AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 2004
Registration No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
_________________________
DYNECO CORPORATION
(Name of Small Business Issuer in Its Charter)
Minnesota 8711 41-1508703
(State or Other (Primary Standard (I.R.S.
Jurisdiction Industrial Employer
of Incorporation Classification Identification No.)
or Organization) Number)
564 International Place
Rockledge, FL 32955
(321) 639-0333
(Address and Telephone Number of Principal Executive Offices)
_________________________
Thomas C. Edwards, Ph.D., President
564 International Place
Rockledge, FL 32955
(321) 639-0333
(Name, Address and Telephone Number of Agent For Service)
_________________________
Copies of all communications to:
Steven I. Weinberger, Esq.
Schneider Weinberger LLP
2499 Glades Road, Suite 108
Boca Raton, FL 33431
Telephone: (561) 362-9595
Facsimile No. (561) 362-9612
Approximate Date of Proposed Sale to the Public: As soon as practicable 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 of the Securities Act, check
the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
ii
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Security(1) Offering Price(1) Registration Fee(1)
-------------------- ------------ --------------- ----------------- -------------------
Common Stock, par value
$.01 per share 4,025,000 $.225 $905,625 $114.74
Common Stock, par value
$.01 per share, underlying
warrants 4,050,000 $.225 $911,250 $115.46
Common Stock, par value
$.01 per share, underlying
options 100,000 $.225 $22,500 $ 2.85
-------
Total Registration Fee $233.05
=======
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457, based upon the average of the bid and asked
prices for the common stock on February 2, 2004.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
iii
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.
Subject to Completion February 6, 2004
PROSPECTUS
DYNECO CORPORATION
8,175,000 SHARES OF COMMON STOCK
This prospectus covers the resale of a total of 8,175,000 shares being
offered by selling security holders. Of the shares covered by this prospectus,
4,025,000 shares have been issued and 4,150,000 shares are issuable upon
exercise of warrants and options issued to the selling security holders. We will
not receive any proceeds from sales of shares by the selling security holders.
Our shares of common stock are traded over-the-counter on the "pink
sheets" under the symbol "DYCO". There is currently only a limited market for
our common stock and we do not know if an active trading market will develop. In
the absence of a trading market, purchasers of our shares may be unable to
resell them. On February 2, 2004, the closing price for our common stock as
reported on the "pink sheets" was $0.20 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _____, 2004
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this document or
to which we have referred you. We have not authorized anyone to provide you with
information that is different. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospectus may have
changed since that date.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until ________, 2004 (90 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation to deliver a prospectus when acting as an
underwriter with respect to unsold allotments or subscriptions.
2
PROSPECTUS SUMMARY
THE COMPANY
DynEco Corporation develops advanced compressors and pumps based upon
unique and patented machine technologies. We are currently and primarily engaged
in the continuing improvement and demonstration of our proprietary dry, oil-less
compressor technology for fuel cell applications and other uses. DynEco
compressors, marketed as UniVane(TM), provide air compression and fuel
circulation and delivery functions which, we believe, enable fuel cells to
operate more efficiently and with greater power output, thereby serving an
important role in the continuing development and adoption of compact, economical
and very low emission fuel cell power systems.
Fuel cell stacks produce electricity through a process known as
electrochemical power generation. Fuel cells are much like batteries, except
that when they are continuously supplied with oxygen from the air and hydrogen
fuel, they continue to produce electricity. While fuel cells produce pure water
and heat, they do not "run down". However, since they have no moving parts, most
fuel cells depend upon external components to supply their air and hydrogen -
principally, air compressors and hydrogen circulators. Our UniVane air
compressors and hydrogen circulators, due in large part to our relatively new
association with Parker-Hannifin Corporation, are designed to form an integral
part of fuel cell systems that are capable of delivering electrical power.
In May 2003 we granted an exclusive, worldwide, royalty-generating
license to Parker-Hannifin Corporation to develop, manufacture and distribute
air compressors and hydrogen circulators based upon our technology.
Parker-Hannifin is a Fortune 500 industrial company (NYSE: PH) that, among other
things, designs, develops and distributes a large number of industrial products.
As a result of the license agreement, we are currently dependent upon the
success of Parker-Hannifin in completing development of equipment for fuel cell
stacks and other products incorporating our air compressors and hydrogen
circulators. Parker-Hannifin generated net sales in 2002 of in excess of $6
billion. Although demonstration compressors and hydrogen generators are being
built, they have not yet been incorporated into commercial products and,
therefore, there have been no product sales that have generated royalty payments
under the license agreement. Our future success is also dependent upon the
successful development and market acceptance of fuel cell systems. Under the
exclusive license, we currently provide consulting services to Parker-Hannifin
for a monthly consulting fee of $25,000.
Our executive offices are located at 564 International Place,
Rockledge, Florida 32955, and our telephone number there is (321) 639-0333.
References in this prospectus to "DynEco", "we", "us" and "our" are to DynEco
Corporation and its wholly owned subsidiary, DynEco International, Inc.
THE OFFERING
Common Stock:
Outstanding Prior
to this Offering ............... 32,912,978 shares
Outstanding After
this Offering .................. 37,012,978 shares, including 4,150,000
shares covered by this prospectus
issuable upon the exercise of
outstanding warrants and options.
Common Stock Reserved: ............... 4,813,369 shares issuable on exercise of
options that have been granted and
16,185,120 shares issuable upon exercise
of outstanding warrants.
3
SELECTED FINANCIAL DATA
The following summary of our financial information for the years ended
December 31, 2002 and 2001 has been derived from, and should be read in
conjunction with, our audited financial statements included elsewhere in this
prospectus. Information for the nine months ended September 30, 2003 and 2002
has been derived from, and should be read in conjunction with, our unaudited
financial statements included elsewhere in this prospectus.
Nine Months Ended Years Ended
September 30, December 31,
----------------- ------------
2003 2002 2002 2001
---- ---- ---- ----
Revenues ................... $ 257,447 $ 137,131 $ 132,883 $ 86,027
Operating expenses ......... $ 379,756 $ 289,225 $ 545,499 $ 304,914
Net (loss) ................. $(139,402) $(295,014) $(522,785) $(193,241)
Net (loss) per share ....... $ -- $ (.01) $ (.02) $ (.01)
September 30, 2003 December 31, 2002
------------------ -----------------
Working capital (deficit) .......... $(464,823) $(513,704)
Total assets ....................... $294,918 $254,081
Current liabilities ................ $(533,282) $543,723
Total liabilities .................. $(698,604) $709,045
Shareholders' equity (deficit) ..... $(403,686) $(454,964)
4
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE
AND INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING US AND OUR BUSINESS BEFORE PURCHASING THE SECURITIES
OFFERED HEREBY.
RISKS RELATED TO OUR BUSINESS
WE HAVE ONLY RECENTLY COMMENCED REVENUE-PRODUCING OPERATIONS AND THE LIMITED
INFORMATION AVAILABLE ABOUT US MAKES AN EVALUATION OF US DIFFICULT.
We have conducted limited operations and we have little operating
history that permits you to evaluate our business and our prospects based on
prior performance. You must consider your investment in light of the risks,
uncertainties, expenses and difficulties that are usually encountered by
companies in their early stages of development, particularly those engaged in
emerging technologies. There can be no assurance that we will successfully
address such risks, and the failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
WE HAVE EXPERIENCED HISTORICAL LOSSES AND A SUBSTANTIAL ACCUMULATED DEFICIT. IF
WE ARE UNABLE TO REVERSE THIS TREND, WE WILL LIKELY BE FORCED TO CEASE
OPERATIONS.
For the fiscal years ended December 31, 2002 and 2001, we experienced
net losses of $(522,785) and $(193,241), respectively. For the nine months ended
September 30, 2003 and 2002, we experienced net losses of $(139,402) and
$(295,014), respectively. In addition, at September 30, 2003, we had an
accumulated deficit of $7,240,818. Our operating results for future periods will
include significant expenses, including new product development expenses,
potential marketing costs, programming and administrative expenses, and will be
subject to numerous uncertainties. As a result, we are unable to predict whether
we will achieve profitability in the future, and our auditors have concluded
that, absent revenues from operations or alternative financing, there are
substantial doubts that we will be able to continue as a going concern.
WE HAVE A WORKING CAPITAL DEFICIT AND SIGNIFICANT CAPITAL REQUIREMENTS. WE WILL
CONTINUE TO INCUR LOSSES UNTIL WE ARE ABLE TO GENERATE SUFFICIENT REVENUES TO
OFFSET OUR EXPENSES.
As of September 30, 2003, our current liabilities were approximately
$533,282 and our current assets were approximately $68,459. As a result, we had
a working capital deficit of approximately $464,823. We immediately require
substantial working capital, and our revenues from operations are currently
limited and we have received no commitments for funding from any third parties.
If we are unable to generate substantial revenues from operations or obtain
working capital from external sources, we will be forced to curtail or cease
operations in which event investors will lose their investment in our company.
WE CURRENTLY HAVE A SINGLE STRATEGIC BUSINESS PARTNER, AND IF OUR PARTNER IS
UNABLE TO SUCCESSFULLY DEVELOP, MANUFACTURE OR MARKET OUR PRODUCTS OR OTHER
PRODUCTS INCORPORATING OUR TECHNOLOGY, WE WILL NOT GENERATE SUBSTANTIAL REVENUES
AND WE WILL LIKELY CEASE OPERATIONS.
We have granted an exclusive, worldwide license to Parker-Hannifin
Corporation for our air UniVane compressors, hydrogen circulators and related
technology. In connection with this license, Parker-Hannifin is responsible for
the development of products incorporating the licensed technology.
5
We are entitled to a royalty fee from Parker-Hannifin Corporation that is based
upon its sale of our products and products incorporating our technology.
However, Parker-Hannifin may not be successful in marketing these products, in
which event we will not receive royalty fees from Parker-Hannifin. While we
depend upon Parker-Hannifin for sales of royalty-generating products, we have no
control over Parker-Hannifin's technical and manufacturing development or
marketing activities, and Parker-Hannifin is only required to use reasonable
commercial efforts to market these products. If Parker-Hannifin does not
successfully market royalty-generating products under our license agreement, we
will not receive royalty fees and we will likely be forced to cease operations.
To date, Parker-Hannifin has not sold any products as to which we are entitled
to a royalty payment.
OUR EXCLUSIVE RELIANCE ON PARKER-HANNIFIN FOR PRODUCT SALES MEANS THAT WE MAY
FOREGO OTHER POTENTIAL SOURCES OF REVENUE PRODUCTION WITHOUT ASSURANCE THAT
SALES BY PARKER-HANNIFIN WILL BE SUBSTANTIAL.
Under our exclusive license agreement with Parker-Hannifin, we are
prohibited from selling our UniVane fuel cell compressors and hydrogen
circulators to any other party. While Parker-Hannifin has agreed to use
commercially reasonable efforts to develop, manufacture or sell our products
during the period that the exclusive license agreement is in effect, we will
forgo potential sales to third parties without any guaranty that Parker-Hannifin
will be successful in its marketing efforts.
WE ARE DEPENDENT ON MARKET ACCEPTANCE FOR FUEL CELL COMPRESSORS AND HYDROGEN
CIRCULATORS. IF MARKET ACCEPTANCE DOES NOT OCCUR OR IS SUBSTANTIALLY DELAYED, WE
MAY BE FORCED TO CEASE OPERATIONS.
Stationary fuel cell systems represent a relatively new technology and
our success will depend on this technology achieving market acceptance. Fuel
cell systems for stationary and mobile applications represent an emerging
market. The development of a substantial market for stationary and mobile fuel
cell systems may be impacted by many factors, all of which are out of our
control, including:
o Cost competitiveness of stationary and mobile fuel cell systems;
o User acceptance of fuel cell systems;
o Cost of hydrogen fuel;
o User perception of fuel cell systems' safety; and
o Emergence of newer, more competitive technologies and products.
If a substantial fuel cell systems market develops slower than
anticipated or fails to develop, we may not be able to recover the expenses we
incurred to develop our fuel cell compressor products. Moreover, our UniVane
compressors are based upon and rely solely upon our unique technology. They have
not been produced on a commercial basis and have not received substantial
compressor product market acceptance for several reasons, including
manufacturing cost.
IF THE LICENSE AGREEMENT WITH OUR CHIEF EXECUTIVE OFFICER IS TERMINATED WE WILL
BE UNABLE TO USE THE TECHNOLOGY INCORPORATED INTO OUR PRODUCTS AND WE WILL CEASE
OPERATIONS.
The technology in our compressor products is the subject of various
patents owned by Dr. Thomas Edwards, our president and chief executive officer.
We license the technology from Dr. Edwards under a license agreement entered
into in January 2004, which replaced a license agreement entered into in 1992.
In the event we fail to make required royalty payments to Dr. Edwards under the
license agreement, or if we become bankrupt, the license agreement will
terminate and we will no longer be entitled to use the licensed technology. If
we lose the right to use the licensed technology, we will likely cease
operations, in which event investors will lose their entire investment in
DynEco.
6
WE HAVE NO COMMERCIAL PRODUCT SALES AND ONLY LIMITED SALES OF PROTOTYPES. IF WE
CANNOT GENERATE SIGNIFICANT SALES OF OUR PRODUCTS, WE CANNOT FUND OUR OPERATIONS
OR ACHIEVE PROFITABILITY, IN WHICH CASE WE WILL BE FORCED TO CEASE OPERATIONS.
Parker-Hannifin may not be able to manufacture or commercialize our
UniVane compressor and hydrogen circulator products in a cost effective manner.
Most recently, we have derived revenues principally from consulting fees and
research and development contracts. Our compressor and hydrogen circulator
product sales have been limited to demonstration and prototype models. We have
not made any commercial sales of units that include fuel-processing
capabilities. Parker-Hannifin may not be able to produce or commercialize any of
our fuel cell compressor products in a cost-effective manner, and, if produced,
may be unable to successfully market these products. We expect the production
costs of the initial commercial units to be delivered under prototype
development contracts to be higher than their sales price and there can be no
assurance that higher production levels will occur or that sales prices will
ever exceed production costs.
Parker-Hannifin may not be able to develop manufacturing technologies
and processes or expand their manufacturing facilities to the point of being
capable of economically or profitably satisfying large commercial orders that
may occur. Development and expansion of these technologies and processes require
extensive lead times and the commitment of significant financial, engineering
and human resources. Parker-Hannifin may choose not to develop the required
manufacturing technologies and processes.
