ITEM 1. BUSINESS
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the design, marketing and sale of a diverse line of hand exercise and light exercise equipment, including hand grips, running weights, jump ropes and aerobic steps and slides. It markets these products under the licensed trademarks SPALDING(TM) and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM). In addition, it designs and markets sports bags and luggage, which are marketed primarily under the licensed name JEEP(TM) and under its own names PROTECH(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 ("CNA"), 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, CNA sued the Company for monetary damages, alleging, among other things, breach of contract. The Company and CNA subsequently settled the matter by releasing each other from any claims and allowing CNA 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 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 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 of reorganization, the Company, then known under the name DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of changing its state of incorporation. See ITEM 3. LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PRODUCTS
EXERCISE EQUIPMENT - The Company's line of exercise equipment consists primarily of handheld products, including dumbbells, ankle and wrist weights, hand grips, jump ropes, exercise suits, slimmer belts and strength training products. In addition, the Company markets light weight equipment such as aerobic steps and slides and exercise mats. The Company also carries a line of small electronic devices designed to monitor physical activity such as stopwatches, pedometers, pulse meters and calorie counters.
SPORTS BAGS/LUGGAGE - The Company's line of sports bags/luggage consists primarily of duffle bags, weekend bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases. Some of the models are equipped with wheels and/or retractable handles.
OTHER PRODUCTS - It is anticipated that in September 1997, the Company will begin marketing an insulated bag incorporating a wrap-around gel freeze pack with the ability to cool and preserve food and other products for an extended period of time. The Company, through a wholly-owned subsidiary, obtained the exclusive rights to the patents underlying the technology as well as the trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under which the products are sold. See "Intellectual Property"--"License Agreements" on the next page.
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 ofdesign patents with respect to certain of its products. See "Intellectual Property." 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 $57,000 on design activities, including fees to designers and patent attorneys. The Company may, from time to time, utilize the services of consultants for product and package design.
Most of the Company's products are manufactured in the Philippines, Taiwan, and Hong Kong, which in the most recent fiscal year accounted for approximately 38%, 27%, and 10% of the Company's products, respectively. In addition, the Company's products are manufactured in the United States, People's Republic of China, and Indonesia. Exercise equipment is usually shipped by the manufacturers to the Company within 45 days of the placement of an order. Orders for sports bags/luggage, which for the most part are produced in the Philippines and China, usually require a period of 90 to 120 days before they are shipped. The Company ordinarily has its products manufactured based on purchase orders and it has no long term relationships with any of its manufacturers. The Company believes that, if necessary, it will be able to obtain its products from firms located in other countries at little if any additional expense. As a consequence, the Company believes that an interruption in deliveries by a manufacturer located in a particular country will not have a material adverse impact on the business of the Company. Nevertheless, because of political instability in a number of the supply countries, occasional import quotas and other restrictions on trade or otherwise, there can be no assurance that the Company will at all times have access to a sufficient supply of merchandise.
SALES AND MARKETING The Company sells its products on a wholesale basis only. Most of its products are sold to catalog showrooms, drug chains, discount stores and sporting goods chains. For the fiscal year ended April 30, 1997 approximately 25% and 13% of the Company's revenues were derived from sales to Kmart and Service Merchandise, respectively. No other customer accounted for more than 10% of the Company's revenues. For the fiscal year ended April 30, 1997, sales of exercise equipment accounted for approximately 53% of the Company's revenues while 47% of the Company's revenues were derived from the sale of sports bags/luggage.
The Company sells its products primarily through independent sales agents on a commission-only basis. The Company currently engages approximately 23 sales agents either on an individual basis or through independent sales organizations. Although it has written agreements with a number of its agents, all of such agreements are terminable at will. The Company has no long term arrangements with any of its agents. The Company usually pays commissions ranging from 1% to 5% of the net sale price of its products. The Company believes its sales agents sell products exclusively on behalf of the Company.
In addition, on a small scale, the Company markets existing products to retailers for resale under their own private labels. The Company has already begun deliveries to Service Merchandise Co. and expects to start deliveries to other retailers in the fall of 1997. Although the scope of this marketing effort is currently limited, the Company intends to expand the number of private label transactions. No assurance can be given that its efforts in this area will be successful.
The Company currently anticipates that it may increasingly focus its attention on direct response marketing. The Company believes that its products are particularly well suited for so-called impulse buys. Therefore, it intends to develop plans to use infomercials to market its products. To date, no significant expenditures have been made in connection with this effort.
COMPETITION The Company's exercise products compete with products marketed and sold by a number of companies. The Company believes that its main competitors are Icon Health and Fitness, Inc., 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 The Company owns a number of trademarks, including POCKETSPLUS, PROTECH TRAVEL SYSTEMS & DESIGN and EXER-SLIDE.
LICENSE AGREEMENTS - The Company sells a number of its products under licensed names. The Company has entered into licensee agreements which provide for the grant of licenses to the Company and the payment of royalties by the Company, as follows:
JEEP -- Under an agreement dated January 8, 1993, as amended by letter amendment dated January 8, 1996, between the Company and the Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company was granted the exclusive license to use the names JEEP, WRANGLER and RENEGADE in connection with the manufacture, sale and distribution of sports bags/luggage products. The current expiration date of the Jeep Agreement is December 31, 1998. The parties have informally agreed to start negotiations regarding the terms of an extension of the current agreement.
SPALDING -- Under two separate agreements between the Company and Spalding & Evenflo Companies Inc. dated November 1, 1992 and April 1, 1994, the Company was granted the exclusive
right to use the name SPALDING in connection with the sale and distribution of a number of products, including weight bars and large exercise machines. The current expiration date of the agreements is September 30, 1997. However, the Company is currently negotiating a renewal of the agreement relating to hand held exercise equipment.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated December 22, 1994, Ms. Ireland approves and endorses certain exercise equipment designed and manufactured by the Company. Under the agreement, the Company has the right to use her name in connection with the equipment and Ms. Ireland will make appearances to promote such equipment. In addition, the Company has the right to use her photograph and likeness in connection with the sale of the equipment. The agreement is currently scheduled to expire in June 1998 but is subject, at the Company's option, to renewal until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996, between New Century Marketing & Distributors, Inc. and a wholly-owned subsidiary of the Company, the Company obtained the exclusive rights to a patented technology as well as to the trademarked names FREEZY-BAG and FREEZYGEL. The technology has the ability to cool foods and other products and is used in the wrapping of such products. The agreement has a term of two years but is renewable, at the option of the Company, for additional one-year periods.
