---------------
Property and Equipment:
Tools and Dies 746,774 775,839
Furniture and Equipment 102,205 102,205
Capitalized Equipment Leases 576,071 576,071
--------------- ---------------
Totals - At Cost 1,425,050 1,454,115
Less: Accumulated Depreciation (1,378,217) (1,329,269)
--------------- ---------------
Property and Equipment - Net 46,833 124,846
--------------- ---------------
Other Assets:
Security Deposits and Miscellaneous 13,612 2,050
Reorganization Value in Excess of Amount Allocable
to Identifiable Assets - Net -- 112,328
--------------- ---------------
Total Other Assets 13,612 114,378
--------------- ---------------
Total Assets $ 4,023,975 $ 5,715,417
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-2
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30,
---------------------------
1 9 9 9 1 9 9 8
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Banker's Acceptances Payable $ 850,000 $ --
Accounts Payable and Accrued Expenses - Non-Related 757,821 458,359
Accounts Payable and Accrued Expenses - Related Party 591,429 19,186
Income Taxes Payable -- 79,422
--------------- ---------------
Total Current Liabilities 2,199,250 556,967
--------------- ---------------
Commitment and Contingencies [6] -- --
--------------- ---------------
Stockholders' Equity:
Preferred Stock - $.001 Par Value, 10,000,000 Shares
Authorized; None Outstanding -- --
Common Stock - Par Value $.001 Per Share;
Authorized 50,000,000 Shares; Issued 4,418,798 Shares 4,419 4,419
Additional Paid-in Capital 4,869,796 4,869,796
Accumulated [Deficit] Retained Earnings (3,049,487) 284,238
--------------- ---------------
Totals 1,824,728 5,158,453
Less: Treasury Stock - At Cost - 540 Shares (3) (3)
--------------- ---------------
Total Stockholders' Equity 1,824,725 5,158,450
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 4,023,975 $ 5,715,417
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-3
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Predecessor
Company Company
Reorganized Company For the Nine For the Three
For the Year Ended Months Ended Months Ended
April 30, April 30, July 31,
------------------------- --------- --------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Revenues:
Sales $ 6,632,837 $ 8,001,138 $ 7,492,729 $ 1,983,164
Other Income 35,381 41,938 54,642 10,201
--------------- --------------- ---------------- ---------------
Total Revenues 6,668,218 8,043,076 7,547,371 1,993,365
Cost of Sales 6,394,734 5,291,768 4,959,319 1,454,637
--------------- --------------- ---------------- ---------------
Gross Profit 273,484 2,751,308 2,588,052 538,728
--------------- --------------- ---------------- ---------------
Operating Expenses:
Research and Development 310,287 60,493 4,042 --
Shipping Expense 389,154 273,459 452,093 116,894
Selling Expense 838,898 865,223 686,214 198,993
Advertising and Promotion 1,200,517 413,271 152,563 1,819
General and Administrative 803,997 736,738 931,683 238,791
Interest and Bank
Charges - Non-Related 64,356 8,441 21,462 4,174
Interest and Bank
Charges - Related Party -- 125,481 177,339 53,096
--------------- --------------- ---------------- ---------------
Total Operating Expenses 3,607,209 2,483,106 2,425,396 613,767
--------------- --------------- ---------------- ---------------
Reorganization Items:
Bankruptcy Administration Costs -- -- 48,874 1,325
--------------- --------------- ---------------- ---------------
[Loss] Income Before Provisions
for Income Taxes (3,333,725) 268,202 113,782 (76,364)
--------------- --------------- ---------------- ---------------
Income Tax Provision:
Current -- 139,251 103,700 --
Deferred -- -- -- --
--------------- --------------- ---------------- ---------------
Total Tax Provision -- 139,251 103,700 --
--------------- --------------- ---------------- ---------------
Net [Loss] Income $ (3,333,725) $ 128,951 $ 10,082 $ (76,364)
=============== =============== ================ ===============
[Loss] Income Per Share of
Common Shares $ (.75) $ .03 $ --
=============== =============== ================
Weighted Average Number of
Common Shares 4,418,258 3,655,758 3,198,258
=============== =============== ================
The earnings per share as it related to the predecessor company is not
meaningful due to the reorganization.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-4
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional [Deficit] Treasury Total
Common Paid-in Retained Stock - Stockholders'
Stock Capital Earnings At Cost Equity
------------ --------------- -------------- ------------ --------------
Balance - May 1, 1996 $ 17,444 $ 590,291 $ (637,237) $ (17,500) $ (47,002)
Net [Loss] for the three months
ended July 31, 1996 -- -- (76,364) -- (76,364)
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate Predecessor Equity
Accounts and to Reflect
New Issuance of Shares in
Connection with Fresh Start (1,450) (580,146) 713,601 17,497 149,502
------------ --------------- -------------- ------------ --------------
15,994 10,145 -- (3) 26,136
To Reflect 1 for 5 Reverse
