<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K/A
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

       For Fiscal Year ended April 30, 1997 Commission File Number 0-21475

                           DYNAMIC INTERNATIONAL, LTD.
             (Exact Name of Registrant as Specified in its Charter)

            Nevada                                     93-1215401
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization) 

58 Second Avenue, Brooklyn, New York                        11215
(Address of Principal Executive Offices)                  (Zip Code)

Registrant's telephone number, including Area Code:          (718) 369-4160
                                                        

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock (par value $.001 per share)
                                 Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.   Yes [x]   No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court. 
Yes [x] No[ ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant: can not be determined because of the absence of an active trading
market for Registrant's securities.

The number of shares outstanding of Registrant's Common Stock as of June 30,
1997: 3,198,258
<PAGE>   2
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                      INDEX

                                                                        Page No.

PART I   ITEM 1.  BUSINESS..................................................3
              General.......................................................3
              Plan of Reorganization........................................3
              Products......................................................3
              Design and Development........................................4
              Sales and Marketing...........................................4
              Competition...................................................5
              Intellectual Property--License Agreements.....................5
              Management Agreement with Achim Importing Co., Inc............6
              Employees.....................................................7
         ITEM 2.  PROPERTIES................................................7
         ITEM 3.  LEGAL PROCEEDINGS.........................................7
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......7

PART II  ITEM 5.  MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND
                       RELATED STOCKHOLDER MATTERS..........................8
         ITEM 6.  SELECTED FINANCIAL DATA...................................8
         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS..................9
              General.......................................................9
              Plan of Reorganization........................................9
              Results of Operations for the Nine Months Ended April 30,
                   1997 and the Three Months Ended July 31, 1996 Com-
                   pared to the Fiscal Year Ended April 30, 1996............10
              Results of Operations for the Years Ended April 30, 1996
                   and 1995.................................................12
              Liquidity and Capital Resources...............................14
              Seasonality and Inflation.....................................15
         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............16
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                       ACCOUNTING AND FINANCIAL DISCLOSURE..................16

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........17
              Officers and Directors........................................17
              Board of Directors............................................17
         ITEM 11. EXECUTIVE COMPENSATION....................................17
              Compliance with Section 16(a) of the Securities
                   Exchange Act of 1934.....................................19
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                       OWNERS AND MANAGEMENT................................19
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
                       TRANSACTIONS.........................................19

PART IV  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                       AND REPORTS ON FORM 8-K..............................22

         SIGNATURES.........................................................23

         EXHIBITS...........................................................24

         FINANCIAL STATEMENTS AND SCHEDULES.................................F-1


                                       -2-
<PAGE>   3
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                                      PART I

ITEM 1.   BUSINESS

GENERAL

Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the
design, marketing and sale of a diverse line of hand exercise and light exercise
equipment, including hand grips, running weights, jump ropes and aerobic steps
and slides. It markets these products under the licensed trademarks SPALDING(TM)
and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM).
In addition, it designs and markets sports bags and luggage, which are marketed
primarily under the licensed name JEEP(TM) and under its own names PROTECH 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 issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, as part of the Plan, the
Company, then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM 3.
LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

PRODUCTS

      EXERCISE EQUIPMENT - The Company's line of exercise equipment consists
      primarily of handheld products, including dumbbells, ankle and wrist
      weights, hand grips, jump ropes, exercise suits, slimmer belts and
      strength training products. In addition, the Company markets light weight
      equipment such as aerobic steps and slides and exercise mats. The Company
      also carries a line of small electronic devices designed to monitor
      physical activity such as stopwatches, pedometers, pulse meters and
      calorie counters.

                                       -3-
<PAGE>   4
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


      SPORTS BAGS/LUGGAGE - The Company's line of sports bags/luggage consists
      primarily of duffle bags, weekend bags, garment bags, suitcases, pilot
      cases and flight attendant wheeled cases. Some of the models are equipped
      with wheels and/or retractable handles.

      OTHER PRODUCTS - The Company, through a wholly-owned subsidiary, has
      obtained the exclusive rights to the patents underlying the technology
      used in an insulated bag incorporating a wrap-around gel pack or freeze
      pack with the ability to cool and preserve food and other products for an
      extended period of time. In addition, it obtained the trademarks
      FREEZY-BAG(TM) and FREEZYGEL(TM) under which the products are sold. See
      "Intellectual Property--License Agreements". The Company is currently
      testing the marketability of these products.

The Company may from time to time manufacture and/or market additional products
under its own names or under licensed names.

DESIGN AND DEVELOPMENT

The Company usually designs its own exercise equipment and creates its own molds
and tooling. Such molds and tooling are used by the manufacturers to produce the
equipment. The Company retains an ownership interest in the molds which are
returned to it upon the termination of the Company's relationship with a
particular manufacturer. The Company has been granted a number of design patents
with respect to certain of its products. 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 $102,000 on design activities, including fees to
designers and patent attorneys. The Company may, from time to time, utilize the
services of consultants for product and package design.

Most of the Company's products are manufactured in the Philippines, Taiwan, and
Hong Kong, which in the most recent fiscal year accounted for approximately 38%,
27%, and 10% of the Company's products, respectively. In addition, the Company's
products are manufactured in the United States, People's Republic of China, and
Indonesia. Exercise equipment is usually shipped by the manufacturers to the
Company within 45 days of the placement of an order. Orders for sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.

SALES AND MARKETING

The Company sells its products on a wholesale basis only. Most of its products
are sold to catalog showrooms, drug chains, discount stores and sporting goods
chains. For the fiscal year ended April 30, 1997 approximately 25% and 13% of
the Company's revenues were derived from sales to Kmart and Service Merchandise,
respectively. No other customer accounted for more than 10% of the Company's
revenues. For the fiscal year ended April 30, 1997, sales of exercise equipment
accounted for approximately 53% of the Company's revenues while 47% of the
Company's revenues were derived from the sale of sports bags/luggage.

The Company sells its products primarily through independent sales agents on a
commission-only basis. The Company currently engages approximately 23 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such

                                       -4-
<PAGE>   5
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sale price of its products. Although the Company believes that its
sales agents sell products exclusively on behalf of the Company, there are no
agreements that prohibit them from selling competing products.

In addition, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company has begun
deliveries to Service Merchandise Co., Inc. and Kohl's Department Stores.
Although the scope of this marketing effort is currently limited, the Company
intends to expand the number of private label transactions. No assurance can be
given that its efforts in this area will be successful.

The Company currently anticipates that it may increasingly focus its attention
on direct response marketing. The Company believes that its products are
particularly well suited for so-called impulse buys. Therefore, it intends to
develop plans to use infomercials to market its products. To date, no
significant expenditures have been made in connection with this effort.

COMPETITION
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc. All
of these companies possess far greater financial and other resources, including
sales forces, than the Company's. However, the Company believes that as a result
of its ability to use the trademarked names SPALDING(TM) and KATHY IRELAND(TM)
it will be able to retain its share of the market. Nevertheless, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.

The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.

INTELLECTUAL PROPERTY--LICENSE AGREEMENTS
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH TRAVEL
SYSTEMS & DESIGN and EXER-SLIDE.

      LICENSE AGREEMENTS - The Company sells a number of its products under
      licensed names. The Company has entered into licensee agreements which
      provide for the grant of licenses to the Company and the payment of
      royalties by the Company, as follows:

             JEEP -- Under an agreement dated January 8, 1993, as amended by
      letter amendment dated January 8, 1996, between the Company and the
      Chrysler Corporation (as so amended, the "Jeep Agreement"), the Company
      was granted the exclusive license to use the names JEEP, WRANGLER and
      RENEGADE in connection with the manufacture, sale and distribution of
      sports bags/luggage products. The current expiration date of the Jeep
      Agreement is December 31, 1998. The parties have informally agreed to
      start negotiations regarding the terms of an extension of the current
      agreement.

             SPALDING -- Pursuant to two separate agreements between the Company
      and Spalding & Evenflo Companies Inc. dated November 1, 1992 and April 1,
      1994, the Company was granted the exclusive right to use the name SPALDING
      in connection with the sale and distribution of a number of products,
      including weight bars and large exercise machines. The agreements will
      expire in September 1997. However, the Company is currently negotiating a
      renewal of the agreement relating to the handheld exercise equipment and
      it is

                                       -5-
<PAGE>   6
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


      confident that it will be able to negotiate such renewal. Nevertheless, no
      assurance can be given that the Company will be successful in negotiating
      a renewal of the agreement.

             KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated
      December 22, 1994, Ms. Ireland approves and endorses certain exercise
      equipment designed and manufactured by the Company. Under the agreement,
      the Company has the right to use her name in connection with the equipment
      and Ms. Ireland will make appearances to promote such equipment. In
      addition, the Company has the right to use her photograph and likeness in
      connection with the sale of the equipment. The agreement is currently
      scheduled to expire in June 1998 but is subject, at the Company's option,
      to renewal until June 2000.

             FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996,
      between New Century Marketing & Distributors, Inc. and a wholly-owned
      subsidiary of the Company, the Company obtained the exclusive rights to a
      patented technology as well as to the trademarked names FREEZY-BAG and
      FREEZYGEL. The technology has the ability to cool foods and other products
      and is used in the wrapping of such products. The agreement has a term of
      two years but is renewable, at the option of the Company, for additional
      one-year periods.

MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.

Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim, Achim performs
certain administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers.

In consideration for these services, Achim receives an annual fee, payable
monthly, calculated as a percentage of the Company's invoiced sales originating
at the warehouse ranging from 4% of invoiced sales under $30 million to 3% for
sales of $60 million or more. For sales not originating at the warehouse, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment.

In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.

The Warehousing Agreement has a term of two years and is automatically renewable
for additional one-year periods unless written notice of termination is given at
least six months prior to the commencement of a renewal period. During the
fiscal year ended April 30, 1997, the Company accrued approximately $458,488 in
fees under the Warehousing Agreement consisting of $94,907 for the three months
ended July 31, 1996 and $363,581 for the nine months ended April 30, 1997.

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.

In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
will purchase the products directly from the manufacturer and resell them to the

                                       -6-
<PAGE>   7
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


Company in order to accommodate Achim's commercial lenders who often require a
security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1997, the Company owed an amount of
$2,590,360, including interest of $260,795 under this arrangement. See "Certain
Relationships and Related Transactions". As of June 30, 1997, this sum had
decreased to $1,871,029, including interest of $276,894. The weighted average
interest rate paid by the Company to Achim at June 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.

EMPLOYEES

As of June 30, 1997, the Company employed 12 persons, of whom four were
executive officers, three were engaged in administrative and clerical
activities, three were engaged in sales and two were involved in warehousing and
shipping. None of the Company's employees is represented by a union and no work
stoppages have occurred.

ITEM 2.           PROPERTIES

The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. See ITEM
1. BUSINESS "Management Agreement with Achim Importing Co., Inc." and ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ITEM 3.           LEGAL PROCEEDINGS

On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.




                                       -7-
<PAGE>   8
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                     PART II

ITEM 5.  MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

Until 1995, the Company's Common Stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the Bankruptcy
Code in August 1995, no trading information is available after the fiscal
quarter ended July 31, 1995. The following table sets forth the high and low bid
quotations for the Company's Common Stock and Warrants through the quarter ended
July 31, 1995. These quotations have been reported by the National Association
of Securities Dealers, Inc. and represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions.

<TABLE>
<CAPTION>
                  Fiscal Quarter                              Common Stock
                      Ended                               High            Low
                      -----                               ----            ---
<S>                                                     <C>             <C>   
                 April 30, 1995                          $2.000          $0.875
                  July 31, 1995                          $1.438          $0.375
</TABLE>

The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.

ITEM 6.           SELECTED FINANCIAL DATA

The table on the following page summarizes certain financial data that are
qualified by the more detailed financial statements included herein. Effective
August 8, 1996, the Company emerged as the surviving entity in a merger with
DCL. The balance sheet of the combined entity was substantially similar to that
of DCL immediately prior to the merger. As a consequence, the financial data of
the Company for the reporting periods July 31, 1996 and prior consist of those
of DCL.

The Company has not paid a cash dividend to its public shareholders on its
Common Stock. The Company does not contemplate paying any cash dividends on its
Common Stock in the near future.

Due to the reorganization (see Note 2 to the Financial Statements), operating
results of the reorganized company may not be comparable to those of the
predecessor company.