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 Importing Co., Inc. ("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. Achim also provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Warehousing Agreement has a term of two years and is automatically renewable for one year periods unless written notice of termination shall have been given at least six months prior to the commencement of a renewal period.
In consideration for the services performed under the Warehousing Agreement, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. In addition, 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. The Company also pays a monthly fee of 3% of the Company's invoiced sales in connection with the warehousing services performed by Achim under the Warehousing Agreement. During the fiscal year ended April 30, 1997, the Company accrued approximately $458,488 in fees under the Warehousing Agreement.
Achim is controlled 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.
In addition, pursuant to an unwritten understanding, Achim makes its lines of credit available to the Company which will enable it to finance the purchases of its inventory from its overseas suppliers. Also, from time to time, Achim will purchase the products directly from the manufacturer and resell them to the Company without markup. Achim charges the Company interest in order to accommodate Achim's commercial lenders who often require a security interest in
the merchandise until it has been sold and the lender has been repaid. The Company pays Achim for the invoiced amount of inventory without markup, reimburses Achim for its bank charges, and pays it interest at the prime rate plus one percent on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360, including interest of $260,795 under this arrangement. As of June 30, 1997, this sum had decreased to $1,871,029, including interest of $276,894.
EMPLOYEES
As of June 30, 1997, the Company employed 12 persons, of whom three were executive officers, three were engaged in administrative and clerical activities, four were engaged in sales and two were involved in warehousing and shipping.
ITEM 2.
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. Mr. Grossman is the Company's Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before it became affiliated with the Company, it remains the lessee under the lease. Achim makes the property available to the Company on an at-will basis. Other than the service fees paid by the Company to Achim 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Court"). On May 23, 1996, the Court entered an Order confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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 is available after the fiscal quarter ended July 31, 1995. The following table sets forth the high and low bid quotations for the Company's Common Stock and Warrants through the quarter ended July 31, 1995. These quotations have been reported by the National Association of Securities Dealers, Inc. and represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions.
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.
ITEM 6. SELECTED FINANCIAL DATA
The table on the following page 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.
The Company has not paid a cash dividend to its public shareholders on its Common Stock. The Company does not contemplate paying any cash dividends on its Common Stock in the near future.
Due to the reorganization (see Note 2 to the Financial Statements), operating results of the reorganized company may not be comparable to those of the predecessor company.
*Management's assumptions used in determining the Company's reorganization value are discussed in Note 2 to the Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. The discharge of claims under the bankruptcy proceedings described immediately below, has been reflected in the financial statements for the fiscal year ended April 30, 1996. Effective August 8, 1996, the Company completed a migratory merger from Delaware to Nevada by merging into a newly formed Nevada entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was substantially identical to that of the Company prior to the merger. The Company and its predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below, which the Company adopted 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.
PLAN OF REORGANIZATION
In August 1995, the Company 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. 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 issued and outstanding shares thereby gaining absolute control over the Company's affairs. See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT and ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS An additional 160,000 shares and 62,798 shares were issued to the Company's unsecured creditors and the Company's existing security holders, respectively. The value of the cash and securities distributed under the plan of reorganization aggregated $531,561. An amount of $16,692,193, representing the difference between the value of the total distribution and the amount of allowable claims under the bankruptcy, was recorded as an extraordinary gain.
In addition, under the Plan, the Company merged with a newly formed Nevada corporation, for the purpose of changing its state of incorporation. The balance sheet of the combined entity was substantially similar to the balance sheet of the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start reporting on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start accounting, all assets and liabilities were restated to reflect their reorganization value which approximated book value at July 31, 1996. The reorganization value in excess of amounts allocable to identifiable assets is amortized over a period of eleven years.
Pending the resolution of the bankruptcy proceedings, the Company restructured its operations and relocated its administrative headquarters and warehouse facilities.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND THE THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1996
Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were, on a combined basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997, and the three months ended July 31, 1996, respectively, were $5,084,000, on a combined basis. These combined sales of exercise products were $532,000 or 9.5% less than the previous fiscal year. Sales of sports bags/luggage products of $3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996, respectively, were $4,391,000, on a combined basis. These combined sales of sports bags/luggage products were 6.6% less than the previous fiscal year. Sales for the fiscal year ended April 30, 1996 were reduced by $3,211,000 of customer credits for a discontinued line of manual treadmills and ski machines.
The Company does not believe that the decrease in sales of its products represents a material trend. The Company believes that the decrease is primarily the result of the reorganization proceedings and that the trend will be reversed. The Company intends to accomplish this by expanding its product lines and increasing the attractiveness of its products by developing new packaging.
Operating expenses of $2,227,000 and $556,000 for the nine months ended April 30, 1997 and three months ended July 31, 1996, respectively, were, on a combined basis, $3,901,000 less than the fiscal year ended April 30, 1996, due to the reorganization. This decrease was represented approximately by net changes in the following expenses:
The Company's pre-tax profits of $147,000 for the fiscal year ended April 30, 1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31, 1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As a result of the merger of Dynamic Classics, Ltd. into Dynamic International, Ltd. (see Note 2 to the Financial Statements) and the ownership change due to the reorganization, for tax purposes, the $76,000 loss is reportable in the Company's final tax return (see Note 5 to the Financial Statements). As there is a loss
for the period, no current tax provision was recorded for the period May 1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards of approximately $19,500,000, of which approximately $16,700,000 would be utilized to offset the extraordinary gain on the discharge of pre-Petition liabilities in its final tax return. All deferred taxes arising from the preconfirmation net operating losses were offset entirely by a valuation allowance. Effectively, no deferred tax benefits were realized from preconfirmation net operating losses. Any loss carry-forward not utilized in the Company's final tax return is lost. Accordingly, the Company has no deferred taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997 begins on August 9, 1996. The current income tax provision of $104,000 for the nine months ended April 30, 1997 is based on pretax profits of $223,000 for the period August 9, 1996 to April 30, 1997. The effective tax rate is 46% comprised of 26% of federal taxes and 20% of state and local taxes.