Stock Split (12,795) 12,795 -- -- --
------------ --------------- -------------- ------------ --------------
Balance - July 31, 1996 3,199 22,940 -- (3) 26,136
Adjustment at the Date of the
Implementation of Fresh Start
Accounting for the Cumulative
Effect of Applying Retroactively
the New Method of Valuing
Inventories at August 1, 1996 -- -- 145,205 -- 145,205
Net Income for the nine months
ended April 30, 1997 -- -- 10,082 -- 10,082
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1997 3,199 22,940 155,287 (3) 181,423
Issuance of 20,000 Shares for
Legal Expenses in Connection
with the Public Offering 20 74,635 -- -- 74,655
Net Proceeds from Issuance of
1,200,000 Shares of Common
Stock [Offering Costs of
$1,251,924] in December 1997 1,200 4,772,221 -- -- 4,773,421
Net Income for the year ended
April 30, 1998 -- -- 128,951 -- 128,951
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1998 4,419 4,869,796 284,238 (3) 5,158,450
Net [Loss] for the year ended
April 30, 1999 -- -- (3,333,725) -- (3,333,725)
------------ --------------- -------------- ------------ --------------
Balance - April 30, 1999 $ 4,419 $ 4,869,796 $ (3,049,487) $ (3) $ 1,824,725
============ =============== ============== ============ ==============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-5
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Predecessor
Company Company
Reorganized Company For the Nine For the Three
For the Year Ended Months Ended Months Ended
April 30, April 30, July 31,
------------------------- --------- --------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Operating Activities:
Net [Loss] Income $ (3,333,725) $ 128,951 $ 10,082 $ (76,364)
Adjustments to Reconcile Net [Loss]
Income to Net Cash Provided by
[Used for] Operating Activities:
Depreciation and Amortization 161,276 80,489 87,681 26,191
Reserve for Bad Debt 249,000 (44,315) -- --
Loss on Disposal of Property
and Equipment 67,900 -- -- --
Interest Converted to Principal -- -- 11,439 36,670
Reorganization Item:
Cash Distribution -- -- (515,638) --
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable and Due
from Suppliers (671,324) 186,230 482,254 (221,255)
Inventory (85,438) 966,773 (923,565) 115,616
Prepaid Expenses 560,130 (608,861) 122,017 (100,596)
Miscellaneous Receivables -- 2,658 132,379 --
Prepaid and Refundable Income
Taxes (5,439) 13,713 252,046 (812)
Security Deposits and Other (11,562) 2,600 -- --
Increase [Decrease] in:
Accounts Payable and
Accrued Expenses - Non-Related 299,462 (2,805,591) (56,766) 155,784
Accounts Payable and
Accrued Expenses - Related Party 572,243 -- -- --
Income Taxes Payable (79,422) (12,450) 103,700 --
--------------- --------------- ---------------- ---------------
Net Cash - Operating Activities -
Forward (2,276,899) (2,089,803) (294,371) (64,766)
--------------- --------------- ---------------- ---------------
Investing Activities:
Purchase of Property and Equipment -
Forward $ (38,835) $ (67,900) $ -- $ --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-6
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Predecessor
Company Company
Reorganized Company For the Nine For the Three
For the Year Ended Months Ended Months Ended
April 30, April 30, July 31,
------------------------- --------- --------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Net Cash - Operating Activities -
Forwarded $ (2,276,899) $ (2,089,803) $ (294,371) $ (64,766)
--------------- --------------- ---------------- ---------------
Net Cash - Investing Activities -
Forwarded (38,835) (67,900) -- --
--------------- --------------- ---------------- ---------------
Financing Activities:
Proceeds from Banker's Acceptances 850,000 -- -- --
Proceeds from Note Payable -
Related Party -- -- 600,000 --
Repayment from Notes Payable -
Related Party -- -- (145,324) --
Repayment of Loan Payable -
Related Party -- (1,059,785) -- --
Repayment of Capital Lease Obligations -- (24,228) (29,656) (18,812)
Proceeds from Insurance Note Payable -- -- -- 77,225
Repayment of Insurance Note Payable -- -- (62,020) (15,205)
Payment of Deferred Offering Costs -- -- (30,043) --
Net Proceeds from Issuance of
1,200,000 Share Common Stock -- 4,773,421 -- --
--------------- --------------- ---------------- ---------------
Net Cash - Financing Activities 850,000 3,689,408 332,957 43,208
--------------- --------------- ---------------- ---------------
[Decrease] Increase in Cash and
Cash Equivalents (1,465,734) 1,531,705 38,586 (21,558)
Cash and Cash Equivalents -
Beginning of Periods 1,575,248 43,543 4,957 26,515
--------------- --------------- ---------------- ---------------
Cash and Cash Equivalents -
End of Periods $ 109,514 $ 1,575,248 $ 43,543 $ 4,957
=============== =============== ================ ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 40,323 $ 25,451 $ 1,553 $ 203,964
Income Taxes $ 53,923 $ -- $ -- $ --
Supplemental Disclosures of Non-cash Investing And Financing Activities:
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 34,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.
