As filed with the Securities and Exchange Commission on July 11, 1996 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _______________ DYNECO CORPORATION (Name of Small Business Issuer in its Charter) MINNESOTA 3563 41-1508703 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) _______________ 564 INTERNATIONAL PLACE ROCKLEDGE, FLORIDA 32955 (407) 639-0333 (Address and Telephone Number of Principal Executive Offices) _______________ 564 INTERNATIONAL PLACE ROCKLEDGE, FLORIDA 32955 (Address of Principal Place of Business or Intended Place of Business) _______________ RICHARD D. BESSER CHIEF EXECUTIVE OFFICER DYNECO CORPORATION 564 INTERNATIONAL PLACE ROCKLEDGE, FLORIDA 32955 (407) 639-0333 (Name, Address and Telephone Number of Agent for Service) _______________ COPIES TO: SCOTT D. SMITH, ESQ. LINZY O. SCOTT, III, ESQ. POWELL, GOLDSTEIN, FRAZER & MURPHY 16TH FLOOR, 191 PEACHTREE STREET, N.E. ATLANTA, GEORGIA 30303 Approximate Date of Proposed Sale to the Public: From time to time after the effective date of this Registration Statement. _______________ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. /X/ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- PROPOSED TITLE OF EACH CLASS PROPOSED MAXIMUM MAXIMUM AMOUNT OF OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) FEE - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)(3) 3,000,000 $ 3.00 $ 9,000,000 $ 3,103.45 - ------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)(4) 5,244,318 $ 3.00 $ 15,732,954 $ 5,425.16 - ------------------------------------------------------------------------------------------------------------------- Class D Warrants 940,305 $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------- Class E Warrants 427,911 $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)(5) 940,305 $ 3.00 $ 2,820,915 $ 972.73 - ------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)(6) 427,911 $ 5.00 $ 2,139,555 $ 737.78 - ------------------------------------------------------------------------------------------------------------------- Total $ 29,693,424 $ 10,239.12 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (1) Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers such additional indeterminate shares of Common Stock that may become issuable pursuant to anti-dilution adjustments, stock splits, stock dividends and similar adjustments. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act as of July 8, 1996. (3) The Registrant intends to issue such shares of Common Stock for cash to certain purchasers within ninety (90) days following the effective date of this Registration Statement; provided, however, that the Registrant will offer such shares of Common Stock on a delayed or continuous basis in one or more acquisitions pursuant to Rule 415 under the Securities Act to the extent such shares of Common Stock are not sold within the ninety (90) day period. (4) Includes: (a) 3,926,000 shares of Common Stock issued to investors in connection the acquisition of DynEco International, Inc.; (b) 132,496 shares of Common Stock issued in 1994 and 1995 pursuant to certain stock options and warrants issued by the Registrant; and (c) 1,185,822 shares of Common Stock issued to investors in connection with the Registrant's private placements of Common Stock from December 1994 to October 1995. (5) Issuable upon the exercise of the Class D Warrants. (6) Issuable upon the exercise of the Class E Warrants. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I INFORMATION REQUIRED IN PROSPECTUS CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2 FORM SB-2 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS 1. Front of Registration Statement and Outside Front Cover Page of Prospectus . . . . . . . . . . . . . . . . . Front of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors. . . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors 4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds 5. Determination of Offering Price . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus 6. Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors; Dilution 7. Selling Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . * 8. Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Plan of Distribution 9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business 10. Directors, Executive Officers, Promoters and Control Persons. . . . . . . . . . . . . . . . . . . . . . . . . . . Management 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . . . Principal Shareholders and Share Ownership of Management 12. Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . Capitalization; Description of Capital Stock 13. Interests of Named Experts and Counsel. . . . . . . . . . . . . . . . . . . Legal Matters 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . * 15. Organization Within Last Five Years . . . . . . . . . . . . . . . . . . . . * 16. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . Business 17. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . Business 19. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . Certain Transactions 20. Market for Common Equity and Related Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . Price Range of and Dividends on Common Stock 21. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . Management 22. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . * _______________ * Not applicable. PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 11, 1996 DYNECO CORPORATION 8,244,318 SHARES OF COMMON STOCK 940,305 CLASS D WARRANTS 427,911 CLASS E WARRANTS This Prospectus relates to 3,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of DynEco Corporation, a Minnesota corporation (the "Company"), to be issued and sold from time to time by the Company, and 5,244,318 shares of Common Stock for reoffer or resale from time to time by the selling shareholders (the "Selling Shareholders"). This Prospectus also relates to 940,305 Class D Warrants and 427,911 Class E Warrants issued to investors in connection with the Company's most recent private placement that closed in October 1995. See "Plan of Distribution." The Selling Shareholders acquired their respective shares of Common Stock in private placement transactions effected by the Company, upon the exercise of stock options and warrants or through direct sales effected with the Company. See "Management" and "Description of Capital Stock-Stock Warrants." This offering (the "Offering") is not being underwritten. The securities covered hereby may be sold by the Company and the Selling Shareholders and/or their respective registered representatives from time to time at prices to be determined at the time of such sales. There is no minimum required purchase, and there is no arrangement to have funds received by the Company and such Selling Shareholders and/or their respective registered representatives placed in escrow, trust or similar account or arrangement, unless the proceeds come from a purchaser residing in a state in which the sale of the securities has not yet been qualified. With respect to the shares of Common Stock to be issued and sold by the Company, the Company intends to issue such shares for cash to certain purchasers within ninety (90) days following the date of this Prospectus. However, the Company has not entered into purchase agreements with respect to such shares of Common Stock, and there can be no assurance that the Company will be able to effect such sales. To the extent the Company does not sell such shares within the ninety (90) day period, the Company shall offer the remaining shares of Common Stock on a delayed or continuous basis in connection with one or more acquisitions pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"). The Company, the Selling Shareholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Securities Act with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation. See "Plan of Distribution." The Company intends to apply for listing of the Company's Common Stock on The Nasdaq SmallCap Market of The Nasdaq Stock Market ("NASDAQ") at such time that it reasonably believes that the Company will meet The Nasdaq SmallCap Market listing requirements, although there can be no assurance that the Company's Common Stock will be accepted for listing on The Nasdaq SmallCap Market, or that, if listed, that an active trading market will develop. The Company's Common Stock is currently quoted on the NASDAQ OTC Bulletin Board under the symbol "DYCO." On July ___, 1996, the closing bid price of the Company's Common Stock as reported on the NASDAQ OTC Bulletin Board was $___________ per share. See "Price Range of and Dividends on Common Stock." All costs, expenses and fees in connection with the registration of the securities covered hereby, estimated at $206,539, will be borne by the Company. Brokerage commissions, if any, attributable to the sale of the securities by the Selling Shareholders will be borne by such Selling Shareholders. Except for the purchase price payable upon exercise of the Class D Warrants and Class E Warrants, the Company will not receive any proceeds from the sale of the securities by the Selling Shareholders. In the event the Class D Warrants and Class E Warrants are fully exercised and the Company effects the sale of the 3,000,000 shares of Common Stock offered hereby at the last reported closing bid price on July ___, 1996, the Company will receive net proceeds of $______. See "Plan of Distribution" and "Use of Proceeds." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY. ____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is July ___, 1996 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. AVAILABLE INFORMATION The Company is not currently a reporting company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon completion of this Offering, the Company intends to register as such and to furnish its security holders with annual reports containing audited financial statements and such interim unaudited reports as it deems appropriate. The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. Statements made in the Prospectus concerning the contents of any documents referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description, and each such statement shall be deemed qualified in its entirety by such reference. Copies of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional office of the Commission located at 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. Copies of all or any part thereof may be obtained from the Commission upon the payment of the fees prescribed by the Commission. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED HEREIN, REFERENCES TO THE "COMPANY" OR "DYNECO CORPORATION" INCLUDE ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS WHOLLY-OWNED SUBSIDIARIES DYNECO INTERNATIONAL, INC. ("DYNECO INTERNATIONAL") AND TERTM TECHNOLOGY CORPORATION ("TERTM"). EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. ORBITAL VANE-TM- IS A REGISTERED TRADEMARK OF THE COMPANY. ALL OTHER TRADEMARKS AND SERVICE MARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE HOLDERS. THE COMPANY The Company designs, develops, joint-ventures and licenses advanced proprietary compressor technologies for use in industrial, commercial and selected consumer-related markets. These markets include but are not limited to air compression systems, automotive air conditioning, vacuum pumps, commercial and residential building climate control systems, consumer refrigeration systems, transport refrigeration systems, military applications and other advanced compressor technologies. The Company believes that it is an industry leader in the innovation, design and development of state-of-the-art compressor technology, and that its DynEco Orbital Vane Compressor can provide end-users with a small, quiet, reliable and low-cost alternative to traditional compressor designs. The DynEco Orbital Vane Compressor is based on a circular, non-contact sealing rotary mechanism with an integral lubricant management system and can be sized and configured to operate over a wide range of capacities and applications. Until recently, the Company's business strategy has been to develop and license its proprietary technology to third-parties for product development applications initiated by such parties and to enter into joint-venture arrangements. Although the Company presently intends to continue joint- venturing and licensing its proprietary technology to third-parties, the Company also intends to develop and manufacture compressor products directed to selected consumer-related markets and to original equipment manufacturers in a variety of industries such as air compression, automotive climate control, vacuum pumps, mass transit and electric vehicle climate control systems, commercial environmental systems and residential and light commercial hermetic air conditioning systems. The Company believes that through a series of strategic alliances and acquisitions it can assemble the resources to manufacture and market air compressors, airends, air conditioner compressors and vacuum pumps in the near future. The Company also intends to produce specialty and niche applications of its patented DynEco Orbital Vane Compressor systems through its own manufacturing facilities and market such products through established industrial distribution channels. The Company has historically incurred losses primarily resulting from expenditures related to the research, development, testing and marketing of its proprietary technology. The Company expects that operating losses will continue until such time as its proposed compressor products generate sufficient revenues to fund its continuing operations. The Company's principal executive offices are located at 564 International Place, Rockledge, Florida 32955, and the Company's telephone number is (407) 639-0333. 3 THE OFFERING Common Stock Offered by the Company. . . . . . . . 3,000,000 shares Common Stock Offered by the Selling Shareholders. . . . . . . . . . . . 5,244,318 shares(1) Class D Warrants and Class E Warrants. . . . . . . 940,305 Class D Warrants and 427,911 Class E Warrants. Each Class D Warrant and Class E Warrant entitles the holder, for $2.50 and $5.00, respectively, to purchase one share of the Company's Common Stock. See "Description of Capital Stock - Stock Warrants." Common Stock Outstanding after the Offering. . . . . . . . . . . . . . . 9,075,132 shares(2) NASDAQ Bulletin Board Symbol . . . . . . . . . . . DYCO Proposed NASDAQ SmallCap Market Symbol . . . . . . DYCO Use of Proceeds. . . . . . . . . . . . . . . . . . See "Use of Proceeds." (1) Based on the number of shares issued and outstanding as of the date of this Prospectus. Does not include 1,368,216 shares of Common Stock reserved for issuance upon the exercise of the Company's Class D Warrants and Class E Warrants. See "Description of Capital Stock - Stock Warrants." (2) Assumes the sale of all shares of Common Stock offered by the Company hereby. 4 SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA CONSOLIDATED STATEMENT OF OPERATIONS DATA THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ -------------------------------- 1996 1995 1995 1994 ---------- ---------- ------------ ------------ Revenues $ - $ 5,000 $ 5,000 $ 70,000 Operating expenses: General and administrative 188,351 320,056 836,550 735,002 Research and development 59,610 59,489 248,523 43,835 ---------- ---------- ------------ ------------ Total operating expenses 247,961 379,545 1,085,073 778,837 ---------- ---------- ------------ ------------ Operating loss (247,961) (374,545) (1,080,073) (708,837) Other income (expense): Interest income 13,074 - 8,776 - Gain (loss) on sale of property and equipment - 585 789 (1,640) Loss in joint-venture (15,000) - (23,900) - Interest expense (100) - (1,597) (313) Loss in litigation settlement - - - (75,456) ---------- ---------- ------------ ------------ Total other income (expense) (2,026) 585 (15,932) (77,409) ---------- ---------- ------------ ------------ Net loss $ (249,987) $ (373,960) $ (1,096,005) $ (786,246) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Net loss per share $ (.04) $ (.08) $ (.22) $ (.24) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Weighted average number of common shares outstanding 6,075,132 4,666,623 5,075,014 3,312,721 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ CONSOLIDATED BALANCE SHEET DATA: MARCH 31, 1996 -------------- Current assets $ 897,873 Total assets $ 1,710,066 Current and total liabilities $ 312,168 Accumulated deficit $(4,015,399) Total shareholders' equity $ 1,397,898 Working capital $ 585,705 ________________________ 5 RISK FACTORS The securities offered hereby are highly speculative and involve a high degree of risk and should only be purchased by investors who can afford to lose their entire investment. Prospective investors, prior to making an investment, should carefully consider, along with the other information contained in this Prospectus, the following considerations and risks in evaluating an investment in the Company. The order in which risk factors appear is not intended as an indication of the relative weight or importance thereof. LIMITED OPERATING HISTORY Although the Company has been in existence since 1984, the Company has only recently begun to focus on the production and sales of its proposed compressor technology. Until recently, the Company was primarily engaged in the licensing of its proprietary compressor technology and certain proprietary technology related to one of its subsidiaries. The Company is currently negotiating a joint-venture arrangement for the manufacture and sale of its compressor products, but to date it has not begun to manufacture or sell any compressor products or compressor systems. Accordingly, the Company has no relevant operating history upon which potential investors may base an evaluation of the Company's performance. There can be no assurance that the Company's operations will be profitable, or that sales of the Company's compressor products will develop. The likelihood of success of the Company must be considered in light of the problems, experiences, difficulties, complications and delays frequently encountered in connection with the operation and development of new and expanding businesses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." HISTORICAL LOSSES AND ACCUMULATED DEFICIT The Company has historically incurred losses primarily resulting from expenditures related to the research, development, testing and marketing of its proprietary technology. For the year ended December 31, 1995, and three months ended March 31, 1996, the Company incurred net losses of $1,096,005 and $249,987, respectively. At December 31, 1995 and March 31, 1996, the Company had an accumulated deficit of $3,765,412 and $4,015,399, respectively. The Company expects that operating losses will continue until such time as sales of its proposed compressor products generate sufficient revenues to fund its continuing operations. There can be no assurance, however, that the Company will ever be able to successfully make the transition from research and development to manufacturing, marketing and selling of its proposed compressor products at competitive prices, or that the Company will ever generate significant income or become profitable. The Company's prospects therefore must be considered in light of the risks, expenses, and difficulties frequently encountered in establishing a new business in a highly competitive and mature industry. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." NEED FOR ADDITIONAL CAPITAL The Company generated only nominal revenues of $5,000 for the year ended December 31, 1995 from operations. The Company did not generate any revenues during the three months ended March 31, 1996 and is unlikely to achieve any significant revenues, if any, during the remainder of the current fiscal year. To date, the Company has relied principally upon cash provided by external financing activities to fund its capital requirements. The Company obtained approximately $1,904,145 of cash or cash equivalents provided by financing activities for the year ended December 31, 1995, but did not obtain any cash or cash equivalents from financing activities for the three months ended March 31, 1996. The Company believes that its existing capital resources obtained from such external financing activities will be sufficient to satisfy its capital requirements for approximately the next 4 to 7 months. There is no assurance, however, that the Company will be able to generate sufficient cash from operations, if any, in future periods beyond this 4 to 7 month period to satisfy the Company's capital requirements. Therefore, the Company may have to continue to rely on external 6 financing activities to satisfy the Company's capital requirements for the foreseeable future. However, other than as described in this Prospectus, the Company has no commitments for borrowings or additional sales of equity, and there can be no assurance that the Company will be successful in consummating any such future financing transactions on terms satisfactory to the Company, if at all. Factors which could affect the Company's access to the capital markets, or the costs of such capital, include changes in interest rates, general economic conditions and the perception in the capital markets of the Company's business, results of operations, leverage, financial condition and business prospects. If the Company is unable to secure sufficient capital in the immediate future, its results of operations for future periods and its ability to pursue its business strategy may be impaired. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." UNCERTAINTY OF MARKET ACCEPTANCE The worldwide compressor market is well established and substantial in terms of varying designs and types, units purchased and dollar volume. Due to the variety of consumer, commercial and industrial applications for compressor products, the Company believes the compressor market offers significant opportunity for the entrance of new compressor products based upon the Company's proprietary compressor technology. The Company's future financial performance and market acceptance are dependent, in part, upon the Company's ability to educate end-users of the potential cost and performance advantages of the Company's compressor technology over traditional compressor products. In certain instances, for example, the Company has and may continue to be required to supply compressor products on a test-market basis for which it will not receive immediate, if any, revenues. However, current economic pressure and proven reliability of traditional compressor products may make end-users reluctant to purchase substantial capital equipment or invest in new technology. There can be no assurance that the Company's proposed compressor products will be accepted by end-users or that a significant market for such products will be developed and sustained. See "Business." TECHNOLOGICAL CHANGE AND RISKS OF PRODUCT DEVELOPMENT The consumer, commercial and industrial compressor markets are mature, highly competitive and characterized by few technological changes. While the Company believes that its proposed compressor products are based on improved technology that has undergone extensive laboratory and limited field testing, the Company anticipates that it will need to conduct further field testing and compressor product development to determine whether the manufacture and distribution of commercially feasible and quality compressor products can be accomplished in the various markets where the Company believes market opportunities presently exist. Furthermore, the Company's future success will depend upon its ability to research and develop enhancements to its products or new products which are responsive to the demands of the marketplace. There can be no assurance that these product development efforts will be successful, that other new products will be developed on a timely basis or that such products will achieve market acceptance. Any failure by the Company to continue to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness and have a material adverse effect on the Company's results of operations. See "Business." COMPETITION The Company is engaged in fields within the compressor industry that are characterized by a high level of competition. Most of the Company's competitors have significantly greater financial, technical, manufacturing, sales, marketing and other resources, greater name recognition and longer operating histories. While the Company believes that its technology and products are superior to the technology and products of its competitors, there can be no assurance that the Company's technology and products will achieve market acceptability sufficient to result in profitable operations, or that its competitors or other companies not presently 7 manufacturing compressors will not in the future develop and market better technology and products for sale at lower prices that may render the Company's technology and products obsolete or less competitive. LIMITATIONS ON THE PROTECTION OF INTELLECTUAL PROPERTY The Company relies on a combination of patents, copyrights, trademarks, trade secret protection and licensing, confidentiality and nondisclosure agreements to establish and protect its intellectual property rights. As a practical matter, however, these approaches may provide only limited protection and, notwithstanding these precautions, it may be possible for unauthorized third parties to obtain and use information that the Company regards as proprietary or copy certain portions of the Company's products or manufacturing processes. In addition, the laws of some foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. Even if a competitor were to infringe upon the Company's intellectual property rights, enforcing the Company's proprietary rights in an infringement action would be costly. Furthermore, there can be no assurance that others will not independently develop similar technology or products, duplicate the Company's technology or products or design products that circumvent any patents used by the Company. There can also be no assurance that the Company will not be the subject to an infringement action brought by third parties or a demand that the Company obtain a license from such third parties. Such claims may result in protracted and costly litigation or royalty arrangements or otherwise have a material adverse effect on the Company's results of operations. While it may be necessary or desirable in the future for the Company to obtain licenses relating to one or more of its products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. See "Business - Patents and Proprietary Rights." PRODUCT LIABILITY CLAIMS The future manufacture and sale of the Company's proposed products will involve the inherent risk of product liability claims against the Company. The Company does not currently maintain any product liability coverage but intends to do so at such time as the Company begins to manufacture and sell its products. However, due to the uncertainty as to the nature and extent of manufacturers' and distributors' liability for personal injuries, there can be no assurance that the product liability insurance obtained by the Company will be adequate to cover such claims. The successful assertion or settlement of an uninsured claim, or a claim exceeding the Company's insurance coverage would have a material adverse effect on the Company's results of operations and financial condition. In addition, there can be no assurance that insurance will be available, or if available, that it will not be prohibitively expensive. To date, the Company has not been the subject of any suits or legal proceedings relating to its technology or products. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent upon the personal efforts and abilities of its senior management, directors and certain of its key technical employees. The loss of the services of any member of the management or technical staff, particularly those of Mr. Richard D. Besser or Thomas C. Edwards, Ph.D., could have a material adverse effect on the Company's ability to achieve its objectives. The Company has entered into employment, confidentiality and non- competition agreements with Mr. Besser and Dr. Edwards and intends to obtain confidentiality and non-competition agreements with its key employees and others who may become knowledgeable with respect to the Company's intellectual property. The Company has obtained key-man life insurance on Mr. Besser and Dr. Edwards in the amounts of $2,000,000 and $1,500,000, respectively. The Company's success and plans for future growth will also depend in part on its ability to attract and retain qualified professional, technical, managerial and marketing personnel. There can be no assurance that the Company will be successful in attracting and retaining, on terms satisfactory to the Company, the personnel it requires to develop, manufacture, market and sell its products and to conduct its operations successfully. See "Management." 8 BROAD DISCRETION IN USE OF PROCEEDS Management of the Company may adjust the application and allocation of the net proceeds from the sale of the shares of Common Stock offered by the Company hereby and upon the exercise, if any, of its Class D Warrants and Class E Warrants if such adjustment is determined to be in the best interests of the Company in order to address changed circumstances and opportunities. As a result, shareholders will not have an opportunity to review or vote upon such application and allocation of the net proceeds, and the success of the Company will be substantially dependent upon the judgment of the Company's management. See "Use of Proceeds." CONTINUED CONTROL BY PRESENT MANAGEMENT Upon completion of this Offering, assuming the Company effects the sale of 3,000,000 shares of Common Stock offered by the Company hereby, the Company's officers and directors and their affiliates will beneficially own approximately 2,239,500 shares of Common Stock, or approximately 24.68% of the issued and outstanding shares of the Company's Common Stock as described in "Principal Shareholders and Share Ownership of Management" without giving effect to the exercise of any stock options or warrants held by them and assuming no shares of Common Stock are sold by such officers and directors and their affiliates. Although upon completion of this Offering the Company's officers and directors and their affiliates will not control a majority of the Company's Common Stock, if they act in concert with other Company shareholders, they will collectively under some circumstances control the affairs and decisions of the Company for an indefinite period of time through the election of their nominees to the Board of Directors, who in turn appoint the Company's officers. Consequently, the purchasers of the Common Stock offered hereby may not have an effective voice in the management of the Company. See "Principal Shareholders and Share Ownership of Management." Further, Mr. Besser and Dr. Edwards have been elected as Directors of the Company to hold office until 1999, and Frederick M. Zimmerman, Ph.D., has been elected to hold office as a Director of the Company until 1998. See "Management - Directors and Executive Officers" and "Description of Capital Stock - Change of Control Provisions." ANTI-TAKEOVER PROVISIONS The Company is subject to Minnesota statutes regulating business combinations and restricting voting rights of certain persons acquiring shares of Common Stock of the Company, which may hinder or delay a change in control of the Company that a shareholder might consider to be in the best interests of the Company and its shareholders. Additionally, certain provisions of the Company's Amended and Restated Articles of Incorporation and By-laws contain provisions which may hinder, delay or prevent a change in control of the Company. See "Description of Capital Stock - Change of Control Provisions." ARBITRARY DETERMINATION OF OFFERING PRICE The public offering price for the shares of Common Stock offered by the Company hereby will be determined by negotiations between the Company and prospective purchasers and may not necessarily bear any relationship to the assets, earnings, net worth or current market value of the Company's Common Stock or any other recognized criteria of value. DILUTION The Company has granted significant stock options and warrants and expects to issue additional equity interests, including stock options and warrants, to directors, officers, employees, consultants and third-party financing sources in amounts that are uncertain at this time. Moreover, the Company may sell up to 3,000,000 shares of Common Stock offered by the Company hereby at, above or less than market price. As a result, 9 purchasers of the Common Stock will experience dilution in an uncertain amount. Accordingly, in the aggregate, purchasers of the Common Stock offered hereby will bear a greater risk of loss than the current shareholders. See "Dilution," "Management - Stock Option Plans" and "Description of Capital Stock - Stock Warrants." DIVIDEND POLICY The Company has not paid any dividends on its capital stock since its incorporation and does not intend to pay any cash dividends in the foreseeable future. The Company currently intends to follow a policy of retaining earnings, if any, to finance the development and expansion of its business. See "Price Range of and Dividends on Common Stock." NO ASSURANCE OF A PUBLIC MARKET AND POSSIBILITY OF A VOLATILE MARKET While there is presently only a limited, sporadic and highly volatile public market for shares of the Company's Common Stock, prior to this Offering, there has been no public market for the Company's Class D Warrants and Class E Warrants. There is no assurance that any public market will exist after this Offering for the securities offered hereby, or, if one exists, that it will not be volatile. The market price for the securities offered hereby may be subject to significant fluctuations in response to variations in the Company's quarterly operating results, general trends in the Company's industry and other factors, as well as general economic conditions. In addition, the stock market, at times, has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. Securities of issuers having relatively limited capitalization or securities recently offered in a public offering or being publicly traded are particularly susceptible to change based on short-term trading strategies of certain investors. Accordingly, there can be no assurance that purchasers will be able to resell their securities at prices for which they were purchased or at any price. SHARES ELIGIBLE FOR FUTURE SALE Following the Offering and assuming the Company effects the sale of the 3,000,000 shares of Common Stock offered by the Company hereby, the Company will have 9,075,132 shares of Common Stock outstanding, not including 1,368,216 and 718,779 shares of Common Stock reserved for issuance upon the exercise of the Company's outstanding warrants and stock options, respectively. Of the shares outstanding, a total of 7,965,132, including the shares offered hereby, will be eligible for sale in the open market without restriction. The remaining 1,110,000 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Of these restricted securities, approximately 1,110,000 shares are currently eligible for sale in the public market pursuant to Rule 144. The Company, its directors and executive officers and certain other shareholders have agreed not to sell any of their shares of Common Stock for a period of 180 days from the date of this Prospectus. The lock-up provisions are intended to assist in the development of an orderly trading market in the Common Stock, the development of an adequate investment research following of the Company and the promotion of institutional demand for the Common Stock. Following the Offering, sales and potential sales of substantial amounts of the Company's Common Stock in the public market pursuant to Rule 144 or otherwise could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise additional capital through the sale of equity securities. See "Principal Shareholders and Share Ownership of Management," "Description of Capital Stock" and "Shares Eligible for Future Sale." EXERCISE OF WARRANTS AND OPTIONS The existence of the Class D Warrants and Class E Warrants and the outstanding stock options to acquire 718,779 shares of the Common Stock of the Company could adversely affect the Company's ability to obtain 10 future financing, and their exercise could further dilute the interests of investors acquiring securities in this Offering. The price which the Company may receive for the Common Stock issued upon exercise of such warrants and stock options will probably be less than the market price of the Common Stock at the time such warrants and stock options are exercised. Moreover, the holders of the warrants and stock options might be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain needed capital by a new offering of its securities on terms more favorable than those provided for by the warrants and stock options. The Company may also issue additional shares, warrants and stock options, which issuances may have the same effect. See "Management" and "Description of Capital Stock." REDEMPTION OF WARRANTS The Class D Warrants and Class E Warrants may be redeemed by the Company at any time prior to the expiration of such Warrants at a redemption price of $.01 per Warrant upon thirty (30) days prior written notice if the bid price of the Company's Common Stock shall have closed at or above $3.00 and $5.50 per share for the Class D Warrants and Class E Warrants, respectively, for ten (10) consecutive trading days on The Nasdaq SmallCap Market or on any other national securities exchange. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Capital Stock - Stock Warrants." NON-REGISTRATION IN CERTAIN JURISDICTIONS OF COMMON STOCK, WARRANTS AND SHARES UNDERLYING THE WARRANTS The Company's shares of Common Stock, Class D Warrants and Class E Warrants that are being registered hereby are not saleable or exercisable unless, at the time of such sale or exercise, the Company has a current prospectus covering the Common Stock, the Warrants and the shares issuable upon exercise of such Warrants, and such securities have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the holders of such securities. Due to the Company's lack of financial resources, the Company anticipates that the securities offered hereby will be initially registered and qualified in the States of Florida and Minnesota only. Although the Company will use its best efforts to have all such securities so registered or qualified in such other states as required, there is no assurance that it will be able to do so. Although the shares of Common Stock and Warrants have not been knowingly sold by the Company to purchasers in jurisdictions in which such securities were not registered or otherwise qualified for sale, purchasers may buy shares of Common Stock and Warrants in the aftermarket or may move to jurisdictions in which such securities are not so registered or qualified. In these events, the Company would be unable to transfer ownership on its books or to issue shares to those persons desiring to exercise their Warrants unless and until their shares of Common Stock and Warrants could be qualified for sale in the jurisdiction in which such purchasers reside, or an exemption from such qualification exists in such jurisdiction, and holders of such shares of Common Stock or Warrants would have no choice but to attempt to sell the shares of Common Stock and Warrants in a jurisdiction where such sale is permissible. No assurances can be given that the Company will be able to effect any required qualification. LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SYSTEM Under the rules of the National Association of Securities Dealers, Inc. ("NASD"), in order to qualify for initial quotation of securities on The Nasdaq SmallCap Market, a company, among other things, must have at least $4,000,000 in total assets, $2,000,000 in total capital and surplus, $1,000,000 in market value of public float, a minimum bid price of $3.00 per share and at least two active market makers for its Common Stock. For continued listing, a company, among other things, must have at least $2,000,000 in total assets, $1,000,000 11 in total capital and surplus, $1,000,000 in market value of public float, a minimum bid price of $1.00 per share and the continuation of at least two active market makers. If the Company is unable to satisfy NASDAQ's maintenance requirements, trading, if any, in the listed securities would thereafter be conducted in the over-the-counter market in what are commonly referred to as the "pink sheets" or the NASDAQ OTC Bulletin Board. As a result, the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of the transactions, reduction in security analysts' and the news media's coverage of the Company and lower prices for the Company's securities than might otherwise be attained. BROKER-DEALER SALES OF COMPANY SECURITIES During periods when the Company's securities do not qualify for inclusion on the NASDAQ SmallCap Market or are removed therefrom, the Company's securities may become subject to a rule of the Commission that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worths in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser of such securities and have received the purchaser's written consent to the transaction prior to the sale. Consequently, the Commission's rule may adversely affect the ability of broker-dealers to sell the Company's securities and may also affect the ability of purchasers in this Offering to sell such securities in the secondary market. The Company intends to promptly apply for inclusion of its Common Stock on The Nasdaq SmallCap Market at such time that it reasonably believes that the Company will meet The Nasdaq SmallCap Market listing requirements. However, there is no assurance that the Company's Common Stock will be accepted for listing on The Nasdaq SmallCap Market. FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements. The Company's forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to the design, development, joint-venturing and licensing of its compressor technologies. The forward-looking statements and associated risks set forth in this Prospectus include or relate to the Company's ability to: (i) consummate the acquisition of Fab-Tech Industries of Brevard, Inc.; (ii) develop and distribute its industrial air compressor system through Kurt/Dyneco Compressor Company, LLC; (iii) finalize the joint-venture arrangement with SCS/Frigette Corp.; (iv) finalize its licensing arrangement with Coltec Industries, Inc.; (v) design and develop its compressor technology for the mass transit and electric powered vehicle climate control systems market; (vi) design and develop its compressor technology for the commercial environmental systems market; (vii) design and develop its compressor technology for the residential and light commercial hermetic air conditioning compressor market; (viii) market its products; (ix) develop market recognition and market acceptance of the Company's Orbital Vane Compressor; (x) successfully implement its marketing initiatives; and (xi) achieve adequate intellectual property protection for the Company's products. The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that: (i) the Company will continue to design, market and provide new compressor products and technologies on a timely basis; (ii) competitive conditions in the market will not change adversely or materially; (iii) interest in the Company's Orbital Vane Compressor technology will continue or increase; (iv) the market will accept the Orbital Vane Compressor technology; (v) the Company will retain and add qualified sales, research and development personnel; (vi) the Company's forecasts will accurately anticipate market demand; and (vii) there will be no material adverse change in the Company's operations or business. The foregoing assumptions are based on 12 judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control. Accordingly, although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any such assumption could prove to be inaccurate and therefore there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, there are a number of other risks presented by the Company's business and operations which could cause the Company's financial condition and results of operations to vary markedly from the results contemplated by the forward- looking statements. In light of significant uncertainties inherent in the forward-looking information included in this Prospectus, the inclusion of such information should not be regarded as a representation by the Company, or any other person that the Company's objectives or plans will be achieved. 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $ _______ million, after deducting estimated offering expenses payable by the Company and assuming a public offering price of $ _____ per share. In addition, in the event the Class D Warrants and Class E Warrants are fully exercised, the Company would receive an additional $4,490,317.50 in net proceeds. While the Company currently anticipates that the sale of the shares of Common Stock offered by the Company hereby shall be made at or around the market price for the Common Stock as of the date of this Prospectus, there can be no assurance that the Company will effect such sales at such price, or that the Company will effect such sales at all. The Company will not receive any proceeds from the sale of the shares of Common Stock offered by the Selling Shareholders. The Company intends to use the net proceeds, if any, for the acquisition of the assets and business of Fab-Tech Industries of Brevard, Inc. ("Fab-Tech") of Rockledge, Florida for an anticipated purchase price of $2,400,000 in cash and the assumption of all liabilities, which may be retired by the Company. Fab- Tech is an established business engaged in the production of precision parts, components and sub-assemblies and sheetmetal fabrication of mechanical components. See "Business-Manufacturing Facilities Acquisition." Although the Company intends to consummate the purchase of Fab-Tech as soon as practicable after the sale of the shares of Common Stock offered by the Company hereby, there can be no assurance that the Company will be able to consummate such purchase. In the event the acquisition of Fab-Tech is not consummated for any reason, the Company intends to proceed to identify other companies comparable to Fab-Tech in size, operations and purchase price and initiate discussions with a view of making such acquisition. However, the Company has not initiated any discussions with a view to make any acquisition. Therefore, there can be no assurance that the Company will acquire any business operations, and if the Company were to make any such acquisition, there is no assurance that such business operations will be profitable or of any financial benefit to the Company. The Company intends to use the balance of any net proceeds to provide increased working capital to support anticipated marketing and sales growth, for research and product development, purchase of capital equipment, leasehold improvements and complementary technologies and for other general corporate purposes. In addition, any proceeds received upon the exercise of the Class D Warrants, Class E Warrants and outstanding stock options to purchase the Company's Common Stock will be used for general working capital purposes. Pending the foregoing uses, the net proceeds will be invested in short-term, interest-bearing investment grade securities, certificates of deposit, money market accounts or obligations issued or guaranteed by the United States government. The foregoing represents the Company's best estimate of the allocation of the net proceeds of this Offering based upon the current status of its business operations, its current plans and current economic conditions. Future events, including problems, delays, expenses and complications frequently encountered by early stage companies as well as changes in competitive conditions affecting the Company's business and the success or lack thereof of the Company's marketing efforts, may make shifts in the allocation of funds necessary or desirable. A change in the use of such proceeds or the timing of such use will be at the Company's sole discretion. 14 PRICE RANGE OF AND DIVIDENDS ON COMMON STOCK Since April 1994, the Company's Common Stock has traded on the NASDAQ OTC Bulletin Board administered by the NASD under the symbol "DYCO." The following table sets forth, for the periods indicated, the range of high and low bid prices for the Common Stock as reported by the NASD. These quotations reflect inter-dealer prices, without adjustments for retail mark-ups, mark-downs or commissions, and may not represent actual transactions. HIGH LOW -------- -------- FISCAL 1994 Second Quarter (from April 4). . . . . . . $ 3 1/4 $ 2 Third Quarter. . . . . . . . . . . . . . . 3 1/2 2 3/4 Fourth Quarter . . . . . . . . . . . . . . 2 3/4 1 1/2 FISCAL 1995 First Quarter. . . . . . . . . . . . . . . 3 3/8 1 3/4 Second Quarter . . . . . . . . . . . . . . 4 1/4 1 1/2 Third Quarter. . . . . . . . . . . . . . . 3 3/8 2 5/16 Fourth Quarter . . . . . . . . . . . . . . 3 1/2 2 1/8 FISCAL 1996 First Quarter. . . . . . . . . . . . . . . 3 3/4 2 1/2 Second Quarter . . . . . . . . . . . . . . 