AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2006
Registration No. 333-124283
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM SB-2/A
POST-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
__________
DYNAMIC LEISURE CORPORATION
(FORMERLY KNOWN AS DYNECO CORPORATION)
(Name of Small Business Issuer in Its Charter)
Minnesota 4700 (formerly 8711) 41-1508703
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
2203 N. Lois Avenue, Suite 900
Tampa, FL 33607
(813) 877-6300
(Address and Telephone Number of Principal Executive Offices)
__________
Daniel G. Brandano, President
2203 N. Lois Avenue, Suite 900
Tampa, FL 33607
(813) 877-6300
(Name, Address and Telephone Number of Agent For Service)
With Copies to
Crone Law Group LLP
201 Mission Street, Suite 1930
San Francisco, CA 94105
__________
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. [_]
EXPLANATORY NOTE CONCERNING THIS POST-EFFECTIVE AMENDMENT NO. 1
This post-effective amendment to the Registration Statement filed on
Form SB-2 and originally effective on May 6, 2005 is being filed pursuant to the
Company's undertaking to file a post-effective amendment when subsequent events
may represent a fundamental change in the information set forth in the
registration statement. This amendment gives effect to and describes our stock
exchange with Dynamic Leisure Group, a 1:30 reverse stock split, and our new
plan of operations and business direction. This amendment also updates our
financial information through year-end 2005 (consistent with our Form 10-KSB
filed March 31, 2006). Additional revisions are made as necessary to provide
updated information. It should be noted that no new shares are being registered
hereby, and the Company shall receive no revenues from shares of stock sold
hereunder.
NOTE REGARDING REVERSE STOCK SPLIT, SHARE QUANTITIES AND PRICES
Due to a 1:30 reverse stock split effective at close of business on
March 3, 2006, all stock and warrant prices and quantities (including historical
transactions) are stated herein in post-split prices and quantities.
ii
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Maximum Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Registration
to be Registered Registered Per Security(1) Offering Price(1) Fee(1)
- ---------------------------- ------------ --------------- ----------------- ------------
Common Stock, par value
$.01 per share ............. 15,000 $ 3.00 (2) $ 45,000.00 $ 5.30
Common Stock, par value
$.01 per share, underlying
convertible notes .......... 163,500 $ 3.00 (3) $ 490,500.00 $ 57.73
Common Stock, par value
$.01 per share, underlying
warrants ................... 109,000 $ 4.31 (3) $ 470,062.50 $ 55.33
Common Stock, par value
$.01 per share, underlying
warrants ................... 50,000 $ 7.55 (3) $ 375,000.00 $ 44.14
Common Stock, par value
$.01 per share, underlying
warrants ................... 100,000 $ 3.00 (3) $ 300,000.00 $ 35.31
Common Stock, par value
$.01 per share, underlying
warrants ................... 7,500 $ 4.50 (3) $ 33,750.00 $ 3.97
--------
Total Registration Fee ..... $ 201.78*
========
*This Registration Fee was paid along with the original filing of the
Registration Statement in 2005.
__________
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(2) Fee computed based upon the higher of the conversion price of the notes and
the average of the closing bid and asked prices for the common stock within
five trading days prior to filing the registration statement.
(3) Fee computed based upon the higher of the exercise price of the warrants and
the average of the closing bid and asked prices for the common stock within
five trading days prior to filing the registration statement.
Pursuant to Rule 416, this registration statement also covers such additional
number of common shares as may be necessary to prevent dilution resulting from
stock splits, stock dividends or similar transactions attributable to the
securities being registered.
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, April 13, 2006
PROSPECTUS
DYNAMIC LEISURE CORPORATION
(FORMERLY KNOWN AS DYNECO CORPORATION)
445,000 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to an aggregate of 445,000
shares of our common stock, 15,000 shares of which have been issued and are
outstanding, 163,500 shares are issuable upon conversion of outstanding
convertible promissory notes, and 266,500 shares are issuable upon exercise of
outstanding warrants. The selling security holders listed on page 16 may sell
these shares from time to time. We are not selling any shares of common stock
under this prospectus, and we will not receive any proceeds from sales of shares
by the selling stockholders.
The selling security holders may sell all or any portion of the shares
for their own account from time to time in one or more transactions through
brokers or dealers at market prices then prevailing, in underwritten
transactions at prices related to then-current market prices, or in individually
negotiated transactions at such prices as may be agreed upon. See page 17, "Plan
of Distribution."
We will pay all expenses in connection with the registration of the
shares under the Securities Act of 1933, as amended, including the preparation
of this prospectus. See page 17, "Plan of Distribution."
Our common stock is traded on the over-the-counter bulletin board under
the symbol "DYLI." On April 10, 2006, the closing bid price for our common stock
was $1.78 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______, 2006
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
----
About this Prospectus .................................................. 1
Forward-Looking Statements ............................................. 1
Note Regarding Reverse Stock Split, Share Quantities and Prices ........ 1
Prospectus Summary ..................................................... 2
Risk Factors ........................................................... 5
Use of Proceeds ........................................................ 16
Determination of Offering Price ........................................ 16
Selling Security Holders ............................................... 16
Plan of Distribution ................................................... 19
Legal Proceedings ...................................................... 21
Directors, Executive Officers, Promoters and Control Persons ........... 21
Security Ownership of Certain Beneficial Owners and Management ......... 24
Description of Securities .............................................. 26
Interest of Named Experts and Counsel .................................. 28
Description of Business ................................................ 29
Management's Discussion and Analysis or Plan of Operation .............. 41
Description of Property ................................................ 47
Certain Relationships and Related Transactions ......................... 48
Market for Common Equity and Related Stockholder Matters ............... 49
Executive Compensation ................................................. 54
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 54
Financial Statements ................................................... F-1
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.
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".
NOTE REGARDING REVERSE STOCK SPLIT, SHARE QUANTITIES AND PRICES
Due to a 1:30 reverse stock split effective at close of business on
March 3, 2006, all stock and warrant prices and quantities (including historical
transactions) are stated herein in post-split prices and quantities.
1
SUMMARY INFORMATION AND RISK FACTORS
You should read the following summary together with the more detailed
information regarding us and the securities being offered for sale by means of
this prospectus and our financial statements and notes to those statements
appearing elsewhere in this prospectus. This summary highlights information
contained elsewhere in this prospectus.
In this prospectus, unless the context requires otherwise, references
to the "Company", "Dynamic", "we", "us" and "our" are to Dynamic Leisure
Corporation, formerly known as DynEco Corporation, and its wholly-owned
subsidiaries, DynEco International, Inc., Dynamic Leisure Group North America,
Inc., Dynamic Leisure Europe Limited, Changes in L'Attitudes, Inc., Island
Resort Tours, Inc., and International Travel and Resorts, Inc.
THE COMPANY
Historically, our Company devoted its business efforts to the
development of high-efficiency compressors and pumps with potential commercial
applications. In 2005, the Company defaulted on certain loans, had no revenue
from existing operations, had limited financial resources, and was in danger of
ceasing operations. However, on January 13, 2006, the Company entered into a
Stock Exchange Agreement with Dynamic Leisure Group, Inc., now known as Dynamic
Leisure Group North America, Inc., and as a result the Company is now focused on
the leisure travel field under the name Dynamic Leisure Corporation. In March
2006, the Company's common stock underwent a 1:30 reverse stock split in an
effort to make the stock more attractive to investors.
Since January 2006, the Company has proceeded to follow a plan of
strategic acquisitions in the travel industry. On February 8, 2006, the Company
acquired Changes in L'Attitudes, Inc., a Largo, Florida online leisure travel
company. On March 6, 2006, the Company acquired Island Resort Tours, Inc. and
International Travel and Resorts, Inc., two New York-based wholesale tour
operators.
The Company's strategy focuses on the acquisition and integration of
key assets in the leisure travel industry to provide an ongoing business base,
including the implementation of its proprietary TourScape dynamic packaging
travel software. The Company intends to continue its growth, focusing on the
leisure travel market and developing a more prominent Internet presence.
This Prospectus is being amended to provide investors with a current
understanding of the Company's business efforts.
Our executive offices are now located at 2203 N. Lois Avenue, Suite
900, Tampa, Florida 33607, and our telephone number there is (813) 877-6300.
THE OFFERING
This prospectus covers the resale of a total of 445,000 shares of our
common stock by selling security holders. Of those shares covered by this
prospectus, 15,000 shares have been issued and are currently outstanding,
163,500 shares are issuable upon conversion of outstanding convertible
promissory notes, and 266,500 shares are issuable upon exercise of outstanding
warrants. 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. We will pay all of the fees and expenses associated with registration
of the shares covered by this prospectus.
2
Common Stock:
Outstanding Prior to this Offering .. 1,118,766 shares
Outstanding After this Offering ..... 1,563,766 shares, including 445,000
shares the resale of which is covered
by this prospectus issuable upon the
exercise of outstanding promissory
notes and warrants. The promissory
notes are convertible at $3.00 per
share, subject to adjustment. The
warrants are exercisable at prices
ranging from $3.00 per share to $7.50
per share, subject to adjustment.
Common Stock Reserved: .............. 124,539 shares issuable on exercise of
options (including options that have
been granted and options that may be
granted under our equity compensation
plans), 163,500 shares covered by this
prospectus that are issuable upon
conversion of promissory notes and
809,337 shares issuable upon exercise
of outstanding warrants (including
warrants to purchase 266,500 shares
the resale of which is covered by this
prospectus). The promissory notes are
convertible at $3.00 per share,
subject to adjustment. The warrants
are exercisable at prices ranging from
$3.00 per share to $7.50 per share,
subject to adjustment.
OTC BULLETIN BOARD SYMBOL .............. DYLI
REGISTRATION RIGHTS .................... We originally filed the registration
statement of which this prospectus is
a part pursuant to a Subscription
Agreement, dated as of March 2, 2005,
between us and two selling security
holders. The Subscription Agreement
required us to use our reasonable best
efforts to file the registration
statement by April 29, 2005 and to
have the registration statement
declared effective not later than the
sooner of July 29, 2005 or ninety days
after the effective date thereof. The
registration statement was filed on
April 22, 2005 and was originally
declared effective on May 6, 2005.
Had we not conformed to registration
requirements of the Subscription
Agreement, we would have owed cash
liquidated penalties. For more
information regarding the Subscription
Agreement, see "Exhibit 10.11."
3
As of January 13, 2006, we entered
into a Modification and Waiver
Agreement between the same two selling
shareholders, under which we are
required to file a Post-Effective
Amendment to the Registration
Statement on or before April 13, 2006
and required to cause the Amendment to
be declared effective by the SEC not
later than sixty (60) days thereafter,
or else liquidated damages may ensue.
For more information regarding the
Modification and Waiver Agreement, see
Exhibit 10.17.
RISK FACTORS ........................... See "Risk Factors" beginning on page
5 and other information set forth in
this prospectus for a discussion of
factors that you should carefully
consider before deciding to invest in
the shares of our common stock.
PLAN OF DISTRIBUTION ................... The shares of common stock offered for
resale may be sold by the selling
security holders pursuant to this
prospectus in the manner described
under "Plan of Distribution" on page
19.
SELECTED FINANCIAL DATA
The following summary of our financial information for the years ended
December 31, 2005 and 2004 has been derived from, and should be read in
conjunction with, our audited financial statements included elsewhere in this
prospectus.
Years Ended December 31,
------------------------
2005 2004
--------- ---------
Revenues .......................................... $ -0- $ 286,900
Cost of Revenues .................................. -0- 16,096
Operating expenses ................................ 497,698 670,213
Net (loss) ........................................ $(526,195) $(434,523)
Net (loss) per share .............................. $ (0.47) $ (0.39)
December 31, 2005
-------------------
Working capital deficit ................ $ 1,033,565
Current liabilities .................... 1,033,565
Total liabilities ...................... 1,168,284
Shareholders' deficit .................. $ 1,105,911
4
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.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS RAISED DOUBT OVER OUR
CONTINUED EXISTENCE AS A GOING CONCERN.
We have incurred substantial operating and net losses, as well as
negative operating cash flow, since our inception. As a result, we continue to
have significant working capital and stockholders' deficits including a
substantial accumulated deficit at December 31, 2005 and December 31, 2004. In
recognition of such, our independent registered public accounting firm has
included an explanatory paragraph in its report on our consolidated financial
statements for the fiscal years ended December 31, 2005 and December 31, 2004
that expressed substantial doubt regarding our ability to continue as a going
concern.
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, 2005 and 2004, we experienced
net losses of $526,195 and $434,523, respectively. In addition, at December 31,
2005, we had an accumulated deficit of $8,661,023. Our operating results for
future periods will include significant expenses, including new product
development expenses, potential marketing costs, professional fees 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, or at all.
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 December 31, 2005, our current liabilities were approximately
$1,033,565; we had no current assets and therefore have a working capital
deficit equal to our current liabilities. 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 HAVE BEEN HISTORICALLY UNSUCCESSFUL IN OUR ATTEMPTS TO RAISE SUFFICIENT
CAPITAL TO FUND OUR PLANS. IF WE ARE UNABLE TO DO SO, WE MAY CEASE OPERATIONS.
Historically, we have funded our operations through limited revenues
and debt and equity financing. Although we were successful in obtaining a
$2,000,000 financing in January 2006, 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 acquisition costs, but we have not yet integrated our acquired businesses
and technologies, acquired target companies according to our business model,
obtained sufficient financing to carry out our plans, or received sufficient
operating revenues to support our human and equipment infrastructures. Until
such time, if ever, that we are successful in obtaining additional financing to
carry out our strategy, there is significant risk that we may be required to
cease operations.
5
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 RESELL THEM
PUBLICLY.
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:
- Investors may have difficulty buying and selling our shares or
obtaining market quotations;
- Market visibility for our common stock may be limited; and
- A lack of visibility for our common stock may depress the market
price for our shares.
IN THE EVENT THAT WE ISSUE ADDITIONAL SHARES, CONVERTIBLE PROMISSORY NOTES,
WARRANTS AND OPTIONS, THE MARKET PRICE FOR OUR SHARES MAY BE ADVERSELY AFFECTED.
As of April 11, 2006, we have executed convertible promissory notes,
granted options and issued warrants to purchase an aggregate of 7,230,514 shares
of our common stock. The options are exercisable at prices ranging from $1.50
per share to $11.40 per share, and the warrants are exercisable ranging from
$0.68 per share to $11.25 per share. In addition, as we procure additional
financing and acquire additional business assets, we shall undoubtedly grant
additional shares, as well as warrants and options, to the financiers and
shareholders of target companies. To the extent that additional shares are
issued, notes are converted, and options and warrants are exercised, the shares
that are issued may result in an oversupply of shares and an undersupply of
purchasers, thereby diluting the market for our shares. The existence of options
and options that are exercisable at below market may have a depressive effect on
the market price for our common stock.
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 445,000 shares being offered by existing
stockholders, including 430,000 shares issuable upon the exercise of outstanding
warrants and the conversion of outstanding promissory notes. 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. The existence of warrants and notes that are
exercisable or convertible at below market may have a depressive effect on the
market price for our shares. In the event that the warrants and notes are
exercised and converted at a price per share that is below the market price for
our shares, the issuance of shares upon exercise may be dilutive to existing
stockholders.
WE MAY BE EXPOSED TO POTENTIAL RISKS RELATING TO OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING AND OUR ABILITY TO HAVE THOSE CONTROLS ATTESTED TO BY OUR
INDEPENDENT AUDITORS.
6
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX
404"), the Securities and Exchange Commission adopted rules requiring public
companies to include a report of management on the company's internal controls
over financial reporting in their annual reports, including Form 10-KSB. In
addition, the independent registered public accounting firm auditing a company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal controls over financial reporting
as well as the operating effectiveness of the company's internal controls. We
were not subject to these requirements for the fiscal year ended December 31,
2005. We are evaluating our internal control systems in order to allow our
management to report on, and our independent auditors attest to, our internal
controls, as a required part of our Annual Report on Form 10-KSB beginning with
our report for the fiscal year ended December 31, 2007.
While we expect to expend significant resources in developing the
necessary documentation and testing procedures required by SOX 404, there is a
risk that we will not comply with all of the requirements imposed thereby. At
present, there is no precedent available with which to measure compliance
adequacy. Accordingly, there can be no positive assurance that we will receive a
positive attestation from our independent auditors.
In the event that we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence
in the reliability of our financial statements, and our ability to obtain equity
or debt financing could suffer.
EVOLVING GOVERNMENT REGULATION COULD IMPOSE TAXES OR OTHER BURDENS ON OUR
BUSINESS, WHICH COULD INCREASE OUR COSTS OR DECREASE DEMAND FOR OUR PRODUCTS.
We must comply with laws and regulations applicable to online commerce.
Increased regulation of the Internet or different application of existing laws
might slow the growth in the use of the Internet and commercial online services,
which could decrease demand for our products, increase the cost of doing
business or otherwise reduce our sales and revenues. The statutes and case law
governing online commerce are still evolving, and new laws, regulations or
judicial decisions may impose on us additional risks and costs of operations. In
addition, new regulations, domestic and/or international, regarding the privacy
of our users' personally identifiable information may impose on us additional
costs and operational constraints.
BECAUSE THE TRAVEL MARKET IS SEASONAL, OUR QUARTERLY RESULTS MAY FLUCTUATE.
Our business experiences seasonal fluctuations, reflecting seasonal
trends for the products offered by our websites, as well as Internet services
generally. For example, traditional leisure travel bookings are higher in the
first two calendar quarters of the year in anticipation of spring and summer
vacations and holiday periods, but online travel reservations may decline with
reduced Internet usage during the summer months. In the last two quarters of the
calendar year, demand for travel products generally declines, and the number of
bookings flattens. These factors could cause our revenues to fluctuate from
quarter to quarter. Our results may also be affected by seasonal fluctuations in
the inventory made available to us by travel suppliers.
WE OPERATE IN THE HIGHLY COMPETITIVE TRAVEL MARKET, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY.
The market for travel product is intensely competitive. We compete with
a variety of companies with respect to each product or service we offer.
7
- We compete with online travel retailers including Expedia, Orbitz,
Travelocity, and many smaller companies in providing online travel
products.
- We compete with airlines, hotels, rental car companies, cruise
operators and other travel service providers, whether working
individually or collectively, some of which are suppliers to our
websites.
- We compete with local, regional, national and international
traditional travel agencies.
- We compete with consolidators and wholesalers of airline tickets,
lodging and other travel products, including Cheaptickets.com,
Priceline.com, Hotwire, Hotels.com, and TravelWeb.
- We compete with operators of Global Distribution Systems (GDS),
which control the computer.
- We compete with operators of travel industry reservation databases.
Our competitors have longer operating histories, larger customer bases,
greater brand recognition, and significantly greater financial, marketing and
other resources than we have. Some of our competitors also benefit from vertical
integration with GDS's. Consequently, we may not be able to compete effectively
in the market.
IF WE FAIL TO CREATE AND INCREASE OUR BRAND RECOGNITION AMONG CONSUMERS, WE MAY
NOT BE ABLE TO ATTRACT AND EXPAND ONLINE TRAVEL SALES.
We believe that maintaining and enhancing our brands is a critical
aspect of our efforts to attract and expand our online traffic. The number of
Internet sites that offer competing services increases the importance of
maintaining and enhancing brand recognition. Promotion of our brands will depend
largely on our success in providing a high-quality online experience supported
by a high level of customer service. In addition, we intend to spend substantial
amounts on marketing and advertising with the intention of continuing to expand
our brand recognition to attract and retain online users and to respond to
competitive pressures. However, we cannot assure you that these expenditures
will be effective to promote our brands or that our marketing efforts generally
will achieve our goals.
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE TRAVEL
COMMERCE.
Our sales and revenues will not grow as we plan if consumers do not
purchase significantly more travel products online than they currently do and if
the use of the Internet as a medium of commerce for travel products does not
continue to grow or grows more slowly than expected. Consumers have
traditionally relied on travel agents and travel suppliers and are accustomed to
a high degree of human interaction in purchasing travel products. The success of
our business is dependent on significant increase in the number of consumers who
use the Internet to purchase travel products.
OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD.
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication technology.
8
Unanticipated events or developments could result in a compromise or breach of
the systems we use to protect customer transaction data. Furthermore, our
servers and those of our service providers may be vulnerable to viruses or other
harmful code or activity transmitted over the Internet. While we proactively
check for intrusions into our infrastructure, a virus or other harmful activity
could cause a service disruption.
In addition, we bear financial risk from reservations placed with
fraudulent credit card data. Although we have implemented anti-fraud measures, a
failure to control fraudulent credit card transactions adequately could
adversely affect our business. Because of our limited operation history, we
cannot assure you that our anti-fraud measures are sufficient to prevent
material financial loss.
WE DEPEND ON OUR RELATIONSHIPS WITH TRAVEL SUPPLIERS AND COMPUTER RESERVATION
SYSTEMS, AND CHANGES IN THESE RELATIONSHIPS COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS.
Our business relies on relationships with travel suppliers, and it
would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers comprehensive
access to travel services and products. Consistent with industry practices, we
currently have few agreements with our travel suppliers obligating them to sell
services or products through our websites. Our travel suppliers generally can
cancel or modify their agreements with us upon no or relatively short notice. It
is possible that travel suppliers may choose not to make their inventory of
services and products available through online distribution. Travel suppliers
could elect to sell exclusively through other sales and distribution channels or
to restrict our access to their inventory, either of which could significantly
decrease the amount or breadth of our inventory of available travel offerings.
Adverse changes in any of these relationships could reduce the amount of
inventory that we are able to offer through our websites. In addition, any
decline in the quality of travel products and services provided by these
suppliers, or a perception by travelers of such a decline, could adversely
affect our reputation.
INTERRUPTION IN SERVICE FROM THIRD PARTIES COULD IMPAIR THE QUALITY OF OUR
SERVICE.
We rely on third-party computer systems and third-party providers,
including the computerized central reservation systems of the airline, hotel and
car rental industries, to make airline ticket, hotel room and car rental
reservations and credit card verifications and confirmations.
Currently, a majority of our transactions are processed through Sabre,
Inc. Any interruption or deterioration in these third-party services or
deterioration in their performance could impair the quality of our service. If
our arrangement with any of these third parties is terminated, we may not find
an alternate source of systems support on a timely basis or on commercially
reasonable terms. In particular, any migration from the Sabre system could
require a substantial commitment of time and resources and hurt our business.
OUR SUCCESS DEPENDS UPON IMPLEMENTING AND INTEGRATING OUR TOURSCAPE TECHNOLOGY.
Our company has recently acquired two wholesale travel companies and
plans on acquiring several more in the near future. As part of our business
model, the implementation and integration of the TourScape dynamic packaging
technology is vital to increasing these companies' efficiencies and thus
increasing overall revenues. If we cannot successfully implement and integrate
the TourScape technology, our profitability may not increase as planned, or at
all.
9
OUR NEW TECHNOLOGY MAY NOT BE SUCCESSFULLY DEVELOPED, INSTALLED OR IMPLEMENTED
WITHOUT DISRUPTING OUR BUSINESS.