The Company issued 20,000 shares for legal services valued at $74,655 in
connection with the Company's public offering [See Note 11].
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Summary of Significant Accounting Policies
The Company - Dynamic International, Ltd. [the "Company"] is engaged in the sale
and distribution of a diverse line of exercise equipment and related sports
accessories which are distributed throughout the United States.
Revenue - Revenue is recognized when the goods are shipped to the customer.
Fresh Start Reporting - Financial accounting during a Chapter 11 proceeding is
prescribed in "Statement of Position 90-7 of the American Institute of Certified
Public Accountants," titled "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ["SOP 90-7"], which the Company adopted effective
July 31, 1996. The emergence from the Chapter 11 proceeding resulted in the
creation of a new reporting entity without any accumulated deficit and with the
Company's assets and liabilities restated at their estimated fair values [also
see Note 2 Reorganization and Management Plan]. Because of the application of
fresh start reporting, the financial statements for periods after reorganization
are not comparable in all respects to the financial statements for periods prior
to reorganization.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the wholly owned inactive subsidiary. All
significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Inventories - Inventories consist principally of finished goods and are stated
at the lower of cost; first-in, first-out method, ["FIFO"] or market.
Property, Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is provided generally by accelerated methods over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are charged against income. Estimated useful lives used in calculating
depreciation are as follows:
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
Capitalized Equipment Leases 5 years to 7 years
Advertising and Promotion - Advertising and promotion expense, primarily
comprised of print media distributed to current and potential customers, is
expensed as incurred.
Prepaid Expenses - The Company had deferred certain packaging design, displays,
and direct response advertising costs for several new products that were not
introduced as of April 30, 1998. These costs of approximately $480,000 were
classified as prepaid expenses in 1998 and were expensed in the year ended April
30, 1999.
Loss Per Share - The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share"; which
is effective for financial statements issued for periods ending after December
15, 1997. Accordingly, earnings per share data in the financial statements for
the years ended April 30, 1999 and 1998, have been calculated in accordance with
SFAS No. 128. Prior periods earnings per share data have been recalculated as
necessary to conform prior years data to SFAS No. 128. Prior periods' earnings
per share data have been restated to give retroactive effect for the one for
five reverse stock split in September of 1997.
F-8
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[1] Summary of Significant Accounting Policies [Continued]
Loss Per Share [Continued] - SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15, "Earnings per Share," and replaces its primary earnings per
share with a new basic earnings per share representing the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period. SFAS No. 128 also requires a dual presentation of basic and
diluted earnings per share on the face of the statement of operations for all
companies with complex capital structures. Diluted earnings per share reflects
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period, such as common
shares that could result from the potential exercise or conversion of securities
into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Potential common shares of 5,120,000 are not currently dilutive, but may be in
the future.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Stock Options and Similar Equity Instruments Issued to Employees - The Financial
Accounting Standards Board ["FASB"] issued Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," in
October 1995. SFAS No. 123 uses a fair value based method of accounting for
stock options and similar equity instruments as contrasted to the intrinsic
value based method of accounting prescribed by Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
adopted SFAS No. 123 on April 1, 1996 for financial note disclosure purposes and
will continue to apply APB Opinion No. 25 for financial reporting purposes.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets - The
excess reorganization value was to be amortized over a period of eleven years on
the straight line basis [see Note 2]. Management evaluated the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of April 30, 1999, management believes the
asset to be impaired because of current period operating and cash flow losses
and the excess reorganization value was written off as a result of the
uncertainty of the projected discounted cash flows from related operations [See
Note 2].