IF WE OR OUR ONLY PARTNER ARE UNABLE TO DEVELOP THE NECESSARY TECHNOLOGY TO
TIMELY INTRODUCE AND MARKET OUR FUEL CELL INDUSTRY COMPRESSOR PRODUCTS OR OTHER
POTENTIAL APPLICATIONS, WE WILL NOT GENERATE SUFFICIENT REVENUES TO FUND
OPERATIONS OR ACHIEVE PROFITABILITY.
Our compressor and hydrogen circulator products and technology
development efforts are subject to unanticipated and significant technical and
market delays, expenses and technical or other problems, as well as the possible
lack of funding to complete this development. Our success will depend upon our
compressor and hydrogen circulator products and technologies, or other
applications of this technology, that meet acceptable cost and performance
criteria, and upon their timely introduction into the marketplace. None of our
proposed products and technologies may ever be successfully developed, and even
if developed, they may not actually perform as designed or be adopted by others.
Failure to develop or significant delays in the development of our products and
technology would have a material adverse effect on our ability to sell products
based upon our technology and generate sufficient cash for us to achieve
profitability.
WE DEPEND ON THE CONTINUED SERVICES OF OUR CHIEF EXECUTIVE OFFICER BUT WE DO NOT
HAVE KEY MAN INSURANCE ON HIS LIFE.
Our future success may depend upon the continued services of Thomas
Edwards, Ph.D., as our chief executive officer. The loss of Dr. Edwards'
services would be detrimental to us and could have a material adverse effect on
our business, financial condition and results of operations. We do not maintain
key-man insurance on the life of Dr. Edwards. Our future success is also
dependent on our ability to identify, hire, train and retain other qualified
managerial and other employees. Competition for these individuals is intense and
increasing. We may not be able to attract, assimilate, or retain qualified
technical and managerial personnel and our failure to do so could have a
material adverse effect on our business, financial condition and results of
operations.
7
RISKS RELATED TO THIS OFFERING
WE HAVE BEEN UNSUCCESSFUL IN OUR ATTEMPTS TO RAISE SUFFICIENT CAPITAL TO FUND
OUR BUSINESS PLANS. IF WE ARE UNABLE TO DO SO WE WILL LIKELY CEASE OPERATIONS.
To date, we have funded our operations through limited revenues and
debt and equity financing. However, we have been unsuccessful in attracting
significant additional private funding for our business. We are dependent upon
our receipt of revenues from operations or additional financing to fund our
current cash flow deficit and to enable us to develop new products. To date, we
have received no commitment for additional funding, and if we are unsuccessful
in attracting such funding, we may be required to cease operations.
THIS PROSPECTUS PERMITS SELLING SECURITY HOLDERS TO RESELL THEIR SHARES. IF THEY
DO SO, THE MARKET PRICE FOR OUR SHARES MAY FALL.
This prospectus includes 8,175,000 shares being offered by existing
stockholders, including 4,150,000 shares issuable upon the exercise of
outstanding warrants and options. To the extent that these shares are sold into
the market for our shares, there may be an oversupply of shares and an
undersupply of purchasers. If this occurs the market price for our shares may
decline significantly and investors may be unable to sell their shares at a
profit, or at all.
THERE IS CURRENTLY ONLY A LIMITED TRADING MARKET FOR OUR SHARES AND IF AN ACTIVE
TRADING MARKET DOES NOT DEVELOP, INVESTORS IN THIS OFFERING MAY HAVE DIFFICULTY
PUBLICLY RESELLING THEIR SHARES.
There is currently only a limited trading market for our shares and we
do not know if an active trading market will develop. An active market will not
develop unless other broker-dealers develop interest in trading our shares, and
we may be unable to generate interest in our shares among broker-dealers until
we generate meaningful revenues and profits from operations. Until that time
occurs, if it does at all, purchasers of our shares may have difficulty selling
them publicly. In the absence of an active trading market:
o Investors may have difficulty buying and selling our shares or
obtaining market quotations;
o Market visibility for our common stock may be limited; and
o A lack of visibility for our common stock may depress the market
price for our shares.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE COULD HAVE A DEPRESSIVE EFFECT ON
THE MARKET PRICE FOR OUR COMMON STOCK.
As of the date of this prospectus, there are 32,912,978 shares of our
common stock issued and outstanding.
Of the issued and outstanding shares, approximately 19,230,378 shares
of our common stock (3,958,411 of which are owned by our officers, directors and
principal stockholders) have been held for in excess of one year and will be
available for public resale pursuant to Rule 144 promulgated under the
Securities Act commencing 90 days following the date of this prospectus. As of
the date of this prospectus, the 8,175,000 shares being offered by selling
security holders can be publicly transferred. Unless covered by an effective
registration statement, the resale of our shares of common stock owned by
8
officers, directors and affiliates is subject to the volume limitations of Rule
144. In general, Rule 144 permits our shareholders who have beneficially owned
restricted shares of common stock for at least one year to sell without
registration, within a three-month period, a number of shares not exceeding one
percent of the then outstanding shares of common stock. Furthermore, if such
shares are held for at least two years by a person not affiliated with us (in
general, a person who is not one of our executive officers, directors or
principal shareholders during the three month period prior to resale), such
restricted shares can be sold without any volume limitation.
Sales of our common stock under Rule 144 or pursuant to such
registration statement may have a depressive effect on the market price for our
common stock.
IT IS NOT POSSIBLE TO FORESEE ALL RISKS WHICH MAY AFFECT US. MOREOVER,
WE CANNOT PREDICT WHETHER WE WILL SUCCESSFULLY EFFECTUATE OUR CURRENT BUSINESS
PLAN. EACH PROSPECTIVE PURCHASER IS ENCOURAGED TO CAREFULLY ANALYZE THE RISKS
AND MERITS OF AN INVESTMENT IN THE SHARES AND SHOULD TAKE INTO CONSIDERATION
WHEN MAKING SUCH ANALYSIS, AMONG OTHERS, THE RISK FACTORS DISCUSSED ABOVE.
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
security holders.
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
MARKET INFORMATION
The Company's common stock is traded on the OTC Pink Sheets market
under the symbol "DYCO". DynEco common stock began trading publicly in April
1994 on the NASDAQ Small Cap Market following its initial public stock offering.
Trading in the Company's common stock was de-listed to the OTC Bulletin Board(R)
("OTCBB") in August 1996. During 2000, due to the Company not becoming a
reporting company under the Securities Exchange Act of 1934, as amended, trading
in the Company's common stock was referred from the OTCBB to OTC Pink Sheets
market. The following table reflects, for the periods indicated, high and low
quotations per share of common stock. These Pink Sheet quotations reflect
inter-dealer prices, without retail mark-up, mark down or commissions and may
not necessarily represent actual transactions.
Period High Low
------ ---- ---
October 1, 2003 - December 31, 2003 $0.38 $0.13
July 1, 2003 - September 30, 2003 $0.30 $0.13
April 1, 2003 - June 30, 2003 $0.30 $0.13
January 1, 2003 - March 31, 2003 $0.27 $0.11
October 1, 2002 - December 31, 2002 $0.12 $0.08
July 1, 2002 - September 30, 2002 $0.15 $0.10
April 1, 2002 - June 30, 2003 $0.16 $0.09
January 1, 2002 - March 31, 2002 $0.15 $0.15
9
As of the date of this prospectus our common stock was owned of record
by approximately 1,078 holders. The last reported sale price for our common
stock on the OTC Pink Sheets on February 2, 2004 was $0.20.
DIVIDENDS
We have never paid cash dividends on our common stock. We intend to
keep future earnings, if any, to finance the expansion of our business, and we
do not anticipate that any cash dividends will be paid in the foreseeable
future. Our future payment of dividends will depend on our earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
SEC "PENNY STOCK" RULES
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock could be considered to be a "penny stock".
A penny stock is subject to rules that impose additional sales practice
requirements on broker/dealers who sell these securities to persons other than
established customers and accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of these securities. In addition he must receive the purchaser's
written consent to the transaction prior to the purchase. He must also provide
certain written disclosures to the purchaser. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell our securities, and may
negatively affect the ability of holders of shares of our common stock to resell
them.
FORWARD-LOOKING STATEMENTS
This prospectus, including the Management's Discussion and Analysis or
Plan of Operation, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities and Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. These forward-looking statements are
subject to risks and uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the
results, performance or achievements expressed or implied by the forward-looking
statements. You should not unduly rely on these statements.
Forward-looking statements can be identified by the fact that they do
not relate strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
"project," "contemplate," "will," "would," "should," "could," or "may."
With respect to any forward-looking statement that includes a statement
of its underlying assumptions or bases, we believe such assumptions or bases to
be reasonable and have formed them in good faith, assumed facts or bases almost
always vary from actual results, and the differences between assumed facts or
bases and actual results can be material depending on the circumstances. When,
in any forward-looking statement, we express an expectation or belief as to
future results, that expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
stated expectation or belief will result or be achieved or accomplished. All
subsequent written and oral forward-looking statements attributable to us, or
anyone acting on our behalf, are expressly qualified in their entirety by the
cautionary statements. We do not undertake any obligations to publicly release
any revisions to any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect unanticipated events
that may occur.
10
Factors that may cause our actual results to differ materially from
those described in forward-looking statements include the risks discussed
elsewhere in this prospectus under the caption "Risk Factors".
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following analysis of our consolidated financial condition and
results of operations for the years ended December 31, 2002 and 2001 and the
nine months ended September 30, 2003 and 2002, should be read in conjunction
with the Consolidated Financial Statements and other information presented
elsewhere in this prospectus.
GENERAL
We are engaged primarily in developing and commercializing patented
high efficiency low-pressure non-lubricated air compressors and hydrogen
circulators, known collectively as UniVane devices, for stationary and
automotive fuel cells. We believe these devices also have product applications
in addition to fuel cells.
Our current business strategy is to develop and license our proprietary
technology to established third-party manufacturers for the production, sale and
improvement of products based upon this technology. During May 2003, we granted
an exclusive worldwide patent license agreement to Parker-Hannifin Corporation
to develop, manufacture and market our UniVane air compressors and hydrogen
circulators for all product applications.
We have historically incurred losses primarily resulting from
expenditures related to the research, development, testing and preliminary
marketing of our proprietary technology. We expect that operating losses will
continue until such time, if ever, as our future royalty income generates
sufficient revenues to fund continuing operations. Under the Parker License
Agreement, DynEco is paid $25,000 per month for 12-months primarily to transfer
UniVane technology to Parker and to aid in the transition from prototype
production to commercial manufacturing. We intend to endeavor to extend and
expand our relationship with Parker, but there is no assurance that these or
other payments will continue through June 2004.
RESULTS OF OPERATIONS
Our historical results of operations prior to 2003 are not indicative
of our current operations due to a shift in business operations, commencing with
the licensing of our UniVane patent rights to the Parker-Hannifin Corporation
along with the associated consulting agreement, as well as a $150,000 funding
agreement between the Company and the State of Florida's Technology Research and
Development Authority.
NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002
Our revenues from prototype sales decreased to $1,524 during the first
nine months of 2003 as compared to $126,809 in 2002. Product consulting revenues
increased to $125,000 during 2003 versus $10,322 in 2002. These changes in
revenue composition relate to the Parker-Hannifin licensing and consulting
agreement made in 2003. Technology Research and Development Authority funding
11
revenues aggregated $150,000 in 2003. This funding agreement did not exist
during the comparable period in 2002.
Prototype costs fell to $15,664 during 2003 from $133,739 in 2002, as a
result of the termination of our prototype sales in 2003.
Gross margin was $241,783 versus $3,392 during 2003 and 2002,
respectively. The increase in gross margin is a result of the change in
operations in 2003 as a result of the Parker-Hannifin and Technology Research
and Development Authority agreements.
Operating expenses increased 31.3% to $379,756 in 2003 from $289,225
for 2002. Compensation increased $53,320, primarily as a result of a
reallocation of labor that was formerly utilized to produce prototypes for sale.
Professional fees included in general and administrative expenses increased
$43,979, which is a result of legal costs associated with securing the
Parker-Hannifin and Technology Research and Development Authority agreements and
the financial statement audit fee incurred in 2003.
Our net loss decreased $155,612 to $139,402 during 2003 from $295,014
in 2002. The improvement shown in operating results for the first nine months of
2003 are not expected to continue during the remainder of 2003, due primarily to
the Technology Research and Development Authority funding ceiling reached in the
fourth quarter of 2003.
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
Our revenues from prototype sales increased 87.1% to $123,486 in 2002
from $66,017 in 2001. Product engineering and design consulting revenues
decreased 53.0% to $9,397 during 2002 from $20,010 for 2001. These changes in
revenue composition are associated with the shift from the product design and
engineering phase of the UniVane fuel cell compressor to prototype development
and sales.
Prototype costs rose to $131,215 during 2002 from $84,196 in 2001, a
55.8% increase reflecting the increase in prototype sales.
Gross margin was $1,668 versus $1,831 during 2002 and 2001,
respectively. This negligible gross margin was due to the relatively high cost
of producing a small number of fuel cell compressors for customer product
testing purposes.
Operating expenses increased 78.9% to $545,499 in 2002 from $304,914
for 2001. Compensation increased $72,232, primarily as a result of hiring two
additional employees in 2002. Insurance included in general and administrative
expenses increased $18,620, which is basically all attributed to increasing
employee medical premiums. Additionally in 2002, we recognized an impairment
loss for non-UniVane patent rights totaling $144,930.
We recognized a gain on debt extinguishment of $46,244 versus $138,314
in 2002 and 2001, respectively.
Our net loss increased $329,544 to $522,785 during 2002 from $193,241
in 2001. The increase was essentially the result of the $240,585 increase in
operating expenses and the $92,070 change in gain on debt extinguishment.
12
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, our primary source of liquidity was $41,860
of cash and $26,305 of accounts receivable. The working capital deficit was
$(464,823). We had total assets of $294,918, of which long-term assets consisted
of $148,651 of patent rights and $77,763 of property and equipment. Our
liabilities totaling $533,282 included $177,234 of accounts payable, $310,781 of
accrued liabilities, and $45,267 of current maturities of long-term debt. Total
shareholders' deficit was $(403,686). At September 30, 2003, we had an
accumulated deficit of $(7,240,818).
Net cash used in operating activities was $79,174 for the nine months
ended September 30, 2003, and was $298,470 and $162,999 in years 2002 and 2001,
respectively. We obtained $122,575 from financing activities for the nine months
ended September 30, 2003, and obtained a net $353,916 and $199,933 during years
2002 and 2001, respectively. The cash received from financing activities was
primarily due to issuances of our common stock through various private
placements.
As of September 30, 2003, and the date of this prospectus, our sources
of external and internal financing are 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, we will rely upon external sources
for liquidity, including additional private placements of our common stock and
the exercise of various outstanding stock warrants and stock options, as to
which we have no understandings or commitments from anyone.
