ITEM 1. BUSINESS
Statements contained herein which are not historical facts are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties including, but not limited to, general economic conditions, the Company's ability to complete development and then market its products and competitive factors and other risk factors detailed herein.
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the design, marketing and sale of hand exercise and light exercise equipment, including hand grips, running weights, jump ropes and aerobic steps and slides. It markets these products under the licensed trademarks SPALDING[TM] and KATHY IRELAND[TM] as well as under its own trademarked name SHAPE SHOP[TM]. In addition, it designs and markets related sports bags and luggage, which are marketed primarily under the licensed name JEEP[TM] and under its own names Santa Fe[TM], Polaris Expedition[TM] and SPORTS GEAR[TM]. The Company's objective is to become a designer and marketer of goods that are associated with a free-spirited lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the successor to a New York company incorporated in 1964. In August 1996, DCL merged with and into DIL, which had been newly formed for the purpose of this merger. The objective of the merger was to change the Company's state of incorporation from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. For the fiscal year ended April 30, 1995, sales of these products represented approximately 53% of the Company's gross sales. However, due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial charge backs by its customers. Although, pursuant to a written agreement, one of the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. In March 1995, CNM sued the Company for monetary damages, alleging, among other things, breach of contract. The Company and CNM subsequently settled the matter by releasing each other from any claims and allowing CNM to collect an aggregate of $15,000 from the Company. The Company suffered severe losses from its venture into this line of business and in August 1995 filed a voluntary petition requesting relief under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a Plan of Reorganization (the "Plan") pursuant to which creditors received partial satisfaction of their claims. MG Holding Corp. ("MG"), which had purchased a promissory note from the Company's principal financial institution, received 2,976,000 shares of Common Stock, representing approximately 93% of the then issued and outstanding shares thereby gaining absolute control over the Company's affairs. See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the Company, then known under the name DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of changing its state of incorporation. See ITEM 3. LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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PRODUCTS
EXERCISE EQUIPMENT - The Company's exercise equipment consists primarily of hand held products, including dumbbells, ankle and wrist weights, hand grips, jump ropes, exercise suits, slimmer belts and strength training products. In addition, the Company markets light weight equipment such as aerobic steps and slides and exercise mats. The Company also carries a line of small electronic devices designed to monitor physical activity such as stopwatches, pedometers, pulse meters and calorie counters.
SPORTS BAGS/LUGGAGE - The Company's sports bags/luggage consists primarily of duffle bags, weekend bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases. Some of the models are equipped with wheels and/or retractable handles.
OTHER PRODUCTS - The Company, through a wholly-owned subsidiary, has obtained the exclusive rights to the patents underlying the technology used in an insulated bag incorporating a wrap-around gel pack or freeze pack with the ability to cool and preserve food and other products for an extended period of time. In addition, it obtained the trademarks Polaris Surround Chill[TM] Freezy Bag[TM] and Polaris Surround Chill[TM] Freezy Gel[TM] under which the products are sold. See "Intellectual Property--License Agreements".
The Company has obtained the exclusive right to manufacture, distribute and sell a hand held, portable total home gym product. This product is being sold under the trademark SPALDING[TM] Rotaflex[TM].
The Company may from time to time manufacture and/or market additional products under its own names or under licensed names.
DESIGN AND DEVELOPMENT
The Company usually designs its own exercise equipment and creates its own molds and tooling. Such molds and tooling are used by the manufacturers to produce the equipment. The Company retains an ownership interest in the molds which are returned to it upon the termination of the Company's relationship with a particular manufacturer. The Company has been granted a number of design patents with respect to certain of its products. See "Intellectual Property--License Agreements". The Company employs a designer on a full-time basis for the design of its sports bags/luggage products. During the most recent fiscal year the Company spent approximately $179,000 on design activities, including fees to designers and patent attorneys. The Company may, from time to time, utilize the services of consultants for product and package design.
Most of the Company's products are manufactured in Indonesia, Taiwan and the United States which in the most recent fiscal year accounted for approximately 40%, 25% and 14%, respectively of the Company's products. In addition the Company's products are manufactured in the Phillippines, Hong Kong, Sri Lanka and Pakistan. Exercise equipment is usually shipped by the manufacturers to the Company within 45 days of the placement of an order. Orders for sports bags/luggage, which for the most part are produced in the Philippines and China, usually require a period of 90 to 120 days before they are shipped. The Company ordinarily has its products manufactured based on purchase orders and it has no long term relationships with any of its manufacturers. The Company believes that, if necessary, it will be able to obtain its products from firms located in other countries at little if any, additional expense. As a consequence, the Company believes that an interruption in deliveries by a manufacturer located in a particular country will not have a material adverse impact on the business of the Company. Nevertheless, because of political instability in a number of the supply countries, occasional import quotas and other restrictions on trade or otherwise, there can be no assurance that the Company will at all times have access to a sufficient supply of merchandise.
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SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its products are sold to discount stores, mass merchants and sporting goods stores. For the fiscal year ended April 30, 1999, Sears, Kmart and Kohl's account for 25%, 20% and 14%, respectively, of the Company's revenue. No other customer accounted for more than 10% of the Company's revenues. For the fiscal year ended April 30, 1999, sales of the Company's sports bags/luggage products accounted for approximately 58% of the Company's revenues while approximately 42% of the Company's revenues were derived from the sales of exercise equipment.
The Company sells its products primarily through independent sales agents on a commission-only basis. The Company currently engages approximately 19 sales agents either on an individual basis or through independent sales organizations. Although it has written agreements with a number of its agents, all of such agreements are terminable at will. The Company has no long term arrangements with any of its agents. The Company usually pays commissions ranging from 1% to 5% of the net sales price of its products. Although the Company believes that its sales agents sell products exclusively on behalf of the Company, there are no agreements that prohibit them from selling competing products.
In addition, on a small scale, the Company markets existing products to retailers for resale under their own private labels. The Company delivers to Kohl's Department Stores. Although the scope of this marketing effort is currently limited, the Company intends to expand the number of private label transactions. No assurance can be given that its efforts in this area will be successful.
The Company has made substantial progress with large customers for sales of the Sports bags/Luggage line. During the fiscal year ended April 30, 1999, sales of sports bags/luggage products to Sears Roebuck, Kohl's Department Stores and BJ's Wholesale Club increased by approximately $753,000, $709,000 and $201,000, respectively. In addition, the Company has been successful in selling a new JEEP "Extreme Collection" to more exclusive fine luggage specialty stores.
The Company has entered into an agreement dated June 15, 1999 with Power Point International Ltd. to advertise and market the Spalding licensed exercise products on Latin American television. The main focus will be on Spalding Rotaflex hand held portable home gym and Spalding Mini Trampoline. The Company has also hired a consultant to help it to efficiently enter the Latin American market.
COMPETITION
The Company's exercise products compete with products marketed and sold by a number of companies. The Company believes that its main competitors are Icon Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All of these companies possess far greater financial and other resources, including sales forces, than the Company's. However, the Company believes that as a result of its ability to use the trademarked names SPALDING[TM] and KATHY IRELAND[TM] it will be able to retain its share of the market. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
The Company's sports bags/luggage products compete with products designed by a number of the largest companies in the industry, including Samsonite, Sky Way and American Tourister. The Company believes that because of its concentration on the upscale lifestyle and more specialized leisure market that are associated with the trademark JEEP[TM] the Company will be able to continue to grow its sports bags/luggage business. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
INTELLECTUAL PROPERTY--LICENSE AGREEMENTS
The Company owns a number of trademarks, including Shape Shop RX[TM], Santa Fe[TM] and Polaris Expedition(TM).
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LICENSE AGREEMENTS - The Company sells a number of its products under licensed names. The Company has entered into licensee agreements which provide for the grant of licenses to the Company and the payment of royalties by the Company, as follows:
JEEP - Under an agreement dated January 8, 1993, as amended by letter amendments dated January 8, 1996 and July 8, 1998 between the Company and the Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company was granted the exclusive license to use the names JEEP, WRANGLER and RENEGADE in connection with the manufacture, sale and distribution of sports bags/luggage products. The current expiration date of the Jeep Agreement is December 31, 2002.
SPALDING --Under an agreement dated October 1, 1997, between the Company and Spalding & Evenflo Companies Inc., the Company was granted the exclusive right to use the name Spalding in connection with the sale and distribution of hand held exercise products. The agreement, as renewed will expire September 30, 2001.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated December 22, 1994, Ms. Ireland approves and endorses certain exercise equipment designed and manufactured by the Company. Under the agreement, the Company has the right to use her name in connection with the equipment and Ms. Ireland will make appearances to promote such equipment. In addition, the Company has the right to use her photograph and likeness in connection with the sale of the equipment. The agreement, which expired in June 1998, has been renewed until June 2000.