F-9
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Reorganization and Management Plan
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. A Plan of Reorganization was
filed by the Company on October 30, 1995 and subsequently amended and modified
on February 22, 1996. On April 5, 1996, the creditors voted to accept the
amended and modified Plan [the "Plan"], and on May 23, 1996, the court confirmed
the Plan. The Plan was substantially consummated in August 1996. For accounting
purposes, the Company assumed that the Plan was consummated on July 31, 1996.
As contemplated by the Plan, a new company, Dynamic International, Ltd. was
formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic
International, Ltd. The capital structure and the balance sheet of the combined
entity, immediately after the merger, were substantially the same as those of
the company prior to the merger. The "new common stock" is referred to below as
the common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the
bankruptcy proceeding totaled approximately $17.2 million. The Plan discharged
such claims through distributions of cash of approximately $515,000 and issuance
of shares of new common stock. The cash distributions were paid in August 1996.
A total of 3,198,798 shares of new common stock were issued on July 25, 1996 out
of which 2,976,000 shares were issued to one secured creditor, which also
satisfied $15,923 of loans made by the chief executive officer of the Company to
the Company (see Note 4); 160,000 shares were issued to unsecured creditors, and
62,798 shares were issued to the reconfirmation common stock equity interest
holders.
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the reorganization value of
the Company determined by projecting cash flows over an eleven year period and
discounting such cash flows at a cost of capital rate of 15% and the statutory
federal, state and local tax rates currently in effect. The discounted residual
value at the end of the forecast period is based on the capitalized cash flows
for the last year of that period. Cash distributions and the estimated stock
distribution value totaling $531,561 has been recorded as other liabilities as
of April 30, 1996. The gain of approximately $16.7 million resulting from the
excess of the allowed claims over the total value of the cash and the common
stock distributed to the secured and unsecured creditors has been recorded as an
extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and assumptions.
Accordingly, there will usually be differences between projections and actual
results because events and circumstances frequently do not occur as expected,
and those differences may be material.
As part of the reorganization, the Company will continue to sell hand exercise,
light exercise equipment and luggage and sports bags. Management believes it can
increase revenues by increasing its focus on direct response marketing by
developing infomercials to market these products. Management believes these
increased marketing efforts, adequate financing through its related entity,
Achim Importing, discontinuance of the unprofitable products, and sustainable
gross profit percentages, could be effectively implemented within the twelve
month period. The Company adopted "fresh-start reporting" in accordance with
Statement of Position ["SOP"] 90-7 issued by the American Institute of Certified
Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption of
"fresh-start reporting" if the reorganization value of the emerging entity
immediately before the date of confirmation is less than the total of all
postpetition and allowed claims, and if holders of existing voting shares
immediately before confirmation receive less than 50 percent of the voting
shares of the emerging entity, both conditions of which were satisfied by the
Company. Although the confirmation date was May 23, 1996, fresh-start reporting
was adopted on July 31, 1996. There were no material fresh-start related
adjustments during the period May 23, 1996 to July 31, 1996.
F-10
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[2] Reorganization and Management Plan [Continued]
Under fresh start accounting, all assets and liabilities are restated to reflect
their reorganization value, which approximates book value at date of
reorganization. Therefore, no reorganization value has been allocated to the
assets and liabilities. In addition, the accumulated deficit of the predecessor
company at July 31, 1996 totaling $713,601 was eliminated, and at August 1,
1996, the reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of amounts
allocable to identifiable assets was being amortized over an eleven year period
on the straight line method. Amortization expense for the nine months ended
April 30, 1997, and the years ended April 30, 1998 and 1999 was $9,108, $12,144,
and $112,328, respectively. As discussed in Note 1, management believes the
asset to be impaired and has chosen to write off the balance of $100,185 as of
April 30, 1999 to a fair value of $-0-.