The following table sets forth the results of operations for the periods discussed above:
On July 10, 1997, the Company and MG agreed that no further payments shall be payable to MG under the Note (SEE ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS) until the consummation of the Company's contemplated public offering or at the scheduled maturity of the Note, whichever occurs earlier.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of $25,381,400 or 78% from the previous fiscal year. The decrease was primarily due to the discontinuation of a line of manual treadmills and ski machines. Sales of this equipment alone accounted for approximately $15,580,000 during the fiscal year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a result of the Company's bankruptcy proceedings, it was forced to reduce its sales of other exercise equipment and of its sports bags/luggage products which led to a decline in sales of $5,334,700 and $1,333,600, respectively, to $5,615,600 and $4,701,800, respectively. Sales of exercise equipment and sports bags/luggage products during this period were offset by credits of $3,210,900 issued to customers in connection with the discontinued line of manual treadmills and ski machines.
In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Sales of the treadmills and ski machines began in June 1994. The Company sold approximately $24,000,000 of these products from June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these products were shipped directly to customers. Due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial chargebacks by its customers. Although, pursuant to a written agreement, the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, they breached this agreement soon thereafter. The significance of the defective problem was evident in April 1995. During this month, the Company issued credits to customers for approximately $5,000,000 of the $7,487,000 of credits for the fiscal year ended April 30, 1995. The Company issued another $3,211,000 in credits for defective merchandise during the fiscal year ended April 30, 1996.
The following table sets forth the financial statement effect of the manual treadmills and ski machines for the periods indicated:
The sale of these products was discontinued in August 1995 and all inventory was disposed of by October 1995. Currently, the Company does not anticipate that there will be additional returns of these products or that any claims remain to be settled.
In addition, the Company's operating expenses decreased by approximately $1,083,300 to $6,683,200. As a result of the Company's reorganization, the Company had decreases in the following expenses:
For the fiscal year ended April 30, 1996, after giving effect to an extraordinary gain as a result of the discharge of pre-petition liabilities in the amount of $16,692,200, the Company recorded net income of $6,945,300, compared to a net loss of $11,227,300 during the previous fiscal year. The Company would have recorded a net loss of $9,746,900 before the extraordinary gain, or a decrease of $1,562,500 from the prior fiscal year. This decrease primarily reflected a reduction in the Company's selling and administrative expenses of approximately $1,083,300 and a reduction in interest expense of $1,001,400 primarily as a result of the bankruptcy proceedings which for the most part exempted the Company from making interest payments on outstanding debt.
The extraordinary gain on debt discharge of pre-petition liabilities which is recorded on the Company's books in fiscal year ended April 30, 1996 is taxable in the subsequent fiscal period, as the actual distribution to discharge the debt occurred in July, 1996. For tax purposes, without the gain on debt discharge, the Company had an operating loss for the year ended April 30, 1996 which resulted in the Company not having any current income tax liability (effective tax rate of 0%). The current operating losses and the prior year loss carry-forwards totaled approximately $19,500,000. Based on ownership changes resulting from the reorganization (see Note 2 to the Financial Statements), approximately $16,700,000 will be utilized to offset the extraordinary gain on debt discharge in its final tax return for the period May 1, 1996 to August 8, 1996. The balance of the net operating loss carry-forward is lost. The deferred tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of 11% is approximately $7,511,000.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED APRIL 30, 1997
During the nine months ended April 30, 1997, cash used by operating activities amounted to $294,400. This was primarily the result of an increase in inventory of $1,032,900, cash distributions to creditors of $515,600, and a decrease in accounts payable and accrued expenses of $56,800, which were offset by net income of $119,400 and decreases in accounts receivable and due from supplier, prepaid expenses, miscellaneous receivables, prepaid and refundable income taxes, and an increase in income taxes payable of $482,300, $122,000, $132,400, $252,000, and $103,700, respectively.
Financing activities provided cash of $333,000. Proceeds from notes payable of $600,000 were offset by repayments of notes payable, repayments of capital lease obligations, repayments of insurance note payable, and payment of deferred offering costs of $145,000, $29,700, $62,000, and $30,000, respectively. The Company had positive cash flow of $38,600 for the nine months ended April 30, 1997.
THREE MONTHS ENDED JULY 31, 1996
During the three months ended July 31, 1996, cash used by operating activities amounted to $64,800. This was the result of a net loss of $76,400, increases in accounts receivable and due from supplier, and prepaid expenses of $221,300 and $100,600, respectively, which were offset by a decrease in inventory and an increase in accounts payable and accrued expenses of $115,600 and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance notes payable of $77,200 were offset by repayments of insurance notes payable, and repayments of capital lease obligations of $15,200 and $18,800, respectively. The Company had a negative cash flow of $21,600 for the three months ended July 31, 1996.
The Company believes that cash generated by operations and the availability of Achim's credit line to finance the Company's purchase of inventory will be sufficient to finance its operations for the next twelve months. In addition, pursuant to an unwritten understanding, Achim makes its lines of credit available to the Company which will enable it to finance the purchases of its inventory from its overseas suppliers. Also, from time to time, Achim will purchase the products directly from the manufacturer and resell them to the Company without markup. Achim charges the Company interest on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,400 in principal and interest under this arrangement. As of June 30, 1997, this sum had decreased to $1,871,000. See ITEM 1 BUSINESS "Management Agreement with Achim Importing Co., Inc."