We are currently replacing many of our existing computer systems with
systems designed to operate with our websites. There can be no assurance that
these new systems will be successfully developed, installed according to the
expected timeframe or within the anticipated budget, implemented without any
disruption to our business, or result in the intended operational benefits and
cost efficiencies.
RAPID TECHNOLOGICAL CHANGES MAY RENDER OUR TECHNOLOGY OBSOLETE OR DECREASE THE
ATTRACTIVENESS OF OUR PRODUCTS TO CONSUMERS.
To remain competitive in the online travel industry, we must continue
to enhance and improve the functionality of and features of our websites. The
Internet and the online commerce industry are rapidly changing. In particular,
the online travel industry is characterized by increasingly complex systems and
infrastructures and new business models. If competitors introduce new products
embodying new technologies, or if new industry standards and practices emerge,
our existing website, technology and systems may become obsolete. Our future
success will depend on our ability to do the following:
- enhance our existing products;
- develop and license new products and technologies, such as our
supplier link technology, that address the increasingly
sophisticated and varied needs of our prospective customers and
suppliers; and
- respond to technological advances and emerging industry standards
and practices on a cost effective and timely basis.
Developing our website and other technology entails significant
technical and business risks. We may use new technologies ineffectively, or we
may fail to adapt our website, transaction processing systems and network
infrastructure to consumer requirements or emerging industry standards. For
instance, our website functionality that allows searches and displays of ticket
pricing and travel itineraries is a critical part of our service, and it may
become out-of-date or insufficient from our customers' perspective and in
relation to the search and display functionality of our competitors' websites.
If we face material delays in introducing new services, products and
enhancements, our customers and suppliers may forego the use of our products and
use those of our competitors. The technology and methodologies to attract
customers to specific websites is constantly changing. Customer preferences on
which websites to use and the comfort level regarding reliability, safety of
personal information, and ease of use continues to evolve. If we are unable to
achieve the level of customer activity and follow-through purchases, we may not
be able to achieve the level of revenue and profitability that we require, which
could negatively affect our stock price.
OUR COMPUTER SYSTEMS MAY SUFFER FAILURES, CAPACITY CONSTRAINTS AND BUSINESS
INTERRUPTIONS THAT COULD INCREASE OUR OPERATION COSTS AND CAUSE US TO LOSE
CUSTOMERS.
In order to be successful, we must continue to provide reliable,
real-time access to our systems for our customers and suppliers. As our
operations continue to grow in both size and scope, domestically and
internationally, we shall need to improve and upgrade our systems and
infrastructure to offer an increasing number of customers and travel suppliers
enhanced products, services, features and functionality. The expansion of our
10
systems and infrastructure will require us to commit substantial financial,
operational and technical resources before the volume of business will increase.
Consumers and suppliers will not tolerate a service hampered by slow delivery
times, unreliable service levels or insufficient capacity, any of which could
have a material adverse effect on our business, operating results and financial
condition.
Our operations face the risk of systems failures. Our systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, computer hacking break-ins, earthquake,
terrorism and similar events. The occurrence of natural disaster or
unanticipated problems at our facilities in Tampa Bay, New York or at the
locations of key vendors such as Sabre could cause interruptions or delays in
our business, loss of data or render us unable to process reservations. In
addition, the failure of our computer and communications systems to provide the
data communications capacity required by us, as a result of human error, natural
disaster of other occurrence of any or all of these events could adversely
affect our reputation, brand and business.
In these circumstances, our redundant systems or disaster recovery
plans may not be adequate. Business interruption insurance may not adequately
compensate us for losses that may occur. Similarly, although many of our
contracts with our service providers require them to have disaster recovery
plans, we cannot be certain that these will be adequate or implemented properly.
In addition, our business interruption insurance may not adequately compensate
us for losses that may occur.
WE HAVE ACQUIRED TWO BUSINESSES AND PLAN TO ACQUIRE OTHER BUSINESSES AND
PRODUCTS; IF WE DO, WE MAY BE UNABLE TO INTEGRATE THEM WITH OUR BUSINESS, OR WE
MAY IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire
businesses, products or technologies that we believe are strategic. We do not
currently have any understanding, commitments or agreements with respect to any
acquisition. We may not be able to identify, negotiate or finance any future
acquisition successfully. Even if we do succeed in acquiring a business, product
or technology, we have no experience in integrating an acquisition into our
business; the process of integration may produce unforeseen operating
difficulties and expenditures and may absorb significant attention of our
management that would otherwise be available for the ongoing development of our
business. If we make future acquisitions, we may issue shares of stock that
dilute other stockholders, expend cash, incur debt, assume contingent
liabilities or create additional expenses related to amortizing other intangible
assets with estimable useful lives, any of which might harm our business,
financial condition or results of operations.
OUR PLANNED GROWTH INVOLVES A NUMBER OF RISKS THAT COULD HAVE A NEGATIVE IMPACT
ON OPERATIONS.
Our management group has been assembled only recently and, as a result,
our management group may be unable to manage effectively our organization and/or
implement our Internet-business based strategy. In addition, the ongoing
transition of our current business to an Internet-based model has placed, and
will continue to place, additional strain on our personnel, accounting,
management information, technology and corporate support systems. Any inadequacy
in these systems to manage the increased size and scope of operations resulting
from our transition and any future growth, or our inability to integrate
successfully any future acquisition, could materially adversely affect our
business, financial condition and results of operations.
11
WE MAY BE UNABLE TO MAKE ATTRACTIVE ACQUISITIONS OR INTEGRATE ACQUIRED
COMPANIES, WHICH COULD SEVERELY DISRUPT OUR OPERATIONS AND ONGOING BUSINESS.
We plan to acquire or make investments in complementary businesses,
products, services or technologies. However, we cannot assure you that we shall
be able to identify suitable acquisition or investment candidates.
Even if we do identify suitable candidates, we cannot assure you that
we will be able to make acquisitions or investments on commercially acceptable
terms. If we buy a business, we could have difficulty in assimilating that
company's personnel, operations, products, services or technologies into our
operations. We have experienced such difficulties in the past. If we encounter
these difficulties in the future, there will be disruptions in our ongoing
business, distractions to our management and employees, and increases in our
expenses, all of which will adversely affect our results of operations.
ANY FUTURE ACQUISITIONS WE MAKE MAY NOT BE PROFITABLE.
Part of our Internet business strategy is to identify and acquire
travel-related Internet organizations in the travel services industry. Future
acquisitions may involve a number of risks that could adversely affect our
business, results of operations and financial condition. These could include
adverse short-term effects on our reported operating results such as those
caused by severance payments to employees of acquired companies, difficulties in
eliminating duplicative costs, restructuring charges associated with the
acquisitions and other expenses associated with the change of control, as well
as non-recurring acquisition costs. Acquisitions may also divert management's
attention, create difficulties with retention, hiring and training of key
personnel, raise risks associated with unanticipated problems or legal
liabilities, and require non-cash accounting charges associated with the
amortization of acquired intangible assets. Furthermore, although we conduct due
diligence and generally require representations, warranties and indemnification
from the former owners of acquired companies, those former owners may not
accurately represent the financial and operating conditions of their companies
and may not have the means to satisfy their indemnification obligations. If an
acquired company's financial or operating results were misrepresented, the
acquisition could have a material adverse affect on our business, financial
condition and results of operations.
FINANCING OF FUTURE ACQUISITIONS WILL DILUTE EXISTING STOCKHOLDER OWNERSHIP.
We intend to finance future acquisitions by using shares of our common
stock or preferred stock for a substantial portion of the consideration to be
paid. This reliance upon the use of common stock or preferred stock as
consideration will dilute shareholders' interests in the Company.
OUR SUCCESS DEPENDS ON MAINTAINING THE INTEGRITY OF OUR SYSTEMS AND
INFRASTRUCTURE.
In order to be successful, we must continue to provide reliable,
real-time access to our systems for our customers and suppliers. As our
operations continue to grow in both size and scope, domestically and
internationally, we shall need to improve and upgrade our systems and
infrastructure to offer an increasing number of customers and travel suppliers
enhanced products, services, features and functionality. The expansion of our
systems and infrastructure will require us to commit substantial financial,
operational and technical resources before the volume of business will increase.
Consumers and suppliers will not tolerate a service hampered by slow delivery
times, unreliable service levels or insufficient capacity, any of which could
have a material adverse effect on our business, operating results and financial
condition.
12
THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE CONTINUING CONTRIBUTION OF OUR KEY
PERSONNEL, INCLUDING MR. DANIEL BRANDANO, OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WHOSE KNOWLEDGE OF OUR BUSINESS WOULD BE DIFFICULT TO REPLACE IN THE
EVENT WE LOSE HIS SERVICES.
Our operations are dependent on the efforts and relationships of Daniel
Brandano and the other executive officers as well as the senior management of
our organization. We will likely be dependent on the senior management of our
organization for the foreseeable future. If any of these individuals becomes
unable to continue in their role, our business or prospects could be adversely
affected. For example, the loss of Mr. Brandano could inhibit the development
and enhancement of our websites, could damage customer relations and our brand,
and could restrict our ability to raise additional working capital if and when
needed. Although we have entered into an employment agreement with Mr. Brandano,
there can be no assurance that he will continue in his present capacity for any
particular period of time.
THE TRAVEL INDUSTRY IS SUBJECT TO NUMEROUS AND UNIQUE RISKS THAT MAY ALSO AFFECT
OUR BUSINESS, FINANCIAL CONDITION, AND OPERATIONS.
Our results of operations will depend upon factors affecting the
vacation industry in general. Our revenues and earnings are especially sensitive
to events that affect domestic and international air travel and the level of car
rentals and hotel reservations. A number of factors could result in a temporary
or long-term overall decline and demand for packaged vacations, including the
following examples:
- International Terrorism: The September 11, 2001 attacks against the
United States halted airline travel and changed forever the government's
security measures and consumers' views concerning travel safety. The July 2005
bombings in the London Underground similarly heightened safety awareness in
Europe.
- Extreme Weather Conditions: In March 2006, forty-one days of rain on
the Hawaiian islands caused flash floods, landslides, mudslides, and a dam break
on the island of Kauai. In August 2005, Hurricane Katrina laid waste to
substantial portions of the United States, including New Orleans, Louisiana,
Biloxi and Gulfport, Mississippi, and Mobile, Alabama. Hurricanes Emily and
Wilma both caused significant damage to Cozumel, Mexico, in July and October
2005. In December 2004, a tsunami in the Indian Ocean devastated areas of India,
Indonesia, Kenya, Malaysia, the Maldives, Myanmar, the Seychelles, Somalia, Sri
Lanka, Thailand, and the United Republic of Tanzania.
- Political Instability, Security Issues, and Labor Disturbances: In
2006, rioting in France led to street clashes with police, the shutdown of major
tourist attractions, and labor strikes. In May 2005, the disappearance of
Natalee Holloway in Aruba, and the follow-up criminal investigation, cast
concerns over the safety of travelers in Aruba. The United States State
Department issues travel warnings recommending that Americans avoid certain
countries. As of April 9, 2006, warnings were issued for Uzbekistan, Pakistan,
Bosnia-Herzegovina, Liberia, the Ivory Coast, Israel, Nigeria, Algeria, Sudan,
Colombia, Afghanistan, Kenya, Iran, Iraq, Saudi Arabia, Nepal, Indonesia,
Zimbabwe, Lebanon, Yemen, Burundi, Somalia, the Central African Republic, and
the Philippines.
- Illnesses: The Avian Influenza (Bird Flu) currently causes
significant concern in Asia and Europe. The Severe Acute Respiratory Syndrome
(SARS) was first reported in Asia in 2003, but spread to more than two dozen
countries in North America, South America, Europe, and Asia before the global
outbreak was contained. In November 2003, a stomach illness struck dozens of
passengers and crew members aboard a cruise ship. Nearly every month illnesses
are reported on multiple cruise ships.
13
- Air and Sea Disasters: Cruise ships have reported missing passengers,
presumably lost overboard, as follows: four lost through early April 2006;
thirteen lost in 2005; eleven lost in 2004; and nine lost in 2003. In addition,
cruise ships often strike land or run aground, often with fatal results. In
March 2006, a fatal fire broke out on a cruise ship in the Carribean. In
November 2005, pirates attempted to overtake a cruise ship in Somalia. In
December 2005, two fatal commercial air crashes occurred, in Miami and Nigeria.
In October 2005, another fatal aircraft crash occurred near Lissa, Nigeria. In
September 2005, a commercial aircraft crashed in Medan, Indonesia. In August
2005, fatal air crashes occurred in Peru, Venezuela, Greece and Italy.
Demand for our products and services may be significantly affected by
any of these unique risks. In addition, any significant economic downturn or any
recession could have a material adverse effect on our business, financial
condition and operations results.
ALTHOUGH THE COMPANY CONTINUES TO HOLD LICENSING RIGHTS ON CERTAIN INTELLECTUAL
PROPERTY, THERE ARE RISK FACTORS ATTENDANT TO THOSE RIGHTS.
WE HAVE A STRATEGIC BUSINESS PARTNER FOR OUR PATENT AND LICENSE RIGHTS, AND IF
OUR PARTNER IS UNABLE SUCCESSFULLY TO DEVELOP, MANUFACTURE OR MARKET PRODUCTS OR
OTHER PRODUCTS INCORPORATING OUR TECHNOLOGY, WE WILL NOT GENERATE SUBSTANTIAL
REVENUES FROM OUR PATENT AND LICENSE RIGHTS.
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, manufacture and marketing of products incorporating the
licensed technology. While Parker-Hannifin has produced demonstration
compressors and hydrogen circulators incorporating our licensed technology,
Parker-Hannifin has not yet manufactured commercial products that incorporate
our technology. We are entitled to a royalty fee from Parker-Hannifin
Corporation that is based upon its sale of our products and products
incorporating our technology. However, Parker-Hannifin may not be successful in
marketing these products, in which event we will not receive royalty fees from
Parker-Hannifin. While we depend upon Parker-Hannifin for sales of
royalty-generating products, we have no control over Parker-Hannifin's technical
and manufacturing development or marketing activities, and Parker-Hannifin is
only required to use reasonable commercial efforts to market these products. If
Parker-Hannifin does not successfully market royalty-generating products under
our license agreement, we will not receive royalty fees. 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 HAVE NO 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
for use in fuel cells. 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.
14
FUEL CELL TECHNOLOGY HAS NOT YET BECOME A WIDELY-ACCEPTED ALTERNATIVE FUEL
SOURCE.
Fuel cell systems represent a relatively new technology, and our
success depends in part 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:
- Cost competitiveness of cell systems;
- User acceptance of fuel cell systems;
- Cost of hydrogen fuel;
- User perception of fuel cell systems' safety; and
- 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. 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.
WE HAVE NO COMMERCIAL PRODUCT SALES AND ONLY LIMITED SALES OF PROTOTYPES. THERE
IS NO GUARANTEE THAT PARKER-HANNIFIN WILL GENERATE SIGNIFICANT SALES OF OUR
PRODUCTS.
Parker-Hannifin may not be able to manufacture or commercialize our
UniVane compressor and hydrogen circulator products in a cost effective manner.
Through 2004, we 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 CANNOT PREDICT WHETHER WE WILL SUCCESSFULLY EFFECTUATE OUR
EVER-DEVELOPING 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.
15
USE OF PROCEEDS
The selling security holders will receive the proceeds from the resale
of the shares of common stock registered under this prospectus. We shall not
receive any proceeds upon the sale of shares by the selling security holders.
DETERMINATION OF OFFERING PRICE
As the registration covers shares transferable by certain selling
security holders (see below), the Company has not determined an offering price.
Market information for the Company's common stock is set forth below.
SELLING SECURITY HOLDERS
BACKGROUND OF THE TRANSACTIONS
This prospectus covers the resale of 445,000 shares of our common stock
issued or issuable in connection with the following transactions:
December 2004 - January 2005. During the period from December 7, 2004
to January 31, 2005, we sold an aggregate of 15,000 shares of common stock to
four individuals, for an aggregate purchase price of $45,000, or $3.00 per
share. For each two shares purchased, the purchaser also received one warrant to
purchase one additional share of common stock, exercisable until December 31,
2006, at an exercise price of $4.50 per share. The proceeds from the sales are
being used for general working capital purposes.
The registration statement of which this prospectus forms a part covers
resale of the shares and warrants issued in the foregoing transaction.
March 2005. On March 2, 2005, we completed a $300,000 financing
consisting of our convertible promissory notes and common stock purchase
warrants. The notes are convertible at the option of the holder into shares of
our common stock, at a price of $3.00 per share, subject to adjustment. The
notes are payable with interest at the rate of 5% per annum. Principal
amortization payments, each in the amount of approximately $15,789 plus accrued
interest, are to be paid in 19 equal monthly installments, commencing July 2,
2005. Amortization payments may be made in cash (accompanied by a 10% premium)
or, at our option, in registered common stock, at a 20% discount to market.
Amortization payments in stock are subject to (a) a limitation based upon the
weighted average trading volume of the common stock for the 20 trading days
preceding the payment date and (b) a 4.99% cap on the beneficial ownership that
each investor may have at any point in time while the notes and warrants are
outstanding.
We also issued the investors common stock purchase warrants to purchase
an aggregate of 266,500 shares of common stock, consisting of (a) five year
warrants to purchase 109,000 shares at an exercise price of $4.31 per share,
subject to adjustment, (b) five-year warrants to purchase 50,000 shares at an
exercise price of $7.50 per share, subject to adjustment and (c) five year
warrants to purchase 100,000 shares at $3.00 per share, subject to adjustment,
and (d) three year wants to purchase 7,500 shares at $4.50, subject to
adjustment. We may require the investors to exercise the warrants described in
(c) if the closing price for our common stock is $4.50 or more for 30
consecutive trading days, and average daily volume during such period is at
least 8,333 shares. The exercise of warrants is also subject to the 4.99% cap on
the beneficial ownership that each investor may have at any point in time while
the notes and warrants are outstanding.
16
We filed a registration statement (of which this prospectus forms a
part) covering the shares issuable upon conversion or payment of the notes and
exercise of the warrants. In accordance with our obligations under the
subscription agreement with the investors, the registration statement of which
this prospectus forms a part covers 150% of the number of shares issuable upon
conversion of the promissory notes, as well as up to 22,667 shares of common
stock issuable upon conversion of promissory notes and exercise of warrants
issued to finders (including an investor) in this transaction. The proceeds of
the loan were used for general working capital purposes. Repayment of the notes
is collateralized by a general security interest in all of our assets.
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,
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. We do not believe that any of the
selling security holders are broker-dealers or affiliated with broker-dealers.
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.
17
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
- ------------------------------------------------------------------------------------------
Alpha Capital
Aktiengesellschaft .. 266,667 (1)(9) 266,667 -- --
JM Investors .......... 144,583 (2)(9) 144,583 -- --
Libra Finance S.A. .... 8,333 (3)(9) 8,333 -- --
RJ Prager Corp. ....... 2,917 (4)(9) 2,917 -- --
Ralph Beisner ......... 5,000 (5) 5,000 -- --
Jason W. Sanders ...... 2,500 (6) 2,500 -- --
Mitchell Levy ......... 2,500 (7) 2,500 -- --
Norman Nick ........... 12,500 (8) 12,500 -- --
------- ------- ------- -------
TOTAL ................. 445,000 445,000
=======
__________________
(1) Consists of 100,000 shares of common stock issuable upon conversion of
promissory notes and 166,667 shares issuable upon exercise of currently
exercisable warrants. The address of the selling security holder is Pradafant 7,
9490 Furstentums, Vaduz, Lichtenstein. Konrad Ackerman and Rainer Poschof the
selling security holder, make decisions as to the voting and disposition of the
securities.
(2) Consists of 56,750 shares of common stock issuable upon conversion of
promissory notes and 87,833 shares issuable upon exercise of currently
exercisable warrants. The address of the selling security holder is 152 East 9th
Street, Lakewood, New Jersey 08701. Jeffrey Rubin makes decisions as to the
voting and disposition of the securities.
(3) Consists of 5,000 shares of common stock issuable upon conversion of
promissory notes and 3,333 shares issuable upon exercise of currently
exercisable warrants. The address of the selling security holder is P. O. Box
4603, Zurich, Switzerland. Seymour Braun makes decisions as to the voting and
disposition of the securities.
(4) Consists of 1,750 shares of common stock issuable upon conversion of
promissory notes and 1,167 shares issuable upon exercise of currently
exercisable warrants. The address of the selling security holder is 5301 North
Federal Highway, Boca Raton, Florida 33487. Robert Jay Prager makes decisions as
to the voting and disposition of the securities.
(5) Consists of 3,333 shares of common stock and 1,667 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 27 Quaker Farm Trail, Hyde Park, New York 12538.
(6) Consists of 1,667 shares of common stock and 833 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 100 South Point Drive, Miami Beach, Florida 33139.
(7) Consists of 1,667 shares of common stock and 833 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 201 North West 82nd Avenue, Suite 203, Plantation, Florida 33324.
(8) Consists of 8,333 shares of common stock and 4,167 shares issuable upon
exercise of currently exercisable warrants. The address of the selling security
holder is 20220 Boca West Drive, #1803, Boca Raton, Florida 33434.
(9) The exercise of warrants or conversion of convertible promissory notes by
the named selling security holder was, on the effective date of this Prospectus,
subject to a 4.99% beneficial ownership limitation that the named selling
security holder may have at any point in time while the warrants or notes are
outstanding, unless such limitation is voided by the selling security holder on
at least 61 days' notice to us.
18
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.
To our knowledge, there are currently no plans, arrangements or
understandings between the selling security holders and any underwriter,
broker-dealer or agent regarding the sale of the common stock by the selling
security holders. The selling security holders may decide not to sell all or a
portion of the common stock offered by them pursuant to this prospectus. In
addition, any selling security holder may transfer, devise or give the common
stock by other means not described in this prospectus. Any common stock covered
by this prospectus that qualifies for sale pursuant to Rule 144 or Rule 144A
under the Securities Act, or Regulation S under the Securities Act, may be sold
under Rule 144 or Rule 144A or Regulation S rather than pursuant to this
prospectus.
The aggregate proceeds to the selling security holders from the sale of
the common stock offered pursuant to this prospectus will be the purchase price
of such common stock less discounts and commissions, if any. The selling
security holders reserve the right to accept and, together with its agents from
time to time, reject, in whole or part, any proposed purchase of common stock to
be made directly or through its agents. We will not receive any of the proceeds
from this offering.
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
19
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.
The Subscription Agreement between the Company and two of the selling
security holders required us to use our reasonable best efforts to file the
registration statement by April 29, 2005 and to have the registration statement
declared effective not later than the sooner of July 29, 2005 or ninety days
after the effective date thereof. The registration statement was filed on April
22, 2005 and was originally declared effective on May 6, 2005. Had we not
conformed to registration requirements of the Subscription Agreement, we would
have owed cash liquidated penalties. For more information regarding the
Subscription Agreement, see Exhibit 10.11.
As of January 13, 2006, we entered into a Modification and Waiver
Agreement between the same two selling shareholders, under which we are required
to file a Post-Effective Amendment to the Registration Statement on or before
April 13, 2006 and required to cause the Amendment to be declared effective by
the SEC not later than sixty (60) days thereafter, or else liquidated damages
shall accrue in the amounts set forth in a second Subscription Agreement, dated
January 13, 2006. For more information regarding the Modification and Waiver
Agreement, see Exhibit 10.17.
20
In addition, with the Modification and Waiver Agreement, the Company
agreed to file a new Registration Statement in relation to additional securities
granted as part of that transaction. The new Registration Statement must be
filed within 120 days of January 13, 2006 and become effective within 180 days
thereof.
SHARES ELIGIBLE FOR FUTURE SALE
As of the original effective date of this prospectus, we had 1,118,766
shares of common stock issued and outstanding. Of the issued and outstanding
shares, approximately 600,000 shares of our common stock (175,919 of which were
then owned by our then-current officers, directors and principal stockholders)
had been held for in excess of one year and are available for public resale
pursuant to Rule 144 promulgated under the Securities Act. As of the date of
this prospectus, the 445,000 shares being offered by selling security holders
can be publicly transferred, and the resale of 272,500 shares of common stock
are covered by a registration statement that became effective on December 30,
2004. Not included in the foregoing are 124,539 shares issuable upon exercise of
options that have been granted and 546,171 shares not covered by this prospectus
that are 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 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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
In connection with the transactions contemplated by the Stock Exchange
Agreement dated January 13, 2006, Thomas C. Edwards resigned as an officer
(President and Chief Executive Officer) and director of the Company, and Kevin
Hooper resigned as a director of the Company. In accordance with the terms of
the Stock Exchange Agreement, Leonard Sculler, who has served as a director of
the Company since June 2003, continues to serve as a director of the Company for
a period of at least one year. George R. Schell, who served as a director of the
Company since 1998, confirmed in a January 2006 telephone conversation with the
Company's General Counsel that he had informally resigned as a director of the
Company, and was not re-elected at a January 31, 2006 Meeting of Shareholders.
21
At the Meeting of Shareholders, the following persons were elected to
serve as officers and directors of the Company until the next annual meeting of
shareholders and until their successors are duly elected and qualified; the
table includes the names, positions held, and ages of our executive officers and
directors:
NAME AGE POSITION
- ------------------ --- ----------------------------
Daniel G. Brandano 56 Director, President, CEO
Thomas W. Busch 50 Director, Vice President, Treasurer, CFO
Robert A.G. LeVine 44 Director, Secretary, General Counsel
Leonard Sculler 67 Director
Daniel Brandano, Director, President and Chief Executive Officer, has
served as President, Chief Executive Officer, and Chairman of the Board of
Directors of Dynamic Leisure Group North America, Inc. (formerly known as
Dynamic Leisure Group, Inc.) since May 2005. Since May 2003, Mr. Brandano has
served as the Managing Director of Street Venture Partners, LLC, a consulting
firm designed to identify opportunities in the travel and technology industry
for mergers, acquisitions and alternative exit strategies. From 1998 through
2002, Mr. Brandano served as the Chief Executive Officer for Affinity
International Travel Systems, Inc., based in St. Petersburg, Florida.
Thomas Busch, Director, Vice President and Chief Financial Officer, has
served as Vice President, Treasurer, Chief Financial Officer, and Director of
Dynamic Leisure Group North America, Inc. (formerly known as Dynamic Leisure
Group, Inc.) since May 2005. From April 2001 to April 2005, Mr. Busch was an
independent Financial Consultant. From September 2000 to May 2001, Mr. Busch
served as the Chief Financial Officer for Affinity International Travel Systems,
Inc. based in St. Petersburg, Florida.
Robert LeVine, Director, Secretary and General Counsel, has served as
Secretary and Director of Dynamic Leisure Group North America, Inc. (formerly
known as Dynamic Leisure Group, Inc.) since May 2005. Mr. LeVine has been a
licensed attorney in good standing in the State of Florida since 1987 and has,
since 1992, been a principal in his own private practice. Mr. LeVine earned a
Bachelor of Arts degree from Harvard College and his Juris Doctor degree from
the University of Cincinnati College of Law, where he served as Executive Editor
of the Cincinnati Law Review.
Leonard Sculler has served on the Board of Directors of the Company
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.
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 in the past 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.
22
CORPORATE GOVERNANCE MATTERS
Audit Committee. The board of directors has not yet established an
audit committee, and the functions of the audit committee are currently
performed by our Chief Financial Officer, with assistance by expert independent
accounting personnel and oversight by the entire board of directors. We are not
currently subject to any law, rule or regulation requiring that we establish or
maintain an audit committee. We may establish an audit committee in the future
if the board determines it to be advisable or we are otherwise required to do so
by applicable law, rule or regulation.
Board of Directors Independence. Our board of directors consists of
four members. We are not currently subject to any law, rule or regulation
requiring that all or any portion of our board of directors include
"independent" directors. However, one of our directors - Leonard Sculler - is
"independent" within the meaning of Section 10A-3 of the Securities Exchange Act
of 1934 and Nasdaq Marketplace Rule 4200.
Audit Committee Financial Expert. We do not yet have an audit
committee, but one member of our board of directors -- Thomas W. Busch -- is an
"audit committee financial expert" within the meaning of Item 401(e) of
Regulation S-B. In general, an "audit committee financial expert" is an
individual member of the audit committee (board of directors) who (a)
understands generally accepted accounting principles and financial statements,
(b) is able to assess the general application of such principles in connection
with accounting for estimates, accruals and reserves, (c) has experience
preparing, auditing, analyzing or evaluating financial statements comparable to
the breadth and complexity to the Company's financial statements, (d)
understands internal controls over financial reporting and (e) understands audit
committee functions. Mr. Busch is not "independent" within the meaning of that
term under federal securities laws and regulations.
Code of Ethics. We adopted a Code of Business Conduct and Ethics on
April 12, 2005 applicable to all of our Officers, Directors and Employees. The
Code of Business Conduct and Ethics is a written standard designed to deter
wrongdoing and to promote (a) honest and ethical conduct, (b) full, fair,
accurate, timely and understandable disclosure in regulatory filings and public
statements, (c) compliance with applicable laws, rules and regulations, (d) the
prompt reporting violation of the code and (e) accountability for adherence to
the Code. We are not currently subject to any law, rule or regulation requiring
that we adopt a Code of Ethics. The Code of Business Conduct and Ethics was
filed with the SEC on April 22, 2005. We shall provide a copy, without charge,
to any person desiring a copy of the Code of Ethics, by written request to us at
our principal offices.
Nominating Committee. We have not yet established a nominating
committee. Our board of directors, sitting as a board, performs the role of a
nominating committee. We are not currently subject to any law, rule or
regulation requiring that we establish a nominating committee.
Compensation Committee. We have not yet established a nominating
committee. Our board of directors, sitting as a board, performs the role of a
compensation committee. We are not currently subject to any law, rule or
regulation requiring that we establish a compensation committee.
23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us as of March 24,
2006, 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 Dynamic Leisure Corporation, 2203 North Lois
Avenue, Suite 900, Tampa, Florida 33607.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as being owned
by them.
Under securities laws, a person is considered to be the beneficial
owner of securities owned by him (or certain persons whose ownership is
attributed to him) and that can be acquired by him within 60 days from the date
of this Report, including upon the exercise of options, warrants or convertible
securities. We determine a beneficial owner's percentage ownership by assuming
that options, warrants or convertible securities that are held by him, but not
those held by any other person, and which are exercisable within 60 days of the
date of this prospectus, have been exercised or converted.
The table is based on 9,331,016 shares of common stock currently
outstanding, after giving effect to the issuance of shares in connection with
the Stock Exchange Agreement dated January 13, 2006. Each share of Series A
Preferred Stock carries 1,000 votes per share on each matter submitted to a vote
of shareholders, and is convertible into 1,000 shares of common stock. Under the
Stock Exchange Agreement, the Company issued Series A Preferred Stock
convertible into our common stock at such time as we increased our authorized
shares sufficiently to permit the Series A Preferred Stock to be converted into
common stock. The Company's Board of directors authorized an increase in the
number of authorized shares of common stock to 300,000,000 shares, subsequently
authorized by our shareholders. Except as otherwise required by SEC rules
relating to beneficial ownership, the table does not give effect to the issuance
of up to:
o 124,539 shares upon exercise of options that have been granted;
o 4,353,211 shares upon exercise of outstanding stock purchase
warrants; and
o 2,752,764 shares upon conversion of outstanding convertible
promissory notes.
24
Amount and Nature of Beneficial Ownership
-----------------------------------------
Common Shares
-----------------------------------------
Name Number of Shares Percent of Class
---- ------------------- -------------------
Daniel G. Brandano (1) ............... 3,011,102 29.8%
Thomas W. Busch (2) .................. 866,666 9.3%
Robert A. G. LeVine (3) .............. 266,666 2.9%
Leonard Sculler ...................... 6,666 *
Officers and Directors as Group
(5 persons) .......................... 4,151,100 41.1%
Diversified Acquisition Trust, LLC (4)
50 Braintree Hill Park, Ste. 108
Braintree, MA ........................ 2,795,546 27.4%
MMA Capital, LLC (5)
456 Montgomery Street, Ste. 2200
San Francisco, CA 94104 .............. 4,000,000 30.0%
Stephen A. Hicks(6)
300 East 40th Street
New York, NY 10016 ................... 1,666,667 16.2%
Raymon Valdes(7)
3080 East Bay Drive
Largo, Florida 33771 ................. 740,000 7.6%
Claudale Limited (8)
c/o T&T Management Services Limited
28 Irish Town, Gibraltar ............. 693,333 7.4%
GRQ Consultants, Inc. (9)
595 S. Federal Hwy, Ste. 600
Boca Raton, FL 33432 ................. 644,442 6.7%
Alpha Capital Aktiengesellschaft (10)
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein .................. 519,299 5.3%
* Less than 1%.
(1) Includes shares registered to Street Ventures Partners, LLC, a limited
liability company in which Mr. Brandano shares equal ownership with his spouse.
Consists of (a) 833,333 shares of common stock, (b) 1,066,666 shares of common
stock registered to Street Venture Partners, LLC, (c) 333,333 shares of common
stock held by family members (d) 388,885 shares issuable upon exercise of the
convertible feature of a note held by Street Venture Partners, LLC and (d)
388,885 shares issuable upon exercise of currently exercisable warrants held by
Street Venture Partners, LLC.
(2) Consists of 866,666 shares of common stock.
(3) Consists of 266,666 shares of common stock.
25
(4) Geoffrey J. Eiten is the sole beneficial owner of Diversified Acquisition
Trust, LLC. Mr. Eiten, through the trustee, exercises sole investment and voting
powers over the shares included in the table. Consists of (a) 1,906,666 shares
of common stock, (b) 444,440 shares issuable upon exercise of the convertible
feature of a note and (c) 444,440 shares issuable upon exercise of currently
exercisable warrants.
(5) Consists of (a) 2,000,000 shares issuable upon exercise of the convertible
feature of a note and (b) 2,000,000 shares issuable upon exercise of outstanding
warrants.
(6) Consists of (a) 700,000 shares of common stock and (b) 966,667 shares
issuable upon exercise of the convertible feature of a note.
(7) Consists of (a) 340,000 shares of common stock and (b) 400,000 shares
issuable upon exercise of the convertible feature of a note.
(8) Claudale Limited is a Gibraltar company which owns 693,333 shares of common
stock. Claudale Limited also manages a family trust for Mr. Daniel Brandano. Mr.
Brandano has no ownership interest in Claudale Limited and disclaims beneficial
ownership or control of any of the Company's shares owned by Claudale Limited.
(9) Consists of (a) 400,000 shares of common stock, (b) 111,110 shares issuable
upon exercise of the convertible feature of a note and (c) 133,332 shares
issuable upon exercise of outstanding warrants.
(10) Consists of (a) 100,000 shares of common stock, (b) 252,632 shares issuable
upon exercise of the convertible feature of a note and (c) 166,667 shares
issuable upon exercise of outstanding warrants.
DESCRIPTION OF SECURITIES
GENERAL
The following description of our capital stock and provisions of our
Articles of Incorporation is a summary thereof and is qualified by reference to
our Articles of Incorporation, copies of which may be obtained upon request. Our
authorized capital currently consists of 300,000,000 shares of common stock, par
value $.01 per share, and 20,000,000 shares of preferred stock, par value $.01
per share. Currently, 9,331,016 shares of common stock are issued and
outstanding; preferred stock previously issued to the shareholders of Dynamic
Leisure Group, Inc. pursuant to the Stock Exchange Agreement dated January 13,
2006 were automatically converted to shares of common stock upon the increase in
authorized shares in February 2006.
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.
26
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. Although preferred stock was designated and issued as part of the
Stock Exchange Agreement, that stock automatically converted to common stock
upon our increasing the authorized shares of common stock, and we have no plans
to issue any further 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 4,353,211 shares of our common stock. The warrants were
issued in connection with various 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 prices ranging from $.68
per share to $11.25 per share and expire on various dates through June 15, 2010.
We are entitled to call warrants to purchase 394,504 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 $8.10 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. We may require holders of 100,000 warrants to exercise those
warrants if the closing price for our common stock is $4.50 or more for 30
consecutive trading days, and average daily volume during such period is at
least 8,333 shares. The exercise of warrants to purchase 259,000 shares is also
subject to a 4.99% cap on the beneficial ownership that each holder may have at
any point in time while any of the warrants (or the promissory notes in
connection with which the warrants were issued) are outstanding.
CONVERTIBLE PROMISSORY NOTES
In connection with a private placement completed in March 2005, we
issued our secured convertible promissory notes in the aggregate principal
amount of $300,000. The notes are convertible at the option of the holder into
shares of our common stock, at a price of $3.00 per share, subject to
adjustment. On January 13, 2006, the Company entered into a Modification and
Waiver Agreement with Alpha Capital Aktiengesellschaft, JM Investors, LLC, Libra
Finance, S.A. and RG Prager Corporation. The parties to the Modification and
Waiver Agreement are also parties to a series of agreements dated March 2, 2005,
as amended, under which the Company issued convertible promissory notes
aggregating of $327,000. At the time of execution of the Modification and Waiver
Agreement, the Company was in default of its obligations under the March 2, 2005
agreements.
Under the Modification and Waiver Agreement, interest on the
convertible promissory notes at the rate of 5% per annum will be paid quarterly,
commencing March 31, 2006. Monthly principal amortization payments equal to
one-eleventh (1/11th) of the Initial Principal Amount, or approximately $29,700,
are to commence on June 1, 2006. The notes are convertible at a fixed price of
$.75 per share, subject to certain adjustments. As part of the terms of the
Financing Transaction, the note holders released their security interest in the
Company's assets.
In accordance with the terms of the Modification and Waiver Agreement,
upon receipt of the funding of $2 million in a January 13, 2006 Financing
Transaction, the note holders opted to receive payment, and the Company paid a
total of approximately $245,250 to the note holders, consisting of approximately
$163,500 in principal amount of promissory notes and a premium in the amount of
27
approximately $81,750. Provided an Event of Default has not occurred, the
Company may opt to prepay a portion or the entire outstanding principal amount
of the promissory notes by paying a sum equal to one hundred and fifty percent
(150%) of the principal amount to be redeemed plus any accrued but unpaid
interest.
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, the Company issued an aggregate of
200,000 shares of its common stock to the two investors under the March 2, 2005
transaction documents. Pursuant to the terms of the Modification and Waiver
Agreement (a) those provisions of the transaction documents dated March 2, 2005
providing exceptions to the adjustment provisions of the notes and warrants have
been eliminated, (b) the exercise price of the warrants to purchase up to
259,000 shares of the Company's common stock issued under the March 2, 2005
transaction documents was changed to $1.00 per share and the warrants are
exercisable until 3 years from the filing of the Form 8-K announcing the
recapitalization of the Company, (c) the number of shares issuable upon exercise
of those warrants to the investors cannot be reduced to less than 300,000
shares. Under the Modification and Waiver Agreement, under certain
circumstances, we may require the investors to exercise the 300,000 warrants.
The Company may prepay the note at 150% of the principle due, plus interests and
other amounts due, through the redemption date but only if an effective
registration statement exists.
We agreed to file an amendment to the existing registration statement
covering resale of the shares issuable under the transaction documents dated
March 2, 2005. Such registration statement must be filed on or before April 13,
2006 and become effective not later than 60 days after the date of filing, or
the Company will be subject to the payment of liquidated damages to the note
holders. In addition, we have agreed to file a new registration statement
covering the resale of those shares issuable under the Modification and Waiver
Agreement the resale of which are not covered by the existing registration
statement. Such additional registration statement must be filed by May 13, 2006
and become effective not later than 60 days after the date of filing, or the
Company will be subject to the payment of liquidated damages to the note
holders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Stock Trans,
Inc., 44 West Lancaster Avenue, Ardmore, PA 19003. Our transfer agent may be
reached by telephone at (610) 649-7300.
INTEREST OF NAMED EXPERTS AND COUNSEL
Neither the Company's new legal counsel, Crone Law Group of San
Francisco, California, nor the Company's Independent Registered Public
Accounting Firm, Salberg & Company, P.A. of Boca Raton, Florida, has any
interest in the Company.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFCATION FOR SECURITIES ACT
LIABILITIES
Our Amended and Restated Articles of Incorporation contain a provision
eliminating the liability of a director to us and our stockholders for monetary
damages for breaches of fiduciary duty as a director, to the fullest extent
permitted by law.
28
Our Amended and Restated Bylaws also authorize the Company to indemnify
any director, officer or agent of the Company, or any other person, to the full
extent permitted by law. This indemnification may include the right to be paid
the expenses incurred in defending any action, suit or proceeding in advance of
its final disposition. Our Amended and Restated Bylaws require the Company to
indemnify directors, officers or employees in connection with certain actions,
suits or proceedings, subject to certain limitations.
Any repeal or modification of our Amended and Restated Articles of
Incorporation shall be prospective only and shall not adversely affect any right
or protection of our directors or officers existing at the time of a repeal or
modification for any breach covered by the Amended and Restated Articles of
Incorporation which occurred prior to such repeal or modification.
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, 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. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by our directors, officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our 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 of 1933 and will be
governed by the final adjudication of such issue.
DESCRIPTION OF BUSINESS
COMPANY HISTORY
We were incorporated under the laws of the state of Minnesota in
December 1984, under the name TERTM, Inc. In 1989, we changed our name to TERTM
Technology Corporation and, in December 1993, again changed our name to DynEco
Corporation. Most recently, in March 2006, we again changed our name to Dynamic
Leisure Corporation.
Prior to 1991, we engaged in the design, development, manufacture and
marketing of certain proprietary products using a proprietary production process
known as the Thermal Expansion Resin Transfer Molding Process. We also marketed
and licensed a design engineering and contract manufacturing capability of
products using the TERTM process to third parties. We discontinued these
operations in 1991 and, until the acquisition of the compressor assets and
business of DynEco International, Inc. ("DynEco International") in March 1994,
we only engaged in licensing the TERTM process and providing application
engineering consulting with respect to those licenses. We ceased all
TERTM-related activities in March 1994.
In January 1993, we were introduced to DynEco International, a
developmental stage company engaged in the development of proprietary compressor
technology intended to be commercially exploited primarily through licensing to
third parties. While DynEco International expressed interest in being acquired
by us, due to our financial obligations, DynEco International was unwilling to
consummate a business combination with us until we restructured our obligations.
In order to do so, on July 12, 1993, we filed a Plan of Reorganization and a
Disclosure Statement under Chapter 11 of the Federal Bankruptcy laws with the
United States Bankruptcy Court for the District of Minnesota. The Plan of
Reorganization was subsequently confirmed by the Order of the Bankruptcy Court
on December 17, 1993. The Chapter 11 case was closed by the Order of the
Bankruptcy Court in June 1994.
29
On March 31, 1994, we consummated the acquisition of all of the issued
and outstanding shares of capital stock of DynEco International in exchange for
(a) approximately 130,867 shares of our common stock and (b) warrants to
purchase approximately 9,753 shares of our common stock. Those warrants have
since expired unexercised. On the effective date of the acquisition, DynEco
International became our wholly-owned subsidiary, and DynEco International's
security holders collectively became our majority shareholders. At the same
time, our directors and officers resigned their positions, and the directors and
officers of DynEco International became our directors and officers.
From the time of our acquisition of DynEco International until May
2003, we engaged in the development and commercialization of the patented
technologies licensed to us by our then Chief Executive Officer, Thomas C.
Edwards, Ph.D. We funded those activities through limited revenues and sales of
our equity securities. The focus of our activities was the development of
products that could be used in fuel cell applications. However, we were unable
to successfully develop these products on a commercial basis due to our limited
financial resources, the lack of public acceptance of fuel cells as an
alternative energy source and our inability to attract manufacturers willing to
devote resources to altering their manufacturing processes to accommodate the
production of our products.
In May 2003, we entered into the exclusive license agreement with
Parker-Hannifin Corporation that is described above. Between that time and
December 31, 2005, our activities were limited to our consulting services
rendered to Parker Hannifin and our continued development of non-fuel cell
applications for our UniVane technology. All of our existing material agreements
have been executed and are being performed by the Company. As a result, the
operations of DynEco International as an operating subsidiary have ceased, and
DynEco International is not currently engaged in active operations.
In January 2006, we entered into a Stock Exchange Agreement with the
former shareholders of Dynamic, under which the Company acquired all of the
outstanding capital stock of Dynamic, and Dynamic became a wholly-owned
subsidiary of the Company. Dynamic was founded in May 2005 for the purpose of
consolidating leisure-based travel products, such as airfares, hotels, car
rentals, excursions, and tours, using proprietary computer software and
broadband communication technology. Currently, we plan to operate primarily in
the wholesale travel industry, after several years of operating in the
industrial goods industry. For further information on the Stock Exchange
Agreement with Dynamic and the corporate name change, see Exhibit 10.22.
HISTORICAL BUSINESS - PATENTING AND LICENSING OF COMPRESSOR AND PUMP TECHNOLOGY
Over the last several years, and through January 13, 2006, we were
engaged primarily in the development of high efficiency compressors and pumps
believed to have commercial application in products. The technology underlying
our compressors and pumps was created by Dr. Thomas Edwards, our founder and
former Chief Executive Officer. The technology is the subject of three patents
that have been issued by the United States Patent and Trademark Office. As the
Company retains certain patent and license rights, we include a description of
the Company's efforts in compressor and pump technology in this prospectus.
30
FUEL CELLS
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 are an emerging energy source that is being developed
as an alternative to traditional energy sources such as gasoline and coal. 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, without
combustion. 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 only heat
and water as by-products. 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 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. 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. Some fuel cell applications have progressed to the
pre-production stage and have received significant attention in the financial
and popular press.
DYNECO UNIVANE(R) COMPRESSOR AND HYDROGEN CIRCULATOR
We developed a line of compressors and pumps incorporating Dr. Edwards'
technology, known as UniVane devices. 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. Although numerous compressor manufacturers produce lubricant-free
(oiless) compressors, the primary innovation in our lubricant-free compressors
and pumps is that they are more reliable and efficient than other oiless
compressors and pumps. We believe that our UniVane devices can be successfully
incorporated into commercially viable fuel cell applications.
We control the rights to two proprietary mechanisms - Orbital Vane(R)
and UniVane devices. UniVane compressors operate without a lubrication system, a
primary requirement for fuel cell compressors. On the other hand, Orbital Vane
machines require lubricant systems and, therefore, unlike the UniVane, are
unsuitable for fuel cell applications. The Company 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 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. The
Company's 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 results 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.
31
LICENSE AGREEMENT WITH DR. THOMAS C. EDWARDS
On February 4, 2004, we executed an Exclusive Patent and Know-How
License Agreement (the "2004 License Agreement") with Thomas C. Edwards, Ph.D.,
our former president and chief executive officer. The 2004 License Agreement
replaced and superceded a license agreement that we entered into with Dr.
Edwards on March 9, 1992.
Under the 2004 License Agreement, we were 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 license agreement with Dr. Edwards covers three patents
issued by the United States Patent and Trademark Office, including Dr. Edwards'
patents for UniVane technology. We are permitted to sublicense the licensed
technology, and have sublicensed the licensed technology to Parker-Hannifin
under our exclusive license agreement with Parker-Hannifin (see below).
Under the 2004 License Agreement, we were 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 were 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. No royalty fees are due and owing to Dr. Edwards under this license
agreement.
Under a January 12, 2006 Exclusive Patent and Know-How License
Agreement, Dr. Edwards relinquished any entitlement to royalty payments under
the prior Exclusive Patent and Know-How License Agreement and has assigned and
transferred to us all of his right, title and interest under the 2004 License
Agreement. For further information on the January 12, 2006 Exclusive Patent and
Know-How License Agreement, see Exhibits 10.29 and 10.30.
LICENSE AGREEMENT WITH PARKER-HANNIFIN CORPORATION
Our limited financial resources prevented us from commercializing our
UniVane devices into revenue-producing products. Consequently, 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 granted Parker-Hannifin a sublicense
agreement that grants them exclusive worldwide 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. 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 UniVane technology air compressor and hydrogen
circulator technology to any other party.
In consideration for the license grant, Parker-Hannifin agreed to pay
us a royalty for each air compressor and hydrogen circulator incorporating our
UniVane technology and sold by Parker-Hannifin. 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. 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:
32
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.
In 2005, our UniVane fuel cell compressors and hydrogen circulators
were our only products capable of generating revenues, leaving us 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; there is no assurance
that commercial applications for our UniVane devices will be developed or, even
if developed, that they will be successfully marketed. With the exception of an
immaterial number of sales of prototype units, 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. If
Parker-Hannifin does not successfully market royalty-generating products under
our license agreement, we do not receive royalty fees. In 2005, we received no
royalty fees.
The license agreement with Parker-Hannifin will continue until 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.
In connection with the license agreement, we provided consulting
services to Parker-Hannifin to assist in transitioning our UniVane technology to
them and for developing and improving products covered by the license agreement.
The consulting agreement provided for an initial term of one year terminating
May 31, 2004, subject to automatic month-to-month renewals unless one party
provided 90-days notice of termination to the other. We received consulting fees
of $25,000 per month under the agreement. Following expiration of the initial
12-month period, we continued to provide consulting services to Parker-Hannifin
until November 2004, when Parker-Hannifin concluded that development of our
UniVane technology had progressed to the point that it no longer required our
consulting services in connection with their product development activities.
Accordingly, we mutually orally agreed with Parker-Hannifin that our consulting
services would cease to be provided as of December 10, 2004. The cessation of
consulting services does not alter our rights and obligations relating to our
right to future royalty payments based upon sales of products incorporating our
UniVane devices.
33
SUPPLY AGREEMENT WITH PARKER-HANNIFIN CORPORATION
On August 6, 2004, we entered into a supply agreement with
Parker-Hannifin, under which Parker-Hannifin agreed to supply us with our
requirements of UniVane products for resale in non-fuel cell applications, if
any, that we may develop in the future. Under the supply agreement, any UniVane
products we purchase from Parker-Hannifin will be sold to us at the standard
distributor pricing established by Parker-Hannifin from time-to-time. We are
under no obligation to purchase any products from Parker Hannifin and have made
no commitment to purchase any products under the supply agreement. If we are
able to develop non-fuel cell applications for our UniVane devices, we have
granted Parker-Hannifin a right of first refusal to supply us with systems
incorporating those devices, if Parker-Hannifin demonstrates that it can supply
systems meeting our technical requirements at pricing that is reasonably
competitive with other suppliers. As of the date of this Report, we have not
developed any non-fuel cell applications that would be subject to the provisions
of the supply agreement with Parker-Hannifin.
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.
RESEARCH AND DEVELOPMENT
For each of the two years ended December 31, 2005 and 2004, we spent
approximately $100,383 and $145,171, respectively, on research and development
activities.
GOVERNMENT REGULATION
As of December 31, 2005, our principal products and services consisted
of our UniVane device licenses. During 2005, we were also engaged in technology
development unrelated to our UniVane devices. None of our principal products or
services required 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 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.
It should be noted that the Company retains its licensing rights with
Parker-Hannifin.
34
CURRENT BUSINESS - TRAVEL OPERATIONS
On January 13, 2006, we entered into a Stock Exchange Agreement with
the former shareholders of Dynamic Leisure Group, Inc. ("Dynamic"), now known as
Dynamic Leisure Group North America, Inc., a privately-held Florida corporation,
under which we acquired all of the outstanding capital stock of Dynamic, and
Dynamic became a wholly-owned subsidiary of the Company. For audited financial
statements of Dynamic Leisure Group Inc., see the Company's 8-K/A filed with the
SEC on March 29, 2006.
The Company, operating primarily through its wholly-owned subsidiary,
Dynamic Leisure Group North America, Inc., is engaged in the business of
marketing, selling and distributing a variety of wholesale and retail
travel-related products and services. Specifically, we market, sell and
distribute vacation packages, tours, cruises, domestic and international airline
tickets, car rentals and accommodation products and services to travel agencies
and consumers. We are currently implementing a business strategy to utilize the
Internet as a delivery platform for our inventory of travel related products and
services.
We intend to fulfill demand for our travel product by aggregating our
inventory of packaged leisure travel products and using the Internet as the
delivery platform.
We believe we have developed and acquired the infrastructure necessary
to implement our Internet business strategy. Specifically, we have:
- developed and acquired technologies;
- developed specialized knowledge and experience concerning certain
geographic destinations; and
- established relationships with travel suppliers that enable us to
offer a large inventory base at competitive rates.
A key component of our Internet business strategy is to focus our
resources in two segments: the business to consumer and business to business
travel arena. We intend to concentrate our resources on the direct-to-consumer
travel arena, where our objective is to sell leisure travel products that
traditionally have had higher margins than airline ticket sales, including,
among others, vacation packages, tours, and cruises. We also intend to continue
to sell our leisure travel products to other travel providers, through existing
and potential new relationships.
With our current infrastructure, we believe we are well-positioned to
take advantage of the potential growth in the domestic and international travel
industries and in online travel. Our strategy is to focus on the sale and
distribution of travel products, such as vacation packages, tours and cruises,
which traditionally have had higher margins than airline ticket sales.
Our Internet business strategy is centered on the development,
implementation and integration of several websites. Our sites, many currently in
development, are being designed to attract a loyal customer base in the United
States, Europe, Asia and Latin America, and to convert these potential customers
into leisure travel buyers.
35
OUR INTERNET BUSINESS STRATEGY
We believe that in order to become profitable we must begin selling
travel products such as vacation packages, tours and cruises, which
traditionally have had higher margin than airline ticket sales. Our Internet
business strategy, which is centered on the development of our websites and is
focused on the online sale of specialized vacation and tour packages, is
designed to sell such traditionally higher margin products. Specifically, our
strategy is designed to:
- Attract and acquire a substantial base of travel customers in the
U.S., Europe and Latin America, by developing a compelling and functional web
presence, launching the appropriate marketing and strategic partnership
initiatives and offering the necessary customer service mechanisms; and
- Convert customers into leisure travel buyers by offering attractive
prices on personalized vacation packages, tours and cruises utilizing our
TourScape operating system.
To achieve the goals of our business strategy, however, we need to
successfully develop our websites into full-service websites that will use our
existing hardware and software infrastructure, as well as our strategic
partnerships and existing vendor contracts.
OUR INFRASTRUCTURE
We believe we are acquiring and developing the infrastructure necessary
to effectively carry out our Internet business strategy. This infrastructure is
comprised of our network architecture, Internet-enabled software engines,
back-end operations and strategic and contract-based relationships.
Network Architecture. We are developing and implementing a network
architecture designed to support our Internet and enterprise-based activities.
This architecture takes advantage of, and builds upon, our existing
technologies. Our systems are being designed and developed by a series of
vendors, including but not limited to SABRE, and by our internal technology
staff. We believe that our systems will be capable of supporting all of our
internal operations and Internet-related initiatives, including:
- A processing capability for online users' query and booking
transactions;
- An ability to provide agents with the tools and resources necessary
to deliver superior customer service; and
- A means to support expansion that meets growing corporate needs and
consumer demands.
Internet-Enabled Software Systems. We have made significant investments
in the software infrastructure that will be integrated into the Company's
website. Our software systems include TourScape, a tour/wholesale reservation
software system. TourScape, developed by the SABRE Group, improves productivity,
efficiency, record-keeping and business tracking, and reduces operator training
and booking time. It also supports multiple product lines, unlimited packaging
capabilities, numerous pricing and costing methods and various commission
levels.
Internal Operations. Despite the automation of the real-time booking
processes, travel reservations often still require some human interaction for
completion. At a minimum, this involves physically handling and mailing paper
airline tickets to customers, where applicable, and manually reviewing tour
36
package transactions for accuracy and completeness. Under our Internet business
strategy, we plan to provide live agent customer support to those customers
requiring it. Because of our expertise as a wholesale distributor as well as a
telephone-based travel operator, we believe we are well-positioned to expand
these operational capabilities to our Internet activities.
Contractual Relationships. The leisure tours and packages we currently
market, which are critical components to the overall success of our Internet
initiatives, are the result of contracts we have secured with travel industry
vendors. As a travel wholesaler, we believe we have a competitive advantage over
suppliers and other online travel agencies that lack such relationships. These
contractual relationships, along with the other relationships we have created
with others in the Internet and travel industries help lay the foundation for
our Internet initiatives. These contracts can be canceled or modified by the
supplier upon no or relatively short notice.
OUR MARKETING STRATEGY
We are employing the following marketing strategies:
FOCUSING ON THE SALE OF SPECIALIZED LEISURE TRAVEL PACKAGES. As noted
by industry analysts, it is imperative that online travel agencies begin selling
products that traditionally have had higher margins than airline ticket sales,
such as vacation packages, tours and cruises in order to generate profitable
operations. We believe that, in order to be profitable, online agencies, must:
- Have specialized vacation package inventory available to consumers;
- Utilize online tools that help facilitate complex leisure travel
purchases; and
- Provide the customer service, both online and off, that is necessary
to make the customer feel comfortable booking these types of transactions
online.
We believe we are well-positioned to compete in the online travel
business for the following reasons:
Our TourScape booking technology will provide consumers with a
user-friendly mechanism for booking complex and specialized travel packages.
Our existing base of travel specialists can provide the requisite
e-travel personal assistance through real-time chat, Internet telephony, 800
telephone service, and in the near future, Internet-based video communication.
Finally, because of our status as a travel wholesaler and distributor,
with established travel vendor relationships, we expect that our websites will
offer a wide variety of specialized packages at rates that travel consumers will
find attractive.
COMBAT THE TRADITIONALLY HIGH "LOOK-TO-BOOK" RATIO. According to
reliable research, a high percentage of online travel visitors have looked, but
not booked, online. Of those, most have bought their tickets through an 800
number or a conventional travel agent after researching online. Therefore, as a
means of capturing maximum revenue, the Company's customers will be encouraged
to utilize the services of our travel agent staff through live chat, Internet
call button, or an 800 number if, for some reason, they are not inclined to
purchase online. To further combat this trend, personalization technology, which
37
will store a customer's travel preferences, will be implemented into the
Company's websites. By combining our agent-based customer service and
personalization technology, we believe the Company will be positioned to improve
on the industry's current "look-to-book" ratio.
FOSTER STRATEGIC PARTNERSHIPS AND PRIVATE LABEL PROGRAMS. We believe
that one of the most important aspects of developing a successful online travel
website is the process of creating and managing the requisite strategic
partnerships and alliances. Strategic partnerships with web portals, e-commerce
companies and content providers have the potential to generate revenue from
transactions and advertisements, and also place the brand in front of Internet
users.
We intend to pursue these types of strategic online partnerships as a
means to generate traffic, customer acquisition and revenue. We intend to enter
into private label agreements to provide fulfillment on all travel purchased on
several heavily trafficked e-commerce websites.
ESTABLISH A DYNAMIC AFFILIATE PROGRAM. Thousands of websites are
currently utilizing the affiliate (also known as associate or referral) programs
of online vendors to offer their visitors the opportunity to buy everything from
books to sporting goods to cars. These programs allow any website owner to
create banner links that transport visitors to the affiliate e-commerce website
in the hope they will make a purchase, thereby entitling the website owner to a
commission. By establishing and promoting an affiliate program, we believe we
will create an opportunity to sell travel products in appropriate contextual
settings on complementary we sites. We are currently identifying e-commerce
companies to establish our affiliate program.
TARGET UNTAPPED INTERNATIONAL MARKETS. We believe online travel
agencies have traditionally underappreciated the travel market outside the U.S.
Recognizing the opportunities presented by rapid growth in use of the Internet
abroad, we have formed Dynamic Leisure Europe Limited, a wholly-owned subsidiary
located in London, England, in an effort to expand our target market. We believe
the European market is a potentially large source of business for the U.S.
vacation accommodation product and that our presence in the market provides a
base for potential expansion and a hub for customer service in the European
online and offline market.
COMPETITION
Our competitors in the online travel industry include travel suppliers
and travel agencies. Each of these types of competitors and factors upon which
we compete are described below. Many of our competitors have greater experience,
brand name recognition and/or financial resources than we do. We may be unable
to compete successfully and our failure to compete successfully may have a
material adverse effect on our business, financial condition and results of
operation.
SUPPLIERS. Suppliers primarily encompass airlines, hotels, car rental
agencies and some cruise lines. This includes not only enhancing their websites
and adding the Internet as a significant distribution channel to consumers, but
also expanding their marketing efforts and forming new strategic alliances with
other key online players.
Advantages of suppliers over their agency counterparts include, among
others,
- Well-established brands and consumer confidence in those brands;
- Customer loyalty;
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- Existing operational infrastructure and fulfillment of capabilities;
- Access to additional inventories and pricing incentives;
- Other incentives such as frequent flyer miles programs; and
- Availability of extensive financial resources to invest in Internet
initiatives.
TRAVEL AGENCIES. Travel agencies with an online presence are comprised
of both the online companies and established brick-and mortar operations.
According to studies of online travel, some of the leaders in online travel
include, among others:
- Travelocity
- Expedia
- GetThere.com
- Travel Network
- Uniglobe Travel
- Lowestfare.com
All of the leaders mentioned above offer price and availability search
capabilities for air, hotel and care rental and allow the user to book directly
online without human intervention. Most of the agencies also offer special deals
and discounted offerings. Some provide destination content. One of the areas
some agencies are endeavoring to enhance is their offering of tour packages and
cruises.
INTELLECTUAL PROPERTY
We regard the protection of our intellectual property as important to
our future success and rely on a combination of copyright, trademark, service
mark and trade secret laws, license agreements and contractual restrictions to
establish and protect intellectual property rights in our website architecture
and technology, products, content and services. We plan to enter into
confidentiality and invention assignment agreements with our employees and
contractors in order to limit disclosure of our confidential information and to
protect our ownership interest in our website architecture and technology. We
cannot assure you that these contractual arrangements or the other steps taken
by us to protect our intellectual property will prove sufficient to prevent
misappropriation of our technology or deter independent third-party development
of similar technologies.
REGULATORY ENVIRONMENT
Regulation of the Travel Industry
Many travel suppliers, particularly airlines, are subject to extensive
regulation by federal, state and foreign governments. In addition, the travel
services industry is subject to certain special taxes by federal, state, local
and foreign governments, including hotel bed taxes, car rental taxes, airline
excise taxes and airport taxes and fees. New or different regulatory schemes and
changes in tax policy could have an adverse impact on the travel service
industry in general and could have a material adverse affect on our business,
financial condition, and results of operations. Changes in tax policy for online
purchases, including travel purchases, could also have a material adverse affect
on our business, financial condition and results of operations.
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Regulation of the Internet
At the present time the amount of state and federal governmental
regulation applicable to the Internet is relatively small when compared to other
areas of communication and commerce. As the size, use and popularity of the
Internet increases, it is possible that laws and regulations may be enacted with
respect to the Internet, covering issues such as user privacy, pricing,
taxation, content, copyrights, distribution, antitrust and quality of products
and services. Additionally, the rapid growth of electronic commerce may trigger
the development of tougher consumer protection laws. The adoption of such laws
or regulations could reduce the rate of growth of the Internet and could make it
more difficult and expensive for us to carry on our planned business activities.
Due to the increasing use of the Internet and the burden it has placed
on the current telecommunications infrastructure, telephone carriers have
requested the Federal Communications Commission, the FCC, to regulate Internet
service providers and online service providers and impose access fees on those
providers. If the FCC imposes access fees, the costs of using the Internet could
increase dramatically. These regulations, if promulgated, could result in the
reduced use of the Internet as a medium for commerce, which could have a
material adverse effect on our business, financial condition and results of
operations.
Regulation Concerning Privacy
Specific laws and regulations concerning use of the Internet have been
enacted, both in the United States and in the European Union. While we expect to
have a privacy policy designed to ensure the protection of the privacy of our
users, there can be no assurance that these programs will conform to any
regulations which have been adopted by the FTC or the European Union directive.
We do intend to take the necessary measures to ensure that our website complies
with industry standards relating to user privacy.
RECENT ACQUISITIONS
CASUAL CAR GENERAL SERVICE AGREEMENT
On January 3, 2006, Street Venture Partners, LLC, sold the US rights to
the Casual Car General Service Agreement (GSA) to Dynamic Leisure Group, Inc.
for an unsecured convertible Promissory Note in the amount of $350,000, and a
warrant to purchase 388,889 shares of the Company's common stock at a fixed
price of $.90 per share. The GSA allows the Company to sell car rental products
to leisure travelers primarily in Europe and the United Kingdom, through Skycars
International Rent a Car, Middlesex, United Kingdom.
The Company plans to continue with the Casual Car GSA, selling direct
to the final consumer via the Internet, under the Casual Car rental brand. The
Casual Car GSA allows the Company to begin to establish a foundation in certain
desired leisure travel markets with multiple product offerings.
STOCK EXCHANGE AGREEMENT DATED JANUARY 13, 2006
On January 13, 2006, we entered into a Stock Exchange Agreement with
the former shareholders of Dynamic Leisure Group, Inc. ("Dynamic"), now known as
Dynamic Leisure Group North America, Inc., a privately-held Florida corporation,
under which we acquired all of the outstanding capital stock of Dynamic, and
Dynamic became a wholly-owned subsidiary of the Company. As consideration for
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its acquisition of the outstanding capital stock of Dynamic, the Company issued
an aggregate of 197,000 shares of its Series A Preferred Stock to the former
shareholders of Dynamic, which automatically converted to common stock upon the
increase in authorized shares occurring in February 2006. See Exhibit 10.19. 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.
FEBRUARY 8, 2006 ACQUISITION OF CHANGES IN L'ATTITUDES, INC.
On February 8, 2006, the Company consummated the purchase of all of the
issued and outstanding capital stock of Changes in L'Attitudes, Inc. ("CLA"),
for a purchase price of $1,750,000. The purchase price consists of a combination
of cash ($640,000), shares of our common stock (340,000 shares), and a one-year
secured Convertible Debenture in the principal amount of $600,000. The
acquisition of CLA is expected to provide the Company with a direct-to-consumer
selling channel via the Internet to the strategically desirable Caribbean
leisure market. See Exhibit 10.26.
MARCH 6, 2006 ACQUISITION OF ISLAND RESORT TOURS, INC. AND INTERNATIONAL TRAVEL
AND RESORTS, INC.
On March 6, 2006, the Company purchased all of the issued and
outstanding capital stock of Island Resort Tours, Inc. ("IRT") and International
Travel and Resorts, Inc. ("ITR"), for a purchase price of $4,000,000. The
purchase price consists of a combination of cash ($1,500,000), shares of the
Company's common stock (700,000 shares), and a one-year secured Convertible
Promissory Note in the principal amount of $1,450,000. The acquisition of IRT
and ITR is expected to increase the Company's presence in the desired Caribbean
leisure travel market, provide access to key travel industry products, including
air travel, and add to the expertise of the Company's management team. See
Exhibit 10.28.
EMPLOYEES
As of the date of this Prospectus, the Company employed approximately
40 people and was actively hiring further personnel. No employee is a party to a
collective bargaining agreement.
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, 2005 and 2004 should be
read in conjunction with the Consolidated Financial Statements and other
information presented elsewhere in this Prospectus.
GENERAL
Through January 13, 2006, we were engaged primarily in developing and
commercializing patented high efficiency low-pressure non-lubricated air
compressors and hydrogen circulators, known collectively as UniVane devices. The
basic UniVane compressor technology development is based upon the concepts,
innovations and embodiments of the patents Dr. Edwards has exclusively 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
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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, worldwide patent license to Parker-Hannifin
Corporation to further develop, enhance, manufacture and market our UniVane
devices for all product applications into which the UniVane is incorporated.
Subsequent to year-end, on January 12, 2006, Dr. Edwards entered into in an
Exclusive Patent and Know-How License Agreement, in which Dr. Edwards
relinquished any entitlement to royalty payments under the Exclusive Patent and
Know-How License Agreement dated February 4, 2004 and has assigned and
transferred to the Company all of his right, title and interest under the
Exclusive Patent and Know-How License Agreement dated February 4, 2004.
Under the license agreement, Parker-Hannifin is responsible for
generating production UniVane compressor engineering designs and producing and
marketing them. As a result, in 2005 our technical efforts were re-directed to
generating potentially improved UniVane manufacturing designs, 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 were also identifying
non-fuel cell markets for UniVane compressors and designing systems that would
employ the machines in those markets.
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-Hannifin License Agreement, we were being paid $25,000
per month for twelve months primarily to transfer UniVane technology to
Parker-Hannifin and to aid in the transition from prototype production to
commercial manufacturing. We continued to provide these services to
Parker-Hannifin on a monthly basis until December 2004, when Parker-Hannifin
concluded that development of our UniVane technology had progressed to the point
that it no longer required our consulting services in connection with their
product development activities. Accordingly, we mutually agreed with
Parker-Hannifin that our consulting services would cease to be provided
effective December 10, 2004. The cessation of consulting services did not alter
our rights and obligations relating to our right to future royalty payments
based upon sales of products incorporating our UniVane devices. Prior to 2003,
we were developing and attempting to commercialize the licensed UniVane
technology with its own limited resources.
On January 13, 2006, we entered into a Stock Exchange Agreement with
the former shareholders of Dynamic Leisure Group, Inc. ("Dynamic") a privately
held, Florida corporation, under which we acquired all of the outstanding
capital stock of Dynamic, and Dynamic became a wholly-owned subsidiary of the
Company. Following the agreement, the Company intends to change the focus of its
business strategy to pursue opportunities in the leisure travel market,
primarily as a wholesaler of travel packages to frequently traveled destinations
such as Florida, Las Vegas, California and Hawaii in the US and the Caribbean,
Mexico, Central and South America, the United Kingdom and Europe. As part of the
Stock Exchange Agreement with Dynamic, we issued 6,566,667 shares of our common
stock.
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The Company expects its new focus on the leisure travel market will be
obtained through the combination of acquiring existing well-established
businesses and via internal organic growth. Subsequent to year end, in order to
pursue this strategy, the Company acquired Changes in L'Attitudes, Inc. a
Florida-based direct-to-consumer internet seller of vacation packages primarily
to the Caribbean and Mexico, and Island Resort Tours, Inc. and International
Travel and Resorts, Inc. ("ITR"), wholesalers of Caribbean travel primarily
through established networks of travel agencies, and a provider of telephone and
marketing support to various Caribbean locations.
CRITICAL ACCOUNTING ESTIMATES
Valuation of Patent Rights
The valuation of patent rights has a material impact on our reported
financial condition and operating performance. 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.
Due to: (a) uncertainties in the developing fuel cell industry, (b)
inherent risk of competing future technologies, and (c) our reliance on
Parker-Hannifin, in 2004 we recognized an impairment loss of the entire net
carrying value of patent rights of $144,603. This loss is reflected as an
operating expense and increased the stockholders' deficit to $719,196 at
December 31, 2004.
We recorded and charged to operations impairment losses of $0 and
$144,603, relating to patent rights, for the years ended December 31, 2005 and
2004, respectively.
Stock-Based Compensation Plans
We have two active 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 or the board. These plans have an aggregate of 83,333 shares of common
stock reserved for issuance. Options outstanding were for 124,539 and 82,039 of
shares of common stock at December 31, 2005 and 2004, respectively. In 2004,
stock options were granted to an individual in lieu of issuing common stock, but
this transaction was outside the stock-based compensation plans. The Company
issued stock options to directors, employees, and the chief executive officer
totaling 23,333 and zero, respectively, in 2005 and 2004. No stock-based
employee compensation cost is reflected in net income during 2005 and 2004, in
accordance with the provisions of Accounting Principles Board Opinion No. 25.
The Company issued 19,167 options and recorded $56,925 in expense for options
issued to consultants in 2005, in accordance with the fair value method of SFAS
123.
RESULTS OF OPERATIONS
We had no revenue for 2005, and in 2004, revenues were primarily
derived from consulting fees under the agreement with Parker-Hannifin. Our
monthly consulting fee terminated in December of 2004.
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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.
In 2006, the business changed to focus on the leisure travel market.
Revenues for the near term will depend upon our receipt of royalty payments, if
any, related to the sale of systems that employ our UniVane technology from
Parker-Hannifin Corporation; upon the success of our acquisitions of Changes in
L'Attitudes, International Travel and Resorts, and Island Resort Tours in early
2006; and upon our ability to add revenue through internal growth.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
The Company produced no revenue from consulting fees during 2005
compared with $275,000 in 2004. Prototype sales decreased from $11,900 in 2004
to zero in 2005. These consulting fees related to the Parker-Hannifin consulting
agreement entered into during May 2003. Other revenues were from prototype
sales. We now rely on Parker-Hannifin for the commercialization of the licensed
technology.
Gross margin decreased to zero in 2005 from $270,804 in 2004 due to no
sales being recorded in 2005.
Operating expenses decreased 25.7% to $497,698 in 2005 from $670,213 in
2004. General and administrative expenses decreased by $2,930 from 2004 to 2005.
During 2004, an impairment loss of $144,603 was recorded for patented technology
because there is no determinable income directly related to our patents. In
2005, the Company did not have an impairment loss.
Our net loss for 2005 increased $91,672 to $526,195 from $434,523.
Interest expense increased to $199,041 for 2005 from $35,427 for 2004, primarily
because of the amortization of the debt discount on the convertible debentures.
The valuation of certain features of the warrants issued on March 2, 2005
resulted in a non-cash income of $86,408 for 2005.
Financial Condition - Liquidity and Capital Resources
The Company continued to develop technology with potentially marketable
commercial applications through December 31, 2005. Our financial condition was
reliant on continuing equity investment until, if ever, Parker-Hannifin is
successful in commercializing the UniVane technology. During 2005 we had no
revenue while in 2004 equity funding was augmented by prototype sales and
consulting fees.
In 2005, the Company was primarily financed by the proceeds from
issuance of $300,000 in convertible promissory notes, and by the proceeds of
$85,000 from common stock issuance. These proceeds were used to fund an
operating cash deficit of $355,352, to repay $17,211 of the convertible
promissory notes and to pay the debt issue cost associated with the promissory
notes of $21,726. During 2005, investing activities were minimal with $1,011 of
fixed assets purchased. In 2004, the operating cash deficit of $176,100 and the
cash used in investing activities of $9,540 were funded by the reduction of cash
from $199,441 at the end of 2003 to $16,899 at the end of 2004. The cash
provided by financing activities in 2004 of $3,088 was due from the sales of
common stock, less repayment of shareholder loans and capital lease obligations.
From time-to-time, we issue stock, options and warrants to satisfy operating
expenses, which provides us with a form of liquidity. For example, during
44
February 2004, the Company settled an outstanding legal services agreement from
August 1, 2001, in which the holder was owed $10,000 payable with 3,333 shares
of issuable common stock, which had been reflected in the Company's records as
common stock issuable. In February 2004, the Company granted stock options on
3,333 shares in lieu of issuing shares. In April 2004, the Company issued 6,667
shares of common stock to a director for services rendered and 3,333 common
stock purchase warrants to a consultant for services rendered. In April 2005,
the Company issued 19,167 options and recorded $56,925 in expense for options
issued to consultants. 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. Equity financings of the type previously completed
are dilutive to our stockholders and adversely impact the market price for our
shares.
In November 2002, we entered into an agreement with the Technological
Research and Development Authority that provided $150,000 in funding for the
development and commercialization of the Company's UniVane compressors and
hydrogen circulators for fuel cell applications. In consideration of the
funding, we are 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 the Company 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. No royalty payments were made
to the Technological Research and Development Authority during the year ended
December 31, 2005 or 2004.
As of December 31, 2005, we had an overdrawn cash position of $232,
which is reflected as a current liability in the financial statements and no
accounts receivable. The working capital deficit was $1,033,565. We had total
assets of $62,373, all long-term, consisting of $33,418 of net property and
equipment and $28,955, primarily net debt issue costs. Our current liabilities
totaling $1,033,565 included $62,921 of accounts payable, $363,584 of accrued
liabilities, $213,640 loans payable $37,216 of current maturities of long-term
debt, a warrant liability of $240,592 and $115,380 of convertible promissory
notes. Total shareholders' deficit was $1,105,911. At December 31, 2005, we had
an accumulated deficit of $8,661,023.
We were in default of the repayment terms on notes payable aggregating
$35,000 at December 31, 2004, and no extension has been granted by the debt
holders. The notes were issued to David O'Brien and Edward Werner, neither of
whom is affiliated with us. The proceeds of the loans were used for general
working capital purposes. Currently, there have been no actions taken by the
debt holders to foreclose since the notes payable were unsecured.
As of December 31, 2005, our sources of internal and external financing
are limited. In January 2005, the Company issued an additional 8,333 common
shares and 4,167 warrants exercisable for two years in exchange $25,000 cash. In
March of 2005 the Company completed a $300,000 financing consisting of secured
convertible promissory notes and common stock purchase warrants. In the third
quarter of 2005, we sold 39,999 shares of common stock and common stock purchase
warrants to purchase 39,999 shares to two investors for an aggregate purchase
price of $60,000 cash. 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 December 2004, we completed regulatory review of
a public registration of 272,500 shares of our common stock, comprised of
134,167 for shares outstanding and 138,333 for shares issuable to an option
holder and warrant holders at an exercise price of $5.40 per share. In January
2005, our shares were listed on the OTC Bulletin Board.
45
Historically, we relied upon limited revenues from consulting fees and
equity financing in order to fund operations. While these activities 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.
The continued inability to generate cash flow or revenue from fuel cell
products influenced us to pursue other revenue sources and the Stock Exchange
Agreement with Dynamic. We expect the leisure travel business to continue to
increase significantly as the primary focus of our future.
On January 13, 2006, we received $2,000,000 of financing by the
issuance of a convertible secured promissory note, convertible at $1.00 per
share and a warrant to purchase up to 2,000,000 million shares of the Company's
common stock at $1.00 per share. The proceeds from the financing will be used
for initial cash payments towards acquisitions of companies in the leisure
travel market, partial repayment of a convertible promissory note outstanding
and certain other outstanding obligations of the Company, infrastructure
including computer hardware and software, and general working capital. We will
continue to require external financing which will likely create additional
dilution to our existing shareholders.
On January 31, 2006, shareholders approved a 1:30 reverse split of the
Company's common stock. As a result of the reverse stock split, every thirty
(30) shares of our common stock outstanding on the effective date were
automatically combined into one (1) share. The reverse stock split became
effective at the close of business on March 3, 2006, and post-reverse trading
began at market open on March 6, 2006. The accompanying financial statements
have been retroactively adjusted for the subsequent affect of the reverse stock
split and the Stock Exchange Agreement of January 13, 2006.
On February 8, 2006, we acquired Changes in L'Attitudes, Inc. ("CLA"),
and on March 6, 2006, we acquired Island Resort Tours, Inc. and International
Travel and Resorts, Inc. ("IRT/ITR"). The purchase prices included our issuing
1,040,000 shares of our common stock and $2,050,000 of convertible notes that
may be converted to our common stock at a price of $1.50. The convertible notes
are payable with interest at the rate of 9% per annum. The CLA and IRT/ITR notes
mature on February 7, 2007 and March 6, 2007, respectively ("Maturity Date").
The notes are convertible into our common stock, on or before the Maturity Date,
at a rate of $1.50 per share. The conversion rate may be adjusted downward if
we, in subsequent acquisitions on or before December 31, 2006, provide
consideration that includes convertible securities with a conversion rate of
less than $1.50 per share. In the event of any such adjustment, the conversion
rate will be adjusted to the most favorable rate offered, but no lower than
$1.00 per share. Subsequent to the Closing Date, if the Company obtains
cumulative net external financing of $2,500,000 or more, early repayment of 50%
of the outstanding balance on the notes may be required. If the Company receives
in excess of $5,000,000 in cumulative net external financing, an early repayment
of the full outstanding balance on the notes may be required. The Company has
agreed to include resale of the shares issued, and those issuable upon
conversion of the convertible notes in the next registration statement filed by
us. The convertible note issued to CLA is secured by a lien on the assets of
CLA. The convertible note issued to IRT/ITR is secured by a lien on the assets
of IRT/ITR. The acquisitions have provided us with new sources of revenue, but
also involved issuing common stock that is dilutive to our current shareholders
and may either cause additional dilution if the notes are converted to common
stock, or increase our need for additional cash flow from operations or outside
financing to meet our obligations.
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We are hopeful the exposure of a securities 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.
Our cash and anticipated receipt of funds from financings have been
insufficient to satisfy our 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 to satisfy
our capital requirements. While we now have revenue and operations, there is no
history of our ability to generate sufficient working capital to meet our
operational and debt service needs. Therefore, we will 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,
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 historically
completed, including our recent financing and acquisitions are dilutive to our
stockholders and may adversely impact the market price for our shares.
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 previous business was not seasonal in nature, and was not expected
to be 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. Our future success in fuel cells is dependent upon the successful
development and market acceptance of fuel cell systems.
The leisure travel market may be affected by weather conditions,
inflation, and the overall economy in the US, UK, and Europe. During 2004 and
2005, an unusually large quantity of hurricanes, a number of which were severe,
affected travel to the Caribbean and Mexico, and the Southeastern United States,
including a number of locations that incurred long term damage to properties and
infrastructure. While we believe that diversifying destinations and points of
originations will reduce the potential exposure to seasonality and the weather,
we shall need to add additional products and services to our existing business.
DESCRIPTION OF PROPERTY
Pursuant to the Stock Exchange with the former shareholders of Dynamic,
the corporate offices were moved to 2203 N. Lois Avenue, Suite 900, Tampa, FL
33607, where we lease space on a monthly basis. For further information on the
Stock Exchange Agreement, see Exhibit 10.22.
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CERTAIN RELATIONSHIPS AND RELATED 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 1992
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." As described elsewhere in this Prospectus and the Exhibits, Dr.
Edwards resigned from the Company in January 2006.
On December 11, 2003, we issued 6,666 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 $3.60 per share.
On April 27, 2004, we issued 6,666 shares of common stock to George R.
Schell, as consideration for his services as a director, valued at $3.60 per
share.
On August 17, 2004, we entered into an Amended and Restated Business
and Advisory Consulting Agreement with MBN Consulting, LLC. MBN is the
beneficial owner of approximately 2.1% of our common stock. 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, (f) serving as liaison between DynEco and its legal and
accounting advisors, and (g) 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, commencing upon our receipt of combined equity and debt funding
from any sources in an amount of at least $1,000,000. Under the original
consulting agreement, MBN also received 66,667 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. In March 2005, we requested MBN to devote
additional time to our business matters and, in light of the additional
responsibilities undertaken by MBN, we verbally agreed to pay MBN a monthly
consulting fee of $3,000 commencing March 1, 2005 (in lieu of the monthly
consulting fee provided for in the Amended and Restated Consulting Agreement).
Effective January 16, 2006, the Company entered a new Consulting
Agreement with MBN. The new agreement covers a two-year term, provides payment
to MBN of $5,000 per month for the first two months and $7,500 for each month
thereafter, and provides 200,000 five-year warrants to purchase common stock at
$1.25 per share.
48
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock commenced trading on the over-the-counter bulletin
board on January 25, 2005, under the symbol "DYCO". From March 1994 until
January 25, 2005, our shares were listed on the pink sheets under the symbol
"DYCO." However, the trading market for our shares on the pink sheets was not
active. The following table sets forth the high and low bid prices for our
common stock on the pink sheets from January 1, 2004 to January 24, 2005 and on
the over-the-counter bulletin board from January 25, 2005 to March 31, 2006. The
bid prices are inter-dealer prices, without retail markup, markdown or
commission, and do not reflect actual transactions. Our stock began trading
under the symbol "DYLI" at market open on March 6, 2006.
PERIOD HIGH BID LOW BID
- ---------------------------------------- -------- -------
January 1, 2006 to March 31, 2006 ...... $ 4.00 $ 0.81
October 1, 2005 to December 31, 2005 ... $ 2.25 $ 0.30
July 1, 2005 to September 30, 2005 ..... $ 3.30 $ 1.35
April 1, 2005 to June 30, 2005 ......... $ 4.20 $ 2.46
January 1, 2005 to March 31, 2005 ...... $ 6.00 $ 2.43
October 1, 2004 to December 31, 2004 ... $ 5.40 $ 2.40
July 1, 2004 to September 30, 2004 ..... $ 5.40 $ 3.00
April 1, 2004 to June 30, 2004 ......... $ 6.30 $ 3.60
January 1, 2004 to March 31, 2004 ...... $ 8.10 $ 5.10
The prices reflect a 1:30 reverse-stock split that became effective at business
close on March 3, 2006.
SHAREHOLDERS OF RECORD
As of March 24, 2006, there were 9,331,016 shares of our common stock
issued and outstanding. We have also reserved a total of 4,353,211 shares for
issuance upon conversion of convertible promissory notes and exercise of
outstanding common stock purchase warrants, and 124,539 shares upon exercise of
outstanding options to purchase shares of our common stock.
INFORMATION RELATED TO OUTSTANDING SHARES
Of the issued and outstanding shares, approximately 1,118,766 shares of
our common stock (6,667 of which are owned by our officers, directors and
principal stockholders) have been held for in excess of one year and are
available for public resale pursuant to Rule 144 promulgated under the
Securities Act. The resale of another 134,167 shares, including 138,333 shares
issuable upon exercise of outstanding warrants and options, is covered by a
Registration Statement filed on Form SB-2 (SEC File No. 333-112585). The resale
of another 15,000 shares, and 430,000 shares issuable upon exercise of
outstanding warrants and options, is covered by the Registrations Statement
filed on Form SB-2 (SEC File No. 333-124283), covered by this post-effective
amendment.
49
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 registration
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.
SEC "PENNY STOCK" RULES
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock could be considered to be a "penny stock".
A penny stock is subject to rules that impose additional sales practice
requirements on broker/dealers who sell these securities to persons other than
established customers and accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of these securities. In addition he must receive the purchaser's
written consent to the transaction prior to the purchase. He must also provide
certain written disclosures to the purchaser. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell our securities, and may
negatively affect the ability of holders of shares of our common stock to resell
them.
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, 2005:
50
NUMBER OF
SECURITIES TO BE
ISSUED UPON WEIGHTED-AVERAGE AVAILABLE FOR FUTURE
EXERCISE OF EXERCISE PRICE OF ISSUANCE UNDER EQUITY
OUTSTANDING OUTSTANDING COMPENSATION PLAN
OPTIONS, WARRANTS OPTIONS, WARRANTS (EXCLUDING SECURITIES
AND RIGHTS AND RIGHTS REFLECTED IN COLUMN A)
- ------------------------------------- ----------------- ----------------- ----------------------
Equity Compensation Plans
Approved by Security Holders:
2001 Equity Incentive Plan .......... 22,278 $ 3.00 11,055
1993 Corporate Stock Option Plan .... 21,667 $ 3.05 3,333
1993 Advisors Stock Option Plan ..... 6,667 $ 3.60 0
Equity Compensation Plans Not
Approved by Security Holders:
Options ............................. 73,928 $ 8.75 0
Warrants ............................ 99,104 $ 5.40 0
Total ............................... 223,644 $ 5.99 14,388
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, 2005 to each person named in the Summary Compensation table.
PERCENT OF EXERCISE
NUMBER OF SECURITIES TOTAL OPTION/SARS OR BASE
UNDERLYING GRANTED TO EMPLOYEES PRICE EXPIRATION
NAME OPTION/SARS GRANTS (#) IN FISCAL YEAR ($/SH) DATE
- ------------------------------ ---------------------- -------------------- -------- ----------
Thomas C. Edwards, Ph.D. ..... 3,330 7.8% $ 3.00 April 2008
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 33,333 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.
51
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,
options to purchase 22,278 shares have been granted 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 25,000 shares of our common stock for issuance upon
exercise of stock options granted, from time-to-time, to our officers,
directors, and employees.
The Corporate Stock Option Plan is currently administered by our board
of directors. Under the plan, the board determines which of our employees,
officers and directors are to be granted options. The committee or board
determines whether options are to be incentive stock options or non-qualified
stock options.
Subject to the provisions of the plan, and the Internal Revenue Code
with respect to incentive stock options, the board determines who shall receive
options, the number of shares of common stock that may be purchased under the
options, the time and manner of exercise of options and exercise prices. At its
discretion, the board also determines the form of consideration to be received
and may permit the exercise price of options granted under the plan to be paid
in whole or in part with previously acquired shares and/or the surrender of
options. The term of options granted under the stock option plan may not exceed
ten years, or five years for an incentive stock option granted to an optionee
owning more than 10% of our voting stock. The exercise price for incentive stock
options may not be less than 100% of the fair market value of our common stock
at the time the option is granted. However, incentive stock options granted to a
10% holder of our voting stock may not be exercisable at less than 110% of the
fair market value of our common stock on the date of the grant. The exercise
price for non-qualified options will be set by the board, in its discretion, but
in no event shall the exercise price be less than 85% of the fair market value
of our common stock on the date of grant.
52
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 report, options to purchase 21,667 shares 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 6,667 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 report, options to purchase 6,667 shares had
been granted and are outstanding under the 1993 Advisors Stock Option Plan. The
1993 Advisors Stock Option Plan has terminated and no further awards may be made
thereunder, however, outstanding awards of 6,667 shares remain effective until
their termination date on December 31, 2008.
OTHER PLANS
Other plans include 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.
As of December 31, 2005, we had outstanding options covering 124,539
shares of our common stock and warrants covering 859,337 shares of our common
stock under equity plans not approved by shareholders. The options have exercise
prices ranging from $1.50 per share to $11.40 per share and expiration dates
ranging from January 2006 to December 2008. The warrants are exercisable at
$1.50 per share to $11.25 per share and expiration dates ranges from September
2006 to June 2010.
The grants of these options were approved on a case-by-case basis by
the board of directors, and are within the limits of the number of shares that
we are authorized to issue. The grant of these options and warrants were not
authorized by our shareholders. We may, in the future, authorize the grant of
additional options and/or issuance of additional warrants for the foregoing
purposes and other valid corporate purposes.
53
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 2005 to each person named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING UNEXERCISED AT FY-END ($)
SHARES ACQUIRED VALUE REALIZED OPTIONS/SARS AT FY-END(#) EXERCISABLE /
ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
--------------- -------------- -------------------------- -------------
Thomas C.
Edwards, Ph.D.
Chief Executive
Officer -0- -0- 70,594 $0/$0
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, 2005 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, 2005:
Fiscal Other Annual LTIP All Other
------------------------ ---------------------- ------- ------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION / (#) PAYOUTS COMPENSATION
- --------------------- ------ ------- ----- ------------ ------- ------- ------------
Thomas C. Edwards 2005 $56,806 -0- -0- -0- -0- -0-
Chief Executive 2004 $60,000 -0- 0 -0- -0- 0
Officer and President 2003 $60,000 -0- 0 -0- -0- 0
Effective January 1, 2004, we entered into an employment agreement with
Thomas C. Edwards, Ph.D., for his services as our chief executive officer and
chief technical officer. The employment agreement was for a term of five years,
but on January 13, 2006 Dr. Edwards resigned from the Company and his employment
agreement was terminated.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes to or disagreements with our accountants
that are required to be disclosed.
FINANCIAL STATEMENTS
See Exhibit F-1.
54
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521, subdivision 2, of the Minnesota Statutes requires the
Company 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 the Company, 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 the Company, or, in the case of performance
by a director, officer or employee of the Company 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 the Company. In addition, Section 302A.521, subdivision
3, requires payment by the Company, 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, 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.
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.................................... $ 202.00
Legal Fees and Expenses*........................................... $ 7,500.00
Accounting Fees and Expenses*...................................... $ 5,000.00
Financial Printing*................................................ $ 2,500.00
Transfer Agent Fees*............................................... $ 1,500.00
Blue Sky Fees and Expenses*........................................ $ 0.00
Miscellaneous*..................................................... $ 3,298.00
----------
TOTAL.................................................... $20,000.00
==========
* Estimated
II-1
RECENT SALES OF UNREGISTERED SECURITIES
On March 14, 2003, we issued 2,000 shares of common stock and warrants
to purchase an additional 120,000 shares to James Hittman, a vendor in
settlement of $15,000 of accounts payable. The warrants are exercisable until
June 30, 2006, at an exercise price of $5.40 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 11,667 shares of common stock to the
following four employees for services rendered, valued at the contemporaneous
cash sales price of $3.60 per share.
Name Shares
---- ------
Michael Owens ........................... 4,167
Jennifer Dockery ........................ 2,500
Paul Esparza ............................ 2,500
Phil Keener ............................. 2,500
Each of the employees 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 66,667 shares of common stock to MBN
Consulting, LLC, a consulting firm, for services rendered, valued at the
contemporaneous cash sales price of $3.60 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.
II-2
On November 18, 2003, we issued 66,667 shares of common stock to the
following four investors, for a purchase price of $240,000.
Name Shares
---- ------
Blaine Schmidt .......................... 13,333
Avonlea Homes Investments Ltd. .......... 20,000
Corporate Capital Group Int'l ........... 16,667
Centaurus Capital Corp. ................. 16,667
In connection with this transaction, we also issued warrants to
purchase 133,333 shares of common stock to Centaurus Capital Corp. On March 24,
2004, Centaurus Capital Corp. assigned warrants to purchase 100,000 shares to
Sausilito Ltd. The warrants are exercisable until November 30, 2005
(subsequently extended to November 30, 2006), at an exercise price of $5.40 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 6,667 shares of common stock to each of
Kevin Hooper and Leonard Sculler, as consideration for their services as
directors of the Company, valued at the contemporaneous cash sales price of
$3.60 per share. Each of the directors had a preexisting business relationship
with the Company, were provided access to business and financial information
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 833 shares of common stock and warrants
to purchase an additional 1,667 shares to the following designees of Schneider
Weinberger & Beilly LLP, (now former) counsel to the Company, for services
rendered, valued at the contemporaneous cash sales price of $3.60 per share:
Name Shares Warrants
---- ------ --------
Susan Schneider ......................... 392 750
Steven Weinberger ....................... 392 750
Sydney Monda ............................ 50 167
II-3
The warrants are exercisable until June 30, 2006, at an exercise price
of $5.40 per share. Schneider Weinberger & Beilly LLP had a preexisting business
relationship with the Company, was provided access to business and financial
information 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 52,000
shares of common stock and warrants to purchase an additional 104,000 shares to
the following 23 accredited investors, for a purchase price of $187,200:
Name Shares Warrants
---- ------ --------
F. Patrick McQuillan
IRA Trust ............................ 2,000 4,000
James McQuillan ......................... 2,000 4,000
Douglas Michael ......................... 2,000 4,000
The Kendall Family
Rev. Trust ........................... 2,000 4,000
Steven Horning .......................... 8,000 16,000
Thomas Limberis ......................... 2,000 4,000
D.J. Fretland ........................... 2,000 4,000
John Linsmaye ........................... 2,000 4,000
David Commers ........................... 2,000 4,000
Joe Langer .............................. 2,000 4,000
William Galbraith ....................... 4,000 8,000
Lee Evans ............................... 2,000 4,000
Margaret Galbraith ...................... 2,000 4,000
Robert Gosselin ......................... 2,000 4,000
Robert Bailey ........................... 2,000 4,000
Gerald Neal ............................. 1,000 2,000
Tony Walker ............................. 2,000 4,000
Brett Hutchings ......................... 2,000 4,000
Joseph Hutchings ........................ 2,000 4,000
Christopher Jones ....................... 4,000 8,000
Gerald Neal ............................. 500 1,000
Richard Caveglia ........................ 500 1,000
The warrants are exercisable until June 30, 2006, at an exercise price
of $5.40 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
II-4
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 April 27, 2004, we issued 6,667 shares of common stock to George
Schell, as consideration for his services as a director of a Company, valued at
$3.60 per share. Mr. Schell 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.
During the period from December 7, 2004 to January 31, 2005, we sold an
aggregate of 15,000 shares of common stock for an aggregate purchase price of
$45,000, or $3.00 per share. For each two shares purchased, the purchaser also
received one warrant to purchase one additional share of common stock,
exercisable until December 31, 2006, at an exercise price of $4.50 per share.
The proceeds from the sales are being used for general working capital purposes.
The shares and warrants were sold to the following four persons, each of whom we
had reasonable grounds to believe was an "accredited investor" within the
meaning of Rule 501 of Regulation D under the Securities Act. Each investor was
provided access to business and financial information about us and had such
knowledge and experience in business and financial matters that it was able to
evaluate the risks and merits of an investment. Accordingly, each investor was
also "sophisticated" within the meaning of federal securities laws. Each
certificate evidencing securities issued to the investors 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 transactions. No commissions, similar compensation or other
remuneration was paid in connection with the sales. The issuance of the shares
and warrants was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) of the Securities Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
Name Shares Warrants
---- ------ --------
Ralph A. Beinser ........................ 3,333 1,667
Jason W. Sanders ........................ 1,667 833
Mitchell Levy ........................... 1,667 833
Norman Nick ............................. 8,333 4,167
On March 2, 2005, we completed a $300,000 financing consisting of our
convertible promissory notes and common stock purchase warrants. The notes are
convertible at the option of the holder into shares of our common stock, at a
price of $3.00 per share, subject to adjustment. We also issued the investors
common stock purchase warrants to purchase an aggregate of 250,000 shares of
common stock, consisting of (a) five year warrants to purchase 100,000 shares at
an exercise price of $4.31 per share, subject to adjustment, (b) five-year
warrants to purchase 50,000 shares at an exercise price of $7.50 per share,
II-5
subject to adjustment and (c) five year warrants to purchase 100,000 shares at
$3.00 per share, subject to adjustment. The conversion of the notes and exercise
of warrants is subject to a 4.99% cap on the beneficial ownership that each
investor may have at any point in time while the notes and warrants are
outstanding. Repayment of the notes is collateralized by a general security
interest in all of our assets. The notes and warrants were sold to the following
investors, each of whom we had reasonable grounds to believe was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act:
Name Note Principal Warrants
---- -------------- --------
Alpha Capital Aktiengesellschaft ........ $ 200,000 166,667
JM Investors ............................ $ 100,000 83,333
Each investor 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. Each
certificate evidencing securities issued to the investors 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 from registration. No general solicitation or advertising was used in
connection with the transactions. We paid unaffiliated finders a total of
$27,000, by the issuance of our promissory notes payable in the same manner as
the investor notes, and issued the finders five-year warrants to purchase a
total of 9,000 shares of common stock. The issuance of the shares and warrants
was exempt from the registration requirements of the Securities Act by reason of
Sections 4(2) and 4(6) of the Securities Act and the rules and regulations,
including Rule 506 of Regulation D thereunder, as transactions by an issuer not
involving a public offering.
On August 26, 2005, we sold an aggregate of 6,666 shares of common
stock for an aggregate purchase price of $10,000, or $1.50 per share. For each
share purchased, the purchaser also received one warrant to purchase one
additional share of common stock, exercisable until September 23, 2008, at an
exercise price of $3.00 per share. The proceeds from the sales were used for
general working capital purposes. The shares and warrants were sold to the
following two persons, each of whom we had reasonable grounds to believe was an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act.
Name Shares Warrants
---- ------ --------
Margaret Galbraith ...................... 3,333 3,333
Richard Galbraith ....................... 3,333 3,333
Each investor was provided access to business and financial about us
and had such knowledge and experience in business and financial matters that it
was able to evaluate the risks and merits of an investment. Accordingly, each
investor was also "sophisticated" within the meaning of federal securities laws.
Each certificate evidencing securities issued to the investors includes 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 transactions. No commissions, similar compensation or other
remuneration was paid in connection with the sales. The issuance of the shares
and warrants was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) of the Securities Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
II-6
On September 22, 2005, we sold an aggregate of 33,333 shares of common
stock for an aggregate purchase price of $50,000, or $3.00 per share. For each
shares purchased, the purchaser also received one warrant to purchase one
additional share of common stock, exercisable until September 23, 2006, at an
exercise price of $1.50 per share. The proceeds from the sales were used for
general working capital purposes. The shares and warrants were sold to the
following person, who we had reasonable grounds to believe was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act.
Name Shares Warrants
---- ------ --------
James Praggastis ........................ 33,333 33,333
The investor was provided access to business and financial about us and
had such knowledge and experience in business and financial matters that it was
able to evaluate the risks and merits of an investment. Accordingly, the
investor was also "sophisticated" within the meaning of federal securities laws.
The certificate evidencing securities issued to the investor 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 transactions. No commissions, similar compensation or other
remuneration was paid in connection with the sales. The issuance of the shares
and warrants was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) of the Securities Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
In June 2005, we issued common stock purchase warrants to purchase
10,000 shares to one company as part of a consulting agreement. The warrants are
exercisable for a period of five years at various exercise prices, with
one-third at $3.75 per share, one-third at $7.50 per share and one-third at
$11.25 per share. The consulting firm is in the financial consulting business,
and therefore, has access to business and financial information about us and had
such knowledge and experience in business and financial matters that it was able
to evaluate the risks and merits of taking warrants from the Company in lieu of
cash payment. The warrants contain a legend restricting transferability of the
shares issuable upon exercise of the warrants unless the shares are registered
under the Securities Act of 1933, as amended. No placement agent was involved,
no commissions were paid, and no general solicitation or advertising was used in
connection with this transaction. The issue of the warrants was exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof and the rules and regulations thereunder.
In connection with the Stock Exchange Agreement of January 13, 2006, on
March 6, 2006 the Company issued the former shareholders of Dynamic Leisure
Group, Inc. an aggregate of 6,566,667 shares of the Company's common stock.
As stated above, in connection with the Company's purchase of Changes
in L'Attitudes, Inc., on March 6, 2006 the Company issued 340,000 shares of
common stock to Raymon Valdes. In addition, under the Purchase Agreement
governing that transaction, the Company issued Mr. Valdes a convertible
debenture in the amount of $600,000, convertible into the Company's common stock
at the rate of $1.50 per share.
As stated above, in connection with the Company's purchase of Island
Resort Tours, Inc. and International Travel and Resorts, Inc., on March 6, 2006
the Company issued 700,000 shares of common stock to Stephen A. Hicks. In
addition, under the Purchase Agreement governing that transaction, the Company
issued Mr. Hicks a convertible debenture in the amount of $1,450,000,
convertible into the Company's common stock at the rate of $1.50 per share.
II-7
Also between January 1, 2006 and March 24, 2006, the Company issued an
aggregate of 366,910 shares of the Company's common stock to holders who
converted promissory notes and exercised warrants of Dynamic Leisure Group, Inc.
and to investors in the Company. The notes were sold to a total of two
investors, each of whom we had reasonable grounds to believe was an "accredited
investor" within the meaning of Regulation D under the Securities Act. Each
investor was provided access to business and financial information 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. Each
certificate evidencing securities issued to the investors 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 from registration. No general solicitation or advertising was used in
connection with the transactions.
II-8
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
- ----------- -----------------------
3.1 Amended and Restated Articles of Incorporation +
3.2 Bylaws ++
5 Legal Opinion of Schneider Weinberger & Beilly LLP dated April
21, 2005
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 dated 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 +++
10.11 Subscription Agreement dated March 2, 2005 used in connection
with $300,000 financing transaction +++++
10.12 Form of Convertible Promissory Note dated March 2, 2005 used in
connection with $300,000 financing transaction +++++
10.13 Security Agreement dated March 2, 2005 used in connection with
$300,000 financing transaction +++++
10.14 Collateral Agent Agreement dated March 2, 2005 used in connection
with $300,000 financing transaction +++++
II-9
10.15 Form of Non-Callable Warrant used in connection with $300,000
financing transaction +++++
10.16 Form of Callable Warrant used in connection with $300,000
financing transaction +++++
10.17 Modification and Waiver Agreement dated January 13, 2006**
10.18 Articles of Amendment Designating Series A Preferred Stock **
10.19 Certificate of Amendment of Amended Articles of Incorporation,
filed and effective February 2, 2006 (2)***
10.20 Articles of Correction, filed on February 28, 2006 and effective
at close of business on March 3, 2006 (3)****
10.21 Articles of Correction, filed on February 28, 2006 and effective
at close of business on March 3, 2006 (4)****
10.22 Stock Exchange Agreement dated January 13, 2006 by and between
DynEco Corporation and the former shareholders of Dynamic Leisure
Group, Inc.**
10.23 Secured Convertible Promissory Note dated January 13, 2006 to MMA
Capital, LLC **
10.24 Security Agreement dated January 13, 2006 with MMA Capital, LLC **
10.25 Common Stock Purchase Warrant dated January 13, 2006 to MMA
Capital, LLC **
10.26 Purchase Agreement, dated February 8, 2006 between Dynamic
Leisure Group, Inc. and Raymon Valdes (12)*****
10.27 Security Agreement, dated February 8, 2006 between Dynamic
Leisure Group, Inc and Raymon Valdes (13)*****
10.28 Purchase Agreement, dated March 6, 2006 between Dynamic Leisure
Group, Inc. and Stephen A. Hicks (14)
10.29 Separation Agreement dated January 13, 2006 by and between DynEco
Corporation and Dr. Thomas Edwards**
10.30 Exclusive Patent and Know-How License Agreement dated January 12,
2006 by and between DynEco Corporation and Dr. Thomas Edwards**
14 Code of Ethics ******
23.1 Consent of Schneider Weinberger & Beilly LLP (filed with Exhibit
5)
23.2 Consent of Salberg & Company, P.A. ******
23.3 Consent of Salberg & Company, P.A.
II-10
__________________
* Compensatory Agreement.
** Incorporated by reference from the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on January 23,
2006.
*** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on February 3, 2006.
**** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 3, 2006.
***** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on February 10, 2006.
****** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 8, 2006.
****** Incorporated by reference from the Company's registration statement on
Form SB-2, filed with the Securities and Exchange Commission on April
22, 2005.
+ Incorporated by reference from the Company's registration statement on
Form SB-2, filed with the Securities and Exchange Commission on August
23, 2004.
++ Incorporated by reference from the Company's registration statement on
Form SB-2, filed with the Securities and Exchange Commission on
February 6, 2004.
+++ Incorporated by reference from the Company's registration statement on
Form SB-2, filed with the Securities and Exchange Commission on August
23, 2004.
++++ Incorporated by reference from the Company's registration statement on
Form SB-2, filed with the Securities and Exchange Commission on June
18, 2004.
+++++ Incorporated by reference from the Company's Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on March 31,
2005.
II-11
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-12
LEGAL MATTERS
The legality of the securities offered by this prospectus was
originally passed upon for us by Schneider Weinberger & Beilly LLP, Boca Raton,
Florida. Members of Schneider Weinberger & Beilly LLP and their affiliates
beneficially own an aggregate of 2,500 shares of our common stock, including
1,666 shares issuable upon the exercise of outstanding common stock purchase
warrants, the resale of which is covered by a currently effective registration
statement.
EXPERTS
The consolidated financial statements of Dynamic Leisure Corporation as
of December 31, 2005 and 2004, respectively, and for each of the two years then
ended appearing in this prospectus and registration statement have been audited
by Salberg & Company, P.A., 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.
ADDITIONAL INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock offered by this prospectus, which became
effective on May 6, 2005. 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 file periodic reports with the SEC;
copies of all of our filings with the SEC may be viewed on the SEC's Internet
website at http://www.sec.gov.
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 containing audited financial
statements to security holders. We currently have no plans to register our
common stock under Section 12(g) of the Exchange Act. If we are not required to
deliver an annual report to security holders, we do not intend to voluntarily
deliver annual reports to security holders containing audited financial
statements.
II-13
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/A and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Tampa, Florida on April 13, 2006.
DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano.
------------------------------------------------
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Act of 1933, this Form
SB-2/A registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Daniel G. Brandano President, April 13, 2006
- ---------------------- Chief Executive Officer, and
Director
/s/ Thomas W. Busch Vice President, Treasurer April 13, 2006
- ------------------- Chief Financial Officer, and
Director
/s/ Robert A.G. LeVine Secretary and April 13, 2006
- ---------------------- Director
/s/ Leonard Sculler Director April 13, 2006
- -------------------
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
F-1
DYNECO CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Page(s)
-------
Report of Independent Registered Public Accounting Firm ............... F-3
Consolidated Balance Sheets ........................................... F-4
Consolidated Statement of Operations .................................. F-5
Consolidated Statement of Changes in Stockholders' Deficiency ......... F-6
Consolidated Statement of Cash Flows .................................. F-7
Notes to Financial Statements ......................................... F-8 - 31
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Shareholders of:
DynEco Corporation:
We have audited the accompanying consolidated balance sheets of DynEco
Corporation as of December 31, 2005 and 2004 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for each of the two years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 as of December 31, 2005 and 2004 and the consolidated results of its
operations and its cash flows for the each of the two years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's net loss in 2005 of $526,195,
net cash used in operations in 2005 of $355,352, and working capital deficit of
$1,033,565 accumulated deficit of $8,661,023 and stockholders' deficiency of
$1,105,911 at December 31, 2005 and default on $35,000 of notes payable as well
as default on $309,789 of convertible promissory notes raise substantial doubt
about its ability to continue as a going concern. Management's plans as to these
matters are 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
March 20, 2006
F-3
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004
ASSETS
2005 2004
----------- -----------
Current Assets
Cash .............................................. $ - $ 16,889
Accounts receivable ............................... - 6,875
Other current assets .............................. - 5,143
----------- -----------
Total Current Assets ............................ - 28,907
Property and equipment, net ......................... 33,418 59,448
----------- -----------
Other Assets
Deposits .......................................... 521 566
Debt issue costs, net ............................. 28,434 -
----------- -----------
Total Other Assets .............................. 28,955 566
Total Assets .................................... $ 62,373 $ 88,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible promissory notes, net of discount ..... $ 115,380 $ -
Bank overdraft liability .......................... 232 -
Accounts payable .................................. 62,921 126,240
Accrued compensation .............................. 283,625 280,708
Accrued interest .................................. 59,930 24,850
Other accrued liabilities ......................... 20,029 5,859
Loan payable ...................................... 208,987 190,935
Loan payable-Bank ................................. 4,653 37,102
Current maturity of notes payable - Shareholders .. 37,216 1,538
Warrant liability ................................. 240,592 -
----------- -----------
Total Current Liabilities ....................... 1,033,565 667,232
Long Term Liabilities
Loans payable-Bank, net of current portion ........ 15,501 120,549
Notes payable-Shareholders, net of current portion 119,218 20,336
----------- -----------
Total Long Term Liabilities ..................... 134,719 140,885
Total Liabilities ............................... $ 1,168,284 $ 808,117
----------- -----------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, $0.01 par value, 19,650,000
shares authorized, none issued and outstanding ... $ - $ -
Preferred stock series A, $0.01 par value, 350,000
shares authorized, none issued and outstanding ... - -
Common stock, $0.01 par value, 300,000,000 shares
authorized, 1,157,951 shares and 1,103,766 issued
and outstanding as of 12/31/2005 and 12/31/2004,
respectively ..................................... 11,580 11,038
Common stock issuable, at par value (6,667 shares) - 67
Additional paid-in capital ........................ 7,543,532 7,404,527
Accumulated deficit ............................... (8,661,023) (8,134,828)
----------- -----------
Total Stockholders' Deficit ..................... (1,105,911) (719,196)
----------- -----------
Total Liabilities and Stockholders' Deficit ..... $ 62,373 $ 88,921
=========== ===========
See accompanying notes to the financial statements
F-4
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
Year Ended December 31,
--------------------------
2005 2004
---- ----
Revenues - Consulting ............................ $ - $ 275,000
Compressor prototypes .......................... - 11,900
----------- -----------
Total Revenues ............................... - 286,900
Cost of revenues ................................. - 16,096
----------- -----------
Gross Profit ................................... - 270,804
Operating Expenses
Compensation ................................... 141,603 168,541
General and administrative ..................... 354,139 357,069
Impairment loss ................................ - 144,603
Bad debt expense ............................... 1,956 -
----------- -----------
Total Operating Expenses ..................... 497,698 670,213
----------- -----------
Loss from Operations ......................... (497,698) (399,409)
Other Income (Expense)
Interest income ................................ 1,257 313
Other income ................................... 82,879 -
Interest expense ............................... (199,041) (35,427)
Warrant valuation income ....................... 86,408 -
----------- -----------
Total Other Expense, net ..................... (28,497) (35,114)
----------- -----------
Net Loss ..................................... $ (526,195) $ (434,523)
=========== ===========
Net Loss Per Share - Basic and Diluted ........... $ (0.47) $ (0.39)
=========== ===========
Weighted average number of shares outstanding
during the period - basic and diluted .......... 1,125,327 1,102,332
=========== ===========
See accompanying notes to the financial statements
F-5
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2005 and 2004
Total
Common Stock Paid In Accumulated Stockholders'
Common Stock Issuable Capital Deficit Equity
--------------------- -------------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 .... 1,097,099 $ 10,971 $ 3,333 $ 33 $ 7,349,628 $(7,700,305) $ (339,673)
Exchange of issuable Common stock
For Common Stock Option ....... - - (3,333) (33) 33 - -
Common stock issued for services 6,667 67 - - 23,933 - 24,000
Common stock warrants granted for
services ........................ - - - - 11,000 - 11,000
Common stock issuable for cash .. - - 6,667 67 19,933 - 20,000
Net Loss for 2004 ............... - - - - - (434,523) (434,523)
---------- -------- ------- ---- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2004 .... 1,103,766 11,038 6,667 67 7,404,527 (8,134,828) (719,196)
Common stock issued from 2004 ... 6,667 67 (6,667) (67) - - -
Common stock issued for cash .... 48,333 483 - - 84,517 - 85,000
Option Grant .................... - - - - 56,925 - 56,925
Common stock surrendered for Note (815) (8) - - (2,437) - (2,445)
Net Loss for 2005 ............... - - - - - (526,195) (526,195)
---------- -------- ------- ---- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2005 .... 1,157,951 $ 11,580 $ - $ - $ 7,543,532 $(8,661,023) $(1,105,911)
========== ======== ======= ==== =========== =========== ===========
See accompanying notes to the financial statements
F-6
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
Years Ended December 31,
2005 2004
---- ----
Cash Flows from Operating Activities:
Net loss ........................................... $(526,195) $(434,523)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 27,041 28,757
Amortization of debt issue costs ................. 20,291 -
Amortization of debt discount .................... 132,591 -
Interest accretion on loan payable ............... 21,936 19,633
Impairment loss .................................. - 144,603
Bad debt expense ................................. 1,956 -
Write off of deposit ............................. 46 -
Common stock issued for services ................. - 24,000
Common stock issued for warrants ................. - 11,000
Stock option grant for consultants ............... 56,925 -
Write off of accounts payable .................... (82,879) -
Warrant valuation expense ........................ (86,408) -
(Increase) decrease in current assets:
Accounts receivable .............................. 6,875 18,125
Other current assets ............................. 742 1,940
Other assets .................................... - (521)
Increase (decrease) in current liabilities:
Accounts payable ................................. 19,560 9,250
Accrued expenses ................................. - (4,223)
Accrued salaries ................................. 2,917 -
Accrued Interest Payable ......................... 35,080 -
Other accrued liabilities ........................ 14,170 5,859
--------- ---------
Net Cash Used In Operating Activities ............ (355,352) (176,100)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .............. (1,011) (8,491)
Disbursements relating to patent rights ............ - (1,049)
--------- ---------
Net Cash Used In Investing Activities ............ (1,011) (9,540)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note repayments .................................... (1,217) (2,309)
Loan repayments .................................... (4,066) (14,603)
Increase in loans payable .......................... - -
Proceeds from convertible promissory notes ......... 300,000 -
Repayment of convertible promissory notes .......... (17,211) -
Repayment of capital lease obligation .............. (1,538) -
Debt issue costs ................................... (21,726) -
Proceeds from common stock ......................... 85,000 20,000
Cash overdraft ..................................... 232 -
--------- ---------
Net Cash Provided By Financing Activities ....... 339,474 3,088
--------- ---------
Net Decrease in Cash ................................. (16,889) (182,552)
Cash at Beginning of Year ............................ 16,889 199,441
--------- ---------
Cash at End of Year .................................. $ - $ 16,889
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes ......... $ - $ -
========= =========
Cash paid during the year for interest ............. $ 9,411 $ 10,544
========= =========
Supplemental Disclosure of non-cash investing and
financing activities:
Exchange of employee receivable for stock receivable $ 2,250 $ -
========= =========
Issuance of promissory notes as debt issue cost .... $ 27,000 $ -
========= =========
Discount on promissory notes ....................... $ 327,000 $ -
========= =========
Refinance of lease obligation ...................... $ - $ 24,525
========= =========
See accompanying notes to the financial statements
F-7
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
DynEco Corporation and Subsidiary ("DynEco", "we", "us", "our" or
the "Company") is engaged primarily in developing and
commercializing patented air and hydrogen compressors, known
collectively as UniVane(R) devices, for stationary and automotive
fuel cells. During 2005 and 2004, the Company's wholly-owned
subsidiary, DynEco International, Inc., was inactive.
Principles of Consolidation:
For the years ended December 31, 2005 and 2004, 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 2005 and 2004 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.
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
F-8
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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 $144,603, relating to patent
rights, for the year ended December 31, 2004. All expenditures
during 2005 were charged to operations.
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 two active stock-based compensation plans, which are
described more fully in Note 10. 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. The Company issued stock
options to directors, employees, and the chief executive officer
totaling 23,333 and zero, respectively, in 2005 and 2004. No
stock-based employee compensation cost is reflected in net income
during 2005 and 2004. The Company issued 19,167 options and recorded
$56,925 in expense for options issued to consultants in 2005.
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.
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.
F-9
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
123, Accounting for Stock-Based Compensation, to stock-based
employee compensation as of December 31:
2005 2004
---------- ----------
Net loss, as reported .................. $ (526,195) $ (434,523)
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 .................. 69,300 -
---------- ----------
Pro forma net loss ..................... $ (595,495) $ (434,523)
========== ==========
Basic and diluted per share information:
Net loss per share, as reported ........ $ (0.47) $ (0.39)
========== ==========
Net loss per share, pro forma .......... $ (0.53) $ (0.39)
========== ==========
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 $0 and $286,900
during the years ended December 31, 2005 and 2004 respectively;
compressor revenues and contract consulting revenue.
Compressor revenues totaled $11,900 for 2004. 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 $275,000 for 2004 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.
That contract terminated after November 2004.
Research and Development
In accordance with Statement of Financial Accounting Standards No. 2
"Accounting For Research and Development Costs," the Company
expenses all research and development costs. Research and
development expenses included in General and administrative expenses
were $1,771 and $6,819 in 2005 and 2004, respectively.
F-10
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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, 2005,
there were warrants and options convertible into 983,876 common
shares and debt convertible into 109,000 common shares which may
dilute future earnings per share. There is no calculation of fully
diluted earnings per share in 2005 or 2004 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 and Other Concentrations
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. There were
no accounts receivable at December 31, 2005. At December 31, 2004,
$6,797 or 99% of the accounts receivable balance was due from one
customer.
The Company had no revenue in 2005, and recognized $275,000 or 96%
in revenues for the year ended December 31, 2004 from one customer.
As of December 31, 2005, 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 are in the
name of a current officer/director of the Company, which the Company
licenses from that officer/director pursuant to the terms of a
Technology License Agreement (see Note 9).
F-11
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The Company is relying on its Parker-Hannifin Exclusive Worldwide
License Agreement for future revenues (see Note 9).
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.
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.
New Accounting Pronouncements:
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements, which may apply to the Company.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). This statement replaces APB Opinion
No. 20 "Accounting Changes" and FASB Statement No. 3 "Reporting
Accounting Changes in Interim Financial Statements". SFAS 154
applies to all voluntary changes in accounting principle and to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions. SFAS 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented,
this SFAS requires that the new accounting principle be applied to
the balances of assets and liabilities as of the beginning of the
earliest period for which retrospective application is practicable
and that a corresponding adjustment be made to the opening balance
of equity or net assets for that period rather than being reported
in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to
all prior periods, this SFAS requires that the new accounting
principle be applied as if it were adopted prospectively from the
earliest date practicable. The Company adopted this SFAS as of
January 1, 2006. There is no current impact on the Company's
financial statements with the adoption of this FASB.
Reclassifications
Certain amounts in the 2004 financial statements have been
reclassified to conform with the 2005 presentation.
F-12
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 2 GOING CONCERN
The Company has a net loss of $526,195 and net cash used in operations
of $355,352 for the year ended December 31, 2005, a working capital
deficiency of $1,033,565, accumulated deficit of $8,661,023, and a
stockholders' deficiency of $1,105,911 at December 31, 2005.
Additionally, the Company was in default of the repayment terms on
notes payable aggregating $35,000 as well as defaulting on the
repayment terms of the convertible promissory notes aggregating
$309,789 at December 31, 2005. Because the Company's developmental
contracts generate insufficient operating capital and given these
financial results along with the Company's expected cash requirements
in 2006, additional capital investment will be necessary to develop and
sustain the Company's operations.
Management's plans to raise additional capital have been successful.
The Company was forced to cease its present operations. In January
2006, the Company entered into a Stock Exchange Agreement with Dynamic
Leisure Group, Inc. ("DLG"). The shareholders of DLG acquired
sufficient shares in the exchange to obtain more than 80% control of
the Company (see Note 12). The financial statements do not contain any
adjustments, which might be necessary if the Company is unable to
continue as a going concern.
In September 2004, the Company received 90 days notice from Parker
Hannifin to cancel the consulting agreement as laid out in the original
exclusive worldwide license agreement dated May 1, 2003. The consulting
agreement terminated after November 2004. Once released to production,
the Company will forgo the first $75,000 of royalties owed by Parker,
although this amount will be credited toward any minimums due under the
agreement. The original agreement will stand in all other respects.
NOTE 3 PATENT RIGHTS
Patent rights are licensed from an officer/director and consisted of
the following at December 31:
Estimated
Useful Life
2005 2004 in Years
--------- --------- -----------
Patent Rights ................ $ 0 $ 223,995 17 - 20
Less: accumulated amortization 0 (79,392)
Impairment Loss .............. 0 (144,603)
--------- ---------
Patent rights, net ........... $ - $ -
========= =========
Amortization expense was $0 in 2005 and $15,561 in 2004.
During the year ending December 31, 2004, the Company recognized an
impairment loss of $144,603 on its UniVane(R) patent rights. Although
the license agreement with a customer is still in effect, since license
revenues have not started and since the consulting agreement was
cancelled, the Company has been unable to project a positive cash flow
from this product or establish a fair market value of the patent using
other valuation techniques.
F-13
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Estimated
Useful Life in
2005 2004 Years
--------- --------- --------------
Machinery and equipment ...... $ 136,322 $ 136,322 3-10
Equipment under capital lease 108,840 108,840 7
Office furniture and equipment 58,878 57,685 3-10
Leasehold improvements ....... 4,615 4,615 5
--------- ---------
Total property and equipment . $ 308,655 $ 307,642
Less accumulated depreciation (275,237) (248,194)
--------- ---------
Property and equipment, net .. $ 33,418 $ 59,448
========= =========
Depreciation expense, including that on equipment under capital lease,
was $27,041 in 2005 and $13,196 in 2004.
NOTE 5 LOANS PAYABLE
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 UniVane(R) 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 UniVane(R)-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. Pursuant to EITF No. 88-18
"Sale of Future Revenues", the Company recorded the funding as a
current liability and in connection with APB No. 21 "Interest on
Receivables and Payables," accretes interest to the maximum value of
$450,000 through the November 2012 expiration date. At December 31,
2005, in connection with the accretion of interest, the Company
charged $21,936 to interest expense. The accreted balance due as of
December 31, 2005 was $208,987 and is included in loans payable in
the accompanying balance sheet.
Loan Payable to Finance Company
The Company refinanced a capital lease obligation through a new
finance company in November of 2004. The loan requires 60 monthly
payments of $521 consisting of principal and interest. The principal
balance at December 31, 2005 was $20,154 consisting of $4,653
current portion included in loans payable and $15,501 included in
loans payable, net of current portion.
F-14
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 6 CONVERTIBLE PROMISSORY NOTES & WARRANTS
On March 2, 2005, the Company completed a $300,000 financing consisting
of secured convertible promissory notes and common stock purchase
warrants. The notes mature on March 2, 2007. Interest accrues and is
payable monthly at the rate of 5% per annum or a default interest rate
of 10% per annum. Principal amortization payments, each in the amount
of $15,789 plus accrued interest, are to be paid in 19 equal monthly
installments, commencing July 2, 2005. The note holders must convert
the monthly payment amount into shares of our common stock, at a fixed
conversion price of $3.00 per share. However, the notes are only
convertible if the average 5 days lowest closing bid prices of the
Company's common stock for the 20 consecutive days prior to the
conversion date is equal to or greater than 100% of the fixed
conversion price. If the holder cannot convert due to the limitations
then the Company shall make the monthly amortization payments in cash
with a 10% premium or at its option, in registered common stock, at a
20% discount to market. Amortization payments in common stock are
subject to (a) a limitation based upon the weighted average trading
volume of the common stock for the 20 trading days preceding the
payment date and (b) a 4.99% cap on the beneficial ownership that each
investor may have at any point in time while the notes and warrants are
outstanding.
The secured convertible promissory notes are subject to a redemption
clause whereby if there is any event of default, as defined in the
notes or related subscription agreement, the investor may require
redemption at the greater of (i) 120% of the principal amount of the
debt or (ii) the conversion share quantity (computed using the fixed
rate) times the highest closing price of the common stock for the
period commencing on the deemed conversion date until the day prior to
receipt of the redemption payment.
The Company evaluated whether or not the secured convertible promissory
notes contain embedded conversion options which meet the definition of
derivatives under SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities" and related interpretations. The Company concluded
that since the fixed conversion rate does not change at the holders
option, the notes qualify as conventional convertible debt and thus are
not considered derivatives. Therefore the Company reviewed the notes
for any beneficial conversion values that existed under EITF 98-5 and
00-27. There was no beneficial conversion value determined since all
debt discount was allocated to the value of the warrants (see below).
We also issued the investors immediately exercisable common stock
purchase warrants to purchase an aggregate of 250,000 shares of common
stock, consisting of (a) five-year warrants to purchase 100,000 shares
at an exercise price of $4.3125 per share, subject to adjustment under
Company control, (b) five-year warrants to purchase 50,000 shares at an
exercise price of $7.50 per share (see reduced exercise price below),
subject to adjustment under Company control and (c) five-year warrants
to purchase 100,000 shares at $3.00 per share, subject to adjustment
under Company control. We may require the investors to exercise the
warrants described in (c) if the closing price for our common stock is
$4.50 or more for 30 consecutive trading days, and average daily volume
during such period is at least 8,333 shares. The exercise of warrants
is also subject to the 4.99% cap on the beneficial ownership that each
investor may have at any point in time while the notes and warrants are
outstanding. If certain registration statement requirements as
discussed below are not met, the warrants holders may exercise the
warrants on a cashless basis. The exercise price of the warrants
described in subparagraph (b) was reduced to $5.40 per share.
F-15
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
We agreed to file a registration statement covering the shares issuable
upon conversion or payment of the notes and exercise of the warrants.
The registration statement was to be filed by April 20, 2005 and
effective within 90 days from the filing date and maintained effective
during the defined period of distribution or we would incur liquidated
damages equal to 2% of the promissory note principal balance per 30
days of non-compliance. However, there was a limitation on the amount
of liquidated damages payable. Liquidated damages shall not accrue or
be payable during periods which the registerable securities are
transferable by the holder pursuant to Rule 144(K) of the 1933 Act. We
may not issue unregistered shares to the warrant holders upon exercise
of the warrants unless they consent. The registration statement was
timely filed and is currently available to permit resales by the note
and warrant holders.
Repayment of the notes is collateralized by a general security interest
in all of our assets.
If the Company does not issue unlegended shares under the provisions of
the agreements, the Company may be liable for damages, including
liquidated damages of $100 per day for each $10,000 of purchase price
per 30 days of non-compliance.
We paid unaffiliated finders a total of $27,000, by the issuance of
promissory notes payable in the same manner and with the same terms as
the investor notes, and issued the finders five-year warrants to
purchase a total of 9,000 shares of common stock, exercisable at
$4.3125 per share, subject to adjustment under Company control. The
total monthly principle payment is $15,789 ($300,000 notes) plus $1,421
($27,000 note) or $17,210. The total debt issue costs of $48,726 are
amortized over the debt term.
The Company evaluated whether or not the warrants and registration
rights meet the definition of derivatives under SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities" and related
interpretations. Pursuant to EITF 05-4 the Company concluded that since
the Company must issue registered shares under the warrant agreements
or be subject to a potentially cash payment at the holder option, the
instruments must be combined and classified as a derivative liabilities
at fair value with changes in fair value recorded in other income or
expense.
The value of the 250,000 warrants issued with the convertible
promissory notes was $905,318 which exceeded the $300,000 promissory
note value and accordingly, the full amount of the note $300,000 was
allocated to the warrant value by recording a debt discount of $300,000
and recording a $300,000 warrant liability. In addition, the excess of
the value over the note amount, aggregating $605,318 was recorded as a
warrant liability and charged to other income (expense) as a change in
fair value of warrant liability. The debt discount will be amortized to
interest expense over the debt term. The warrants were valued using the
Black-Scholes option pricing method with a common stock price of $.12
based on the quoted trade price, five-year expected term, zero expected
dividends, volatility of 354% and a discount rate of 4.18%. As there
was no value allocated to the debt, there was no beneficial conversion
amount to record. The warrant value for the 9,000 finder warrants using
the same Black-Scholes assumptions as above was $27,000, also recorded
as debt discount and as warrant liability.
F-16
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
At December 31, 2005 in accordance with SFAS 133, the Company revalued
the total 259,000 warrants underlying the warrant liability which total
value was $240,592 using the following Black-Scholes assumptions:
common stock price of $.93, 4.2 years expected term, zero expected
dividends, volatility of 334% and a discount rate of 4.35%.
The revaluation resulted in a decrease to the warrant liability of
$691,726 from the initial recording in March 2005 and a corresponding
credit to change in fair value of warrant liability. Accordingly, the
net change in the fair value of the warrant liability during fiscal
2005 resulted in other income of $86,408.
Convertible debentures .......................... $ 327,000
Debt discount ................................... (194,409)
Repayments ...................................... (17,211)
---------
Convertible debentures, net of discount ......... $ 115,380
=========
Debt issue costs ................................ $ 48,726
Amortization of costs thru December 31, 2005 .... 20,292
---------
Debt issue costs, net of amortization ........... $ 28,434
=========
On July 1, 2005, the Company failed to make the required installment
payments under the secured convertible promissory notes. The delinquent
payments to the five note holders aggregated $17,211 of principal plus
accrued interest. On August 3, 2005, the note holders waived the
Company's default in making the July 1, 2005 payments and agreed not to
assert any remedies they have under the notes and related loan
agreements. As consideration for the waivers and agreements on the part
of the note holders, the Company:
o Agreed to pay in August two note holders a total of $18,721
representing the July 1, 2005 installment of principal and agreed
upon accrued interest under their notes,
o Reduced the exercise price of warrants to purchase a total of
50,000 shares of the Company's common stock issued to the two
note holders, from $7.50 per share to $5.40 per share; and
o Agreed with the other three note holders to defer repayment of
the unpaid principal installment of $1,421 plus accrued interest
on their notes until the March 2, 2007 maturity date of the
notes, and agreed that those note holders could convert the
deferred payments into shares of our common stock at the lesser
of $2.01 per share or the then applicable conversion price of the
note.
Notwithstanding the waivers and settlement agreement, we failed to make
the installment payments, plus interest, and we have failed to make
required installment payments to the note holders in September,
October, November and December 2005. Accordingly, the Company has
accrued interest at the default rate since August 1, 2005.
On September 1st, October 1st, November 1st, and December 1st, the
Company failed to make the required installment payments under the
secured convertible promissory notes. The delinquent payments to the
five note holders aggregated $17,211 per month of principal, plus
accrued interest. As a result of the default, the loan is now
considered a current liability. The note holders have not commenced
F-17
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
legal proceedings against us or sought to foreclose on the security
interest collateralizing the promissory notes. In January 2006, holders
of the secured convertible promissory notes signed a Modification and
Waiver Agreement, revising the required repayment schedule and certain
terms of the original agreement (see Note 12).
NOTE 7 NOTES PAYABLE-SHAREHOLDERS
Notes payable - shareholders consisted of the following at December 31:
2005 2004
--------- ---------
Promissory notes payable - shareholders;
Interest bearing at rates ranging from
5% to 15%, unsecured and due at various
dates through August 2007 ............. $ 156,434 $ 157,651
Less current maturities ................. (37,216) (37,102)
--------- ---------
Long - term portion of notes payable
- shareholders ........................ $ 119,218 $ 120,549
========= =========
Future maturities of notes payable - shareholders are as follows for
years ending December 31:
2006 37,216
2007 119,218
---------
$ 156,434
=========
The Company repaid $1,217 of notes payable to a shareholder during the
year ended December 30, 2005.
At December 31, 2005, the Company was in default of the repayment terms
on notes aggregating $35,000. This amount is included in the current
maturities of notes payable on the accompanying consolidated balance
sheet at December 31, 2005.
NOTE 8 CAPITAL LEASES
The company repaid $1,538 of capital leases during the year ended
December 31, 2005 including the lease obligation that was refinanced as
mentioned above.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Edwards Technology License Agreement:
During February 2004, under an amendment to a 1992 license
agreement, the Company was granted an exclusive license to utilize
certain compressor technology, which includes the current UniVane(R)
technology, developed by an officer/director, Dr. Thomas Edwards, in
exchange for future royalty payments based on the underlying
technology-producing income. The Company was obligated to pay Dr.
Edwards 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. As of December 31, 2005,
no royalty payments were incurred or due as
F-18
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
no related sales have yet occurred, and there are no minimum
payments required. The February 2004 agreement was superceded by a
Exclusive Patent and Know-How License Agreement dated January 12,
2006. (See Note 13)
Technological Research and Development Authority Funding Agreement:
See Note 5
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
UniVane(R) 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 UniVane(R)
patent expiration, or the final use of UniVane(R)-related technology
by Parker-Hannifin.
Additionally in June 2003, the Company entered into a product
consulting agreement with Parker. In exchange for continued product
development and engineering services from the Company, Parker is
obligated to pay a monthly fee of $25,000 for the first year of
service. In November 2004, the consulting agreement terminated. In
conjunction with the termination, the Company will forgo the first
$75,000 of royalties owed by Parker.
Operating Lease:
The Company currently leases space on a month-to-month basis. Rent
expense for the years ending December 31, 2005 and 2004 were $12,000
and $18,888, respectively.
NOTE 10 STOCKHOLDERS' DEFICIT
Common Stock Issued for Cash
On December 15, 2004, the Company accepted $20,000 for 6,666 shares
of common stock from three individuals. The transfer agent had not
issued the shares as of December 31, 2004 and accordingly, the
shares were reflected as issuable at December 31, 2004 and were
reclassified as issued in 2005.
In 2005, the Company accepted $85,000 for 48,333 shares of stock
from 4 individuals. The shares were all issued by the end of the
year.
The company also received 815 shares of stock in repayment of a note
receivable during the 3rd quarter of 2005.
F-19
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Common Stock Issued for Debt and 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 contemporaneous private
placement offerings. During 2005 no shares were issued, and during
2004, the stated share price received was $3.60.
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 3,333 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
3,333 shares with an exercise price of $3.00 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 6,667 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 $3.60 per
share, which reflected recent cash offering prices of the Company's
common stock since the Company was not yet publicly trading its
common stock (See Note 11).
Common Stock Warrants:
At December 31, 2005, the Company had warrants outstanding as
follows:
Common Shares Exercise Price Expiration
Under Warrant Per Share Date
------------- -------------- --------------
133,333 $ 5.40 November 2006
3,333 $ 5.40 September 2006
7,500 $ 4.50 December 2006
406,171 $ 5.40 June 2007
40,000 $ 3.00 September 2008
109,000 $ 4.31 March 2010
50,000 $ 5.40 March 2010
100,000 $ 3.00 March 2010
3,333 $ 3.75 June 2010
3,333 $ 7.50 June 2010
3,334 $11.25 June 2010
-------
859,337
=======
F-20
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
A summary of changes in stock warrants during 2005 and 2004 is
presented below:
2005 2004
-------- --------
Outstanding at beginning of year 546,170 540,504
Granted ........................ 313,167 6,666
Expired or Cancelled ........... 0 (1,000)
-------- --------
Balance at December 31, ........ 859,337 546,170
======== ========
Stock-Based Compensation Plans:
At December 31, 2005, the Company has two active stock-based
compensation plans, as follows: The 1993 Corporate Stock Option
Plan, and the 2001 Equity Incentive Plan. The 1993 Advisors Stock
Option Plan has terminated however, outstanding grants under the
plan will continue according to their terms until exercised or
expired.
The 1993 Corporate and Advisors Stock Option plans have an aggregate
50,000 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 33,333 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, 2004.
At December 31, 2005, 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
-------------- ------------- ---------------- ----------------
$ 3.00 20,000 0.1 Years $ 3.00
$ 1.50 1,111 0.5 Years $ 1.50
$ 3.00 3,333 0.6 Years $ 3.00
$ 11.40 333 1.4 Years $ 11.40
$ 3.00 42,500 2.3 Years $ 3.00
$ 11.40 50,595 2.9 Years $ 11.40
$ 3.60 6,667 3.0 Years $ 3.60
-------
124,539
=======
F-21
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
All options are presently exercisable.
A summary of the changes in stock options outstanding during 2005
and 2004 is presented below:
2005 2004
------------------------ ------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------- -------------- -------- --------------
Options outstanding at the
beginning of the year .... 82,039 $ 8.24 157,112 $ 9.90
Options granted ............ 42,500 $ 3.00 3,333 $ 3.00
Options exercised .......... - $ - - $
Options forfeited .......... - $ - (78,406) $ (11.10)
-------- --------- ------- --------
Options outstanding at end
of year .................. 124,539 $ 6.45 82,039 $ 8.24
======== ========= ======= ========
Weighted average fair value
of options granted during
the year ................. $ 137,500 $ -
NOTE 11 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. As part of the transaction related to
the January 13, 2006 Stock Exchange Agreement, this individual
signed a Separation Agreement, terminating his employment agreement
with the Company. In addition to terminating his employment as of
the Separation Agreement date, the individual agreed to forego all
unpaid or accrued salary due under the January 1, 2004 and prior
agreements (See Note 13).
On June 29, 2004, the Company issued 6,667 shares of common stock
having a fair value of $24,000 to its Chairman of the Board of
Directors for services rendered (See Note 10).
Patent rights are licensed from an officer/director of the Company
(See Notes 3 and 9).
NOTE 12 INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate
as a result of the following items:
2005 2004
------- -------
Tax benefit computed at the maximum
federal statutory rate .................... (34.0)% (34.0)%
Net (increase) due to various
basis differences in assets and liabilities 4.4 5.1
Net operating loss carryforward .............. 29.6 28.9
----- ----
Income tax provision ......................... - % - %
===== ====
F-22
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The tax effect of temporary differences at December 31 were as follows:
2005 2004
----------- -----------
Asset:
Net operating loss carryforward .... $ 2,515,236 $ 2,389,507
Other individually immaterial items 65,566 81,125
----------- -----------
Net deferred tax asset before valuation
allowance ............................ 2,580,802 2,470,632
Less valuation allowance .............. (2,580,802) (2,470,632)
----------- -----------
Net deferred tax asset ................ $ - $ -
=========== ===========
For financial statement purposes, no tax benefit has been reported in
2005 or 2004 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 a
decrease of approximately $110,000 and $526,000 in 2005 and 2004,
respectively.
At December 31, 2005, the Company had net operating loss carryforwards
as follows for income tax purposes:
Carryforward Net Operating
Expires December 31 Loss Carryforwards
------------------- ------------------
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
2024 425,000
2025 594,000
-----------
$ 8,439,000
===========
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 which occurred subsequent to year-end, (See Note 13)
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.
F-23
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 13 SUBSEQUENT EVENTS
CASUAL CAR GENERAL SERVICE AGREEMENT
On January 3, 2006 Street Venture Partners, LLC, sold the US rights to
the Casual Car General Service Agreement (GSA) to Dynamic Leisure
Group, Inc. ("Dynamic") for an unsecured convertible Promissory Note in
the amount of $350,000, and a warrant to purchase 388,889 shares of the
Company's common stock at a fixed price of $.90 per share. The
Promissory Note is convertible to the Company's common stock at $.90
per share and paying 10% interest annually. The GSA allows the Company
to sell car rental products to leisure travelers primarily in Europe
and the United Kingdom, through Skycars International Rent a Car,
Middlesex, United Kingdom.
The Company plans to continue with the Casual Car GSA, selling direct
to the final consumer via the Internet, under the Casual Car rental
brand. The Casual Car GSA allows the Company to begin to establish a
foundation in certain desired leisure travel markets with multiple
product offerings.
STOCK EXCHANGE AGREEMENT DATED JANUARY 13, 2006
On January 13, 2006, the Company entered into an agreement with the
former shareholders of Dynamic, under which the Company acquired all of
the outstanding capital stock of Dynamic, and Dynamic became a wholly
owned subsidiary of the Company.
As consideration for its acquisition of the outstanding capital stock
of Dynamic, the Company issued an aggregate of 197,000 shares of its
Series A Preferred Stock to the former shareholders of Dynamic.
Issuance of the Series A Preferred Stock in exchange for the
outstanding capital stock of Dynamic pursuant to the Stock Exchange
Agreement resulted in a change in control of DynEco where (a) the
former shareholders of Dynamic acquired voting rights over
approximately 83% of the currently outstanding voting securities of the
Company and (b) the designees of the former shareholders of Dynamic
were appointed as the executive officers and a majority of the board of
directors of DynEco. The Series A Preferred Stock converted into
6,566,667 shares of the common stock of the Company when DynEco's
Articles of Incorporation were amended to increase the number of
authorized shares of the Company's common stock sufficient to permit
full conversion of the Series A Preferred Stock. The Company also
agreed that the currently outstanding options and warrants of Dynamic
would be exchanged for options and warrants to purchase an aggregate of
1,493,887 post reverse shares of common stock of the Company, and that
the currently outstanding convertible promissory notes of Dynamic would
become convertible into 1,386,111 post reverse shares of common stock
of the Company.
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.
F-24
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The transaction is treated as a recapitalization of Dynamic Leisure
Group, Inc. Accordingly, the financial statements of the Company just
subsequent to the recapitalization consists of the balance sheets of
both companies at historical cost, the historical operations of
Dynamic, and the operations of Dynamic Leisure Corporation, f/k/a
DynEco Corporation from the recapitalization date.
SEPARATION AGREEMENT DATED JANUARY 13, 2006
In connection with the transactions contemplated by the Stock Exchange
Agreement described elsewhere in this Report, DynEco Corporation and
Dr. Thomas Edwards entered into a Separation Agreement dated January
13, 2006 under which:
o The Employment Agreement dated as of January 1, 2004 by and between
DynEco Corporation and Dr. Edwards was terminated;
o Dr. Edwards irrevocably waived, forfeited and relinquished any right
to receive any accrued or deferred compensation in connection with
his prior services rendered to DynEco Corporation. As of December
31, 2005, $283,625 in deferred compensation payable to Dr. Edwards
was accrued ;
o The parties confirmed that they entered into a modification
agreement relating to the Exclusive Patent License and Know-How
Agreement dated February 4, 2004;
o DynEco irrevocably waived, forfeited and relinquished any right,
title or interest in any intellectual property created by Dr.
Edwards during the course of his services to DynEco, other than the
intellectual property covered by the Exclusive Patent License and
Know-How Agreement dated February 4, 2004;
o DynEco transferred and assigned to Dr. Edwards, all of DynEco's
right, title and interest in the lease covering DynEco's facilities
in Rockledge, Florida, and Dr. Edwards assumed all of DynEco's
obligations thereunder; and
o DynEco transferred and assigned to Dr. Edwards, all of DynEco's
right, title and interest in the furniture, property and equipment
located at DynEco's facilities in Rockledge, Florida, and Dr.
Edwards has assumed all of DynEco's obligations thereunder.
The Separation Agreement will result in the Company recording a benefit
of approximately $283,625 in 2006, related to the forfeiture of accrued
compensation by Dr. Edwards.
MANAGEMENT OF DYNECO CORPORATION
In connection with the transactions contemplated by the Stock Exchange
Agreement dated January 13, 2006 described elsewhere in this Note,
Thomas C. Edwards resigned as an officer (President and Chief Executive
Officer) and director of DynEco Corporation, and Kevin Hooper resigned
as a director of DynEco Corporation. In accordance with the terms of
the Stock Exchange Agreement, Leonard Sculler, who has served as a
director of DynEco Corporation since June 2003, continues to serve as a
director of the Company for a period of at least one year. George R.
Schell, who served as a director of DynEco since 1998, confirmed in a
January 2006 telephone conversation with the Company's General Counsel
that he had informally resigned as a director of DynEco Corporation,
and was not re-elected at a January 31, 2006 Special Meeting of
Shareholders.
F-25
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
At the Special Meeting of Shareholders, the following persons were
elected to serve as directors of the Company until the next annual
meeting of shareholders and until their successors are duly elected and
qualified:
Daniel G. Brandano
Thomas W. Busch
Robert A.G. LeVine
Leonard Sculler
In connection with the transactions contemplated by the Stock Exchange
Agreement dated January 13, 2006 described elsewhere in this Report,
the following persons have been appointed to serve as officers of the
Company, in the capacities indicated, until the next annual meeting of
the board of directors and until their successors are duly elected and
qualified:
Daniel G. Brandano - President
Thomas W. Busch - Vice President and Treasurer
Robert A.G. LeVine - Secretary
MODIFICATION AND WAIVER AGREEMENT DATED JANUARY 13, 2006
On January 13, 2006, the Company entered into a Modification and Waiver
Agreement with Alpha Capital Aktiengesellschaft, JM Investors, LLC,
Libra Finance, S.A. and RG Prager Corporation. The parties to the
Modification and Waiver Agreement are also parties to a series of
agreements dated March 2, 2005, as amended, under which DynEco issued
convertible promissory notes aggregating of $327,000. At the time of
execution of the Modification and Waiver Agreement, the Company was in
default of its obligations under the March 2, 2005 agreements.
Under the Modification and Waiver Agreement, interest on the
convertible promissory notes at the rate of 5% per annum will be paid
quarterly, commencing March 31, 2006. Monthly principal amortization
payments of approximately $29,700 are to commence on June 1, 2006. In
accordance with the terms of the Modification and Waiver Agreement,
upon receipt of the funding of $2 million in a January 13, 2006
Financing Transaction, the note holders opted to receive payment, and
the Company paid a total of approximately $245,250 to the note holders,
consisting of approximately $163,500 in principal amount of promissory
notes and a premium in the amount of approximately $81,750. The notes
are convertible at $.75 per share, subject to certain adjustments. As
part of the terms of the Financing Transaction, the note holders
released their security interest in the Company's assets.
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, the Company issued an aggregate
of 200,000 shares of its common stock to the two investors under the
March 2, 2005 transaction documents. Pursuant to the terms of the
Modification and Waiver Agreement (a) those provisions of the
transaction documents dated March 2, 2005 providing exceptions to the
adjustment provisions of the notes and warrants have been eliminated,
(b) the exercise price of the warrants to purchase up to 259,000 shares
of DynEco common stock issued under the March 2, 2005 transaction
documents was changed to $1.00 per share and the warrants are
F-26
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
exercisable until 3 years from the filing of the Form 8-K announcing
the recapitalization of Dynamic and DynEco, (c) the number of shares
issuable upon exercise of those warrants to the investors cannot be
reduced to less than 300,000 shares. Under the Modification and Waiver
Agreement, under certain circumstances, we may require the investors to
exercise the 300,000 warrants. The Company may prepay the note at 150%
of the principle due, plus interests and other amounts due, through the
redemption date but only if an effective registration statement exists.
We have agreed to file an amendment to the existing registration
statement covering resale of the shares issuable under the transaction
documents dated March 2, 2005. Such registration statement must be
filed on or before April 13, 2006 and become effective not later than
60 days after the date of filing, or the Company will be subject to the
payment of liquidated damages to the note holders. In addition, we have
agreed to file a new registration statement covering the resale of
those shares issuable under the Modification and Waiver Agreement the
resale of which are not covered by the existing registration statement.
Such additional registration statement must be filed by May 13, 2006
and become effective not later than 60 days after the date of filing,
or the Company will be subject to the payment of liquidated damages to
the note holders. In the event that a Form 8-K/A, including the audited
financial statements of Dynamic is not filed on or prior to April 5,
2006, then the Modification and Waiver Agreement will become null and
void, except that the note holders are entitled to retain the 200,000
shares issued to induce them to enter into the Modification and Waiver
Agreement.
EXCLUSIVE PATENT AND KNOW-HOW LICENSE AGREEMENT DATED JANUARY 12, 2006
On January 12, 2006, the Company and Dr. Thomas C. Edwards entered into
an Exclusive Patent and Know-How License Agreement that amends and
supersedes the Exclusive Patent and Know-How License Agreement dated
February 4, 2004, by and between the Company and Dr. Edwards. The 1994
Agreement granted us the exclusive license to use certain patented
technology owned by Dr. Edwards, in return for a royalty payment to Dr.
Edwards based upon a percentage of revenues generated from sales of
products incorporating the licensed technology. The Company
subsequently granted the Parker-Hannifin Corporation an exclusive
license to use the technology covered by 1994 License Agreement in
UniVane(R) products developed by Parker-Hannifin.
Under the January 12, 2006 Exclusive Patent and Know-How License
Agreement, Dr. Edwards has relinquished any entitlement to royalty
payments under the Exclusive Patent and Know-How License Agreement
dated February 4, 2004 and has assigned and transferred to the Company
all of his right, title and interest under the Exclusive Patent and
Know-How License Agreement dated February 4, 2004.
There is no financial affect from the January 12, 2006 agreement.
ARTICLES OF AMENDMENT DESIGNATING SERIES A PREFERRED STOCK
The designations, rights, powers, preferences and limitations of the
Series A preferred Stock of the Company are set forth in Articles of
Amendment to the Company's Articles of Incorporation that were filed
with the Secretary of State of Minnesota. The Articles of Amendment
provide that a series of Preferred Stock, denominated as Series A
F-27
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Preferred Stock and consisting of 350,000 shares, was created by the
Board of Directors in furtherance of the authority conferred upon the
Board by the Company's Articles of Incorporation.
The Articles of Amendment provide that (a) the Series A Preferred Stock
shall vote as a group with the holders of the Company's common stock on
each matter that is submitted to a vote of common shareholders, (b)
each share of Series A Preferred Stock is entitled to 1,000 votes per
share on each matter submitted to a vote of shareholders, (c) each
share of Series A Preferred Stock shall automatically be converted into
33.33 shares of the Company's common stock at such time as the Company
has amended its Articles of Incorporation to authorize the issuance of
a sufficient number of shares of common stock to permit all of the then
outstanding shares of Series A Preferred Stock to be converted and (d)
the Series A Preferred Stock shall rank pari passu with our common
stock as to dividend, liquidation and redemption rights.
Of the 350,000 authorized shares of Series A Preferred Stock, 197,000
were issued to the former shareholders of Dynamic in connection with
the closing of the Stock Exchange Agreement described elsewhere in this
Note, and the balance were reserved for issuance in the event of
exercise of outstanding options and warrants, and conversion of
convertible promissory notes, that are now convertible into shares of
the Company. Subsequent to the increase in the number of shares of
common stock we are authorized to issue, the 197,000 outstanding shares
of Series A Preferred Stock were exchanged for 6,566,667 shares of our
common stock, as previously disclosed in the Stock Exchange Agreement
section of this Note. (See reverse split of common stock below.)
ARTICLES OF AMENDMENT INCREASING AUTHORIZED SHARES OF COMMON STOCK
On January 31, 2006, shareholders authorized an increase in the number
of shares of common stock the Company is authorized to issue to
300,000,000. On February 2, 2006, we filed Articles of Amendment with
the Secretary of State of Minnesota, amending Article III of the
Amended Articles of Incorporation, increasing the authorized shares of
common stock to 300,000,000 from 80,000,000. The aggregate number of
common and preferred shares that the Company has authority to issue was
restated to 320,000,000 from 100,000,000. The Amended Articles of
Incorporation were effective upon filing.
JANUARY 13, 2006 FINANCING TRANSACTION
On January 13, 2006, the Company entered into a series of documents
with MMA Capital, LLC, under which we borrowed $2,000,000 and issued to
MMA Capital a Convertible Secured Promissory Note in the aggregate
principal amount of $2,000,000. Interest is payable quarterly at the
rate of 8% per annum and the outstanding principal amount of the note,
together with accrued but unpaid interest, becomes due and payable on
January 11, 2007. In the event of default, the interest rate is the
greater of ten percent (10%) per annum or the maximum amount permitted
by applicable law from the date of the Event of Default until paid in
full.
At the option of the holder, the outstanding principal amount of the
promissory note and accrued but unpaid interest may be converted into
shares of common stock of the Company at the rate of $1.00 per share,
subject to adjustment in the event we issues
F-28
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
shares for a consideration of less than $1.00 per share and to reflect
the occurrence of forward or reverse stock splits, corporate
reorganization or certain other corporate events. The Company agreed to
file a registration statement under the Securities Act of 1933, as
amended, to register the shares issuable upon conversion of the
promissory note. It constitutes an event of default under the note, and
subjects us to the payment of liquidated damages, if the registration
statement does not become effective on or before July 12, 2006, and
does not remain effective for a period of at least 90 days. For each
week of non-compliance, liquidated damages will be 2% of the product of
(a) the sum of the holder's shares of stock not registered on a timely
basis and (b) the weekly average closing price of the shares of the
Company's common stock. The Company's obligations under the promissory
note are collateralized by a security interest in substantially all of
our assets.
In connection with the transaction, we issued a common stock purchase
warrant in favor of MMA Capital to purchase up to 2,000,000 shares of
the Company's common stock, exercisable for a period of three years, at
an exercise price of $1.00 per share, subject to adjustment in the
event we issue shares for a consideration of less than $1.00 per share
and to reflect the occurrence of forward or reverse stock splits,
corporate reorganization or certain other corporate events. If, at the
time of exercise, there is not an effective registration statement
covering resale of the shares issuable upon exercise of the warrant,
the warrant holder may exercise the warrant on a cashless basis,
whereby the holder surrenders a portion of the warrants in lieu of
paying the exercise price in cash.
A fee equal to 8% of the proceeds ($160,000) was paid to Forte Capital
Partners LLC, an unaffiliated third party, who assisted MMA Capital 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. The $160,000 will be recorded as a deferred debt issuance
cost asset to be amortized over the debt term.
Per SFAS 133 and EITF 00-19, the convertible note will be classified as
one financial instrument as it is considered conventional convertible
debt. In addition, the warrants are classified as a liability at their
fair value of approximately $1,800,000 with a corresponding charge to
debt discount. The beneficial conversion value of $200,000 associated
with the convertible debt is recorded as a debt discount and additional
paid in capital. The debt discount will be amortized over the term of
the debt.
FEBRUARY 8, 2006 ACQUISITION OF CHANGES IN L'ATTITUDES, INC.
On February 8, 2006 the Company consummated the purchase of all of the
issued and outstanding capital stock of Changes in L'Attitudes, Inc.
("CLA"), for a purchase price of $1,750,000. The purchase price
consists of a combination of cash ($640,000), shares of our common
stock (340,000 shares), and a one-year secured Convertible Debenture in
the principal amount of $600,000. The cash portion consists of $200,000
delivered at closing, with the balance to be delivered on or before
June 9, 2006, following completion of audits of the financial
statements of CLA for the years ended December 31, 2004, and December
31, 2005. The balance of the cash payment will be reduced by any trade
payables in excess of short term liquid assets.
F-29
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Additional shares of our common stock may be issued if the Company, as
part of any subsequent business acquisitions on or before December 31,
2006, issues to the acquiree/seller our common stock at a rate of less
than $1.50 per share.
The Debenture is payable with interest at the rate of 9% per annum, and
matures on February 7, 2007 ("Maturity Date"). The Debenture is
convertible into our common stock, on or before the Maturity Date, at a
rate of $1.50 per share. The conversion rate may be adjusted downward
if we, in subsequent acquisitions on or before December 31, 2006,
provide consideration that includes convertible securities with a
conversion rate of less than $1.50 per share. In the event of any such
adjustment, the conversion rate will be adjusted to the most favorable
rate offered, but no lower than $1.00 per share. Subsequent to the
Closing Date, if the Company obtains cumulative net external financing
of $2,500,000 or more, early repayment of 50% of the outstanding
balance on the Debenture may be required. If the Company receives in
excess of $5,000,000 in cumulative net external financing, an early
repayment of the full outstanding balance on the Debenture may be
required. The Company has agreed to include resale of the shares
issued, and those issuable upon conversion of the Debenture in the next
registration statement filed by us. The Convertible Debenture is
secured by a lien on the assets of CLA.
The acquisition of CLA is expected to provide the Company with a direct
to consumer selling channel via the internet to the strategically
desirable Caribbean leisure market.
ARTICLES OF CORRECTION TO CHANGE DYNECO CORPORATION'S NAME
On February 28, 2006, we filed Articles of Correction with the
Secretary of State of Minnesota, to change the Company's name to
Dynamic Leisure Corporation. These Articles were effective in the State
of Minnesota at the close of business on March 3, 2006.
There was no financial affect related to this filing.
MARCH 3, 2006 REVERSE SPLIT OF COMMON STOCK
On January 31, 2006, shareholders approved a 1:30 reverse split of our
common stock. On February 28, 2006, we filed Articles of Correction
with the Secretary of State of Minnesota, restating previously amended
Article III with explanation of the approved reverse stock split to be
effective at the close of business on March 3, 2006. Dynamic Leisure
Corporation's (f/k/a DynEco Corporation) stock began trading post-split
on the NASDAQ exchange at the open of business on March 6, 2006. As a
result of the reverse stock split, every thirty (30) shares of our
common stock outstanding on the effective date was automatically
combined into one (1) share. Except as provided with respect to
fractional interests, no cash was paid or distributed as a result of
the reverse stock split nor were any fractional shares issued as a
result of the reverse stock split. In settlement of fractional
interests which arose as a result of the reverse stock split, the
shareholder was entitled to cash in an amount equal to (a) the market
price of one (1) share of common stock immediately following the
reverse stock split, multiplied by (b) the fractional share amount
immediately following the reverse stock split. Distributions of amounts
which may be due shareholders as a result of fractional interests are
to be handled for the Company by its transfer agent.
F-30
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The accompanying financial statements as of and for the years ended
December 31, 2005 and December 31, 2004 have been retroactively
adjusted for the subsequent affect of the reverse stock split and the
Stock Exchange Agreement of January 13, 2006 with Dynamic.
MARCH 6, 2006 ACQUISITION OF ISLAND RESORT TOURS, INC. AND
INTERNATIONAL TRAVEL AND RESORTS, INC.
On March 6, 2006, the Company purchased all of the issued and
outstanding capital stock of Island Resort Tours, Inc. ("IRT") and
International Travel and Resorts, Inc. ("ITR"), for a purchase price of
$4,000,000.
The purchase price consists of a combination of cash ($1,500,000),
shares of the Company's common stock (700,000 shares), and a one-year
secured Convertible Promissory Note in the principal amount of
$1,450,000. The cash portion consists of $500,000 delivered at closing,
with the balance to be delivered on or before May 5, 2006, following
completion of audits of the financial statements of IRT and ITR for the
years ended December 31, 2004 and December 31, 2005. The balance of the
cash payment will be reduced by any trade payables in excess of
short-term liquid assets.
Additional shares of our common stock may be issued if the Company, as
part of any subsequent business acquisitions on or before December 31,
2006, issues our common stock to an acquiree/seller at a rate less than
$1.50 per share. In such event, additional shares may be issued
equivalent to the most favorable rate, but in no event at a rate less
than $1.00 per share. Up to an additional 350,000 shares of our common
stock could be issued as a result of this adjustment provision.
The Promissory Note is payable with interest at the rate of 9% per
annum and matures on March 6, 2007 (the "Maturity Date"). The Note is
convertible into the Company's common stock on or before the Maturity
Date at a rate of $1.50 per share. The conversion rate may be adjusted
downward if the Company, in subsequent acquisitions on or before
December 31, 2006, provides consideration that includes convertible
securities with a conversion rate of less than $1.50 per share. In the
event of any such adjustment, the conversion rate will be adjusted to
the most favorable rate offered, but no lower than $1.00 per share.
Subsequent to the Closing Date, if the Company obtains cumulative net
external financing of $3,500,000 or more prior to the maturity date,
early repayment of 50% of the outstanding balance on the Note may be
required. If we receive in excess of $7,000,000 in cumulative net
external financing prior to the maturity date, an early repayment of
the full outstanding balance on the Note may be required. The Company
has agreed to include resale of the shares issued and those issuable
upon conversion of the Note in the next registration statement filed by
us.
The Convertible Note is secured by a lien on assets of IRT and ITR. The
acquisition of IRT and ITR is expected to increase the Company's
presence in the desired Caribbean leisure travel market, provide access
to key travel industry products, and add to the expertise of the
Company's management team.
F-31