<TABLE>
<CAPTION>
                               REORGANIZED  
                                 COMPANY*                                   PREDECESSOR COMPANY
                                               ---------------------------------------------------------------------------
                              9 Months Ended   3 Months Ended                        Year Ended April 30
                                                               -----------------------------------------------------------
                                  4/30/97          7/31/96          1996            1995            1994           1993
<S>                            <C>             <C>             <C>             <C>             <C>            <C>         
Net Sales                      $  7,492,729    $  1,983,164    $  7,151,715    $ 32,533,097    $ 29,497,353   $ 25,735,479
--------------------------------------------------------------------------------------------------------------------------
Income
(Loss)
for Year                            119,399         (76,364)      6,945,299     (11,227,335)        244,308       (427,409)
--------------------------------------------------------------------------------------------------------------------------
Net Income
(Loss)
per Share                               .04
--------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
Working
Capital
(Deficit)                           (45,789)                       (293,884)     (7,493,435)      3,094,821      3,173,751
--------------------------------------------------------------------------------------------------------------------------
Total
Assets                            4,807,062                       4,253,396       6,414,185      16,677,772     13,373,816
--------------------------------------------------------------------------------------------------------------------------
Long Term
Obligations
Including
Capitalized
Lease
Obligations                         215,254                          23,965         116,124         127,877         92,129
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Management's assumptions used in determining the Company's reorganization value
are discussed in Note 2 to the Financial Statements.


                                       -8-
<PAGE>   9
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


         (1) Due to the reorganization (see Note 2 to the financial statements),
operating results of the reorganized company may not be comparable to those of
the predecessor company. Management's assumptions used in determining the
Company's reorganization value are discussed in Note 2 to the financial
statements.

         (2) In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Sales of these products began in June
1994. Total sales of these products amounted to approximately $24,000,000 from
June 1, 1994 to August 23, 1995, the date the Company filed its Chapter 11
petition. Approximately 73% of these products were shipped directly to
customers. Due to serious manufacturing defects and poor construction of the
Company's products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996, the Company's Plan was approved by the Bankruptcy Court. During
July and August 1996, the Company satisfied its obligations under the Plan
through cash payments and the issuance of common stock.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

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.

                                       -9-
<PAGE>   10
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. The
amount of claims allowed under the bankruptcy proceedings, aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG, which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock in satisfaction
of such promissory note, representing approximately 93% of the issued and
outstanding shares thereby gaining absolute control over the Company's affairs.
See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash and
securities distributed under the plan of reorganization aggregated $531,561. An
amount of $16,692,193, representing the difference between the value of the
total distribution and the amount of allowable claims under the bankruptcy, was
recorded as an extraordinary gain.

In addition, under the Plan, the Company merged with a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.

Upon emergence from bankruptcy, the Company adopted fresh-start reporting on
July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years.

Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND THE THREE
MONTHS ENDED JULY 31, 1996 COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1996

Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996, respectively, were, on a combined
basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise
equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997,
and the three months ended July 31, 1996, respectively, were $5,084,000, on a
combined basis. These combined sales of exercise products were $532,000 or 9%
less than the previous fiscal year. Sales of sports bags/luggage products of
$3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three
months ended July 31, 1996, respectively, were $4,391,000, on a combined basis.
These combined sales of sports bags/luggage products were 7% less than the
previous fiscal year. Sales for the fiscal year ended April 30, 1996 were
reduced by $3,211,000 of customer credits for a discontinued line of manual
treadmills and ski machines.

The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.

Operating expenses of $2,227,000 and $558,000 for the nine months ended April
30, 1997 and three months ended July 31, 1996, respectively, were, on a combined
basis, $3,899,000 less than the fiscal year ended April 30, 1996, due to the
reorganization.



                                      -10-
<PAGE>   11
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


The following is a discussion of the effect of the Company's reorganization and
adoption of fresh-start reporting on the various income statement line items
during the nine-month period ended April 30, 1997. For this purpose, the nine
months ended April 30, 1997 are compared to the nine months ended April 30,
1996. Decreases for the nine months ended April 30, 1997 compared to the nine
months ended April 30, 1996 are represented approximately by net changes in the
following expenses:

<TABLE>
<S>                       <C>     
Freight out ...........   $ 10,000
Insurance claims ......   $ 70,000
Lawsuits ..............   $289,000
Showroom rent .........   $319,000
Officers' salaries ....   $ 81,000
Office salaries .......   $262,000
Warehouse salaries ....   $115,000
Salesmen salaries .....   $ 57,000
Payroll taxes .........   $ 45,000
Fringe benefits .......   $  2,000
Repairs & maintenance .   $  4,000
Travel & entertainment    $ 30,000
Office equipment rental   $  7,000
Miscellaneous taxes ...   $  8,000
Consultant fees .......   $105,000
Promotional material ..   $189,000
Pension costs .........   $726,000
Telephone .............   $ 31,000
Data-processing fees ..   $  6,000
Postage ...............   $ 10,000
Bad debt expense ......   $666,000
</TABLE>

Freight out decreased by $10,000 due primarily to reduced volume.
Insurance claims and lawsuits decreased by $70,000 and $289,000, respectively,
     as a result of the accrual of proofs of claim filed during the bankruptcy
     proceeding as liabilities subject to compromise during the nine-month
     period ended April 30, 1996.
Showroom rent decreased by $319,000 since a proof of claim for the balance of
     the lease was recorded during the nine-month period ended April 30, 1996.
     The showroom was closed in October 1995.
Officers salaries decreased by $81,000 due to reduction in the salary of the 
     former President of the Company in September 1995, and the elimination of a
     Chief Operating Officer position in December 1995. These changes resulted
     in decreases of $37,000 and $44,000, respectively.
Office salaries decreased by $262,000 due primarily to the elimination of the
     Vice President of Operations position in June 1996 which accounted for
     $119,000 of the reduction. In addition, the position of Credit Manager was
     eliminated in May 1996 resulting in a savings of $45,000. The balance of
     $98,000 is due to the overall reduction of the office staff as a part of
     the reorganization.
Warehouse salaries decreased by $115,000 due to the elimination of warehouse
     employees under the reorganization.
Salesmen salaries decreased by $57,000 due to the elimination of a sales
     position in August 1996. 
Payroll taxes and fringe benefits decreased by $45,000 and $2,000, respectively,
     due primarily to the positions and employees eliminated during the 
     reorganization.
Repairs and maintenance decreased by $4,000.
Travel and entertainment expenses decreased by $30,000 due to the decrease in
     executive and sales personnel. 
Office equipment rental decreased by $7,000 due to a reduction of the equipment
     rented due to the reorganization.
Miscellaneous taxes decreased by $8,000 as a consequence of the change in the
     Company's state of incorporation from Delaware to Nevada which resulted in
     the elimination of Delaware franchise taxes.
Consultant fees decreased by $105,000 because the Company did not hire
     consultants during the nine months ended April 30, 1997.
Promotional materials decreased by $189,000 due to decreased spending for these
     materials. 
Pension costs decreased by $726,000 because a proof of claim filed by the 
     Pension Benefit Guarantee Corp. for this amount was recorded as part of the
     reorganization during the nine months ended April 30, 1996. 
Telephone expenses decreased by $31,000 due to the closing of the showroom in 
     October 1995. 
Data-processing costs decreased by $6,441 due to the reorganization of the 
     Company.
Postage decreased by $10,000 due to improved cost management.
Bad debt expense decreased by $666,000 because of improved collections and 
     decreased sales volume.

Interest expense of $198,800 and $57,300 for the nine months ended April 30,
1997 and July 31, 1996, respectively, were, on a combined basis, $127,400 or 33%
lower than the previous fiscal year. This decrease is the result of a $223,000
decrease in contractual interest which was offset by an increase in related
party interest of $96,000. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS.

The Company's pre-tax profits of $147,000 for the fiscal year ended April 30,
1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31,
1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As
a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996


                                      -11-
<PAGE>   12
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


to July 31, 1996. The Company also has net operating loss carry-forwards of
approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision of $104,000 for
the fiscal year ended April 30, 1997 is based on pretax profits of $223,000 for
the period August 9, 1996 to April 30, 1997. The effective tax rate is 46%
comprised of 26% of federal taxes and 20% of state and local taxes.

The following table sets forth the results of operations for the periods
discussed above:

<TABLE>
<CAPTION>
                             Reorganized
                               Company          Predecessor Company
                            -------------  ------------------------------
                            For 9 Months   For 3 Months   For Fiscal Year
                            Ended 4/30/97  Ended 7/31/96  Ended 4/30/96
                            -------------  -------------  ---------------
<S>                           <C>           <C>            <C>      
Sales .....................     7,492,700     1,983,200      7,151,700
Other income ..............        54,600        10,200         98,300
                              -----------   -----------    -----------
                                7,547,300     1,993,400      7,250,000
Cost of sales .............     4,850,000     1,454,600      9,480,500
                              -----------   -----------    -----------
Gross profit (loss) .......     2,697,300       538,800     (2,230,500)
                              -----------   -----------    -----------
Operating Expenses ........     2,226,600       556,500      6,683,200
Interest ..................       198,800        57,300        383,500
                              -----------   -----------    -----------
                                2,425,400       613,800      7,066,700
                              -----------   -----------    -----------
Reorganization ............        48,900         1,300        449,700
                              -----------   -----------    -----------
Pretax income (loss) ......       223,000       (76,300)    (9,746,900)
Tax .......................       103,700            --     (7,511,000)
                              -----------   -----------    -----------
Income (loss) before
   extraordinary item .....       119,300       (76,300)    (2,235,900)
                              -----------   -----------    -----------
Extraordinary item
   gain on discharge of
   pre-petition liabilities            --            --     16,692,200
Tax .......................            --            --      7,511,000
                              -----------   -----------    -----------
Extraordinary gain,
   net of tax .............            --            --      9,181,200
                              -----------   -----------    -----------
NET INCOME (LOSS) .........       119,300       (76,300)     6,945,300
                              ===========   ===========    ===========
</TABLE>

On July 10, 1997, the Company and MG agreed that no further payments shall be
payable to MG under the Note (see ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS) until the consummation of the Company's contemplated public
offering or at the scheduled maturity of the Note, whichever occurs earlier.

RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995

Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its sports bags/luggage products which
led to a decline in sales of $5,334,700 and $1,333,600, respectively, to
$5,615,600 and $4,701,800, respectively. Sales of exercise equipment and sports
bags/luggage products during this period were offset by credits of $3,210,900
issued to customers in connection with the discontinued line of manual
treadmills and ski machines.

                                      -12-
<PAGE>   13
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Sales of the treadmills and ski machines began in
June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to our customers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was forced to allow substantial chargebacks by its customers.
Although, pursuant to a written agreement, the manufacturers acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, they breached this agreement soon thereafter. The significance of the
defective problem was evident in April 1995. During this month, the Company
issued credits to customers for approximately $5,000,000 of the $7,487,000 of
credits for the fiscal year ended April 30, 1995. The Company issued another
$3,211,000 in credits for defective merchandise during the fiscal year ended
April 30, 1996.

The following table sets forth the financial statement effect of the manual
treadmills and ski machines for the periods indicated:

<TABLE>
<CAPTION>
                     Reorganized
                      Company                         Predecessor Company
                    -------------     ------------------------------------------------------
                    For 9 Months      For 3 Months     For Fiscal Year       For Fiscal Year
                    Ended 7/31/96     Ended 7/31/96     Ended 4/30/96         Ended 4/30/95
<S>                     <C>             <C>             <C>                 <C>         
Sales ...........       $      --       $      --       $    597,000        $ 23,255,000
Credits .........              --              --         (3,210,900)         (7,487,000)
                        ---------       ---------       ------------        ------------
Net Sales .......              --              --         (2,613,900)         15,768,000
Inventory Reserve              --              --                 --          (1,320,000)
Cost of Sales ...              --              --            156,000         (18,604,000)
                        ---------       ---------       ------------        ------------
Gross Loss ......       $      --       $      --       $ (2,457,900)       $ (4,156,000)
</TABLE>

The sale of these products was discontinued in August 1995 and all inventory was
disposed of by October 1995. Currently, the Company does not anticipate that
there will be additional returns of these products or that any claims remain to
be settled.