5 2 The high and low bid price per share for the Common Stock on July 8, 1996 was $2 1/4. As of July 8, 1996, the Company had approximately 694 shareholders of record. Since its inception, the Company has paid no dividends on shares of the Common Stock. The Company does not anticipate paying any dividends in the foreseeable future. The Board of Directors of the Company has determined to retain all earnings to support anticipated growth in the operations of the Company. Future declarations and payments of dividends, if any, will be determined in light of then-current conditions, including the Company's earnings, operations, capital requirements, liquidity, financial conditions and other factors deemed relevant by the Board of Directors. See "Risk Factors - Dividend Policy." 15 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, as adjusted to give effect to the sale of the 3,000,000 shares of Common Stock by the Company for an aggregate purchase price of $9,750,000, in connection with the Offering and the anticipated application of the net proceeds therefrom of $9,543,461, after deducting estimated offering expenses of $206,539 payable by the Company.(1)(2) MARCH 31, 1996 -------------------------------- ACTUAL AS ADJUSTED ------------ ------------ Current liabilities: Accounts payable $ 14,592 $ 14,592 Accrued expenses 297,576 147,576 ------------ ------------ Total current liabilities 312,168 162,168 ------------ ------------ Shareholders' equity: Common stock, $.01 par value; 6,075,132 shares issued and outstanding (and adjusted to reflect issuance of the 3,000,000 shares in connection with this Offering) 60,751 90,751 Paid-in capital 5,352,546 14,866,007 Accumulated deficit (4,015,399) (4,015,399) ------------ ------------ Total shareholders' equity 1,397,898 10,941,359 ------------ ------------ Total liabilities and shareholders' equity $ 1,710,066 $ 11,103,527 ------------ ------------ ------------ ------------ (1) Assumes a $3.25 purchase price for the 3,000,000 shares of Common Stock offered by the Company hereby. On March 31, 1996, the closing bid price for the Company's Common Stock as reported on the NASDAQ OTC Bulletin Board was $3.25 per share. (2) At March 31, 1996, the Company had outstanding stock options for the purchase of 718,779 shares of Common Stock at exercise prices ranging from $.01 to $2.00. Additionally, the Company had outstanding Class D Warrants for the purchase of 940,305 shares of Common Stock for $2.50 per share and Class E Warrants for the purchase of 427,911 shares of Common Stock for $5.00 per share. The capitalization table does not include the effects of any exercise of these outstanding stock options or warrants as of March 31, 1996. 16 DILUTION At March 31, 1996, the Company's net book value was $1,397,898 or $.23 per share of Common Stock. "Net book value" represents the assets of the Company, less all liabilities. Without taking into account any further changes in such net book value after March 31, 1996, other than to give effect to the sale of 3,000,000 shares of Common Stock by the Company hereby for an aggregate purchase price of $9,750,000 (assuming a purchase price of $3.25 per share), and the respective application of the net proceeds therefrom of $9,543,461, after deducting estimated offering expenses of $206,539 payable by the Company, the pro-forma net book value as of such date would have been $10,941,359 or approximately $1.21 per share. This represents an immediate increase to existing shareholders in net book value of $.98 per share, and an immediate dilution to new investors of $2.04 per share. "Dilution" represents the difference between the offering price per share and the pro-forma net book value per share of Common Stock at March 31, 1996. The following table illustrates the dilution per share of Common Stock to new investors in net book value per share of Common Stock on the sale of the Common Stock offered by the Company hereby: Offering price per share $3.25 Net book value per share before Offering $ .23 Pro-forma net book value per share after this Offering $1.21 Increase per share attributable to sale of shares $ .98 Dilution per share to new investors $2.04 The following tables summarize the differences between the current shareholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid by each group, and the average price per share of Common Stock paid by each group. TOTAL SHARES PURCHASED CONSIDERATION ------------------------ -------------------------- PRICE PER NUMBER % AMOUNT % SHARE --------- ---- ----------- ---- ----------- Current shareholders 6,075,132 67% $ 5,413,297 36% $ .89 New investors 3,000,000 33% $ 9,750,000 64% $ 3.25 --------- ---- ----------- ---- Total 9,075,132 100% $15,163,297 100% --------- ---- ----------- ---- --------- ---- ----------- ---- The above table does not take into account the estimated expenses of this Offering nor the exercise of issued and outstanding stock options and warrants. 17 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The selected consolidated statement of operations data presented below for the fiscal years ended December 31, 1995 and 1994 have been derived from the Company's consolidated financial statements, which statements have been audited by Silverman Olson Thorvilson & Kaufmann LTD, certified public accountants, as indicated in their report included elsewhere in this Prospectus. The selected consolidated statement of operations data for the three months ended March 31, 1996 and 1995 and the consolidated balance sheet data at March 31, 1996 are derived from unaudited consolidated financial statements included herein. In the opinion of the Company, the unaudited information has been prepared on a basis consistent with the audited information and includes all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly information set forth herein. Results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the full fiscal year. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus. CONSOLIDATED STATEMENT OF OPERATIONS DATA THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, -------------------------- --------------------------- 1996 1995 1995 1994 ----------- ----------- ------------ ----------- Revenues $ - $ 5,000 $ 5,000 $ 70,000 Operating expenses: General and administrative 188,351 320,056 836,550 735,002 Research and development 59,610 59,489 248,523 43,835 ----------- ----------- ------------ ----------- Total operating expenses 247,961 379,545 1,085,073 778,837 ----------- ----------- ------------ ----------- Operating loss (247,961) (374,545) (1,080,073) (708,837) Other income (expense): Interest income 13,074 - 8,776 - Gain (loss) on sale of property and equipment - 585 789 (1,640) Loss in joint-venture (15,000) - (23,900) - Interest expense (100) - (1,597) (313) Loss in litigation settlement - - - (75,456) ----------- ----------- ------------ ----------- Total other income (expense) (2,026) 585 (15,932) (77,409) ----------- ----------- ------------ ----------- Net loss $ (249,987) $ (373,960) $ (1,096,005) $ (786,246) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Net loss per share $ (.04) $ (.08) $ (.22) $ (.24) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Weighted average number of common shares outstanding 6,075,132 4,666,623 5,075,014 3,312,721 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- 18 CONSOLIDATED BALANCE SHEET DATA: MARCH 31, 1996 ----------- Current assets $ 897,873 Total assets $ 1,710,066 Current and total liabilities $ 312,168 Accumulated deficit $(4,015,399) Total shareholders' equity $ 1,397,898 Working capital $ 585,705 ________________________ Assuming the acquisition of Fab-Tech's assets and business operations occurs on or before July 11, 1996, the following pro-forma statements of operations and balance sheet for the three months ended March 31, 1996 give effect to the acquisition as though it were effective at the beginning of such period. The statements give effect to the acquisition under the purchase method of accounting and the assumptions in the accompanying notes to the pro-forma financial statements. The pro-forma statements may not be indicative of the results that would have occurred if the acquisition had been effective on the dates indicated or of the results that may be obtained in the future. The pro- forma statements should be read in conjunction with the financial statements and notes thereto of the Company and Fab-Tech included elsewhere in this Prospectus. FOR THE THREE MONTHS ENDED MARCH 31, 1996 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) ----------------------------------------------------------------------------- PRO-FORMA DYNECO FAB-TECH PRO-FORMA DYNECO CORPORATION INDUSTRIES OF CONSOLIDATING CORPORATION CONSOLIDATED BREVARD, INC.(1) ENTRIES CONSOLIDATED ------------ ---------------- ------------- ------------ Sales $ - $ 973,855 $ - $ 973,855 Cost of sales - (714,528) - (714,528) Operating expenses (247,961) (141,800) (50,500)(2) (440,261) ----------- ----------- ---------- ----------- Income (loss) from operations (247,961) 117,527 (50,500) (180,934) Other income (expense) (2,026) (35,893) - (37,919) ----------- ----------- ---------- ----------- Net income (loss) $ (249,987) $ 81,634 $ (50,500) $ (218,853) ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net loss per share $ (.04) $ (.02) ----------- ----------- ----------- ----------- Weighted average number of shares outstanding 6,075,132 9,075,132 ----------- ----------- ----------- ----------- (1) Represents Fab-Tech unaudited activity for the period ended March 31, 1996. (2) Represents amortization of intellectual property acquired in the Fab-Tech acquisition for the period ended March 31, 1996. 19 MARCH 31, 1996 PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) ------------------------------------------------------------------------ PRO-FORMA DYNECO FAB-TECH PRO-FORMA DYNECO CORPORATION INDUSTRIES OF CONSOLIDATING CORPORATION CONSOLIDATED BREVARD, INC.(1) ENTRIES(2) CONSOLIDATED ------------ ---------------- ------------- ------------ Current assets $ 897,873 $ 972,463 $ 7,143,461 $ 9,013,797 Property and equipment 86,418 1,267,497 - 1,353,915 Intangible and other assets 725,775 - 1,742,750(3) 2,468,525 ------------ ------------ ------------ ------------ Total assets $ 1,710,066 $ 2,239,960 $ 8,886,211 $ 12,836,237 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Current liabilities $ 312,168 $ 710,561 $ - $ 1,022,729 Long-term debt - 859,015 - 859,015 Equity 1,397,898 670,384 8,886,211 10,954,493 ------------ ------------ ------------ ------------ Total liabilities and equity $ 1,710,066 $ 2,239,960 $ 8,886,211 $ 12,836,237 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (1) Represents Fab-Tech unaudited balance sheet at March 31, 1996. (2) Assumes the successful completion of the sale of 3,000,000 shares of Common Stock offered by the Company hereby (assuming a purchase price of $3.25 per share and net proceeds of $9,543,461) and $2,400,000 cash purchase of Fab- Tech net assets. (3) Represents fair market value adjustment for assets and amortization of assets costs over their estimated useful lives. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto also contained in this Prospectus. GENERAL HISTORY The Company was incorporated as a Minnesota corporation in December 1984 under the name TERTM, Inc. In 1989, the Company changed its corporate name to TERTM Technology Corporation and changed its name again in December 1993 to DynEco Corporation. Prior to 1991, the Company was engaged in the design, development, manufacture and marketing of certain proprietary products using a proprietary production process known as the Thermal Expansion Resin Transfer Molding Process ("TERTM Process"). The Company also marketed and licensed its design engineering and contract manufacturing capabilities for the design, development and manufacture of products using the TERTM Process to third parties. The Company discontinued its manufacturing operations in 1991, and until the acquisition of the compressor assets and business of DynEco International in March 1994, the Company only engaged in licensing the TERTM Process and providing application engineering consulting with respect to licenses. Since its inception in 1984 and until its curtailment of manufacturing operations in 1991, the Company incurred substantial research and development expenses in connection with the development and refinement of its manufacturing operations and the establishment of its management and manufacturing organization with respect to the TERTM Process operations. As a result, the Company incurred operating losses in each year since its inception. During 1991, the Company exhausted its working capital, and was unable to obtain additional financing and could no longer support its manufacturing operations. The Company responded to its weakening financial condition by curtailing all manufacturing operations and began to focus on licensing the 21 TERTM Process and providing application engineering consulting with respect to existing licenses. The Company's initial business strategy was to realize licensing revenues in order to reduce its outstanding liabilities. In January 1993, the Company's management was introduced to DynEco International, a development stage company engaged in the development of proprietary compressor technology intended to be commercially exploited primarily through licensing to third parties. Although the Company's and DynEco International's technologies were dissimilar, the Company had successfully negotiated licenses in the Asian and European markets which experience could permit DynEco International to gain Asian and European market entry contacts. DynEco International, however, was unwilling to proceed with any serious discussions with the Company until the Company restructured its obligations. As discussions ensued, the Company concluded that a Chapter 11 reorganization was the only way the Company could restructure its obligations and induce DynEco International to enter into an acquisition agreement. The Company's Chapter 11 petition, the Plan of Reorganization and a Disclosure Statement were filed with the United States Bankruptcy Court for the District of Minnesota on July 12, 1993. The Plan of Reorganization was subsequently confirmed by the Order of the Bankruptcy Court on December 17, 1993. The Chapter 11 case was closed by the Order of the Bankruptcy Court in June 1994, and the Bankruptcy Court has no further jurisdiction over the Company and its affairs. On March 31, 1994, the Company consummated the acquisition of DynEco International's business for (a)(i) approximately 3,926,000 shares of the Company's Common Stock and (ii) warrants to purchase approximately 392,600 shares of the Company's Common Stock for the purchase price of $7.00 per share in exchange for all of the issued and outstanding DynEco International capital stock, and (b) the assumption of DynEco International's two stock option plans which reserve 1,500,000 shares of DynEco International common stock for purchase by certain persons. Upon the effective date of the acquisition of DynEco International, DynEco International became a wholly-owned subsidiary of the Company, and DynEco International's security holders collectively became majority shareholders of the Company. The Company's directors and officers resigned their positions, and the directors and officers of DynEco International became the directors and officers of the Company. The Company's business operations were restructured into two principal divisions: (i) the DynEco compressor business operated through the newly acquired wholly-owned subsidiary, DynEco International, and (ii) the TERTM Process business operated through the newly-organized wholly-owned subsidiary, TERTM. The Company is currently primarily engaged in (1) the continuing improvement of its proprietary compressor technology, and (2) the ongoing exploitation of its proprietary compressor technology through licensing arrangements with third parties. Further, the Company intends to engage in manufacturing activities in connection with its compressor technology through the acquisition of suitable manufacturing companies or, alternatively, enter into manufacturing alliances with third parties with respect to product application of the Company's proprietary compressor technology. The Company intends to sell its TERTM Process technology and business once a suitable purchaser is identified. See "Business." RESULTS OF OPERATIONS The historical results of operations of the Company for the fiscal year ending December 31, 1993 are not indicative of the Company's current operations as such reflect an entity whose principal business operations have been discontinued. Furthermore, the Company generated only nominal revenues of $5,000 and $70,000 for the years ended December 31, 1995 and 1994, respectively, and did not generate any revenues for the three months ended March 31, 1996. As a result, comparison of results of operations would not be meaningful and, therefore, is not included herein. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1996, the Company's primary source of liquidity was $759,953 in cash, and the Company's working capital was $585,705. Of the Company's total assets of $1,710,066, $86,418 consisted of property and equipment, $171,100 consisted of an investment in a joint-venture, $169,440 consisted of investment in technology and $385,235 consisted of patent and license rights. Company liabilities totaling 22 $312,168 included accounts payable of $14,592 and accrued expenses of $297,576. Shareholders' total equity was $1,397,898. At March 31, 1996, the Company had an accumulated deficit of $4,015,399. Net cash used in operating activities was $693,756 during the year ended December 31, 1995. The Company obtained $1,904,145 from financing activities for the year ended December 31, 1995. The cash received from financing activities was due to the issuance of Company Common Stock through various private placements and the result of the exercise of Company Class B Warrants, Class C Warrants and DynEco International Warrants. The Company has financed its operations since April 1, 1994 primarily from the issuance of Common Stock in connection with the exercise of Company Class A Warrants, Class B Warrants and Class C Warrants which expired on December 31, 1994, March 31, 1995 and June 30, 1995, respectively, and the private placement sale of Company Common Stock. Cash or cash equivalents received from the exercise of Company Class A Warrants, Class B Warrants and Class C Warrants was approximately $481,963. Proceeds from the private placement of the Company's Common Stock in 1995 was approximately $1,784,580. As of March 31, 1996, and the date of this Prospectus, the Company's sources of external and internal financing were limited. It is not expected that the internal sources of liquidity will improve until net cash is provided by operating activities, and until such time, the Company will rely upon external sources for liquidity, including the exercise of the Company's Class D Warrants, Class E Warrants and various outstanding stock options for which the Company has no understandings or commitments from anyone. The Company believes that its working capital should satisfy its capital requirements for approximately the next 4 to 7 months. There can be no assurance, however, that the Company will be able to generate sufficient cash from operations, if any, in future periods beyond this 4 to 7 month period to satisfy the Company's capital requirements. Therefore, the Company may have to continue to rely on external financing activities to satisfy the Company's capital requirement for the foreseeable future. However, other than as described in this Prospectus, the Company has no commitments for borrowings or additional sales of equity, and there can be no assurance that the Company will be successful in consummating any such future financing transactions on terms satisfactory to the Company, if at all. SEASONALITY AND INFLATION The Company's business is not seasonal in nature, nor does management believe that its operations have been materially affected by inflationary forces. 23 BUSINESS The Company designs, develops, joint-ventures and licenses advanced proprietary compressor technologies embodied in the DynEco Orbital Vane Compressor for use in industrial, commercial and selected consumer-related markets. The Company believes that its DynEco Orbital Vane Compressor can provide end-users with a small, quiet, reliable and low-cost alternative to traditional compressor designs. Until recently, the Company's business strategy has been to develop and license its proprietary technology to third-parties for product development applications initiated by such parties and to enter into joint-venture arrangements. Although the Company presently intends to continue joint-venturing and licensing its proprietary technology to third-parties, the Company also intends to develop and manufacture compressor products directed to selected consumer-related markets and to original equipment manufacturers in a variety of industries such as air compression, automotive climate control, vacuum pumps, mass transit and electric vehicle climate control systems, commercial environmental systems and residential and light commercial hermetic air conditioning systems. The Company believes that through a series of strategic alliances and acquisitions it can assemble the resources to manufacture and market air compressors, airends, air conditioner compressors and vacuum pumps in the near future. The Company also intends to produce specialty and niche applications of its patented DynEco Orbital Vane Compressor systems through its own manufacturing facilities and market such products through established industrial distribution channels. INDUSTRY BACKGROUND The industrial, commercial and consumer compressor markets are large and varied. Industry experts estimate that the annual world-wide market for compressor products exceeds $30 billion, of which an estimated $15 billion are annually sold in the United States. Compressor product markets in which the central system component is a compressor or compressor airend include: - Industrial, Commercial and General Purpose Air Compressors - Automotive Air Conditioners for Conventional Powered and Electrical- Powered Vehicles - Vacuum Pumps - Light Commercial and Residential Air Conditioners - Commercial Refrigeration Systems - Transport Refrigeration Systems - Military Applications - Advanced Compressor Technologies Each of these compressor product markets encompasses numerous manufacturers of the several components and sub-components required for the complete system that houses and drives the compressor. While many manufacturers in these industries produce components, they are more generally characterized as system packagers since they fabricate their proprietary system to a large degree through the assembly of components produced by others. Because of the comparative complexity of the heart of these products -- THE COMPRESSOR -- only a relatively small number of manufacturers produce them. This industry structure of packaging systems utilizing components manufactured by others is a central aspect of the Company's compressor business commercialization strategy. 