[3] Inventories/Change in Method of Accounting for Inventory
The inventories consist of finished goods. During the three month period ended
January 31, 1998, the Company changed its method of determining the cost of
inventories from the LIFO method to the FIFO method. Under the current economic
environment of low inflation, the Company believes that the FIFO method will
result in a better measurement of operating results. This change has been
applied by retroactively restating the accompanying consolidated financial
statements. The balance of retained earnings as of August 1, 1997 [see note 2
reorganization and management plan] and April 30, 1997 have been adjusted for
the effect [net of taxes] of applying retroactively the new method of valuing
inventories.
[4] Related Party Transactions
Pursuant to a Warehouse and Service Agreement dated as of September 1, 1996 [the
"Warehousing Agreement"] between the Company and a related party [the "Entity"]
wholly owned by a major stockholder, the Entity performs certain administrative
services on behalf of the Company. Under the Warehousing Agreement, the Entity
assists, among other things, in the maintenance of financial and accounting
books and records, in the preparation of monthly financial accounts receivable
aging schedules and other reports and in the performance of credit checks on the
Company's customers. In consideration for these services, the Entity 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, the Entity receives a service fee in the amount of
1.5% of the Company's invoiced sales to customers and accounts located in the
United States if payment is made by letter of credit and 1% is such customers
and accounts are located outside the United States, irrespective of manner of
payment. In addition, under the Warehousing Agreement, the Entity provides
warehousing services consisting of receiving, shipping, and storing of the
Company's merchandise. The Company pays the Entity a monthly fee of 3% of its
invoiced sales originating at the warehouse in connection with these warehousing
services performed by the Entity under the Warehousing Agreement.
F-11
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[4] Related Party Transactions [Continued]
The Warehousing Agreement had a term of two years and was renewed on September
1, 1998 for another one year period. This agreement will automatically renew
from year to year unless written notice of termination is given at least six
months prior to the commencement of a renewal period. During the fiscal years
ended April 30, 1999 and 1998, the Company accrued $289,415 and $183,095 in fees
under the Warehousing Agreement. Total warehousing and administrative expenses
charged to operations for the year ended April 30, 1999 were $289,415, with a
balance due of $308,601 at April 30, 1999, for the year ended April 30, 1998
were $183,095 of which $19,186 was the balance due at April 30, 1998, for the
nine months ended April 30, 1997 were approximately $364,000, and for the three
months ended July 31, 1996 were approximately $95,000.
The related party has purchased inventory for the Company and has charged the
Company for the invoiced amount of the inventory. In addition, pursuant to an
unwritten understanding, the related party arranges for the issuance by its
financial lender of letters of credit in favor of the Company's oversea supplier
thereby enabling the Company to finance the purchases of its inventory.
Interest expense charged to operations for the year ended April 30, 1999 was
$-0-, for the year ended April 30, 1998 was $65,568, for the nine months ended
April 30, 1997 was $67,898 and $16,746 for the three months ended July 31, 1996.
Other amounts payable to the related party totaled $282,828 and $-0-,
respectively, at April 30, 1999 and 1998. Such amounts represent unpaid
inventory purchases and various fees due to the related party. The amounts
payable for the purchase of inventory beared interest at the Citibank prime rate
plus 1% from September 1996 to April 1997 and the Citibank prime rate plus 3%
prior to September 1996. The prime rate used was 8.25% for the period September
1996 to April 1998 and 8.5% for the period prior to September 1996 . Interest
expense charged to operations was $59,913 for the year ended April 30, 1998,
$109,441 for the nine months ended April 30, 1997, and $36,350 for the three
months ended July 31, 1996. The weighted average interest rate at April 30, 1998
and 1997 was 9.25%. The related party, as of May 1998, no longer charges
interest on amounts paid on behalf of the Company for inventory purchases and
various other fees.
[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.
Income tax liabilities at April 30, 1999 and 1998 included in income taxes
payable consist of the following:
1 9 9 9 1 9 9 8
------- -------
Current taxes $ -- $ 79,422
Deferred taxes:
Federal -- --
Other income and franchise taxes -- --
-------------- --------------
Total Income Tax Liability $ -- $ 79,422
-------------------------- ============== ==============
F-12
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[5] Income Taxes [Continued]
At April 30, 1999, there are temporary differences that would result in a
short-term deferred tax asset of approximately $225,000 arising primarily from
valuation allowances relating to accounts receivable and inventory. The Company
also has net operating losses of approximately $2,700,000 and deferred
amortization of approximately $100,000 resulting in a long-term deferred asset
of approximately $1,280,000.