In addition, the Company's operating expenses decreased by approximately
$1,083,300 to $6,683,200. As a result of the Company's reorganization, the
Company had decreases in the following expenses:

                                    Officers salaries         $160,200
                                    Office salaries           $180,100
                                    Salesmen salaries         $316,300
                                    Payroll taxes             $ 73,500
                                    Fringe benefits           $145,400
                                    Travel & entertainment    $236,600

         Officers salaries decreased by $160,000 as a result of a reduction in
         the salary of the Company's former President in September 1995, and the
         separation from the Company of the Senior Executive Vice President in
         January 1995. These changes accounted for decreases of $67,000 and
         $73,000, respectively. Office salaries decreased by $180,000 due to the
         overall reduction in office personnel in October 1995 as the operations
         of the Company were consolidated and Achim began to supply
         administrative and warehousing services. Salesmen salaries decreased by
         $316,000 because bonuses and overrides were discontinued after August
         1995. Payroll taxes and fringe benefits decreased by $74,000 and
         $145,000, respectively, due to the overall reduction in office
         personnel in October 1995 as the operations of the Company were
         consolidated and Achim began to supply administrative and warehousing
         services. Travel and entertainment decreased by $237,000 due to the
         reduction in executive staff and the cost containment measures
         instituted due to the reorganization.

For the fiscal year ended April 30, 1996, after giving effect to an
extraordinary gain as a result of the discharge of pre-Petition liabilities in
the amount of $16,692,200, the Company recorded net income of $6,945,300,
compared to a net loss of $11,227,300 during the previous fiscal year. The
Company would have recorded a net loss of $9,746,900 before the extraordinary
gain, or a decrease of $1,562,500 from the prior fiscal year. This decrease
primarily reflected a reduction in the Company's selling and administrative
expenses of approximately



                                      -13-
<PAGE>   14
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


$1,083,300 and a reduction in interest expense of $1,001,400. This decrease was
due to the Company's exemption from making interest payments of $558,312 during
the reorganization proceedings. In addition, interest expense decreased by
$456,912 due to reduced borrowing for the year ended April 30, 1996.

The extraordinary gain on debt discharge of pre-Petition liabilities which is
recorded on the Company's books in fiscal year ended April 30, 1996 is taxable
in the subsequent fiscal period, as the actual distribution to discharge the
debt occurred in July, 1996. For tax purposes, without the gain on debt
discharge, the Company had an operating loss for the year ended April 30, 1996
which resulted in the Company not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the
Company's pretax loss of $11,309,000 resulted in a federal tax benefit of
$3,845,000 utilizing the statutory rate. As a result of changes to the valuation
allowance, the reversal of previously established deferred tax assets and losses
for which no benefit was provided, the Company's effective tax rate resulted in
a benefit of $82,000.

LIQUIDITY AND CAPITAL RESOURCES

      NINE MONTHS ENDED APRIL 30, 1997

      During the first nine months after the Company's reorganization, cash used
      in operations amounted to $294,371. Cash used to pay creditors during the
      reorganization amounted to $515,638. Cash was also used to increase
      inventory by $1,032,882 during the nine-month period. The increase in
      inventory was due to an anticipated increase in sales and the purchase of
      larger volumes to take advantage of the decreased costs associated with
      the higher-volume purchases.

      Accounts receivable and amounts due from suppliers decreased by $482,254,
      prepaid expenses decreased by $122,017, miscellaneous receivables
      decreased by $132,379 and prepaid and refundable income taxes decreased by
      $252,046. These amounts partially offset expenditures for inventory and
      payments to credits.

      Cash of $332,957 provided by financing activities was primarily the result
      of a $600,000 loan from MG Holding and was used to pay the creditors in
      accordance with the Company's Plan. Cash provided by financing activities
      was used to repay $145,324 of the note payable to MG Holding. In addition,
      payments were made for capital leases, insurance notes, and deferred stock
      offering costs of $29,656, $62,020, and $30,043, respectively. The Company
      had a positive cash flow of $38,586.

      THREE MONTHS ENDED JULY 31, 1996

      During the three months ended July 31, 1996, cash used by operating
      activities amounted to $64,800. This was the result of a net loss of
      $76,400, increases in accounts receivable and due from supplier, and
      prepaid expenses of $221,300 and $100,600, respectively, which were offset
      by a decrease in inventory and an increase in accounts payable and accrued
      expenses of $115,600 and $155,800, respectively.

      Financing activities provided cash of $43,200. Proceeds from insurance
      notes payable of $77,200 were offset by repayments of insurance notes
      payable, and repayments of capital lease obligation of $15,200 and
      $18,800, respectively. The Company had a negative cash flow of $21,600 for
      the three months ended July 31, 1996.

                                      -14-
<PAGE>   15
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


      FISCAL YEAR ENDED APRIL 30, 1996

      During the fiscal year ended April 30, 1996, cash used by operating
      activities amounted to $1,145,616. This was primarily the result of
      temporary benefits received by the Company under the bankruptcy and
      subsequent reorganization. Net income of $6,945,299 and the increase in
      pre-Petition liabilities of $8,614,728 were offset by the gain of debt
      discharge under the Plan of $16,692,193. In addition, the Company was not
      required to pay interest on most of its debt during the bankruptcy period.
      Future cash flows will no longer receive these benefits. Cash of $47,933
      was used primarily to purchase equipment for the manufacture of two
      exercise products as well as computer hardware and software.

      Financing activities generated cash in the amount of $877,493. Proceeds
      from bank notes payable, bankers acceptances, and a loan from MG Holding
      were $3,393,628, $1,118,556, and $557,000, respectively. These proceeds
      were offset by repayments of bankers acceptances and capital leases of
      $4,127,139 and $64,552, respectively. The Company had a negative cash flow
      of $316,056 for this period.

      CURRENT POSITION

      Pursuant to an unwritten understanding, Achim arranges for the issuance by
      its financial lender of letters of credit in favor of the Company's
      overseas suppliers, thereby enabling the Company to finance the purchases
      of its inventory. Also, in the event of domestic suppliers, from time to
      time, Achim purchases products from the manufacturer and resells them to
      the Company in order to accommodate Achim's commercial lenders who often
      require a security interest in the merchandise until it has been sold and
      the lender has been repaid. The Company pays Achim for the amount actually
      paid to the supplier (including any applicable discounts) without markup,
      reimburses Achim for its bank charges and pays it interest at the prime
      rate plus 1% on the unpaid balance of the purchases. As of April 30, 1997,
      the Company owed an amount of $2,590,360 in principal and interest under
      this arrangement. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS. The weighted average interest rate paid by the Company to
      Achim at April 30, 1997 and April 30, 1996 was 9.25% and 11.5%,
      respectively.

      The Company owes an aggregate of approximately $1,200,000 to MG Holding,
      which is wholly owned by Marton B. Grossman, the Company's Chairman and
      President, under a note evidencing debtor-in-possession financing provided
      by MG Holding. The note accrues interest at the Citibank Prime Rate plus
      1%. As of April 30, 1997, the Company had accrued interest in the amount
      of $34,219 in connection with this loan. The promissory note is to be paid
      in 24 monthly installments commencing September 5, 1996. To date, three
      payments have been made. In July 1997, the Company and MG Holding agreed
      that no payments will be due until the consummation of this offering or
      the scheduled maturity of the note, whichever occurs earlier. The Company
      intends to repay the note from the proceeds of this offering.

      The Company believes that cash generated by operations and the
      availability of Achim's credit line to finance the Company's purchase of
      inventory will be sufficient to finance its operations for the next twelve
      months.

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 registrant.


                                      -15-
<PAGE>   16
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included herein commencing on page F-1.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its
independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.

During the period of their engagement from June 30, 1973 until June 26, 1996,
there were no disagreements between the Company and Hoberman on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.

On July 11, 1996 the Company's Board of Directors appointed Moore Stephens, P.C.
as its independent accountants.





                                      -16-
<PAGE>   17
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OFFICERS AND DIRECTORS

The officers and directors of the Company are as follows:

      Name                     Age      Position
      ----                     ---      --------

Marton B. Grossman             67       Chairman and President
Isaac Grossman                 35       Vice Chairman, Treasurer and Secretary
William P. Dolan               44       Vice President--Finance
John Holodnicki                44       Vice President--Sales

         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.

         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.

BOARD OF DIRECTORS

Each director is elected at the Company's annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are two directors of the Company. The
bylaws permit the Board of Directors to fill any vacancy and the new director
may serve until the next annual meeting of stockholders or until his successor
is elected and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by employment
contracts, at the discretion of the Board.

ITEM 11.          EXECUTIVE COMPENSATION

The following table sets forth the compensation paid or accrued by the Company
during the three fiscal years ended April 30, 1997 (i) to its Chief Executive
Officer, (ii) its other two Executive Officers and (iii) two additional
non-Executive Officers whose cash compensation exceeded $100,000 per year in any
such year:



                                      -17-
<PAGE>   18
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


<TABLE>
<CAPTION>
                                        SUMMARY COMPENSATION TABLE (1) (2)
Name/Principal                     Year Ended          Annual Compensation                  All Other
Position                            April 30         Salary            Bonus             Compensation (3)
------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>                                     <C>    
Marton B. Grossman                    1997           $0                                      $31,200
President & Director                  1996           $0                                      $18,200
                                      1995           $0                                      $0
------------------------------------------------------------------------------------------------------------
Isaac Grossman                        1997           $0                                      $32,240
Director, Treasurer                   1996           $0                                      $18,200
                                      1995           $0                                      $0
------------------------------------------------------------------------------------------------------------
William P. Dolan                      1997           $100,000                                $0
Vice President-Finance                1996           $100,000                                $0
                                      1995           $ 97,691                                $0
------------------------------------------------------------------------------------------------------------
John Holodnicki                       1997           $120,000                                $0
Vice President                        1996           $120,000                                $0
                                      1995           $ 97,046                                $0
------------------------------------------------------------------------------------------------------------
Marvin Cooper (4)                     1997           $128,125                                $0
Executive Vice President              1996           $182,876                                $0
                                      1995           $250,099                                $0
------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which does not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or 10%
of such person's or persons' cash compensation.

(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.

(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac Grossman's
activities performed on behalf of the Company. Marton Grossman is the sole
shareholder, and Isaac Grossman is an employee of Achim. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.

(4)  Mr. Cooper resigned his position in March 1997.

None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.

Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares. If the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he will be issued 600,000 shares. If the Company's earnings before
taxes for the fiscal year ending April 30, 2000, are no less than $1,500,000, he
will be issued 1,000,000 shares. The stated earnings criteria are cumulative so
that in the event of an earnings shortfall during a fiscal year, shares relating
to two fiscal years will be issued provided that the Company, during the
succeeding fiscal year, realizes earnings that in the aggregate are equal to two
years of earnings as set forth in the Agreement. The Agreement also provides for
piggyback registration rights with respect to the Common Stock to be issued.

The following table sets forth the number of shares of Common Stock to be issued
to Marton Grossman under the Bonus Agreement:

<TABLE>
<CAPTION>
                                                                              Estimated Future Payments
                                                    Performance or Other           Under Non-Stock
                           Number of Shares,           Period Until               Price-Based Plans
                            Units or Other             Maturation or          --------------------------
Name                            Rights                     Payout             Threshold  Target  Maximum
----                       -----------------        ---------------------     --------------------------
<S>                           <C>                     <C>                     <C>        <C>     <C>
Marton B. Grossman            2,000,000               April 30, 2000              *       *       *
----------------------------------------------------------------------------------------------------
</TABLE>

         *The number of shares to be issued in a particular fiscal year is based
         on the criteria set forth above.



                                      -18-
<PAGE>   19
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 1996 through April 30, 1997, other than Forms 3
that were filed late with respect to Messrs. Marton and Isaac Grossman and
William Dolan and the Marton Grossman Annuity Trust, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
beneficial owners were complied with.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of July 28, 1997, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (i) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215.

<TABLE>
<CAPTION>
                                                                  Shares Owned Beneficially
                                                                      and of Record (1)
                                                                      -----------------
         Name and Address                                     No. of Shares             % of Total
         ----------------                                     -------------             ----------
<S>                                                           <C>                       <C> 
         Marton B. Grossman (2)                                2,976,000                   93.0
         Isaac Grossman (3)                                    2,976,000                   93.0
         William P. Dolan                                            123                      *
         John Holodnicki                                              11                      *
         All Officers and Directors
              as a Group (3 persons)                           2,976,134                   93.0
---------------------------------------------------------------------------------------------------
</TABLE>
         * Less than 1%

         (1) Includes shares issuable within 60 days upon the exercise of all
         options and warrants. Shares issuable under options or warrants are
         owned beneficially but not of record.