24 DYNECO ORBITAL VANE COMPRESSOR The Company's proprietary compressor design is a circular, non-contact sealing rotary compressor with an integral lubricant system which management believes can be sized and configured for numerous product applications, including air compression systems, automotive air conditioning climate control systems, vacuum pumps, commercial and residential building climate control systems, consumer refrigeration systems, transport refrigeration systems, military applications and other advanced compressor technologies. Positive displacement compressors, no matter of what kind, achieve gas compression by confining gases within dynamic chambers formed by close-fitting mechanical parts. The energy efficiency of all such compressors is controlled primarily by two opposing demands: (1) minimum mechanical friction; and (2) optimal internal gas sealing. Thus, a compression volume consisting of tight-fitting dynamic surfaces will yield excellent sealing but induce significant mechanical friction and wear. On the other hand, loose moving parts will decrease wear and friction but result in additional gas leakage. Therefore, to one degree or another, all commercially successful compressors have reached competitive efficiency by satisfactorily balancing adequate internal sealing with tolerable mechanical friction and wear. The ideal dynamic sealing surfaces, of course, would be ones that operate in extremely close sealing proximity but do not actually rub against each other. Such conditions would offer excellent gas sealing and essentially no friction or wear. Furthermore, the ideal dynamic exchange of internal mechanical compressor loads should take place across pure rolling elements or fully developed fluid films. Management believes that all of these ideals are closely approximated by the Company's patented small, lightweight and simple rotary compressor. The Company believes that its DynEco Orbital Vane Compressor technology can provide users with a small, quiet, reliable and low-cost alternative to traditional reciprocating, rotary vane and rotary screw compressor designs. The Company also believes that its DynEco Orbital Vane Compressor technology is inherently different from current reciprocating, rotary vane and rotary screw compressor airends with respect to reliability. IDENTIFIED PRODUCT MARKETS The Company has implemented a compressor industry entry strategy initially focusing on four markets: (1) the industrial air compressor systems market; (2) the air conditioning climate control systems aftermarket and replacement market for automotive passenger cars and light trucks; (3) the vacuum pump market; (4) the mass transit and electric vehicle climate control systems market; (5) the commercial environmental systems market; and (6) the residential and light commercial hermetic air conditioning compressor market. INDUSTRIAL AIR COMPRESSOR SYSTEMS MARKET Industrial air compressor airends are utilized in sophisticated air compression systems which generally operate under severe operating conditions with a continuous demand for the provision of high-quality compressed air. Industry experts estimate the annual demand for 5 to 25hp industrial air compressor systems in the United States exceeds 56,000 units annually at an average cost of approximately $1,400 per unit. The Company believes that it can enter this market through joint-ventures, strategic alliances and Company product development, manufacturing and marketing strategies. In December 1994, the Company entered into a joint-venture arrangement with Kurt Manufacturing Company, a Minnesota corporation ("Kurt Manufacturing"), to organize a new entity to develop and distribute 10 to 25hp industrial air compressor systems featuring the Company's proprietary DynEco Orbital Vane Compressor technology with respect to the air compressor systems' airend. Kurt Manufacturing is a leading 25 manufacturer of complex precision component parts and systems for numerous industrial and commercial manufacturing companies and certain proprietary industrial products of its own which it distributes through its distribution channels. The joint business enterprise, "Kurt/DynEco Compressor Company, LLC" also referred to herein as "Kurt/DynEco," is completing the testing and development of the initial proposed air compressor system identified as the Kurt/DynEco Compressor and exhibited a prototype of the 10hp Kurt/DynEco Compressor to the industrial compressor market during March 1996 at the Plant Engineering Show in Chicago, Illinois. Company management anticipates that production and sales of the initial air compressor system will occur during the end of the Company's current fiscal year. However, due to alterations to certain engineering design specifications associated with the initial proposed air compressor system, production efforts have experienced delays. Accordingly, there can be no assurance that production and sales of the initial air compressor system will occur during the end of the Company's current fiscal year. The Kurt/DynEco Compressors are to be initially marketed through the facilities of Kurt Manufacturing's industrial products distribution channel which has an established distributor organization with a network of approximately 800 industrial products dealers. The initial products contemplated by the joint-venture are 10hp and 25hp Kurt/DynEco Compressor systems. The 25hp units are expected to enter the market during the second quarter of 1997. The compressor airends will be initially manufactured by Kurt Manufacturing, and the packaged air compressor systems may be fabricated by both Kurt Manufacturing and Fab-Tech. All other components, including electric motors, air tanks, tubing, coolers and electronic controls, are believed to be readily available from vendors in sufficient quantities for the Company's purposes. The Kurt/DynEco Compressor system product line is designed with a distinctive appearance and appropriate logos to identify each compressor system as a member of the Kurt/DynEco Compressor systems. In addition to the joint-venture arrangement with Kurt Manufacturing, the Company is exploring other opportunities that exist with respect to the development of air compressor airends for air compressor systems that range below 5hp and above 25hp. AUTOMOTIVE AIR CONDITIONER CLIMATE CONTROL SYSTEMS MARKET Industry experts estimate that the current annual United States market for automotive air conditioner compressors is approximately 11,320,000 units selling at an average price of $144 per unit. Approximately 85% of all vehicles sold in the United States are delivered with factory-installed air conditioning systems. The balance, estimated to use approximately 1,700,000 compressors annually, represent the automotive replacement and aftermarket submarkets with estimated sales of approximately $200 million. The Company believes that the $200 million automotive replacement and aftermarket submarkets provide the greatest opportunity for penetration into the automotive air conditioner climate control systems market. While compressor sales to original equipment manufacturers such as General Motors Corporation, Ford Motor Company, Chrysler Corporation, Toyota Motor Corporation and the like are substantial, Company management believes that penetration into the market requires substantial investment of financial resources and a proven record of near-perfect reliability in the automobile industry. Furthermore, Company management believes that major automobile manufacturers manufacture many of their own air conditioner products and would themselves require substantial financial investments in order to incorporate other air compressors. The automotive replacement and aftermarket submarkets, however, are more informal and fragmented permitting easier, earlier and less costly submarket penetration. Additionally, the submarkets provide the Company with a means of proving the reliability of its Orbital Vane Compressor in the automobile industry, thereby facilitating future licensing and sales to major automobile manufacturers. The Company is currently negotiating a joint-venture arrangement with SCS/Frigette Corp. ("SCS/Frigette") and has signed a letter of intent to design, develop, manufacture and sell compressors for the automotive passenger car and light truck air conditioner climate control system aftermarket and 26 compressor replacement market using the Company's Orbital Vane Compressor technology. SCS/Frigette is a significant packager, distributor and installer of automotive air conditioner climate control systems for the aftermarket. The current arrangement provides for the implementation of a joint business plan for the combination and utilization of the Company's extensive know-how in the design and development of automotive air conditioning compressors and its exclusive rights to a patented design for automotive air conditioning compressors and SCS/Frigette's manufacturing and marketing capabilities. Company management believes that the initial compressor production and sales will occur during the Company's 1997 fiscal year. However, there can be no assurance that the Company's current negotiations with SCS/Frigette will result in any definitive agreements and, further, that any such arrangement with SCS/Frigette will be profitable or a financial benefit to the Company. Regardless of the outcome of these negotiations, however, the Company intends to proceed with the commercialization of the automotive air conditioning climate control compressor. The Company has also had discussions with several automotive aftermarket and replacement air conditioning system manufacturers with respect to licensing its Orbital Vane Compressor technology. However, such discussions are in the preliminary stage, and the nature and scope of licensing arrangements, if eventually effected, are presently unknown to the Company. The Company also believes there may be an enhanced opportunity for entrance into the automotive air conditioner climate control market because of governmental regulations governing the production of certain refrigerants used in air conditioners. Because of concerns with the adverse environmental damage to the ozone layer caused in connection with the use of a chlorofluorocarbon known as R-12 and produced under a variety of trade names, including Freon, most governments, including the United States, have legislation which curtails the production and use of R-12. Recently, the automotive industry decided to use a compound known as HFC-134a (1,1,1,2-tetrafluoroethane) for automotive air conditioner refrigerant. Although it appears that HFC-134a will not cause stratospheric ozone damage, HFC-134a operates at slightly different pressures, and its chemical properties can damage conventional air conditioning system hoses, seals and lubricants presently designed for R-12 refrigerant. As a result, although HFC-134a can be used in air conditioner climate control systems currently designed for R-12, the Company believes that its use can adversely impact the air conditioning system's operation and integrity. The Company believes that its proprietary compressor technology is compatible with HFC-134a refrigerant use, and, to date, the Company has received favorable test results from the Oak Ridge National Laboratory (ORNL) Science and Technology Partnership Office, a reputable industry laboratory, which identified the DynEco Orbital Vane Compressor as a compact, lightweight and more efficient automobile air conditioning compressor using HFC-134a refrigerant. As a result of the governmental regulations on the production and use of current refrigerants, the Company believes that annual automotive air-conditioner compressor requirements may be significantly increased in the near future because of the need for both the redesign of current compressors for new autos and trucks and the replacement of air conditioner compressors in existing autos and trucks. VACUUM PUMP MARKET The United States Department of Commerce estimates that the current annual United States market for vacuum pumps is approximately $162,000,000. Approximately 44% of all vacuum pumps sold in the United States are vacuum pumps in the 0.5hp to 50hp range selling at an average price of $452 per unit. The Company believes that its Orbital Vane Compressor technology is well-suited for the vacuum pump market. The Company is currently negotiating with the Quincy Compressor Division of Coltec Industries, Inc. ("Coltec") a license royalty agreement pursuant to which Coltec will manufacture vacuum pumps in the 0.5hp to 10hp range using the Company's proprietary technology. The proposed 27 agreement provides that the Company will grant Coltec an exclusive royalty- bearing license to use the Company's patented technology for the manufacture, use or sale of vacuum pumps having a rated horsepower between 0.5hp and 10hp, inclusive, in North and South America and a portion of the Pacific Rim. The Company will also provide Coltec four prototype units, each consisting of a full set of drawings and a working prototype in consideration of a cash payment upon acceptance of each prototype. Company management anticipates that the license agreement will be signed during the third quarter of 1996, and that commercial production should begin by the end of the third quarter of 1997. There can be no assurance, however, that such licensing arrangement will be effected at all, and if effected, that such licensing arrangement will be profitable or of a financial benefit to the Company. MASS TRANSIT AND ELECTRIC POWERED VEHICLE CLIMATE CONTROL SYSTEMS MARKET Despite the substantial government and private industry interest in electric-powered transportation, there presently is little information available as to the estimated size of that market. However, in light of recent federal and state regulatory initiatives with respect to electric-powered transportation and the political environment favoring alternate power sources for transportation, the Company perceives an emerging market opportunity for utilization of the DynEco Orbital Vane Compressor technology with respect to climate control cooling and heating applications. Although an operable electric-powered vehicle climate control system utilizing the Company's compressor technology has not been developed, the Company has recently delivered for testing DynEco Orbital Vane Compressors to Trans/Air, Inc. ("Trans/Air"), a manufacturer of bus air conditioning systems, that are both fossil fueled and electric powered. To date, the compressors have received favorable test results, and Trans/Air has requested that DynEco design and develop a compressor with larger capacity for their high capacity mass-transit air conditioning systems. The Company has also been engaged and has performed development subcontract work under the U.S. Department of Energy ("DOE") and the Advanced Research Projects Agency ("ARPA") for preliminary development of vehicle climate control systems. Although the Company believes that the current worldwide market opportunity is limited in numbers and principally related to passenger buses, the Company is completing the design and development of a proprietary climate control system for electric-powered passenger vehicles. However, there can be no assurance that the Company's design efforts will be successful and if successful, that the Company's design will be utilized by the electric-powered passenger vehicle market. COMMERCIAL ENVIRONMENTAL SYSTEMS MARKET The Company has entered into preliminary discussions with Rotary Power International, Inc. ("Rotary Power") contemplating the design, development and, if testing is successful, licensing of an air conditioner compressor for the commercial building HVAC system market. Rotary Power, a manufacturer of rotary engines for commercial and military uses, is an emerging commercial building HVAC system developer utilizing proprietary technology which meets federal and state regulatory initiatives with respect to environmental concerns in large commercial building HVAC system installations. The Company perceives an emerging market opportunity for utilization of the DynEco Orbital Vane Compressor technology with respect to building environmental systems involving both cooling and heating applications. Although an environmental system utilizing the Company's compressor technology has not been developed, the Company's electric- powered vehicle climate control system work performed for Trans/Air, DOE and ARPA has application to building HVAC environmental systems. Despite the Company's inability to predict the market opportunity for commercial building HVAC systems utilizing the Company's proprietary DynEco Orbital Vane Compressor technology, the Company believes that such market opportunity justifies a studied strategy and, accordingly, has commenced design development for an HVAC air conditioner compressor. Regardless of whether Rotary Power decides to utilize the Company's compressor for its air conditioner system, the Company intends to 28 proceed with the commercialization of the HVAC air conditioner compressor. However, there can be no assurance that Rotary Power will utilize the Company's compressor technology, and, further, if operations are commenced, that such operations will be profitable or of any financial benefit to the Company. RESIDENTIAL AND LIGHT COMMERCIAL HERMETIC AIR CONDITIONING COMPRESSOR MARKET In May 1996, the Company entered into a Memorandum of Understanding with the Energy and Resources Laboratories of Taiwan's Industrial Technology Research Institute for the development of a mini-split air conditioning system centered around the Company's Orbital Vane Compressor technology. The Industrial Technology Research Institute is a Taiwanese research and development organization employing nearly 6,000 persons under ten divisions serving a wide range of new and traditional industries. The Industrial Technology Research Institute functions as both a technical center for industry and an arm of Taiwan's industrial development policies. Under the Memorandum of Understanding, the Company will supply existing technology, know-how and engineering resources for developing a workable hermetic refrigerant compressor, and the Industrial Technology Research Institute will provide engineering and resources to build and integrate the compressor into the mini-split system. Once testing is complete, the Company intends to negotiate a manufacturing, sales and distribution agreement with a suitable company in Taiwan. However, there can be no assurance that the results of such testing will be successful, and if successful, that a suitable company in Taiwan for the commercialization of the system will be located. The Company believes that the Orbital Vane Compressor technology is well- suited for use as a hermetic compressor for residential and light commercial air conditioning. The Company's compressor calorimeter testing indicates that the energy efficiency of the Company's Orbital Vane Compressor is competitive with or exceeds the performance of well-developed, reciprocating, rotary and scroll compressors. Due to the favorable displacement-to-size ratio of orbital vane compressors, they can be operated at one-half the speed of scroll or reciprocating hermetic compressors. Lower operational speed inherently increases compressor reliability while simultaneously lowering noise. In addition, due to low speeds, smaller, more efficient and lower cost electric motors can be used to power the compressor. Accordingly, the Company believes that the hermetic compressor may offer the Company a significant business opportunity. MANUFACTURING FACILITIES ACQUISITION The Company is currently negotiating an agreement for the acquisition of the assets and business operations of Fab-Tech. Fab-Tech is an established business engaged in the production of precision parts, components and sub- assemblies and sheetmetal fabrication of mechanical components. Fab-Tech's present plant facilities occupy a 12,500 square foot building located near the Company's offices in Rockledge, Florida. Company management believes that Fab- Tech's manufacturing operations, personnel, machinery and equipment are suitable for the Company's planned business compressor manufacturing operations. The Company's present strategy is to purchase Fab-Tech using a portion of the proceeds, if any, from the sale of the shares of Common Stock offered by the Company hereby, and expand Fab-Tech's capacity to permit the manufacture of compressor products through the purchase of additional equipment and expansion of Fab-Tech's physical plant, or relocation of the business to larger facilities as justified. The purchase of additional equipment and expansion of Fab-Tech's physical plant will require additional capital investment on the part of the Company as well as additional working capital. The Company presently does not know the extent or amount of any such additional capital investment, but anticipates that such investment may be significant. In addition, the negotiations with respect to the acquisition of Fab-Tech are still continuing, and there can be no assurance that the Company's current negotiations will result in any definitive agreement or that any arrangement with Fab-Tech will be profitable or a financial benefit to the Company. 29 PATENT AND PROPRIETARY RIGHTS In January 1992, the Company's subsidiary, DynEco International, entered into a Patent and Know-How License Agreement with Dr. Edwards and a First Amended Patent and Know-How License Agreement in March 1992 (collectively, the "License Agreement"). Under the terms of the License Agreement, DynEco International was granted an exclusive, world-wide license to manufacture, sell and to sublicense licensed products derived from the DynEco Orbital Vane Compressor technology. Under the terms of the License Agreement, Dr. Edwards is entitled to receive royalty payments equal to one (1%) percent of the sales value of the licensed products and ten (10%) percent of the royalty income received from sublicenses of the licensed products. In addition, Dr. Edwards received 2,200,000 shares of DynEco International's common stock (of which 700,000 shares were transferred to others at the direction of Dr. Edwards) which shares were ultimately exchanged for shares of Company Common Stock. The License Agreement is for a fifteen (15) year term, or, if Know-How is not used, upon the expiration of the last to expire patent covered by the License Agreement. DynEco International has the right to discontinue royalty payments in the event the patent rights have irrevocably lapsed or become unenforceable. In such an event, DynEco International, at its sole option, may repurchase all of the shares of Company Common Stock issued to Dr. Edwards pursuant to the License Agreement which are then owned by him at a price of $0.50 per share. Dr. Edwards also agreed to enter into any sublicense agreement with any third party at the request of DynEco International. The License Agreement is binding upon the assigns, legal representatives and/or successors in business of the parties. Prior to the commencement of the Offering, Dr. Edwards has agreed to amend the License Agreement pursuant to which he will assign all of his rights with respect to the DynEco Orbital Vane Compressor technology to the Company. Pursuant to the License Agreement, the Company is the licensee of a series of United States patents and patent applications with respect to the DynEco Orbital Vane Compressor. The following information briefly describes the current status of such patents and patent applications: PATENTS ISSUED: Patent #5087183 Issued to Dr. Edwards on February 11, 1992 Subtitled: "Rotary Vane Machine with Simplified Anti-Friction Positive BiAxial Vane Motion Control" Patent #5160252 Issued to Dr. Edwards on November 3, 1992 Subtitled: "Rotary Vane Machine with Anti-Friction Positive BiAxial Vane Motion Control" Patent #5374172 Issued to Dr. Edwards on December 20, 1994 Subtitled: "Rotary Univane Gas Compressor" Patent #5452998 Issued to Dr. Edwards on September 26, 1995 Subtitled: "Non-Contact Vane-Type Fluid Displacement with Suction Flow Check Valve Assembly" Patent #5501586 Issued to Dr. Edwards on March 26, 1996 Subtitled: "Non-Contact Rotary Vane Gas Expanding Apparatus" 30 PATENT APPLICATIONS PENDING: Patent Application #08/268074 filed June 28, 1994 (in-part continuation) Subtitled: "Non-Contact Vane-Type Fluid Displacement Machine with Consolidated Vane-Guide Assembly" Patent Application #08/556234 filed November 9, 1995 Subtitled: "Non-Contact Vane-Type Fluid Displacement Machine with Multiple Discharge Valving Arrangement" (continuation of Patent Application #08/283471 filed June 28, 1994) Patent Application #08/419976 filed April 10, 1995 Subtitled: "Non-Contact Vane-Type Fluid Displacement Machine with Lubricant Separator and Sump Arrangement" (continuation in part of Patent Application #08/267983 filed June 28, 1994) The Company's success is dependent upon maintaining its patents and proprietary rights. The Company intends to continue to rely upon a combination of patent, copyrights, trademarks, trade secret protection and licensing, confidentiality and nondisclosure agreements to establish and protect its proprietary technology. The Company also intends to continue its policy of obtaining patent protection in appropriate foreign jurisdictions. As a practical matter, however, these approaches may provide only limited protection and, notwithstanding these precautions, it may be possible for unauthorized third parties to obtain and use information that the Company regards as proprietary or copy certain portions of the Company's products or manufacturing processes. In addition, the laws of some foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can also be no assurance that competitors will not independently develop other and more efficient technology than that developed by the Company. The Company is not presently aware of any patents that would prohibit the use of any technology developed by the Company. However, the future issuance of patents to others may require modifications of the Company's operational plans. The Company also holds four patents with respect to its TERTM Process. However, the Company anticipates selling the TERTM Process technology and business once a suitable purchaser is identified. PROPERTIES The Company currently leases on a month-to-month basis approximately 4,296 square feet of office and laboratory space in Rockledge, Florida for a monthly rental, including operating reimbursements, of approximately $2,200. Assuming the acquisition of Fab-Tech, the Company expects to relocate its offices, laboratory and the Fab-Tech operations to a larger space in the Rockledge, Florida area. The Company presently has no understandings or arrangements with anyone to relocate and has not made any decision whether to lease or purchase any space. EMPLOYEES At March 31, 1996, the Company had six (6) full-time employees. The Company believes that its relationship with its employees is good. LEGAL PROCEEDINGS On June 5, 1996, a complaint was filed against the Company in the District Court of Ramsey County, Minnesota (Case No. C4-96-6586), alleging that the Company breached its contractual obligations to four of its former directors in connection with the issuance of certain stock options in 1994. The Company believes that the claims are without merit and that such claims will not have a material adverse effect on the Company's financial condition or results of operations. 31 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company. NAME AGE POSITION Richard D. Besser 61 Chairman of the Board, President and Chief Executive Officer Thomas C. Edwards, Ph.D. 53 Chief Technical Officer and Director Ralph E. Nelson, C.P.A. 39 Chief Financial Officer and Secretary Richard F. Galbraith, M.D. 65 Director Gerald J. Kamman 58 Director Dennis R. Longren 62 Director Charles J. Tambornino 53 Director Frederick M. Zimmerman, Ph.D. 61 Director RICHARD D. BESSER has served as Chairman of the Board, President and Chief Executive Officer of the Company and as Chief Executive Officer of the Company's DynEco International and TERTM subsidiaries since September 1994. Prior to joining the Company, Mr. Besser was retired from full-time employment and engaged in periodic management consulting. From 1988 until his retirement in 1992, Mr. Besser served as Chief Executive Officer and President of Chicago Pneumatic Tool Company, a $200 million international manufacturer of air tools, compressors and related products. Prior to joining Chicago Pneumatic Tool Company, Mr. Besser was a Divisional President of Warner-Swasey Corporation. Mr. Besser has over 30 years of industrial management and executive experience, including 17 years with Inland Steel Company. Mr. Besser is a graduate of the University of Illinois and holds an MBA from the University of Chicago. Mr. Besser is responsible for the Company's general business strategy, long-term planning and day-to-day business operations. THOMAS C. EDWARDS, PH.D. has served as Chief Technical Officer and as a Director of the Company since March 1, 1994. Dr. Edwards co-founded DynEco International and served as its President and Chief Executive Officer from its inception in December 1991 until it was acquired by the Company in March 1994. From February 1990 to December 1991, Dr. Edwards served as Chief Executive Officer of Innovation Technologies, Inc., a predecessor of DynEco International. From March 1985 to February 1990, Dr. Edwards served as Director, Product Design Office, of the Rovac Corporation. Dr. Edwards holds a BSME and a MSME degree from New Mexico State University and obtained a Ph.D. in Mechanical Engineering from Purdue University in 1970. Dr. Edwards is the holder of many patents and the author of numerous papers, reports and publications. Dr. Edwards is also a member of several professional societies and organizations and has been the recipient of several honors. RALPH E. NELSON, C.P.A. has served as Chief Financial Officer and Secretary of the Company since January 1996. Prior to joining the Company, Mr. Nelson, a certified public accountant, worked privately as a consultant from April 1994 to December 1995 and from January 1991 to November 1991. Mr. Nelson was Vice President and Controller of Prosegur Inc., which provides domestic and international transportation of valuables, from December 1991 to March 1994. From 1987 to 1990, Mr. Nelson was the Chief Financial Officer for two start-up and developmental stage high technology companies where he was involved in various 32 private placements and public offerings to raise capital. Prior to 1987, Mr. Nelson was employed by the international accounting firm of Deloitte & Touche. Mr. Nelson graduated from Saint Leo College, Florida with a BA degree in accounting and business management. RICHARD F. GALBRAITH, M.D. has served as a Director of the Company since September 1994. Dr. Galbraith, a neurologist, pioneered the concept of neurological outreach programs in rural Minnesota and Wisconsin in 1966, and since that time has managed the program for Minneapolis Clinic of Neurology Ltd., a leading neurological and psychiatric clinic based in Minneapolis, Minnesota. Dr. Galbraith is an active investor in start-up and developmental stage companies. Dr. Galbraith is a graduate of Seattle University College of Medicine and the Mayo Graduate School of Medicine. GERALD J. KAMMAN has served as a Director of the Company since December 1995. Mr. Kamman recently retired as President of The Hoover European Appliance Group, a $500 million wholly-owned subsidiary of the Maytag Corporation. Mr. Kamman also served as President of three other Maytag units: Dixie-Narco Group from 1989 to 1993; Diversified Productions Division from 1988 to 1989; and Magic Chef Air Conditioning Company from 1980 to 1988. Mr. Kamman began his career in sales and marketing in 1963 at the Whirlpool Corporation, then moved up through increasing levels of responsibility at American Standard and General Electric Company. He earned his first Presidency in 1978 at Friedrich Air Conditioning & Refrigeration Company in San Antonio, Texas. Mr. Kamman graduated from Hanover College in Hanover, Indiana with a BA degree in Business and Economics. DENNIS R. LONGREN has served as a Director of the Company since April 1994. Prior to his retirement in June 1992, Mr. Longren served from September 1990 as Group Vice President-Ordnance Systems of Alliant Techsystems, Inc., a $300 million manufacturer of ordnance systems for the Department of Defense, and was employed in various management positions with its predecessor, Honeywell, Inc., from 1963 to September 1990, including Vice President and General Manager- Ordnance Division. Mr. Longren is a graduate of the University of Minnesota where he received a B of AE degree. CHARLES J. TAMBORNINO has served as a Director of the Company since April 1994. From May 1994 to May 1996, Mr. Tambornino served as President of McQuay International Corporation, a manufacturer of various industrial and commercial products under the McQuay, American Air-Filter, Barry Blower, Jenn Fan and Wesper brand names. From January 1990 to May 1994, Mr. Tambornino served as Executive Vice President and General Manager of Snyder General, the predecessor of McQuay International Corporation. Mr. Tambornino recently served as the Chairman of the Air Conditioning and Refrigeration Institute, an industry association. Mr. Tambornino is a graduate of the University of Minnesota where he received his BSME degree. FREDERICK M. ZIMMERMAN, PH.D. has served as a Director of the Company since July 1995. Dr. Zimmerman is Professor of the Manufacturing Systems Engineering and International Management School at the University of St. Thomas in St. Paul, Minnesota. Prior to returning to academia in 1985, Dr. Zimmerman was engaged for more than 25 years as an engineer, Manager, Vice President and President primarily with IBM, National Computer Systems (NCS) and Camax, an NCS affiliate company. He is a noted author of "The Turnaround Experience: Real World Lessons in Revitalizing Corporations" as well as numerous professional and technical articles. Dr. Zimmerman received a BA in Economics from the University of Minnesota, and holds a Ph.D. in Strategic Management and Organizational Studies from the University of Minnesota Carlson School of Management. The Board of Directors has standing Audit, Compensation and Nomination Committees. The Audit Committee is responsible for reviewing and making recommendations to the Board of Directors regarding the Company's employment of independent auditors, the annual audit of the Company's financial statements and 33 the Company's internal accounting practices and policies. The Audit Committee is presently composed of Mr. Longren (Chairman), Dr. Galbraith and Mr. Tambornino. The Compensation Committee is responsible for reviewing, making recommendations to the Board of Directors and, in some cases, determining the remuneration and compensation arrangements for senior management. The Compensation Committee is presently composed of Dr. Edwards, Dr. Galbraith and Mr. Tambornino. The Nominating Committee is responsible for making recommendations to the Board of Directors regarding candidates for directorship positions to be filled by the Company's shareholders or the Board of Directors. The Nominating Committee also makes recommendations to the Board of Directors regarding positions available on committees of the Board. The Nominating Committee is presently composed of Mr. Besser, Dr. Edwards and Dr. Galbraith. Members of the Board of Directors who are neither employees nor consultants of the Company receive an annual retainer of $2,000 and a fee of $500 for each Board meeting and $100 for each Committee meeting attended. All directors are reimbursed for expenses incurred in connection with attendance at meetings of the Board of Directors or committees thereof. All members of the Board of Directors also participate in the Company's 1993 Corporate Stock Option Plan. See "--Stock Options Plans--1993 Corporate Stock Option Plan." EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth all compensation awarded to, earned by or paid for services rendered in all capacities to the Company during the fiscal year ended December 31, 1995 by Mr. Richard D. Besser, the Company's Chairman, President and Chief Executive Officer (the "Named Executive Officer"). No other executive officer of the Company received compensation in excess of $100,000 for services rendered during fiscal 1995. SUMMARY COMPENSATION TABLE Annual Compensation All Other Name and Principal Position Salary Bonus Compensation - --------------------------- ------ ----- ------------ Richard D. Besser Chairman, President and Chief Executive Officer. . . . . . . . . . . . . . . . $156,000 $ -0- $ -0- EMPLOYMENT AGREEMENTS Effective as of September 22, 1994, the Company entered into a five-year employment agreement with Mr. Besser which provides for an annual base salary of $156,000, subject to any increase the Board of Directors may from time to time approve. Mr. Besser's employment agreement is subject to successive one year renewals at the end of the five-year employment term. Pursuant to Mr. Besser's employment agreement, Mr. Besser also has the right to purchase at any time during the term of his employment agreement, or any renewal thereof, 250,000 shares of Common Stock of the Company for a purchase price of $.01 per share. The 250,000 shares are subject to certain restrictions, including Mr. Besser's right to transfer the shares prior to certain dates, and the Company's ability to repurchase the shares in the event of termination of Mr. Besser's 34 employment. The employment agreement provides that Mr. Besser will continue to receive all benefits under his employment agreement throughout the remainder of its term if his employment is terminated by him under certain conditions, including failure of a successor to assent to his employment agreement in the event of a change in control, or if his employment agreement is terminated by the Company without "cause" (as defined in the employment agreement). Mr. Besser is also prohibited from directly or indirectly competing with the Company for one year after termination of his employment. The Company has also entered into employment agreements with Mr. Nelson, the Company's Chief Financial Officer and Secretary, Dr. Edwards, the Company's Chief Technical Officer, and Thomas R. Reinarts, Ph.D., the Company's Director of Product Development. STOCK OPTION PLANS 1993 CORPORATE STOCK OPTION PLAN. In connection with the acquisition of DynEco International, the Company adopted the DynEco International stock option plan which provides for the grant of options to directors, officers and employees to purchase up to an aggregate of 750,000 shares of Company authorized but unissued Common Stock, subject to adjustment in certain cases, including stock splits, recapitalization and reorganizations (the "1993 Corporate Stock Option Plan" or "Corporate Stock Option Plan"). The purpose of the Corporate Stock Option Plan is to attract, retain and motivate the Company's directors, officers and employees. The Corporate Stock Option Plan is not qualified under Section 401(a) of the Internal Revenue Code and is not subject to any provisions of the Employee Retirement Income Security Act of 1974. The Corporate Stock Option Plan is administered by the Compensation Committee of the Board of Directors and provides for the granting of both incentive stock options (as defined in Section 422 of the Internal Revenue Code) ("ISOs") and nonqualified stock options ("NSOs"). Options are granted under the Corporate Stock Option Plan on such terms and at such prices as determined by the Compensation Committee; provided, however, that the per share exercise price of an ISO and a NSO cannot be less than 100% and 85%, respectively, of the fair market value of the Company's Common Stock on the date of grant, and terms of an ISO and a NSO cannot exceed ten years and five years, respectively. As of the date of this Prospectus, the Company has granted only NSOs and such options expire on December 31, 1998, unless terminated earlier pursuant to their terms. Upon resignation, retirement or termination from the Company's Board of Directors, or the Company (in the case of officers and employees), for any reason other than death or disability, options granted will terminate unless exercised by the optionee within ninety days after such event and twelve months with respect to death or disability, but in no event after the option has expired by its terms. If an option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased shares will become available for further grant under the Corporate Stock Option Plan. Options granted under the Corporate Stock Option Plan are assignable and transferable by the holder subject to the consent of the Company and in compliance with federal and state securities laws. The purchase price is payable in cash, by check, other shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the shares being acquired upon exercise of the option, the surrender of options representing shares of Company Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the shares being acquired upon exercise of the option, or any combination of such methods of payment. As of July 8, 1996, the Company had granted 685,000 options under the Corporate Stock Option Plan. 1993 ADVISORS STOCK OPTION PLAN. In connection with the acquisition of DynEco International, the Company also adopted the DynEco International stock option plan which provides for the grant of options to certain advisors and consultants of the Company to purchase up to an aggregate of 750,000 shares of Company authorized but unissued Common Stock subject to adjustment in certain cases, including stock splits, 35 recapitalization and reorganizations (the "1933 Advisors Stock Option Plan" or "Advisors Stock Option Plan"). The purpose of the Advisors Stock Option Plan is to attract, retain and motivate certain of the Company's non-employee technical advisors, advisory committee members and consultants. The Advisors Stock Option Plan is not qualified under Section 401(a) of the Internal Revenue Code and is not subject to any provisions of the Employee Retirement Income Security Act of 1974. The Advisors Stock Option Plan is also administered by the Compensation Committee of the Board of Directors and provides for the granting of nonqualified stock options. Options are granted under the Advisors Stock Option Plan on such terms and at such prices as determined by the Compensation Committee; provided, however, that the per share exercise price cannot be less than 85% of the fair market value of the Company's Common Stock on the date of grant, and the term of the option cannot exceed five years. Options granted under the Advisors Stock Option Plan expire on December 31, 1998. Upon resignation or termination from a consulting arrangement, for any reason, including death or disability, options granted will terminate unless exercised by the optionee within twelve months after the date of such termination, but in no event after the option has expired by its terms. If an option should expire or become unexercisable for any reason without having being exercised in full, the unpurchased shares will become available for further grant under the Advisors Stock Option Plan. Options granted under the Advisors Stock Option Plan are assignable and transferable by the holder subject to the consent of the Company and in compliance with federal and state securities laws. The purchase price is payable in cash, by check, other shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the shares being acquired upon exercise of the option, the surrender of options representing shares of Company Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the shares being acquired upon the exercise of the option, or any combination of such methods of payment. As of July 8, 1996, the Company had granted 33,779 options under the Advisors Stock Option Plan for the purchase price of $1.00 per share of the Company's Common Stock. CERTAIN TRANSACTIONS In connection with the organization in December 1994 of Kurt/DynEco Compressor Company, LLC, a joint-venture between the Company and Kurt Manufacturing, the Company issued 100,000 shares of its Common Stock valued at $175,000 to Kurt Manufacturing in exchange for a license to utilize certain patented technology developed by Kurt Manufacturing, whose majority shareholder, Mr. William Kuban, is a shareholder and former director of the Company. The Company later transferred the license to the joint-venture. In July 1995, the Company also issued 200,000 shares of its Common Stock to Kurt Manufacturing in exchange for certain tooling, dies and jigs and production engineering services valued at $200,000, which the Company later transferred to the joint-venture. The Company and Kurt Manufacturing also each contributed $10,000 to Kurt/DynEco Compressor Company, LLC in exchange for their respective fifty percent ownership interest in the joint-venture. See "Business - Identified Product Markets - Industrial Air Compressor Systems Market." 36 PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of July 8, 1996 by (i) each person or entity who is known by the Company to own beneficially more than 5% of the outstanding shares of the Company's Common Stock, (ii) each of the Company's directors, (iii) the Named Executive Officer and (iv) all directors and officers of the Company as a group. Unless otherwise indicated, the shareholders identified in this table have sole voting and investment power with respect to the shares owned of record by them. The following table is based upon 6,075,132 shares of Common Stock outstanding as of July 8, 1996. SHARES BENEFICIALLY OWNED PRIOR TO OFFERING (2) NAME AND ADDRESS OF --------------------------- BENEFICIAL OWNERS(1) NUMBER PERCENT -------------------- ------ ------- Kurt Manufacturing Company. . . . . . . . . . 320,000 5.27% 5280 Main Street, N.E. Minneapolis, MN 55421 (3) Julius Miller . . . . . . . . . . . . . . . . 321,500 5.29% 2814 Mourning Dove Way Titusville, FL 32780 (4) Richard D. Besser (5) . . . . . . . . . . . . 306,500 5.05% Thomas C. Edwards, Ph.D (6) . . . . . . . . . 1,548,500 25.49% Richard F. Galbraith, M.D. (7). . . . . . . . 234,500 3.86% Gerald J. Kamman. (8) . . . . . . . . . . . . 25,000 * % Dennis R. Longren (9) . . . . . . . . . . . . 60,000 * % Charles J. Tambornino (10). . . . . . . . . . 60,000 * % Frederick M. Zimmerman, Ph.D. (11). . . . . . 45,000 * % All directors and executive officers as a group (8) persons . . . . . . . . . . . 2,279,500 37.52% - ------- *Less than 1% (1) Unless otherwise indicated, the address of each of the beneficial owners identified is 564 International Place, Rockledge, Florida 32955. (2) Under the rules of the Commission, a person is deemed to be a beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of a security if that person has the right to acquire beneficial ownership within 60 days. (3) Includes 20,000 shares of Common Stock held by Mr. William Kuban, a majority shareholder of Kurt Manufacturing Company. (4) Includes 280,000 shares of Common Stock held jointly by Mr. Miller with his wife and 40,000 shares of Common Stock held by Electronic Sheetmetal Craftsmen, Inc., an affiliate of Mr. Miller. (5) Includes 250,000 shares of Common Stock that may be purchased by Mr. Besser for a purchase price of $.01 per share pursuant to his employment agreement and 50,000 shares of Common Stock obtainable upon the exercise of an option assigned to Mr. Besser by Dr. Edwards. (6) Includes 425,000 shares of Common Stock held by Dr. Edward's wife as to which Dr. Edwards may be deemed to share voting and dispositive power and 50,000 shares of Common Stock obtainable by Dr. Edwards upon the exercise of options. (7) Includes 144,500 shares of Common Stock held by Dr. Galbraith's wife as to which Dr. Galbraith may be deemed to share voting and dispositive power and 60,000 shares of Common Stock obtainable as of July 11, 1996 or within 60 days thereof by Dr. Galbraith upon the exercise of options. (8) Represents 25,000 shares of Common Stock obtainable by Mr. Kamman upon the exercise of options. (9) Represents 60,000 shares of Common Stock obtainable by Mr. Longren upon the exercise of options. (10) Represents 60,000 shares of Common Stock obtainable by Mr. Tambornino upon the exercise of options. (11) Represents 45,000 shares of Common Stock obtainable by Dr. Zimmerman upon the exercise of options. 37 PLAN OF DISTRIBUTION The securities covered hereby may be sold by the Company and the Selling Shareholders from time to time at prices to be determined at the time of such sales. The securities sold by the Selling Shareholders may be sold in transactions (which may include block transactions by or for the account of the Selling Shareholders) in the over-the-counter market, in negotiated transactions, through a combination of such methods or otherwise. The Selling Shareholders will act independently of the Company in making decision with respect to such sales. The Selling Shareholders are not restricted as to the price or prices at which they may sell their respective securities, and sales of such securities at less than the market price may depress the market price of the Company's Common Stock. Selling Shareholders may effect sales of the securities by selling their securities directly to purchasers, through broker-dealers acting as agents for the Selling Shareholders or to broker-dealers who may purchase securities as principals and thereafter sell the securities from time to time in the over-the- counter market, in negotiated transactions or otherwise. Usual and customary or specifically negotiated brokerage fees or commissions may be incurred in connection with such sales and, if incurred, shall be borne by the Selling Shareholders. The Company shall, however, pay all costs, expenses and fees in connection with the registration of the securities covered hereby. The Company will not receive any proceeds from any sales of the securities by the Selling Shareholders. With respect to the shares of Common Stock to be issued by the Company, the Company intends to issue such shares for cash to certain purchasers within ninety (90) days following the date of this Prospectus. However, the Company has not entered into purchase agreements with respect to the shares of Common Stock, and there can be no assurance that the Company will be able to effect such sale. To the extent the Company does not sell such shares within the ninety (90) day period, the Company will offer the remaining Common Stock on a delayed or continuous basis in connection with one or more acquisitions pursuant to Rule 415 under the Securities Act. In offering the securities, the Company and the Selling Shareholders and any broker-dealers and any other participating broker-dealers who execute sales for the Selling Shareholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales, and any profits realized by the Selling Shareholders and the compensation of such broker-dealer may be deemed to be underwriting discounts and commissions. The Company has advised the Selling Shareholders that during such time as they may be engaged in a distribution of securities included herein they are required to comply with Rules 10b-6 and 10b-7 under the Exchange Act (as those Rules are described in more detail below) and, in connection therewith, that they may not engage in any stabilization activity, except as permitted under the Exchange Act, are required to furnish each broker-dealer through which securities included herein may be offered copies of this Prospectus, and may not bid for or purchase any securities of the Company or attempt to induce any person to purchase any securities except as permitted under the Exchange Act. Rule 10b-6 under the Exchange Act prohibits, with certain exceptions, participants in a distribution from bidding for or purchasing, for an account in which the participant has a beneficial interest, any of the securities that are the subject of the distribution. Rule 10b-7 governs bids and purchases made in order to stabilize the price of a security in connection with a distribution of the security. 38 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of Common Stock, $.01 par value per share. As of July 8, 1996, the Company has issued and outstanding 6,075,132 shares of Common Stock which are held of record by 694 shareholders. An additional 940,305, 427,911 and 718,779 shares of Common Stock are issuable upon exercise of the Class D Warrants, Class E Warrants and various outstanding stock options of the Company, respectively. The following brief description of the Company's capital stock does not purport to be complete and is subject in all respects to applicable Minnesota law and the provisions of the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The holders of the Company's Common Stock are entitled to one vote for each share held on each matter submitted to a vote of shareholders. Cumulative voting for the election of directors is not permitted; therefore, the holders of a majority of the issued and outstanding shares of Company Common Stock can elect all of the directors if they choose to do so. The holders of Common Stock have no preemptive rights. There are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock and such shares are not subject to further calls or assessments by the Company. Subject to the prior rights of any shares of preferred stock then outstanding, the holders of Common Stock are entitled to participate pro rata in any dividends, if and when declared, and in distributions upon any liquidation of the Company. The Company does not intend to pay any cash dividends in the foreseeable future. See "Dividend Policy." The rights of holders of the shares of Common Stock may become subject in the future to prior and superior rights and preferences in the event the Board of Directors establishes one or more additional classes of Common Stock, or one or more series of preferred stock. See "Preferred Stock." The Board of Directors has no present plan to establish any such additional classes or series. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued in connection with this Offering will be upon issuance, duly and validly authorized and issued, fully paid and non-assessable. PREFERRED STOCK The Board of Directors of the Company may designate the terms and preferences of one or more class or series of preferred stock, and issue such stock at a price and on such terms (including terms relating to its voting, dividend, redemption, sinking fund, liquidation, preemptive and conversion rights and preferences) as it determines are appropriate. The rights and preferences granted to preferred shares issued in the future may adversely affect the rights of holders of Company Common Stock to the extent such preferred shareholders convert preferred shares into Company Common Stock. The Company has no immediate intention of creating any class or series of, or issuing, any preferred stock. STOCK WARRANTS CLASS A, CLASS B AND CLASS C STOCK WARRANTS. In connection with the Chapter 11 reorganization, the Company issued Class A Warrants to purchase 628,254 shares of Common Stock for the purchase price of $3.00 per share, Class B Warrants to purchase 480,395 shares of Common Stock for the purchase price of $5.00 per share, and Class C Warrants to purchase 68,995 shares of Common Stock for the purchase price of $7.00 per share. The Company subsequently reduced the exercise price for the Class B Warrants and Class C Warrants to $3.00 and $5.00 per share, respectively. As of the date of this Prospectus, 480,395 Class A 39 Warrants, 68,995 Class B Warrants and 140 Class C Warrants were exercised resulting in the issuance of 549,530 shares of Common Stock. The Class A Warrants, Class B Warrants and Class C Warrants expired on December 31, 1994, March 31, 1995 and June 30, 1995, respectively. FORMER DYNECO INTERNATIONAL WARRANTS. In connection with the acquisition of DynEco International, the Company assumed certain stock warrants pursuant to their terms. The warrants to purchase shares of Company Common Stock issued to former DynEco International shareholders, on the basis of one warrant for each ten shares of DynEco International common stock, had an exercise price of $7.00 per share (the "DynEco International Warrants"). The Company subsequently reduced the exercise price for the DynEco International Warrants to $2.50 per share. As of the date of this Prospectus, 16,500 DynEco International Warrants were exercised resulting in the issuance of 16,500 shares of Common Stock. The DynEco International Warrants expired on December 31, 1995. CLASS D WARRANTS AND CLASS E WARRANTS. In February 1996, the Company issued 940,305 Class D Warrants and 427,911 Class E Warrants. Each Class D Warrant and Class E Warrant entitles the registered holder to purchase one share of Common Stock at an exercise price of $2.50 and $5.00 per share, respectively, subject to adjustments in certain events. As of the date of this Prospectus, none of the Class D Warrants and Class E Warrants have been exercised. The Class D Warrants expire on April 10, 1999, and the Class E Warrants expire on April 10, 2001, subject to earlier redemption by the Company. The terms of the Class D Warrants and the Class E Warrants (collectively, the "Warrants") are substantially similar with the exception of the purchase price, expiration dates and the provisions relating to redemption. The Company has the right to redeem the Class D Warrants and Class E Warrants at any time prior to the expiration of such warrants at a redemption price of $.01 per warrant upon thirty days prior written notice, provided that before any such redemption can take place, the last price of the Company's Common Stock shall have closed at or above $3.00 per share and $5.50 per share, respectively, for ten consecutive trading days on the NASDAQ Small-Cap Market or on any other national securities exchange registered under the Exchange Act. The Warrants provide for adjustment of the exercise price and the number of shares of Common Stock purchasable upon exercise to protect holders against dilution in certain events, including stock dividends, stock splits, reclassification, and any combination of Common Stock, or the merger, consolidation or disposition of substantially all the assets of the Company. Holders of the Warrants are not entitled to vote, receive dividends or exercise any of the rights of holders of shares of the Company's Common Stock for any purpose. The Warrants were issued pursuant to the terms and conditions of a Warrant Agreement between the Company and American Securities Transfer, Inc. The foregoing summary of the Warrants is not complete and is qualified in its entirety by reference to the Warrant Agreement. CHANGE OF CONTROL PROVISIONS The Company's Articles of Incorporation provide for three classes of Directors: one class to hold office for a term expiring at the 1999 annual meeting of shareholders; one class to hold office for a term expiring at the 1997 annual meeting of shareholders; and one class to hold office for a term that expired at the 1995 annual meeting of shareholders. Presently, Mr. Richard D. Besser and Thomas C. Edwards, Ph.D. hold office until 1999, and Frederick M. Zimmerman, Ph.D. holds office until 1998. The remaining Directors of the Company hold office until the next annual meeting of shareholders. Further, certain provisions of the Company's Articles of Incorporation and By-laws contain director nomination and removal provisions which may hinder or delay a change in control of the Company. 40 The Company is also governed by the provisions of Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act. In general, Section 302A.671 provides that the shares of a corporation acquired in a "control share acquisition" have no voting rights unless voting rights are approved in a prescribed manner. A "control share acquisition" is an acquisition, directly or indirectly, of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 prohibits a publicly-held Minnesota corporation from engaging in a "business combination" with an "interested shareholder" for a period of four years after the date of transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. "Business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder. An "interested shareholder" is a person who is the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock or who is an affiliate or associate of the corporation and at any time within four years prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock. Additionally, certain provisions of the Company's Articles of Incorporation and By-laws contain provisions which may hinder, delay or prevent a change in control of the Company; generally, these provisions may not be amended without the affirmative vote of at least 75% of the outstanding shares of Company voting stock. Also in the event of a proposed merger, tender offer, proxy contest or other attempt to gain control of the Company not approved by the Board of Directors, it would be possible, subject to the limitations imposed by applicable law, the Company's Articles of Incorporation and the applicable rules of the securities exchanges upon which the Common Stock may be listed, for the Board of Directors to authorize the issuance of one or more classes, or series of the preferred stock with voting rights or other rights and preferences which would impede the success of the proposed merger, tender offer, proxy contest or other attempt to gain control of the Company. The consent of the holders of Common Stock would not be required for any such issuance of preferred stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock and the Warrants is American Securities Transfer, Inc., Denver, Colorado. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have outstanding approximately 9,075,132 shares of Common Stock (assuming the sale of the 3,000,000 shares of Common Stock offered by the Company hereby and no exercise of warrants or options to purchase Common Stock). In addition to the 3,000,000 shares offered hereby, there will be approximately __________ shares immediately eligible for sale in the public market without restriction after completion of the offering (excluding __________shares of Common Stock subject to the lock-up agreements described in "Risk Factors -- Shares Eligible for Future Sale"). Of the remaining outstanding shares of Common Stock, approximately _________shares of Common Stock will be eligible for sale in the public market 90 days after the date of this Prospectus (excluding __________ shares subject to the lock-up agreements), subject in certain cases to compliance with the restrictions of Rule 144 or Rule 701 promulgated under the Securities Act. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted" shares for at least two years, including persons who may be deemed affiliates of the Company, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding shares of Common Stock of the Company, 41 or the average weekly trading volume of Common Stock on the Nasdaq Stock Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about the Company. A person who is not an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least three years, would be entitled to sell such shares immediately following the offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144. In addition, any employee, director or officer of, or consultant to, the Company who purchased his shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, which permit non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. Certain of the Selling Shareholders, and all officers and directors of the Company have agreed that, without the prior written consent of the Company's Board of Directors, they will not, during the period ending 180 days after the date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, provided that the Company may grant options under its existing stock option plans during such 180 day period and provided that such restrictions shall not apply to shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. Of such shares, a total of __________ shares will be eligible for resale in the public market at the expiration of such 180 day period subject in certain cases to compliance with the restrictions of Rule 144 or Rule 701. Prior to the offering, there has been only a limited public market for the Common Stock, and no prediction can be made as to the effect, if any, that future sales of Common Stock, or the availability of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. 42 LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia. EXPERTS The consolidated balance sheets of the Company as of December 31, 1995 and 1994 and the related statements of income, shareholders' equity and cash flows for the years ended December 31, 1995 and 1994 included in this Prospectus and the related financial statement schedules included elsewhere in the Registration Statement have been audited by Silverman Olson Thorvilson & Kaufmann LTD, certified public accountants, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 43 DYNECO CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) Consolidated Balance Sheet F-2 Consolidated Statement of Operations F-3 Consolidated Statement of Cash Flows F-4 - F-5 Selected Information F-6 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Independent Auditors' Report F-7 Consolidated Balance Sheet F-8 Consolidated Statement of Operations F-9 Consolidated Statement of Shareholders' Equity (Deficit) F-10 Consolidated Statement of Cash Flows F-11 - F-12 Notes to Consolidated Financial Statements F-13 - F-23 FAB-TECH INDUSTRIES OF BREVARD, INC. INDEX TO FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) Balance Sheet F-24 Statement of Income and Retained Earnings F-25 Statement of Cash Flows F-26 Selected Information F-27 FOR THE YEAR ENDED DECEMBER 31, 1995 AND 1994 Independent Auditors' Report F-28 Balance Sheet F-29 Statement of Income and Retained Earnings F-30 Statement of Cash Flows F-31 Notes to Financial Statements F-32 - F-35 F-1 DYNECO CORPORATION CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (UNAUDITED) ASSETS Current asset: Cash $ 759,953 Other current assets 137,920 ----------- Total current assets 897,873 Property and equipment, net 86,418 Investment in joint venture 171,100 Intangible assets: Patent/license rights, net 385,235 Technology acquired, net 169,440 ----------- Total intangible assets 554,675 ----------- Total assets $ 1,710,066 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,592 Accrued liabilities 297,576 ----------- Total current liabilities 312,168 Commitments and contingencies - Shareholders' equity: Common stock, $.01 par value; 6,075,132 shares issued and outstanding 60,751 Paid-in capital 5,352,546 Accumulated deficit (4,015,399) ----------- Total shareholders' equity 1,397,898 ----------- Total liabilities and shareholders' equity $ 1,710,066 ----------- ----------- The accompanying selected information is an integral part of the financial statements. F-2 DYNECO CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) 1996 1995 --------- --------- Revenues $ - $ 5,000 Operating expenses: General and administrative expenses 188,351 320,056 Research and development 59,610 59,489 --------- --------- Total operating expenses 247,961 379,545 --------- --------- Operating loss (247,961) (374,545) --------- --------- Other income (expense): Investment income 13,074 - Interest expense (100) - Loss in joint venture (15,000) - Gain on disposal of property and equipment - 585 --------- --------- Total other income (expense) (2,026) 585 --------- --------- Net loss $(249,987) $(373,960) --------- --------- --------- --------- Per share information: Net income (loss) per share $ (.04) $ (.08) --------- --------- --------- --------- Weighted average number of common shares outstanding 6,075,132 4,666,623 --------- --------- --------- --------- The accompanying selected information is an integral part of the financial statements. F-3 DYNECO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (249,987) $(373,960) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 9,995 19,469 Loss in joint venture 15,000 - Common stock issued for services - 200,000 Gain on sale of property and equipment - (585) Decrease in current assets: Other current assets (28,231) (4,725) Increase (decrease) in current liabilities: Accounts payable (190,421) (17,124) Accrued expenses 120,076 11,483 ---------- --------- Net cash used in operating activities (323,568) (165,442) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (14,499) (4,096) Proceeds from sale of property and equipment - 1,200 Increase in patent/license rights (12,576) (1,930) ---------- --------- Net cash used in financing activities (27,075) (4,826) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock subscriptions receivable - 37,400 Issuance of common stock - 179,396 ---------- --------- Net cash provided by financing activities - 216,796 ---------- --------- Net increase in cash (350,643) 46,528 Cash - beginning of period 1,110,596 3,823 ---------- --------- Cash - end of period $ 759,953 $ 50,351 ---------- --------- ---------- --------- The accompanying selected information is an integral part of the financial statements. F-4 DYNECO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) 1996 1995 ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the three month period for interest $100 $ - ---- ---- ---- ---- SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995: The Company issued $124,060 of common stock in exchange for stock subscriptions receivable. The accompanying selected information is an integral part of the financial statements. F-5 DYNECO CORPORATION SELECTED INFORMATION FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization: DynEco Corporation ("DynEco" or the "Company") is engaged in developing compressor technology and related products for use in commercial, industrial, and consumer markets through its wholly-owned subsidiary, DynEco International, Inc., and is engaged in the licensing of its proprietary resin transfer molding process and providing application engineering consultation with respect to those licenses as a part of DynEco Corporation's activities prior to incorporation of and transfer of related rights to its wholly-owned subsidiary, Tertm Technology Corporation. Basis of Presentation: The accompanying unaudited consolidated balance sheets as of March 31, 1996, and the unaudited consolidated statements of operations and cash flows for the three month periods ended March 31, 1996 and 1995, include the accounts of DynEco Corporation and its wholly-owned subsidiaries, DynEco International, Inc. and Tertm Technology Corporation. All references to the "Company" in these financial statements related to the consolidated entity. All significant intercompany accounts and transactions are eliminated in consolidation. These financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the Company's financial position, the results of operations and its cash flows for the three months ended March 31, 1996 and 1995. The results for the period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. This report should be read in conjunction with the Financial Statements and Notes contained in the Company's Annual Report for the year ended December 31, 1995. Net Income (Loss) Per Share: Income (loss) per share is calculated based on the weighted average number of common shares outstanding as the effect of including common stock equivalents would be anti-dilutive. F-6 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders DynEco Corporation and Subsidiaries Rockledge, Florida We have audited the accompanying consolidated balance sheet of DynEco Corporation and its subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. 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 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 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 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 DynEco Corporation as of December 31, 1995 and 1994 and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. SILVERMAN OLSON THORVILSON & KAUFMANN LTD CERTIFIED PUBLIC ACCOUNTANTS Minneapolis, Minnesota February 2, 1996 F-7 DYNECO CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 ----------- ----------- Current asset: Cash $ 1,110,596 $ 3,823 Stock subscriptions receivable (Note 2) - 37,400 Other current assets 109,689 18,586 ----------- ----------- Total current assets 1,220,285 59,809 Property and equipment, net (Note 3) 76,355 85,146 Investment in joint venture (Note 7) 186,100 - Intangible assets (Note 4): Patent/license rights, net 372,923 285,660 Technology acquired, net 174,735 195,915 ----------- ----------- Total intangible assets 547,658 481,575 ----------- ----------- Total assets $ 2,030,398 $ 626,530 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 205,013 $ 112,148 Accrued compensation and payroll taxes 174,500 20,236 Other accrued expenses 3,000 32,000 ----------- ----------- Total current liabilities 382,513 164,384 ----------- ----------- Commitments and contingencies (Note 5) - - Shareholders' equity (deficit): Common stock, $.01 par value; 6,075,132 and 4,523,960 shares issued and outstanding, respectively (Note 6) 60,751 45,240 Paid-in capital 5,352,546 3,086,313 Accumulated deficit (3,765,412) (2,669,407) ----------- ----------- Total shareholders' equity 1,647,885 462,146 ----------- ----------- Total liabilities and shareholders' equity (deficit) $ 2,030,398 $ 626,530 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of the financial statements. F-8 DYNECO CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ----------- ----------- Revenues (Note 8) $ 5,000 $ 70,000 Operating expenses: General and administrative expenses 836,550 735,002 Research and development 248,523 43,835 ----------- --------- Total operating expenses 1,085,073 778,837 ----------- --------- Operating loss (1,080,073) (708,837) Other income (expense): Interest income 8,776 - Gain (loss) on sale of property and equipment 789 (1,640) Loss in joint venture (Note 7) (23,900) - Interest expense (1,597) (313) Loss on litigation settlement (Note 9) - (75,456) ----------- --------- Total other income (expense) (15,932) (77,409) ----------- --------- Net loss $(1,096,005) $(786,246) ----------- --------- ----------- --------- Net loss per share $ (.22) $ (.24) ----------- --------- ----------- --------- Weighted average number of common shares outstanding 5,075,014 3,312,721 ----------- --------- ----------- --------- The accompanying notes are an integral part of the financial statements. F-9 DYNECO CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 TOTAL COMMON STOCK STOCK SHAREHOLDERS' ---------------------- PAID-IN SUBSCRIPTION ACCUMULATED EQUITY SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT) ----------- --------- ------------- ------------ -------------- -------------- Balance at December 31, 1993 281,284 $ 2,813 $1,835,693 $(114,888) $(1,883,161) $ (159,543) Settlement of stock subscription receivable (Note 9) - - - 114,888 - 114,888 Common stock issued in acquisition of DynEco International, Inc. (Note 11) 3,926,000 39,260 510,740 - - 550,000 Common stock issued for cash 133,979 1,340 361,058 - - 362,398 Common stock issued for services 66,897 669 167,580 - - 168,249 Common stock issued for patent/license rights (Note 7) 100,000 1,000 174,000 - - 175,000 Common stock issued pursuant to stock subscriptions receivable (Note 2) 15,800 158 37,242 - - 37,400 Net loss - - - - (786,246) (786,246) --------- ------- ---------- --------- ----------- ---------- Balance at December 31, 1994 4,523,960 45,240 3,086,313 - (2,669,407) 462,146 Common stock issued for cash 1,212,839 12,128 1,854,617 - - 1,866,745 Common stock issued for services 338,333 3,383 411,616 - - 414,999 Net loss - - - - (1,096,005) (1,096,005) --------- ------- ---------- --------- ----------- ----------- Balance at December 31, 1995 6,075,132 $60,751 $5,352,546 $ - $(3,765,412) $ 1,647,885 --------- ------- ---------- --------- ----------- ----------- --------- ------- ---------- --------- ----------- ----------- The accompanying notes are an integral part of the financial statements. F-10 DYNECO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,096,005) $(786,246) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 37,113 51,445 (Gain) loss on sale of property and equipment (789) 1,640 Common stock issued for services 214,999 168,249 Loss in joint venture 23,900 - Non-cash loss on litigation settlement - 75,456 (Increase) decrease in current assets: Other current assets (91,103) 8,774 Increase in current liabilities: Accounts payable 92,865 65,580 Accrued expenses 125,264 24,986 ----------- --------- Net cash used in operating activities (693,756) (390,116) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (6,498) (28,998) Proceeds from the sale of property and equipment 1,200 - Investment in joint venture (10,000) - Increase in patent/license rights (88,318) (20,000) Proceeds from note receivable - 28,600 ----------- --------- Net cash used in financing activities (103,616) (20,398) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock subscriptions receivable 37,400 - Issuance of note payable - related party - 32,473 Issuance of common stock 1,866,745 362,398 ----------- --------- Net cash provided by financing activities 1,904,145 394,871 ----------- --------- Net increase (decrease) in cash 1,106,773 (15,643) Cash - beginning of year 3,823 19,466 ----------- --------- Cash - end of year $ 1,110,596 $ 3,823 ----------- --------- ----------- --------- The accompanying notes are an integral part of the financial statements. F-11 DYNECO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ----------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $1,597 $ - ------ ----- ------ ----- SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995: The Company issued 200,000 shares of its common stock valued at $200,000 in exchange for tooling and design, development and manufacturing services which the Company subsequently contributed to Kurt/DynEco Compressor Company, LLC in 1995 (Note 7). During 1994: In connection with the acquisition of DynEco International, Inc., the Company acquired a $28,600 note receivable, $27,360 of other current assets, $92,292 of property and equipment, $81,935 of patent/license rights, net of $22,133 of accounts payable and cancellation of its previous obligation on notes payable totalling $130,146 for 3,926,000 shares of common stock valued at $550,000. The $211,800 excess purchase price was identified as technology acquired (Note 11). The Company acquired patent/license rights through the issuance of common stock valued at $175,000 (Note 7). Additionally, $37,400 of common stock was issued in exchange for stock subscriptions receivable (Note 2). The accompanying notes are an integral part of the financial statements. F-12 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization: DynEco Corporation ("DynEco" or the "Company") is engaged in developing compressor technology and related products for use in commercial, industrial, and consumer markets through its wholly-owned subsidiary, DynEco International, Inc., and is engaged in the licensing of its proprietary resin transfer molding process and providing application engineering consultation with respect to those licenses as a part of DynEco Corporation's activities prior to incorporation of and transfer of related rights to its wholly-owned subsidiary, Tertm Technology Corporation. Basis of Presentation: For the years ended December 31, 1995 and 1994, the financial statements include the accounts of DynEco Corporation and its wholly-owned subsidiaries, DynEco International, Inc. for the period from its March 31, 1994 acquisition and Tertm Technology Corporation for the period from its incorporation, May 27, 1994. For the period from January 1, 1994 to March 31, 1994, the financial statements include the accounts of DynEco Corporation on a stand-alone basis. All references to "the Company" in these financial statements relate to the consolidated entity. All significant intercompany accounts and transactions are eliminated in consolidation. Property and Equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method and is expensed based upon the estimated useful lives of the assets. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Intangible Assets: Intangible assets consist of the costs associated with obtaining patent/license rights and the cost of technology acquired in the acquisition of DynEco International, Inc. Net Income (Loss) Per Share: Income (loss) per share is calculated based on the weighted average number of common shares outstanding as the effect of including common stock equivalents would be anti-dilutive. F-13 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions about the future outcome of current transactions which may affect the reporting and disclosure of these transactions. Accordingly, actual results could differ from those estimates used in the preparation of these financial statements. Reclassifications: Certain reclassifications have been made in the 1994 financial statements in order to conform with 1995 financial statement presentation. These reclassifications have no effect on accumulated deficit or net loss, as originally reported. NOTE 2: STOCK SUBSCRIPTIONS RECEIVABLE As of December 31, 1994, the Company had entered into agreements to issue 15,800 shares of common stock at per share prices ranging from $2 to $3 in exchange for subscriptions receivable aggregating $37,400. In January 1995, the Company collected the subscriptions receivable balance in full. NOTE 3: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: Estimated Useful Life 1995 1994 In Years --------- --------- ----------- Machinery and equipment $ 78,181 $ 80,692 3-7 Office equipment 43,967 38,958 3-10 -------- --------- Total property and equipment 122,148 119,650 Less accumulated depreciation (45,793) (34,504) -------- --------- Property and equipment, net $ 76,355 $ 85,146 -------- --------- -------- --------- In 1994, the Company acquired $92,292 of property and equipment in connection with the March 31, 1994 acquisition of DynEco International, Inc. (Note 11). Depreciation expense was $14,878 in 1995 and $34,504 in 1994. F-14 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 4: INTANGIBLE ASSETS Intangible assets consisted of the following at December 31: Estimated Useful Life 1995 1994 In Years --------- --------- ----------- Patent/license rights $383,083 $294,765 17 Technology acquired (Note 13) 211,800 211,800 10 -------- -------- Total intangible assets 594,883 506,565 Less accumulated amortization (47,225) (24,990) -------- -------- Intangible assets, net $547,658 $481,575 -------- -------- -------- -------- Amortization expense was $22,235 in 1995 and $16,941 in 1994. NOTE 5: COMMITMENTS AND CONTINGENCIES Stock Warrants: At December 31, 1995, the Company had warrants outstanding as follows: Common Exercise Shares Under Price Expiration Warrant Warrant Per Share Date ------- ------------ --------- ---------- Class D 940,305 $2.50 April 1999 Class E 427,911 $5.00 April 2001 --------- 1,368,216 --------- --------- The warrants are redeemable by the Company for $.01 per warrant after shares of the Company's common stock have closed at or above $3.00 for ten consecutive trading days for the Class D warrants and at or above $5.50 for the Class E warrants. Stock Options: At December 31, 1995, an aggregate of 1,500,000 shares of common stock were reserved for issuance under the Company's 1993 corporate stock option plan and 1993 advisors stock option plan. Pursuant to the plans, the board of directors may grant options to key individuals at their discretion. F-15 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 5: COMMITMENTS AND CONTINGENCIES (CONTINUED) Stock Options (continued): As of December 31, 1995, the Company had the following non-qualified options outstanding: Total Presently Exercise Common Shares Exercisable Price Expiration Under Option Options Per Share Date ------------- ----------- --------- ------------- 178,779 178,779 $1.00 December 1998 180,000 135,000 $2.00 December 1998 250,000 250,000 $ .01 December 1999 ------- ------- 608,779 563,779 ------- ------- ------- ------- Various officers and directors have been granted a total of 525,000 options under the plans which were included in the table above. NOTE 6: CAPITAL STOCK The Company has authorized an aggregate of 50,000,000 shares of capital stock, which it may designate at its option, as either preferred stock at a specified par value or common stock at a $.01 par value. At December 31, 1995 or 1994, there were no shares of preferred stock designated, issued or outstanding. NOTE 7: RELATED PARTY TRANSACTIONS Non-Royalty Patented-Technology License: In December 1994, the Company issued 100,000 shares of its common stock valued at $175,000 in exchange for a non-royalty license to utilize certain patented technology developed by a privately held corporation ("Licensor") whose majority shareholder is also a shareholder in the Company. Investment in Joint Venture: During December 1994, the Company and the Licensor jointly organized a new entity named Kurt/DynEco Compressor Company, LLC (Kurt/DynEco) to design, develop, manufacture and market specific use industrial air compressor systems. This new entity is owned 50% by DynEco and 50% by the Licensor. In exchange for its 50% interest in Kurt/DynEco, the Company paid $10,000 in 1995. Additionally during 1995, the Company granted a non-royalty limited technology license to Kurt/DynEco and contributed certain tooling and design, development and manufacturing services valued at $200,000 which the Company acquired from the licensor through the issuance of 200,000 shares of its common stock. F-16 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 7: RELATED PARTY TRANSACTIONS (CONTINUED) The following is a summary of the unaudited condensed financial position and results of operations of Kurt/Dyneco as of December 31, 1995: 1995 (UNAUDITED) ----------- Current assets $ 4,281 Non current assets 200,000 -------- Total assets $204,281 -------- -------- Current liabilities $ 32,082 Stockholders' equity 172,199 -------- Total liabilities and stockholders' equity $204,281 -------- -------- Revenues $ - Operating expenses 47,801 -------- Net loss $(47,801) -------- -------- The Company's share of Kurt/DynEco's loss was $23,900 in 1995. Note Payable - Related Party In 1993, the Company received $97,673 through the issuance of a note payable to DynEco International, Inc. prior to its acquisition by the Company. During 1994, the note balance was effectively forgiven through the March 31, 1994 acquisition (Note 11). NOTE 8: MAJOR CUSTOMERS In 1995 and 1994, the Company received $5,000 and $70,000, respectively, from one customer in exchange for engineering services. During 1995, the Company completed its engineering contract and does not expect to receive additional future revenues from this customer. NOTE 9: LOSS ON LITIGATION SETTLEMENT In 1993, the Company was a named defendant in a lawsuit by a shareholder and former officer which alleged that the Company did not perform in accordance with certain conditions in the former officer's employment agreement. The Company disputed this claim and filed a counterclaim of its own against the shareholder. During February 1994, both the lawsuit and Company's counterclaim were settled. The effect of the settlement was the elimination of the $114,888 stock subscription receivable and reduction of certain accrued expenses by $39,432, resulting in a $75,456 loss on litigation settlement. F-17 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 10: INCOME TAXES The effective tax rate varies from the maximum federal statutory rate as a result of the following items: 1995 1994 ---------- ---------- Tax benefit computed at the maximum federal statutory rate (34.0)% (34.0)% Net (increase) decrease due to various temporary and permanent differences (.8) 3.5 Net operating loss carryforward 34.8 30.5 ------ ------ Income tax provision - % - % ------ ------ ------ ------ Deferred taxes consisted of the following at December 31: 1995 1994 ----------- ----------- Asset: Net operating loss carryforward $ 1,423,000 $ 1,032,000 Other 140,000 143,000 ----------- ----------- Net deferred tax asset before valuation allowance 1,563,000 1,175,000 Less valuation allowance (1,563,000) (1,175,000) ----------- ----------- Net deferred tax asset $ - $ - ----------- ----------- ----------- ----------- For financial statement purposes, no tax benefit has been reported in 1995 or 1994 as the Company has had significant losses in recent years and realization of the tax benefits is uncertain. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. At December 31, 1995, the Company had net operating loss carryforwards as follows for income tax purposes: Carryforward Net Operating Expires December 31: Loss Carryforwards -------------------- ------------------ 2001 $ 82,000 2002 404,000 2003 72,000 2004 522,000 2005 550,000 2006 206,000 2007 236,000 2008 274,000 2009 716,000 2010 1,118,000 ---------- $4,180,000 ---------- ---------- F-18 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 10: INCOME TAXES (CONTINUED) The utilization of the carryforwards is dependent upon the ability to generate sufficient taxable income during the carryforward period. In addition, utilization of these carryforwards is limited due to ownership changes as defined in the Internal Revenue Code. Furthermore, carryforwards relating to DynEco International, Inc., prior to its March 31, 1994 acquisition (approximately $400,000) are subject to separate return limitation regulations. NOTE 11: DYNECO INTERNATIONAL, INC. ACQUISITION On March 31, 1994, the Company exchanged 3,926,000 shares of Company common stock, representing a 93% interest in the Company, for 3,926,000 shares of DynEco International, Inc. (DII), representing all the issued and outstanding shares of DII. The exchange resulted in DII becoming a wholly-owned subsidiary of the Company. The total DII purchase price consisted of 3,926,000 shares of company common stock valued at $550,000, or $.14 per share by the Company. This value was determined based on approximately 93% of the total market value of all Company stock outstanding immediately prior to this transaction less a discount to factor in the reduction in value stemming from the restricted distribution rights of these non-registered shares and the size of the newly issued block. The Company has accounted for the acquisition under the purchase method whereby the assets and liabilities of DII are recorded at their net book value, which approximated fair market value as of the date of acquisition as estimated by management. The following items represent the tangible assets acquired and liabilities assumed: Notes receivable $158,746 Other current assets 27,360 Property and equipment 92,292 Patent/license rights 81,935 Trade payable (22,133) -------- Net tangible assets $338,200 -------- -------- The $211,800 excess purchase price over the fair market value of tangible assets and liabilities acquired has been identified as technology acquired and is being amortized over a ten-year period. F-19 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 11: DYNECO INTERNATIONAL, INC. ACQUISITION (CONTINUED) Summarized below is the 1994 unaudited condensed and proforma DynEco Corporation consolidated statement of operations as if the acquisition had taken place at the beginning of the year ended December 31, 1994. It was assumed that the 3,926,000 shares issued in connection with this acquisition were outstanding at the beginning of the proforma period. Revenues $ 95,000 (1) Operating expenses (938,167)(1)(2) --------- Operating loss (843,167) Other expense (76,659)(1) --------- Net loss $(919,826) --------- --------- Net loss per share $ (.22) --------- --------- Weighted average number of shares outstanding 4,270,020 --------- --------- (1) Includes DynEco International, Inc. unaudited Activity for the period from January 1, 1994 to March 31, 1994 (date of acquisition). During this three month period DynEco International, Inc.'s statement of operations included revenues of $25,000, operating expenses of $138,150 and other income of $750. (2) Includes $21,180 of amortization of Technology acquired in the DynEco International, Inc. acquisition for the year ended December 31, 1994. NOTE 12: SUBSEQUENT EVENTS Joint Venture Agreement: In February 1996, the Company and a leading manufacturer of automotive air conditioning systems headquartered in Texas announced a preliminary agreement for the formation of a joint venture to produce automotive air conditioning compressors using the Company's proprietary compressor technology. The joint venture's facilities will be located in Forth Worth, Texas and is expected to be operational in 1997. F-20 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 12: SUBSEQUENT EVENTS (CONTINUED) Proposed Business Acquisition: In November 1995, the Company entered into an agreement with an investment banking firm, to assist the Company in obtaining up to an additional $2,000,000 in equity and $1,000,000 of debt financing. The Company believes that it will complete its fund-raising efforts in the second or third quarter of 1996. Upon successful completion, the proceeds from the offering will be used to acquire the assets, liabilities and manufacturing operations of Fab-Tech Industries of Brevard, Inc. (FTI), a privately-held business engaged in the production of precision parts, components and subassemblies. The total FTI cash purchase price is estimated at $2,400,000, plus the assumption of all FTI liabilities. The following items represent the expected net tangible assets acquired, pending final approval from the management of both parties: Cash $ 164,805 Accounts receivable 470,126 Inventory 365,250 Other current assets 12,815 Property and equipment 1,089,797 Accounts payable (110,109) Accrued liabilities 17,381) Notes payable - shareholders (370,484) Current maturities of long-term debt (314,831) Long-term debt (683,238) ---------- Net tangible assets $ 606,750 ---------- ---------- The $1,793,250 excess purchase price over the fair market value of net tangible assets assumed has been identified as the value attributed to FTI's intellectual property and customer lists acquired. F-21 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 12: SUBSEQUENT EVENTS (CONTINUED): Proposed Business Acquisition (Continued): Summarized below is the unaudited condensed and proforma consolidated balance sheet and statement of operations as if the proposed $3,000,000 fund-raising and business acquisition had taken place at the beginning of the year ended December 31, 1995. 1995 PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) --------------------------------------------------------------- PRO- FORMA DYNECO FAB-TECH PRO-FORMA DYNECO CORPORATION INDUSTRIES OF CONSOLIDATING CORPORATION CONSOLIDATED BREVARD, INC. (1) ENTRIES (2) CONSOLIDATED ------------ ----------------- ------------- ------------ Current assets $ 1,220,285 $1,012,996 $ 457,579 $ 2,690,860 Property and equipment 76,355 1,089,797 - 1,166,152 Intangible assets 733,758 - 1,816,984(3) 2,550,742 ----------- ---------- ---------- ----------- Total assets $ 2,030,398 $2,102,793 $2,274,563 $ 6,407,754 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Current liabilities $ 382,513 $ 812,805 $ - $ 1,195,318 Long-term debt - 683,238 1,000,000 1,683,238 Equity 1,647,885 606,750 1,274,563 3,529,198 ----------- ---------- ---------- ----------- Total liabilities and deficit $ 2,030,398 $2,102,793 $2,274,563 $ 6,407,754 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- (1) Represents Fab-Tech Industries of Brevard, Inc. audited balance sheet at December 31, 1995. (2) Assumes successful completion of $3,000,000 fund-raising with estimated commissions of $50,000 and $2,400,000 cash purchase of Fab-Tech Industries of Brevard, Inc. net assets. (3) Represents fair market value adjustment for assets and amortization of asset costs over their estimated useful lives. F-22 DYNECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 12: SUBSEQUENT EVENTS (CONTINUED): Proposed Business Acquisition (Continued): 1995 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) ------------------------------------------------------------------- PRO-FORMA DYNECO FAB-TECH PRO-FORMA DYNECO CORPORATION INDUSTRIES OF CONSOLIDATING CORPORATION CONSOLIDATED BREVARD, INC. (1) ENTRIES CONSOLIDATED ------------ ----------------- ------------- ------------ Sales $ 5,000 $ 3,618,091 $ - $ 3,623,091 Cost of sales - (2,593,751) - (2,593,751) Operating expenses (1,085,073) (497,027) (227,000)(2) (1,809,100) ----------- ----------- --------- ----------- Income (loss) from operations (1,080,073) 527,313 (227,000) (779,760) Other income (expense) (15,932) (136,579) (95,000)(3) (247,511) ----------- ----------- --------- ----------- Net income (loss) $(1,096,005) $ 390,734 $(322,000) $(1,027,271) ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- Net loss per share $ (.22) $ (.17) ----------- ----------- ----------- ----------- Weighted average number of shares outstanding 5,075,014 6,075,014 ----------- ----------- ----------- ----------- (1) Represents Fab-Tech Industries of Brevard, Inc. audited activity for the year ended December 31, 1995. (2) Represents amortization of intellectual property acquired in the Fab-Tech Industries acquisition for the year ended December 31, 1995. (3) Represents interest expense incurred on $1,000,000 of debt financing for the year ended December 31, 1995. F-23 FAB-TECH INDUSTRIES OF BREVARD, INC. BALANCE SHEET MARCH 31, 1996 (UNAUDITED) ASSETS Current assets: Cash $ 48,704 Accounts receivable 443,649 Inventory 472,000 Other current assets 8,110 ---------- Total current assets 972,463 Property and equipment, net 1,267,497 ---------- Total assets $2,239,960 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 174,823 Advances and notes payable - shareholders 230,662 Accrued liabilities 44,128 Current maturities of long-term debt 62,451 Current maturities of capital lease obligations 198,497 ---------- Total current liabilities 710,561 Long-term debt 116,273 Capital lease obligations 742,742 ---------- Total liabilities 1,569,576 Commitments - Shareholders' equity: Common stock, $1 par value; 7,500 shares authorized; 1,500 shares issued and outstanding 1,500 Paid in capital 118,500 Retained earnings 550,384 ---------- Total shareholders' equity 670,384 ---------- Total liabilities and shareholders' equity $2,239,960 ---------- ---------- The accompanying selected information is an integral part of the financial statements. F-24 FAB-TECH INDUSTRIES OF BREVARD, INC. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) 1996 1995 ----------- ----------- Sales $973,855 $780,192 Cost of goods sold 714,528 534,063 -------- -------- Gross profit 259,327 246,129 Operating expenses 141,800 122,364 -------- -------- Income from operations 117,527 123,765 Other income (expense): Interest expense (38,607) (32,306) Miscellaneous 2,714 3,708 -------- -------- Total other income (expense) (35,893) (28,598) -------- -------- Net income 81,634 95,167 Retained earnings (accumulated deficit) - beginning of the period 486,750 236,016 Shareholder distributions (18,000) - -------- -------- Retained earnings - end of the period $550,384 $331,183 -------- -------- -------- -------- The accompanying selected information is an integral part of the financial statements. F-25 FAB-TECH INDUSTRIES OF BREVARD, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) 1996 1995 --------- --------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net income $ 81,634 $ 95,167 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 40,200 36,300 (Increase) decrease in assets: Accounts receivable 26,477 (91,541) Inventory (106,750) (114,200) Other current assets 4,705 (703) Increase (decrease) in liabilities: Accounts payable 64,714 18,113 Accrued liabilities 26,747 6,985 --------- --------- Net cash provided by (used in) operating activities 137,727 (49,879) --------- --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Increase (decrease) in advances and notes payable - shareholders (139,822) (82,812) Repayment of long-term debt (24,024) (21,564) Repayment of capital lease obligations (71,982) (44,554) Shareholder distributions (18,000) - --------- --------- Net cash used in financing activities (253,828) (148,930) --------- --------- Net decrease in cash (116,101) (198,809) Cash - beginning of period 164,805 230,859 --------- --------- Cash - end of period $ 48,704 $ 32,050 --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest during the period $ (38,607) $ 32,306 --------- --------- --------- --------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During 1996: The Company issued $217,900 of capital lease obligations in exchange for property and equipment. During 1995: The Company issued $36,159 of capital lease obligations in exchange for property and equipment. The accompanying selected information is an integral part of the financial statements. F-26 FAB-TECH INDUSTRIES OF BREVARD, INC. SELECTED INFORMATION FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization: Fab-Tech Industries of Brevard, Inc. was incorporated in the State of Florida in May 1989. The Company is engaged in precision machining and sheet metal fabrication of mechanical components. Income Taxes: The Company has elected to be treated as an S-corporation under applicable federal and state tax regulations. Accordingly, no provision for income taxes has been provided in these financial statements, as any corporate earnings or losses will pass-through to the Company shareholders' personal returns. NOTE 2: NEGOTIATIONS FOR THE SALE OF THE BUSINESS In 1995, the Company entered into negotiations to sell all of its assets and manufacturing operations to DynEco Corporation, a publicly-held business. The sale is anticipated to occur in the second or third quarter of 1996 at an estimated sales price of $2,400,000 plus the assumption of all Company liabilities. F-27 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Fab-Tech Industries of Brevard, Inc. Rockledge, Florida We have audited the accompanying balance sheet of Fab-Tech Industries of Brevard, Inc. as of December 31, 1995 and 1994 and the related statements of income and retained earnings, and cash flows for the years then ended. 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 audits. We conduced 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 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of Fab-Tech Industries of Brevard, Inc., as of December 31, 1995 and 1994, and the results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. SILVERMAN OLSON THORVILSON & KAUFMANN LTD CERTIFIED PUBLIC ACCOUNTANTS Minneapolis, Minnesota February 9, 1996 F-28 FAB-TECH INDUSTRIES OF BREVARD, INC. BALANCE SHEET DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 ---------- ---------- Current assets: Cash $ 164,805 $ 230,859 Accounts receivable 470,126 381,848 Inventory 365,250 187,373 Other current assets 12,815 11,702 ---------- ---------- Total current assets 1,012,996 811,782 Property and equipment, net (Note 2) 1,089,797 758,342 ---------- ---------- Total assets $2,102,793 $1,570,124 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 110,109 $ 63,816 Distributions and notes payable - shareholders (Note 3) 370,484 317,040 Accrued liabilities 17,381 26,211 Current maturities of long-term debt (Note 4) 86,475 81,997 Current maturities of capital lease obligations (Note 5) 228,356 148,046 ---------- ---------- Total current liabilities 812,805 637,110 Long-term debt (Note 4) 116,273 202,108 Capital lease obligations (Note 5) 566,965 374,890 ---------- ---------- Total liabilities 1,496,043 1,214,108 ---------- ---------- Commitments (Note 6) - - Shareholders' equity: Common stock, $1 par value; 7,500 shares authorized; 1,500 shares issued and outstanding 1,500 1,500 Paid in capital 118,500 118,500 Retained earnings 486,750 236,016 ---------- ---------- Total shareholders' equity 606,750 356,016 ---------- ---------- Total liabilities and shareholders' equity $2,102,793 $1,570,124 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of the financial statements. F-29 FAB-TECH INDUSTRIES OF BREVARD, INC. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 ----------- ----------- Sales $3,618,091 $3,765,966 Cost of goods sold 2,593,751 2,834,991 ---------- ---------- Gross profit 1,024,340 930,975 Operating expenses 497,027 416,714 ---------- ---------- Income from operations 527,313 514,261 ---------- ---------- Other income (expense): Interest expense (143,918) (133,603) Loss on sale of equipment (Note 2) (1,190) (3,690) Miscellaneous 8,529 15,213 ---------- ---------- Total other income (expense) (136,579) (122,080) ---------- ---------- Net income 390,734 392,181 Retained earnings (accumulated deficit) - beginning of year 236,016 (24,165) Shareholder distributions (140,000) (132,000) ---------- ---------- Retained earnings - end of year $ 486,750 $ 236,016 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of the financial statements. F-30 FAB-TECH INDUSTRIES OF BREVARD, INC. STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 --------- --------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net income $ 390,734 $ 392,181 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 190,761 146,448 Loss on sale of property and equipment 1,190 3,690 (Increase) decrease in assets: Accounts receivable (88,278) (142,760) Inventory (177,877) 282,272 Other current assets (1,113) 734 Increase (decrease) in liabilities: Accounts payable 46,293 (188,744) Accrued liabilities (8,830) (4,285) --------- --------- Net cash provided by operating activities 352,880 489,536 --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of equipment (22,541) - Proceeds from the sale of equipment 5,000 500 --------- --------- Net cash provided by (used in) investing activities (17,541) 500 --------- --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Increase in distributions and notes payable - shareholders 53,444 55,360 Issuance of long-term debt - 2,600 Repayment of long-term debt (95,830) (65,769) Repayment of capital lease obligations (219,007) (141,367) Shareholder distributions (140,000) (132,000) --------- --------- Net cash used in financing activities (401,393) (281,176) --------- --------- Net increase (decrease) in cash (66,054) 208,860 Cash - beginning of year 230,859 21,999 --------- --------- Cash - ending of year $ 164,805 $ 230,859 --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest during the year $ 141,418 $ 133,603 --------- --------- --------- --------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During 1995: The Company issued $14,473 of long-term debt and $491,392 of capital lease obligations in exchange for $505,865 of property and equipment. During 1994: The Company issued $58,950 of long-term debt and $217,838 of capital lease obligations in exchange for $270,820 of property and equipment and $5,968 of other current assets. The accompanying notes are an integral part of the financial statements. F-31 FAB-TECH INDUSTRIES OF BREVARD, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization: Fab-Tech Industries of Brevard, Inc. was incorporated in the State of Florida in May 1989. The Company is engaged in precision machining and sheet metal fabrication of mechanical components. Accounts Receivable: The Company believes that all accounts receivable are fully collectible as of year end; accordingly, no allowance for doubtful accounts has been recorded. If management estimates that there are collectibility issues, an appropriate amount will be reserved and charged to operations when that determination is made. Inventory: Work in progress inventory is recorded at the lower of cost (determined on a first-in, first-out basis) or market value. Property and Equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of the assets. Expenditures for additions and improvements are capitalized, while repair and maintenance are expensed as incurred. Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Accounts receivable arise from sale of products to the Company's customer base consisting of businesses in the aerospace, medical and high-technology commercial industries, which are located throughout the United States. The Company performs ongoing credit evaluations of its customers' financial condition, and generally requires no collateral from its customers. The Company's credit losses are subject to general economic conditions of the industries represented in its customer base, including those commercial businesses operating under governmental contracts. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions about the future outcome of current transactions which may affect the reporting and disclosure of these transactions. Accordingly, actual results could differ from those estimates used in the preparation of these financial statements. F-32 FAB-TECH INDUSTRIES OF BREVARD, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes: The Company has elected to be treated as an S-corporation under applicable federal and state tax regulations. Accordingly, no provision for income taxes has been provided in these financial statements, as any corporate earnings or losses will pass-through to the Company shareholders' personal returns. NOTE 2: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: Estimated Useful Life 1995 1994 in Years ----------- ------------ ---------- Machinery and equipment $ 370,462 $ 310,241 7 Office equipment 61,856 26,614 5-7 Leasehold improvements 3,618 3,618 5 Equipment under capital leases 1,192,705 767,762 7 ---------- ---------- 1,628,641 1,108,235 ---------- ---------- Less accumulated depreciation (538,844) (349,893) ---------- ---------- Property and equipment, net $1,089,797 $ 758,342 ---------- ---------- ---------- ---------- Depreciation expense, including that on equipment under capital leases, was $190,761 and $146,448 in 1995 and 1994, respectively. Accumulated depreciation on the equipment under capital leases was $288,689 at December 31, 1995 and $171,686 at December 31, 1994. During 1995, the Company sold equipment with an original cost of $8,000 and a net book value of $6,190 for $5,000, resulting in a $1,190 loss on sale. In 1994, the Company sold equipment with an original cost of $15,042 and a net book value of $4,190 for $500, resulting in a $3,690 loss on sale. NOTE 3: DISTRIBUTIONS AND NOTES PAYABLE - SHAREHOLDERS Distributions and notes payable - shareholders are all due on demand and unsecured; and consisted of the following at December 31: 1995 1994 -------- -------- Notes payable to shareholders - interest at rates from 9.5% to 10.5% at December 31, 1995. $231,484 $236,040 Distributions payable to shareholders - non-interest bearing. 139,000 81,000 -------- -------- Total distributions and notes payable - shareholders $370,484 $317,040 -------- -------- -------- -------- F-33 FAB-TECH INDUSTRIES OF BREVARD, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 4: LONG-TERM DEBT Long-term debt consisted of the following at December 31: 1995 1994 ---------- ---------- Installment note payable - bank - variable interest rate (10.75% at December 31, 1995), collateralized by a first security interest in accounts receivable, inventory, property and equipment and the personal guarantee of two shareholders. The note is due in August 1998. $174,840 $225,970 Installment note payable - equipment - interest bearing at 14.4%, collateralized by equipment and due in November 1996. 26,623 54,655 Other notes payable. 1,285 3,480 -------- -------- 202,748 284,105 Less current maturities (86,475) (81,997) -------- -------- Total long-term debt $116,273 $202,108 -------- -------- -------- -------- Future maturities of long-term debt are as follows for years ending December 31: 1996 $ 86,475 1997 64,286 1998 51,987 -------- $202,748 -------- NOTE 5: CAPITAL LEASE OBLIGATIONS The Company leases certain machinery and office equipment under capital leases with various expiration dates through August 2000. Future minimum lease payments as of December 31, 1995 for each of the next five years are as follows: 1996 $ 311,166 1997 286,116 1998 196,187 1999 118,561 2000 37,570 --------- Total minimum lease payments 949,600 Less amount representing interest (154,279) --------- Present value of net minimum lease payments 795,321 Less current maturities (228,356) --------- Long-term obligation $ 566,965 --------- --------- F-34 FAB-TECH INDUSTRIES OF BREVARD, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 6: COMMITMENTS Operating Lease: The Company leases its corporate office and manufacturing facility under a non-cancellable operating lease which expires in September 1998. Future minimum lease payments are as follows for years ending December 31: 1996 $ 59,625 1997 59,625 1998 44,719 -------- $163,969 -------- -------- Rent expense totalled $59,625 in 1995 and 1994. Significant Customers and Suppliers: During 1995, the Company made sales to five significant customers which represent 20%, 13%, 12%, 11% and 10% of net sales. During 1994, the Company made sales to three significant customers which represent 31%, 16% and 14% of net sales. In 1994, the Company purchased materials aggregating approximately $150,000 and $100,000 from two separate vendors which represents approximately 18% and 12% of total material purchases during the year. Financial Instruments: At December 31, 1995, the Company had deposits in excess of federally insured amounts of $21,621 at one financial institution. NOTE 7: SUBSEQUENT EVENT In 1995, the Company entered into negotiations to sell all of its assets and manufacturing operations to DynEco Corporation, a publicly- held business. The sale is anticipated to occur in the second or third quarter of 1996 at an estimated sales price of $2,400,000 plus the assumption of all Company liabilities. F-35 [OUTSIDE BACK COVER PAGE OF PROSPECTUS] - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such other information or representations must not be relied upon as having been authorized by the Company or the Selling Shareholders. Neither the delivery of this Prospectus nor any sales made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the registered securities to which it relates, nor does it constitute an offer to sell or a solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. __________ TABLE OF CONTENTS PAGE Available Information................................................... 2 Prospectus Summary...................................................... 3 Risk Factors............................................................ 6 Use of Proceeds......................................................... 14 Price Range of and Dividends on Common Stock............................ 15 Capitalization.......................................................... 16 Dilution................................................................ 17 Selected Consolidated Financial Information and Other Data.............. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 21 Business................................................................ 24 Management.............................................................. 32 Certain Transactions.................................................... 36 Principal Shareholders and Share Ownership of Management................ 37 Plan of Distribution.................................................... 38 Description of Capital Stock............................................ 39 Shares Eligible for Future Sale......................................... 41 Legal Matters........................................................... 43 Experts................................................................. 43 __________ DYNECO CORPORATION 8,244,318 SHARES OF COMMON STOCK 940,305 CLASS D WARRANTS 427,911 CLASS E WARRANTS PROSPECTUS July ___, 1996 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is organized under the laws of the State of Minnesota. The Minnesota Statutes (the "Statutes"), provide that a Minnesota corporation shall indemnify its directors, officers, employees and other agents (each, a "Corporate Agent") against expenses and liabilities (including amounts paid in settlement) in connection with any proceeding involving such person by reason of his being a Corporate Agent if such person: (i) has not been indemnified by another organization; (ii) acted in good faith; (iii) received no improper personal benefit, and section 302A.255, if applicable, has been satisfied; and (iv) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Expenses incurred by a Corporate Agent in connection with a proceeding may, under certain circumstances, be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors. Under the Statutes, a Minnesota corporation may maintain insurance on behalf of the Corporate Agent against any liabilities asserted against and incurred by him in such capacity, whether or not the corporation would have been required to indemnify the Corporate Agent against the liabilities under the Statutes. As permitted by the Statutes, the Company's Amended and Restated Articles of Incorporation contains provisions which limit the personal liability of directors for monetary damages for breach of their fiduciary duties as directors except to the extent such limitation of liability is prohibited by the Statutes. In accordance with the Statutes, these provisions do not limit the liability of any director for any breach of the director's duty of loyalty to the Company or its shareholders; for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or for any transaction from which the director derives an improper personal benefit. These provisions do not limit the rights of the Company or any shareholder to seek an injunction or any other non-monetary relief in the event of a breach of a director's fiduciary duty. In addition, these provisions apply only to claims against a director arising out of his role as a director and do not relieve a director form liability for violations of statutory law, such as certain liabilities imposed on a director under the federal securities laws. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the estimated expenses to be borne by the Company in connection with the issuance and distribution of the securities being registered: ITEM AMOUNT ---- -------- Securities and Exchange Commission registration fee. . $10,239 NASD filing fee. . . . . . . . . . . . . . . . . . . . N/A Nasdaq SmallCap Market listing fee . . . . . . . . . . N/A Blue Sky fees and expenses . . . . . . . . . . . . . . 1,300 Printing expenses. . . . . . . . . . . . . . . . . . . 50,000 Legal fees and expenses. . . . . . . . . . . . . . . . 125,000 Accounting fees and expenses . . . . . . . . . . . . . 20,000 Transfer Agent and Registrar fee . . . . . . . . . . . N/A Miscellaneous. . . . . . . . . . . . . . . . . . . . . -- -------- Total . . . . . . . . . . . . . . . . . . . . . . . $206,539 -------- -------- II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below in chronological order is information regarding the sales of securities of the Company without registration under the Securities Act during the past three years. NUMBER 1994 OF SHARES AMOUNT - ---- --------- ---------- Shares issued to acquire DynEco International, Inc. 3,926,000 $ 550,000 Shares issued pursuant to Class A Warrants 280,395 686,526 Shares issued pursuant to Class B Warrants 60 300 Shares issued pursuant to the December 1994 Private Placement Memorandum 20,000 40,000 Miscellaneous shares issued pursuant to options 16,221 16,221 --------- ---------- Total 4,242,676 1,293,047 1995 - ---- Shares issued pursuant to Class A Warrants 200,000 200,000 Shares issued pursuant to Class B Warrants 68,935 206,805 Shares issued pursuant to Class C Warrants 140 700 Shares issued pursuant to the December 1994 Private Placement Memorandum 175,000 139,400 Shares issued pursuant to the February 1995 Private Placement Memorandum 135,000 121,420 Shares issued pursuant to DynEco International, Inc. warrants 16,500 41,250 Shares issued pursuant to the May 1995 Private Placement Memorandum 855,822 1,472,169 Miscellaneous shares issued pursuant to stock options 100,000 100,000 Miscellaneous correction to shares outstanding ( 225) - 1996 - ---- None --------- ---------- Total 1,551,172 2,281,744 --------- ---------- --------- ---------- II-2 All issuances of securities described above were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering or Rule 701 promulgated under the Securities Act; provided, however, that shares issued pursuant to the Class A Warrants, Class B Warrants and Class C Warrants were made in reliance on Rule 148 promulgated under the Securities Act. All of the securities were acquired by the recipients for investment and with no view toward the resale or distribution thereof. In each instance, the recipient was either an employee of the Company or a sophisticated investor, the offers and sales were made without any public solicitation and the stock certificates bear restrictive legends. No underwriter was involved in the transactions and no commissions were paid. II-3 ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: EXHIBIT NO. DESCRIPTION OF EXHIBIT 3.1 -- Amended and Restated Articles of Incorporation of DynEco Corporation. 3.2 -- Amended and Restated Bylaws of DynEco Corporation. 4.1* -- Form of Common Stock certificate of DynEco Corporation. 4.2* -- Form of Class D Warrant Certificate of DynEco Corporation. 4.3* -- Form of Class E Warrant Certificate of DynEco Corporation. 5.1* -- Opinion of Powell, Goldstein Frazer & Murphy. 10.1 -- Warrant Purchase Agreement dated July 1, 1994 between DynEco International, Inc. shareholders and DynEco Corporation. 10.2 -- Warrant Agreement between DynEco Corporation and American Securities Transfer, Inc. to issue Class D and Class E Warrants. 10.3* -- Patent and Know-How License Agreement dated January 14, 1992 between CNS Compressor Corporation and Thomas C. Edwards, Ph.D. 10.4* -- First Amended Patent and Know-How License Agreement dated March 9, 1992 between CNS Compressor Corporation and Thomas C. Edwards, Ph.D. 10.5* -- TERTM Technology Corporation Plan of Reorganization pursuant to Title 11 of the United States Code. 10.6* -- TERTM Technology Corporation Amended Plan of Reorganization pursuant to Title 11 of the United States Code. 10.7* -- TERTM Technology Corporation Second Amended Plan of Reorganization pursuant to Title 11 of the United States Code. 10.8 -- TERTM Technology Corporation Articles of Exchange included in Exhibit 3.1 filed herewith. 10.9 -- TERTM Technology Corporation Agreement and Plan of Exchange included in Exhibit 3.1 filed herewith. 10.10 -- Product Development and Manufacturing Agreement dated December 30, 1994 between Kurt/DynEco Compressor Corporation, Kurt Manufacturing Company, and DynEco International, Inc. 10.11 -- Product Development and Technology Confidentiality Agreement dated November 2, 1995 between Quincy Compressor Division, Coltec Industries, Inc. and DynEco Corporation. 10.12 -- 1993 Employee Stock Option Plan of DynEco International, Inc. II-4 10.13 -- Form of 1993 Corporate Stock Option Agreement. 10.14 -- 1993 Advisor's Stock Option Plan of DynEco International, Inc. 10.15 -- Form of 1993 Advisors Stock Option Agreement. 10.16 -- Letter of Intent dated March 8, 1995 between Fab-Tech Industries of Brevard, Inc. and DynEco Corporation. 10.17 -- Employment Agreement dated March 1, 1994 between DynEco Corporation and Thomas C. Edwards, Ph.D. 10.18 -- Employment Agreement dated September 22, 1994 between DynEco Corporation and Richard D. Besser. 10.19 -- Employment Agreement dated June 3, 1996 between DynEco Corporation and Thomas R. Reinarts, Ph.D. 10.20 -- Employment Agreement dated January 2, 1996 between DynEco Corporation and Ralph E. Nelson. 10.21 -- Employment Agreement dated January 14, 1992 between CNS Compressor Corporation and Thomas C. Edwards, Ph.D. 10.22 -- Lease Agreement dated February 20, 1995 between B&D Trust and DynEco International, Inc. 21.1 -- Subsidiaries of Registrant. 23.1 -- Consent of Silverman Olson Thorvilson & Kaufmann Ltd. 23.2(*) -- Consent of Powell, Goldstein, Frazer & Murphy appears in its opinion to be filed as Exhibit 5.1. 24.1 -- Power of Attorney appears on page II-7. 27.1 -- Financial Data Schedule. _______________ * To be filed by Amendment. (b) Financial Statement Schedules: All of the financial statement schedules for which provision is made in the applicable accounting regulation of the Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. II-5 ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) That, for determining liability under the Securities Act, to treat each such post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Rockledge, State of Florida on July 11, 1996. DYNECO CORPORATION By: /s/ Richard D. Besser ___________________________________ Richard D. Besser, Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Richard D. Besser or Ralph E. Nelson the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Richard D. Besser - ----------------------------- Richard D. Besser Chairman of the Board, June 24, 1996 President and Chief Executive Officer (Principal Executive Officer) /s/ Ralph E. Nelson, C.P.A. - ----------------------------- Ralph E. Nelson, C.P.A. Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) July 11, 1996 /s/ Thomas C. Edwards, Ph.D. - ----------------------------- Thomas C. Edwards, Ph.D. Chief Technical Officer and Director July 11, 1996 /s/ Richard F. Galbraith, M.D. - ----------------------------- Richard F. Galbraith, M.D. Director June 25, 1996 /s/ Gerald J. Kamman - ----------------------------- Gerald J. Kamman Director June 25, 1996 II-7 /s/ Dennis R. Longren - ----------------------------- Dennis R. Longren Director June 24, 1996 /s/ Charles J. Tambornino - ----------------------------- Charles J. Tambornino Director July 11, 1996 - ----------------------------- Frederick M. Zimmerman, Ph.D. Director July __, 1996 II-8