The Company owes an aggregate of approximately $1,060,000 to MG, which is wholly owned by Marton Grossman, the Company's Chairman and President. The loan is evidenced by a promissory note which accrues interest at the Citibank Prime Rate plus one percent. As of April 30, 1997 the Comapny had accrued interest in the amount of $37,219 in connection with this loan. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. In July 1997, the Company and MG agreed that no payments will be due until the consummation of the public offering, for which the Company filed a registration statement with the Securities and Exchange Commission, or the scheduled maturity of the note, whichever occurs earlier. The Company intends to repay the note from the proceeds of this offering.
The Company has filed with the Securities and Exchange Commission a registration statement relating to an underwritten public offering of its securities. It is anticipated that the net proceeds after deducting expenses in connection with the offering will be in excess of $5 million. The Company intends to use the proceeds from the offering to purchase inventory, repay the note to MG and for advertising and marketing. There can be no assurance as to if and when the registration statement will be declared effective.
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 effect the registrant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its independent accountants ("Hoberman"). This action had been approved by the Company's Board of Directors. During the past two years Hoberman did not issue a report on the Company's financial statements that either contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26, 1996, there were no disagreements between the Company and Hoberman on any matter of accounting principles or practices, financial statement disclosure, or audit scope and procedure, which disagreement, if not resolved to the satisfaction of Hoberman, would have caused them to make reference to the subject matter of the disagreement in connection with any report that was to have been, or will be, prepared for the Company.
On July 11, 1996 the Company's Board of Directors appointed Moore Stephens, P.C. as its independent accountants.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
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.
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.
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.
BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified. At present, the Company's bylaws require no fewer than one director. Currently, there are two directors of the Company. The bylaws permit the Board of Directors to fill any vacancy and the new director may serve until the next annual meeting of stockholders or until his successor is elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contracts, at the discretion of the Board.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company during the three fiscal years ended April 30, 1997 (i) to its Chief Executive Officer, (ii) its other two Executive Officers and (iii) two additional non-Executive Officers whose cash compensation exceeded $100,000 per year in any such year.
SUMMARY COMPENSATION TABLE (1) (2)
(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) Not an executive officer
(4) Mr. Cooper resigned his position in March 1997.
None of the individuals listed in the table above receive any long-term incentive plan awards during the fiscal year.
Marton B. Grossman, the Company's Chairman and President, does not have an employment agreement and is not being paid a salary. However, in April 1997, the Company entered into a Bonus Agreement with Mr. Grossman which provides for the issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if the Company reaches certain earnings milestones, as follows: If the Company's earnings before taxes for the fiscal year ending April 30, 1998, are no less than $500,000, he will be issued 400,000 shares. If the Company's earnings before taxes for the fiscal year ending April 30, 1999, are no less than $1,000,000, he
will be issued 600,000 shares. If the Company's earnings before taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he will be issued 1,000,000 shares. The stated earnings criteria are cumulative so that in the event of an earnings shortfall during a fiscal year, shares relating to two fiscal years will be issued provided that the Company, during the succeeding fiscal year, realizes earnings that in the aggregate are equal to two years of earnings as set forth in the Agreement. The Agreement also provides for piggyback registration rights with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock to be issued to Mr. Marton Grossman issued under the Bonus Agreement:
* The number of shares to be issued in aprticular fiscal year is based on the criteria set forth above.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater-than-ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from May 1, 1996 through April 30, 1997 other than Forms 3 that were filed late with respect to Messrs. Marton and Isaac Grossman and William Dolan and the Marton Grossman Annuity Trust, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1997, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (i) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's officers and directors, and (iii) all officers and directors of the Company as a group. Each stockholder's address is c/o the Company, 58 Second Avenue, Brooklyn, New York 11215.
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all options and warrants. Shares issuable under options or warrants are owned beneficially but not of record.
(2) Consists of shares of Common Stock held by a series of trusts (collectively, the "Grossman Trust") for the benefit of relatives of Mr. Grossman. Under its terms, the Grossman Trust will return to Mr. Grossman annually until August 1998, a portion of the shares held by the Grossman Trust. The number of shares to be returned to Mr. Grossman is based on the then current market price of the Common Stock and can therefore not be determined at the present time. Mr. Grossman disclaims beneficial ownership in the shares held by the Grossman Trust that will not be returned to him.
(3) Consists of shares held by the Grossman Trust of which Mr. Isaac Grossman is currently a beneficiary as to 464,600 shares. The actual number of shares held by the Grossman Trust as to which Isaac Grossman is a beneficiary may be smaller since under the terms of the Grossman Trust, a portion of the shares may be returned to Marton Grossman as described in footnote (2). Mr. Grossman is a trustee of the Grossman Trust and in that capacity shares voting power as to the shares held by the Grossman Trust.
ITEM 13.
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 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 of reorganization, MG loaned approximately $1,205,000 to the Company to consummate the plan and other expenses. The Company issued a promissory note to MG evidencing the loan and granted it a security interest in all of the Company's assets. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. The note accrues interest at the Citibank prime rate plus one percent. In July 1997, the Company and MG agreed that no principal or interest payments under the note would be due until the consummation of this offering or the scheduled maturity of the note, whichever occurs earlier.
Pursuant to 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, the preparation of monthly financial accounts receivable aging schedules and other reports and credit checks on the Company's customers. Achim also provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Warehousing Agreement has a term of two years and is automatically renewable for one year periods unless written notice of termination shall have been given at least six months prior to the commencement of a renewal period.
In consideration for the services performed under the Warehousing Agreement, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. In addition, 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. The Company also pays a monthly fee of 3% of the Company's invoiced sales in connection with the warehousing services performed by Achim under the Warehousing Agreement. During the fiscal year ended April 30, 1997, the Company accrued approximately $458,500 in fees under the Warehousing Agreement.
Achim is controlled by Marton B. Grossman. The Company believes that the terms of the Warehousing Agreement with Achim are at least as favorable as would have been obtained from an unaffiliated third party.