         (2) Consists of shares of Common Stock held by a series of trusts
         (collectively, the "Grossman Trust") for the benefit of relatives of
         Mr. Grossman. Mr. Isaac Grossman and two of his relatives are the
         trustees of the Grossman Trusts. Under its terms, the Grossman Trust
         will return to Mr. Grossman annually until August 1998 56% of the value
         of the shares (payable in cash or in shares) when deposited into each
         of the Grossman Trusts. Since the number of shares to be returned to
         Mr. Grossman is based on the then current market price of the Common
         Stock, such number cannot be determined at the present time. To date,
         no shares have been returned to Mr. Grossman under this arrangement.
         Mr. Grossman disclaims beneficial ownership in the shares held by the
         Grossman Trust that will not be returned to him.

         (3) Consists of shares held by the Grossman Trust of which Mr. Isaac
         Grossman is currently a beneficiary as to 464,600 shares. The actual
         number of shares held by the Grossman Trust as to which Isaac Grossman
         is a beneficiary may be smaller since under the terms of the Grossman
         Trust, a portion of the shares may be returned to Marton Grossman as
         described in footnote (2). Mr. Grossman is a trustee of the Grossman
         Trust and in that capacity shares voting power as to the shares held by
         the Grossman Trust.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530. MG
is wholly owned by Marton B. Grossman, the Company's Chairman and President. The
note was subsequently repaid by the Company through the issuance of 2,976,000
shares of Common Stock to MG. MG assigned the Common Stock to a trust for the
benefit of members of Mr. Grossman's family.

                                      -19-
<PAGE>   20
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


Also in connection with the Plan, MG Holding loaned approximately $1,205,000 to
the Company to consummate the Plan and for related expenses. The Company issued
a promissory note to MG Holding evidencing the loan and granted it a security
interest in all of the Company's assets. The promissory note is to be paid in 24
monthly installments commencing September 5, 1996. The note accrues interest at
the Citibank prime rate plus 1%. The weighted average interest rate as of the
date hereof and at April 30, 1997 was 9.35% and 9.25%, respectively. As of April
30, 1997, the Company had accrued interest in the amount of $37,219 in
connection with this loan. As of June 30, 1997, the amount of interest owed
amounted to $54,197. In July 1997, the Company and MG Holding agreed that no
principal or interest payments under the note would be due until the
consummation of this offering or the scheduled maturity of the note, whichever
occurs earlier.

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, 1997, the Company accrued approximately $458,488 in
fees under the Warehousing Agreement consisting of $94,907 for the three months
ended July 31, 1996 and $363,580 for the nine months ended April 30, 1997.

Achim is wholly owned by Marton B. Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.

In addition, pursuant to an unwritten understanding, Achim arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers, thereby enabling the Company to finance the purchases of its
inventory. Also, from time to time, when taking deliveries from domestic
suppliers, Achim purchases products from the manufacturer and resells them to
the Company in order to accommodate Achim's commercial lenders who often require
a security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus 1% on the unpaid
balance of the purchases. As of April 30, 1997, the Company owed an amount of
$2,590,360 in principal and interest under this arrangement. See ITEM 13.
CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS. As of June 30, 1997, this sum had
decreased to $1,871,029, including interest of $276,894. The weighted average
interest rate paid by the Company to Achim at June 30, 1997, April 30, 1997 and
April 30, 1996 was 9.37%, 9.25% and 11.5%, respectively.




                                      -20-
<PAGE>   21
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Isaac Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company. Other than the fees payable by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS--"Management Agreement with Achim Importing Co.,
Inc" and ITEM 2. PROPERTIES.






                                      -21-
<PAGE>   22
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      1. and 2.         Financial Statements and Schedules

         The financial statements are listed in the Index to Financial
         Statements on page F-1 and are filed as part of this annual report.

         3.                Exhibits

         The Index to Exhibits following the Signature Page indicates the
         exhibits which are being filed herewith and the exhibits which are
         incorporated herein by reference.

(b)                        Reports on Form 8-K

         No Reports on Form 8-K were filed during the last quarter of the fiscal
         year ended April 30, 1997.






                                      -22-
<PAGE>   23
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                   SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                                    DYNAMIC INTERNATIONAL, LTD.






                                                    By: /s/ MARTON B. GROSSMAN
                                                        -----------------------
                                                        Marton B. Grossman
                                                        Chairman and President


Dated: 3rd day of December, 1997


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below as of the 3rd day of December, 1997 by the following 
persons on behalf of Registrant and in the capacities indicated.






By: /s/ MARTON B. GROSSMAN                 By: /s/ SHEILA GROSSMAN
    ------------------------------             ------------------------------
    Marton B. Grossman                         Sheila Grossman
    Chairman and President                     Director





By: /s/ ISAAC GROSSMAN                     By:
    ------------------------------             ------------------------------
    Isaac Grossman                             Bernard Goldman
    Vice Chairman, Treasurer & Secretary       Director





By: /s/ WILLIAM P. DOLAN                   By: 
   ------------------------------              ------------------------------
    William P. Dolan                           Harry P. Braunstein
    Vice President--Finance                    Director
    (Chief Financial & Accounting Officer)






                                      -23-
<PAGE>   24
10-K/A FYE 4/30/97                                   DYNAMIC INTERNATIONAL, LTD.


                                    EXHIBITS

1        Form of Underwriting Agreement (1)

2.01     Agreement of Merger dated July 19, 1996 between the Company and Dynamic
         Classics, Ltd. (2)

2.02     Second Amended and Modified Plan of Reorganization dated February 22,
         1996 (the "Plan") (3)

2.03     Errata Sheet and Correction Statement with respect to the Plan dated
         May 7, 1996 (3)

2.04     Order Confirming the Plan dated May 23, 1996 (3)

3.01     Certificate of Incorporation (2)

3.02     Bylaws (2)

4.02     Form of Common Stock Certificate (2)

10.01    License Agreement with Spalding Sports Worldwide dated April 1, 1994
         (4)

10.02    License Agreement dated January 8, 1993 with Chrysler Corporation (4)

10.03    Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)

10.04    Warehousing and Service Agreement dated as of September 1, 1996 with
         Achim Importing Co., Inc.(5)

10.05    License Agreement dated November 1, 1996 by and between New Century
         Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.
         (1)

10.06    Bonus Agreement with Marton Grossman (1)

16.01    Letter from Hoberman Miller & Co. dated October 23, 1996 (5)

------------------------------------------------------------------------------
         
         (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



                                      -24-
<PAGE>   25
                          DYNAMIC INTERNATIONAL, LTD.
                                 AND SUBSIDIARY

                              FINANCIAL STATEMENTS

                                 APRIL 30, 1997
<PAGE>   26
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY


                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
<S>                                                                           <C>
Independent Auditors' Reports                                                 F-1 to F-2

Consolidated Financial Statements:

   Balance Sheets as of April 30, 1997 and 1996                               F-3 to F-4

   Statements of Operations for the nine months ended April 30, 1997,
     three months ended July 31, 1996
     and the years ended April 30, 1996 and 1995                                  F-5

   Statements of Stockholders' Equity (Deficit) for the nine months ended
     April 30, 1997, three months ended
     July 31, 1996 and the years ended April 30, 1996 and 1995                    F-6

   Statements of Cash Flows for the nine months ended April 30, 1997,
     three months ended July 31, 1996
     and the years ended April 30, 1996 and 1995                              F-7 to F-8

   Notes to Financial Statements                                              F-9 to F-24

Independent Auditor's Report on Supplemental Schedule                            F-25

   Schedule II - Valuation and Qualifying Accounts                               F-26
</TABLE>
<PAGE>   27
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
Dynamic International, Ltd.


We have audited the accompanying consolidated balance sheet of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and its
subsidiary as of April 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
nine months ended April 30, 1997, the three months ended July 31, 1996, and the
year ended April 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary as of
April 30, 1997 and 1996, and the results of their operations and their cash
flows for the nine months ended April 30, 1997, the three months ended July 31,
1996, and the year ended April 30, 1996, in conformity with generally accepted
accounting principles.

As discussed more fully in Note 2 to the consolidated financial statements, on
August 23, 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the United States Bankruptcy Code. On May 23, 1996, the United
States Bankruptcy Court for the Southern District of New York confirmed the
Company's Amended and Modified Plan of Reorganization dated February 22, 1996.


                              Moore Stephens, P.C.
                              Certified Public Accountants

New York, New York
June 27, 1997, except as
to Note 4, for which the
date is July 10, 1997


                                       F-1
<PAGE>   28
                          INDEPENDENT AUDITOR'S REPORT


Board of Directors
Dynamic International, Ltd.

We have audited the accompanying statements of operations, stockholders' equity
(deficit) and cash flows of dynamic International, Ltd. (formerly Dynamic
Classics, Ltd., see Note 2) and Subsidiary for the year ended April 30, 1995.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and
Subsidiary for the year ended April 30, 1995 in conformity with generally
accepted accounting principles.


As more fully discussed in Note 2, the Company, on August 23, 1995, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Act.






                          /s/ HOBERMAN, MILLER & CO., P.C.
                          ---------------------------------
                              Hoberman, Miller & Co., P.C.



New York, New York
June 26, 1996





                                       F-2
<PAGE>   29
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      REORGANIZED         PREDECESSOR
                                                                        COMPANY             COMPANY
                                                                        APRIL 30,           APRIL 30,
                                                                         1997                 1996
                                                                      -----------         -----------
<S>                                                                   <C>                 <C>
                                          ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                         $    43,543         $    26,515
     Accounts receivable - trade (net of allowance for doubtful
       accounts of $167,000 in 1997 and 1996)                              887,089           1,036,927
     Due from suppliers                                                     65,273              26,760
     Inventory                                                           3,301,735           2,384,469
     Prepaid expenses                                                       60,272              81,693
     Miscellaneous receivables                                               2,658             135,039
     Prepaid and refundable income taxes                                    39,914             291,146
                                                                       -----------         -----------
          Total Current Assets                                           4,400,484           3,982,549
                                                                       -----------         -----------

PROPERTY AND EQUIPMENT
     Tools and dies                                                        707,939             707,939
     Furniture and equipment                                               102,205             102,205
     Capitalized equipment leases                                          576,071             576,071
                                                                       -----------         -----------
                                                                         1,386,215           1,386,215
     Accumulated depreciation                                           (1,260,924)         (1,156,160)
                                                                       -----------         -----------
          Total Property and Equipment, net                                125,291             230,055
                                                                       -----------         -----------

OTHER ASSETS
     Due from suppliers                                                     36,142              36,142
     Security deposits                                                       4,650               4,650
     Deferred stock offering costs                                         116,023                  --
     Reorganization value in excess of amounts allocable to
       identifiable assets, net                                            124,472                  --
                                                                       -----------         -----------
          Total Other Assets                                               281,287              40,792
                                                                       -----------         -----------
TOTAL ASSETS                                                           $ 4,807,062         $ 4,253,396
                                                                       ===========         ===========
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       F-3
<PAGE>   30
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                            REORGANIZED         PREDECESSOR
                                                                              COMPANY             COMPANY
                                                                             APRIL 30,            APRIL 30,
                                                                               1997                 1996
                                                                            -----------         -----------
<S>                                                                         <C>                 <C>
                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
     Accounts payable and accrued expenses - non related                    $   846,234           1,009,248
     Accounts payable and accrued expenses - related party                    2,627,580           2,129,893
     Capital lease obligations - current                                         24,228              48,731
     Income taxes payable                                                       103,700                  --
     Loan payable - related party                                               844,531             557,000
     Other liabilities                                                               --             531,561
                                                                            -----------         -----------
            Total Current Liabilities                                         4,446,273           4,276,433
                                                                            -----------         -----------

OTHER LIABILITIES
     Capital lease obligations, net of current portion                               --              23,965
     Loan payable - related party                                               215,254                  --
                                                                            -----------         -----------
            Total Other Liabilities                                             215,254              23,965
                                                                            -----------         -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
     Common stock, par value $.01 per share; authorized
         5,000,000 shares; issued 1,744,396 shares                                   --              17,444
     Common stock, par value $.001 per share; authorized
         50,000,000 shares; issued 3,198,798 shares                               3,199                  --
     Additional paid in capital                                                  22,940             590,291
     Accumulated deficit                                                             --            (637,237)
     Retained Earnings (since July 31, 1996, date of reorganization,
         total deficit eliminated was $713,601)                                 119,399                  --
                                                                            -----------         -----------
                                                                                145,538             (29,502)
     Less: Treasury stock, at cost, 15,000 shares                                    --             (17,500)
     Less: Treasury stock, at cost, 540 shares                                       (3)                 --
                                                                            -----------         -----------
            Total Stockholders' Equity (Deficit)                                145,535             (47,002)
                                                                            -----------         -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 4,807,062         $ 4,253,396
                                                                            ===========         ===========
</TABLE>


All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The discharge of prepetition liabilities including
liabilities subject to compromise has been recorded and the gain on the debt
discharge is reflected in the consolidated statement of operations for the year
ended April 30, 1996.