These assets, both short-term and long-term, have been reduced to zero by a
valuation allowance of approximately $1,505,000 due to the uncertainty that the
Company will be able to generate sufficient taxable income in the future
necessary to utilized these assets.
The net operating losses will expire in fiscal 2014.
There are no temporary differences that would result in a deferred tax asset or
liability at April 30, 1998.
A summary of the provision [credit] for income taxes is as follows:
Years ended
April 30,
-------------------------
1 9 9 9 1 9 9 8
------- -------
Current:
Federal $ -- $ 51,490
State and Local -- 27,932
-------------- ---------------
-- 79,422
-------------- ---------------
Deferred:
Federal -- --
State and Local -- --
-------------- ---------------
-- --
-------------- ---------------
$ -- $ 79,422
============== ===============
The reconciliation of the federal statutory income tax expense [credit] to the
Company's actual income tax [credit] is as follows:
Three
Nine months months
Years ended ended ended
April 30, April 30, July 31,
----------------------- --------- --------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
U.S. Federal Income Taxes at Statutory Rate $ (1,134,000) $ 91,189 $ 75,900 $ --
Change in Valuation Allowance 1,506,300 -- -- --
Benefit of Surtax Exemption -- (6,363) -- --
Tax Effect of Permanent Differences 1,800 1,020 5,400 --
State Income Taxes, Net of Federal Benefit (374,100) 33,767 25,000 --
Underaccrual of Prior Year's Federal Income Tax -- 23,825 -- --
Other -- (4,187) (2,600) --
-------------- ------------- ------------- ----------
$ -- $ 139,251 $ 103,700 $ --
============== ============= ============= ==========
F-13
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[6] Commitments and Contingencies
[A] Royalty Obligations - The Company has entered into various royalty,
licensing, and commission agreements for products sold by the Company. These
agreements provide for minimum payments and a percentage of specific product
sales, over a period of one to eight years. Royalty expense for the year ended
April 30, 1999 was approximately $788,000, for the year ended April 30, 1998 was
approximately $426,000, for the nine months ended April 30, 1997 was
approximately $353,000 and for the three months ended July 31, 1996 was
approximately $94,000.
[B] 401(k) Plan - On January 1, 1990, the Company adopted a 401[k] plan. The
plan was officially terminated by the Board of Directors as of December 31,
1997.
The 401[k] expense amounted to $-0- for the year ended April 30, 1999 and 1998,
and for the period May 1, 1996 to April 30, 1997.
[C] Litigation - In the normal course of its operations, the Company has been
named as a defendant in a patent infringement lawsuit. Company counsel has
advised the Company that an unfavorable outcome with respect to this claim is
unlikely and it is not possible to estimate a range of potential loss.
[D] Consulting Agreement - The Company had an unwritten agreement for $5,000
month to month for consulting services in connection with new product
development. This agreement was terminated in November 1998.
[E] Infomercial Production Agreement - On February 12, 1998, the Company entered
into an infomercial production agreement to produce an infomercial for a total
commitment of $284,000. As of April 30, 1998, $142,000 was paid under this
agreement and was classified as a prepaid expense. The entire amount was
expensed in fiscal 1999.
[7] Major Customers
During the year ended April 30, 1999, sales to three major customers were
approximately 25%, 20%, and 14% [$1,647,000, $1,341,000 and $928,000,
respectively] of the Company's net sales. At April 30, 1999, accounts receivable
from these customers totaled $861,000. There were no material receivables
subject to foreign currency fluctuations.
During the year ended April 30, 1998 sales to major customers were approximately
$2,007,985. At April 30, 1998 accounts receivable from these customers totaled
$262,246.
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, 1999 and 1998 such excess balances totaled $121,915 and
$1,518,673, respectively. The Company has not experienced any losses and
believes it is not exposed to any significant credit risk from cash and cash
equivalents.
F-14
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[8] Credit Risk/financial Instruments [Continued]
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that it
does not have an accounts receivable credit risk exposure beyond the allowance
provided. The Company does not require collateral or other security to support
financial instruments subject to credit risk.
[9] Significant Risks And Uncertainties
[A] The Company's exercise products compete with products marketed and sold by a
number of companies. The Company's main competitors in this area possess far
greater financial and other resources, including sales forces, than the Company.