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996, between New Century Marketing & Distributors, Inc. and a wholly-owned subsidiary of the Company, the Company obtained the exclusive rights to a patented technology as well as to the trademarked names FREEZY-BAG and FREEZYGEL. The technology has the ability to cool foods and other products and is used in the wrapping of such products. The agreement, as renewed, is scheduled to expire on December 31, 1999. The Company intends to negotiate an extension of the agreement.
ROTAFLEX -- Under an agreement dated December 17, 1997 with Connelly Synergy Systems LLC, the Company has obtained the exclusive right to manufacture, distribute and sell a hand held portable total home gym product to be sold under the trademark Spalding[TM] Rotaflex(TM).
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996 (the "Warehousing Agreement") between the Company and Achim, Achim performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, Achim assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and in the performance of credit checks on the Company's customers.
In consideration for these services, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for sales of $60 million or more. For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment.
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In addition, under the Warehousing Agreement, Achim provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by Achim under the Warehousing Agreement.
The Warehousing Agreement had an initial term of two years which was subsequently renewed for a one year period. The agreement is subject to additional one year extension unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal year ended April 30, 1999, the Company accrued approximately $289,000 in fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and President. The Company believes that the terms of the Warehousing Agreement with Achim are at least as favorable as would have been obtained from an unaffiliated third party.
EMPLOYEES
As of June 30, 1999, the Company employed 12 persons, of whom five were executive officers, two were engaged in administrative and clerical activities, three were engaged in sales and two were involved in warehousing and shipping. None of the Company's employees is represented by a union and no work stoppages have occurred.
ITEM 2.
ITEM 2. PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400 square feet, of which 4,500 square feet are dedicated to office space, located at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before it became affiliated with the Company, it remains the lessee under the lease. Achim makes the property available to the Company on an at-will basis. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company's intellectual property counsel has been advised that on July 29, 1999, Bollinger Industries filed a complaint in the U.S. District for the Northern District of Texas. To date, the complaint has not been served on the Company. The complaint alleges infringement of three patents by the Company with respect to one of its exercise steps. The Company intends to vigorously defend the claim. The Company has been advised by its intellectual property counsel that an unfavorable outcome with respect to the claim is unlikely. At the present time it is not possible to assess the potential loss in the event of an unfavorable outcome.
On August 23, 1995, the Company filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Court"). On May 23, 1996, the Court entered an Order confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 was available after the fiscal quarter ended July 31, 1995.
On December 27, 1997, the Company completed a public sale of 1,200,000 units: each unit consisting of one share of Common Stock, one redeemable Class A Warrant and one redeemable Class B Warrant. The Common Stock and the Warrants became separately traded on March 12, 1998. The Units, Common Stock, Class A Warrants and the Class B Warrants are quoted on the OTC Bulletin Board under the symbols DYNIU, DYNI, DYNIW and DYNIZ, respectively.
The following quotes have been reported by the Nasdaq Stock Market Inc., OTC Bulletin Board. Such quotations reflect interdealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Fiscal High Low Security/Symbol Quarter Bid Bid - --------------- ------- ---- ---- Units/DYNIU January 31, 1998 5.625 5.625 April 30, 1998 5.625 5.625 July 31, 1998 5.625 4.625 October 31, 1998 5.062 0.625 January 31, 1999 1.250 0.438 April 30, 1999 0.438 0.250
Common Stock/DYNI(1) July 31, 1998 2.000 2.000 October 31, 1998 1.000 0.051 January 31, 1999 0.578 0.290 April 30, 1999 0.330 0.125
A Warrants/DYNIW (2) October 31, 1998 0.038 0.013 January 31, 1999 0.013 0.013 April 30, 1999 0.031 0.031
B Warrants/ DYNIZ (3)
(1) No quotes were posted to the OTC Bulletin Board for this security until July 1998.
(2) No quotes were posted to the OTC Bulletin Board for this security until August 1998. The expiration date of this security has been extended until June 12, 2000.
(3) No quotes are available on the OTC Bulletin Board for this security.
The Company has not paid a cash dividend on its Common Stock. The Company intends to retain all earnings for the foreseeable future for use in the operation and expansion of its business and, accordingly, the Company does not contemplate paying any cash dividends on its Common Stock in the near future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data that are qualified by the more detailed financial statements included herein. Effective August 8, 1996, the Company emerged as the surviving entity in a merger with DCL. The balance sheet of the combined entity was substantially similar to that of DCL immediately prior to the merger. As a consequence, the financial data of the Company for the reporting periods July 31, 1996 and prior consist of those of DCL. Due to the reorganization (see Note 2 to the Financial Statements), operating results of the reorganized company may not be comparable to those of the predecessor company.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained herein which are not historical facts are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties including, but not limited to, general economic conditions, the Company's ability to complete development and then market its products and competitive factors and other risk factors detailed herein.
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GENERAL
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. The discharge of claims under the bankruptcy proceedings described immediately below, has been reflected in the financial statements for the fiscal year ended April 30, 1996. Effective August 8, 1996, the Company completed a migratory merger from Delaware to Nevada by merging into a newly formed Nevada entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic International, Ltd. The balance sheet of the combined entity was substantially identical to that of the Company prior to the merger. The Company and its predecessor are herein together referred to as the "Company."
As a consequence of the Company's fresh-start accounting, as described below, which the Company adopted on July 31, 1996, reporting for the year ended April 30, 1997 is accomplished by combining the financial results for the three-month period ended July 31, 1996 and those of the nine-month period ended April 30, 1997.
Because of the application of fresh-start reporting, the financial statements for the periods after reorganization are not comparable in any respects to the financial statements for the periods prior to the reorganization.
PLAN OF REORGANIZATION
In August 1995, the Company filed a voluntary petition requesting relief under Chapter 11 of the Bankruptcy Code.
In 1994, the Company added a new line of products consisting primarily of treadmills and ski machines. Initially, the Company was successful in marketing these products. For the fiscal year ended April 30, 1995, sales of these products represented approximately 53% of the Company's gross sales. However, due to serious manufacturing defects and poor construction of the Company's products delivered by the Company's manufacturers, primarily located in the People's Republic of China, the Company was forced to allow substantial chargebacks by its customers. Although, pursuant to a written agreement, one of the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the defects and agreed to pay for returns and to provide replacement goods at no cost, it breached this agreement soon thereafter. In March 1995, CNM sued the Company for monetary damages alleging, among other things, breach of contract. The Company and CNM subsequently settled the matter by releasing each other from any claims and allowing CNM to collect an aggregate of $15,000 from the Company. The Company suffered severe losses from its venture into this line of business and in August 1995 filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan") pursuant to which creditors received partial satisfaction of their claims. The amount of claims allowed under the bankruptcy proceedings, aggregated approximately $17,223,800, which exceeded the assets as recorded immediately subsequent to the confirmation of the Plan by approximately $12,970,400. Under the Plan, the Company made cash payments in the amount of approximately $515,800. MG, which had purchased a promissory note from the Company's principal financial institution, received 2,976,000 shares of Common Stock in satisfaction of such promissory note, representing approximately 93% of the then issued and outstanding shares thereby gaining absolute control over the Company's affairs. See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. An additional 160,000 shares and 62,798 shares were issued to the Company's unsecured creditors and the Company's existing security holders, respectively. The value of the cash and securities distributed under the plan of reorganization aggregated $531,561. An amount of $16,692,193, representing the difference between the value of the total distribution and the amount of allowable claims under the bankruptcy, was recorded as an extraordinary gain.
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In addition, under the Plan, the Company merged with a newly formed Nevada corporation, for the purpose of changing its state of incorporation. The balance sheet of the combined entity was substantially similar to the balance sheet of the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start reporting on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start accounting, all assets and liabilities were restated to reflect their reorganization value which approximated book value at July 31, 1996. The reorganization value in excess of amounts allocable to identifiable assets is amortized over a period of eleven years.
Pending the resolution of the bankruptcy proceedings, the Company restructured its operations and relocated its administrative headquarters and warehouse facilities.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED APRIL 30, 1999 COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1997.