                  The accompanying notes are an integral part
                  of these consolidated financial statements.


                                      F-4
<PAGE>   31
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        REORGANIZED     PREDECESSOR
                                                          COMPANY        COMPANY
                                                      FOR THE NINE     FOR THE THREE                PREDECESSOR COMPANY
                                                       MONTHS ENDED      MONTHS ENDED               FOR THE YEARS ENDED
                                                        APRIL 30,          JULY 31,                      APRIL 30,
                                                          1997              1996                1996                  1995
                                                       ----------        -----------         ------------         ------------
<S>                                                    <C>               <C>                 <C>                  <C>
REVENUES
   Sales                                               $7,492,729        $ 1,983,164         $  7,151,715         $ 32,533,097
   Other income                                            54,642             10,201               98,272               70,638
                                                       ----------        -----------         ------------         ------------
                                                        7,547,371          1,993,365            7,249,987           32,603,735
COST OF SALES                                           4,850,002          1,454,637            9,480,484           34,761,846
                                                       ----------        -----------         ------------         ------------
GROSS PROFIT (LOSS)                                     2,697,369            538,728           (2,230,497)          (2,158,111)
                                                       ----------        -----------         ------------         ------------
OPERATING EXPENSES
   Research and development                                 4,042                 --              101,992               44,962
   Shipping expenses                                      452,093            116,894              738,681            1,198,563
   Selling expenses                                       686,214            198,993            1,254,006            2,455,493
   Advertising and promotion                              152,563              1,819              389,672              346,400
   General and administrative                             931,683            238,791            4,198,800            3,720,998
   Interest and bank charges - non related
     (Contractual interest of $806,937 for
     the year ended April 30, 1996)                        21,462              4,174              248,625            1,384,898
   Interest and bank charges - related party              177,339             53,096              134,928                   --
                                                       ----------        -----------         ------------         ------------
                                                        2,425,396            613,767            7,066,704            9,151,314
                                                       ----------        -----------         ------------         ------------
REORGANIZATION ITEMS:
   Bankruptcy administration costs                         48,874              1,325              449,693                   --
                                                       ----------        -----------         ------------         ------------

INCOME (LOSS) BEFORE
   PROVISION FOR INCOME TAXES                             223,099            (76,364)          (9,746,894)         (11,309,425)
                                                       ----------        -----------         ------------         ------------

INCOME TAX PROVISION (BENEFIT)
   Current                                                103,700                 --                   --             (396,143)
   Deferred                                                    --                 --           (7,511,000)             314,053
                                                       ----------        -----------         ------------         ------------
                                                          103,700                 --           (7,511,000)             (82,090)
                                                       ----------        -----------         ------------         ------------
INCOME (LOSS) BEFORE
   EXTRAORDINARY ITEM                                     119,399            (76,364)          (2,235,894)         (11,227,335)
                                                       ----------        -----------         ------------         ------------

EXTRAORDINARY ITEM:
   Gain on discharge of prepetition liabilities                --                 --           16,692,193                   --
   Income tax provision                                        --                 --            7,511,000                   --
                                                       ----------        -----------         ------------         ------------
   Extraordinary gain net of income tax                        --                 --            9,181,193                   --
                                                       ----------        -----------         ------------         ------------
NET INCOME (LOSS)                                      $  119,399        $   (76,364)        $  6,945,299         $(11,227,335)
                                                       ==========        ===========         ============         ============

INCOME  PER SHARE OF COMMON
   SHARES                                              $     0.04

WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES                                        3,198,258
</TABLE>

The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.

                  The accompanying notes are an integral part
                  of these consolidated financial statements.


                                      F-5
<PAGE>   32
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                              Additional           Retained           Treasury         Stockholders'
                                                Common          Paid in            Earnings             Stock            Equity
                                                Stock           Capital            (Deficit)           at Cost           (Deficit)
                                               --------        ---------         ------------         --------         ------------
<S>                                            <C>             <C>               <C>                  <C>              <C>
Balance - May 1, 1994                          $ 17,444        $ 590,291         $  3,644,799         $(17,500)        $  4,235,034

Net Loss                                             --               --          (11,227,335)              --          (11,227,335)
                                               --------        ---------         ------------         --------         ------------

Balance - April 30, 1995                         17,444          590,291           (7,582,536)         (17,500)          (6,992,301)

Net Income                                           --               --            6,945,299               --            6,945,299
                                               --------        ---------         ------------         --------         ------------

Balance - April 30, 1996                         17,444          590,291             (637,237)         (17,500)             (47,002)

Net Loss for the Three Months Ended
   July 31, 1996                                     --               --              (76,364)              --              (76,364)
                                               --------        ---------         ------------         --------         ------------

Balance - July 31, 1996                          17,444          590,291             (713,601)         (17,500)            (123,366)

Eliminate predecessor equity accounts and
   to reflect new issuance of shares in
   connection with fresh start                   (1,450)        (580,146)             713,601           17,497              149,502
                                               --------        ---------         ------------         --------         ------------

                                                 15,994           10,145                   --               (3)              26,136

To reflect 1 for 5 reverse stock split          (12,795)          12,795                   --               --                   --
                                               --------        ---------         ------------         --------         ------------

Balance - July 31, 1996                           3,199           22,940                   --               (3)              26,136

Net income for the Nine Months Ended
   April 30, 1997                                    --               --              119,399               --              119,399
                                               --------        ---------         ------------         --------         ------------

Balance - April 30, 1997                       $  3,199        $  22,940         $    119,399         $     (3)        $    145,535
                                               ========        =========         ============         ========         ============
</TABLE>


The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.

                  The accompanying notes are an integral part
                  of these consolidated financial statements.


                                      F-6
<PAGE>   33
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             REORGANIZED       PREDECESSOR
                                                               COMPANY           COMPANY
                                                             FOR THE NINE      FOR THE THREE             PREDECESSOR COMPANY
                                                             MONTHS ENDED      MONTHS ENDED              FOR THE YEARS ENDED
                                                              APRIL 30,          JULY 31,                   APRIL 30,
                                                                1997              1996               1996               1995
                                                             -----------        ---------        -----------        ------------
<S>                                                          <C>                <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net Income (loss)                                         $   119,399        $ (76,364)       $ 6,945,299        $(11,227,335)
   Adjustments to reconcile net income (loss) to
     net cash provided (used) by operating activities:
       Depreciation and amortization                              87,681           26,191            220,400             268,148
       Amortization of deferred interest under
         capital leases                                               --               --                 --              17,979
       Reserve for bad debts                                          --               --            167,000                  --
       Loss on disposal of property
          and equipment                                               --               --             71,030                  --
       Deferred income taxes                                          --               --         (7,511,000)            314,053
       Income on partial discharge of
         capital lease obligations                                    --               --            (77,403)                 --
       Interest converted to principal                            11,439           36,670                 --                  --
       Reorganization item:
         Gain on discharge of debt, net
          of income tax                                               --               --         (9,181,193)                 --
         Cash distribution                                      (515,638)              --                 --                  --
       Changes in operating assets and liabilities:
         (Increase) Decrease in operating assets:
          Accounts receivable and due
            from suppliers                                       482,254         (221,255)           220,882           6,843,636
          Inventory                                           (1,032,882)         115,616          1,065,821           3,260,017
          Prepaid expenses                                       122,017         (100,596)           168,856            (183,186)
          Miscellaneous receivables                              132,379               --           (108,179)             51,352
          Prepaid and refundable income taxes                    252,046             (812)                --            (291,146)
          Security deposits                                           --               --             86,858              (3,537)
         Increase (Decrease) in operating liabilities:
          Prepetition liabilities                                     --               --          8,614,728                  --
          Accounts payable and accrued expenses                  (56,766)         155,784         (1,828,715)          1,949,987
          Income taxes payable                                   103,700               --                 --            (200,770)
                                                             -----------        ---------        -----------        ------------
       Net Cash Provided (Used) by
         Operating Activities                                $  (294,371)       $ (64,766)       $(1,145,616)       $    799,198
                                                             -----------        ---------        -----------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                                 --               --            (47,933)           (143,995)
                                                             -----------        ---------        -----------        ------------

       Net Cash Used by Investing Activities                 $        --        $      --        $   (47,933)       $   (143,995)
                                                             -----------        ---------        -----------        ------------
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      F-7
<PAGE>   34
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)

<TABLE>
<CAPTION>
                                                     REORGANIZED      PREDECESSOR
                                                       COMPANY         COMPANY
                                                     FOR THE NINE    FOR THE THREE            PREDECESSOR COMPANY
                                                     MONTHS ENDED    MONTHS ENDED             FOR THE YEARS ENDED
                                                      APRIL 30,        JULY 31,                   APRIL 30,
                                                        1997            1996               1996                1995
                                                     ---------        --------        -----------        ------------
<S>                                                  <C>              <C>             <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable                       $      --        $     --        $ 3,393,628        $ 24,250,741
   Repayment of notes payable                               --              --                 --         (26,460,130)
   Proceeds from notes payable - related party         600,000              --                 --                  --
   Repayment of notes payable - related party         (145,324)             --                 --                  --
   Proceeds from loan payable - related party               --              --            557,000                  --
   Proceeds from bankers acceptances                        --              --          1,118,556           9,321,558
   Repayment of bankers acceptances                         --              --         (4,127,139)         (7,876,394)
   Repayment of officer's loans payable                     --              --                 --              (2,373)
   Repayment of capital lease obligations              (29,656)        (18,812)           (64,552)           (109,308)
   Proceeds from insurance note payable                     --          77,225                 --                  --
   Repayment of insurance note payable                 (62,020)        (15,205)                --                  --
   Payment of deferred offering costs                  (30,043)             --                 --                  --
                                                     ---------        --------        -----------        ------------

       Net Cash Provided (Used) by
         Financing Activities                          332,957          43,208            877,493            (875,906)
                                                     ---------        --------        -----------        ------------

Net Increase (Decrease) in Cash and
   Cash Equivalents                                     38,586         (21,558)          (316,056)           (220,703)

Cash and Cash Equivalents, beginning of period           4,957          26,515            342,571             563,274
                                                     ---------        --------        -----------        ------------

Cash and Cash Equivalents, end of period             $  43,543        $  4,957        $    26,515        $    342,571
                                                     =========        ========        ===========        ============
SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the periods for:
     Interest                                        $  25,451        $  1,553        $   203,964        $  1,196,322
     Income tax                                      $      --        $     --        $        --        $    116,319
</TABLE>


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During the years ended April 30, 1995 the Company incurred capital lease
obligations of $143,855 in connection with lease agreements to acquire
equipment.