In addition, pursuant to an unwritten understanding, Achim makes its lines of credit available to the Company which will enable it to finance the purchases of its inventory from its overseas suppliers. Also, from time to time, Achim will purchase the products directly from the manufacturer and resell them to the Company without markup. Achim charges the Company interest on the unpaid balance of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,400 in principal and interest under this arrangement. As of June 30, 1997, this sum had decreased to $1,871,000.
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. He 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 service fees paid 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.".
PART IV
ITEM 14.
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 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, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
By: /s/ Marton B. Grossman ------------------------- Marton B. Grossman Chairman and President
Dated: 29th day of July, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of the 29th day of July, 1997 by the following persons on behalf of Registrant and in the capacities indicated.
By: /s/ Marton B. Grossman ------------------------- Marton B. Grossman Chairman and President
By: /s/ Isaac Grossman ------------------------- Isaac Grossman Vice Chairman, Treasurer, and Secretary
By: /s/ William P. Dolan ------------------------- William P. Dolan Vice President-Finance (Chief Financial and Accounting Officer)
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)
4.02 Form of Common Stock Certificate (2)
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)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6) - ------------------------------------------------------------------------------ *Subject to a request for confidential treatment from Securities and Exchange Commission. Specific portions of the document for which confidential treatment has been requested have been blacked out. Such portions have been filed separately with the Commission pursuant to the application for confidential treatment.
(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.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONTENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders Dynamic International, Ltd.
We have audited the accompanying consolidated balance sheet of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and its subsidiary as of April 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine months ended April 30, 1997, the three months ended July 31, 1996, and the year ended April 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary as of April 30, 1997 and 1996, and the results of their operations and their cash flows for the nine months ended April 30, 1997, the three months ended July 31, 1996, and the year ended April 30, 1996, in conformity with generally accepted accounting principles.
As discussed more fully in Note 2 to the consolidated financial statements, on August 23, 1995, the Company filed a voluntary petition requesting relief under Chapter 11 of the United States Bankruptcy Code. On May 23, 1996, the United States Bankruptcy Court for the Southern District of New York confirmed the Company's Amended and Modified Plan of Reorganization dated February 22, 1996.
Moore Stephens, P.C. Certified Public Accountants
New York, New York June 27, 1997, except as to Note 4, for which the date is July 10, 1997.
INDEPENDENT AUDITOR'S REPORT
Board of Directors Dynamic International, Ltd.
We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended April 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Dynamic International, Ltd. (formerly Dynamic Classic, Ltd.) and Subsidiary for the year ended April 30, 1995 in conformity with generally accepted accounting principles.
As more fully discussed in Note 2 the Company, on August 23, 1995, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Act.
/s/ HOBERMAN, MILLER & CO., P.C. - -------------------------------- New York, New York June 26, 1996
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued)
All of the liabilities as stated above at April 30, 1996, the period during which the Company was operating under reorganization proceedings, are post-petition liabilities. The discharge of prepetition liabilities including liabilities subject to compromise has been recorded and the gain on the debt discharge is reflected in the consolidated statement of operations for the year ended April 30, 1996.
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
The earnings per share as it relates to the predecessor company is not meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
The par value of the common stock prior to July 31, 1996 was $.01 per share. The par value of the common stock of the reorganized company commencing July 31, 1996 is $.001 per share.
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended April 30, 1995 the Company incurred capital lease obligations of $143,855 in connection with lease agreements to acquire equipment.
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code, the Company discharged approximately $17.2 million of allowed claims including a secured loan in the amount of $ 6.8 million owed to one creditor. The claims were discharged by a cash payment of $515,638 and the issuance of 3,198,798 shares of common stock. Of this amount, 2,976,000 shares were issued to one creditor which also satisfied $15,923 of loans made by the chief executive officer of the Company to the Company.
The accompanying notes are an integral part of these consolidated financial statements.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
Dynamic International, Ltd. (the "Company") is engaged in the sale and distribution of a diverse line of hand exercise and light exercise equipment, sports bags/luggage and gift products which are distributed throughout the United States.
b. Revenue
Revenue is recognized when the goods are shipped to the customer.
c. Fresh Start Reporting
Financial accounting during a Chapter 11 proceeding is prescribed in "Statement of Position 90-7 of the American Institute of Certified Public Accountants," titled "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company adopted effective July 31, 1996. The emergence from the Chapter 11 proceeding resulted in the creation of a new reporting entity without any accumulated deficit and with the Company's assets and liabilities restated at their estimated fair values (also see Note 2 Reorganization and Management Plan). Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable in all respects to the financial statements for periods prior to reorganization.
d. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the wholly owned inactive subsidiary. All significant intercompany accounts and transactions have been eliminated.
e. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
f. Inventories
Inventories consist principally of finished goods and are stated at the lower of cost; last-in, first-out method, (LIFO) or market.
g. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided generally by accelerated methods over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against income. Estimated useful lives used in calculating depreciation are as follows:
Tools and dies 5 years Furniture and equipment 5 years to 7 years
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h. Deferred Offering Costs
Legal and accounting costs incurred in connection with the proposed public offering of the Company's common stock will be charged to additional paid-in capital upon completion of the proposed public offering. If the offering is not consummated, these costs will be expensed.
i. Advertising and Promotion
Advertising and promotion expense, primarily comprised of print media distributed to current and potential customers, is expensed as incurred.
j. Earnings Per Share
Earnings (loss) per share are based on the weighted average number of shares outstanding as adjusted for the 1 for 5 reverse split. Common stock equivalents are included in the calculation if they are dilutive. Amounts for the predecessor company (see Note 2) are not presented as they are not meaningful.
k. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
l. Stock Options and Similar Equity Instruments
On January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," for stock options and similar equity instruments (collectively, "Options") issued to employees; however, the Company will continue to apply the intrinsic value based method of accounting for options issued to employees prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issues to Employees," rather than the fair value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
m. Reorganization value in excess of amounts allocable to identifiable assets
The excess reorganization value is amortized over a period of eleven years on the straight line basis (see Note 2). Management re-evaluates the periods of amortization to determine whether subsequent events and circmustances warrant revised estimates of useful lives. If impairment is deemed to exist, the excess reorganization value will be written down to fair value or projected discounted cash flows from related operations. As of April 30, 1997, management expects the asset to be fully recoverable.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN
In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. However, due to defective products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial returns by its customers. Although pursuant to a written agreement, the manufacturers acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, they breached this agreement soon thereafter. For the year ended April 30, 1996, the Company suffered significant losses in the amount of approximately $3,700,000 from its venture into this line of business.