However, the Company believes that as a result of its ability to use trademark
names for which it pays royalties, it will be able to retain its share of the
market. Nevertheless, there can be no assurance that the Company will be able to
effectively compete with these companies as well as with other smaller entities.
The Company's luggage products compete with products designed by a number of the
largest companies in the industry. The Company believes that because of its
concentration on the upscale lifestyle and more specialized leisure market that
are associated with its use of trademark names, the Company will be able to
continue to grow its luggage business. Nevertheless, there can be no assurance
that the Company will be able to effectively compete with these companies as
well as with other smaller entities.
[B] Most of the Company's products are purchased from the Indonesia, Taiwan, and
the United States. 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] Going Concern
The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and continuation of
the Company as a going concern. The Company has incurred a net loss of
$3,333,725 for the year ended April 30, 1999, and utilized $2,276,899 in cash
for operating activities for the year ended April 30, 1999. These factors create
uncertainty whether the Company can continue as a going concern. The Company's
plans to mitigate the effects of the uncertainties are to attain its projected
positive cash flows from operations as a result of an improved profitability
which is projected as a result of anticipated revenue growth with large
customers along with implementing its plan on cutting operational expenses.
Management believes that these plans can be effectively implemented in the next
twelve months. The Company believes it will achieve profitability and positive
cash flow in the next twelve months. The Company's ability to continue as a
going concern is dependent on the implementation and success of these plans. The
financial statements do not include any adjustments in the event the Company is
unable to continue as a going concern. There can be no assurance that
management's plans to reduce operating losses will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-15
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[11] Capital Stock
[A] Public Offering - On December 22, 1997, the Company completed a public sale
of 1,200,000 units, each consisting of one share of common stock, one Class A
Warrant and one Class B Warrant. Each Class A warrant entitled the holder to
purchase one share of common stock at $6 until June 12, 1999 (the expiration
date of these securities has been extended until June 12, 2000). Each Class B
warrant entitles the holder to purchase one share of common stock at $10 until
December 12, 2000. In addition, the Company entered into a unit purchase option
from the underwriter to purchase an aggregate of 120,000 units at a subscription
price of $8.25 per unit commencing December 12, 1998 and expiring December 11,
2002. Each unit purchase option to the underwriter consists of one share of
common stock, one Class A warrant to purchase one share of common stock at $9.90
per share and one Class B warrant to purchase one share of common stock at
$16.50 per share. The net proceeds of approximately $4,800,000 were being used
for the repayment of related party debt, purchase of inventory, general
corporate services, and working capital.
The Company entered into a two year consulting agreement with the underwriter to
provide financial consulting services for a fee of $20,000.
As part of the consideration of its services in connection with the registration
statement, the Company agreed to issue to the underwriter, for nominal
consideration, warrants to purchase up to 120,000 units at an exercise price of
$8.25 per unit for a period of five years. The Class A Warrants and Class B
Warrants underlying the units included in the underwriter's warrants will be
exercisable at a price of $9.90 and $16.50 per share, respectively, or 165% of
the then exercise price of the warrants offered to the public for a period of
five years commencing with the closing of the registration statement. The
non-cash cost of such warrants, representing a cost of raising capital, will be
recorded as a charge and credit to additional paid-in capital when the warrants
are issued. As capital in nature, they are not compensatory.
The Company issued 20,000 shares for legal services valued at $74,655 in
connection with the Company's public offering.
[B] Earn Out Agreement - In March 1997, the Company entered into an agreement
with Marton Grossman, the Company's chairman and president which provides for
the issuance to Mr. Grossman an aggregate 2,000,000 shares of common stock if
the Company reaches certain earnings criteria as follows:
Earnings Before Shares to
Year Ending Income Tax Be Issued
----------- --------------- ---------
April 30, 1998 $ 500,000 400,000
April 30, 1999 $ 1,000,000 600,000
April 30, 2000 $ 1,500,000 1,000,000
If the earning criteria is not met in any one of the above years, but is
cumulatively met in the subsequent year, then the number of shares to be issued
will be the cumulative number of shares at that year end. Issuance of the shares
will result in compensation expense to the Company. Compensation expense will be
measured based on the fair value of the shares at the time the performance
conditions are achieved. Determination will be based on the best estimate of the
outcome of the performance condition. Compensation will be recognized in the
periods in which the performance conditions are achieved.
The Company did not meet the performance conditions for the years ended April
30, 1999 and 1998.