In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 3,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      F-8
<PAGE>   35
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      a.    The Company

            Dynamic International, Ltd. (the "Company") is engaged in the sale
            and distribution of a diverse line of hand exercise and light
            exercise equipment, sports bags/luggage and gift products which are
            distributed throughout the United States.

      b.    Revenue

            Revenue is recognized when the goods are shipped to the customer.

      c.    Fresh Start Reporting

            Financial accounting during a Chapter 11 proceeding is prescribed in
            "Statement of Position 90-7 of the American Institute of Certified
            Public Accountants," titled "Financial Reporting by Entities in
            Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the
            Company adopted effective July 31, 1996. The emergence from the
            Chapter 11 proceeding resulted in the creation of a new reporting
            entity without any accumulated deficit and with the Company's assets
            and liabilities restated at their estimated fair values (also see
            Note 2 Reorganization and Management Plan). Because of the
            application of fresh start reporting, the financial statements for
            periods after reorganization are not comparable in all respects to
            the financial statements for periods prior to reorganization.

      d.    Principles of Consolidation

            The consolidated financial statements include the accounts of the
            Company and the wholly owned inactive subsidiary. All significant
            intercompany accounts and transactions have been eliminated.

      e.    Cash and Cash Equivalents

            The Company considers all highly liquid investments with a maturity
            of three months or less when purchased to be cash equivalents.

      f.    Inventories

            Inventories consist principally of finished goods and are stated at
            the lower of cost, last-in, first-out method, (LIFO) or market.

      g.    Property, Equipment and Depreciation

            Property and equipment are stated at cost. Depreciation is provided
            generally by accelerated methods over the estimated useful lives of
            the assets. Expenditures for maintenance and repairs are charged
            against income. Estimated useful lives used in calculating
            depreciation are as follows:

                        Tools and dies              5 years
                        Furniture and equipment     5 years to 7 years


                                      F-9
<PAGE>   36
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

      h.    Deferred Offering Costs

            Legal and accounting costs incurred in connection with the proposed
            public offering of the Company's common stock will be charged to
            additional paid-in capital upon completion of the proposed public
            offering. If the offering is not consummated, these costs will be
            expensed.


      i.    Advertising and Promotion

            Advertising and promotion expense, primarily comprised of print
            media distributed to current and potential customers, is expensed as
            incurred.

      j.    Earnings Per Share

            Earnings (loss) per share are based on the weighted average number
            of shares outstanding as adjusted for the 1 for 5 reverse split.
            Common stock equivalents are included in the calculation if they are
            dilutive. Amounts for the predecessor company (see Note 2) are not
            presented as they are not meaningful.

      k.    Use of Estimates

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and assumptions that affect the reported amounts of assets and
            liabilities and disclosure of contingent assets and liabilities at
            the date of the financial statements and the reported amounts of
            revenues and expenses during the reporting period. Actual results
            could differ from those estimates.

      l.    Stock Options and Similar Equity Instruments

            On January 1, 1996, the Company adopted the disclosure requirements
            of Statement of Financial Accounting Standards ("SFAS") No. 123,
            "Accounting for Stock-Based Compensation," for stock options and
            similar equity instruments (collectively, "Options") issued to
            employees; however, the Company will continue to apply the intrinsic
            value based method of accounting for options issued to employees
            prescribed by Accounting Principles Board ("APB") Opinion No. 25,
            "Accounting for Stock Issues to Employees," rather than the fair
            value based method of accounting prescribed by SFAS No. 123. SFAS
            No. 123 also applies to transactions in which an entity issues its
            equity instruments to acquire goods or services from non-employees.
            Those transactions must be accounted for based on the fair value of
            the consideration received or the fair value of the equity
            instruments issued, whichever is more reliably measurable.

      m.    Reorganization value in excess of amounts allocable to identifiable
            assets

            The excess reorganization value is amortized over a period of eleven
            years on the straight line basis (see Note 2). Management
            re-evaluates the periods of amortization to


                                      F-10
<PAGE>   37
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

      m.    determine whether subsequent events and circumstances warrant
            revised estimates of useful lives. If impairment is deemed to exist,
            the excess reorganization value will be written down to fair value
            or projected discounted cash flows from related operations. As of
            April 30, 1997, management expects the asset to be fully
            recoverable.

2.    REORGANIZATION AND MANAGEMENT PLAN

      In 1994, the Company added a new line of products consisting primarily of
      treadmills and ski machines. Initially, the Company was successful in
      marketing these products. However, due to defective products delivered by
      the Company's manufacturers, primarily located in the People's Republic of
      China, the Company was forced to allow substantial returns by its
      customers. Although pursuant to a written agreement, the manufacturers
      acknowledged the defects and agreed to pay for returns and to provide
      replacement goods at no cost, they breached this agreement soon
      thereafter. For the year ended April 30, 1996, the Company suffered
      significant losses in the amount of approximately $3,700,000 from its
      venture into this line of business.

      At April 30, 1995, the Company was not in compliance with certain of the
      financial covenants which enabled the bank to declare the outstanding
      balances of all amounts due the bank to be immediately due and payable. In
      July 1995, the lender bank effectively terminated its relationship with
      the Company as it experienced difficulty in complying with the terms of
      the loans. As a result, certain collateral was liquidated by the lender
      bank. On August 22, 1995, the lender bank sold and assigned the loan
      balance of $6.8 million. The assigned loan was secured by a security
      interest in substantially all of the Company's assets. As discussed below,
      the assignor was issued 2,976,000 shares of new common stock in
      consideration of forgiving the $6.8 million outstanding loan.

      On August 23, 1995, the Company filed a voluntary petition for relief
      under Chapter 11 of the United States Bankruptcy Code. A Plan of
      Reorganization was filed by the Company on October 30, 1995 and
      subsequently amended and modified on February 22, 1996. On April 5, 1996,
      the creditors voted to accept the amended and modified Plan (the "Plan"),
      and on May 23, 1996, the court confirmed the Plan. The Plan was
      substantially consummated in August 1996. For accounting purposes, the
      Company assumed that the Plan was consummated on July 31, 1996.

      As contemplated by the Plan, a new company, Dynamic International, Ltd.
      was formed on July 29, 1996. On August 8, 1996, the Company merged into
      Dynamic International, Ltd. The capital structure and the balance sheet of
      the combined entity, immediately after the merger, were substantially the
      same as those of the company prior to the merger. The "new common stock"
      is referred to below as the common stock of Dynamic International, Ltd.

      Chapter 11 claims filed against the Company and subsequently allowed in
      the bankruptcy proceeding totaled approximately $17.2 million. The Plan
      discharged such claims through distributions of cash of approximately
      $515,000 and issuance of shares of new common stock. The cash
      distributions were paid in August 1996. A total of 3,198,798 shares of new
      common stock were issued on July 25, 1996 out of which 2,976,000 shares
      were issued to one secured creditor which also satisfied $15,923 of loans
      made by the chief executive officer of the Company to the Company (see
      Note 4); 160,000 shares were issued to unsecured creditors, and 62,798
      shares were issued to the reconfirmation common stock equity interest
      holders.


                                      F-11
<PAGE>   38
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


2.    REORGANIZATION AND MANAGEMENT PLAN (cont'd)

      The discharge of claims was reflected in the April 30, 1996 financial
      statements. The stock distribution value is based on the reorganization
      value of the Company determined by projecting cash flows over an eleven
      year period and discounting such cash flows at a cost of capital rate of
      15% and the statutory federal, state and local tax rates currently in
      effect. The discounted residual value at the end of the forecast period is
      based on the capitalized cash flows for the last year of that period. Cash
      distributions and the estimated stock distribution value totaling $531,561
      has been recorded as other liabilities as of April 30, 1996. The gain of
      approximately $16.7 million resulting from the excess of the allowed
      claims over the total value of the cash and the common stock distributed
      to the secured and unsecured creditors has been recorded as an
      extraordinary gain for the year ended April 30, 1996.

      The eleven year cash flow projection was based on estimates and
      assumptions about circumstances and events that have not yet taken place.
      Such estimates and assumptions are inherently subject to significant
      economic and competitive uncertainties and contingencies beyond the
      control of the Company, including, but not limited to those with respect
      to the future courses of the Company's business activity. Accordingly,
      there will usually be differences between projections and actual results
      because events and circumstances frequently do not occur as expected, and
      those differences may be material.

      As part of the reorganization, the Company will continue to sell hand
      exercise, light exercise equipment and luggage and sports bags, all of
      which have a proven market acceptance. Management believes it can increase
      revenues by increasing its focus on direct response marketing. Therefore,
      it intends to develop plans to use infomercials to market these products.
      Management believes these increased marketing efforts, adequate financing
      through its related entity, Achim Importing, discontinuance of the
      unprofitable products, and sustainable gross profit percentages, can be
      effectively implemented within the next twelve months. The Company adopted
      "fresh-start reporting" in accordance with Statement of Position ("SOP")
      90-7 issued by the American Institute of Certified Public Accountants on
      July 31, 1996. SOP 90-7 calls for the adoption of "fresh-start reporting"
      if the reorganization value of the emerging entity immediately before the
      date of confirmation is less than the total of all postpetition and
      allowed claims, and if holders of existing voting shares immediately
      before confirmation receive less than 50 percent of the voting shares of
      the emerging entity, both conditions of which were satisfied by the
      Company. Although the confirmation date was May 23, 1996, fresh-start
      reporting was adopted on July 31, 1996. There were no material fresh-start
      related adjustments during the period May 23, 1996 to July 31, 1996.

      Under fresh start accounting, all assets and liabilities are restated to
      reflect their reorganization value, which approximates book value at date
      of reorganization. Therefore, no reorganization value has been allocated
      to the assets and liabilities. In addition, the accumulated deficit of the
      predecessor company at July 31, 1996 totaling $713,601 was eliminated, and
      at August 1, 1996, the reorganized company's financial statements
      reflected no beginning retained earnings or deficit. The reorganization
      value in excess of amounts allocable to identifiable assets is being
      amortized over an eleven year period on the straight line method.
      Amortization expense for the nine months ended April 30, 1997 was $9,108.


                                      F-12
<PAGE>   39
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)






2.    REORGANIZATION AND MANAGEMENT PLAN (cont'd)

      The following is a proforma balance sheet of the reorganized Company based
      on the discounted cash flows as discussed above.

<TABLE>
<CAPTION>
                                          Balance                                              Reorganized
                                           Sheet              Stock             Fresh             Company
                                       July 31, 1996         Exchange           Start          July 31, 1996
                                        -----------         ---------         ---------         ----------
<S>                                     <C>                 <C>               <C>               <C>
Current Assets:
   Cash                                 $     4,957                                             $    4,957
   Accounts receivable, net               1,258,182                                              1,258,182
   Inventory                              2,268,853                                              2,268,853
   Prepaid & refundable
    income taxes                            291,960                                                291,960
   Other assets                             328,030                                                328,030
                                        -----------                                             ----------
      Total Current Assets                4,151,982                                              4,151,982
   Fixed assets, net                        203,863                                                203,863
   Other Assets                              56,848                                                 56,848
   Reorganization value in
    excess of amounts allo-
    cable to identifiable assets                                                133,580            133,580
                                        -----------                           ---------         ----------
      Total Assets                      $ 4,412,693                           $ 133,580         $4,546,273
                                        ===========                           =========         ==========

Current Liabilities:
   Loans payable - MG                   $   593,670                                             $  593,670
   Loans payable - Trade                     62,020                                                 62,020
   Accounts payable and
    accrued expenses                      3,294,925                                              3,294,925
   Capital lease obligations                 32,226                                                 32,226
   Other current liabilities                531,561           (15,923)                             515,638
                                        -----------         ---------         ---------         ----------
      Total Current Liabilities           4,514,402           (15,923)                0          4,498,479

Other liabilities                            21,658                                                 21,658
                                        -----------         ---------         ---------         ----------
      Total Liabilities                   4,536,060           (15,923)                0          4,520,137
                                        -----------         ---------         ---------         ----------
Common stock par value                       17,444           (17,444)                              15,994
                                                               15,994
Additional paid in capital                  590,290          (590,291)         (580,021)            10,145
                                                              590,167
Accumulated deficit                        (713,601)                            713,601                  0
                                        -----------         ---------         ---------         ----------
                                           (105,867)           (1,574)          133,580             26,139
Less: treasury stock                        (17,500)           17,497                                   (3)
                                        -----------         ---------         ---------         ----------
      Total Equity                         (123,367)           15,923           133,580             26,136
                                        -----------         ---------         ---------         ----------
Total Liabilities and Equity            $ 4,412,693         $       0         $ 133,580         $4,546,273
                                        ===========         =========         =========         ==========
</TABLE>


                                     F-13
<PAGE>   40
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


2.    REORGANIZATION AND MANAGEMENT PLAN (cont'd)

      The other current liabilities adjustment is all comprised of loans from MG
      Holding Corp. to pay creditors pursuant to the reorganization plan. The
      liability to the reorganized company is $515,638.

3.    INVENTORIES

      If the first-in, first-out (FIFO) method of accounting had been used by
      the Company, reported net income would have been decreased by $294,000 in
      fiscal 1997. Net income would have been increased by $263,000 in fiscal
      1996, and the net loss would have been increased by $246,000 in fiscal
      1995. On a FIFO basis, reported year end inventories would have increased
      by $24,000 in 1997, $318,000 in 1996 and $55,000 in 1995.