At April 30, 1995, the Company was not in compliance with certain of the financial covenants which enabled the bank to declare the outstanding balances of all amounts due the bank to be immediately due and payable. In July 1995, the lender bank effectively terminated its relationship with the Company as it experienced difficulty in complying with the terms of the loans. As a result, certain collateral was liquidated by the lender bank. On August 22, 1995, the lender bank sold and assigned the loan balance of $6.8 million. The assigned loan was secured by a security interest in substantially all of the Company's assets. As discussed below, the assignor was issued 2,976,000 shares of new common stock in consideration of forgiving the $6.8 million outstanding loan.
On August 23, 1995, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. A Plan of Reorganization was filed by the Company on October 30, 1995 and subsequently amended and modified on February 22, 1996. On April 5, 1996, the creditors voted to accept the amended and modified Plan (the "Plan"),and on May 23, 1996, the court confirmed the Plan. The Plan was substantially consummated in August 1996. For accounting purposes, the Company assumed that the Plan was consummated on July 31, 1996.
As contemplated by the Plan, a new company, Dynamic International, Ltd. was formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic International, Ltd. The capital structure and the balance sheet of the combined entity, immediately after the merger, were substantially the same as those of the Company prior to the merger. The "new common stock" is referred to below as the common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the bankruptcy proceeding totaled approximately $17.2 million. The Plan discharged such claims through distributions of cash of approximately $515,000 and issuance of shares of new common stock. The cash distributions were paid in August 1996. A total of 3,198,798 shares of new common stock were issued on July 25, 1996 out of which 2,976,000 shares were issued to one secured creditor (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.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN(cont'd)
The discharge of claims was reflected in the April 30, 1996 financial statements. The stock distribution value is based on the reorganization value of the Company determined by projecting cash flows over an eleven year period and discounting such cash flows at a cost of capital rate of 15% and the statutory federal, state and local tax rates currently in effect. The discounted residual value at the end of the forecast period is based on the capitalized cash flows for the last year of that period. Cash distributions and the estimated stock distribution value totaling $531,561 has been recorded as other liabilities as of April 30, 1996. The gain of approximately $16.7 million resulting from the excess of the allowed claims over the total value of the cash and the common stock distributed to the secured and unsecured creditors has been recorded as an extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company, including, but not limited to those with respect to the future courses of the Company's business activity. Accordingly, there will usually be differences between projections and actual results because events and circumstances frequently do not occur as expected, and those differences may be material.
As part of the reorganization, the Company will continue to sell hand exercise, light exercise equipment and luggage and sports bags, all of which have a proven market acceptance. Management believes it can increase revenues by increasing its focus on direct response marketing. Therefore, it intends to develop plans to use infomercials to market these products. Management believes these increased marketing efforts, adequate financing through its related entity, Achim Importing, discontinuance of the unprofitable products, and sustainable gross profit percentages, can be effectively implemented within the next twelve months. The Company adopted "fresh-start reporting" in accordance with Statement of Position ("SOP") 90-7 issued by the American Institute of Certified Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start reporting" if the reorganization value of the emerging entity immediately before the date of confirmation is less than the total of all postpetition and allowed claims, and if holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging entity, both conditions of which were satisfied by the Company. Although the confirmation date was May 23, 1996, fresh-start reporting was adopted on July 31, 1996. There were no material fresh-start related adjustments during the period May 23, 1996 to July 31, 1996.
Under fresh start accounting, all assets and liabilities are restated to reflect their reorganization value, which approximates book value at date of reorganization. Therefore, no reorganization value has been allocated to the assets and liabilities. In addition, the accumulated deficit of the predecessor company at July 31, 1996 totaling $713,601 was eliminated, and at August 1, 1996, the reorganized company's financial statements reflected no beginning retained earnings or deficit. The reorganization value in excess of amounts allocable to identifiable assets is being amortized over an eleven year period on the straight line method. Amortization expense for the nine months ended April 30, 1997 was $9,108.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)
The following is a proforma balance sheet of the reorganized Company based on the discounted cash flows as discussed above.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans from MG Holding Corp. to pay creditors pursuant to the reorganization plan. The liability to the reorganized company is $515,638.
3. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used by the Company, reported net income would have been decreased by $294,000 in fiscal 1997. Net income would have been increased by $263,000 in fiscal 1996, and the net loss would have been increased by $246,000 in fiscal 1995. On a FIFO basis, reported year end inventories would have increased by $24,000 in 1997, $318,000 in 1996 and $55,000 in 1995.
4. RELATED PARTY TRANSACTIONS
The Company has an agreement with an entity ("Related Party") owned by the major shareholder, whereby the entity agreed to provide warehousing and general administrative services to the Company. The agreement is for a period of two years with automatic year to year renewals.
The monthly fee for the warehousing services is 3% of monthly sales. The fee for general administrative services is payable monthly and is based on annual sales in percentages ranging from 3% to 4% of invoiced sales. Total warehousing and administrative expenses charged to operations for the nine months ended April 30, 1997 were approximately $364,000, for the three months ended July 31, 1996 were approximately $95,000 and for the year ended April 30, 1996 were approximately $164,000.
The Related Party also purchases inventory for the Company and charges the Company for the invoiced amount of the inventory.