Sales for the fiscal year ended April 30, 1999, decreased by $1,368,000 or 17% to $6,633,000 from $8,001,000 for the fiscal year ended April 30, 1999. During the fiscal year ended April 30, 1999, sales to Service Merchandise Co., Price Costco and Caldor Corp. decreased by approximately $569,000, $83,000 and $390,000, respectively. Service Merchandise sales decreased due to that company's reorganization under Chapter 11 bankruptcy while an annual large promotion sale was not given to the Company by Price Costco as in prior two fiscal years. Sales to Caldor Corp. decreased due to that company's dissolution.
However, the Company has made substantial progress with large customers which it believes will have a favorable impact on fiscal year 2000. During the fiscal year ended April 30, 1999 sales to Sears Roebuck, Kohl's Department Stores and BJ's Wholesale Club increased by approximately $753,000, $709,000 ans $201,000, respectively. In addition, the Company has been successful in selling new Jeep "Extreme Collection" to more exclusive fine luggage specialty stores.
The Company has entered into an agreement dated June 15, 1999, with Power Point International, Ltd. to advertise and market the Spalding licensed exercise products on Latin American television. The main focus will be on the Spalding Rotaflex hand held portable home gym and Spalding Mini Trampoline. The Company has also hired a consultant to help it to efficiently enter Latin American market.
There can be assurance that the Company will be successful in achieving its anticipated increases in revenues or in its efforts to enter the Latin American market.
The Company's gross profit of $273,000 for the fiscal year ended April 30, 1999 was $2,478,000 less than the gross profit of $2,751,000 for the fiscal year ended April 30, 1998. This was primarily the result of net changes in the following items:
Increase (Decrease) Lower gross profit due to decreased volume $491,000 Lower gross profit due to the price mix of merchandise sold $701,000 Sales allowances and discounts $270,000 Necessary inventory adjustments $451,000 Package design $ 21,000 New product design $ 24,000 Royalties $362,000 Overseas agent $ 60,000 Luggage stuffing labor and materials $ 58,000 Air freight in $ 46,000 Other Income ($ 6,000) ---------- $2,478,000
The lower sales volume reduced the gross profit by $491,000. The price mix of the products sold, which compares the gross margins of products sold to the prior fiscal year, accounted for approximately $701,000 of the reduction in the gross profit. Sales allowances and discounts increased by $270,000 due to increased demands by customers. Inventory adjustments increased due to obsolete ans slow moving items of approximately $439,000. Package design expense increased by $21,000 due to changes in packaging for new and existing products. New product samples increased by $24,000 due to primarily to an increase in samples for newly designed items. Royalties increased by $362,000 due to an increase royalties paid for our Kathy Ireland exercise products and the Spalding Rotaflex exerciser.
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During the fiscal year ended April 30, 1999, the Company hired an overseas agent to supervise the production of our Sports bag/luggage products at a cost of $60,000. Luggage stuffing labor materials increased by $58,000 because a larger portion of the sales of these products were required to be prepared for display prior to shipment to the customer. Air freight increased by $46,000 as it was necessary to speed delivery of some products to customers. Other income decreased due to lower interest income.
The Company anticipates that the gross profit will increase in fiscal 2000 due primarily to increased sales and improved merchandise purchasing along with a decreased need for reserves against inventory.
There can be no assurance that the Company will be successful in achieving its anticipated increases in revenues or in its effort to improve purchasing methods.
Operating expenses, exclusive of interest expense, of $3,543,000 for the fiscal year ended April 30, 1999 were $1,194,000 more than operating expenses of $2,349,000 for the fiscal year ended April 30, 1998. This increase is represented approximately by changes in the following expenses:
Increase (Decrease) Research and Development $251,000 Shipping fees $106,000 Promotional and Selling Materials $593,000 Show Expenses $ 83,000 Trade Advertising $114,000 Telephone $ 13,000 Postage $ 14,000
Research and development cost increased by $251,000 due primarily to the introduction of new products. Shipping expenses increased by $106,000 because of a decrease in direct shipments to customers from overseas vendors. Promotional and selling expenses increased by $593,000 due primarily to the cost of producing and testing of an infomercial for the Company's Spalding Rotaflex product. Show expenses increased by $83,000 due to increased costs of the Company's participation in the Super Show. Trade advertising expenditures increased by $114,000 because the Company is obligated to pay one percent of Jeep luggage sales as advertising to Chrysler Corp. under a licensing agreement. In addition the Company has started to utilize specialty magazines to advertise the luggage products. Telephone and postage expenses increased by $13,000 and $14,000, respectively.
The Company anticipates cost reductions in promotional expenses, advertising, show expenses and research and development in the fiscal year ended April 30, 2000. No assurance can be given that the Company will be successful in its cost saving efforts.
Interest expense for the fiscal year ended April 30, 1999 decreased by $70,000 from the fiscal year ended April 30, 1998. This reduction was the result of the partial use of the proceeds of a stock offering, which was completed on December 27, 1997, to payoff current debt.
The Company's net loss $3,334,000 for the fiscal year ended April 30, 1999 represents a $3,602,000 change from a pretax profit of $268,000 for the fiscal year ended April 30, 1998.
The Company expects a profit for the fiscal year ended April 30, 2000 primarily as a result of the increased revenues and cost reductions outlined above. No assurance can be given that the Company will be successful in achieving its anticipated increases in revenues or in its cost saving efforts.
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The following table sets forth the result of operations for the periods discussed above.
Fiscal Year Fiscal Year Ended Ended April 30, 1999 April 30, 1998 ---------- ---------- Net Sales $6,633,000 $8,001,000 Other Income 35,000 42,000 ---------- ---------- $6,668,000 $8,043,000
Cost of Goods Sold 6,395,000 5,292,000 ---------- ----------
Gross Margin 273,000 2,751,000 4.09% 34.20%
Operating Expenses 3,543,000 2,349,000 Interest 64,000 134,000 ---------- ---------- 3,607,000 2,483,000
Pretax Income (Loss) (3,334,000) 268,000
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RESULTS OF OPERATING FOR THE FISCAL YEAR ENDED APRIL 30, 1998 COMPARED TO THE NINE MONTHS ENDED APRIL 30, 1997 AND THREE MONTHS ENDED JULY 31, 1996.
Financial results for the nine months ended April 30, 1997 have been restated for a change in the method of determining the cost of inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Sales of $8,001,000 for the fiscal year ended April 30, 1998 were $1,475,000 or 16% less than combined sales of $9,476,000 for the nine months ended April 30, 1997 and the three months ended July 31, 1996 of $7,493,000 and $1,983,000, respectively.
The Company's gross profit of $2,751,000 for the fiscal year ended April 30, 1998 was $376,000 or 12% less than the combined gross profit of $3,127,000 for the nine months ended April 30,1997 and three months ended July 31, 1996 of $2,588,000 and $539,000, respectively. The reduced gross profit is the result of the lower sales for the fiscal year ended April 30, 1997. However, the gross profit percentage for the fiscal year ended April 30, 1998 of 34.2% was 1.5% higher than the combined gross profit percentage of 32.7% for the nine months ended April 30, 1997 and three months ended July 31, 1996 of 34.2% and 27.0%, respectively.
The Company believes that the decline in sales for the fiscal year is primarily attributable to a shift in focus from increasing sales revenue to generating revenues from merchandise that produces a higher gross profit. As a result the decrease in sales of the Company's products were due to a decrease in sales to one customer to whom the Company no longer wishes to sell products at prices that would have an adverse impact on its gross profit percentage. The Company believes that the decision to shift its focus from emphasis on revenues to profit as discussed above, represents a positive development. Nevertheless, there can be no assurance that the Company will continue to be successful in attaining a higher gross profit percentage.
Operating expenses of $2,349,000 for the fiscal year ended April 30, 1998 were $435,000 less than combined operating expense of $2,784,000 for the nine months ended April 30, 1997 and three months ended July 31, 1996 of $2,227,000 and $557,000, respectively.