4.    RELATED PARTY TRANSACTIONS

      Pursuant to a Warehouse and Service Agreement dated as of September 1,
      1996 (the "Warehousing Agreement") between the Company and an entity
      ("Related Party") owned by a major stockholder, the entity performs
      certain administrative services on behalf of the Company. Under the
      Warehousing Agreement, the entity assists, among other things, in the
      maintenance of financial and accounting books and records, in the
      preparation of monthly financial accounts receivable aging schedules and
      other reports and in the performance of credit checks on the Company's
      customers. In consideration for these services, Achim receives an annual
      fee, payable monthly, calculated at a percentage of the Company's invoiced
      sales originating at the warehouse ranging from 4% of the invoiced sales
      under $30 million to 3% of sales of $60 million or more. For sales not
      originating at the warehouse, Achim receives a service fee in the amount
      of 1.5% of the Company's invoiced sales to customers and accounts located
      in the United States if payment is made by letter of credit and 1% if such
      customers and accounts are located outside the United States, irrespective
      of manner of payment. In addition, under the Warehousing Agreement, the
      entity provides warehousing services consisting of receiving, shipping,
      and storing of the Company's merchandise. The Company pays Achim a monthly
      fee of 3% of its invoiced sales originating at the warehouse in connection
      with these warehousing services performed by Achim under the Warehousing
      Agreement.

      The Warehousing Agreement has a term of two years and is automatically
      renewable for additional one year periods unless written notice of
      termination is given at least six months prior to the commencement of a
      renewal period. During the fiscal year ended April 30, 1997, the Company
      accrued approximately $458,488 in fees under the Warehousing Agreement.
      Total warehousing and administrative expenses charged to operations for
      the nine months ended April 30, 1997 were approximately $364,000, for the
      three months ended July 31, 1996 were approximately $95,000 and for the
      year ended April 30, 1996 were approximately $164,000.

      The Related Party also purchases inventory for the Company and charges the
      Company for the invoiced amount of the inventory.

      Loan payable to the related party totaled $1,059,785 at April 30, 1997.
      Such note is secured by all of the Company's assets. On August 30, 1996,
      loans and other payables, including accrued interest totaling $1,205,109,
      were converted into the note payable. Interest is charged at the


                                      F-14
<PAGE>   41
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

4.    RELATED PARTY TRANSACTIONS (cont'd)

      Citibank prime rate plus 1%. This note is payable in 24 equal installments
      of principal and interest through August 5, 1998. At April 30, 1997, the
      Company was in arrears in the amount of $274,273 consisting of principal
      and interest. On July 10, 1997, the note was amended to allow the arrears
      and note payments to be deferred until the consummation of the Company's
      contemplated public offering (see Note 10) or the scheduled maturity of
      the note, whichever is earlier. Annual maturities of the note at 9.25%
      interest per annum is as follows:

<TABLE>
<S>                                          <C>
                  For the Year Ending
                  April 30,
                  1997 (in arrears)          $  237,053
                  1998                          607,478
                  1999                          215,254
                                             ----------
                                             $1,059,785
                                             ==========
</TABLE>

      Interest expense charged to operations for the nine months ended April 30,
      1997 was $67,898, for the three months ended July 31, 1996 was $16,746 and
      $19,924 for the year ended April 30, 1996.

      Other amounts payable to the related party totaled $2,627,580 and
      $2,129,893, respectively, at April 30, 1997 and 1996. Such amounts
      represent unpaid inventory purchases and various fees due to the related
      party. The amounts payable for the purchase of inventory bears interest at
      the Citibank prime rate plus 1% from September 1996 to April, 1997 and the
      Citibank prime rate plus 3% prior to September 1996. The prime rate used
      was 8.25% for the period September 1996 to April 1997 and 8.5% for the
      period prior to September 1996 . Interest expense charged to operations
      was $111,411 for the nine months ended April 30, 1997, $34,380 for the
      three months ended July 31, 1996 and $115,004 for the year ended April 30,
      1996. The weighted average interest rate at April 30, 1997 and 1996 was
      9.25% and 11.5%, respectively.

5.    INCOME TAXES

      The Company utilizes an asset and liability approach to determine the
      extent of any deferred income taxes, as described in Statement No. 109,
      "Accounting for Income Taxes" of the Financial Accounting Standards Board.
      This method gives consideration to the future tax consequences associated
      with differences between financial statement and tax bases of assets and
      liabilities.

      There was no income tax liabilities at April 30, 1996. Income tax
      liabilities at April 30, 1997 included in income taxes payable consist of
      the following :


                                      F-15
<PAGE>   42
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

5.    INCOME TAXES (cont'd)

<TABLE>
<CAPTION>
                                                   1997
                                                   ----
<S>                                              <C>
      Current taxes                              $103,700

      Deferred taxes:
         Federal                                       --
         Other income and franchise taxes              --
                                                 --------
            Total Income Tax Liability           $103,700
                                                 ========
</TABLE>

      At April 30, 1997, there are no temporary differences that would result in
      a deferred tax asset or liability. The deferred income tax assets and
      liabilities at April 30, 1996 consist of the following:

<TABLE>
<CAPTION>
                                                                            1996
                                                                            ----
<S>                                                                     <C>
      DEFERRED TAX ASSETS:
         Bad debt reserves                                              $    75,000
         Difference in book and tax treatment
           for advertising costs                                             16,000
         Net operating loss carryforwards                                 8,783,000
         Other deferred tax assets                                           50,000
                                                                        -----------
           TOTAL DEFERRED TAX ASSETS                                      8,924,000
                                                                        -----------

      DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):

         Gain on discharge of prepetition
           liabilities                                                    7,511,000
                                                                        -----------
                                                                          7,511,000
                                                                        -----------
         Valuation allowance for deferred
           tax assets                                                    (1,413,000)
                                                                        -----------
                                                                        $        -0-
                                                                        ===========
</TABLE>

      The valuation allowance decreased by $1,094,000 in 1996.


                                      F-16
<PAGE>   43
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

5.    INCOME TAXES (cont'd)

      A summary of the provision (credit) for income taxes is as follows:

<TABLE>
<CAPTION>
                                Reorganized                Predecessor
                                 Company                      Company
                              --------------      ----------------------------------
                               Nine Months
                                  Ended            Year  Ended         Year Ended
                              April 30, 1997      April 30, 1996      April 30, 1995
                              --------------      --------------      --------------
<S>                           <C>                 <C>                 <C>
      Current:
        Federal                $    59,000         $        --         $(401,529)
        State and Local             44,700                  --             5,386
                               -----------         -----------         ---------
                                   103,700                  --          (396,143)
                               -----------         -----------         ---------
      Deferred:
        Federal                         --          (5,675,000)          313,039
        State and Local                 --          (1,836,000)            1,014
                               -----------         -----------         ---------
                                        --          (7,511,000)          314,053
                               -----------         -----------         ---------
                               $   103,700         $(7,511,000)        $ ( 82,090)
                               ===========         ===========         =========
</TABLE>

      The reconciliation of the federal statutory income tax expense (credit) to
      the Company's actual income tax (credit) is as follows:

<TABLE>
<CAPTION>
                                          Reorganized                Predecessor
                                           Company                    Company
                                        --------------    ----------------------------------
                                         Nine Months
                                            Ended          Year  Ended          Year Ended
                                        April 30, 1997    April 30, 1996      April 30, 1995
                                        --------------    --------------      --------------
<S>                                     <C>               <C>                 <C>
      U.S. federal income taxes
        at statutory rate                 $  75,900         $ 2,361,000         $(3,845,205)
      Losses for which no benefit
        was provided                             --                  --             982,371
      Change in valuation
        allowance                                --          (1,094,000)          2,506,820
      Reversal of previously
        established tax asset                    --                  --             313,039
      Tax effect of permanent
        differences                           5,400               8,000              17,035
       State income taxes, net of
        federal benefit                      25,000             764,000                  --
      Benefit of unused net
        operating losses                         --          (1,412,000)                 --
      Differences due to change in
        rate                                     --            (627,000)                 --
      Other                                  (2,600)                 --             (56,150)
                                          ---------         -----------         -----------
                                          $ 103,700         $       -0-         $   (82,090)
                                          =========         ===========         ===========
</TABLE>


                                      F-17
<PAGE>   44
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

5.    INCOME TAXES (cont'd)

      The Company had a net loss for the three months ended July 31, 1996 and
      accordingly, the Company has no income tax provision or liability for the
      period.

      The Company has a net operating loss for the year ended April 30, 1995 of
      approximately $8,400,000 of which $1,200,000 was carried back to prior
      years. The Company has filed prior year amended returns to claim the net
      operating loss carryback which results in refundable income taxes of
      approximately $287,000. As of April 30, 1997, the Company received
      $251,000 of the refundable income taxes. The balance of $36,000 is
      included in prepaid and refundable income taxes at April 30, 1997.

      At April 30, 1996, the net operating loss carryforward totaled
      approximately $19,500,000 of which approximately $16,700,000 will be
      utilized by the Company in its final tax return for the period May 1, 1996
      to August 8, 1996 (see Note 2 re: merger into Dynamic International,
      Ltd.). Based on ownership changes resulting from the reorganization (see
      Note 2), the balance of the net operating loss carryforward is expected to
      be limited by the current provision of Section 382 of the Internal Revenue
      Code.

6.    COMMITMENTS AND CONTINGENCIES

      a.    Capital Leases

            The Company is the lessee of equipment under capital leases expiring
            in various years through 1998.

            In September 1995, the lessor of the Company's capital leases agreed
            to forgive the balance of the unpaid lease payments through
            September 1995 and to accept 60% of the remaining balance of the
            lease payments. As a result, the Company recognized $77,403 of
            income on the adjustment of the lease term. Such income is included
            in other income.

      b.    Operating Leases

            Prior to August, 1995 the Company occupied space for its sales,
            executive offices, assembly and storage facilities under long term
            operating leases expiring August 1998. The leases provided for
            additional payments for insurance, taxes and other charges related
            to the premises. As part of the bankruptcy proceeding, the Company
            was discharged of the obligations of the leases. In October 1995 the
            Company relocated its premises, where the Company is charged
            warehousing fees and administration fees based on sales volume (see
            Note 4).

            Rent expense for the years ended April 30, 1996 and 1995 was
            $341,427 and $583,596.

      c.    Royalty Obligations

            The Company has entered into various royalty, licensing, and
            commission agreements for products sold by the Company. These
            agreements provide for minimum payments and a percentage of specific
            product sales, over a period of one to eight years. Royalty expense
            for the nine months ended April 30, 1997 was approximately $353,000,
            for the three months ended July 31, 1996 was $94,000 and for the
            years ended April 30, 1996 and 1995 was approximately $275,000 and
            $779,000, respectively.


                                      F-18
<PAGE>   45
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


6.    COMMITMENTS AND CONTINGENCIES (cont'd)

      d.    Defined Benefit Pension Plan

            On September 26, 1996, the Defined Benefit Employees Retirement Plan
            was terminated under a distress termination approved by the United
            States Bankruptcy Court. The defined benefit pension obligation
            prior to the termination was $860,945. As part of the bankruptcy
            proceeding, the obligation was settled for $38,743 resulting in a
            gain of $822,202 which is reflected in the extraordinary gain on
            discharge of prepetition liabilities for the year ended April 30,
            1996.

      e.    401(k) Plan

            On January 1, 1990, the Company adopted a 401(k) plan. The plan
            covers all eligible employees. Eligible employees may contribute
            from 1% to 15% of their salaries subject to the statutory maximum of
            $9,240 for the 1995 and 1994 calendar years. The plan also provided
            matching contributions by the Company of 25% of the employees'
            contributions to a maximum contribution of 1% of the employees'
            salaries. On May 31, 1996, the plan's summary plan description was
            modified to make matching contributions discretionary. No matching
            contributions were made by the Company for the 1996 calendar year
            nor will any be made by the 1997 calendar year.

            The 401(k) expense amounted to $0 for the period May 1, 1996 to
            April 30, 1997 and $2,600 and $9,460 for the years ended April 30,
            1996 and 1995, respectively.

      f.    Union Pension Plan

            Certain union employees participate in a multiemployer retirement
            plan sponsored by their union. The Company is required to pay seven
            cents ($.07) per hour per employee to the plan. The data available
            from administrators of the multi- employer plan is not sufficient
            to determine the accumulated benefit obligation, nor the net assets
            attributable to the multiemployer plan in which Company employees
            participate. As of October 1995, the Company no longer has any union
            employees. For the years ended April 30, 1996 and 1995 pension
            expenses for the union employees were $3,745 and $1,680,
            respectively.

      g.    Litigation

            In the normal course of its operations, the Company has been named
            as a defendant in several product liability lawsuits that in the
            opinion of management are not material to the financial statements
            taken as a whole and are substantially covered by the Company's
            product liability insurance.