The loan payable to the related party totaled $1,059,785 at April 30, 1997. Such note is secured by all of the Company's assets. On August 30, 1996, loans and other payables, including accrued interest totaling $1,205,109, were converted into the note payable. Interest is charged at the Citibank prime rate plus 1%. This note is payable in 24 equal installments of principal and interest through August 5, 1998. At April 30, 1997, the Company was in arrears in the amount of $274,273 consisting of principal and interest. On July 10, 1997, the note was amended to allow the arrears and note payments to be deferred until the consummation of the Company's contemplated public offering (see Note 10) or the scheduled maturity of the note, whichever is earlier. Annual maturities of the note at 9.25% interest per annum is as follows:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. RELATED PARTY TRANSACTIONS (cont'd)
Interest expense charged to operations for the nine months ended April 30, 1997 was $67,898, for the three months ended July 31, 1996 was $16,746 and $19,924 for the year ended April 30, 1996.
Other amounts payable to the related party totaled $2,627,580 and $2,129,893, respectively, at April 30, 1997 and 1996. Such amounts represent unpaid inventory purchases and various fees due to the related party. The amounts payable for the purchase of inventory bears interest at the Citibank prime rate plus 1% from September 1996 to April, 1997 and the Citibank prime rate plus 3% prior to September 1996. The prime rate used was 8.25% for the period September 1996 to April 1997 and 8.5% for the period prior to September 1996 . Interest expense charged to operations was $111,411 for the nine months ended April 30, 1997, $34,380 for the three months ended July 31, 1996 and $115,004 for the year ended April 30, 1996. The weighted average interest rate at April 30, 1997 and 1996 was 9.25% and 11.5%, respectively.
5. INCOME TAXES
The Company utilizes an asset and liability approach to determine the extent of any deferred income taxes, as described in Statement No. 109, "Accounting for Income Taxes" of the Financial Accounting Standards Board. This method gives consideration to the future tax consequences associated with differences between financial statement and tax bases of assets and liabilities.
There were no income tax liabilities at April 30, 1996. Income tax liabilities at April 30, 1997 included in income taxes payable consist of the following :
At April 30, 1997, there are no temporaty differences that would result in deferred tax asset on liability. The deferred income tax assets and liabilities at April 30, 1996 consist of the following:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES (cont'd)
DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):
The valuation allowance decreased by $1,094,000 in 1996.
A summary of the provision (credit) for income taxes is as follows:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES (cont'd)
The reconciliation of the federal statutory income tax expense (credit) to the Company's actual income tax (credit) is as follows:
The Company had a net loss for the three months ended July 31, 1996 and accordingly, the Company has no income tax provision or liability for the period.
The Company has a net operating loss for the year ended April 30, 1995 of approximately $8,400,000 of which $1,200,000 was carried back to prior years. The Company has filed prior year amended returns to claim the net operating loss carryback which results in refundable income taxes of approximately $287,000. As of April 30, 1997, the Company received $251,000 of the refundable income taxes. The balance of $36,000 is included in prepaid and refundable income taxes at April 30, 1997.
At April 30, 1996, the net operating loss carryforward totaled approximately $19,500,000 of which approximately $16,700,000 will be utilized by the Company in its final tax return for the period May 1, 1996 to August 8, 1996 (see Note 2 re: merger into Dynamic International, Ltd.). Based on ownership changes resulting from the reorganization (see Note 2), the balance of the net operating loss carryforward is expected to be limited by the current provision of Section 382 of the Internal Revenue Code.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. COMMITMENTS AND CONTINGENCIES
a. Capital Leases
The Company is the lessee of equipment under capital leases expiring in various years through 1998.
In September 1995, the lessor of the Company's capital leases agreed to forgive the balance of the unpaid lease payments through September 1995 and to accept 60% of the remaining balance of the lease payments. As a result, the Company recognized $77,403 of income on the adjustment of the lease term. Such income is included in other income.
b. Operating Leases
Prior to August, 1995 the Company occupied space for its sales, executive offices, assembly and storage facilities under long term operating leases expiring August 1998. The leases provided for additional payments for insurance, taxes and other charges related to the premises. As part of the bankruptcy proceeding, the Company was discharged of the obligations of the leases. In October 1995 the Company relocated its premises, where the Company is charged warehousing fees and administration fees based on sales volume (see Note 4).
Rent expense for the years ended April 30, 1996 and 1995 was $341,427 and $583,596, respectively.
c. Royalty Obligations
The Company has entered into various royalty, licensing, and commission agreements for products sold by the Company. These agreements provide for minimum payments and a percentage of specific product sales, over a period of one to eight years. Royalty expense for the nine months ended April 30, 1997 was approximately $353,000, for the three months ended July 31, 1996 was $94,000 and for the years ended April 30, 1996 and 1995 was approximately $275,000 and $779,000, respectively.
d. Defined Benefit Pension Plan
On September 26, 1996, the Defined Benefit Employees Retirement Plan was terminated under a distress termination approved by the United States Bankruptcy Court. The defined benefit pension obligation prior to the termination was $860,945. As part of the bankruptcy proceeding, the obligation was settled for $38,743 resulting in a gain of $822,202 which is reflected in the extraordinary gain on discharge of prepetition liabilities for the year ended April 30, 1996.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
e. 401(k) Plan
On January 1, 1990, the Company adopted a 401(k) plan. The plan covers all eligible employees. Eligible employees may contribute from 1% to 15% of their salaries subject to the statutory maximum of $9,240 for the 1995 and 1994 calendar years. The plan also provided matching contributions by the Company of 25% of the employees' contributions to a maximum contribution of 1% of the employees' salaries. On May 31, 1996, the plan's summary plan description was modified to make matching contributions discretionary. No matching contributions were made by the Company for the 1996 calendar year nor will any be made by the 1997 calendar year.