Due to the application of fresh start accounting, the financial statements for the periods after reorganization are not comparable in any respects to the financial statements for the periods prior to reorganization. Therefore, a discussion of the changes in operating expenses will compare the nine months ended April 30, 1998 to the nine months ended April 30, 1997. Decreases for the nine months ended April 30, 1998 compared to the nine months ended April 30, 1997 are represented approximately by net changes in the following expenses:
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DECREASE (INCREASE) Promotional expense ($240,000) Product development ($40,000) Shipping fees $244,000 Sales commissions $73,000 Salesman Salaries ($65,000) Officers' salaries $76,000 Professional fees $221,000 Postage $10,000 Provision for bad debts $28,000 Depreciation $11,000
Promotional expenses increased by $240,000 primarily due to promotional fees paid to two customers to promote sales of the Company's products. Product development expenses increased $40,000 because the Company has hired a consultant to develop new products and to further develop existing product lines. Shipping fees decreased by $244,000 due to the decrease in sales and an increase in direct sales to customers from the manufacturer. Sales commissions decreased by $73,00 do to the decrease in revenues. Salesman salaries increased by $65,000 due to the hiring of an executive Vice President of Sales. Officers' salaries decreased by $76,000 due to the departure of the former president of the Company in March 1997. Professional fees were reduced by $221,000 due to decreased need for outside legal and accounting fees during the nine months ended April 30, 1998. Postage decreased by $10,000. Provision for bad debts decreased by $11,000. Depreciation expense decreased by $27,000. During the nine months ended April, 30, 1998, the Company reported as prepaid expenses approximately $480,000 in package design, displays and direct responses advertising costs for several new products that were not introduced until after April 30, 1998.
The Company's pretax profit of $268,000 for the fiscal year ended April 30, 1998 was $231,000 or 624% higher than the combined pretax profit of $37,000 which was comprised of a $76,000 pretax loss for the three months ended July 31, 1996 and a $113,000 pretax profit for the nine months ended April 30, 1997. During the fiscal year ended April 30, 1998, the gross profit decreased by $376,00 due to the decrease in volume. This decrease in gross profit was offset by a reductions in operating expenses, interest expense and reorganization expenses of $435,000, $122,000 and $50,000, respectively.
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The following table sets forth the results of operations for the periods discussed above:
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED APRIL 30, 1999
During the fiscal year ended April 30, 1999, cash used by operating activities amounted to $2,277,000. This was the result of a net loss and increases in accounts receivable and due from supplier and inventory and a decrease in income taxes payable of $3,334,000, $671,000, $85,000 and $79,000, respectively. These uses of cash were offset by increase in accounts payable and accrued expenses and reserve for bad debts and a decrease in prepaid expenses of $872,000, $249,000 and $560,000, respectively.
Financing activies provided cash of $850,000 from banker's acceptances.
On April 30, 1998 the Company entered into an agreement with the Chase Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in the form of letters of credit and banker's acceptances. The agreement also provides for a security interest in the inventory and notes and accounts receivable of the Company. In addition, the agreement provides for the personal guarantee of the President and major shareholder of the Company in the amount of $250,000. As of June 30, 1999 the Company's aggregate balance of $1,041,650 consisted of $850,000 in banker's acceptances and $191,650 in outstanding letter of credit.
Investing activies used cash of approximately $39,000 for molds used in the manufacture of products.
The Company anticipates a positive cash flow from operations for the fiscal year ended April 30, 2000. This positive cash flow will be the result of the anticipated profit and decreases in inventory, prepaid expenses and increased accounts payable to be offset by an increase in account receivable. The Company believes that the projected positive cash flow and the Chase Manhattan credit line, current levels of inventory and accounts receivable will be sufficient to sustain operations and working capital needs for the next twelve months. No assurance can be given that the Company will be successful in achieving its anticipated increases in revenues and cash flows.
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED APRIL 30, 1998
During the fiscal year April 30, 1998, cash used by operating activities amounted to $2,090,000. This was the result of increases in prepaid expenses, as discussed above, and decreases in accrued expenses of $609,000 and $2,806,000 respectively, which were offset by net income, decreases in accounts receivable and due from suppliers, inventory and prepaid and refundable income taxes of $129,000, $186,000, $967,00 and $14,000 respectively.
Investing activities use cash of $67,900 for molds related to a new product.
Financing activities provided cash of $3,689,000 as proceeds from a stock offering of approximately $4,800,000, which was completed on December 27, 1997, were used to pay accounts payable and accrued expenses of approximately $2,800,000. The use of proceeds in this way produced the use of cash for operating activities of $2,090,000. An additional $1,059,785 of the proceeds of the stock offering was used to pay related party debt. The Company had a positive cash flow of $1,532,000. The Company expects that based upon the cash flow for the fiscal year ended April 30, 1998 and the anticipated future cash flows, that the reorganization value in excess of amounts allocable to identifiable assets of $112,000 as April 30, 1998 will be fully recoverable.
NINE MONTHS ENDED APRIL 30, 1997
During the fist nine months after the Company's reorganization, cash used in operations amounted to $294,371. Cash used to pay creditors during the reorganization amounted to $515,638. Cash was also used to increase inventory by $923,000 during the nine- month period. The increase in sales and the purchase of larger volumes to take an anticipated increase in sales and the purchase of larger volumes to take advantage of the decreased costs associated with the higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254, prepaid expenses decreased by $122,017, miscellaneous receivable decreased by $132,379 and prepaid and refundable income taxes decreased by $252,046. These amounts partially offset expenditures for inventory and payments to credits.
Cash of $332,957 provided by financing activities was primarily the result of a $600,000 loan from MG Holding and was to pay the creditors in accordance with the Company's Plan. Cash provided by financing activities was used to repay $145,324 of the note payable to MG Holding. In addition, payments were made for capital leases, insurance notes, and deferred stock offering costs of $29,656, $62,020 and $30,043, respectively. The Company had a positive cash flow of $38,586.
THREE MONTHS ENDED JULY 31, 1996
During the three months ended July 31, 1996, cash used by operating activities amounted to $64,800. This was the result of a net loss of $76,400, increases in accounts receivable and due from supplier, and prepaid expenses of $221,300 and $100,600, respectively, which were offset by a decrease in inventory and an increase in accounts payable and accrued expenses of $115,600 and $155,600 and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance notes payable of $77,200 were offset by repayments of insurance notes payable, and repayments of capital lease obligation of $15,200 and $18,800 respectively. The Company had a negative cash flow if $22,600 for three months ended July 31,1996.
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YEAR 2000 COMPLIANCE
Pursuant to a warehouse agreement with Achim Importing Co., Inc. ("Achim") which is wholly owned by Marton Grossman, the Company's Chairman and President, the Company relies exclusively on Achim's software and operating systems, financial accounting systems and various other administrative functions. Achim has assured the Company that it has reviewed its computer systems to identify those areas that could be adversely affected by Year 2000 software failures and has taken the appropriate steps to avoid Year 2000 problems. Currently, the Company cannot predict the effect of the Year 2000 problem on entities with which it transacts business and there can be no assurance it will not have a material adverse impact on the Company's business, financial condition, results of operations or cash flows.
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SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically in the second and third quarter of the fiscal year as a result of shipments of exercise equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material impact on the Company, nor is it aware of changes in prices of material or other operating costs or in the selling price of its products and services that will materially affect the Company's profits.
ITEM 8.
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
NONE.
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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:
Name Age Position ---- --- -------- Marton B. Grossman 68 Chairman and President Isaac Grossman 37 Vice Chairman, Treasurer and Secretary Sheila Grossman 59 Director William P. Dolan 46 Vice President--Finance John Holodnicki 46 Vice President--Sales Jack Pers 52 Vice President--Sales Bernard Goldman 78 Director*
*Member of the Company's Audit Committee.
MARTON B. GROSSMAN has been the Chairman and Chief Executive Officer of the Company since July 29, 1996. For the past 34 years, he has been President of Achim, a privately-held company engaged in the import and export of window coverings and accessories. In addition, he is President of MG Holding Corp., a privately-held financial holding company. Mr. Grossman is the father of Isaac Grossman, the Company's Vice Chairman, Treasurer and Secretary. Mr. Grossman spends approximately 20% of his time working for the Company.
ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and Secretary since July 1996, and Vice President of Achim since 1989. He is the son of Marton B. Grossman, the Company's Chairman and President. Mr. Grossman spends approximately 20% of his time working for the Company.
SHEILA GROSSMAN was elected a director in October 1997. From 1962 to 1987 she was affiliated with Achim where she performed a variety of functions including Secretary to the President. Ms. Grossman is the spouse of Marton Grossman, the Company's Chairman and President.
WILLIAM P. DOLAN has been the Company's Vice President-Finance since July 1996. Prior thereto, he had been the Company's Treasurer and Secretary since 1989. Mr. Dolan graduated from the William Paterson College of New Jersey and is a Certified Public Accountant.
JOHN HOLODNICKI has been a Vice President--Sales at the Company since 1994. From 1981 to 1994, he was a Vice President--Sales at HIT Industries, an importer of business computer cases. Mr. Holodnicki earned a degree in Marketing from the University of Illinois in 1975.