F-16
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[12] New Authoritative Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires that such costs to be expensed as
incurred. SOP 98-5 applies to all nongovernmental entities and is generally
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
previously have not been issued. The adoption of SOP 98-5 is not expected to
have a material impact on results of operations, financial position, or cash
flows of the Company as the Company's current policy is substantially in
accordance with SOP 98-5.
The Financial Accounting Standards Board ["FASB"] has had on its agenda a
project to address certain practice issues regarding Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The FASB
plans on issuing various interpretations of APB Opinion No. 25 to address these
practice issues. The proposed effective date of these interpretations would be
the issuance date of the final Interpretation, which is expected to be in
September 1999. If adopted, the Interpretation would be applied prospectively
but would be applied to plan modification and grants that occur after December
15, 1998. The FASB's tentative interpretations are as follows:
* APB Opinion No. 25 has been applied in practice to include in its definition
of employees, outside members of the board or directors and independent
contractors. The FASB's interpretation of APB Opinion No. 25 will limit the
definition of an employee to individuals who meet the common law definition
of an employee [which also is the basis for the distinction between
employees and nonemployees in the current U.S. tax code]. Outside members of
the board of directors and independent contractors would be excluded from
the scope of APB Opinion No. 25 unless they qualify as employees under
common law. Accordingly, the cost of issuing stock options to board members
and independent contractors not meeting the common law definition of an
employee will have to be determined in accordance with FASB Statement No.
123, "Accounting for Stock-Based Compensation," and usually recorded as an
expense in the period of the grant [the service period could be prospective,
however, see EITF 96-18].
F-17
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[12] New Authoritative Pronouncements [Continued]
* Options [or other equity instruments] of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by the
employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies only; it
would not apply to equity method investees or joint ventures.
* If the terms of an option [originally accounted for as a fixed option] are
modified during the option term to directly change the exercise price, the
modified option should be accounted for as a variable option. Variable grant
accounting should be applied to the modified option from the date of the
modification until the date of exercise. Consequently, the final measurement
of compensation expense would occur at the date of exercise. The
cancellation of an option and the issuance of a new option with a lower
exercise price shortly thereafter [for example, within six months] to the
same individual should be considered in substance a modified [variable]
option.
* Additional interpretations will address how to measure compensation expense
when a new measurement date is required.
[13] Debt
On April 30, 1998, the Company entered into a credit agreement with The Chase
Manhattan Bank for maximum borrowings of $1,500,000 in the form of letters of
credit and bankers acceptances. The agreement also provides for a security
interest in the inventory and notes and accounts receivable of the Company. The
agreement also provides for the personal guarantee of the President and major
shareholder of the Company in the amount of $250,000. At April 30, 1999,
$277,025 is available under the letters of credit and bankers acceptances.
Banker's acceptances totaling $850,000 are outstanding at April 30, 1999 with
maturity dates ranging from June to September of 1999. The weighted average
interest rate at April 30, 1999 was 8.5%.
[14] Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Values of Financial Instruments," requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, and short-term debt, it was assumed that the carrying
amount approximated fair value because of the near term maturities of such
obligations.
F-18
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders
Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic
International, Ltd and its subsidiary as of April 30, 1999 and 1998, and for the
years then ended, the nine months ended April 30, 1997, and the three months
ended July 31, 1996 is included on page F-1 of this Form 10-K. In connection
with our audit of such financial statements, we have also audited the related
accompanying financial statement Schedule II - Valuation and Qualifying Accounts
for the years ended April 30, 1999 and 1998, the nine months ended April 30,
1997, and the three months ended July 31, 1996.
In our opinion, the financial statements schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
June 30, 1999
F-19
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Reorganized Predecessor
Company Company
Reorganized Company For the Nine For the Three
For the Year Ended Months Ended Months Ended
April 30, April 30, July 31,
------------------------ --------- --------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- -------
Allowance for Doubtful Accounts
Balance - Beginning $ 122,685 $ 167,000 $ 167,000 $ 167,000
Additions Charged to Income 249,000 -- -- --
Recovery of Uncollectible Accounts - Net -- -- -- --
Writeoffs of Uncollectible Amounts -- (44,315) -- --
-------------- --------------- ---------------- ---------------
Allowance for Doubtful Accounts
Balance - Ending $ 371,685 $ 122,685 $ 167,000 $ 167,000
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F-20