As filed with the Securities and Exchange Commission on July 11, 1996
REGISTRATION NO. 33-
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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
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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
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Common Stock ($.01 par value)(3) 3,000,000 $ 3.00 $ 9,000,000 $ 3,103.45
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Common Stock ($.01 par value)(4) 5,244,318 $ 3.00 $ 15,732,954 $ 5,425.16
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Class D Warrants 940,305 $ -- $ -- $ --
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Class E Warrants 427,911 $ -- $ -- $ --
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Common Stock ($.01 par value)(5) 940,305 $ 3.00 $ 2,820,915 $ 972.73
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Common Stock ($.01 par value)(6) 427,911 $ 5.00 $ 2,139,555 $ 737.78
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Total $ 29,693,424 $ 10,239.12
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(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.
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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