7.    MAJOR CUSTOMERS

      During the year ended April 30, 1996, sales to three major customers were
      approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and $1,001,000,
      respectively) of the Company's net sales. At April 30, 1996, accounts
      receivable from these customers totaled $465,506. During the year ended
      April 30, 1995, sales to two major customers were approximately 26% and
      14% ($8,459,000 and $4,555,000, respectively) of the Company's net sales.
      At April 30, 1995, there were no accounts receivable from these customers.
      The Company sells a 10% limited amount to foreign customers. There were no
      material receivables subject to foreign currency fluctuations.


                                      F-19
<PAGE>   46
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

7.    MAJOR CUSTOMERS (cont'd)

      During the nine months ended April 30, 1997 sales to major customers were
      approximately $3,080,180. At April 30, 1997 accounts receivable from these
      customers totaled $379,902. During the three months ended July 31, 1996,
      sales to major customers were approximately $837,450. At July 31, 1996,
      accounts receivable from these customers totaled $548,726.

8.    CREDIT RISK/FINANCIAL INSTRUMENTS

      Due to the nature of its business and the volume of sales activity, the
      Company's cash balance occasionally exceeds the $100,000 protection of
      FDIC insurance. At April 30, 1997 there was no such excess balance. At
      April 30, 1996 such excess balances totaled approximately $207,000. The
      Company has not experienced any losses and believes it is not exposed to
      any significant credit risk from cash and cash equivalents.

      The Company routinely assesses the financial strength of its customers
      and, based upon factors surrounding the credit risk of its customers,
      establishes an allowance for uncollectible accounts and, as a consequence,
      believes that it does not have an accounts receivable credit risk exposure
      beyond the allowance provided. The Company does not require collateral or
      other security to support financial instruments subject to credit risk.

      The carrying amounts of short-term debt reported in the balance sheets
      approximate fair value. The fair value of the Company's long-term debt
      (including the current portion) also approximates its carrying amount in
      the balance sheets based on the rates currently available to the Company
      for similar debt with similar terms.

9.    SIGNIFICANT RISKS AND UNCERTAINTIES

      a.    The Company's exercise products compete with products marketed and
            sold by a number of companies. The Company's main competitors in
            this area possess far greater financial and other resources,
            including sales forces, than the Company. However, the Company
            believes that as a result of its ability to use trademark names for
            which it pays royalties, it will be able to retain its share of the
            market. Nevertheless, there can be no assurance that the Company
            will be able to effectively compete with these companies as well as
            with other smaller entities.

            The Company's luggage products compete with products designed by a
            number of the largest companies in the industry. The Company
            believes that because of its concentration on the upscale lifestyle
            and more specialized leisure market that are associated with its use
            of trademark names, the Company will be able to continue to grow its
            luggage business. Nevertheless, there can be no assurance that the
            Company will be able to effectively compete with these companies as
            well as with other smaller entities.

      b.    Most of the Company's exercise products are purchased from
            Phillippines, Korea, and Taiwan. The Company believes that, if
            necessary, it will be able to obtain its products from firms located
            in other countries at little, if any, additional expense. As a
            consequence, the Company believes that an interruption in deliveries
            by a manufacturer located in a particular country will not have a
            material adverse impact on the business of the Company.
            Nevertheless, because of political instability in a number of the
            supply countries, occasional import quotas and other restrictions on
            trade or otherwise, there can be no assurance that the Company will
            at all times have access to a sufficient supply of merchandise.


                                      F-20
<PAGE>   47
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

10.   OTHER ITEMS

      a.    Discontinued Products

            In 1994, the Company added a new line of products consisting
            primarily of treadmills and ski machines. Sales of the treadmills
            and ski machines began in June 1994. The Company sold approximately
            $24,000,000 of these products from June 1, 1994 to August 23, 1995.
            Approximately $17,600,000 or 73% of these products were shipped
            directly to consumers. Due to serious manufacturing defects and poor
            construction of the Company's products delivered by the Company's
            manufacturers, primarily located in the People's Republic of China,
            the Company was forced to allow substantial chargebacks by its
            customers. Although, pursuant to a written agreement, the
            manufacturers acknowledged the defects and agreed to pay for returns
            and to provide replacement goods at no cost, they breached this
            agreement soon thereafter. As a result, during April 1995, the
            Company issued credits to customers for approximately $5,000,000 of
            the $7,487,000 of credits for the fiscal year ended April 30, 1995.
            The Company issued another $3,211,000 in credits for defective
            merchandise during the fiscal year ended April 30, 1996.

            The following table sets forth the financial statement effect of the
            Company's line of treadmills and ski machines for the periods
            indicated:

<TABLE>
<CAPTION>
                           Reorganized      Predecessor
                            Company           Company
                          for the Nine      for the Three                   Predecessor Company
                         Months Ended       Months Ended                    For the Years Ended
                        April 30, 1997     July 31, 1996         April 30, 1996             April 30, 1995
                        --------------     -------------         --------------             --------------
<S>                     <C>                <C>                   <C>                       <C>
      Sales                $   --              $   --              $   597,000               $ 23,255,000
      Credits                  --                  --               (3,210,900)                (7,487,000)
                           ------              ------              -----------               ------------
      Net Sales                --                  --               (2,613,900)                15,768,000
      Inventory
        Reserve                --                  --                       --                 (1,320,063)
      Cost of Sales            --                  --                  156,000                (18,604,172)
                           ------              ------              -----------               ------------
      Gross Loss           $   --              $   --              $(2,457,900)              $ (4,156,235)
                           ======              ======              ===========               ============
</TABLE>

            The sale of these products was discontinued in August 1995, and all
            inventory was disposed of by October 1995. Currently, the Company
            does not believe that there will be additional returns of these
            products or that any claims relating thereto remain to be settled.


                                     F-21
<PAGE>   48
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


10.   OTHER ITEMS (cont'd)

      b.    Public Offering

            The Company is offering for public sale 1,200,000 units, each
            consisting of one share of common stock, one Class A Warrant and one
            Class B Warrant at $5.00 per unit. Although no assurance can be
            given that the sale will be successful, the Company intends to
            utilize the net proceeds of approximately $4,920,000 for the
            repayment of current debt, purchase of inventory, general corporate
            services, and working capital.

            Simultaneous with the public offering, the Company intends to
            declare a one for five reverse stock split. All share data for the
            reorganized Company has been adjusted for the split.

            The following supplementary earnings per share reflect the repayment
            of indebtedness of $1,300,000 and the resulting reduction of
            interest expense and increase in net income as if it had taken place
            at the beginning of the reorganization period.

<TABLE>
<CAPTION>
                                                 For the Nine Months
                                                Ended April 30, 1997
                                                --------------------
<S>                                             <C>
            Net Income                                155,738
            Earnings Per Share                            .05
            Number of Shares                        3,458,258
</TABLE>

      c.    Earn Out Agreement

            In March 1997, the Company entered into an agreement with Marton
            Grossman, the Company's chairman and president which provides for
            the issuance to Mr. Grossman an aggregate 2,000,000 shares of common
            stock if the Company reaches certain earnings criteria as follows:

<TABLE>
<CAPTION>
                                    Earnings Before        Shares to
                Year Ending           Income Tax           Be Issued
                -----------           ----------           ---------
<S>            <C>                   <C>                   <C>
               April 30, 1998        $   500,000             400,000
               April 30, 1999        $ 1,000,000             600,000
               April 30, 2000        $ 1,500,000           1,000,000
</TABLE>

            If the earning criteria is not met in any one of the above years,
            but is cumulatively met in the subsequent year, then the number of
            shares to be issued will be the cumulative number of shares at that
            year end. Issuance of the shares will result in compensation expense
            to the Company. Compensation expense will be measured based on the
            fair value of the shares at the time the performance conditions are
            achieved. Determination will be based on the best estimate of the
            outcome of the performance condition. Compensation will be
            recognized in the periods in which the performance conditions are
            achieved.


                                      F-22
<PAGE>   49
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)


10.   OTHER ITEMS (cont'd)

      d.    Consulting Agreement

            The Company anticipates entering into a two year consulting
            agreement with the underwriter to provide financial consulting
            services for a fee of $20,000.

      e.    Underwriter's Purchase Warrants

            As part of the consideration of its services in connection with the
            registration statement, the Company has agreed to issue to the
            underwriter, for nominal consideration, warrants to purchase up to
            120,000 units at an exercise price of $8.25 per unit for a period of
            five years. The Class A Warrants and Class B Warrants underlying the
            units included in the underwriter's warrants will be exercisable at
            a price of $9.90 and $16.50 per share, respectively, or 165% of the
            then exercise price of the warrants offered to the public for a
            period of five years commencing with the closing of the registration
            statement. The non-cash cost of such warrants, representing a cost
            of raising capital, will be recorded as a charge and credit to
            additional paid-in capital when the warrants are issued. As capital
            in nature, they are not compensatory.

      f.    Underwriter Option

            The Company has granted the underwriter an option exercisable for 45
            days from the effective date of the registration statement to
            purchase up to 180,000 units at the public offering price less the
            underwriting discounts.

11.   AUTHORITATIVE PRONOUNCEMENTS

      a.    The FASB issued SFAS No. 125, "Accounting for Transfer and Servicing
            of Financial Assets and Extinguishment of Liabilities" in June of
            1996. SFAS No. 125 provides accounting and reporting standards for
            transfers and servicing of financial assets and extinguishment of
            liabilities. SFAS No. 125 is effective for financial statements
            issued for fiscal years occurring after December 31, 1996 and is to
            be applied prospectively. The Company does not have transactions
            which come under the general heading of "Transfers of Servicing of
            Financial Assets," and the added refinements for "Extinguishment of
            Debt" are not expected to be significant. Therefore, SFAS 125 is not
            expected to have any effect on the Company.

      b.    The FASB has issued SFAS No. 128, "Earnings Per Share" and FASB No.
            129, "disclosure of Information About Capital Structure." Both are
            effective for financial statements issued for periods ending after
            December 15, 1997. SFAS No. 128 simplifies the computation of
            earning per share by replacing the presentation of primary earnings
            per share with a presentation of basic earnings per share. The
            statement requires dual presentation of basic and diluted earnings
            per share by entities with complex capital structures. Basic
            earnings per share include no dilution and is computed by dividing
            income available to common stockholders by the weighted average
            number of shares outstanding for the period. Diluted earnings per
            share reflect the potential dilution of securities that could share
            in the earnings of an entity similar to fully diluted earnings per
            share.


                                      F-23
<PAGE>   50
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


11.   AUTHORITATIVE PRONOUNCEMENTS (cont'd)

      b.    While the Company has not analyzed SFAS No. 128 sufficiently to
            determine its long-term impact on per share reported amounts, SFAS
            No. 128 should not have a significant effect on historically
            reported per share loss amounts.

            SFAS No. 129 does not change any previous disclosure requirements
            but, rather, consolidates existing disclosure requirements for ease
            of retrieval.

      c.    In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
            Income" and SFAS 131, "Disclosures About Segments of an Enterprise
            and Related Information". Both are effective for financial
            statements for fiscal years beginning after December 15, 1997. The
            Company will adopt both statements on May 1, 1998. Adoption is not
            expected to have a material impact on the financial position and
            results of operations.


                                      F-24
<PAGE>   51
              INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE



To the Board of Directors and Shareholders
Dynamic International, Ltd.

Our report on the consolidated financial statements of Dynamic International,
Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months
ended April 30, 1997 and three months ended July 31, 1996 is included on page
F-1 of this Form S-1. In connection with our audit of such financial statements,
we have also audited the related accompanying financial statement Schedule II -
Valuation and Qualifying Accounts for the nine months ended April 30, 1997, the
three months ended July 31, 1996, and the year ended April 30, 1996.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.




                                   Moore Stephens, P.C.
                                   Certified Public Accountants


New York, New York
June 27, 1997


                                      F-25
<PAGE>   52
                      DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                              REORGANIZED       PREDECESSOR       PREDECESSOR
                                                               COMPANY            COMPANY            COMPANY
                                                             FOR THE NINE       FOR THE THREE     FOR THE YEAR
                                                             MONTH ENDED         MONTH ENDED         ENDED
                                                              APRIL 30,           JULY 31,          APRIL 30,
                                                                1997               1996               1996
                                                              --------           --------           --------
<S>                                                           <C>                <C>                <C>
Allowance for doubtful accounts balance - beginning           $167,000           $167,000           $     --
Additions charged to income                                         --                 --            167,000
Recovery of uncollectible accounts - net                            --                 --                 --
Writeoffs of uncollectible amounts                                  --                 --                 --
                                                              --------           --------           --------
Allowance for doubtful accounts balance - ending              $167,000           $167,000           $167,000
                                                              ========           ========           ========
</TABLE>


                                      F-26