Subsequently, during November 2003, we issued 2,000,000 shares of our
common stock and 4,000,000 warrants for $232,500, net of $7,500 in offering
expenses. Additionally, we issued 2,000,000 shares of common stock to a
consulting firm engaged to attract interest in DynEco within the investment
community.
We believe that our cash and anticipated receipt of consulting fees
should be sufficient to satisfy our capital requirements for the next 9 to 12
months. However, the $25,000 per month consulting fees we receive from
Parker-Hannifin may be discontinued after May 2004, and those fees together with
our currently available cash, are insufficient to satisfy our monthly operating
costs or anticipated costs associated with new product development. There can be
no assurance, however, that we will be able to generate sufficient cash from
operations, if any, in future periods beyond this 9 to 12 month period to
satisfy our capital requirements. Therefore, we may have to continue to rely on
external financing activities to satisfy our capital requirements for the
foreseeable future. However, we have no commitments for borrowings or additional
sales of equity, and there can be no assurances that we will be successful in
consummating any such future financing transactions on terms satisfactory to us,
or at all.
SEASONALITY AND INFLATION
Our business is not seasonal in nature, and management does not believe
that our operations have been materially affected by inflationary forces.
BUSINESS
We develop advanced compressors and pumps based upon unique and
patented machine technologies. We are currently and primarily engaged in
creating and developing new types of technology, their improvement and
demonstration of proprietary dry, oil-less compressor technology for fuel cell
applications. This work is conducted through engineering programs funded by
developers and producers of fuel cells and investor support. UniVane compressors
13
provide air compression and hydrogen circulator functions which enable fuel
cells to operate more efficiently with greater power output thereby serving an
important role in the continuing development and adoption of compact, economical
fuel cell power systems. DynEco's machines are also being investigated for use
as hydrogen circulation pumps for fuel cell-powered buses.
The development of new technology such as ours, and the
commercialization of products incorporating the new technology, requires the
devotion of significant capital and time. In order to maximize our limited
resources during the continuing development of our technology, we have entered
into a strategic alliance with Parker-Hannifin Corporation, a Fortune 500
industrial company that, among other things, designs, develops and distributes a
wide range of industrial and consumer products, and generated net sales in 2002
in excess of $6 billion. We have granted an exclusive, worldwide,
royalty-generating license to Parker-Hannifin Corporation to develop,
manufacture and distribute air compressors and hydrogen circulators that are
based upon our technology.
As a result of the exclusive nature of the license granted to
Parker-Hannifin, we are currently dependent upon the success of Parker-Hannifin
in completing development of balance-of-plant systems for fuel cell stacks and
other products incorporating our air compressors and hydrogen circulators.
THE FUEL CELL POWER SYSTEM
Fuel cells produce power electrochemically by passing hydrogen-rich gas
over an anode and air over a cathode, and introducing an electrolyte in between
to enable exchange of electrical charges called ions. The natural propensity of
hydrogen in the fuel gas to react with oxygen in the air causes one or the other
stream to become charged, or ionized. The flow of the ions through the
electrolyte induces an electric current in an external circuit or load. The
effectiveness of this process is strongly dependent upon the electrolyte used to
create the chemical reactivity needed for ion transport. As a result, fuel cells
are categorized by the type of electrolyte it uses. The anode and cathode
typically use catalytic materials to enhance reactivity. The action of the
electrochemical conversion process results in the production of electricity,
heat, and water. No solid waste is produced. The process heat can be applied to
useful purposes to further enhance efficiency.
Fuel cells have significant feedstock flexibility. Any hydrocarbon
material can be used, whether gas, liquid, or solid. These materials must,
however, undergo "reforming" to free the hydrogen from the carbon bonds. Natural
gas, for example, is reformed by subjecting it to steam and high operating
temperatures. In order to use coal, biomass, or a range of hydrocarbon wastes, a
similar process is applied, called gasification. These more complex fuels
require a clean-up step to remove pollutants that could otherwise poison the
fuel cell elements.
Fuel cell systems also require a power conditioner to convert direct
current from the fuel cell to the more commonly used alternating current.
A single fuel cell element typically produces 0.5 to 0.9 volts. By
stacking these fuel cell elements together, they build up voltage and power
delivery capability in what is known as a 'stack'. Plants can be built to a
customer's specific requirements from one to hundreds of kilowatts now, and
eventually hundred of megawatts. However, we believe that a very large number of
small fuel cells will eventually replace large central power plants. Fuel cells
convert a high proportion of the chemical energy in fuel to electricity, making
them very efficient. The electrochemical conversion also makes fuel cell
efficiency largely insensitive to the size of the unit or the amount of load
applied.
14
A fuel cell power system generally consists of several major subsystems
including:
o the electrochemical fuel cell stack that produces the electricity;
o a hydrogen reformer that produces nearly pure hydrogen from the
input hydrocarbon fuel;
o air and gaseous fuel management, including a compressor and hydrogen
circulator, plumbing, heat exchangers and fans;
o system and sub-system controls; and
o an electrical power interface.
Everything but the fuel cell stack is also known as the
"balance-of-plant." Having no moving parts, fuel cells combine hydrogen and
oxygen to produce electrical energy by means of an electrochemical reaction.
Unlike batteries, which have a defined duration and require extended periods of
recharging, fuel cells provide power as long as they are operational and are
adequately provided with hydrogen and oxygen.
Central to the mass adoption of fuel cell power systems is the ability
to produce the system, whether it is for the stationary or mobile market, at a
life-cycle cost that is competitive with existing power systems. As such, fuel
cell stack manufacturers and system integrators have begun to focus on enabling
technologies to improve operating performance and lower system costs, thereby
improving the overall efficiency and attractiveness of the system. Important
among these priorities is high efficiency/high reliability compressor and pump
technology for air and gaseous fuel management; the technology upon which we
focus.
THE FUTURE OF FUEL CELLS
Management believes the current growth in energy requirements will
continue and, in future years, electricity will be the most rapidly growing form
of energy consumption. The magnitude of this growth will severely strain many
existing transmission and distribution systems, precipitating capacity
constraints. Upgrading transmission and distribution systems is extremely costly
and time consuming.
Fuel cells are ideally suited to relieve transmission and distribution
systems pressures by placing power at or near consumer sites, which is called
on-site or distributed generation. Power can be located near a substation to
relieve transmission, or at user sites to relieve distribution. Efficiency can
be enhanced in on-site applications by using fuel cell process heat to:
o heat facilities (combined heat and power);
o generate steam for industrial processes (cogeneration); or
o generate steam for electricity generation.
On-site applications include relying solely on on-site power with no
grid connection-- stand alone, or using on-site power during periods of peak
grid load and providing power back to the grid during off-peak periods. Siting
fuel cells is relatively easy with their small footprint, low noise levels, and
lack of emissions. The modular nature of fuel cells enables energy suppliers to
match capacity with specific load requirements, avoiding the high costs of large
new plants and the potential for underutilized capacity. The absence of
emissions significantly reduces permitting time, usually a major time
requirement in scheduling electricity-generating operations. In addition, shop
fabrication on a mass-assembly basis shortens installation time.
15
DYNECO UNIVANE COMPRESSOR AND HYDROGEN CIRCULATOR
We control the rights to two proprietary mechanisms - Orbital Vane(R)
and UniVane devices. UniVane compressors operate without a lubrication system -
the primary requirement for fuel cell compressors and, therefore, the current
focal point of DynEco activities. On the other hand, Orbital Vane machines
require lubricant systems and, therefore, unlike the UniVane, they are
unsuitable for fuel cell applications. Thus, we are focusing current technology
development efforts only on our UniVane technology. Further, DynEco no longer
renews patent annuity/maintenance fees for Orbital Vane patents; this hastens
the transition of these patents to the public domain.
Positive displacement compressors, no matter 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 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. We believe these ideals are closely approximated by our patented UniVane
devices and are the underlying technical reasons that they appear particularly
well suited for many fuel cell applications.
THE COMPRESSOR MARKET OPPORTUNITY FOR DYNECO CORPORATION
Over the past several years, environmental and economic concerns have
led to searches for alternative sources of power for electricity generation and
transportation. Fuel cells have emerged as a leading source of power for these
applications as they are an inherently cleaner, more efficient and reliable
source of power than current generation methods. As previously noted, fuel cells
convert hydrogen and oxygen into electricity through an electrochemical process
that can be twice as efficient as conventional electrical energy production, and
they emit nearly zero emissions while producing heat and water as by-products.
Recently, interest in fuel cell technology has accelerated due to increasing
environmental concerns and energy reliability awareness. In addition, stationary
and automotive fuel cell applications have progressed to the pre-production
stage and have received significant attention in the financial and popular
press. Because the UniVane compressor exhibits high efficiency and the
duty-cycle of fuel cells, especially residential units, is high, this efficiency
becomes important to overall fuel cell system efficiency and commercialization
economics.
DISTRIBUTED GENERATION. Interest in distributed generation (e.g.: a
small power plant for every home) is being driven by a number of important
factors. First, consumers are searching for more reliable, higher quality power
that is unavailable from the existing electric grid. Second, increasing demand
for electricity often outweighs centralized power generation and transmission
resources, and environmental and economic limitations may curtail the ability to
build new power plants and transmission lines. Third, natural gas suppliers are
receptive to new, non-seasonal, markets for their product. Finally, continuing
energy deregulation is presenting new opportunities for distributed generation.
Stationary fuel cell power systems may, in certain market applications, also
provide a lower capital cost for supplementing and expanding the electrical
utility plant, and generally offer more flexibility in distribution strategies.
16
TRANSPORTATION. Several compelling forces are moving the automotive
industry away from traditional gasoline and diesel powered internal combustion
engines. Perhaps the greatest driver is the desire for low and no emission
vehicles. For example, the California Air Resources Board recently reaffirmed
its directive, which would require at least 10% of the automobiles sold in
California to be zero emission by 2003. In addition, recent gasoline price
increases have magnified the desire for alternative energy sources and reduced
dependency on foreign oil. Certainly the events of September 11, 2001,
underscore the importance of weaning America from this dependency and
commercialized fuel cells can fill this role. The U.S. Congress is currently
considering a proposal to raise the Corporate Average Fuel Economy standards for
light trucks and sport utility vehicles. Automotive fuel cell power systems are
2 to 3 times more fuel-efficient than gasoline or diesel powered internal
combustion engines. These characteristics make fuel cells a potentially
attractive option for future vehicles.
We believe our UniVane technology is adaptable to both distributed,
e.g., stationary power generation, and transportation, e.g., automotive fuel
cells. UniVane devices have distinguished themselves in operation at stationary
fuel cell conditions and, due to their demonstrated high efficiency, continue to
attract additional commercial interest. While we have designed large-capacity
UniVane devices that may be suitable for automotive use, none have yet been
built and there is no assurance that they will prove appropriate for that
application.
LICENSE AGREEMENT WITH DR. THOMAS C. EDWARDS
On January 1, 2004, we entered into an Exclusive Patent and Know-How
License Agreement with Thomas C. Edwards, Ph.D., our president and chief
executive officer. Under the license agreement, we have been granted the
exclusive, worldwide, royalty-bearing license to use certain patented technology
owned by Dr. Edwards, as well as the related technical know-how, for the lives
of the respective patents. The patents covered by the license agreement include
Dr. Edwards' patents for UniVane technology. We are permitted to sublicense the
licensed technology, and have sublicensed the licensed technology to
Parker-Hannifin under our exclusive license agreement with Parker-Hannifin.
Under the license agreement, we are required to pay Dr. Edwards a
royalty fee equal to 1% of the sales or lease price of all products sold or
leased by us that incorporate the licensed technology. We are also obligated to
pay Dr. Edwards a royalty fee equal to 10% of gross royalty fees in excess of
$500,000 per calendar year received by us from sublicenses of the licensed
technology. To date, no royalty fees are due and owning to Dr. Edwards under the
license agreement.
The January 2004 license agreement replaces and supercedes a license
agreement that we entered into with Dr. Edwards on March 9, 1992. Our license to
use Dr. Edwards' inventions prior to the January 2004 license agreement was
granted under the 1992 license agreement. As consideration to Dr. Edwards' under
the 1992 license agreement, we issued Dr. Edwards 2,200,000 shares of our common
stock.
LICENSE AGREEMENT WITH PARKER-HANNIFIN CORPORATION
In May 2003, we entered into an exclusive license agreement with
Parker-Hannifin Corporation, a Cleveland, Ohio-based, multinational designer,
manufacturer and distributor of numerous industrial and consumer products, with
2002 net sales in excess of $6 billion.
Under the license agreement, we have granted Parker-Hannifin a
sublicense agreement that grants them exclusive world-wide rights to develop,
manufacture, sell and use our UniVane air compressors and hydrogen circulators,
as well as the technology and patents incorporated in our products, throughout
17
the world. Under the license agreement, we are precluded from manufacturing,
using or selling our air compressors and hydrogen circulators to anyone other
than Parker-Hannifin, and from developing or licensing our technology air
compressor and hydrogen circulator technology to any other party.
We anticipate that our UniVane air compressors and hydrogen circulators
will be sold by Parker-Hannifin both as stand-alone products and as part of
other products manufactured and/or distributed by Parker-Hannifin. The license
agreement continues in force until the later of the end date of the last to
expire patent or the final use of the technology by Parker-Hannifin or its
customer(s). Parker-Hannifin has agreed to use reasonable commercial efforts to
promote the sale of our air compressors and hydrogen circulators.
In consideration for the license grant, Parker-Hannifin has agree to
pay us a royalty for each air compressor and hydrogen circulator incorporating
our UniVane technology and sold by Parker-Hannifin to third parties other than
Parker-Hannifin's subsidiaries and affiliates. The royalty is payable quarterly,
will be calculated as a percentage of the net selling price of the product sold
by Parker-Hannifin, and is based upon attaining the following levels of product
sales:
Annual Number of Products Percentage of Net Selling Price
------------------------- -------------------------------
1 - 50 15%
51 - 250 10%
251 - 10,000 8%
10,000 + 6%
After the third year of the license agreement, royalties will not be
paid on products sold into a country where none of our technology is covered by
a valid patent. In the event that royalty fees from Parker-Hannifin are less
than $100,000 in any calendar year beginning with the calendar year commencing
January 1, 2007, Parker-Hannifin may elect to either (a) pay us the difference
between $100,000 and the amount of royalty fees paid for that year, or (b)
permit the license granted to it to become non-exclusive.
No sales of licensed products have been made to date and we cannot
predict whether Parker-Hannifin will successfully sell licensed products
incorporating our technology.
We have also entered into a product consulting agreement with
Parker-Hannifin to provide consulting services to Parker-Hannifin for developing
and improving products covered by the license agreement. The consulting
agreement is for an initial term of one year terminating May 31, 2004, subject
to automatic month-to-month renewals unless one party provides 90-days notice of
termination to the other. We are entitled to consulting fees of $25,000 per
month under the agreement. Parker-Hannifin is under no obligation to continue to
use our consulting services after May 31, 2004.
Parker-Hannifin has purchased machine tools and special tooling, and
has appointed a specialized engineering and manufacturing team to produce
UniVane compressors. Specifically, they have begun, with our participation, the
manufacture of some 50 new demonstration units for both air compression and
hydrogen circulation.
TECHNOLOGICAL RESEARCH AND DEVELOPMENT AUTHORITY FUNDING AGREEMENT
Effective November 20, 2002, we entered into a funding agreement with
the Technological Research and Development Authority of the State of Florida.
18
Under the funding agreement, we are entitled to receive a maximum of $150,000
from the Authority to provide partial funding for the development and
commercialization of our UniVane compressors and hydrogen circulators. During
2003, we received the entire $150,000 funding commitment under this agreement.
As consideration for the funding, we are required to pay the Authority
a royalty equal to 5% of our revenues from the sale, distribution, lease or
other disposal of our UniVane compressors and hydrogen circulators. The royalty
is payable until such time as total royalty payments equal $450,000. The
agreement is for a term of 10 years.
NEW PRODUCT DEVELOPMENT
Our present business and technical activities are primarily focused
upon aiding Parker-Hannifin in improving UniVane machines and putting them into
production in various sizes and capacities. However, in the event Parker is
unsuccessful in their efforts to manufacture and sell UniVane devices, we intend
to concentrate on the development of new types of systems that would utilize
UniVane devices. New product development may include such uses as aquaculture
and septic system aeration, food processing and manufacturing.
COMPETITION
The creation of successful mechanisms - devices that perform with great
effectiveness tasks of importance to humans - occurs rarely and tend to have
very long periods of usefulness. These mechanical 'idiot savants' include such
mechanisms as the ball bearing, the rotary-hook sewing machine mechanism, the
automatic machine gun, barbed wire, tumbler locks and the reciprocating piston
mechanism (crank/rod/piston/cylinder). The latter mechanism is the heart of
every gasoline and Diesel internal combustion engine ever made. All of the
mechanisms remain essentially unchanged since they were invented.
Nonetheless, there are numerous manufacturers of non-lubricated
compressors that can deliver air to fuel cells. However, conventional dry
compressors have proven, from the standpoint of fuel cell use, to be relatively
inefficient, and of limited longevity and reliability. This is the case
primarily because the moving parts of conventional oil-less compressors rub
against one another (and, again, must do so without a lubrication system) thus
invoking significant friction and wear.
Various types of fans or blowers are used in some fuel cell designs,
but because fans cannot develop significant pressure, such fuel cells must be
larger and more expensive. Although no assurance can be made, it is our belief
that it will remain chronically difficult for conventional devices to compete
effectively with the non-contact UniVane fluid-handling machine. Parker-Hannifin
engineers and technical personnel independently reached much the same conclusion
and that conclusion resulted in their decision to adopt our UniVane technology.
Nevertheless, there is no assurance that others will not create a new device
that is competitive with or superior to the UniVane mechanism.
EMPLOYEES
As of the date of this prospectus, we employed four persons on a
full-time basis, consisting of our chief executive officer/president and
engineer, office manager, facility manager and designer/model maker. We also
employ one person on a part-time/as-needed basis as our electronics expert. None
19
of our employees is a party to a collective bargaining agreement and
relationships with our employees are believed to be good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions held and ages of our
executive officers and directors.
NAME AGE POSITION
---- --- --------
Thomas C. Edwards, Ph.D. 60 Chief Executive Officer,
President and Director
George R. Schell 67 Director
Leonard Sculler 65 Director
Kevin Hooper 40 Director
Thomas C. Edwards, Ph.D., has served as our chief executive officer,
president and a director since 1996 He received his Ph.D. in mechanical
engineering from Purdue University in 1970 where he specialized in thermo
sciences and machine design. Dr. Edwards has received many patents and has
published numerous professionally peer-reviewed technical papers in areas
related to his expertise. He is the only known living person after whom a
thermodynamic cycle is named, the "Edwards Cycle". Processes within this cycle
also appear in fuel cell operation.
George R. Schell has served on our board of directors since 1998. Since
September 2002, Mr. Schell has been retired. He received a Bachelor of Science
degree in civil engineering in 1958 from Virginia Military Institute and an MBA
from the College William and Mary in Williamsburg VA. From February 2002 until
August 2002, he served as our acting chief operating officer. From August 1999
until February 2002, he was a private consultant in the areas of and
distribution and marketing. Mr. Schell founded Schell Supply Corporation, a
Virginia Beach, Virginia-based wholesale plumbing pipe and valve fitting company
in 1968, and served as its president until his retirement in August 1999. Mr.
Schell continues to conduct special projects on behalf of DynEco on an as-needed
basis.
Leonard Sculler has served on our board of directors since June 2003.
Mr. Sculler founded M&R Marking Systems, Inc. in 1960, and served as its chief
executive officer until his retirement in May 2001. During his tenure, M&R
Marking Systems, a privately held company, grew to become the largest
manufacturer of hand-held embossers in the world, and is currently the largest
US manufacturer of hand-held marking products, with sales in over 85 countries.
Mr. Sculler has served as Chairman of the Board of M&R Marking Systems since
1992.
Kevin Hooper has served on our board of directors since June 2003. From
October 2000 to the present, Mr. Hooper served as a project manager in the
United States Air Force at Cape Canaveral Air Force Station. From November 1987
to the present he also serves as managing trustee of The Hooper Partnership, a
privately-held owner of commercial real estate and agricultural property
headquartered in Cocoa, Florida. From June 1998, until October of 2000, Mr.
20
Hooper was employed as a mechanical engineer for Lockheed Martin Astronautics at
the Cape Canaveral Air Force Station. Mr. Hooper has been a registered
professional engineer in the State of Florida since 1994.
All directors serve for one year and until their successors are elected
and qualify. Directors do not presently receive monetary compensation for
serving as directors but have received stock and stock options. Officers are
appointed by the board of directors, and, subject to employment agreements,
their terms of office are at the discretion of the board of directors.
There are no family relationships between any of our officers or
directors.
We do not as yet have an audit committee, nominating committee or a
compensation committee. While we are not currently subject to any regulatory
requirement to do so, we intend to organize these committees in the future,
depending upon our evaluation of factors including applicable regulatory
requirements, company growth and financial resources.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to all compensation
awarded to, earned by or paid by us during each of the three fiscal years ended
December 31, 2002 to: (a) our chief executive officer; and (b) each of our
executive officers who was awarded, earned or we paid more than $100,000 for the
fiscal year ended December 31, 2002:
Fiscal Other Annual LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Options/(#) Payouts Compensation
--------------------------- ------------------------------------------------------------------------------------
Thomas C. Edwards, Ph.D. 2002 $60,000 $-0- -0- -0- $-0- $-0-
Chief Executive Officer 2001 $60,000 $-0- -0- -0- $-0- $-0-
and President 2000 $60,000 $-0- -0- 500,000 $-0- $-0-
Effective January 1, 2004, we entered into an employment agreement with
Thomas C. Edwards, Ph.D., for his services as our chief executive officer and
chief technical officer. The employment agreement is for a term of five years
and provides that we pay Dr. Edwards an annual salary of $60,000 for his first
year of service under the agreement, $70,000 for the second year, $80,000 for
the third year, $90,000 for the fourth year and $100,000 for the final year. Dr.
Edwards will be reimbursed for his expenses incurred in connection with his
services and we have agreed to pay Dr. Edwards' medical, dental and supplemental
insurance in accordance with our policies for such benefits. The employment
agreement precludes Dr. Edwards from disclosing our confidential information to
any third party and provides that Dr. Edwards will not compete with us during
the term of the agreement and for a period of five years thereafter.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information relating to our outstanding
equity compensation plans as of December 31, 2002:
21
Number of Securities Remaining
Number of Securities to Available for Future Issuance
Be Issued Upon Exercise Weighted-average Exercise Under Equity Compensation Plan
Of Outstanding Options, Price of Outstanding Options, (excluding securities reflected
Warrants and Rights Warrants and Rights in column a)
----------------------- ----------------------------- -------------------------------
Equity Compensation
Plans Approved by
Security Holders
2001 Equity Incentive
Plan ................... 0 N/A 1,000,000
1993 Corporate Stock
Option Plan ............ 193,333 $.18 556,667
1993 Advisors Stock
Option Plan ............ 220,000 $.14 530,000
Equity Compensation
Plans not Approved by
Security Holders .......... 4,370,036 $.34 0
--------- ---- ---------
Total ..................... 4,783,369 $.33 2,086,667
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning our grant of
options to purchase shares of our common stock during the fiscal year ended
December 31, 2002 to each person named in the Summary Compensation table.
Percent of
Number of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
---- ------------ -------------- ----------- ---------------
Thomas C. Edwards, Ph.D.
Chief Executive Officer -0- 0% N/A N/A
2001 EQUITY INCENTIVE PLAN
In October 2001, our board of directors authorized and approved the
2001 Equity Incentive Plan. The plan was approved and ratified by our
shareholders on October 25, 2001. Under the 2001 Equity Incentive Plan, we have
reserved a total of 1,000,000 shares of our common stock for issuance upon
exercise of incentive and non-qualified stock options, stock bonuses and rights
to purchase awarded from time-to-time, to our officers, directors, employees and
consultants.
The 2001 Equity Incentive Plan is currently administered by our board
of directors. Under the plan, the board determines which of our employees,
officers, directors and consultants are to be granted
22
awards, as well as the material terms if each award, including whether options
are to be incentive stock options or non-qualified stock options.
Subject to the provisions of the plan, and the Internal Revenue Code
with respect to incentive stock options, the board determines who shall receive
awards, the number of shares of common stock that may be purchased under the
awards, the time and manner of exercise of options and exercise prices. At its
discretion, the board also determines the form of consideration to be received
upon exercise and may permit the exercise price of options granted under the
plan to be paid in whole or in part with previously acquired shares and/or the
surrender of options. The term of options granted under the stock option plan
may not exceed ten years, or five years for an incentive stock option granted to
an optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options may not be less than 100% of the fair market value of
our common stock at the time the option is granted. However, incentive stock
options granted to a 10% holder of our voting stock may not be exercisable at
less than 110% of the fair market value of our common stock on the date of the
grant. The exercise price for non-qualified options will be set by the board, in
its discretion, but in no event shall the exercise price be less than 85% of the
fair market value of our common stock on the date of grant.
Absent registration under the Securities Act of 1933, as amended, or
the availability of an applicable exemption therefrom, shares of common stock
issued upon the exercise of options or as restricted stock awards will be
subject to restrictions on sale or transfer. As of the date of this prospectus,
no options to purchase shares have been granted or are outstanding under the
2001 Equity Incentive Plan.
1993 CORPORATE STOCK OPTION PLAN
In May 1993, our board of directors authorized and approved the 1993
Corporate Stock Option Plan. The plan was approved and ratified by our
shareholders on March 31, 1994. Under the 1993 Corporate Stock Option Plan, we
have reserved a total of 750,000 shares of our common stock for issuance upon
exercise of stock options granted, from time-to-time, to our officers,
directors, and employees.
The Corporate Stock Option Plan is currently administered by our board
of directors. Under the plan, the board determines which of our employees,
officers and directors are to be granted options. The committee or board
determines whether options are to be incentive stock options or non-qualified
stock options.
Subject to the provisions of the plan, and the Internal Revenue Code
with respect to incentive stock options, the board determines who shall receive
options, the number of shares of common stock that may be purchased under the
options, the time and manner of exercise of options and exercise prices. At its
discretion, the board also determines the form of consideration to be received
and may permit the exercise price of options granted under the plan to be paid
in whole or in part with previously acquired shares and/or the surrender of
options. The term of options granted under the stock option plan may not exceed
ten years, or five years for an incentive stock option granted to an optionee
owning more than 10% of our voting stock. The exercise price for incentive stock
options may not be less than 100% of the fair market value of our common stock
at the time the option is granted. However, incentive stock options granted to a
10% holder of our voting stock may not be exercisable at less than 110% of the
fair market value of our common stock on the date of the grant. The exercise
price for non-qualified options will be set by the board, in its discretion, but
in no event shall the exercise price be less than 85% of the fair market value
of our common stock on the date of grant.
23
Absent registration under the Securities Act of 1933, as amended, or
the availability of an applicable exemption therefrom, shares of common stock
issued upon the exercise of options will be subject to restrictions on sale or
transfer. As of the date of this prospectus, options to purchase 143,333 shares
had been granted and are outstanding under the 1993 Corporate Stock Option Plan.
No incentive stock option may be granted under the plan after April 30, 2003.
1993 ADVISORS STOCK OPTION PLAN
In May1993, our board of directors authorized and approved the 1993
Advisors Stock Option Plan. The plan was approved and ratified by our
shareholders on March 31, 1994. Under the 1993 Advisors Stock Option Plan, we
have reserved a total of 750,000 shares of our common stock for issuance upon
exercise of stock options granted, from time-to-time, to our advisors and
consultants.
The Advisors Stock Option Plan is currently administered by our board
of directors. Under the plan, the board determines which of our consultants
and/or advisors are to be granted options. Options granted under the plan are
non-qualified stock options. Subject to the provisions of the plan, the board
determines the number of shares of common stock that may be purchased under the
options, the time and manner of exercise of options and exercise prices. At its
discretion, the board also determines the form of consideration to be received
and may permit the exercise price of options granted under the plan to be paid
in whole or in part with previously acquired shares and/or the surrender of
options. The exercise price for options granted under the plan are set by the
board, at its discretion, but in no event may the exercise price be less than
85% of the fair market value of our common stock on the date of grant.
Absent registration under the Securities Act of 1933, as amended, or
the availability of an applicable exemption therefrom, shares of common stock
issued upon the exercise of options are subject to restrictions on sale or
transfer. As of the date of this prospectus, options to purchase 200,000 shares
had been granted and are outstanding under the 1993 Advisors Stock Option Plan.
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 2002 to each person named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-ENDOPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
-------------------------------------------------------------------------------
Thomas C. Edwards, Ph.D.
Chief Executive Officer -0- $-0- 2,017,384/0 $0/$0
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Section 302A.521, subdivision 2, of the Minnesota Statutes requires
DynEco to indemnify a person made or threatened to be made a party to a
proceeding by reason of the former or present official capacity of the person
with respect to DynEco, against judgments, penalties, fines, including, without
24
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of DynEco, or, in the case of performance by a
director, officer or employee of DynEco involving service as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of DynEco. In addition, Section 302A.521, subdivision 3, requires
payment by DynEco, upon written request, of reasonable expenses in advance of
final disposition of the proceeding in certain instances. A decision as to
required indemnification is made by a disinterested majority of the board of
directors present at a meeting at which a disinterested quorum is present, or by
a designated committee of the board, by special legal counsel, by the
shareholders, or by a court.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
CERTAIN TRANSACTIONS
Effective January 1, 2004, we entered into an Exclusive Patent and
Know-How License Agreement with Thomas C. Edwards, Ph.D., our president and
chief executive officer. The license agreement is more fully described elsewhere
in this prospectus. The license agreement superceded and replaced the 2002
license agreement with Dr. Edwards. During each of the two years ended December
31, 2002, we neither accrued nor made any payments to Dr. Edwards under either
of the license agreements.
On December 11, 2003, we issued 200,000 shares of common stock to each
of Kevin S. Hooper and Leonard Sculler, as consideration for their services as
directors, valued at the contemporaneous cash sales price of $.12 per share.
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us as of the date
of this prospectus relating to the beneficial ownership of shares of our common
stock by:
o each person who is known by us to be the beneficial owner of more
than five percent of our outstanding common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
25
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of DynEco Corporation, 564 International Place,
Rockledge, Florida 32955.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as being owned
by them.
Under securities laws, a person is considered to be the beneficial
owner of securities owned by him (or certain persons whose ownership is
attributed to him) and that can be acquired by him within 60 days from the date
of this Report, including upon the exercise of options, warrants or convertible
securities. We determine a beneficial owner's percentage ownership by assuming
that options, warrants or convertible securities that are held by him, but not
those held by any other person, and which are exercisable within 60 days of the
date of this prospectus, have been exercised or converted.
The table is based on 32,912,978 shares currently outstanding. Except
as otherwise required by SEC rules relating to beneficial ownership, the table
does not give effect to the issuance of up to:
o 4,813,169 shares upon exercise of options that have been granted; or
o 16,185,120 shares in the event of exercise of outstanding warrants.
Name and Address of Amount Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Thomas C. Edwards ................. 6,091,841 shares (1) 17.2%
George R. Schell .................. 921,130 shares (2) 2.8%
Leonard Sculler ................... 220,000 shares *
Kevin Hooper ...................... 229,000 shares *
Officers and Directors
as a group (4 persons) ........... 7,461,971 shares 21.1%
MBN Consulting, LLC ............... 2,000,000 shares (3) 6.1%
3151 Clint Moore Road, #204
Boca Raton, FL 33431
Richard F. Galbraith .............. 2,908,832 shares (4) 8.6%
5313 320th Street
Cushing, MN 56443
Centaurus Capital Corp. ........... 6,000,000 shares (5) 16.3%
27 Reid Street
P.O. Box HM 3051
Hamilton, HM NX, Burmuda
________________________
* Less than 1%.
(1) Includes shares owned by the spouse of Dr. Edwards. Consists of (a)
3,907,447 shares of common stock, (b) 2,017,834 shares issuable upon
exercise of currently exercisable options and (c) 166,650 shares issuable
upon exercise of currently exercisable warrants.
26
(2) Consists of (a) 721,130 shares of common stock and (b) 200,000 shares
issuable upon exercise of currently exercisable options.
(3) Does not include 106,000 shares of common stock or 100,000 shares issuable
upon exercise of outstanding warrants owned by Steven Sanders, the managing
member and a beneficial owner of MBN Consulting, LLC.
(4) Includes shares owned by the spouse of Mr. Galbraith.
(5) Consists of (a) 2,000,000 shares of common stock and (b) 4,000,000 shares
issuable upon exercise of currently exercisable warrants.
DESCRIPTION OF SECURITIES
GENERAL
The following description of our capital stock and provisions of our
Articles of Incorporation is a summary thereof and is qualified by reference to
our Articles of Incorporation, copies of which may be obtained upon request. Our
authorized capital consists of 80,000,000 shares of common stock, par value $.01
per share, and 20,000,000 shares of preferred stock, par value $.01 per share.
As of the date of this prospectus, 32,912,978 shares of common stock and no
shares of preferred stock were issued and outstanding.
COMMON STOCK
Holders of shares of common stock are entitled to share, on a ratable
basis, such dividends as may be declared by the board of directors out of funds,
legally available therefore. Upon our liquidation, dissolution or winding up,
after payment to creditors, our assets will be divided pro rata on a per share
basis among the holders of our common stock.
Each share of common stock entitles the holders thereof to one vote.
Holders of common stock do not have cumulative voting rights which means that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors if they choose to do so, and, in such event, the
holders of the remaining shares will not be able to elect any directors. Our
By-Laws require that only a majority of our issued and outstanding shares need
be represented to constitute a quorum and to transact business at a
stockholders' meeting. Our common stock has no preemptive, subscription or
conversion rights and is not redeemable by us.
PREFERRED STOCK
We are authorized to issue 20,000,000 shares of preferred stock, par
value $.01 per share, having such designations, rights, preferences, powers and
limitations as may be determined by the board of directors at the time of
designation. No preferred stock has yet been designated or issued.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, CO 80401. Our
transfer agent may be reached by telephone at 303-262-0600.
SELLING SECURITY HOLDERS
BACKGROUND OF THE TRANSACTIONS
This prospectus covers the resale of 8,17,000 shares of our common
stock issued or issuable in connection with the following transactions:
27
On November 18, 2003, we completed the sale and issuance of 2,000,000
shares of our common stock and warrants to purchase 4,000,000 additional shares
of common stock to one off-shore investor, for a purchase price of $ 232,500 net
of $7,500 in offering expenses. In connection with this offering, we agreed to
register the resale of the shares of common stock purchased by the investor, as
well as the shares issuable upon exercise of the warrants.
On November 10, 2003, we entered into a three-year consulting agreement
with MBN Consulting, LLC. Under the agreement, MBN has agreed to (a) provide us
with exposure to the retail brokerage community, (b) coordinate meetings with
domestic and international high net worth investors, institutional investors and
money managers and (c) otherwise provide advisory services relating to corporate
development, mergers and acquisitions, corporate finance, and equity and debt
financing transactions. For its services, MBN is entitled to a monthly fee of
$3,000, for a period of 36 months commencing in the month following our receipt
of at least $1,000,000 in funding. MBN also received 2,000,000 shares of our
common stock at the inception of the agreement, and is entitled to compensation
relating to financing transactions consummated by us as a result of MBN's
services. MBN also has the right to designate one member to our board of
directors, but has not yet exercised that right.
On August 1, 2001, we entered into an agreement with Mark Vieno to
perform certain legal services for us, in consideration for which we agreed to
issue Mr. Vieno shares of our common stock having a value of $10,000. Our
obligation to issue the shares was carried on our books as common stock
issuable; however, the shares were never issued. On February 5, 2004, we agreed
with Mr. Vieno to convert the 100,000 shares of common stock issuable into a
five-year option, terminating August 1, 2006 and exercisable at $.10 per share,
to purchase 100,000 shares of our common stock. We agreed with Mr. Vieno to
register the shares issuable upon exercise of the options.
On December 11, 2003, we issued 25,000 shares of our common stock and
50,000 warrants exercisable at $0.18 per share to our counsel, Schneider
Weinberger LLP or persons related to it, as partial consideration for legal
services rendered to us, and we agreed to register the resale of those shares,
including the shares issuable upon exercise of the warrants, by the firm or its
related parties.
The foregoing transactions were completed under the exemption from the
registration requirements of the Securities Act of 1933, including those
afforded by Section 4(2) of that Act, and the rules and regulations promulgated
under that Section.
SELLING SECURITY HOLDERS
The following table sets forth:
o the name of each selling security holder;
o the number or shares of common stock beneficially owned by each
selling security holder as of the date of this prospectus, giving
effect to the exercise of the selling security holders' warrants;
o the number of shares being offered by each selling security holder;
and
o the number of shares to be owned by each selling security holder
following completion of this offering.
28
Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to securities
and includes any securities which the person has the right to acquire within 60
days through the conversion or exercise of options, warrants, promissory notes
and any other security or other right. The information as to the number of
shares of our common stock owned by each selling security holder is based upon
our records and information provided by our transfer agent.
We may amend or supplement this prospectus from time to time to update
the disclosure set forth in the table. Because the selling security holders
identified in the table may sell some or all of the shares owned by them which
are included in this prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling security holders upon termination of the
offering made hereby. We have therefore assumed, for the purposes of the
following table, that the selling security holders will sell all of the shares
owned by them that are being offered hereby, but will not sell any other shares
of our common stock that they presently own.
The shares of common stock being offered have been registered to permit
public sales and the selling security holders may offer all or part of the
shares for resale from time to time. All expenses of the registration of the
common stock on behalf of the selling security holder are being borne by us. We
will receive none of the proceeds of this offering.
Shares Owned
Beneficially Shares Available Shares Percent of
Prior to this Pursuant to Owned After Class
Selling Security Holder Offering this Prospectus Offering After Offering
- ------------------------------------------------------------------------------------------------------------
Centaurus Capital Corp. (1) 6,000,000 6,000,000 -0- -0-
MBN Consulting, LLC (2) 2,000,000 2,000,000 -0- -0-
Susan Schneider (3) 34,250 34,250 -0- *
Steven I. Weinberger (3) 34,250 34,250 -0- *
Sydney Monda (4) 6,500 6,500 -0- *
Mark Vieno 100,000 100,000 -0- -0-
--------- --------- --- ---
TOTAL 8,175,000 8,175,000
========= =========
_________
* Less than 1%.
(1) Consists of 2,000,000 shares of common stock and 4,000,000 shares issuable
upon exercise of currently exercisable warrants. The address of the selling
security holder is 27 Reid Street, P. O. Box HM 3051, Hamilton, HM NX, Bermuda.
David Scott, the director of the selling security holder, makes decisions as to
the voting and disposition of the securities.
(2) Does not include (a) 106,000 shares of common stock or 100,000 shares
issuable upon exercise of outstanding warrants owned by Steven Sanders, the
managing member and a beneficial owner of MBN Consultants, LLC The address of
the selling security holder is 3151 Clint Moore Road, #204, Boca Raton, FL
33431. Steven Saunders makes decisions as to the voting and disposition of the
securities of MBN Consultants, LLC covered by this prospectus.
(3) Consists of 11,750 shares of common stock and 22,500 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 2499 Glades Road, Boca Raton, FL 33431. The selling security holder is
a related party of our counsel, Schneider Weinberger LLP. Each selling security
holder makes its own decisions as to the voting and disposition of the
securities.
29
(4) Consists of 1,500 shares of common stock and 5,000 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 2499 Glades Road, Boca Raton, FL 33431. The selling security holder is
a related party of our counsel, Schneider Weinberger LLP. The selling security
holder makes its own decisions as to the voting and disposition of the
securities.
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under
the Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling security holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling security holders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
resales, broker-dealers may pay to or receive from the purchasers of such
shares, commissions as described above.
The selling security holders may, from time to time, pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under an amendment to this
prospectus under Rule 424 (b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling security holders to include the
pledgee, transferee or other successors-in-interest as selling security holders
under this prospectus.
30
The selling security holders also may transfer the shares of common
stock in other circumstances, in which case the transferees, pledgees or other
successors-in-interest will be the selling beneficial owners for purposes of
this prospectus.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933. The selling security
holders have informed us that they do not have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
We are required to pay all fees and expenses incident to the
registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we had 32,912,978 shares of common
stock issued and outstanding, 19,230,378 of which have been held for one year
and will be available for resale under Rule 144 commencing 90 days following the
date of this prospectus, and 4,025,000 of which are freely transferable pursuant
to this prospectus. The resale of an additional 4,150,000 shares issuable upon
exercise of outstanding warrants and options is also covered by this prospectus.
Not included in the foregoing are 4,713,369 shares issuable upon exercise of
other options that have been granted and 12,135,120 shares issuable on exercise
of other outstanding warrants. They may be resold by their holders as long as
they are covered by a current registration statement or under an available
exemption from registration.
We also have 2,256,000 shares of common stock currently outstanding
(including 873,500 shares held by officers and directors) that are restricted
securities, have not been held for one year and are not covered by an effective
registration statement. These restricted shares will become eligible for sale
under Rule 144 at various times provided that they have been held for at least
one year. In general, Rule 144 permits a shareholder who has owned restricted
shares for at least one year, to sell without registration, within a three month
period, up to one percent of our then outstanding common stock. We must be
current in our reporting obligations in order for a shareholder to sell shares
under Rule 144. In addition, shareholders other than our officers, directors or
5% or greater shareholders who have owned their shares for at least two years
may sell them without volume limitation or the need for our reports to be
current.
We cannot predict the effect, if any, that market sales of common stock
or the availability of these shares for sale will have on the market price of
the shares from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market could adversely affect
market prices for the common stock and could damage our ability to raise capital
through the sale of our equity securities.
31
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Schneider Weinberger LLP, 2499 Glades Road, Suite 108,
Boca Raton, FL 33431. Schneider Weinberger LLP or its related parties own 75,000
shares of our common stock, including 50,000 shares issuable upon exercise of
outstanding warrants, the resale of which is covered by this prospectus.
EXPERTS
The consolidated financial statements of DynEco Corporation as of
December 31, 2002 and for each of the two years then ended appearing in this
prospectus and registration statement have been audited by Salberg & Company,
PA, independent auditors, as set forth in their report thereon appearing
elsewhere in this prospectus, and are included in reliance upon this report
given on the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2
under the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549. Copies of these materials may also be obtained from the
SEC's Public Reference at 450 Fifth Street, N.W., Room 1024, Washington D.C.
20549, upon the payment of prescribed fees. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The registration statement, including all exhibits and schedules and
amendments, has been filed with the SEC through the Electronic Data Gathering,
Analysis and Retrieval system. Following the effective date of the registration
statement relating to this prospectus, we will become subject to the reporting
requirements of the Exchange Act and in accordance with these requirements, will
file annual, quarterly and special reports, and other information with the SEC.
The Internet web site for the SEC is www.sec.gov.
32
DYNECO CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
Consolidated Balance Sheet ...............................................F-2
Consolidated Statements of Operations ....................................F-3
Consolidated Statements of Cash Flows ....................................F-4
Selected Information ..............................................F-5 to F-7
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Independent Auditors' Report .............................................F-8
Consolidated Balance Sheets ..............................................F-9
Consolidated Statements of Operations ...................................F-10
Consolidated Statement of Changes in Shareholders' Equity (Deficit) .....F-11
Consolidated Statements of Cash Flows ...................................F-12
Notes to Consolidated Financial Statements ......................F-13 to F-24
F-1
DYNECO CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
SEPTEMBER 30,
2003
-------------
ASSETS
Current asset:
Cash ...................................................... $ 41,860
Accounts Receivable ....................................... 26,305
Other Current Assets ...................................... 294
-----------
Total current assets ................................. 68,459
Patent rights, net ............................................ 148,651
Property and equipment, net ................................... 77,763
Other assets .................................................. 45
-----------
Total assets ......................................... $ 294,918
===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................... $ 177,234
Accrued compensation ...................................... 284,607
Accrued interest .......................................... 26,174
Current maturity of notes payable - shareholders .......... 35,486
Current maturity of capital lease obligations ............. 9,781
-----------
Total current liabilities ............................... 533,282
Notes payable - shareholders .................................. 124,656
Capital lease obligations ..................................... 40,666
-----------
Total liabilities .................................... 698,604
-----------
Commitments and contingencies ................................. -
Shareholders' equity (deficit):
Common stock, $.01 par value;
28,487,978 shares issued and outstanding ................ 284,880
Common stock issuable ..................................... 1,000
Paid-in capital ........................................... 6,551,252
Accumulated deficit ....................................... (7,240,818)
-----------
Total shareholders' equity (deficit) ................. (403,686)
-----------
Total liabilities and shareholders'
equity (deficit) ................................... $ 294,918
===========
The accompanying selected information is an integral part
of the financial statements.
F-2
DYNECO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues ....................... $ 141,939 $ 53,423 $ 257,447 $ 137,131
Cost of revenues ............... 15,664 50,446 15,664 133,739
------------ ------------ ------------ ------------
Gross Margin .......... 126,275 2,977 241,783 3,392
Operating expenses:
Compensation ................. 39,200 28,014 157,767 104,447
General and administrative ... 91,364 58,604 221,989 184,778
------------ ------------ ------------ ------------
Total operating expenses ... 130,564 86,618 379,756 289,225
------------ ------------ ------------ ------------
Loss from operations ....... (4,289) (83,641) (137,973) (285,833)
Other income (expenses):
Gain on debt settlement ...... - 12,821 7,800 12,821
Interest income .............. 5 33 18 152
Interest expense ............. (3,014) (6,256) (9,247) (22,154)
------------ ------------ ------------ ------------
Total other income (expense) (3,009) 6,598 (1,429) (9,181)
------------ ------------ ------------ ------------
Net loss ................... $ (7,298) $ (77,043) $ (139,402) $ (295,014)
============ ============ ============ ============
Basic and diluted net loss
per share .................... $ - $ - $ - $ (.01)
============ ============ ============ ============
Weighted average number of
common shares outstanding .. 28,487,978 25,470,555 27,927,575 23,812,532
============ ============ ============ ============
The accompanying selected information is an integral part
of the financial statements.
F-3
DYNECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(139,402) $(295,014)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............... 23,130 38,880
Common stock issued for services ............ 42,000 -
Gain on debt settlement ..................... (7,800) (12,821)
(Increase) decrease in current assets:
Accounts receivable ......................... (22,805) (52,523)
Inventory ................................... 1,500 -
Other current assets ........................ 739 (10,148)
Increase (decrease) in current liabilities:
Accounts payable ............................ 26,760 9,290
Accrued expenses ............................ (3,296) 52,066
--------- ---------
Net cash used in operating activities ....... (79,174) (270,270)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patent rights .......................... (18,257) (26,255)
Purchase of property and equipment ................. (7,616) (5,298)
(Increase) decrease in other assets ................ 346 276
--------- ---------
Net cash used in investing activities ....... (25,527) (31,277)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ........................ (2,037) -
Repayment of capital lease obligation .............. (16,868) (18,769)
Issuance of common stock ........................... 141,480 324,600
--------- ---------
Net cash provided by financing activities ... 122,575 305,831
--------- ---------
Net increase (decrease) in cash ........................ 17,874 4,284
Cash - beginning of period ............................. 23,986 3,285
--------- ---------
Cash - end of period ................................... $ 41,860 $ 7,569
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........... $ 12,147 $ 7,154
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2003, the Company issued 60,000 shares of common stock valued at
$7,200 and 120,000 warrants in settlement of $15,000 of accounts payable,
resulting in a $7,800 gain on debt settlement. Additionally, the Company
issued 350,000 shares of common stock valued at $42,000 for services
rendered.
During 2002, the Company refinanced $127,179 of accounts payable through the
issuance of $127,179 of notes payable. Additionally, the Company issued
1,103,240 shares of common stock valued at $100,000 in settlement of
$100,000 of notes payable and issued 270,000 shares of common stock valued
at $32,400 in settlement of accounts payable.
The accompanying selected information is an integral part
of the financial statements.
F-4
DYNECO CORPORATION
SELECTED INFORMATION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
DynEco Corporation ("DynEco" or the "Company") is engaged primarily
in developing and commercializing patented air and hydrogen
compressors, known collectively as UniVanetm devices, for stationary
and automotive fuel cells. During 2003 and 2002, the Company's
wholly-owned subsidiary, DynEco International Inc. was inactive.
Basis of Presentation:
The accompanying unaudited consolidated balance sheets as of
September 30, 2003 and 2002, and the unaudited consolidated
statements of operations and cash flows for the three and nine month
periods ended September 30, 2003 and 2002, include the accounts of
DynEco Corporation and its wholly-owned subsidiary, DynEco
International, Inc. All references to "the Company" in these
financial statements relate 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 and nine months ended September 30, 2003 and
2002. The results for the period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2003. 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, 2002.
Basic and Diluted Net Income (Loss) Per Share:
Basic EPS is computed as net income (loss) available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
warrants and options. As the Company's stock warrants and options
are antidilutive for the periods presented, basic and diluted EPS
are the same.
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.
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
During the nine months ended September 30, 2003 and calendar year 2002,
the Company incurred aggregate net losses of $662,187 and used, in
aggregate, $377,644 of cash in its operations resulting in a working
capital deficit of $(464,823) and an accumulated deficit totaling
$(7,240,818) at September 30, 2003. Additionally, the Company was in
default of the repayment terms on notes payable aggregating $35,000 at
September 30, 2003.
F-5
DYNECO CORPORATION
SELECTED INFORMATION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN (CONTINUED)
Because the Company's developmental contracts generate insufficient
operating capital and given these financial results along with the
Company's expected cash requirements in the remainder of 2003 and 2004,
additional capital investment will be necessary to develop and sustain
the Company's operations.
Through September 30, 2003, the Company has raised an additional
$141,480, net of offering costs of $9,720, in operating funds through
private placements of 1,260,000 shares of common stock, and issued
60,000 shares of its common stock to settle $15,000 of accounts
payable. Additionally, the Company received approximately $131,000 of
funding pursuant to a Technological Research and Development Authority
Funding Agreement and $125,000 of consulting fees in accordance with
the Parker-Hannifin Exclusive Worldwide License Agreement and
Consulting Agreement. Subsequently in November 2003, the Company raised
an additional $240,000 through issuance of 2,000,000 shares of common
stock (Note 4). Additionally, the Company plans to initiate a public
registration of 8,025,000 shares of its common stock in December 2003
in the effort to raise additional capital through the exercise of the
outstanding common stock options and warrants.
Management believes that its plans will allow for adequate funding of
the Company's cash requirements through December 31, 2004, although no
assurance regarding this belief nor the success of these efforts can be
provided at this time.
In the event that management's plans as described above are not
successful, the Company may be required to delay or curtail its fuel
cell compressor development and commercialization programs or be forced
to further reduce its present operations. The financial statements do
not contain any adjustments which might be necessary if the Company is
unable to continue as a going concern.
NOTE 3: COMMON STOCK
The Company has authorized 20,000,000 shares of $.01 preferred stock
and 80,000,000 shares of $.01 par value common stock. At September 30,
2003, there were no shares of preferred stock issued or outstanding.
2003 Issuances of Common Stock:
During the period from January 2003 to September 2003, the Company
issued 1,260,000 shares of common stock and 2,520,000 Class J
warrants for $141,480 of cash, net of offering costs of $9,720,
issued 60,000 shares of common stock and 120,000 Class J warrants in
settlement of $15,000 of accounts payable, issued 240,000 shares of
common stock and 480,000 class J warrants in settlement of common
stock issuable, and issued 350,000 shares of common stock in payment
for services rendered valued at the contemporaneous cash sales price
of $.12 per share.
F-6
DYNECO CORPORATION
SELECTED INFORMATION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 4: SUBSEQUENT EVENTS
Common Stock Issuable:
At September 30, 2003, the Company was obligated to issue an
aggregate of 100,000 shares of its common stock valued at $10,000 in
exchange for 2001 legal services incurred in connection with a
private placement of common stock.
November 2003 Issuances of Common Stock:
During November 2003, the Company issued 2,000,000 shares of common
stock and 4,000,000 Class J warrants for $240,000 of cash.
Additionally, the Company issued 2,000,000 shares of its common
stock to a consulting firm in an attempt to generate awareness of
the Company, under a 36 month consulting agreement.
F-7
Independent Auditors' Report
To the Shareholders and Board of Directors of:
DynEco Corporation:
We have audited the accompanying consolidated balance sheets of DynEco
Corporation and Subsidiary as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for the each of the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the consolidated financial position of DynEco
Corporation and Subsidiary as of December 31, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the two
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, during 2002 and 2001 the Company incurred
aggregate net losses of $716,026 and used, in aggregate, $461,469 of cash in its
operations, resulting in a negative working capital deficit of $(513,704) and an
accumulated deficit totaling $(7,101,416) at December 31, 2002. Additionally,
the Company was in default of the repayment terms on notes payable aggregating
$35,000 at December 31, 2002. These matters raise substantial doubt about its
ability to continue as a going concern. Management's Plan in regards to these
matters is also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
October 15, 2003
F-8
DYNECO CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
----------- -----------
ASSETS
Current assets:
Cash ......................................... $ 23,986 $ 3,285
Accounts Receivable .......................... 3,500 -
Inventory .................................... 1,500 1,500
Other Current Assets ......................... 1,033 4,314
----------- -----------
Total current assets .................... 30,019 9,099
Patent rights, net (Note 3) ...................... 138,494 283,840
Property and equipment, net (Note 4) ............. 85,177 103,383
Other assets ..................................... 391 667
----------- -----------
Total assets ............................ $ 254,081 $ 396,989
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................. $ 165,474 $ 348,662
Accrued compensation ......................... 285,002 255,927
Accrued interest ............................. 29,075 10,195
Other accrued liabilities .................... - 16,385
Current maturities of notes payable -
shareholders (Note 5) ...................... 37,523 160,000
Current maturities of capital lease
obligations (Note 6) ....................... 26,649 22,504
----------- -----------
Total current liabilities .................. 543,723 813,673
Notes payable - shareholders (Note 5) ............ 124,656 -
Capital lease obligations (Note 6) ............... 40,666 61,576
----------- -----------
Total liabilities ....................... 709,045 875,249
----------- -----------
Commitments and contingencies (Note 7) ........... - -
Shareholders' equity (deficit):
Common stock, $.01 par value; 26,577,978
and 21,970,418 issued and outstanding,
respectively (Notes 8 and 12) .............. 265,780 219,704
Common stock issuable (Notes 8 and 12) ....... 3,400 1,000
Paid-in capital .............................. 6,377,272 5,879,667
Accumulated deficit .......................... (7,101,416) (6,578,631)
----------- -----------
Total shareholders' equity (deficit) .... (454,964) (478,260)
----------- -----------
Total liabilities and shareholders'
equity (deficit) ...................... $ 254,081 $ 396,989
=========== ===========
See accompanying notes to consolidated financial statements.
F-9
DYNECO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
Sales ............................................ $ 132,883 $ 86,027
Cost of goods sold ............................... 131,215 84,196
------------ ------------
Gross Profit ...................... 1,668 1,831
Operating expenses:
Compensation ................................. 164,769 92,537
General and administrative ....................... 235,800 212,377
Impairment loss on patent rights (Note 3) .... 144,930 -
------------ ------------
Total operating expenses .......... 545,499 304,914
------------ ------------
Loss from operations .............. (543,831) (303,083)
Other income (expense):
Interest income .............................. 163 820
Interest expense ............................. (25,361) (29,292)
------------ ------------
Total other income (expense) ...... (25,198) (28,472)
------------ ------------
Loss before extraordinary item .... (569,029) (331,555)
Extraordinary item:
Gain on debt extinguishment (Note 11) ........ 46,244 138,314
------------ ------------
Net loss .......................... $ (522,785) $ (193,241)
============ ============
Basic and diluted per share information:
Loss before extraordinary item ............... $ (.02) $ (.02)
Extraordinary item ........................... - .01
------------ ------------
Net loss per share ...................... $ (.02) $ (.01)
============ ============
Weighted average number of
common shares outstanding ...................... 24,576,749 21,082,847
============ ============
See accompanying notes to consolidated financial statements.
F-10
DYNECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
COMMON STOCK TOTAL
COMMON STOCK ISSUABLE SHAREHOLDERS'
--------------------- ---------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- -------- ------- ------ ---------- ----------- ---------
Balance at December 31, 2000 ....... 19,578,247 $195,782 - $ - $5,665,769 $(6,385,390) $(523,839)
Common stock issued for cash, net of
offering costs of $10,000 ........ 2,176,171 21,762 - - 185,858 - 207,620
Common stock issued for debt
(Notes 5 and 8) .................. 216,000 2,160 - - 19,040 - 21,200
Common stock issuable for services
(Note 8) ......................... - - 100,000 1,000 9,000 - 10,000
Net loss ........................... - - - - - (193,241) (193,241)
---------- -------- ------- ------ ---------- ----------- ---------
Balance at December 31, 2001 ....... 21,970,418 219,704 100,000 1,000 5,879,667 (6,578,631) (478,260)
Common stock issued for cash, net of
offering costs of $35,640 ........ 3,146,000 31,460 - - 310,421 - 341,881
Common stock issuable for cash
(Note 8) ......................... - - 240,000 2,400 26,400 - 28,800
Common stock issued for debt
(Notes 5 and 8) .................. 1,311,560 13,116 - - 144,284 - 157,400
Common stock issued for services
(Note 8) ......................... 150,000 1,500 - - 16,500 - 18,000
Net loss ........................... - - - - - (522,785) (522,785)
---------- -------- ------- ------ ---------- ----------- ---------
Balance at December 31, 2002 ....... 26,577,978 $265,780 340,000 $3,400 $6,377,272 $(7,101,416) $(454,964)
========== ======== ======= ====== ========== =========== =========
See accompanying notes to consolidated financial statements.
F-11
DYNECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(522,785) $(193,241)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............... 53,643 52,739
Common stock issued for services ............ 18,000 -
Impairment loss on patents rights ........... 144,930 -
Gain on debt extinguishment ................. (46,244) (138,314)
(Increase) decrease in current assets:
Accounts receivable ......................... (3,500) 2,656
Inventory ................................... - 8,500
Other current assets ................................... 3,281 (4,314)
Increase (decrease) in current liabilities:
Accounts payable ............................ (9,765) (75,544)
Accrued expenses ............................ 63,970 184,519
--------- ---------
Net cash used in operating activities ....... (298,470) (162,999)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patent rights .......................... (29,723) (41,983)
Purchase of property and equipment ................. (5,298) (1,709)
Increase (decrease) in other assets ................ 276 1,600
--------- ---------
Net cash used in investing activities ....... (34,745) (42,092)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation .............. (16,765) (17,687)
Issuance of common stock ........................... 341,881 217,620
Increase in common stock issuable .................. 28,800 -
--------- ---------
Net cash provided by financing activities ... 353,916 199,933
--------- ---------
Net increase (decrease) in cash ........................ 20,701 (5,158)
Cash - beginning of year ............................... 3,285 8,443
--------- ---------
Cash - end of year ..................................... $ 23,986 $ 3,285
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ............. $ 6,481 $ 9,497
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2002, the Company refinanced $127,179 of accounts payable through the
issuance of $127,179 of notes payable (Note 5). Additionally, the Company
issued 1,041,560 shares of common stock valued at $125,000 in settlement of
$125,000 of notes payable (Note 5) and issued 270,000 shares of common stock
valued at $32,400 in settlement of accounts payable.
During 2001, the Company issued 216,000 shares of common stock valued at
$21,200 in settlement of accrued interest (Note 5). Additionally, the
Company is obligated to issue 100,000 shares of common stock valued at
$10,000 in exchange for legal services incurred in connection with a private
placement of common stock (Note 8).
See accompanying notes to consolidated financial statements.
F-12
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
DynEco Corporation ("DynEco" or the "Company") is engaged primarily
in developing and commercializing patented air and hydrogen
compressors, known collectively as UniVanetm devices, for stationary
and automotive fuel cells. During 2002 and 2001, the Company's
wholly-owned subsidiary, DynEco International, Inc., was inactive.
Principles of Consolidation:
For the years ended December 31, 2002 and 2001, the financial
statements include the accounts of DynEco Corporation and its
wholly-owned subsidiary, DynEco International, Inc. All references
to "the Company" in these financial statements relate to the
consolidated entity. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 becomes aware of
collectibility issues, an appropriate amount will be reserved and
charged to operations when that determination is made.
Inventory:
Materials inventory is recorded at the lower of cost (determined on
a first-in, first-out basis) or market value.
Patent Rights:
Patent rights consist of the costs incurred to obtain patent rights
associated with compressor technology. Patent rights are amortized
using the straight-line method over their seventeen to twenty year
life commencing upon patent issuance and the generation of revenues
utilizing the underlying technology.
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.
Impairment of Long-Lived Assets:
The Company records impairment losses of long-lived assets used in
operations when indicators of impairment are present and the
estimated undiscounted cash flows resulting from the use and
eventual disposition of those assets are less than the assets'
carrying amounts. Impairment losses are recorded as the excess of
the carrying amount over the fair value of the long-lived assets.
F-13
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition:
Sales revenues for all customer orders are recognized at the time of
order completion, defined as when all Company manufacturing and
internal inspection obligations related to that order have been
satisfied. This generally occurs upon order shipment.
Stock-Based Compensation:
The Company has three stock-based compensation plans, which are
described more fully in Note 8. The company accounts for its
stock-based compensation plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
2002 2001
--------- ---------
Net loss, as reported .................. $(522,785) $(193,241)
Total stock-based compensation expense,
determined under fair value based
method for all awards, net of related
tax effects ......................... (4,000) (16,000)
--------- ---------
Proforma net loss ...................... $(526,785) (209,241)
========= =========
Basic and diluted per share information:
Net loss per share, as reported .... $ (.02) $ (.01)
========= =========
Net loss per share, pro forma ...... $ (.02) $ (.01)
========= =========
Income Taxes:
Income taxes are provided for tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes, if any. Deferred taxes represent the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Basic and Diluted Net Income (Loss) Per Share:
Basic EPS is computed as net income (loss) available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
warrants and options. As the Company's stock warrants and options
are antidilutive for the periods presented, basic and diluted EPS
are the same.
F-14
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the sale of developmental
compressor products to the Company's customer base consisting of
businesses in the stationary and automotive fuel cell industries
located throughout the world. 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 emerging
fuel cell industry. At December 31, 2002, the entire accounts
receivable balance was due from one customer and was subsequently
collected in full in 2003.
Fair Value of Financial Instruments:
The Company's financial instruments include cash, accounts
receivable, accounts payable, accrued liabilities, notes payable and
capital leases. The fair values of cash, accounts receivable,
accounts payable and accrued liabilities approximated carrying
values due to the short-term nature of these instruments. Fair
values for notes payable and capital leases are not readily
available, but are believed to approximate fair value.
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.
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
During 2002 and 2001, the Company incurred aggregate net losses of
$716,026 and used, in aggregate, $461,469 of cash in its operations
resulting in a working capital deficit of $(513,704) and an accumulated
deficit totaling $(7,101,416) at December 31, 2002. Additionally, the
Company was in default of the repayment terms on notes payable
aggregating $35,000 at December 31, 2002. Because the Company's
developmental contracts generate insufficient operating capital and
given these financial results along with the Company's expected cash
requirements in 2003, additional capital investment will be necessary
to develop and sustain the Company's operations.
Through September 30, 2003, the Company has raised an additional
$141,480, net of offering costs of $9,720, in operating funds through
private placements of 1,260,000 shares of common stock, and issued
60,000 shares of its common stock to settle $15,000 of accounts
payable. Additionally, the Company received approximately $131,000 of
funding pursuant to a Technological Research and Development Authority
Funding Agreement (notes 7 and 12) and $125,000 of consulting fees in
accordance with the Parker-Hannifin Exclusive Worldwide License
Agreement and Consulting Agreement (Note 12). In the fourth quarter of
2003, the Company may raise an additional $240,000 to $300,000 through
issuance of 2,000,000 to 2,500,000 shares of common stock.
F-15
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLAN (CONTINUED)
Management believes that its plans will allow for adequate funding of
the Company's cash requirements through December 31, 2003, although no
assurance regarding this belief nor the success of these efforts can be
provided at this time.
In the event that management's plans as described above are not
successful, the Company may be required to delay or curtail its fuel
cell compressor development and commercialization programs or be forced
to further reduce its present operations. The financial statements do
not contain any adjustments which might be necessary if the Company is
unable to continue as a going concern.
NOTE 3: PATENT RIGHTS
Patent rights are licensed from an officer/director (Notes 7 and 9) and
consisted of the following at December 31:
Estimated
Useful Life
2002 2001 In Years
---- ---- -----------
Patent Rights ................... $189,227 $ 401,492 17-20
Less accumulated amortization ... (50,733) (117,652)
-------- ---------
Patent rights, net .............. $138,494 $ 283,840
======== =========
Amortization expense was $30,139 in 2002 and $27,794 in 2001. Future
patent rights amortization expense is estimated to be approximately
$13,000 per year for the subsequent five-year period commencing in
2003.
During 2002, the Company had an impairment loss of $144,930 for
discontinued patented technology, net of accumulated amortization of
$97,058, concerning non-UniVanetm product devices and applications.
Due to uncertainties inherent in the analysis of future events
regarding technological advancements concerning the Company's patent
rights, and with the developing fuel cell industry, it is reasonably
possible that the actual fair market value of the Company's patent
rights, or its future cash flows related to the patented technology may
ultimately be proven to be less than the Company's recorded value of
patent rights as of December 31, 2002. As a result, the carrying value
of the patent rights may be required to be reduced further, possibly by
a material amount, in the near term.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Estimated
Useful Life
2002 2001 In Years
-------- -------- -----------
Machinery and equipment ......... $126,985 $126,985 3-10
Equipment under capital lease ... 111,398 111,398 7
Office furniture and equipment .. 55,980 50,682 3-10
Leasehold improvements .......... 4,615 4,615 5
-------- --------
F-16
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 4: PROPERTY AND EQUIPMENT (CONTINUED)
Total property and equipment .... 298,978 293,680
Less accumulated depreciation ... (213,801) (190,297)
-------- --------
Property and equipment, net ..... $ 85,177 $103,383
======== ========
Depreciation expense, including that on equipment under capital lease,
was $23,504 in 2002 and $24,945 in 2001. Accumulated depreciation on
equipment under capital lease was $41,706 and $26,157 at December 31,
2002 and 2001, respectively.
NOTE 5: NOTES PAYABLE - SHAREHOLDERS
Notes payable - shareholders consisted of the following at December 31:
2002 2001
-------- ---------
Promissory notes payable - shareholders;
Interest bearing at rates ranging
from 5% to 15 %, unsecured and due at
various dates through August 2007 ....... $162,179 160,000
Less current maturities .................... (37,523) (160,000)
-------- ---------
Long - term portion of notes payable
- shareholders .......................... $124,656 $ -
======== =========
Future maturities of notes payable - shareholders are as follows for
years ending December 31:
2003 $ 37,523
2004 2,005
2005 2,108
2006 2,216
2007 118,327
---------
$ 162,179
=========
At December 31, 2002, the Company was in default of the repayment terms
on notes aggregating $35,000. The Company plans to settle the balance
owing on these notes payable through issuance of common stock in 2003.
During 2002, the Company issued a $127,179 note payable to refinance
$127,179 of accounts payable to a vendor/shareholder (Note 8). This
note bears interest at 5%. Additionally, in 2002, the Company issued
1,041,560 shares of common stock valued at $125,000 and 2,083,120
warrants to purchase common stock at $.18 per share (Note 8), in
settlement of $125,000 of notes payable. In 2001, the Company issued
216,000 shares of common stock valued at $21,200 in payment of accrued
interest to the note holders (Note 8).
NOTE 6: OBLIGATION UNDER CAPITAL LEASE
The Company leases certain machinery and office equipment under capital
leases with various expiration dates through October 2005. Future
minimum lease payments as of December 31, 2002 for each of the next
five years are as follows:
F-17
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 6: OBLIGATION UNDER CAPITAL LEASE (CONTINUED)
2003 ............................................ $ 34,380
2004 ............................................ 25,174
2005 ............................................ 19,697
--------
Total minimum lease payments .................... 79,251
Less amount representing interest ............... (11,936)
--------
Present value of net minimum lease payments ..... 67,315
Less current maturities ......................... (26,649)
--------
Present value of net minimum lease payments ..... $ 40,666
========
NOTE 7: COMMITMENTS AND CONTINGENCIES
Technology License Agreement with Officer/Director:
In 1992, the Company was granted an exclusive license to utilize
certain compressor technology, which includes the current UniVanetm
technology, developed by a current officer/director in exchange for
2,200,000 shares of Company common stock and future royalty payments
based on non-UniVanetm technology application income. The Company is
obligated to pay the officer/director royalties equal to one percent
of sales of non-UniVanetm related products and sublicensed products
and ten percent of any non-UniVanetm royalty income received from
sublicense agreements. The agreement expires in fifteen years from
the 1992 agreement date, or if the technology is not utilized, when
the last underlying patent expires.
In the event that the patent rights expire or become unenforceable,
the Company has the right to discontinue any future royalty payments
and to repurchase all of the remaining Company common stock held by
the officer/director at $.50 per share.
Technological Research and Development Authority Funding Agreement:
During November 2002, the Company entered into an agreement with the
Florida Technological Research and Development Authority (TRDA)
which provides for up to $150,000 in funding for the development and
commercialization of DynEco's UniVanetm compressors and hydrogen
circulators for fuel cell applications. In consideration of the
funding, the Company is obligated to make royalty payments to TRDA
equal to five percent of future UniVanetm-related sales up to an
amount equal to three times the amount DynEco receives from TRDA.
During 2002, There was no funding received. The agreement expires in
November 2012 (Note 12).
Significant Customers, Suppliers and Other Concentrations:
During 2002, the Company made sales to three significant customers
which represent 62.3%, 23.6% and 11.5% of net sales. In 2001, the
Company made sales to two significant customers which represent
52.3% and 44.6% of net sales.
During 2002, the Company purchased materials from two unrelated
suppliers representing 63.4% and 30.8% of total material purchases
during the year. In 2001, the Company purchased materials from two
unrelated suppliers representing 28.9% and 19.0% of total material
purchases during the year.
F-18
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Significant Customers, Suppliers and Other Concentrations (Continued):
As of December 31, 2002, the Company's business is dependent upon
two U.S. patents and one U.S. patent pending, along with several
related foreign patents and foreign patents pending. All patents
issued and pending were issued in the name of a current
officer/director of the Company, which the Company licenses from the
officer/director pursuant to the terms of a Technology License
Agreement (Note 7).
Litigation:
In 2001, a party commenced a legal action against the Company to
collect for damages allegedly sustained to the party's property
which was in the Company's possession during a 1999 compressor
installation. The complaint seeks to recover damages incurred to the
property approximating $13,500 plus interest and legal fees.
The Company has answered this complaint by submitting an invoice for
approximately $20,000 for costs associated with air conditioning
system repair, installation and testing.
As of September 30, 2003, this matter has not been resolved, but it
is management's opinion that the expected outcome of this matter
will not have a material adverse effect on the Company's financial
position or results of operations.
NOTE 8: COMMON STOCK
The Company has authorized 20,000,000 shares of $.01 preferred stock
and 80,000,000 shares of $.01 par value common stock. At December 31,
2002 or 2001, there were no shares of preferred stock issued or
outstanding.
Common Stock Issued for Debt and Services:
During 2002, the Company issued 1,041,560 shares of common stock
valued at $125,000 and 2,083,120 warrants to purchase common stock
at $.18 per share, in settlement of $125,000 of notes payable (Note
5) and issued 270,000 shares of common stock valued at $32,400 in
settlement of accounts payable. Additionally, the Company issued
150,000 shares of common stock valued at $18,000 in exchange for
consulting services.
During 2001, the Company issued 216,000 shares of common stock
valued at $21,200 in settlement of accrued interest. Additionally,
the Company is obligated to issue 100,000 shares of common stock
valued at $10,000 in exchange for legal services incurred in
connection with a private placement of common stock.
All shares of common stock issued in settlement of debt or for
payment of services received were valued at the stated share price
actually received in the respective year's private placement
offerings. During 2002 and 2001, the stated share price received was
$.12 and $.10, respectively.
F-19
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 8: COMMON STOCK (CONTINUED)
Common Stock Issuable:
At December 31, 2002, the Company was obligated to issue an
aggregate of 340,000 shares of common stock in connection with a
2002 receipt of $28,800 for 240,000 shares (Note 12), and for
100,000 shares valued at $10,000 in exchange for 2001 legal services
incurred in connection with a private placement of common stock.
Common Stock Warrants:
At December 31, 2002, the Company had warrants outstanding as
follows:
Common Shares Exercise Price Expiration
Warrant Under Warrant Per Share Date
------- ------------- -------------- --------------
Class I 290,000 $ .50 Oct.-Nov. 2003
Class I 30,000 $ .50 Jan. 2004
Class J 9,215,120 $ .18 June 2007
---------
9,535,120
=========
Stock-Based Compensation Plans:
At December 31, 2002, the Company has three stock-based compensation
plans, as follows: The 1993 Corporate Stock Option Plan, the 1993
Advisors Stock Option Plan, and the 2001 Equity Incentive Plan.
The 1993 Corporate and Advisors Stock Option plans have an aggregate
1,500,000 shares of common stock reserved for issuance under the
plans. The Corporate Plan provides for the issuance of incentive
stock options and nonqualified stock options, whereas, the Advisors
Plan only allows for the issuance of nonqualified stock options.
Pursuant to the plans, the board of directors may grant options to
key individuals at their discretion. Options are granted under the
Corporate and Advisors plans on such terms and at prices as
determined by the compensation committee. All options granted by the
Company have been at prices equal to the current offering's private
placement stated per share prices.
The 2001 Equity Incentive Plan has an aggregate 1,000,000 shares of
common stock reserved for issuance under the plan. The Equity
Incentive Plan provides for the issuance of incentive stock options,
nonstatutory options, stock bonuses, and rights to purchase
restricted stock. The board of directors administers the Plan and
options, stock bonuses and stock rights are granted to key
individuals at their discretion. The maximum option term is ten
years. There have been no stock options, stock bonuses or stock
rights granted under the 2001 Equity Incentive Plan through December
31, 2002.
F-20
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 8: COMMON STOCK (CONTINUED)
Stock-Based Compensation Plans (Continued):
At December 31, 2002, the Company had the following non-qualified
options outstanding and exercisable as follows:
Range of
Exercise Common Shares Weighted Average Weighted Average
Price Under Option Remaining Life Exercise Price
-------- ------------- ---------------- ----------------
$ .12 200,000 6.0 Years $ .12
$ .38 2,970,036 5.9 Years $ .38
$ .38 810,000 4.4 Years $ .38
$ .10 700,000 3.1 Years $ .10
$ .05 33,333 2.5 Years $ .05
$ .38 70,000 0.6 Years $ .38
---------
4,783,369
=========
Of the 4,783,369 common shares under option, all options are
presently exercisable. Additionally, various officers and directors
have been granted a total of 4,370,036 options, all of which are
presently exercisable, which are included in the table above.
A summary of the changes in stock options outstanding during 2002
and 2001 is presented below:
2002 2001
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Options outstanding at
beginning of year 4,683,369 $. 33 3,933,369 $ .37
Options granted 200,000 $ .12 750,000 $ .10
Options exercised - $ - - $ -
Options forfeited (100,000) $(.10) - $ -
--------- ---------
Options outstanding at
end of year 4,783,369 $ .33 4,683,369 $ .33
========= =========
Weighted Average fair
value of options
granted during the
year $.02 $.02
F-21
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 9: RELATED PARTY TRANSACTIONS
During 2002, the Company purchased $12,000 of UniVanetm components from
a supplier that is related to the Company. Two of the supplier's
officers, directors and minority shareholders are also members of
DynEco's board of directors. Both parties believe that the purchase was
made at established supplier pricing with standard industry terms and
that no undue consideration was given to the relationship. At December
31, 2002, there were no amounts due to this related supplier.
Patent rights are licensed from an officer/director of the Company
(Notes 3 and 7).
NOTE 10: INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate
as a result of the following items:
2002 2001
------ ------
Tax benefit computed at the maximum
federal statutory rate .................... (34.0)% (34.0)%
Net (increase) decrease due to various
basis differences in assets and liabilities 12.0 2.3
Net operating loss carryforward .............. 22.0 31.7
----- -----
Income tax provision ......................... - % - %
===== =====
Deferred taxes consisted of the following at December 31:
2002 2001
----------- -----------
Asset:
Net operating loss carryforward .... $ 2,707,000 $ 2,730,000
Other individually immaterial items 111,000 49,000
----------- -----------
Net deferred tax asset before valuation
allowance ............................. 2,818,000 2,779,000
Less valuation allowance .............. (2,818,000) (2,779,000)
----------- -----------
Net deferred tax asset ................ $ - $ -
=========== ===========
For financial statement purposes, no tax benefit has been reported in
2002 or 2001 as the Company has had significant losses since inception
and realization of the tax benefits is uncertain. Accordingly, a
valuation allowance has been established for the full amount of the
deferred tax asset. The change in the valuation allowance was an
increase of $39,000 in 2002 and a decrease of $29,000 in 2001.
F-22
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 10: INCOME TAXES (CONTINUED)
At December 31, 2002, the Company had net operating loss carryforwards
as follows for income tax purposes:
Carryforward Net Operating
Expires December 31 Loss Carryforwards
------------------- ------------------
2003 ................................ $ 72,000
2004 ................................ 522,000
2005 ................................ 550,000
2006 ................................ 206,000
2007 ................................ 236,000
2008 ................................ 274,000
2009 ................................ 716,000
2010 ................................ 1,110,000
2011 ................................ 1,718,000
2012 ................................ 1,017,000
2018 ................................ 436,000
2019 ................................ 392,000
2020 ................................ 195,000
2021 ................................ 180,000
2022 ................................ 337,000
----------
$7,961,000
==========
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 may be 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: EXTRAORDINARY ITEM
In 2002 and 2001, the Company recognized extraordinary gains of $46,244
and $138,314, respectively, related to a settlement and various
statutory expirations of accounts payable.
NOTE 12: SUBSEQUENT EVENTS
2003 Issuances of Common Stock:
During the period from January 2003 to September 2003, the Company
issued 1,260,000 shares of common stock and 2,520,000 Class J
warrants for $141,480 of cash, net of offering costs of $9,720,
issued 60,000 shares of common stock and 120,000 Class J warrants in
settlement of $15,000 of accounts payable, issued 240,000 shares of
common stock and 480,000 class J warrants in settlement of common
stock issuable, and issued 350,000 shares of common stock in payment
for services rendered valued at the contemporaneous cash sales price
of $.12 per share.
F-23
DYNECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
NOTE 12: SUBSEQUENT EVENTS (CONTINUED)
Technological Research and Development Authority Funding Agreement:
During the period from January 2003 to September 2003, the Company
received $131,000 pursuant to a funding agreement with the Florida
Technology Research and Development Authority (Note 7).
Parker-Hannifin Exclusive Worldwide License Agreement and Consulting
Agreement:
During May 2003, the Company granted an exclusive worldwide license
agreement to Parker-Hannifin Corporation (Parker) to manufacture and
market the Company's UniVanetm air compressors and hydrogen
circulators. In consideration of the license, Parker is obligated to
pay the Company a royalty fee on a quarterly basis. The royalty rate
ranges from 15% of the licensed technology's net sales for the first
50 units sold on an annual basis to 6% for units sold in excess of
10,000 annually. Beginning in 2007, the minimum annual royalty fee
is $100,000. If units sold are insufficient to reach the minimum
annual royalty, Parker has the right to remit the difference or the
Agreement converts to a non-exclusive license. This Agreement
expires at the later date of either the last licensed UniVanetm
patent expiration, or the final use of UniVanetm -related technology
by Parker-Hannifin.
Additionally in June 2003, the Company entered into a product
consulting agreement with Parker. In exchange for continued product
development and engineering services from the Company, Parker is
obligated to pay a monthly fee of $25,000 for the first year of
service. In June 2004, the consulting agreement continues on a
month-to-month basis and can be cancelled at Parker's sole
discretion.
F-24
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
Page
Prospectus Summary..........................................3
Risk Factors................................................5
Use of Proceeds.............................................9
Market for Common Stock and Dividend Policy.................9
Forward-Looking Statements.................................10
Management's Discussion and Analysis or Plan of Operation..11
Business...................................................13
Management.................................................20
Executive Compensation.....................................21
Certain Transactions.......................................25
Principal Shareholders.....................................25
Description of Securities..................................27
Selling Security Holders...................................27
Plan of Distribution.......................................30
Shares Eligible for Future Sale............................31
Legal Matters..............................................32
Experts....................................................32
Additional Information.....................................32
Financial Statements......................................F-1
8,175,000 SHARES
DYNECO CORPORATION
PROSPECTUS
________________, 2004
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subdivision 2, of the Minnesota Statutes requires
DynEco to indemnify a person made or threatened to be made a party to a
proceeding by reason of the former or present official capacity of the person
with respect to DynEco, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of DynEco, or, in the case of performance by a
director, officer or employee of DynEco involving service as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of DynEco. In addition, Section 302A.521, subdivision 3, requires
payment by DynEco, upon written request, of reasonable expenses in advance of
final disposition of the proceeding in certain instances. A decision as to
required indemnification is made by a disinterested majority of the board of
directors present at a meeting at which a disinterested quorum is present, or by
a designated committee of the board, by special legal counsel, by the
shareholders, or by a court.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
SEC Registration and Filing Fee....................................... $ 250
Legal Fees and Expenses*.............................................. $15,000
Accounting Fees and Expenses*......................................... $ 5,000
Financial Printing*................................................... $ 1,000
Transfer Agent Fees*.................................................. $ 500
Blue Sky Fees and Expenses*........................................... $ 500
Miscellaneous*........................................................ $ 2,750
-------
TOTAL....................................................... $25,000
=======
* Estimated
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On March 27, 2002, we issued 150,000 shares of our common stock and
warrants to purchase an additional 300,000 shares to two individuals in exchange
for consulting services valued at $18,000.
On July 1, 2002, we issued 1,041,560 shares of our common stock and
warrants to purchase an additional 2,083,120 shares to six note holders (and
current shareholders) in settlement of $125,000 of notes payable.
On July 16, 2002, we issued 150,000 shares of our common stock and
warrants to purchase an additional 300,000 shares to a vendor, in settlement of
$18,000 of accounts payable.
On August 15, 2002, we issued 120,000 shares of our common stock and
warrants to purchase an additional 240,000 shares to our intellectual property
attorney in settlement of $14,400 of accounts payable.
From February 25, 2002 until December 18, 2002, we issued a total of
3,146,000 shares of our common stock and warrants to purchase an additional
6,292,000 shares to 38 accredited investors, for $341,881 of cash, net of
offering costs of $35,640.
On March 14, 2003, we issued 60,000 shares of common stock and warrants
to purchase an additional 120,000 shares in settlement of $15,000 of accounts
payable.
On June 30, 2003, we issued 350,000 shares of common stock to 4
employees for services rendered, valued at the contemporaneous cash sales price
of $.12 per share.
On November 10, 2003, we issued 2,000,000 shares of common stock to a
consulting firm for services rendered, valued at the contemporaneous cash sales
price of $.12 per share.
On November 18, 2003, we issued 2,000,000 shares of common stock and
warrants to purchase an additional 4,000,000 shares, to one offshore investor,
for a purchase price of $240,000.
On December 11, 2003, we issued 400,000 shares of common stock to two
directors as consideration for their services as directors, valued at the
contemporaneous cash sales price of $.12 per share.
On December 11, 2003, we issued 25,000 shares of common stock and
warrants to purchase an additional 50,000 shares to an attorney for services
rendered, valued at the contemporaneous cash sales price of $.12 per share.
From January 6, 2003 until April 7, 2003, we issued a total of
1,260,000 shares of common stock and warrants to purchase an additional
2,520,000 shares to 21 accredited investors, for a purchase price of $151,200.
In each of the foregoing transactions, the recipients of our shares
were either offshore, non-US persons, accredited investors or had such knowledge
in business and financial matters that they were capable of evaluating the risks
and merits of acquiring our shares. Each recipient had access to business and
financial information about us. Each certificate evidencing securities issued in
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the forgoing transactions included a legend to the effect that the securities
were not registered under the Securities Act of 1933, as amended (the "Act"),
and could not be resold absent registration or the availability of an applicable
exemption therefrom. Each of the foregoing transactions was exempt from the
registration requirements of the Act by reason of Section 4(2) and the rules and
regulations thereunder, including Rule 506 of Regulation D.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
----------- -----------------------
3.1(a) Articles of Incorporation*
3.1(b) Articles of Amendment*
3.2 Bylaws*
5.1 Opinion and Consent of Schneider Weinberger LLP*
10.1 2001 Equity Compensation Plan* **
10.2 1993 Corporate Stock Option Plan* **
10.3 1993 Advisors Option Plan* **
10.4 Consulting Agreement with MBN Consulting, LLC*
10.5 License Agreement dated January 1, 2004 between DynEco
Corporation and Dr. Thomas Edwards*
10.6 Funding Agreement dated November 20, 2002 between DynEco
Corporation and the Florida Technological Research and
Development Authority*
10.7 Employment Agreement dated effective January 1, 2004 with
Thomas C. Edwards, Ph.D.* **
10.8 Exclusive Worldwide License Agreement dated May 1, 2003
between DynEco Corporation and Parker-Hannifin Corporation*
23.1 Consent of Schneider Weinberger LLP (see Exhibit 5.1)*
23.2 Consent of Salberg & Co. *
_________________________
* Filed herewith.
** Compensatory agreement.
ITEM 28. UNDERTAKINGS
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "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 Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
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 amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Rockledge, Florida on February 5, 2004.
DYNECO CORPORATION
By: /s/ Thomas C. Edwards, Ph.D.
------------------------------------------------------------
Thomas C. Edwards, Ph.D. President, Chief Executive Officer,
Principal Executive Officer, Chief Financial Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to Form SB-2 registration statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas C. Edwards, Ph.D. President, Principal February 5, 2004
---------------------------- Executive Officer,
Thomas C. Edwards, Ph.D. Chief Executive Officer,
Chief Financial Officer,
Principal Financial Officer
and Director
/s/ George R. Schell Director February 5, 2004
--------------------
George R. Schell
/s/ Leonard Sculler Director February 5, 2004
-------------------
Leonard Sculler
/s/ Kevin Hooper Director February 5, 2004
----------------
Kevin Hooper