JACK PERS has been a Executive Vice President--Sales at the company since October 1998. He began working for the Company on a consulting basis in August 1997 as Director of Product Development. His experience includes a Senior Buyer position at Herman's Sporting Goods from 1973 to 1988, and National Sales Manager at Marcy Fitness from 1989 - 1995.
BERNARD GOLDMAN was elected a member of the board in October 1997. Mr. Goldman was the Chief Executive Officer of Goldman's Department Store, a chain consisting of 12 stores, from 1957 to 1979. Mr. Goldman has been and continues to be a member of the Board of Directors and an executive officer of a number of community and charitable institutions and organizations.
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BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified. At present, the Company's bylaws require no fewer than one director. Currently, there are three directors of the Company. The bylaws permit the Board of Directors to fill any vacancy and the new director may serve until the next annual meeting of stockholders or until his successor is elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contracts, at the discretion of the Board.
The underwriting agreement, for the stock offering completed on December 27, 1997, provides that the underwriter has the right to designate one member of the Board of Directors for a period of three years following the consummation of the Company's public offering on December 27, 1997. To date, no person has been designated by the Underwriter.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company during the three fiscal years ended April 30, 1999 (I) to its Chief Executive Officer, (ii) its other two Executive Officers and (iii) two additional non-Executive Officers whose cash compensation exceeded $100,000 per year in any such year:
SUMMARY COMPENSATION TABLE (1)(2)
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None of the individuals listed in the table above receive any long-term incentive plan awards during the fiscal year.
Marton B. Grossman, the Company's Chairman and President, does not have an employment agreement and is not being paid a salary. However, in April 1997, the Company entered into a Bonus Agreement with Mr. Grossman which provides for the issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if the Company reaches certain earnings milestones, as follows: If the Company's earnings before taxes for the fiscal year ending April 30, 1998, were to have been no less than $500,000, he would have been issued 400,000 shares. If the Company's earnings before taxes for the fiscal year ending April 30, 1999, were to have been no less than $1,000,000, he would have been issued 600,000 shares. If the Company's earnings before taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he will be issued 1,000,000 shares. The stated earnings criteria are cumulative so that in the event of an earnings shortfall during a fiscal year, shares relating to two fiscal years will be issued provided that the Company, during the succeeding fiscal year, realizes earnings that in the aggregate are equal to two years of earnings as set forth in the Agreement. The Agreement also provides for piggyback registration rights with respect to the Common Stock to be issued.
The following table sets forth the number of shares of Common Stock that may be issued to Marton Grossman under the Bonus Agreement:
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater-than-ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from May 1, 1998 through April 30, 1999, other than Forms 4 that were filed late with respect to Messrs. Marton and Isaac Grossman relating to intra-family stock transfers without consideration, all Section 16(a) filing requirements applicable to its officers, directors and greater-than-10% beneficial owners were complied with.
401K PLAN
The Company terminated the 401K plan as of December 31, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 1999, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (I) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's officers and directors, and (iii) all officers and directors of the Company as a group. Each stockholder's address is c/o the Company, 58 Second Avenue, Brooklyn, New York 11215, unless otherwise indicated.
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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 B. Grossman, the Company's Chairman and President. The note was subsequently repaid by the Company through the issuance of 2,976,000 shares of Common Stock to MG. MG assigned the Common Stock to a trust for the benefit of members of Mr. Grossman's family.
Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to the Company to consummate the Plan and for related expenses. The Company issued a promissory note to MG Holding evidencing the loan and granted it a security interest in all of the Company's assets. The promissory note is to be paid in 24 monthly installments commencing September 5, 1996. The note accrues interest at the Citibank prime rate plus 1%. The weighted average interest rate as of the date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April 30, 1997, the Company had accrued interest in the amount of $37,219 in connection with this loan. As of June 30, 1997, the amount of interest owed amounted to $54,197. In July 1997, the Company and MG Holding agreed that no principal or interest payments under the note would be due until the consummation of an offering or the scheduled maturity of the note, whichever occurred earlier. The note and all
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accrued interest was paid in full on December 23, 1997 with the proceeds of the stock offering.
Pursuant to the Warehousing Agreement, Achim performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, Achim assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and credit checks on the Company's customers.
In consideration of these services, Achim receives an annual fee, payable monthly, calculated as a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of invoiced sales under $30,000,000 to 3% for sales of $60,000,000 or more.
For sales not originating at the warehouse, Achim receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and account located in the United States if payment is made by letter of credit and 1% if such customers and accounts are located outside the United States, irrespective of manner of payment.
In addition, under the Warehousing Agreement, Achim provides warehousing services consisting of receiving, shipping and storing of the Company's merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by Achim under the Warehousing Agreement.
The Warehousing Agreement has a term of two years and is automatically renewable for additional one-year periods unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal year ended April 30, 1999, the Company accrued approximately $288,926 in fees under the Warehousing Agreement.
Achim is wholly owned by Marton B. Grossman, the Company's Chairman and President. The Company believes that the terms of the Warehousing Agreement with Achim are at least as favorable as would have been obtained from an unaffiliated third party.
On April 30, 1998 the Company entered into a credit agreement with The Chase Manhattan bank for maximum borrowings of $1,500,000 in the form of letters of credit and banker acceptances. The agreement also provides for a security interest in the inventory and notes and accounts receivable of the Company. The agreement also provides for the personal guarantee of the President and major shareholders of the Company in the amount of $250,000.
The Company occupies a warehouse consisting of approximately 54,400 square feet, of which 4,500 square feet are dedicated to office space, located at 58 Second Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's Vice Chairman, Treasurer and Secretary. The property is leased to Achim which makes the property available to the Company. Other than the fees payable by the Company under the Warehousing Agreement, the Company pays no rent for the property. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co., Inc" and ITEM 2. PROPERTIES.
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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, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
/S/Marton B. Grossman By: ____________________________________ Marton B. Grossman Chairman and President
Dated: 13th day of August, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of the 13th of August, 1999 by the following persons on behalf of Registrant and in the capacities indicated.
/S/Marton B. Grossman /S/Sheila Grossman - ----------------------------------- ----------------------------------- Marton B. Grossman Sheila Grossman Chairman Director
/S/Isaac Grossman - ----------------------------------- ----------------------------------- Isaac Grossman Bernard Goldman Director Director
/S/William P. Dolan - ----------------------------------- William P. Dolan Vice President--Finance (Chief Financial & Accounting Officer)
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EXHIBITS
1 Form of Underwriting Agreement (1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic Classics, Ltd. (2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22, 1996 (the "Plan") (3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated May 7, 1996 (3)
2.04 Order Confirming the Plan dated May 23, 1996 (3)
3.01 Certificate of Incorporation (2)
3.02 Bylaws (2)
4.01 Revised Form of Warrant Agreement to be entered into between the Company and American Stock Transfer & Trust Company (1)
4.02 Form of Common Stock Certificate (2)
4.03(a) Form of A Warrant Certificate (1)
4.03(b) Form of B Warrant Certificate (1)
4.04 Form of Unit Certificate (1)
10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994 (4)
10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4)
10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with Achim Importing Co., Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc. (1)
10.06 Bonus Agreement with Marton Grossman (1)
10.07 License Agreement with Spalding and Evenflo Companies Inc. dated October 1, 1997. (7)
10.08 License Agreement with Connally Synergy Systems LLC dated December 17, 1997. (7)
10.09 Media Campaign Management Agreement with Script to Screen, Inc. dated April 13, 1998. (7)
10.10 Infomercial Production Agreement with Script to Screen, Inc. dated February 12, 1998. (7)
10.11 Exclusive Hand Held - Products Sponsorship Agreement with Power Point Fitness International Ltd. dated July 15, 1999
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10.12 Consulting Agreement with Andrew Freirich dated July 1, 1999.
10.13 Licensing Agreement with Chrysler Corporation dated July 9, 1998.
10.14 Distribution Agreement with Guthy-Renker dated January 13, 1999.
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (5)
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(1) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 333-25425).
(2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996.
(3) Incorporated by reference to the Company's Report on Form 8-K filed October 3, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for Dynamic Classics, Ltd. (File No. 0-8376).
(5) Incorporated by reference to the Annual Report on Form 10-K for 1996.
(6) Incorporated by reference to the Current Report on Form 8-K/A dated October 23, 1996
(7) Incorporated by reference to the Annual Report of Form 10K for 1998.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders Dynamic International, Ltd.
We have audited the accompanying consolidated balance sheet of Dynamic International, Ltd. [formerly Dynamic Classics, Ltd., see Note 2] and its subsidiary as of April 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended, the nine months ended April 30, 1997, and the three months ended July 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dynamic International, Ltd. [formerly Dynamic Classics, Ltd.] and its subsidiary as of April 30, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, the nine months ended April 30, 1997, and the three months ended July 31, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the consolidated financial statements, the Company has suffered a net loss of $3,333,725 and has utilized $2,276,899 in cash for operating activities for the year ended April 30, 1999. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 10. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
MOORE STEPHENS, P. C. Certified Public Accountants
New York, New York June 30, 1999
Item 8: DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures of Non-cash Investing And Financing Activities:
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code, the Company discharged approximately $17.2 million of allowed claims including a secured loan in the amount of $6.8 million owed to one creditor. The claims were discharged by a cash payment of $515,638 and the issuance of 34,198,798 shares of common stock. Of this amount, 2,976,000 shares were issued to one creditor which also satisfied $15,923 of loans made by the chief executive officer of the Company to the Company.
The Company issued 20,000 shares for legal services valued at $74,655 in connection with the Company's public offering [See Note 11].
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
The Company - Dynamic International, Ltd. [the "Company"] is engaged in the sale and distribution of a diverse line of exercise equipment and related sports accessories which are distributed throughout the United States.
Revenue - Revenue is recognized when the goods are shipped to the customer.
Fresh Start Reporting - Financial accounting during a Chapter 11 proceeding is prescribed in "Statement of Position 90-7 of the American Institute of Certified Public Accountants," titled "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ["SOP 90-7"], which the Company adopted effective July 31, 1996. The emergence from the Chapter 11 proceeding resulted in the creation of a new reporting entity without any accumulated deficit and with the Company's assets and liabilities restated at their estimated fair values [also see Note 2 Reorganization and Management Plan]. Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable in all respects to the financial statements for periods prior to reorganization.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the wholly owned inactive subsidiary. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories - Inventories consist principally of finished goods and are stated at the lower of cost; first-in, first-out method, ["FIFO"] or market.
Property, Equipment and Depreciation - Property and equipment are stated at cost. Depreciation is provided generally by accelerated methods over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against income. Estimated useful lives used in calculating depreciation are as follows:
Tools and dies 5 years Furniture and equipment 5 years to 7 years Capitalized Equipment Leases 5 years to 7 years
Advertising and Promotion - Advertising and promotion expense, primarily comprised of print media distributed to current and potential customers, is expensed as incurred.
Prepaid Expenses - The Company had deferred certain packaging design, displays, and direct response advertising costs for several new products that were not introduced as of April 30, 1998. These costs of approximately $480,000 were classified as prepaid expenses in 1998 and were expensed in the year ended April 30, 1999.
Loss Per Share - The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share"; which is effective for financial statements issued for periods ending after December 15, 1997. Accordingly, earnings per share data in the financial statements for the years ended April 30, 1999 and 1998, have been calculated in accordance with SFAS No. 128. Prior periods earnings per share data have been recalculated as necessary to conform prior years data to SFAS No. 128. Prior periods' earnings per share data have been restated to give retroactive effect for the one for five reverse stock split in September of 1997.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[1] Summary of Significant Accounting Policies [Continued]
Loss Per Share [Continued] - SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share," and replaces its primary earnings per share with a new basic earnings per share representing the amount of earnings for the period available to each share of common stock outstanding during the reporting period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share [i.e., increasing earnings per share or reducing loss per share]. The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants.
Potential common shares of 5,120,000 are not currently dilutive, but may be in the future.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Options and Similar Equity Instruments Issued to Employees - The Financial Accounting Standards Board ["FASB"] issued Statement of Financial Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," in October 1995. SFAS No. 123 uses a fair value based method of accounting for stock options and similar equity instruments as contrasted to the intrinsic value based method of accounting prescribed by Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The Company adopted SFAS No. 123 on April 1, 1996 for financial note disclosure purposes and will continue to apply APB Opinion No. 25 for financial reporting purposes.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets - The excess reorganization value was to be amortized over a period of eleven years on the straight line basis [see Note 2]. Management evaluated the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of April 30, 1999, management believes the asset to be impaired because of current period operating and cash flow losses and the excess reorganization value was written off as a result of the uncertainty of the projected discounted cash flows from related operations [See Note 2].
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Reorganization and Management Plan
On August 23, 1995, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. A Plan of Reorganization was filed by the Company on October 30, 1995 and subsequently amended and modified on February 22, 1996. On April 5, 1996, the creditors voted to accept the amended and modified Plan [the "Plan"], and on May 23, 1996, the court confirmed the Plan. The Plan was substantially consummated in August 1996. For accounting purposes, the Company assumed that the Plan was consummated on July 31, 1996.
As contemplated by the Plan, a new company, Dynamic International, Ltd. was formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic International, Ltd. The capital structure and the balance sheet of the combined entity, immediately after the merger, were substantially the same as those of the company prior to the merger. The "new common stock" is referred to below as the common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the bankruptcy proceeding totaled approximately $17.2 million. The Plan discharged such claims through distributions of cash of approximately $515,000 and issuance of shares of new common stock. The cash distributions were paid in August 1996. A total of 3,198,798 shares of new common stock were issued on July 25, 1996 out of which 2,976,000 shares were issued to one secured creditor, which also satisfied $15,923 of loans made by the chief executive officer of the Company to the Company (see Note 4); 160,000 shares were issued to unsecured creditors, and 62,798 shares were issued to the reconfirmation common stock equity interest holders.
The discharge of claims was reflected in the April 30, 1996 financial statements. The stock distribution value is based on the reorganization value of the Company determined by projecting cash flows over an eleven year period and discounting such cash flows at a cost of capital rate of 15% and the statutory federal, state and local tax rates currently in effect. The discounted residual value at the end of the forecast period is based on the capitalized cash flows for the last year of that period. Cash distributions and the estimated stock distribution value totaling $531,561 has been recorded as other liabilities as of April 30, 1996. The gain of approximately $16.7 million resulting from the excess of the allowed claims over the total value of the cash and the common stock distributed to the secured and unsecured creditors has been recorded as an extraordinary gain for the year ended April 30, 1996.
The eleven year cash flow projection was based on estimates and assumptions. Accordingly, there will usually be differences between projections and actual results because events and circumstances frequently do not occur as expected, and those differences may be material.
As part of the reorganization, the Company will continue to sell hand exercise, light exercise equipment and luggage and sports bags. Management believes it can increase revenues by increasing its focus on direct response marketing by developing infomercials to market these products. Management believes these increased marketing efforts, adequate financing through its related entity, Achim Importing, discontinuance of the unprofitable products, and sustainable gross profit percentages, could be effectively implemented within the twelve month period. The Company adopted "fresh-start reporting" in accordance with Statement of Position ["SOP"] 90-7 issued by the American Institute of Certified Public Accountants on July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start reporting" if the reorganization value of the emerging entity immediately before the date of confirmation is less than the total of all postpetition and allowed claims, and if holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging entity, both conditions of which were satisfied by the Company. Although the confirmation date was May 23, 1996, fresh-start reporting was adopted on July 31, 1996. There were no material fresh-start related adjustments during the period May 23, 1996 to July 31, 1996.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[2] Reorganization and Management Plan [Continued]
Under fresh start accounting, all assets and liabilities are restated to reflect their reorganization value, which approximates book value at date of reorganization. Therefore, no reorganization value has been allocated to the assets and liabilities. In addition, the accumulated deficit of the predecessor company at July 31, 1996 totaling $713,601 was eliminated, and at August 1, 1996, the reorganized company's financial statements reflected no beginning retained earnings or deficit. The reorganization value in excess of amounts allocable to identifiable assets was being amortized over an eleven year period on the straight line method. Amortization expense for the nine months ended April 30, 1997, and the years ended April 30, 1998 and 1999 was $9,108, $12,144, and $112,328, respectively. As discussed in Note 1, management believes the asset to be impaired and has chosen to write off the balance of $100,185 as of April 30, 1999 to a fair value of $-0-.
[3] Inventories/Change in Method of Accounting for Inventory
The inventories consist of finished goods. During the three month period ended January 31, 1998, the Company changed its method of determining the cost of inventories from the LIFO method to the FIFO method. Under the current economic environment of low inflation, the Company believes that the FIFO method will result in a better measurement of operating results. This change has been applied by retroactively restating the accompanying consolidated financial statements. The balance of retained earnings as of August 1, 1997 [see note 2 reorganization and management plan] and April 30, 1997 have been adjusted for the effect [net of taxes] of applying retroactively the new method of valuing inventories.
[4] Related Party Transactions
Pursuant to a Warehouse and Service Agreement dated as of September 1, 1996 [the "Warehousing Agreement"] between the Company and a related party [the "Entity"] wholly owned by a major stockholder, the Entity performs certain administrative services on behalf of the Company. Under the Warehousing Agreement, the Entity assists, among other things, in the maintenance of financial and accounting books and records, in the preparation of monthly financial accounts receivable aging schedules and other reports and in the performance of credit checks on the Company's customers. In consideration for these services, the Entity receives an annual fee, payable monthly, calculated at a percentage of the Company's invoiced sales originating at the warehouse ranging from 4% of the invoiced sales under $30 million to 3% of sales of $60 million or more. For sales not originating at the warehouse, the Entity receives a service fee in the amount of 1.5% of the Company's invoiced sales to customers and accounts located in the United States if payment is made by letter of credit and 1% is such customers and accounts are located outside the United States, irrespective of manner of payment. In addition, under the Warehousing Agreement, the Entity provides warehousing services consisting of receiving, shipping, and storing of the Company's merchandise. The Company pays the Entity a monthly fee of 3% of its invoiced sales originating at the warehouse in connection with these warehousing services performed by the Entity under the Warehousing Agreement.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[4] Related Party Transactions [Continued]
The Warehousing Agreement had a term of two years and was renewed on September 1, 1998 for another one year period. This agreement will automatically renew from year to year unless written notice of termination is given at least six months prior to the commencement of a renewal period. During the fiscal years ended April 30, 1999 and 1998, the Company accrued $289,415 and $183,095 in fees under the Warehousing Agreement. Total warehousing and administrative expenses charged to operations for the year ended April 30, 1999 were $289,415, with a balance due of $308,601 at April 30, 1999, for the year ended April 30, 1998 were $183,095 of which $19,186 was the balance due at April 30, 1998, for the nine months ended April 30, 1997 were approximately $364,000, and for the three months ended July 31, 1996 were approximately $95,000.
The related party has purchased inventory for the Company and has charged the Company for the invoiced amount of the inventory. In addition, pursuant to an unwritten understanding, the related party arranges for the issuance by its financial lender of letters of credit in favor of the Company's oversea supplier thereby enabling the Company to finance the purchases of its inventory.
Interest expense charged to operations for the year ended April 30, 1999 was $-0-, for the year ended April 30, 1998 was $65,568, for the nine months ended April 30, 1997 was $67,898 and $16,746 for the three months ended July 31, 1996.
Other amounts payable to the related party totaled $282,828 and $-0-, respectively, at April 30, 1999 and 1998. Such amounts represent unpaid inventory purchases and various fees due to the related party. The amounts payable for the purchase of inventory beared interest at the Citibank prime rate plus 1% from September 1996 to April 1997 and the Citibank prime rate plus 3% prior to September 1996. The prime rate used was 8.25% for the period September 1996 to April 1998 and 8.5% for the period prior to September 1996 . Interest expense charged to operations was $59,913 for the year ended April 30, 1998, $109,441 for the nine months ended April 30, 1997, and $36,350 for the three months ended July 31, 1996. The weighted average interest rate at April 30, 1998 and 1997 was 9.25%. The related party, as of May 1998, no longer charges interest on amounts paid on behalf of the Company for inventory purchases and various other fees.
[5] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of any deferred income taxes, as described in Statement No. 109, "Accounting for Income Taxes" of the Financial Accounting Standards Board. This method gives consideration to the future tax consequences associated with differences between financial statement and tax bases of assets and liabilities.
Income tax liabilities at April 30, 1999 and 1998 included in income taxes payable consist of the following:
1 9 9 9 1 9 9 8 ------- -------
Current taxes $ -- $ 79,422
Deferred taxes: Federal -- -- Other income and franchise taxes -- -- -------------- -------------- Total Income Tax Liability $ -- $ 79,422 -------------------------- ============== ==============
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[5] Income Taxes [Continued]
At April 30, 1999, there are temporary differences that would result in a short-term deferred tax asset of approximately $225,000 arising primarily from valuation allowances relating to accounts receivable and inventory. The Company also has net operating losses of approximately $2,700,000 and deferred amortization of approximately $100,000 resulting in a long-term deferred asset of approximately $1,280,000.
These assets, both short-term and long-term, have been reduced to zero by a valuation allowance of approximately $1,505,000 due to the uncertainty that the Company will be able to generate sufficient taxable income in the future necessary to utilized these assets.
The net operating losses will expire in fiscal 2014.
There are no temporary differences that would result in a deferred tax asset or liability at April 30, 1998.
A summary of the provision [credit] for income taxes is as follows:
Years ended April 30, ------------------------- 1 9 9 9 1 9 9 8 ------- ------- Current: Federal $ -- $ 51,490 State and Local -- 27,932 -------------- --------------- -- 79,422 -------------- --------------- Deferred: Federal -- -- State and Local -- -- -------------- --------------- -- -- -------------- --------------- $ -- $ 79,422 ============== ===============
The reconciliation of the federal statutory income tax expense [credit] to the Company's actual income tax [credit] is as follows:
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[6] Commitments and Contingencies
[A] Royalty Obligations - The Company has entered into various royalty, licensing, and commission agreements for products sold by the Company. These agreements provide for minimum payments and a percentage of specific product sales, over a period of one to eight years. Royalty expense for the year ended April 30, 1999 was approximately $788,000, for the year ended April 30, 1998 was approximately $426,000, for the nine months ended April 30, 1997 was approximately $353,000 and for the three months ended July 31, 1996 was approximately $94,000.
[B] 401(k) Plan - On January 1, 1990, the Company adopted a 401[k] plan. The plan was officially terminated by the Board of Directors as of December 31, 1997.
The 401[k] expense amounted to $-0- for the year ended April 30, 1999 and 1998, and for the period May 1, 1996 to April 30, 1997.
[C] Litigation - In the normal course of its operations, the Company has been named as a defendant in a patent infringement lawsuit. Company counsel has advised the Company that an unfavorable outcome with respect to this claim is unlikely and it is not possible to estimate a range of potential loss.
[D] Consulting Agreement - The Company had an unwritten agreement for $5,000 month to month for consulting services in connection with new product development. This agreement was terminated in November 1998.
[E] Infomercial Production Agreement - On February 12, 1998, the Company entered into an infomercial production agreement to produce an infomercial for a total commitment of $284,000. As of April 30, 1998, $142,000 was paid under this agreement and was classified as a prepaid expense. The entire amount was expensed in fiscal 1999.
[7] Major Customers
During the year ended April 30, 1999, sales to three major customers were approximately 25%, 20%, and 14% [$1,647,000, $1,341,000 and $928,000, respectively] of the Company's net sales. At April 30, 1999, accounts receivable from these customers totaled $861,000. There were no material receivables subject to foreign currency fluctuations.
During the year ended April 30, 1998 sales to major customers were approximately $2,007,985. At April 30, 1998 accounts receivable from these customers totaled $262,246.
During the nine months ended April 30, 1997 sales to major customers were approximately $3,080,180. At April 30, 1997 accounts receivable from these customers totaled $379,902. During the three months ended July 31, 1996, sales to major customers were approximately $837,450. At July 31, 1996, accounts receivable from these customers totaled $548,726.
[8] Credit Risk/financial Instruments
Due to the nature of its business and the volume of sales activity, the Company's cash balance occasionally exceeds the $100,000 protection of FDIC insurance. At April 30, 1999 and 1998 such excess balances totaled $121,915 and $1,518,673, respectively. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash and cash equivalents.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[8] Credit Risk/financial Instruments [Continued]
The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that it does not have an accounts receivable credit risk exposure beyond the allowance provided. The Company does not require collateral or other security to support financial instruments subject to credit risk.
[9] Significant Risks And Uncertainties
[A] The Company's exercise products compete with products marketed and sold by a number of companies. The Company's main competitors in this area possess far greater financial and other resources, including sales forces, than the Company. However, the Company believes that as a result of its ability to use trademark names for which it pays royalties, it will be able to retain its share of the market. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
The Company's luggage products compete with products designed by a number of the largest companies in the industry. The Company believes that because of its concentration on the upscale lifestyle and more specialized leisure market that are associated with its use of trademark names, the Company will be able to continue to grow its luggage business. Nevertheless, there can be no assurance that the Company will be able to effectively compete with these companies as well as with other smaller entities.