The 401(k) expense amounted to $0 for the period May 1, 1996 to April 30, 1997 and $2,600 and $9,460 for the years ended April 30, 1996 and 1995, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer retirement plan sponsored by their union. The Company is required to pay seven cents ($.07) per hour per employee to the plan. The data available from administrators of the multi- employer plan is not sufficient to determine the accumulated benefit obligation, nor the net assets attributable to the multiemployer plan in which Company employees participate. As of October 1995, the Company no longer has any union employees. For the years ended April 30, 1996 and 1995 pension expenses for the union employees were $3,745 and $1,680, respectively.
g. Litigation
In the normal course of its operations, the Company has been named as a defendant in several product liability lawsuits that in the opinion of management are not material to the financial statements taken as a whole and are substantially covered by the Company's product liability insurance.
7. MAJOR CUSTOMERS
During the year ended April 30, 1996, sales to three major customers were approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and $1,001,000, respectively) of the Company's net sales. At April 30, 1996, accounts receivable from these customers totaled $465,506. During the year ended April 30, 1995, sales to two major customers were approximately 26% and 14% ($8,459,000 and $4,555,000, respectively) of the Company's net sales. At April 30, 1995, there were no accounts receivable from these customers. The Company sells a limited amount to foreign customers. There were no material receivables subject to foreign currency fluctuations.
During the nine months ended April 30, 1997 sales to major customers were approximately $3,080,180 . At April 30, 1997 accounts receivable from these customers totaled $379,902. During the three months ended July 31, 1996, sales to major customers were approximately $837,450. At July 31, 1996, accounts receivable from these customers totaled $548,726.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. CREDIT RISK/FINANCIAL INSTRUMENTS
Due to the nature of its business and the volume of sales activity, the Company's cash balance occasionally exceeds the $100,000 protection of FDIC insurance. At April 30, 1997 there was no such excess balance. At April 30, 1996 such excess balances totaled approximately $207,000. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash and cash equivalents.
The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that it does not have an accounts receivable credit risk exposure beyond the allowance provided. The Company does not require collateral or other security to support financial instruments subject to credit risk.
The carrying amounts of short-term debt reported in the balance sheets approximate fair value. The fair value of the Company's long-term debt (including the current portion) also approximates its carrying amount in the balance sheets based on the rates currently available to the Company for similar debt with similar terms.
9. SIGNIFICANT RISKS AND UNCERTAINTIES
a. The Company's exercise products compete with products marketed and sold by a number of companies. The Company's main competitors in this area possess far greater financial and other resources, including sales forces, than the Company. However, the Company believes that as a result of its ability to use trademark names for which it pays royalties, it will be able to retain its share of the market. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
The Company's luggage products compete with products designed by a number of the largest companies in the industry. The Company believes that because of its concentration on the upscale lifestyle and more specialized leisure market that are associated with its use of trademark names, the Company will be able to continue to grow its luggage business. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
b. Most of the Company's exercise products are purchased from Phillippines, Korea, and Taiwan. 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.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. OTHER ITEMS
a. Public Offering
The Company is offering for public sale 1,200,000 units, each consisting of one share of common stock, one Class A Warrant and one Class B Warrant at $5.00 per unit. Although no assurance can be given that the sale will be successful, the Company intends to utilize the net proceeds of approximately $5,100,000 for the repayment of current debt, purchase of inventory, general corporate services, and working capital.
Simultaneous with the public offering, the Company intends to declare a one for five reverse stock split. All share data for the reorganized Company has been adjusted for the split.
The following supplementary earnings per share reflect the repayment of indebtedness of $1,300,000 and the resulting reduction of interest expense and increase in net income as if it had taken place at the beginning of the reorganization period.
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:
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.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (continued)
10. OTHER ITEMS (cont'd)
c. Consulting Agreement
The Company anticipates entering into a three year consulting agreement with the underwriter to provide financial consulting services for a fee of $20,000.
d. Underwriter's Purchase Warrants
As part of the consideration of its services in connection with the registration statement, the Company has agreed to issue to the underwriter, for nominal consideration, warrants to purchase up to 120,000 units at an exercise price of $8.25 per unit for a period of five years. The Class A Warrants and Class B Warrants underlying the units included in the underwriter's warrants will be exercisable at a price of $9.90 and $16.50 per share, respectively, or 165% of the then exercise price of the warrants offered to the public for a period of five years commencing with the closing of the registration statement. The non-cash cost of such warrants, representing a cost of raising capital, will be recorded as a charge and credit to additional paid-in capital when the warrants are issued. As capital in nature, they are not compensatory.
e. Underwriter Option
The Company has granted the underwriter an option exercisable for 45 days from the effective date of the registration statement to purchase up to 180,000 units at the public offering price less the underwriting discounts.
11. AUTHORITATIVE PRONOUNCEMENTS
a. The FASB issued SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities" in June of 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. SFAS No. 125 is effective for financial statements issued for fiscal years occurring after December 31, 1996 and is to be applied prospectively. The Company does not have transactions which come under the general heading of "Transfers of Servicing of Financial Assets," and the added refinements for "Extinguishment of Debt" are not expected to be significant. Therefore, SFAS 125 is not expected to have any effect on the Company.
b. The FASB has issued SFAS No. 128, "Earnings Per Share" and FASB No. 129, "Disclosure of Information About Capital Structure." Both are effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 simplifies the computation of earning per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share. The statement requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share include no dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (continued)
11. AUTHORITATIVE PRONOUNCEMENTS (cont'd)
b. While the Company has not analyzed SFAS No. 128 sufficiently to determine its long-term impact on per share reported amounts, SFAS No. 128 should not have a significant effect on historically reported per share loss amounts.
SFAS No. 129 does not change any previous disclosure requirements but, rather, consolidates existing disclosure requirements for ease of retrieval.
c. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". Both are effective for financial statements for fiscal years beginning after December 15, 1997. The Company will adopt both statements on May 1, 1998. Adoption is not expected to have a material impact on the financial position and results of operations.
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Shareholders Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic International, Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months ended April 30, 1997 and three months ended July 31, 1996, is included on page 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 nine months ended April 30, 1997, the three months ended July 31, 1996 and the year ended April 30, 1996.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Moore Stephens, P.C. Certified Public Accountants
New York, New York June 27, 1997
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS