AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 2004
Registration No. 333-112585
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________
PRE-EFFECTIVE AMENDMENT NO. 2 TO
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 & Beilly LLP
2200 Corporate Blvd., N.W., Suite 210
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 August 23, 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.
There is no active market for our common stock and we do not know if an
active trading market will develop. The selling security holders will offer and
sell their shares of common stock covered by this prospectus at $.30 per share
until our shares are quoted in the over-the-counter market or on an exchange,
and thereafter, at prevailing market prices or privately negotiated prices.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
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. Our business, financial condition, results of operations and
prospectus may have changed since that date.
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PROSPECTUS SUMMARY
THE COMPANY
We are engaged in the development of high efficiency compressors and
pumps that we believe will have commercial application in various products, the
sale of which will generate revenue for us. The technology underlying our
compressors and pumps was created by Dr. Thomas Edwards, our founder and Chief
Executive Officer. The primary innovation in our compressors and pumps is that
they are lubricant free - they do not require oil to lubricate moving parts, as
do traditional compressors and pumps. We have entered into a patent license
agreement with Dr. Edwards under which we have been granted the exclusive right
to use Dr. Edwards' patented technology to develop products that have commercial
application. We have agreed to pay a royalty fee to Dr. Edwards based upon gross
revenues we generate from sales or leases of products incorporating the licensed
technology.
To date, we have developed a line of compressors and pumps
incorporating Dr. Edwards' technology, known as UniVane(R) devices. We believe
that our UniVane devices can be successfully incorporated into commercially
viable fuel cell applications. Fuel cells are an emerging energy source that is
being developed as an alternative to traditional energy sources such as gasoline
and coal. We believe that our compressors and pumps enable fuel cells to operate
more efficiently and with greater power output, thereby promoting the
development and adoption of compact, economical fuel cell power systems.
In May 2003, we entered into a license agreement with Parker-Hannifin
Corporation, a Fortune 500 industrial company that, among other things, designs,
develops, manufactures and distributes a wide range of industrial and consumer
products and has been engaged in, among other things, the development of fuel
cells as an alternative energy source. Under the license agreement, we have
granted Parker-Hannifin the exclusive right to our UniVane technology. We are
discussing with Parker-Hannifin the development of additional non-fuel cell
applications for our UniVane devices such as in the areas of water quality
improvement and aqua farming through aeration.
To the extent that Parker-Hannifin is successful in developing and
marketing fuel cell devices or other products that incorporate our UniVane
devices, we will be entitled to royalty payments from Parker-Hannifin based upon
product sales. To date, no such products have been commercially produced and we
have not yet received any royalty payments from Parker-Hannifin under the
license agreement. We currently provide consulting services to Parker-Hannifin
to assist in fuel cell development using our UniVane devices, and receive a
monthly consulting fee of $25,000. However, Parker-Hannifin may discontinue our
consulting services on not less than 90-days' prior written notice to us. We are
currently dependent on Parker-Hannifin to commercialize our UniVane devices,
although there is no assurance that commercial applications for our UniVane
devices will be developed or, even if developed, that they will be successfully
marketed.
We are also developing applications for non-fuel cell products
utilizing UniVane technology. However, until such time as we are able to
generate substantial revenues from royalty payments under the license agreement
with Parker-Hannifin, or we are able to secure significant third party
financing, our ability to successfully develop, manufacture and market
commercially viable non-UniVane non-fuel cell products is uncertain.
3
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
This prospectus covers the resale of a total of 8,175,000 shares of our
common stock by selling security holders. Of those shares covered by this
prospectus, 4,025,000 shares have been issued and are currently outstanding. The
remaining 4,150,000 shares are issuable upon the exercise of warrants and
options issued to the selling security holders. Selling security holders may
resell their shares from time-to-time, including through broker-dealers, at
prevailing market prices. We will not receive any proceeds from the resale of
our shares by the selling security holders.
Common Stock:
Outstanding Prior
to this Offering ............... 33,112,978 shares
Outstanding After
this Offering .................. 37,262,978 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
15,885,120 shares issuable upon exercise
of outstanding warrants.
SELECTED FINANCIAL DATA
The following summary of our financial information for the years ended
December 31, 2003 and 2002 has been derived from, and should be read in
conjunction with, our audited financial statements included elsewhere in this
prospectus. Information for the three months ended March 31, 2004 and 2003 has
been derived from, and should be read in conjunction with, our unaudited
financial statements included elsewhere in this prospectus.
Six Months Ended Years Ended
June 30, December 31,
-------- ------------
2004 2003 2003 2002
---- ---- ---- ----
Revenues $ 155,103 $ 26,525 $ 176,500 $ 132,883
Cost of Revenues $ 10,035 -- -- $ 131,215
Operating expenses $ 287,747 $ 249,192 $ 778,372 $ 545,499
Net (loss) $(159,497) $(226,253) $(598,889) $(522,785)
Net (loss) per share $ (.01) $ (.01) $ (.02) $ (.02)
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June 30, 2004 December 31, 2003
------------- -----------------
Working capital (deficit) $(554,601) $(421,551)
Total assets $ 311,629 $ 454,837
Current liabilities $ 657,556 $ 653,075
Total liabilities $ 786,799 $ 794,510
Shareholders' (deficit) $(475,170) $(339,673)
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE
AND INVOLVES A HIGH DEGREE OF RISK. THE FOLLOWING FACTORS ARE BELIEVED BY
MANAGEMENT TO BE ALL OF THE MATERIAL RISKS THAT SHOULD BE CAREFULLY CONSIDERED
BY INVESTORS BEFORE PURCHASING OUR SHARES.
RISKS RELATED TO OUR BUSINESS
WE HAVE ONLY RECENTLY COMMENCED REVENUE-PRODUCING OPERATIONS AND THE LIMITED
INFORMATION AVAILABLE ABOUT US MAKES AN INVESTMENT DECISION 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. Consequently, your investment decision cannot be made based
on our past performance or current trends.
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, 2003 and 2002, we experienced
net losses of $(598,889) and $(522,785), respectively. For the six months ended
June 30, 2004 and 2003, we experienced net losses of $(159,497) and $(226,253),
respectively. In addition, at June 30, 2004, we had an accumulated deficit of
$7,859,802. 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. SINCE WE
WILL CONTINUE TO INCUR LOSSES UNTIL WE ARE ABLE TO GENERATE SUFFICIENT REVENUES
TO OFFSET OUR EXPENSES, AS A RESULT OF WHICH INVESTORS MAY BE UNABLE TO SELL OUR
SHARES AT A PROFIT OR AT ALL.
As of June 30, 2004, our current liabilities were approximately
$657,556 and our current assets were approximately $102,955. As a result, we had
a working capital deficit of approximately $554,601. To date, our operating
expenses have greatly exceeded our limited revenues. We immediately require
substantial working capital, but 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 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. While
Parker-Hannifin is producing demonstration compressors and hydrogen circulators
incorporating our licensed technology, Parker-Hannifin has not yet manufactured
commercial products that incorporate our technology. See "Business - License
Agreement with Parker-Hannifin Corporation." We are entitled to a royalty fee
from Parker-Hannifin Corporation that is based upon its sale of our products and
6
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.
SINCE WE PLACE EXCLUSIVE RELIANCE ON PARKER-HANNIFIN FOR UNIVANE PRODUCT SALES,
OUR REVENUES MAY BE ADVERSELY AFFECTED BECAUSE WE MAY FOREGO OTHER POTENTIAL
SOURCES OF REVENUE PRODUCTION WITHOUT ASSURANCE THAT SALES BY PARKER-HANNIFIN
WILL BE SUBSTANTIAL.
During the term of our exclusive license agreement with
Parker-Hannifin, which, in general, continues for the life of the licensed
patent, we are prohibited from selling our UniVane devices 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 of UniVane devices
to third parties. Moreover, Parker-Hannifin may not be successful in its
marketing efforts.
FUEL CELL TECHNOLOGY HAS NOT YET BECOME A WIDELY ACCEPTED ALTERNATIVE FUEL
SOURCE AND ABSENT MARKET ACCEPTANCE, OR IF ACCEPTANCE IS SUBSTANTIALLY DELAYED,
WE MAY BE FORCED TO CEASE OPERATIONS.
Fuel cell systems represent a relatively new technology and our success
will depend on this technology achieving market acceptance. The development of a
substantial market for fuel cell systems may be impacted by many factors, all of
which are out of our control, including:
o Cost competitiveness of 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.
The success of our license agreement with Parker-Hannifin Corporation,
and our receipt of royalty payments under the license agreement, is dependent
upon the success of Parker-Hannifin in developing and marketing fuel cell
products incorporating the technology we have licensed to them. If a substantial
fuel cell systems market develops slower than anticipated or fails to develop,
Parker-Hannifin's efforts may be delayed or frustrated and we may not be able to
recover the expenses we incurred to develop our fuel cell compressor products,
and we may be forced to cease operations. 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.
Under the license agreement, we are required to pay Dr. Edwards' one percent of
7
revenues we receive from sales of products incorporating the licensed
technology, and ten percent of gross royalty fees in excess of $500,000 per
calendar year received by us from sublicenses of the licensed technology. 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.
CONFLICTS OF INTEREST WERE PRESENT IN THE NEGOTIATION OF OUR LICENSE AGREEMENT
WITH DR. EDWARDS THAT MIGHT HAVE AFFECTED THE TERMS THAT WE ARE NOW BOUND BY.
Dr. Edwards is our founder, Chief Executive Officer and the Chairman of
our Board of Directors. Due to the positions occupied by Dr. Edwards, and his
influence over our operations, conflicts of interest were present in connection
with the negotiation of our license agreement with Dr. Edwards. Since the
license agreement was not negotiated at arms' length, the license agreement may
provide terms less favorable to us than if the agreement had been negotiated by
unrelated parties or if had we obtained a fairness opinion prior to entering
into the license agreement.
WE HAVE NO COMMERCIAL PRODUCT SALES AND ONLY LIMITED SALES OF PROTOTYPES. IF
PARKER-HANNIFIN DOES NOT GENERATE SIGNIFICANT SALES OF OUR PRODUCTS, WE WILL BE
UNABLE TO 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.
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.
WE DEPEND ON THE CONTINUED SERVICES OF OUR CHIEF EXECUTIVE OFFICER, WHOSE
EXPERTISE IS CRITICAL TO OUR SUCCESS, AND WHO WE MAY BE UNABLE TO REPLACE.
Our future success depends upon the continued services of Thomas
Edwards, Ph.D., as our chief executive officer. The expertise of Dr. Edwards in
the technology that is fundamental to our business operations is unique and if
we were to lose Dr. Edwards' services, we will encounter difficulty in replacing
him, which would have a material adverse effect on our business, financial
condition and results of operations. Our loss of the services of Dr. Edwards
would not affect the continued validty of the proprietary technology we license
from Dr. Edwards.
8
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 continue to incur
operating expenses, including executive and staff salaries, lease obligations
and costs associated with our in-house product development efforts, but we have
not yet received royalty payments from Parker-Hannifin under our license
agreement with them. Until such time, if ever, as we begin to receive a royalty
income stream from Parker-Hannifin, we will continue to be dependent upon our
receipt of third-party 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 active operations until such time, if ever, as we
receive royalty income from Parker-Hannifin.
THIS PROSPECTUS PERMITS SELLING SECURITY HOLDERS TO RESELL THEIR SHARES. IF THEY
DO SO, THE MARKET PRICE FOR OUR SHARES MAY FALL AND PURCHASERS OF OUR SHARES MAY
BE UNABLE TO RESELL THEM.
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 NO ACTIVE TRADING MARKET FOR OUR SHARES AND IF AN ACTIVE TRADING MARKET
DOES NOT DEVELOP, PURCHASERS OF OUR SHARES MAY BE UNABLE TO PUBLICLY RESELLING
THEM.
There is no active trading market for our shares and we do not know if
an active trading market will develop. An active market will not develop unless
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 be unable to sell 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.
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.
9
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
MARKET INFORMATION
There is currently no established trading market for our common stock.
As of the date of this prospectus, there are 33,112,978 shares of our
common stock issued and outstanding. We have also reserved a total of 15,885,120
shares for issuance upon exercise of outstanding common stock purchase warrants,
and 4,713,369 shares upon exercise of outstanding options to purchase shares of
our common stock.
Of the issued and outstanding shares, 18,280,739 shares of our common
stock (4,255,077 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 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.
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.
Our retained earnings deficit currently limits our ability to pay dividends.
SHAREHOLDERS OF RECORD
Our common stock was held of record by approximately 820 shareholders
of record as of June 30, 2004.
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
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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. Our forward-looking
statements in this prospectus are not protected by the safe harbor provisions 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.
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," "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.
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, 2003 and 2002 and the six
months ended June 30, 2004 and 2003, 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
11
circulators, known collectively as UniVane devices. The basic UniVane compressor
technology development has been carried out by DynEco and is based upon the
concepts, innovations and embodiments of the patents Dr. Edwards has licensed to
us. That license agreement was entered into in January 2004, which replaced a
license agreement entered into in 1992. Under the license agreement, we are
required to pay Dr. Edwards one percent of revenues we receive from sales of
products incorporating the licensed technology, and ten percent of gross royalty
fees in excess of $500,000 per calendar year received by us from sublicenses of
the licensed technology. The underlying UniVane patent #6,623,261 filed July 21,
2001 has a term of twenty years and expires on July 21, 2021. During May 2003,
we granted an exclusive, world-wide patent license to Parker-Hannifin
Corporation to further develop, enhance, manufacture and market our UniVane
devices for all product application into which UniVane is incorporated.
Under the license agreement, Parker-Hannifin is responsible for
generating production UniVane compressor engineering drawings and for
manufacturing them in small quantities. As a result, our technical efforts have
been re-directed to generating potentially improved manufacturing design
concepts, decreasing costs, increasing UniVane operational speeds and capacities
and creating initial engineering conceptual layouts for different size UniVanes.
In addition to engineering efforts to improve UniVane machines, we are also
identifying non-fuel cell markets for UniVane compressors and designing systems
that would employ the machines in those markets. Presently, we are designing and
testing aeration systems that could be applied to pond water reclamation and the
aquaculture industry.
We have historically incurred losses primarily resulting from
expenditures related to the research, development, testing and preliminary
marketing of our proprietary technology. To date, no products incorporating our
UniVane technology have been commercially manufactured and we have not yet
generated revenues, including royalty income, from the sale of products
incorporating our UniVane technology. Until we established our relationship with
Parker-Hannifin, we were unable to identify manufacturers who were willing to
aid in the commercialization of products incorporating our UniVane technology.
However, we expect that operating losses will continue until such time as either
our future royalty income generates sufficient revenues to fund continuing
operations or a combination of royalties and profits that may be generated from
the sale of systems, such as aerators, that use UniVane air compressors.
Under the Parker License Agreement, DynEco is being 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
will continue to provide these services to Parker-Hannifin on a monthly basis
until we receive at least 90 days' written notice of Parker-Hannifin's intent to
discontinue our services. Prior to 2003, DynEco was developing and attempting to
commercialize the licensed UniVane technology with its own limited resources. In
2002, our revenues were generated from the sale of compressor prototypes.
CRITICAL ACCOUNTING ESTIMATES
Valuation of Patent Rights
The valuation of patent rights has a material impact on the reported
financial condition and operating performance of the company. 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 lives commencing upon patent issuance and the
generation of revenues utilizing the underlying technology. Future revenues, if
any, generated by these patents will be in the form of royalties from
Parker-Hannifin. There is no assurance that commercial applications will be
developed.
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Due to: (a) uncertainties in the developing fuel cell industry, (b)
inherent risk of competing future technologies, and (c) our reliance on
Parker-Hannifin, it is possible that the company could recognize an impairment
loss of the entire net carrying value of patent rights of $147,299 as of June
30, 2004. If recognized, this loss would be reflected as an operating expense
and increase the stockholders' deficit to $622,469 at June 30, 2004.
The Company recorded and charged to operations impairment losses of $0
and $144,930, relating to patent rights, for the years ended December 31, 2003
and 2002, respectively.
Stock Based Compensation Plans
The Company has three stock based compensation plans. The board of
directors administers these plans and may grant options to key individuals at
their discretion. Terms and prices are to be determined by the compensation
committee. These plans have an aggregate of 2,500,000 shares of common stock
reserved for issuance. Options outstanding were for 943,333 and 843,333 of
shares of common stock at December 31, 2003 and June 30, 2004 respectively.
During the year ended December 31, 2003 and the six months ended June 30, 2004
there were no options granted under any of these plans. Therefore there was no
compensation expense in accordance with the provisions of Accounting Principles
Board Opinion No. 25 and no pro forma disclosures required under the provisions
of SFAS No. 123. If, however, the Company were to grant significant options to
key individuals in the future, there may be an expense, which could be material,
determined under the fair value based method to arrive at pro forma net income
(loss).
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. Revenues for the near term will
depend upon the level of our continued consulting support to Parker-Hannifin and
our receipt of royalty payments, if any, related to the sale of systems that
employ our UniVane technology.
In May 2003, we licensed our UniVane patent rights to the
Parker-Hannifin Corporation. At the same time we commenced providing services
under an associated product consulting agreement with Parker-Hannifin. The
product development and marketing and distribution resources of Parker-Hannifin
are far greater than those of DynEco, and, in the long-term we anticipate that
these resources will enable us to realize a greater level of revenues without
the related costs that we would incur if we were to undertake these activities
on our own. Moreover, our limited resources do not enable us to undertake
performance of these activities.
Our revenues for 2003 were primarily derived from consulting fees under
the agreement with Parker-Hannifin. In 2004, the $25,000 monthly consulting fee
will continue on a month-to-month basis, unless Parker-Hannifin provides us with
at least 90 days' written notice that they intend to discontinue our services.
To date, there have been no sales of UniVane products that generated
any royalty fees. In general, our license agreement with Parker-Hannifin does
not expire until the later to occur of the last licensed UniVane patent
expiration (i.e., July 21, 2021), or the final use of UniVane-related technology
by Parker-Hannifin.
13
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our revenues were $150,000 from consulting fees during the first six
months of 2004 compared with $25,000 in the 2003 period. These fees relate to
the Parker-Hannifin consulting agreement entered into during May 2003. Other
revenues were from prototype sales.
Operating expenses increased 15.4% to $287,747 in 2004 from $249,192 in
2003. Professional fees increased $34,925 due to legal and accounting fees
associated with filing a Form SB-2 Registration Statement and preparation of
relevant financial information.
Our net loss for the 2004 period decreased $66,756 to $159,497 from
$226,253 due to the consulting fee revenues.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Our revenues from consulting fees were $175,000 during 2003 compared to
no such fees in 2002. Prototype sales decreased $131,383 to $1,500 in 2003 from
$132,883 in 2002. This shift in revenue from prototype sales to consulting fees
is a result of our change in operating strategy. We now rely on Parker-Hannifin
for consulting fee income and the commercialization of the licensed technology.
Gross margin increased $174,832 to $176,500 in 2003 from $1,668 in
2002. This improvement is due to the shift to consulting fee income from
low-margin prototype sales.
Operating expenses increased 42.6% to $778,372 in 2003 from $545,499
for 2002. The increase is attributable to our issuance, during 2003, of
2,775,000 shares of common stock valued at $333,000 in exchange for consulting,
legal, directors and employee services. In 2002, we issued 150,000 shares of
common stock valued at $18,000 in exchange for consulting services. During the
years ending December 31, 2003 and 2002,we recognized an impairment loss of $0
and $144,930, respectively, for discontinued patented technology, net of
accumulated amortization of $0 and $97,058, respectively, concerning our earlier
patented Orbital Vane(R) compressor products. The Company was unsuccessful in
commercializing these products and therefore abandoned the Orbital Vane patents
thus relieving their associated costs. Professional fees included in general and
administrative expenses increased $66,492, which is a result of legal costs
associated with securing the Parker-Hannifin and Technological Research and
Development Authority agreements and the financial statement audit fee incurred
in 2003. The $166,381 in additional operating expenses is attributable to
officer's salary, health insurance costs, UniVane compressor development prior
to entering into the agreement with Parker-Hannifin and new computers and
software.
Our net loss increased $76,104 to $598,889 during 2003 from $522,785 in
2002. The increased operating expenses discussed in the prior paragraph more
than offset the increased consulting fee income.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
DynEco Corporation is a developmental stage company. Its financial
condition relies on continuing equity investment until, if ever, Parker-Hannifin
is successful in commercializing the UniVane technology. During 2003 and 2002
equity funding was augmented by prototype sales, consulting fees and funding
from the Technological Research and Development Authority headquartered in
Titusville, Florida.
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From time-to-time, we issue stock to satisfy operating expenses, which
provides us with a form of liquidity. For example, during 2003, we issued 60,000
shares of common stock valued at $7,200 and 120,000 warrants to purchase common
stock at $.18 per share, in settlement of $15,000 of accounts payable. Also
during 2003, we issued 2,775,000 shares of common stock valued at $333,000 in
exchange for consulting, legal, directors and employee services. Due, in part,
to our lack of earnings, our success in attracting additional funding has been
limited to transactions in which our equity is used as currency. In light of the
availability of this type of financing, and the lack of alternative proposals,
our board of directors has determined that the continued use of our equity for
these purposes may be necessary if we are to sustain operations. Equity
financings of the type we have been required to pursue may be dilutive to our
stockholders and may adversely impact the market price for our shares.
In November 2002, the Company entered into an agreement with the
Technological Research and Development Authority which provided $150,000 in
funding for the development and commercialization of DynEco's UniVane
compressors and hydrogen circulators for fuel cell applications. In
consideration of the funding, the Company is obligated to make royalty payments
to the Authority equal to five percent of future UniVane-related sales up to an
amount equal to three times the amount DynEco receives from the Authority.
During 2003, the entire $150,000 funding commitment was received. The agreement
expires in November 2012. We do not anticipate any additional funding from the
Technological Research and Development Authority.
As of June 30, 2004 our primary source of liquidity was $70,834 of cash
and $26,878 of accounts receivable. The working capital deficit was $(554,601).
We had total assets of $311,629, of which long-term assets consisted of $147,299
of patent rights, net, other of $45, and $61,330 of property and equipment, net.
Our liabilities totaling $786,799 included $112,644 of accounts payable,
$308,756 of accrued liabilities, $176,708 loan payable and $59,448 of current
maturities of long-term debt. Total shareholders' deficit was $(475,170). At
June 30, 2004, we had an accumulated deficit of $(7,859,802).
We are in default of the repayment terms on notes payable aggregating
$35,000 at June 30, 2004, and no extension has been granted by the debt holders.
Currently, there have been no actions taken by the debt holders to foreclose
since the notes payable were unsecured. We anticipate settling the balance owing
on these notes payable through issuance of common stock in 2004.
Net cash used in operating activities was $114,805 for the six months
ended June 30, 2004 compared to $192,665 for the same period in 2003. For the
year ended December 31, 2003 net cash used in operations was $285,805 and
$298,470 in 2002. The cash provided by financing activities in 2003 of $494,807
was due to $373,980 from issuance of common stock through various private
placements and $150,000 in a loan from Technological Research and Development
Authority.
Historically, we have relied upon limited revenues from consulting fees
and equity financing in order to fund operations. While these activities have
provided limited resources, they have never resulted in cash flow in excess of
immediately needed funding. Our inability to generate cash flow in excess of
immediately needed funds was, in large part responsible for our decision to
enter into the strategic relationship with Parker-Hannifin as a means to develop
commercially viable products and a potential source of revenue generation.
As of June 30, 2004, and the date of this prospectus, our sources of
internal and external financing are limited. It is not expected that the
internal sources of liquidity will improve until net cash is provided from
operating activities, and until such time, we will rely upon external sources of
liquidity, including additional private placements of our common stock and
exercise of various outstanding stock warrants and stock options. In February
2004, we initiated a public registration of 8,175,000 shares of our common
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stock, comprised of 4,025,000 for shares outstanding and 4,150,000 for shares
issuable to an option holder and warrant holders at an exercise price of $.18
per share. Following the effective date of the registration statement and
listing of our shares on the OTC Bulletin Board, we are hopeful the exposure of
a national exchange might help increase the Company's market capitalization and
encourage the exercise of outstanding warrants. We have no understandings or
commitments from anyone with respect to external financing, and we cannot
predict whether we will be able to secure necessary funding when needed, or at
all. In addition, we may be unsuccessful in securing a listing for our shares on
the OTC Bulletin Board.
We project our current monthly cash flow requirement to be
approximately $40,000. While our cash and anticipated receipt of consulting fees
should be sufficient to satisfy our capital requirements for the next six to
nine months, the $25,000 per month consulting fee we receive from
Parker-Hannifin may be discontinued upon 90 days' written notice after May 2004,
and, even if continued, those fees together with our current 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 six to nine month period to satisfy our capital
requirements. Therefore, we may have to continue to rely on external financing
activities, including the sale of our equity securities, to satisfy our capital
requirements for the foreseeable future. Due, in part, to our lack of earnings,
our success in attracting additional funding has been limited to transactions in
which our equity is used as currency. In light of the availability of this type
of financing, and the lack of alternative proposals, our board of directors has
determined that the continued use of our equity for these purposes may be
necessary if we are to sustain operations. Equity financings of the type we have
been required to pursue may be dilutive to our stockholders and may adversely
impact the market price for our shares. However, we have no commitments for
borrowings or additional sales of equity, the precise terms upon which we may be
able to attract additional funding is not known at this time, and there can be
no assurance 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. If the
recent increase in oil prices proves to be long lasting, we believe the interest
in fuel cell development will only increase. As previously stated, our future
success is dependent upon the successful development and market acceptance of
fuel cell systems.
BUSINESS
We are engaged in the development of high efficiency compressors and
pumps that we believe will have commercial application in products, the sale of
which will generate revenue for us. The technology underlying our compressors
and pumps was created by Dr. Thomas Edwards, our founder and Chief Executive
Officer, and is the subject of three patents that have been issued by the United
States Patent and Trademark Office. The primary innovation in our compressors
and pumps is that they are lubricant free - they do not require oil to lubricate
moving parts, as do traditional compressors and pumps. We have entered into a
patent license agreement with Dr. Edward under which we have been granted the
exclusive right to use the Dr. Edwards' patented technology to develop products
that have commercial application.
To date, we have developed a line of compressors and pumps
incorporating Dr. Edwards' technology, known as UniVane devices. We believe that
16
our UniVane devices can be successfully incorporated into commercially viable
fuel cell applications. Fuel cells are an emerging energy source that is being
developed as an alternative to traditional energy sources such as gasoline and
coal. We believe that our compressors and pumps enable fuel cells to operate
more efficiently and with greater power output, thereby promoting the
development and adoption of compact, economical fuel cell power systems. Fuel
cells are similar to batteries with the exception that if they are continuously
provided with oxygen from the air and hydrogen fuel, they continue to provide
electricity and, therefore, they do not `run down'. Fuel cells are believed to
be more efficient than traditional energy sources for many reasons, including
that they introduce almost no pollutants into the atmosphere and they utilize
fuel more efficiently than combustion devices.
To date, our limited financial resources have prevented us from
commercializing our UniVane devices into revenue-producing products. In
addition, fuel cell technology has not yet become accepted as an alternative
energy source on a commercial basis and, until recently, we were unable to
attract manufacturers who are willing to devote their resources to alter their
manufacturing processes to accommodate production of our UniVane devices.
However, in May 2003, we entered into a license agreement with Parker-Hannifin
Corporation, a Fortune 500 industrial company that, among other things, designs,
develops, manufactures and distributes a wide range of industrial and consumer
products and has been engaged in, among other things, the development of fuel
cells as an alternative energy source. Under the license agreement, we have
granted Parker-Hannifin the exclusive right to our UniVane technology. We are
discussing with Parker-Hannifin the development of additional applications for
our UniVane devices such as in the areas of water quality improvement and aqua
farming through aeration.
To the extent that Parker-Hannifin is successful in developing and
marketing fuel cell devices or other products that incorporate our UniVane
devices, we will be entitled to royalty payments from Parker-Hannifin based upon
product sales. Non-fuel cell product applications incorporating UniVane
technology being considered for development by Parker-Hannifin include pond
aeration systems, vacuum systems, hydrogen circulators and oxygenation systems.
To date, no such products have been commercially produced and we have not yet
received any royalty payments from Parker-Hannifin under the license agreement.
Further information relating to royalty arrangements with Parker-Hannifin is
discussed below under "License Agreement with Parker-Hannifin Corporation."
We currently provide consulting services to Parker-Hannifin to assist
in fuel cell development using our UniVane devices, and receive a monthly
consulting fee of $25,000. However, Parker-Hannifin may discontinue our
consulting services on not less than 90-days' prior written notice to us. The
$25,000 consulting fee is currently our only source of income. Due to the
exclusive nature of our license agreement with Parker-Hannifin, we are currently
dependent on Parker-Hannifin to commercialize our UniVane devices, although
there is no assurance that commercial applications for our UniVane devices will
be developed or, even if developed, that they will be successfully marketed.
We are also developing non-fuel cell applications utilizing UniVane
technology. However, until such time as we are able to generate substantial
revenues from royalty payments under the license agreement with Parker-Hannifin,
or we are able to secure significant third party financing, our ability to
successfully develop, manufacture and market commercially viable non-UniVane
products is uncertain.
FUEL CELLS
At present, we are devoting substantially all of our efforts to
providing consulting services to Parker-Hannifin Corporation to assist them in
developing fuel cells incorporating our UniVane compressor and hydrogen
generator.
17
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 a more
reliable source of power than current generation methods. Fuel cells convert
hydrogen and oxygen into electricity through a process that can be twice as
efficient as conventional electrical energy production, and they result in
virtually no emissions while producing heat and water as by-products. A fuel
cell is a device that is much like a battery. However, rather than storing
energy in the manner that a battery does, a fuel cell continuously changes the
chemical energy of hydrogen and oxygen into electrical energy and heat. It does
so without combustion.
Recently, interest in fuel cell technology has accelerated due to
increasing environmental concerns and energy reliability awareness. In addition,
some fuel cell applications have progressed to the pre-production stage and have
received significant attention in the financial and popular press. Fuel cells
can be used in stationary applications such as generating electricity or heating
buildings, and for non-stationary applications such as powering vehicles
including automobiles, buses and trains.
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 UniVane technology. Further, DynEco no longer renews
patent annuity/maintenance fees for Orbital Vane patents, which hastens the
transition of these patents to the public domain.
The UniVane compressor and hydrogen circulator provide a flow of oxygen
or hydrogen to other components comprising an entire fuel cell. UniVane
technology can be used for hydrogen circulator pumps, natural gas/air mixing
compressors, cathode air compressors and as a duel compressor for gas and air.
It is a high efficiency device that is designed to offer higher flow at lower
pressures than alternative systems. UniVane devices produce a greater flow while
utilizing about one half the energy of a conventional product.
UniVane compressors consist of a closed stationary cylindrical housing
containing a rotor fitted with a single vane. These rotating parts are suspended
in the housing by non-lubricated ceramic ball bearings so that neither rotating
component actually touches the inner surfaces of the housing. Energy-efficient
non-contact sealing is achieved, and result in essentially no friction or wear
among the parts, even over thousands of hours. These attributes enable the
design and manufacture of subsystems that we believe, for example, can be used
to reliably and efficiently supply air to and circulate hydrogen through fuel
cells.
LICENSE AGREEMENT WITH DR. THOMAS C. EDWARDS
In February 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. The license agreement with Dr.
Edwards covers three patents issued by the United States Patent and Trademark
Office. The patents have expiration dates in September 2023. We are permitted to
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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 license agreement has a term expiring in July 2021, when the last
patent covered by the license agreement expires. The license agreement may be
terminated by a non-defaulting party in the event the other party fails to cure
a default within 90 days of written notice of such default. In addition, we have
the right to terminate the license agreement upon six months' written notice at
any time after 2009. In the event of our bankruptcy, the license agreement shall
terminate and Dr. Edwards will succeed to the rights and obligations under
DynEco's license agreement with Parker-Hannifin Corporation.
The February 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 industrial and products.
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
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 individual products and as part of
systems 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 UniVane air
compressor or hydrogen circulator included in the product sold by
Parker-Hannifin, and is based upon attaining the following levels of product
sales:
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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. The license agreement with Parker-Hannifin will
continue until to the earliest to occur of (a) expiration of the licensed
patent, (b) the final use of the licensed technology by a customer of
Parker-Hannifin, (c) termination of the license agreement by one party due to a
material uncured breach by the other party, (d) termination of the license
agreement by a party due to a bankruptcy or similar proceeding involving the
other party, or (e) the mutual agreement of the parties.
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. This team has commenced the manufacture of 50 demonstration
machines that will test the efficacy of our UniVane air compressors and hydrogen
circulators on both test benches and in operating fuel cells. We also believe
that these compressors can be demonstrated in other applications such as
aeration and natural gas pumping
During the term of our exclusive license agreement with
Parker-Hannifin, we are prohibited from selling our UniVane fuel cell
compressors and hydrogen circulators to any other party. Since, at the present
time, our UniVane fuel cell compressors and hydrogen circulators are our only
products capable of generating revenues, we are substantially dependent upon
Parker-Hannifin for sales of royalty-generating products. However, 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.
SUPPLY AGREEMENT WITH PARKER-HANNIFIN CORPORATION
On August 6, 2004, we entered into a supply agreement with
Parker-Hannifin under which we have agreed to purchase our requirements of
certain compressor products from Parker-Hannifin and Parker-Hannifin has agreed
to sell us our requirements of those products, for resale. The products covered
by the supply agreement are UniVane compressors, products produced by
Parker-Hannifin relating to the sale and installation of UniVane compressors and
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all products utilizing UniVane technology. Under the supply agreement, we will
purchase product from Parker-Hannifin at its standard distributor pricing, as
may be established by Parker-Hannifin from time-to-time. Under the supply
agreement, we have also granted Parker-Hannifin the right of first refusal to
supply us with our requirements of aeration systems incorporating our UniVane
technology for non-fuel cell applications, if Parker-Hannifin demonstrates that
it can supply a system meeting our technical requirements at pricing that is
reasonably competitive with other suppliers.
TECHNOLOGICAL RESEARCH AND DEVELOPMENT AUTHORITY FUNDING AGREEMENT
Effective November 20, 2002, we entered into a funding agreement with
the Technological Research and Development Authority, headquartered in
Titusville, Florida. 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. We are also investigating the
feasibility of incorporating UniVane devices into products other than fuel
cells, such as water aeration and aquaculture and septic system aeration, as
well as manufacturing and food processing. To the extent that new product
development involves UniVane devices, our exclusive license agreement with
Parker-Hannifin grants Parker-Hannifin the exclusive right to develop and
distribute those products. However, under the agreement, we will be entitled to
a royalty payment for each product sold by Parker-Hannifin, so that there is
incentive for us to continue to develop new product applications for our UniVane
devices. In the event Parker is unsuccessful in their efforts to manufacture and
sell UniVane devices, we will likely be forced to cease operations.
RESEARCH AND DEVELOPMENT
For each of the two years ended December 31, 2003 and 2002, we spent
approximately $20,886 and $108,888, respectively, on research and development
activities. Parker-Hannifin incurs additional expenses associated with its
research and development activities. Since the pricing of products incorporating
our technology that may be sold in the future by Parker-Hannifin will be
formulated by Parker-Hannifin without our input, we do not know whether
Parker-Hannifin will pass on research and development costs to its customers.
GOVERNMENT REGULATION
Our principal products and services currently consist of our UniVane
devices and consulting services provided to Parker-Hannifin. We are also engaged
in technology development unrelated to our UniVane devices. None of our
principal products or services requires governmental approvals and we do not
believe or anticipate that existing or probable government regulations will have
a material effect on our business. To the extent that fuel cells or other
21
products developed by Parker-Hannifin are or will be subject to government
regulation, or require or will require governmental approvals, Parker-Hannifin
is responsible for necessary compliance and securing any necessary approvals.
Our current activities do not subject us to the costs or effects of
compliance with environmental laws, rules or regulations. To the extent that
these laws, rules or regulations are applicable to the activities of
Parker-Hannifin, the costs and effects are borne by Parker-Hannifin.
COMPETITION
For reasons discussed elsewhere in this prospectus, we believe that
non-lubricated compressors, such as our UniVane compressors, are more desireable
than conventional lubricated compressors for incorporation into fuel cell
systems. However, there are numerous manufacturers of non-lubricated compressors
that can deliver air to fuel cells. Many of these manufacturers have longer
operating histories than does DynEco and have far greater financial and physical
resources than we do. Among the manufacturers of non-lubricated compressors are
Rieschle Thomas, Becker Pumps Corporation,Gast Manufacturing and Dresser Roots.
We believe that our UniVane compresssors offer the significant
advantage over conventional non-lubricated compressors that 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 non-lubricated compressors rub against one another, 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, fuel cells must be larger, therefore, generally more expensive. We
believe that it will remain difficult for conventional devices to compete
effectively with our non-contact UniVane devices.
We also believe that the strength of the Parker-Hannifin Corporation
name will, through our license agreement with them, provide product development,
manufacturing and marketing capabilities that we would otherwise be unable to
assemble, so as to permit our UniVane devices to be successfully developed and
marketed. However, for this reason, we are dependent upon Parker-Hannifin to
continue to devote its resources to developing our UniVane devices, and, there
is no assurance that Parker-Hannifin will not identify devices competitive with
our UniVane devices and choose to develop fuel cells and other products with
their, and not our, devices. In that event, we will likely be forced to cease
operations.
To the extent that we develop non-fuel cell applications for our
UniVane devices, we will also compete with manufacturers and distributors of
conventional lubricated, as well as non-lubricated compressors. Many
manufacturers of lubricated compressors have longer operating histories and
greater financial and physical resources than we do. While the manufacture and
distribution of non-fuel cell products using our UniVane devices will be subject
to our license agreement with Parker-Hannifin, and, therefore, we will have the
benefit of their manufacturing and marketing capabilities, Parker-Hannifin may
chose to incorporate the lubricated compressors of other companies in their
products, rather than ours. There is no assurance that we can become a
competitive force in the market for lubricated compressors.
PROPERTY
We lease approximately 4,296 square feet of space at 564 International
Place, Rockledge, FL 32955, under a verbal lease with an unaffiliated lessor. We
22
pay rent of $1,500 per month, and make payments for our use of electricity
directly to the power company. The space is used as our corporate offices and as
a laboratory/shop facility. We are advised that the landlord is seeking to sell
the premises and the landlord has verbally agreed to provide us with 30-60 days'
notice if we are required to move. We do not anticipate difficulty in relocating
to comparable facilities should we be required to relocate.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding, nor are we aware of
any legal proceedings being contemplated against us by any governmental
authority. We are not aware of any legal proceeding in which any of our
officers, directors, affiliates or security holders is a party adverse to us or
in which any of them have a material interest adverse to us.
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
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. 61 Chief Executive Officer,
President and Director
George R. Schell 68 Director
Leonard Sculler 66 Director
Kevin Hooper 41 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
23
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.
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, 2003 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, 2003:
Fiscal Other Annual LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Options/(#) Payouts Compensation
--------------------------- -----------------------------------------------------------------------------------
Thomas C. Edwards, Ph.D. 2003 $60,000 $-0- -0- -0- $-0- $-0-
Chief Executive Officer and 2002 $60,000 $-0- -0- -0- $-0- $-0-
President 2001 $60,000 $-0- -0- 500,000 $-0- $-0-
24
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, 2003:
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 ............ 143,333 $.11 606,667
1993 Advisors Stock
Option Plan ............ 200,000 $.12 550,000
Equity Compensation
Plans not Approved by
Security Holders
Options ................ 4,370,036 $.34 0
Warrants ............... 2,643,120 $.18 0
--------- ---- ---------
Total ..................... 7,356,489 $.27 2,156,667
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning our grant of
options to purchase shares of our common stock during the fiscal year ended
December 31, 2003 to each person named in the Summary Compensation table.
25
Percent of
Number of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/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 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.
26
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.
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 May 1993, 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.
27
OTHER PLANS
Other plans includes equity compensation plans not approved by
shareholders. These plans are comprised of options granted and/or warrants
issued to employees and non-employees, including directors, consultants,
advisers, suppliers, vendors, customers and lenders for purposes including to
provide continued incentives, as compensation for services and/or to satisfy
outstanding indebtedness to them.
To date, we have issued options covering 4,370,036 shares of our common
stock and warrants covering 2,643,120 shares of our common stock under equity
plans not approved by shareholders. The options have exercise prices ranging
from $.10 per share to $.38 per share and expiration dates ranging from January
2006 to November 2008. The warrants are exercisable at $.18 per share and expire
on June 30, 2006, except that warrants to purchase 4,000,000 shares expire on
November 30, 2005.
The grants of these options were approved on a case-by-case basis by
the board of directors, and are within the limits of the number of shares that
we are authorized to issue. The grant of these options and warrants were not
authorized by our shareholders. We may, in the future, authorize the grant of
additional options and/or issuance of additional warrants for the foregoing
purposes and other valid corporate purposes.
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 2003 to each person named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
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
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
28
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
DynEco pursuant to the foregoing provisions, we have 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. See "Business - License Agreement with Dr. Thomas C.
Edwards."
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.
On April 27, 2004, we issued 200,000 shares of common stock to George
R. Schell, as consideration for his services as a director, valued at $.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.
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
29
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 33,112,978 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 15,885,120 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) 17.3%
George R. Schell .................. 1,121,130 shares (2) 3.4%
Leonard Sculler ................... 220,000 shares *
Kevin Hooper ...................... 229,000 shares *
Officers and Directors
as a group (4 persons) ......... 7,661,971 shares 21.6%
MBN Consulting, LLC (3) ........... 2,000,000 shares (4) 6.0%
3151 Clint Moore Road, #204
Boca Raton, FL 33431
Richard F. Galbraith .............. 2,908,832 shares (5) 8.8%
5313 320th Street
Cushing, MN 56443
Sausilito Ltd. (6) ................ 3,267,000 shares (7) 9.1%
P. O. Box 150, Design House
Providenciales, Turks & Caicos, BWI
________________________
* 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.
(2) Consists of (a) 921,130 shares of common stock and (b) 200,000 shares
issuable upon exercise of currently exercisable options.
(3) MBN Consulting, LLC is a business consultant, whose sole beneficial owner is
Steven Sanders. Mr. Sanders exercises sole investment and voting powers over
the shares included in the table.
(4) 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.
(5) Includes shares owned by the spouse of Mr. Galbraith.
(6) Sausilito Ltd. is an offshore investor, whose sole beneficial owner is
Bridgette Longshore. Ms. Longshore exercises sole investment and voting
powers over the shares included in the table.
(7) Consists of (a) 3,000,000 shares issuable upon exercise of currently
exercisable warrants and (b) 267,000 shares owned directly by Bridgitte
Longshore, the beneficial owner of Sausilito Ltd.
30
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, 33,112,978 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, and we have
no plans to issue any preferred stock at this time or in the near future.
COMMON STOCK PURCHASE WARRANTS
There are currently outstanding common stock purchase warrants to
purchase an aggregate of 15,885,120 shares of our common stock. The warrants
were issued in connection with equity financing transactions, as well as to
employees and non-employees, including directors, consultants, advisers,
suppliers, vendors, customers and lenders for purposes including to provide
continued incentives, as compensation for services and/or to satisfy outstanding
indebtedness to them. The warrants are exercisable at $.18 per share and expire
on June 30, 2006, except that warrants to purchase 4,000,000 shares expire on
November 30, 2005. We are entitled to call warrants to purchase 11,835,120
shares of common stock, on ten days' prior written notice in the event that our
common stock (a) is included for quotation on the OTC Bulletin Board or any
Nasdaq quotation system and (b) the closing bid price of our common stock is
$.27 or more for 20 consecutive trading days. Any callable warrants not
exercised prior to expiration of the ten day period shall terminate and cease to
be of any further force or effect. TRANSFER AGENT AND REGISTRAR
31
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 8,175,000 shares of our common
stock issued or issuable in connection with the following transactions:
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 Centaurus Capital Corp., an off-shore investor, for a
purchase price of $ 232,500 net of $7,500 in offering expenses. The warrants are
exercisable until November 30, 2005, at an exercise price of $.18 per share.
Centaurus has advised us that in connection with its acquisition of the
shares and warrants on November 18, 2003, it was acting as nominee for three
persons with respect to 1,500,000 shares of common stock. On August 8, 2004, the
nominee relationship between Centaurus and the three persons was terminated and
the 1,500,000 shares were reissued to Blaine Schmidt (as to 400,000 shares),
Avonlea Homes Investments Ltd (as to 600,000 shares) and Corporate Capital Group
Int'l (as to 500,000 shares). On March 24, 2004, Centaurus Capital Corp.
privately transferred warrants to purchase 3,000,000 shares of common stock to
Sausilito Ltd., an unrelated off-shore investor.
We are advised that there are no direct or indirect affiliates between
any of Centaurus Capital Corporation, Sausilito Ltd., Blaine Schmidt, Avonlea
Homes Investments Ltd. and Corporate Capital Group Int'l. Resale of the common
shares and shares of common stock issuable upon exercise of the warrants are
covered by this prospectus.
On August 17, 2004, we entered into an Amended and Restated Business
and Advisory Consulting Agreement with MBN Consulting, LLC. The agreement
replaces and supercedes a consulting agreement dated November 10, 2003 between
DynEco and MBN. Under the amended and restated agreement, MBN has agreed to (a)
advise us with respect to the implementation of short and long range strategic
planning to fully develop and enhance DynEco's assets, resources, products and
services, (b) serving as liaison between DynEco and its shareholders; and
providing such investor relations services as we may request, (c) identifying
and providing advice and consultation in the areas of strategic alliances and
business combinations, including mergers and acquisitions; and preparation for
and attendance at meetings and conferences relating thereto, (d) arranging
meetings between representatives of DynEco and members of the investment
community at which presentations concerning DynEco and its business operations
may be discussed; (e) providing advice and consultation relating to internal
business operations including (i) advice regarding the formation of corporate
goals and their implementation, advice regarding the financial structure of
DynEco and its divisions or subsidiaries, (iii) advice regarding the securing of
debt and/or equity financing and (iv) advice regarding corporate organization
and personnel, (e) serving as liaison between DynEco and its legal and
accounting advisors, and (f) providing such other services as may be mutually
agreed upon by DynEco and MBN. For its services, MBN is entitled to a monthly
fee of $3,000, for a period of 36 months terminating November 10, 2006. The
monthly fees shall accrue commencing September 1, 2004 and shall be payable
32
commencing upon our receipt of combined equity and debt funding from any sources
in an amount of at least $750,000 (of which the parties have agreed that
$250,000 has been received). Under the original consulting agreement, MBN also
received 2,000,000 shares of our common stock as consideration for advising
DynEco in connection with restructuring its board of directors; providing advice
and consultation prior to and in connection with DynEco's relationship with
Parker-Hannifin Corporation, including the May 2003 License Agreement; serving
as liaison to DynEco's shareholders and providing investor relations services;
serving as DynEco's liaison to its financial and legal advisers; providing
administrative support and services to relieve DynEco's chief executive officer
of those responsibilities so that he could attend to his designated duties; and,
providing advice and consultation with respect to new business development.
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, at the
rate of $.10 per share. 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, 2009 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, and that the option exercise price had been pre-paid by reason of his
legal services rendered to us.
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.
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,
33
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) 1,500,000 1,500,000 -0- -0-
MBN Consulting, LLC (2) 2,000,000 2,000,000 -0- -0-
Susan Schneider (3) 34,250 34,250 -0- -0-
Steven I. Weinberger (3) 34,250 34,250 -0- -0-
Sydney Monda (4) 6,500 6,500 -0- -0-
Mark Vieno (5) 220,833 100,000 120,833 *
Sausilito Ltd. (6) 3,267,000 3,000,000 267,000 *
Blaine Schmidt (7) 400,000 400,000 -0- -0-
Avonlea Homes Investments Ltd. (8) 600,000 600,000 -0- -0-
Corporate Capital Group Int'l (9) 500,000 500,000 -0- -0-
--------- --------- ------- ---
TOTAL 8,175,000 8,175,000
========= =========
_________
* Less than 1%.
(1) Consists of 500,000 shares of common stock and 1,000,000 shares issuable
upon exercise of currently exercisable warrants. The address of the selling
security holder is Buckingham Square, 3rd Floor, 720 West Bay Road, P.O. Box
30691 SMB, Grand Cayman, Cayman Islands. Donna A. Trott, the solebeneficial
owner 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 Consultanting, LLC The address of
the selling security holder is 3151 Clint Moore Road, #204, Boca Raton, FL
33431. Steven Sanders makes decisions as to the voting and disposition of the
securities of MBN Consultanting, 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 2200 Corporate Blvd., N.W., Boca Raton, FL 33431. The selling security
holder is a related party of our counsel, Schneider Weinberger & Beilly LLP.
Each selling security holder makes its own decisions as to the voting and
disposition of the securities.
(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 2200 Corporate Blvd., N.W., Boca Raton, FL 33431. The selling security
holder is a related party of our counsel, Schneider Weinberger & BeillyLLP. The
selling security holder makes its own decisions as to the voting and disposition
of the securities.
34
(5) Consists of 20,833 shares owned by Mr. Vieno, 100,000 shares owned by the
spouse of Mr. Vieno and 100,000 shares issuable upon exercise of a currently
exerciseable option.
(6) Consists of (a) 3,000,000 shares of common stock issuable upon exercise of
currently exercisable warrants and (b) 267,000 shares owned directly by
Bridgitte Longshore, the beneficial owner of Sausilito Ltd. The address of the
selling security holder is P. O. Box 150, Design House, Providenciales, Turks &
Caicos Islands, BWI. Audley Williams, trustee, makes decisions as to the voting
and disposition of the securities. The beneficial owner of the selling security
holder is Bridgitte Longshore.
(7) Consists of 400,000 shares of common stock. The address of the selling
security holder is 10086 Hurontario Street, Unit #1, Brampton, Ontario, L7A 1ES,
Canada. Blaine Schmidt makes decisions as to the voting and disposition of the
shares owned by him.
(8) Consists of 600,000 shares of common stock. The address of the selling
security holder is 15466 The Gore Road, RR#3, Caledon East, Ontario, L0N 1E0,
Canada. Michael Steele, the beneficial owner of Avonlea Homes Investments Ltd.,
makes decisions as to the voting and disposition of the shares owned by the
selling security holder.
(9) Consists of 500,000 shares of common stock. The address of the selling
security holder is 277 Great River Road, Great River, NY 11739. Peter Simone,
the beneficial owner of Corporate Capital Group Int'l, makes decisions as to the
voting and disposition of the shares owned by the selling security holder.
DETERMINATION OF OFFERING PRICE
The selling security holders will offer and sell their shares of common
stock covered by this prospectus at $.30 per share until our shares are quoted
in the over-the-counter market or on an exchange, and thereafter, at prevailing
market prices or privately negotiated prices. The initial offering price of $.30
per share was determined arbitrarily and bears no relationship to assets,
revenues, book value or other established criteria of value.
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.
35
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. In the event that shares are resold to
any broker-dealer, as principal, who is acting as an underwriter, we will file a
post-effective amendment to the registration statement of which this prospectus
forms a part, identifying the broker-dealer(s), providing required information
relating to the plan of distribution and filing any agreement(s) with such
broker-dealer(s) as an exhibit. The involvement of a broker-dealer as an
underwriter in the offering will require prior clearance of the terms of
underwriting compensation and arrangements from the Corporate Finance Department
of the National Association of Securities Dealers, Inc.
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.
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.
36
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we had 33,112,978 shares of common
stock issued and outstanding. Of the issued and outstanding shares,
approximately 18,280,739 shares of our common stock (4,255,077 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. Not
included in the foregoing are 4,713,369 shares issuable upon exercise of other
options that have been granted and 15,885,120 shares issuable on exercise of
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.
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.
LEGAL MATTERS
The legality of the securities offered by this prospectus will be
passed upon for us by Dean R. Edstrom, Esq., Attorney-at-Law Professional
Association, Minneapolis, Minnesota, who is acting as special Minnesota counsel
solely for the purpose of opining as to the validity of the securities.
Schneider Weinberger & Beilly LLP, Boca Raton, Florida, will review other
matters for us relating to the registration statement of which this prospectus
forms a part. Members of Schneider Weinberger & Beilly LLP and their affiliates
own an aggregate of 75,000 shares of our common stock, including 50,000 shares
issuable upon the exercise of outstanding common stock purchase warrants, the
resale of which is covered by this prospectus.
EXPERTS
The consolidated financial statements of DynEco Corporation as of
December 31, 2003 and 2002, respectively, and for each of the two years then
ended appearing in this prospectus and registration statement have been audited
by Salberg & Company, PA, Independent Registered Public Accounting Firm, 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.
37
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, and other materials
we file with the SEC, 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 (EDGAR) system. We do not currently file periodic reports
with the SEC; however, following the effective date of the registration
statement relating to this prospectus, we will become a reporting company and
will file annual, quarterly and current reports, and other information with the
SEC. Copies of all of our filings with the SEC may be viewed on the SEC's
Internet web site at http://www.sec.gov. We maintain a website at
http://www.dyneco.com. The information on our website does not form a part of
this prospectus.
For so long as we are a reporting company, we will be required to file
annual reports with the SEC, containing audited financial statements. However,
unless we register our common stock under Section 12(g) of the Exchange Act, we
will not be required to deliver an annual report to security holders. We
currently have no plans to register our common stock under Section 12(g) of the
Exchange Act.
38
DYNECO CORPORATON AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
JUNE 30, 2004
(UNAUDITED)
Consolidated Balance Sheet ..................................................F-2
Consolidated Statements of Operations .......................................F-3
Consolidated Statements of Cash Flows .......................................F-4
Notes to Consolidated Financial Statements ............................F-5 - F-8
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Report of Independent Registered Public Accounting Firm .....................F-9
Consolidated Balance Sheets ................................................F-10
Consolidated Statements of Operations ......................................F-11
Consolidated Statement of Changes in Stockholders' Deficit .................F-12
Consolidated Statements of Cash Flows ......................................F-13
Notes to Consolidated Financial Statements ..........................F-14 - F-28
F-1
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash ....................................................... $ 70,834
Accounts Receivable ........................................ 26,878
Loan Receivable - Employees ................................ 5,243
-----------
Total Current Assets ............................ 102,955
Property and Equipment, net .................................... 61,330
-----------
Other Assets:
Patent rights, net ......................................... 147,299
Other ...................................................... 45
-----------
Total Other Assets .............................. 147,344
Total Assets .................................... $ 311,629
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................... $ 112,644
Accrued compensation ....................................... 281,540
Accrued interest ........................................... 22,225
Other accrued liabilities .................................. 4,991
Loan Payable ............................................... 176,708
Current maturity of notes payable - shareholders ........... 37,133
Current maturity of capital lease obligations .............. 22,315
-----------
Total Current Liabilities ............................. 657,556
Long Term Liabilities:
Notes payable - shareholders, net of current portion ....... 121,533
Capital lease obligations, net of current portion .......... 7,710
-----------
Total Long Term Liabilities ........................... 129,243
Total Liabilities ..................................... 786,799
-----------
Stockholders' Deficit:
Preferred Stock, $.01 par value; 20,000,000 authorized
none issued and outstanding ........................... -
Common stock, $.01 par value; 80,000,000 authorized
33,112,978 issued and outstanding ..................... 331,130
Additional paid-in capital ................................. 7,053,502
Accumulated deficit ........................................ (7,859,802)
-----------
Total Stockholders' Deficit ..................... (475,170)
-----------
Total Liabilities and Stockholders' Deficit ..... $ 311,629
===========
See accompanying notes to unaudited consolidated financial statements.
F-2
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Compressor prototypes ........... $ 5,103 $ 1,525 $ 5,103 $ 1,525
Consulting ...................... 75,000 25,000 150,000 25,000
------------ ------------ ------------ ------------
Total Revenues ............. 80,103 26,525 155,103 26,525
Cost of Revenues
Compressor prototypes ........... 10,035 - 10,035 -
Consulting ...................... - - - -
Total Cost of revenues ..... 10,035 - 10,035 -
------------ ------------ ------------ ------------
Gross Margin ............... 70,068 26,525 145,068 26,525
Operating expenses:
Compensation .................... 42,310 80,307 85,020 118,567
General and administrative ...... 127,718 76,418 202,727 130,625
------------ ------------ ------------ ------------
Total operating expenses ... 170,028 156,725 287,747 249,192
------------ ------------ ------------ ------------
Loss from operations ....... (99,960) (130,200) (142,679) (222,667)
Other income (expenses):
Gain on debt settlement ......... - - - 7,800
Interest income ................. 128 8 149 13
Interest expense ................ (8,407) (8,347) (16,967) (11,399)
------------ ------------ ------------ ------------
Total other income (expense) (8,279) (8,339) (16,818) (3,586)
------------ ------------ ------------ ------------
Net loss ................... $ (108,239) $ (138,539) $ (159,497) $ (226,253)
============ ============ ============ ============
Basic and diluted net loss per share $ - $ - $ (.01) $ (.01)
============ ============ ============ ============
Weighted average number of
common shares outstanding ....... 32,915,176 28,151,165 32,933,857 27,642,729
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
F-3
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(159,497) $(226,253)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .............................. 16,811 15,420
Common stock issued for services ........................... 24,000 42,000
Gain on debt settlement .................................... - (7,800)
Interest accretion on loan payable ......................... 9,290 5,166
(Increase) decrease in current assets:
Accounts receivable ........................................ (1,878) (34,602)
Inventory .................................................. - 1,500
Other current assets ....................................... 1,840 848
Increase (decrease) in current liabilities:
Accounts payable ........................................... 645 14,302
Accrued expenses ........................................... (6,016) (3,246)
--------- ---------
Net cash used in operating activities ...................... (114,805) (192,665)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patent rights ......................................... (2,172) (7,571)
Purchase of property and equipment ................................ - (1,886)
(Increase) decrease in other assets ............................... - 346
--------- ---------
Net cash used in investing activities ...................... (2,172) (9,111)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable ........................................ (989) (1,557)
Repayment of capital lease obligation ............................. (10,641) (12,020)
Loan Payable ...................................................... - 88,983
Issuance of common stock .......................................... - 141,480
--------- ---------
Net cash (used in) provided by financing activities ........ (11,630) 216,886
--------- ---------
Net increase (decrease) in cash ....................................... (128,607) 15,110
Cash - beginning of period ............................................ 199,441 23,986
--------- ---------
Cash - end of period .................................................. $ 70,834 $ 39,096
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest .......................... $ 14,342 $ 9,134
========= =========
See accompanying notes to unaudited consolidated financial statements.
F-4
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America and the rules and regulations of the
United States of America Securities and Exchange Commission for interim
consolidated financial information. Accordingly, they do not include
all the information and footnotes necessary for a comprehensive
presentation of consolidated financial position and results of
operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are
necessary for a fair consolidated financial statement presentation. The
results for the interim period are not necessarily indicative of the
results to be expected for the year.
For further information, refer to the audited consolidated financial
statements and footnotes of the Company for the year ending December
31, 2003 included in the Company's Form SB-2.
NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
DynEco Corporation and Subsidiary ("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 2004, the Company's
wholly-owned subsidiary, DynEco International, Inc., was inactive.
STOCK-BASED COMPENSATION
The Company has three stock-based compensation plans. There were no
grants during the six months ended June 30, 2004 The Company accounts
for stock options issued to employees in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price.
Such compensation amounts are amortized over the respective vesting
periods of the option grant. No stock-based employee compensation cost
is reflected in net income during 2003 and 2002, 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 Company adopted the disclosure provisions of SFAS No. 123
"ACCOUNTING FOR STOCK-BASED COMPENSATION," and SFAS No. 148 "ACCOUNTING
FOR STOCK BASED COMPENSATION - TRANSITION AND DISCLOSURE," which
permits entities to provide pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants
as if the fair-valued based method defined in SFAS No. 123 had been
applied.
The Company accounts for stock options or warrants issued to
non-employees for goods or services in accordance with the fair value
method of SFAS 123. Under this method, the Company records an expense
equal to the fair value of the options or warrants issued. The fair
value is computed using an options pricing model.
F-5
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 as of June 30:
2004 2003
--------- ---------
Net loss, as reported .................................. $(159,497) $(226,253)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects ........................................ - -
--------- ---------
Deduct: Total stock-based compensation expense,
determined under fair value based method for all
awards, net of related tax effects ................. - -
--------- ---------
Proforma net loss ...................................... $(159,497) $(226,253)
========= =========
Basic and diluted per share information:
Net loss per share, as reported .................... $ (.01) $ (.01)
========= =========
Net loss per share, pro forma ...................... $ (.01) $ (.01)
========= =========
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of accounts
receivable. Accounts receivable arose principally from consulting
contract revenues with Parker-Hannifin Corporation in 2004, 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 June 30, 2004,
$25,000 or 93% of the accounts receivable balance was due from one
customer. The Company also recognizes $152,641 or 98% in revenues for
the six months ended June 30, 2004 from the same customer.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per common share (Basic EPS) excludes dilution
and is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the year. Diluted net income
per share (Diluted EPS) reflects the potential dilution that could
occur if stock options or other contracts to issue common stock, such
as convertible notes, were exercised or converted into common stock. At
June 30, 2004, there were approximately 20,970,000 shares potentially
convertible as common stock equivalents outstanding, which may dilute
future earnings per share. There is no calculation of fully diluted
earnings per share in 2004 due to the Company reporting a net loss and
the exercise or conversion of common stock equivalents would have been
anti-dilutive.
NOTE 3 CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
The Company has a net loss of $159,497 and net cash used in operations
of $114,805 for the six months ended June 30, 2004, a working capital
deficiency of $554,601, accumulated deficit of $7,859,802, and a
stockholders' deficiency of $475,170 at June 30, 2004. Additionally,
the Company was in default of the repayment terms on notes payable
aggregating $35,000 at June 30, 2004 and no extension had been granted
by the debt holders.
F-6
Currently, there have been no actions taken by the debt holders to
foreclose since the notes were unsecured. The Company plans to settle
the balance owing on these notes payable through issuance of common
stock in 2004. Because the Company's developmental contracts generate
insufficient operating capital and given these financial results along
with the Company's expected cash requirements in 2004, additional
capital investment will be necessary to develop and sustain the
Company's operations.
In February 2004, the Company initiated a public registration of
8,175,000 shares of common stock, comprised of 4,175,000 for shares
outstanding and 4,000,000 for shares issuable to warrant holders at an
exercise price of $.18 per share.
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 4 NOTES PAYABLE
The Company repaid $989 of notes payable during the six months ended
June 30, 2004.
NOTE 5 CAPITAL LEASES
The Company repaid $10,641 of capital leases during the six months
ended June 30, 2004.
NOTE 6 STOCKHOLDERS' DEFICIENCY
During January 2004, 30,000 stock options expired.
On February 5, 2004, the Company settled an outstanding legal services
agreement from August 1, 2001, in which the holder was owed $10,000
payable with 100,000 shares of issuable common stock, which had been
reflected in the Company's records as common stock issuable. In
February 2004, the Company granted a stock option in lieu of issuing
shares. Under the terms of the option, which expires August 1, 2006,
the holder could exercise an option to purchase 100,000 shares with an
exercise price of $.10 per share. The Company has determined that the
exercise price has been pre-paid but the option has not been exercised
as of the balance sheet date. As a result of this exchange of one
equity instrument for another, there is no additional compensation
expense pursuant to the rules of SFAS No. 123. Accordingly, $1,000 was
reclassified from common stock issuable to additional paid-in capital.
On June 29, 2004, the Company issued 200,000 shares of common stock
having a fair value of $24,000 to its Chairman of the Board of
Directors for services rendered. The shares were valued at $0.12 per
share, which reflects recent cash offering prices of the Company's
common stock since the Company is not yet publicly trading its common
stock (See Note 7).
NOTE 7 RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENT:
On January 1, 2004, the Company entered into an employment agreement
with an individual acting as the Company's Chief Technical Officer and
Chief Executive Officer. Under the terms of the agreement, the
individual will receive a salary as follows:
F-7
Year ended December 31,
-----------------------
2004 $ 60,000
2005 $ 70,000
2006 $ 80,000
2007 $ 90,000
2008 $100,000
TECHNOLOGY LICENSE AGREEMENT AMENDMENT:
During February 2004, the Company was granted an exclusive license to
utilize certain compressor technology, which includes the current
UniVanetm technology, developed by the current Chief Executive Officer
in exchange for future royalty payments based on the underlying
technology-producing income. The Company is obligated to pay the
officer/director quarterly royalties equal to one percent of sales of
related products and sublicensed products and ten percent of any
royalty income received from sublicense agreements. The agreement
expires in December 2009, or upon six months written notice by the
Company. As of June 30, 2004, no payments are due under the terms of
the License Agreement.
On June 29, 2004, the Company issued 200,000 shares of common stock
having a fair value of $24,000 to its Chairman of the Board of
Directors for services rendered (See Note 6).
F-8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of:
DynEco Corporation
We have audited the accompanying consolidated balance sheets of DynEco
Corporation and Subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for each of the two years in the period ended December 31, 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2003 and 2002, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated 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, the Company has a net loss of $598,889 and
net cash used in operations of $285,805 in 2003, a working capital deficiency of
$421,551, accumulated deficit of $7,700,305, and a stockholders' deficiency of
$339,673 at December 31, 2003. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plan in regard to this
matter 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
April 29, 2004
F-9
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
----------- -----------
Current Assets:
Cash ........................................................... $ 199,441 $ 23,986
Accounts Receivable ............................................ $ 25,000 3,500
Inventory ...................................................... - 1,500
Other Current Assets ........................................... 7,083 1,033
----------- -----------
Total Current Assets ................................ 231,524 30,019
----------- -----------
Property and equipment, net (Note 4) ............................... 71,595 85,177
----------- -----------
Other Assets:
Patent rights, net (Note 3) ........................................ 151,673 138,494
Other .............................................................. 45 391
----------- -----------
Total Other Assets .................................. 151,718 138,885
----------- -----------
Total Assets ........................................ $ 454,837 $ 254,081
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable ............................................... $ 116,990 $ 165,474
Accrued compensation ........................................... 290,181 285,002
Accrued interest ............................................... 19,600 29,075
Loan payable (Note 5(A)) ....................................... 167,418 -
Current maturities of notes payable - shareholders (Note 5(B)) . 37,005 37,523
Current maturities of capital lease obligations (Note 6) ....... 21,881 26,649
----------- -----------
Total Current Liabilities ........................... 653,075 543,723
Long Term Liabilities:
Notes payable - shareholders (Note 5(B)) ....................... 122,650 124,656
Capital lease obligations (Note 6) ............................. 18,785 40,666
----------- -----------
Total Long Term Liabilities ......................... 141,435 165,322
Total Liabilities ................................... 794,510 709,045
Commitments and contingencies (Note 7) ............................. - -
Stockholders' Deficit:
Preferred stock, $.01 par value; 20,000,000 authorized
none issued and outstanding ............................... - -
Common stock, $.01 par value; 80,000,000 authorized
32,912,978 and 26,577,978 shares issued and outstanding,
respectively, at December 31, 2003 and 2002 (Note 8) ...... 329,130 265,780
Common stock issuable - 100,000 shares and 340,000 shares,
respectively, at par at December 31, 2003 and 2002 (Note 8) 1,000 3,400
Additional Paid-in capital ..................................... 7,030,502 6,377,272
Accumulated deficit ............................................ (7,700,305) (7,101,416)
----------- -----------
Total Stockholders' Deficit ......................... (339,673) (454,964)
----------- -----------
Total Liabilities and Stockholders' Deficit ......... $ 454,837 $ 254,081
=========== ===========
See accompanying notes to consolidated financial statements.
F-10
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Revenues
Compressor prototypes .................... $ 1,500 $ 132,883
Consulting ............................... 175,000 -
------------ ------------
Total Revenues ...................... 176,500 132,883
Cost of revenues sold ........................ - 131,215
------------ ------------
Gross Profit .................. 176,500 1,668
Operating expenses:
Compensation ............................. 189,172 164,769
General and administrative ............... 589,200 235,800
Impairment loss on patent rights (Note 3) .... - 144,930
------------ ------------
Total operating expenses ...... 778,372 545,499
------------ ------------
Loss from operations .......... (601,872) (543,831)
Other income (expense):
Gain on debt settlement (Note 11) ........ 37,471 46,244
Other income ............................. 25 -
Interest income .............................. 31 163
Interest expense ......................... (34,544) (25,361)
------------ ------------
Total other income, net ....... 2,983 21,046
------------ ------------
Net loss ...................... $ (598,889) $ (522,785)
============ ============
Basic and diluted net loss per share ......... $ (.02) $ (.02)
============ ============
Weighted average number of common shares
outstanding ................................ 28,593,704 24,576,749
============ ============
See accompanying notes to consolidated financial statements.
F-11
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002
COMMON STOCK
COMMON STOCK ISSUABLE TOTAL
--------------------- ----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- -------- -------- ------- ---------- ----------- ---------
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)
Common stock issued for cash, net
of offering costs of $17,220 3,260,000 32,600 - - 341,380 - 373,980
Common stock issued for debt
(Note 8) .................... 60,000 600 - - 6,600 - 7,200
Common stock issued for services
(Note 8) .................... 2,775,000 27,750 - - 305,250 - 333,000
Issuance of Common stock issuable
(Note 8) .................... 240,000 2,400 (240,000) (2,400) - - -
Net loss ......................... - - - - - (598,889) (598,889)
---------- -------- -------- ------- ---------- ----------- ---------
Balance at December 31, 2003 ..... 32,912,978 $329,130 100,000 $ 1,000 $7,030,502 $(7,700,305) $(339,673)
========== ======== ======== ======= ========== =========== =========
See accompanying notes to consolidated financial statements.
F-12
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(598,889) $(522,785)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............... 34,296 53,643
Common stock issued for services ............ 333,000 18,000
Impairment loss on patents rights ........... - 144,930
Gain on debt extinguishment ................. (37,471) (46,244)
Interest accretion on loan payable .......... 17,418 -
(Increase) decrease in current assets:
Accounts receivable ......................... (21,500) (3,500)
Inventory ................................... 1,500 -
Other current assets ................................... (6,050) 3,281
Increase (decrease) in current liabilities:
Accounts payable ............................ (11,013) (9,765)
Accrued expenses ............................ 2,904 63,970
--------- ---------
Net cash used in operating activities ....... (285,805) (298,470)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patent rights .......................... (26,277) (29,723)
Purchase of property and equipment ................. (7,616) (5,298)
Increase in other assets ........................... 346 276
--------- ---------
Net cash used in investing activities ....... (33,547) (34,745)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable ......................... (2,524) -
Repayment of capital lease obligation .............. (26,649) (16,765)
Loan Payable ....................................... 150,000 -
Issuance of common stock ........................... 373,980 341,881
Increase in common stock issuable .................. - 28,800
--------- ---------
Net cash provided by financing activities ... 494,807 353,916
--------- ---------
Net increase in cash ................................... 175,455 20,701
Cash - beginning of year ............................... 23,986 3,285
--------- ---------
Cash - end of year ..................................... $ 199,441 $ 23,986
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ............. $ 26,601 $ 6,481
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2003, the Company issued 60,000 shares of common stock valued at
$7,200 in settlement of $15,000 of accounts payable (Note 8).
During 2002, the Company refinanced $127,179 of accounts payable through the
issuance of $127,179 of notes payable (Note 5(B)), issued 1,041,560 shares
of common stock valued at $125,000 in settlement of $125,000 of notes
payable (Note 5(B)), issued 270,000 shares of common stock valued at $32,400
in settlement of accrued expenses (Note 8), and recognized a $46,244 gain on
statutory expirations of certain accounts payable (Note 11).
See accompanying notes to consolidated financial statements.
F-13
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
DynEco Corporation and Subsidiary ("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.
Principles of Consolidation:
For the years ended December 31, 2003 and 2002, 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.
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.
Significant estimates in 2003 and 2002 include an estimate of the
deferred tax asset valuation allowance, allowance for doubtful
accounts on accounts receivable, amortization period on patent
rights, valuation of patent rights, depreciable lives on equipment
and valuation of stock based compensation.
Cash and cash Equivalents:
For the purpose of the cash flow statement, the Company considers
all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents.
Accounts Receivable:
The Company believes that all accounts receivable are fully
collectible as of December 31, 2003 and 2002. Accordingly, no
allowance for doubtful accounts has been recorded. If management
becomes aware of collectability issues, based on a specific
identification basis due to the low quantity of customers, 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. Inventory on hand as
of December 31, 2003 and 2002 was $0 and $1,500, respectively.
F-14
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
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 which ranges from three to
seven years. Expenditures for additions and improvements are
capitalized, while repairs and maintenance are expensed as incurred.
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. The Company reviews its patent
rights for impairment whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. If the
undiscounted future cash flows of the patent rights are less than
their carrying amounts, their carrying amounts are reduced to fair
value and an impairment loss is recognized. The Company recorded and
charged to operations impairment losses of $0 and $144,930, relating
to patent rights, for the years ended December 31, 2003 and 2002,
respectively.
Impairment of Other Long-Lived Assets:
The Company reviews other long-lived assets and certain identifiable
assets related to those assets for impairment whenever circumstances
and situations change such that there is an indication that the
carrying amounts may not be recoverable. If the undiscounted future
cash flows of the long-lived assets are less than their carrying
amounts, their carrying amounts are reduced to fair value and an
impairment loss is recognized.
Stock-Based Compensation:
The Company has three stock-based compensation plans, which are
described more fully in Note 8. The Company accounts for stock
options issued to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of
the current market price of the underlying stock over the exercise
price. Such compensation amounts are amortized over the respective
vesting periods of the option grant. No stock-based employee
compensation cost is reflected in net income during 2003 and 2002,
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 Company adopted the disclosure provisions of SFAS No. 123
"ACCOUNTING FOR STOCK-BASED COMPENSATION," and SFAS No. 148
"ACCOUNTING FOR STOCK BASED COMPENSATION - TRANSITION AND
DISCLOSURE," which permits entities to provide pro forma net income
(loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied.
The Company accounts for stock options or warrants issued to
non-employees for goods or services in accordance with the fair
value method of SFAS 123. Under this method, the Company records an
expense equal to the fair value of the options or warrants issued.
The fair value is computed using an options pricing model.
F-15
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
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 as of
December 31:
2003 2002
---------- ---------
Net loss, as reported ................................. $ (598,889) $(522,785)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects ....................................... - -
---------- ---------
Deduct: Total stock-based compensation expense,
determined under fair value based method for all
awards, net of related tax effects ................ - (4,000)
---------- ---------
Proforma net loss ..................................... $ (598,889) (526,785)
========== =========
Basic and diluted per share information:
Net loss per share, as reported ................... $ (.02) $ (.02)
========== =========
Net loss per share, pro forma ..................... $ (.02) $ (.02)
========== =========
Revenue Recognition:
The Company follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin 104 for revenue recognition.
In general, the Company records revenue when persuasive evidence of
an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various
revenues streams of the Company:
The Company had two sources of revenues totaling $176,500 during the
year ended December 31, 2003; compressor revenues and contract
consulting revenue.
Compressor revenues totaled $1,500 for 2003 and represented the sale
of two compressors. In 2003, sales revenues for customer orders of
compressors 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 occurs
upon order shipment.
Contract consulting revenue totaled $175,000 for 2003 and related to
the Parker-Hannifin ("Parker") agreement stipulating a monthly fee
of $25,000 per month starting in June 2003. Contract consulting
revenue is recognized for service contracts at the time of
satisfaction of all obligations pursuant to the underlying contract.
In 2002, sales revenues totaled $132,883. Revenues were for customer
orders and were 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 occurs
upon order shipment.
F-16
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
Income Taxes:
The Company accounts for income taxes under the Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement 109").
Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period, which includes the enactment date.
Basic and Diluted Net Income (Loss) Per Share:
Basic net income (loss) per common share (Basic EPS) excludes
dilution and is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the
year. Diluted net income per share (Diluted EPS) reflects the
potential dilution that could occur if stock options or other
contracts to issue common stock, such as convertible notes, were
exercised or converted into common stock. At December 31, 2003,
there were approximately 21,000,000 shares potentially convertible
as common stock equivalents outstanding, which may dilute future
earnings per share. There is no calculation of fully diluted
earnings per share in 2003 or 2002 due to the Company reporting a
net loss and the exercise or conversion of common stock equivalents
would have been anti-dilutive.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of accounts
receivable. Accounts receivable arise principally from consulting
contract revenues with Parker-Hannifin Corporation in 2003 (Note 7),
and in 2002, 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, 2003, the entire accounts receivable balance was due
from one customer and was subsequently collected in full in 2004.
The Company maintains one bank account, which is insured by the FDIC
up to $100,000. The amount in excess of the insured limit was
$106,281 as of December 31, 2003.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments
for which it is practicable to estimate the value. For purpose of
this disclosure, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
F-17
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
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 the carrying values are believed to approximate fair
value.
Reclassifications:
Certain amounts in the year 2002 consolidated financial statements
have been reclassified to conform to the year 2003 consolidated
presentation.
New Accounting Pronouncements:
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements, which may apply, to the Company.
In May 2003, the FASB issued SFAS No. 149; AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 149")
which provides for certain changes in the accounting treatment of
derivative contracts. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, except for certain provisions
that relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003,
which should continue to be applied in accordance with their
respective effective dates. The guidance should be applied
prospectively. The adoption of SFAS 149 is not expected to have a
material impact on the Company's financial position, results of
operations or liquidity.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY ("SFAS 150"). This new statement changes the accounting for
certain financial instruments that, under previous guidance, issuers
could account for as equity. It requires that those instruments be
classified as liabilities in balance sheets. Most of the guidance in
SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS 150 is not expected to have a material impact
on the Company's financial position, results of operations or
liquidity.
In November 2002, the FASB issued FASB Interpretation No. 45,
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45").
FIN 45 requires that a liability be recorded in the guarantor's
balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure
requirements of FIN 45 are effective for the Company for financial
statements of interim periods beginning July 1, 2003. The adoption
of FIN 45 did not have a material impact on the Company's financial
position, results of operations, or liquidity.
F-18
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
In January 2003, the FASB issued FASB Interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46"), as amended
by FIN46(R), which represents an interpretation of Accounting
Research Bulletin No. 51 ("ARB 51"), "CONSOLIDATED FINANCIAL
STATEMENTS". ARB 51 requires that a Company's financial statements
include subsidiaries in which the Company has a controlling
financial interest. That requirement usually has been applied to
subsidiaries in which the Company has a majority voting interest.
However, the voting interest approach is not effective in
identifying controlling financial interests in entities (referred to
as " variable interest entities") that are not controllable through
voting interests or in which the equity investors do not bear the
residual economic risks. FIN 46 provides guidance on identifying
variable interest entities and on assessing whether a Company's
investment in a variable interest entity requires consolidation
thereof. As amended by FIN 46(R), this interpretation is effective
by the end of the first reporting period ending after December 15,
2003 for small business issuers that have special purpose entities
and after December 15, 2004 for all other types of variable interest
entities. The adoption of FIN 46 did not have a material impact on
the Company's financial position, results of operations, or
liquidity.
NOTE 2: GOING CONCERN AND MANAGEMENT'S PLAN
The Company has a net loss of $598,889 and net cash used in operations
of $285,805 in 2003, a working capital deficiency of $421,551,
accumulated deficit of $7,700,305, and a stockholders' deficiency of
$339,673 at December 31, 2003. Additionally, the Company was in default
of the repayment terms on notes payable aggregating $35,000 at December
31, 2003 and no extension had been granted by the debt holders.
Currently, there have been no actions taken by the debt holders to
foreclose since the notes were unsecured. The Company plans to settle
the balance owing on these notes payable through issuance of common
stock in 2004. Because the Company's developmental contracts generate
insufficient operating capital and given these financial results along
with the Company's expected cash requirements in 2004, additional
capital investment will be necessary to develop and sustain the
Company's operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In February 2004, the Company has initiated a public registration of
8,175,000 shares of common stock, comprised of 4,175,000 for shares
outstanding and 4,000,000 for shares issuable to warrant holders upon
future exercise at an exercise price of $.18 per share.
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: PATENT RIGHTS
Patent rights are licensed from an officer/director (Notes 7 and 12)
and consisted of the following at December 31:
F-19
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
Estimated
Useful Life
2003 2002 In Years
-------- -------- -----------
Patent Rights ................... $215,504 $189,227 17-20
Less accumulated amortization .. (63,831) (50,733)
-------- --------
Patent rights, net .............. $151,673 $138,494
======== ========
Amortization expense was $13,099 in 2003 and $30,139 in 2002. Future
patent rights amortization expense is estimated to be approximately
$13,000 per year for the subsequent five-year period commencing in
2004.
During the years ending December 31, 2003 and 2002, the Company
recognized an impairment loss of $0 and $144,930, respectively for
discontinued patented technology, net of accumulated amortization of $0
and $97,058, respectively 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, 2003. 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
2003 2002 In Years
--------- --------- -----------
Machinery and equipment ......... $ 148,114 $ 126,985 3-10
Equipment under capital lease ... 95,999 111,398 7
Office furniture and equipment .. 57,865 55,980 3-10
Leasehold improvements .......... 4,615 4,615 5
--------- ---------
Total property and equipment .... 306,593 298,978
Less accumulated depreciation ... (234,998) (213,801)
--------- ---------
Property and equipment, net ..... $ 71,595 $ 85,177
========= =========
Depreciation expense, including that on equipment under capital lease,
was $21,197 in 2003 and $23,504 in 2002.
F-20
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
NOTE 5: LOANS PAYABLE AND NOTES PAYABLE - SHAREHOLDERS
(A) Loans Payable
Technological Research and Development Authority Funding Agreement:
In 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 2003, the entire $150,000 funding commitment was received.
The agreement expires in November 2012 (See Notes 7 and 12).
Pursuant to EITF No. 88-18 "SALE OF FUTURE REVENUES", the Company
will record the funding as a current liability and in connection
with APB No. 21 "INTEREST ON RECEIVABLES AND PAYABLES," will accrete
interest to the maximum value of $450,000 through the November 2012
expiration date. At December 31, 2003, in connection with the
accretion of interest, the Company charged $17,418 to interest
expense.
(B) Notes payable - shareholders
Notes payable - shareholders consisted of the following at December 31:
2003 2002
--------- ---------
Promissory notes payable - shareholders; Interest
bearing at rates ranging from 5% to 15 %, unsecured
and due at various dates through August 2007 ....... $ 159,655 $ 162,179
Less current maturities ................................ (37,005) (37,523)
--------- ---------
Long - term portion of notes payable - shareholders .... $ 122,650 $ 124,656
========= =========
Future maturities of notes payable - shareholders are as follows for
years ending December 31:
2004 $ 37,005
2005 2,107
2006 2,216
2007 118,327
---------
$ 159,655
=========
At December 31, 2003, 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 2004.
During 2002, the Company issued a $127,179 note payable to refinance
$127,179 of accounts payable to a vendor/shareholder. 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.
F-21
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
NOTE 6: OBLIGATION UNDER CAPITAL LEASE
The Company leases certain machinery and office equipment under
non-cancelable capital leases with various expiration dates through
October 2005. Future minimum lease payments as of December 31, 2003 for
each of the next five years are as follows:
2004 ............................................ $ 25,174
2005 ............................................ 19,697
--------
Total minimum lease payments .................... 44,871
Less amount representing interest ............... (4,205)
--------
Present value of net minimum lease payments ..... 40,666
Less current maturities ......................... (21,881)
--------
Present value of net minimum lease payments ..... $ 18,785
========
NOTE 7: COMMITMENTS AND CONTINGENCIES
Edwards Technology License Agreement:
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.
This agreement was amended in February 2004 (Note 12).
Technological Research and Development Authority Funding Agreement:
See Notes 5(A) and 12.
Parker-Hannifin Exclusive Worldwide License Agreement and Consulting
Agreement:
During May 2003, the Company granted an exclusive worldwide license
agreement to 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.
F-22
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
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.
Significant Customers, Suppliers, and Other Concentrations:
During 2003, the Company received revenues from one significant
customer which represented 99.14% of net sales. In 2002, the Company
received revenues from three significant customers which represented
62.3%, 23.6% and 11.5%, respectively, of 2002 net sales.
During 2003, there were no significant suppliers. During 2002, the
Company purchased materials from two unrelated suppliers
representing 63.4% and 30.8% of total material purchases during the
year.
As of December 31, 2003, the Company's business is dependent upon
three U.S. patents 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 (Notes 7 and 12).
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 December 31, 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.
Operating Lease:
The Company currently leases space on a month to month basis. Rent
expense for the years ending December 31, 2003 and 2002 were $12,800
and $17,050, respectively.
NOTE 8: STOCKHOLDER'S DEFICIENCY
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,
2003 or 2002, there were no shares of preferred stock issued or
outstanding.
Common Stock Issued for Cash:
During 2002, the Company issued 3,146,000 common shares for $0.12
per share or $377,521 and incurred offering costs of $35,640, which
were offset against the proceeds.
During 2003, the Company issued 3,260,000 common shares for $0.12
per share or $391,200 and incurred offering costs of $17,220, which
were offset against the proceeds.
F-23
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
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(B)) and issued 270,000 shares of common stock valued at $32,400 in
settlement of accrued expenses. Additionally, the Company issued
150,000 shares of common stock valued at $18,000 in exchange for
consulting services.
During 2003, the Company issued 60,000 shares of common stock valued
at $7,200 and 120,000 warrants to purchase common stock at $.18 per
share, in settlement of $15,000 of accounts payable. In connection
with the settlement, the Company recognized a gain on debt
settlement totaling $7,800.
During 2003, the Company issued 2,775,000 shares of common stock
valued at $333,000 in exchange for consulting, legal, directors and
employee services.
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 2003 and 2002, the stated share price received was
$.12.
Common Stock Issuable:
At December 31, 2003, the Company was obligated to issue an
aggregate of 100,000 shares of common stock from a 2001 grant for
legal services incurred in connection with a private placement of
common stock. During 2003, the Company issued 240,000 shares of
common stock, which were issuable at December 31, 2002.
Common Stock Warrants:
At December 31, 2003, the Company had warrants outstanding as
follows:
Common Shares Exercise Price Expiration
Warrant Under Warrant Per Share Date
------- ------------- -------------- --------------
Class I 30,000 $ .50 January 2004
Class J 12,185,120 $ .18 June 2007
Class K 4,000,000 $ .18 November 2005
----------
16,215,120
==========
A summary of changes in stock warrants during 2003 and 2002 is
presented below:
2003 2002
----------- ----------
Outstanding at beginning of year .. 9,535,120 350,000
Granted ........................... 7,170,000 9,215,120
Expired or Cancelled .............. (490,000) (30,000)
----------- ----------
Balance at December 31, 2003 ...... 16,215,120 9,535,120
=========== ==========
F-24
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
Stock-Based Compensation Plans:
At December 31, 2003, 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, 2003.
At December 31, 2003, the Company had the following non-qualified
options outstanding and exercisable as follows:
Range of Common Shares Weighted Average Weighted Average
Exercise Price Under Option Remaining Life Exercise Price
-------------- ------------ -------------- --------------
$ .12 200,000 5.0 Years $ .12
$ .38 1,517,834 4.9 Years $ .38
$ .38 10,000 3.4 Years $ .38
$ .10 600,000 2.1 Years $ .10
$ .05 33,333 1.5 Years $ .05
$ .38 2,252,202 0.9 Years $ .38
$ .10 100,000 0.1 Years $ .10
-------
4,713,369
=========
Of the 4,713,369 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.
F-25
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
A summary of the changes in stock options outstanding during 2003
and 2002 is presented below:
2003 2002
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Options outstanding at
beginning of year 4,783,369 $ .33 4,683,369 $ .33
Options granted - $ - 200,000 $ .12
Options exercised - $ - - $ -
Options forfeited (70,000) $(.10) (100,000) $(.10)
-------- ---------
Options outstanding at
end of year 4,713,369 $ .33 4,783,369 $ .33
========= =========
Weighted Average fair value of
options granted during the
year $ - $ .02
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 were 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, 7 and 12).
NOTE 10: INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate
as a result of the following items:
2003 2002
-------- -------
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 (.2) 12.0
Net operating loss carryforward .............. 34.2 22.0
------- -------
Income tax provision ......................... - % - %
======= =======
F-26
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
The tax effect of temporary differences at December 31 were as follows:
2003 2002
----------- -----------
Asset:
Net operating loss carryforward ... $ 2,887,000 $ 2,707,000
Other individually immaterial items 110,000 111,000
----------- -----------
Net deferred tax asset before
valuation allowance ................ 2,997,000 2,818,000
Less valuation allowance ............. (2,997,000) (2,818,000)
----------- -----------
Net deferred tax asset ............... $ - $ -
=========== ===========
For financial statement purposes, no tax benefit has been reported in
2003 or 2002 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 $179,000 in 2003 and an increase of $39,000 in 2002.
At December 31, 2003, the Company had net operating loss carryforwards
as follows for income tax purposes:
Carryforward Net Operating
Expires December 31 Loss Carryforwards
------------------- ------------------
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
2023 603,000
-----------
$ 8,492,000
===========
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: GAIN ON DEBT SETTLEMENT
In 2003 and 2002, the Company recognized a gain of $37,471 and $46,244,
respectively, related to a settlement of accounts payable for $7,800 in
2003 (See Note 8) and various statutory expirations of accounts payable
totaling $29,671 and $46,244 in 2002 and 2003, respectively.
F-27
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
NOTE 12: SUBSEQUENT EVENTS
Edwards Employment Agreement
On January 1, 2004, the Company entered into an employment agreement
with an individual acting as the Company's Chief Technical Officer
and Chief Executive Officer. Under the terms of the agreement, the
individual will receive a salary as follows:
Year ended December 31,
-----------------------
2004 $60,000
2005 $70,000
2006 $80,000
2007 $90,000
2008 $100,000
Edwards Technology License Agreement Amendment:
During February 2004, 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 future royalty payments based on the underlying
technology-producing income. The Company is obligated to pay the
officer/director quarterly royalties equal to one percent of sales
of related products and sublicensed products and ten percent of any
royalty income received from sublicense agreements. The agreement
expires in December 2009, or upon six months written notice by the
Company.
During January 2004, 30,000 stock options expired.
On February 5, 2004, the Company settled an outstanding legal services
agreement from August 1, 2001, in which the holder was owed $10,000
payable with 100,000 shares of issuable common stock which had been
reflected in the Company's records as common stock issuable. In
February 2004, the Company granted a stock option in lieu of issuing
shares. Under the terms of the option, which expires August 1, 2006,
the holder could exercise an option to purchase 100,000 shares with an
exercise price of $.10 per share. The Company has determined that the
exercise price has been pre-paid but the option has not been exercised
as of the balance sheet date. As a result of this exchange of one
equity instrument for another, there is no additional compensation
expense pursuant to the rules of SFAS No. 123. Accordingly, $1,000 was
reclassified from common stock issuable to additional paid-in capital.
On April 27, 2004, the Company issued a Director 200,000 shares of
common stock in exchange for services rendered. Shares of common stock
issued for payment of services received are valued at the stated share
price actually received in the respective year's private placement
offerings. During 2003 and 2002, the stated share price received was
$.12.
F-28
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................................................6
Use of Proceeds.............................................9
Market for Common Stock and Dividend Policy................10
Forward-Looking Statements.................................11
Management's Discussion and Analysis or Plan of Operation..11
Business...................................................16
Management.................................................23
Executive Compensation.....................................24
Certain Transactions.......................................29
Principal Shareholders.....................................29
Description of Securities..................................31
Selling Security Holders...................................32
Plan of Distribution.......................................35
Shares Eligible for Future Sale............................37
Legal Matters..............................................37
Experts....................................................37
Additional Information.....................................38
Financial Statements......................................F-1
8,175,000 SHARES
DYNECO CORPORATION
PROSPECTUS
________________, 2004
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.
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 in connection with the distribution of the
securities being registered, all of which are payable by the Company, 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 100,000 shares to one individual in exchange
for consulting services valued at $18,000. The warrants are exercisable until
June 30, 2006, at an exercise price of $.18 per share. The investor had a
preexisting business relationship with the Company, was provided access to
business and financial about the Company and had such knowledge and experience
in business and financial matters that it was able to evaluate the risks and
merits of an investment in the Company. Accordingly, the investor was
"sophisticated" within the meaning of federal securities laws. Each certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
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. The warrants
are exercisable until June 30, 2006, at an exercise price of $.18 per share.
Each of the investors had a preexisting business relationship with the Company,
was provided access to business and financial about the Company and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in the Company. Accordingly,
the investors were "sophisticated" within the meaning of federal securities
laws. Each certificate evidencing securities issued in the transaction included
a legend to the effect that the securities were not registered under the
Securities Act and could not be resold absent registration or the availability
of an applicable exemption therefrom. No general solicitation or advertising was
used in connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
On July 16, 2002, we issued 150,000 shares of our common stock to a
vendor in settlement of $30,820 of accounts payable. The investor had a
preexisting business relationship with the Company, was provided access to
business and financial about the Company and had such knowledge and experience
in business and financial matters that it was able to evaluate the risks and
merits of an investment in the Company. Accordingly, the investor was
"sophisticated" within the meaning of federal securities laws. Each certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
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. The warrants are
exercisable until June 30, 2006, at an exercise price of $.18 per share. The
investor had a preexisting business relationship with the Company, was provided
access to business and financial about the Company and had such knowledge and
experience in business and financial matters that it was able to evaluate the
risks and merits of an investment in the Company. Accordingly, the investor was
"sophisticated" within the meaning of federal securities laws. Each certificate
evidencing securities issued in the transaction included a legend to the effect
II-2
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
From February 25, 2002 until December 18, 2002, we issued a total of
3,086,000 shares of our common stock and warrants to purchase an additional
6,172,000 shares to 37 accredited investors, for $370,320 of cash, net of
offering costs of $35,640. The warrants are exercisable until June 30, 2006, at
an exercise price of $.18 per share. Each of the investors was provided access
to business and financial about the Company and had such knowledge and
experience in business and financial matters that they were able to evaluate the
risks and merits of an investment in the Company. Accordingly, the investors
were "sophisticated" within the meaning of federal securities laws. Each
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering and
under Rule 506 of Regulation D.
On March 14, 2003, we issued 60,000 shares of common stock and warrants
to purchase an additional 120,000 shares to a vendor in settlement of $15,000 of
accounts payable. The warrants are exercisable until June 30, 2006, at an
exercise price of $.18 per share. The investor had a preexisting business
relationship with the Company, was provided access to business and financial
about the Company and had such knowledge and experience in business and
financial matters that it was able to evaluate the risks and merits of an
investment in the Company. Accordingly, the investor was "sophisticated" within
the meaning of federal securities laws. Each certificate evidencing securities
issued in the transaction included a legend to the effect that the securities
were not registered under the Securities Act and could not be resold absent
registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
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. Each of the investors had a preexisting business relationship
with the Company, were provided access to business and financial about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the investors were "sophisticated" within the meaning of
federal securities laws. Each certificate evidencing securities issued in the
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
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. The investor had a preexisting business relationship
with the Company, was provided access to business and financial about the
Company and had such knowledge and experience in business and financial matters
that it was able to evaluate the risks and merits of an investment in the
Company. Accordingly, the investor was "sophisticated" within the meaning of
federal securities laws. Each certificate evidencing securities issued in the
II-3
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
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. The warrants are exercisable until November
30, 2005, at an exercise price of $.18 per share. Each of the investors was
provided access to business and financial about the Company and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in the Company. Accordingly,
the investors were "sophisticated" within the meaning of federal securities
laws. Each certificate evidencing securities issued in the transaction included
a legend to the effect that the securities were not registered under the
Securities Act and could not be resold absent registration or the availability
of an applicable exemption therefrom. No general solicitation or advertising was
used in connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
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. Each of the investors had a
preexisting business relationship with the Company, were provided access to
business and financial about the Company and had such knowledge and experience
in business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the investors were
"sophisticated" within the meaning of federal securities laws. Each certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
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. The
warrants are exercisable until June 30, 2006, at an exercise price of $.18 per
share. The investor had a preexisting business relationship with the Company,
was provided access to business and financial about the Company and had such
knowledge and experience in business and financial matters that it was able to
evaluate the risks and merits of an investment in the Company. Accordingly, the
investor was "sophisticated" within the meaning of federal securities laws. Each
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
From January 6, 2003 until April 7, 2003, we issued a total of
1,560,000 shares of common stock and warrants to purchase an additional
3,120,000 shares to 23 accredited investors, for a purchase price of $187,200.
The warrants are exercisable until June 30, 2006, at an exercise price of $.18
per share. Each of the investors was provided access to business and financial
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the investors were "sophisticated"
within the meaning of federal securities laws. Each certificate evidencing
securities issued in the transaction included a legend to the effect that the
II-4
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering and under Rule 506 of Regulation D.
On December 11, 2003, we issued 200,000 shares of common stock to a
director as consideration for his services as a director, valued at $.12 per
share. The investor had a preexisting business relationship with the Company,
was provided access to business and financial about the Company and had such
knowledge and experience in business and financial matters that it was able to
evaluate the risks and merits of an investment in the Company. Accordingly, the
investor was "sophisticated" within the meaning of federal securities laws. Each
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
----------- -----------------------
3.1 Articles of Incorporation, as amended
3.2 Bylaws*
5.1 Opinion and Consent of Dean R. Edstrom, Esq., Attorney-at-Law
Professional Association
10.1 2001 Equity Compensation Plan* **
10.2 1993 Corporate Stock Option Plan* **
10.3 1993 Advisors Option Plan* **
10.4 Amended and Restated Business Advisory and Consulting
Agreement dated August 17, 2004 with MBN Consulting, LLC
10.5 License Agreement dated February 4, 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 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*
10.9 Agreements dated August 1, 2001 and February 5, 2004 with Mark
Vieno*
10.10 Supply Agreement dated August 6, 2004 with Parker-Hannifin
Corporation
23.1 Consent of Dean R. Edstrom, Esq., Attorney-at-Law Professional
Association (see Exhibit 5.1)
23.2 Consent of Salberg & Company
_____________________________
* Previously filed.
** Compensatory agreement.
II-5
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;
(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.
II-6
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 August 19, 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 August 19, 2004
---------------------------- Executive Officer,
Thomas C. Edwards, Ph.D. Chief Executive Officer,
Chief Financial Officer,
Principal Financial Officer
and Director
/s/ George R. Schell Director August 19, 2004
--------------------
George R. Schell
/s/ Leonard Sculler Director August 19, 2004
-------------------
Leonard Sculler
/s/ Kevin Hooper Director August 19, 2004
----------------
Kevin Hooper