[B] Most of the Company's products are purchased from the Indonesia, Taiwan, and the United States. The Company believes that, if necessary, it will be able to obtain its products from firms located in other countries at little, if any, additional expense. As a consequence, the Company believes that an interruption in deliveries by a manufacturer located in a particular country will not have a material adverse impact on the business of the Company. Nevertheless, because of political instability in a number of the supply countries, occasional import quotas and other restrictions on trade or otherwise, there can be no assurance that the Company will at all times have access to a sufficient supply of merchandise.
[10] Going Concern
The Company's financial statements are prepared in conformity with generally accepted accounting principles, which contemplates the realization of assets and settlements of liabilities in the normal course of business and continuation of the Company as a going concern. The Company has incurred a net loss of $3,333,725 for the year ended April 30, 1999, and utilized $2,276,899 in cash for operating activities for the year ended April 30, 1999. These factors create uncertainty whether the Company can continue as a going concern. The Company's plans to mitigate the effects of the uncertainties are to attain its projected positive cash flows from operations as a result of an improved profitability which is projected as a result of anticipated revenue growth with large customers along with implementing its plan on cutting operational expenses.
Management believes that these plans can be effectively implemented in the next twelve months. The Company believes it will achieve profitability and positive cash flow in the next twelve months. The Company's ability to continue as a going concern is dependent on the implementation and success of these plans. The financial statements do not include any adjustments in the event the Company is unable to continue as a going concern. There can be no assurance that management's plans to reduce operating losses will be successful. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[11] Capital Stock
[A] Public Offering - On December 22, 1997, the Company completed a public sale of 1,200,000 units, each consisting of one share of common stock, one Class A Warrant and one Class B Warrant. Each Class A warrant entitled the holder to purchase one share of common stock at $6 until June 12, 1999 (the expiration date of these securities has been extended until June 12, 2000). Each Class B warrant entitles the holder to purchase one share of common stock at $10 until December 12, 2000. In addition, the Company entered into a unit purchase option from the underwriter to purchase an aggregate of 120,000 units at a subscription price of $8.25 per unit commencing December 12, 1998 and expiring December 11, 2002. Each unit purchase option to the underwriter consists of one share of common stock, one Class A warrant to purchase one share of common stock at $9.90 per share and one Class B warrant to purchase one share of common stock at $16.50 per share. The net proceeds of approximately $4,800,000 were being used for the repayment of related party debt, purchase of inventory, general corporate services, and working capital.
The Company entered into a two year consulting agreement with the underwriter to provide financial consulting services for a fee of $20,000.
As part of the consideration of its services in connection with the registration statement, the Company agreed to issue to the underwriter, for nominal consideration, warrants to purchase up to 120,000 units at an exercise price of $8.25 per unit for a period of five years. The Class A Warrants and Class B Warrants underlying the units included in the underwriter's warrants will be exercisable at a price of $9.90 and $16.50 per share, respectively, or 165% of the then exercise price of the warrants offered to the public for a period of five years commencing with the closing of the registration statement. The non-cash cost of such warrants, representing a cost of raising capital, will be recorded as a charge and credit to additional paid-in capital when the warrants are issued. As capital in nature, they are not compensatory.
The Company issued 20,000 shares for legal services valued at $74,655 in connection with the Company's public offering.
[B] Earn Out Agreement - In March 1997, the Company entered into an agreement with Marton Grossman, the Company's chairman and president which provides for the issuance to Mr. Grossman an aggregate 2,000,000 shares of common stock if the Company reaches certain earnings criteria as follows:
Earnings Before Shares to Year Ending Income Tax Be Issued ----------- --------------- --------- April 30, 1998 $ 500,000 400,000 April 30, 1999 $ 1,000,000 600,000 April 30, 2000 $ 1,500,000 1,000,000
If the earning criteria is not met in any one of the above years, but is cumulatively met in the subsequent year, then the number of shares to be issued will be the cumulative number of shares at that year end. Issuance of the shares will result in compensation expense to the Company. Compensation expense will be measured based on the fair value of the shares at the time the performance conditions are achieved. Determination will be based on the best estimate of the outcome of the performance condition. Compensation will be recognized in the periods in which the performance conditions are achieved.
The Company did not meet the performance conditions for the years ended April 30, 1999 and 1998.
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[12] New Authoritative Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and how it is designated, for example, gain or losses related to changes in the fair value of a derivative not designated as a hedging instrument is recognized in earnings in the period of the change, while certain types of hedges may be initially reported as a component of other comprehensive income [outside earnings] until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS No. 133 should be as of the beginning of a fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. The Company does not currently have any derivative instruments and is not currently engaged in any hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs, and requires that such costs to be expensed as incurred. SOP 98-5 applies to all nongovernmental entities and is generally effective for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements previously have not been issued. The adoption of SOP 98-5 is not expected to have a material impact on results of operations, financial position, or cash flows of the Company as the Company's current policy is substantially in accordance with SOP 98-5.
The Financial Accounting Standards Board ["FASB"] has had on its agenda a project to address certain practice issues regarding Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The FASB plans on issuing various interpretations of APB Opinion No. 25 to address these practice issues. The proposed effective date of these interpretations would be the issuance date of the final Interpretation, which is expected to be in September 1999. If adopted, the Interpretation would be applied prospectively but would be applied to plan modification and grants that occur after December 15, 1998. The FASB's tentative interpretations are as follows:
* APB Opinion No. 25 has been applied in practice to include in its definition of employees, outside members of the board or directors and independent contractors. The FASB's interpretation of APB Opinion No. 25 will limit the definition of an employee to individuals who meet the common law definition of an employee [which also is the basis for the distinction between employees and nonemployees in the current U.S. tax code]. Outside members of the board of directors and independent contractors would be excluded from the scope of APB Opinion No. 25 unless they qualify as employees under common law. Accordingly, the cost of issuing stock options to board members and independent contractors not meeting the common law definition of an employee will have to be determined in accordance with FASB Statement No. 123, "Accounting for Stock-Based Compensation," and usually recorded as an expense in the period of the grant [the service period could be prospective, however, see EITF 96-18].
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[12] New Authoritative Pronouncements [Continued]
* Options [or other equity instruments] of a parent company issued to employees of a subsidiary should be considered options, etc. issued by the employer corporation in the consolidated financial statements, and, accordingly, APB Opinion No. 25 should continue to be applied in such situations. This interpretation would apply to subsidiary companies only; it would not apply to equity method investees or joint ventures.
* If the terms of an option [originally accounted for as a fixed option] are modified during the option term to directly change the exercise price, the modified option should be accounted for as a variable option. Variable grant accounting should be applied to the modified option from the date of the modification until the date of exercise. Consequently, the final measurement of compensation expense would occur at the date of exercise. The cancellation of an option and the issuance of a new option with a lower exercise price shortly thereafter [for example, within six months] to the same individual should be considered in substance a modified [variable] option.
* Additional interpretations will address how to measure compensation expense when a new measurement date is required.
[13] Debt
On April 30, 1998, the Company entered into a credit agreement with The Chase Manhattan Bank for maximum borrowings of $1,500,000 in the form of letters of credit and bankers acceptances. The agreement also provides for a security interest in the inventory and notes and accounts receivable of the Company. The agreement also provides for the personal guarantee of the President and major shareholder of the Company in the amount of $250,000. At April 30, 1999, $277,025 is available under the letters of credit and bankers acceptances. Banker's acceptances totaling $850,000 are outstanding at April 30, 1999 with maturity dates ranging from June to September of 1999. The weighted average interest rate at April 30, 1999 was 8.5%.
[14] Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Values of Financial Instruments," requires disclosing fair value to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade receivables and payables, and short-term debt, it was assumed that the carrying amount approximated fair value because of the near term maturities of such obligations.
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic International, Ltd and its subsidiary as of April 30, 1999 and 1998, and for the years then ended, the nine months ended April 30, 1997, and the three months ended July 31, 1996 is included on page of this Form 10-K. In connection with our audit of such financial statements, we have also audited the related accompanying financial statement Schedule II - Valuation and Qualifying Accounts for the years ended April 30, 1999 and 1998, the nine months ended April 30, 1997, and the three months ended July 31, 1996.
In our opinion, the financial statements schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
MOORE STEPHENS, P. C. Certified Public Accountants.
New York, New York June 30, 1999
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS