AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2006
Registration No. 333-124283
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM SB-2
POST-EFFECTIVE AMENDMENT NO. 2
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.)
5680A W. Cypress Street
Tampa, FL 33607
(813) 877-6300
(Address and Telephone Number of Principal Executive Offices)
__________
Daniel G. Brandano, President
5680A W. Cypress Street
Tampa, FL 33607
(813) 877-6300
(Name, Address and Telephone Number of Agent For Service)
With Copies to
Crone Rozynko LLP
101 Montgomery Street, Suite 1950
San Francisco, CA 94104
__________
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. 2
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 and incorporates changes requested through comments made
by the Securities and Exchange Commission in May 2006. 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 the second quarter of
2006 (consistent with our Form 10-QSB filed August 21, 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.
i
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 $ 7.50 (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.
ii
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, September 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." As of September 12, 2006, the last trade for our common stock
was $1.00 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______, 2006
iii
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 ........................................................... 6
Use of Proceeds ........................................................ 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 .............. 37
Description of Property ................................................ 46
Certain Relationships and Related Transactions ......................... 47
Market for Common Equity and Related Stockholder Matters ............... 48
Executive Compensation ................................................. 53
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 53
Financial Statements ................................................... F-1
iv
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.
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 (currently inactive), 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 industry 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 2006 acquisition and integration
of key assets in the leisure travel industry to provide an ongoing business
base, leading to organic growth through development of our human and
technological resources, including the implementation of the proprietary
TourScape dynamic packaging travel software. The Company intends to continue its
growth in 2007 by continuing focus on the
leisure travel markets of the Caribbean, Florida, Las Vegas, Hawaii, Mexico and
Europe, expanding its destinations to Central and Southern America, 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 located at 5680A W. Cypress Street Tampa,
Florida 33607, and our telephone number there is (813) 877-6300.
THE OFFERING
This prospectus covers the sale 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 sale 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 .. 11,298,174 shares as of August 31,
2006.
Outstanding After this Offering ..... 11,298,174 shares as of August 31,
2006, including 445,000 shares the
sale 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: .............. 104,539 shares issuable on exercise of
options (including options that have
been granted and options that may be
granted under our equity compensation
plans), 4,649,801 shares issuable upon
conversion of promissory notes
(163,500 shares covered by this
prospectus), and 4,746,491 shares
issuable upon exercise of outstanding
warrants (including warrants to
purchase 266,500 shares the sale 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, pursuant to which we
filed a Post-Effective Amendment to
the Registration Statement on April
13, 2006, and we are 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. We are
currently in negotiations with the
selling security holders regarding
these potential liquidated damages.
For more information regarding the
Modification and Waiver Agreement, see
Exhibit 10.17.
RISK FACTORS ........................... See "Risk Factors" beginning on page 6
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
sale 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 period from
May 16, 2005 (Inception) to December 31, 2005 for Dynamic Leisure Group, the
accounting acquirer and, effectively, the registrant and for the years ended
December 31, 2005 and 2004 for DynEco Corporation has been derived from, and
should be read in conjunction with, our audited financial statements included
elsewhere in this prospectus.
Dynamic Leisure Group, Inc.
The Period Ended
December 31, 2005
-----------------
Revenues ........................................ $ 0
Cost of Revenues ................................ $ 0
Operating expenses .............................. $ 455,954
Net (loss) ...................................... $ (485,314)
Net (loss) per share ............................ $ (0.47)
December 31, 2005
-----------------
Working capital deficit ................ $ 1,126,287
Current liabilities .................... $ 1,164,986
Total liabilities ...................... $ 1,164,986
Shareholders' deficit .................. $ 477,814
4
DynEco Corporation
Years Ended December 31,
-------------------------
2005 2004
---------- ----------
Revenues ........................................ $ 0 $ 286,900
Cost of Revenues ................................ $ 0 $ 16,096
Operating expenses .............................. $ 497,698 $ 670,213
Net (loss) ...................................... $ (603,773) $(434,523)
Net (loss) per share ............................ $ (0.54) $ (0.39)
December 31, 2005
-----------------
Working capital deficit ................ $ 1,111,143
Current liabilities .................... $ 1,111,143
Total liabilities ...................... $ 1,245,862
Shareholders' deficit .................. $ 1,183,489
The following is a summary of the financial information for three and six months
ending June 30, 2006 for Dynamic Leisure Corporation. It has been derived from
and should be read in conjunction with our unaudited quarterly financial
statements included elsewhere in this prospectus. Prior year comparison
information is not presented since the inception date of Dynamic Leisure Group,
Inc. was May 16, 2005.
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three From Inception For the Six From Inception
Months Ended (May 16, 2005) Months Ended (May 16, 2005)
June 30, 2006 To June 30, 2005 June 30, 2006 To June 30, 2005
------------- ---------------- ------------- ----------------
Total Revenues .............................. $ 1,904,547 $ - $ 2,997,045 $ -
Cost of revenues ............................ 1,340,248 - 2,157,572 -
Gross Profit .............................. 564,299 - 839,473 -
Operating Expenses
General and administrative ................ 1,454,825 49,825 2,281,340 49,825
Depreciation and amortization Expense ..... 80,048 - 84,561 -
Total Operating Expenses ................ 1,534,873 49,825 2,365,901 49,825
----------- ----------- ----------- -----------
Loss from Operations .................... (970,574) (49,825) (1,526,428) (49,825)
Other (Income) Expense
Interest income ........................... (6,557) - (13,042) -
Interest expense .......................... 1,002,449 115 2,184,895 115
Loss on extinguishment of debt ............ - - 208,452 -
Other Expense ............................. 8,020 - 8,020 -
Warrant valuation (income) expense ........ (1,441,491) - 778,551 -
Total Other Expense, (income) net ....... (437,579) 115 3,166,876 115
----------- ----------- ----------- -----------
Net Loss ................................ $ (532,995) $ (49,940) $(4,693,304) $ (49,940)
=========== =========== =========== ===========
Net Loss Per Share - Basic and Diluted ...... $ (0.06) $ (0.05) $ (0.53) $ (0.05)
5
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 the
Company to be 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 $603,773 and $434,523, respectively. In addition, at December 31,
2005, we had an accumulated deficit of $8,738,601. 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, INVESTORS MAY BE UNABLE TO SELL OUR SHARES AT A PROFIT
OR AT ALL.
The Company has a net loss of $4,693,304 for the six months ended June
30, 2006 and net cash used in operations of $1,728,848 for the six months ended
June 30, 2006, and a working capital deficiency of $8,711,794 accumulated
deficit of $5,178,618, and a stockholders' deficiency of $291,223 at June 30,
2006. Because the Company has not yet achieved or acquired sufficient 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.
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 and bridge financing of approximately
$1,000,000 payable through mid-September 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.
6
THERE IS NO SIGNIFICANT ACTIVE TRADING MARKET FOR OUR SHARES, AND IF AN ACTIVE
TRADING MARKET DOES NOT DEVELOP, PURCHASERS OF OUR SHARES MAY BE UNABLE TO SELL
THEM PUBLICLY.
There is no significant 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 June 30, 2006, we have executed convertible promissory notes,
granted options and issued warrants to the same promissory noteholders to
purchase an aggregate of 3,370,554 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, we have granted another 333,333 in shares to financiers and
consultants, and 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 SELL THEIR SHARES. IF THEY
DO SO, THE MARKET PRICE FOR OUR SHARES MAY FALL, AND PURCHASERS OF OUR SHARES
MAY BE UNABLE TO SELL 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.
7
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 IMPOSES 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 in America 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. Although we are endeavoring to expand our
markets to customers who book travel in other times of the year, travel booking
tendencies 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.
8
- 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 are third-party information platforms (software and data) that
distribute airline data to the Company and to our competitors,
including price and flight availability, and permit flight
reservations and ticketing.
- 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, such that a competitor's ownership of a GDS allows the
competitor reduced or eliminated transaction costs, guaranteed continued
utilization of the GDS, and more efficient interface with the GDS. 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 creating, 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 creating brand recognition of the new "Dynamic Leisure" and "eCasual" brands
(scheduled to be launched in fall 2006), and maintaining and enhancing brand
recognition of Changes in L'Attitudes, Island Resort Tours, International Travel
and Resorts, and the brands were issued by future acquisitions. Currently, our
Changes.com website enjoys favorable organic placement when searching for
"Caribbean vacations" in Google and other search engines. For example,
throughout 2006 such a search consistently resulted in returning Changes.com as
one of the first five (5) relevant websites, without any marketing expenditure
on our part. Although we do not control how search results are achieved in
various search engines, we believe that this kind of search result provides a
material advantage in terms of sales opportunities. We hold dozens of other
URL's, but these sites do not have similar search priority. 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. Those efforts began in test phase in
June and July 2006 and are expected to increase significantly in during the
third and fourth quarters of 2006. 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.
9
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.
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., a market-dominant global distribution system (GDS) that distributes
airline data to the Company and to many of our competitors, including price and
flight availability, and permits flight reservations and ticketing. 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, or if airlines limit their fare
availability offered through Sabre, 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.
10
OUR SUCCESS DEPENDS UPON IMPLEMENTING AND INTEGRATING OUR TOURSCAPE TECHNOLOGY.
Our company has recently acquired three wholesale travel companies,
Changes in L'Attitudes, Inc., Island Resort Tours, Inc. and International Travel
and Resorts, Inc., and plans to acquire several more wholesale travel companies,
both in the U.S.A. and in Europe, as soon as practicable. We are currently
negotiating to purchase companies, assets and/or hire key personnel to expand
our key destinations to Hawaii and to Europe and to increase revenues through
increased bookings and utilization of our bulk air contracts. We have executed
one non-binding term sheet and are negotiating another non-binding term sheet
for two travel companies with European expertise, one based outside of London,
England (executed term sheet) and another in Florida (in negotiations). These
transactions will require additional funding that has not been obtained as of
this filing. 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. TourScape is a
technology platform designed to market and sell domestic and international
leisure travel products, both retail and wholesale. TourScape permits
user-friendly interface on the internet and allows us to update product
information for our reservation agents quickly. We are currently installing
TourScape into our servers and computers. Because employees of the Company
helped design and refine the TourScape program, we believe that we can implement
and expand TourScape as our needs develop. However, if we cannot successfully
implement and integrate our TourScape technology, our profitability may not
increase as planned, or at all.
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, which are third-party owned software
platforms that allow us to connect directly with our product
suppliers to view and import product information into our systems;
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
11
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
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,
windstorms, sinkholes, 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 THREE 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. Although we
have completed acquisition term sheets with two other travel companies, we do
not currently have any finalized 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 only limited 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 complete future acquisitions, we undoubtedly
will 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.
12
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.
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
13
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.
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.
14
- 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.
- 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 Caribbean. 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 HAS CHANGED ITS BUSINESS PLAN, WE CONTINUE TO HOLD
LICENSING RIGHTS ON TECHNOLOGY THAT MAY BE DEVELOPED BY THE PARKER-HANNIFIN
CORPORATION, YET WE HAVE NO INDICATION THAT THOSE RIGHTS WILL LEAD TO ANY
REVENUES FOR OUR COMPANY.
Prior to changing our business plan to focus on the travel industry, we
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 have
historically depended 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, and Parker-Hannifin
has indicated informally that we are not likely to receive any royalty payments.
For this reason, the Company changed our business plan to wholesale and retail
travel sales.
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 sale 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.
SELLING SECURITY HOLDERS
BACKGROUND OF THE TRANSACTIONS
This prospectus covers the sale 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 -- 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
sale 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.
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.
16
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 sale 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 sale from time to time. All expenses of the registration of the
common stock on behalf of the selling security holder are being borne by us. We
will receive none of the proceeds of this offering.
Shares Owned
Beneficially Shares Available Shares Percent of
Prior to this Pursuant to Owned After Class
Selling Security Holder Offering this Prospectus Offering After Offering
- ------------------------------------------------------------------------------------------
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 -- --
======= =======
17
__________________
(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, received as result of the financing agreement dated March
2, 2005. 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, received as a result of the financing agreement dated
March 2,2005. 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, received as a result of the financing agreement dated
March 2,2005. 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, received as a result of a
subscription agreement. 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, received as a result of a
subscription agreement. 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, received as a result of a
subscription agreement. 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, received as a result of a
subscription agreement. 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 sale 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 sales, 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 sale 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, Alpha Capital Aktiengesellschaft and JM Investors, LLC,
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
could accrue in the amounts set forth in a second Subscription Agreement, dated
January 13, 2006. Although the required effective date has passed, we have not
received any notice to pay liquidated damages, although damages are accruing.
Rather, we are currently negotiating with these two selling security holders
concerning renegotiation and possible additional financing. 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. Again, although the required effective date has passed, we have not
received any notice to pay liquidated damages, although damages are accruing.
Rather, we are currently negotiating with these two selling security holders
concerning renegotiation and possible additional financing.
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 those 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 sale
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 sale 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 104,539 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 57 Director, President, CEO and acting CFO*
Thomas W. Busch 50 Director, Vice President, Treasurer, CFO*
Robert A.G. LeVine 45 Director, Secretary, General Counsel
Leonard Sculler 68 Director
*Mr. Busch resigned as officer and director as of June 5, 2006 at which time Mr.
Brandano assumed the role of acting CFO until a new CFO can be retained.
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.
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. In
addition, on August 31, 2006, Director Sculler was given a one-time grant of
200,000 shares of common stock for his services as director. 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.
Our Chief Operating Officer, Marc J. LeVine, is the brother of Robert
A.G. LeVine. There are no other 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 currently
consists of three 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, and since the resignation of Thomas Busch on June 5, 2006, we have no
"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. In our search for a new CFO, we intend to retain a person
qualified as an "audit committee financial expert."
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 June 30,
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, 5680A W. Cypress
Street, 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 11,298,174 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, which occurred with filing Articles of Amendment with the State of
Minnesota on February 2, 2006. 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 104,539 shares upon exercise of options that have been granted;
o 4,746,491 shares upon exercise of outstanding stock purchase
warrants; and
o 4,649,801 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 25.4%
Robert A. G. LeVine (2) .............. 266,666 2.4%
Leonard Sculler (3) .................. 206,666 1.9%
013fOfficers and Directors as Group
(3 persons) .......................... 3,284,434 29.3%
MMA Capital, LLC (4)
456 Montgomery Street, Ste. 2200
San Francisco, CA 94104 .............. 5,555,000 36.8%
Diversified Acquisition Trust, LLC (5)
50 Braintree Hill Park, Ste. 108
Braintree, MA ........................ 1,835,604 15.0%
Stephen A. Hicks(6)
300 East 40th Street
New York, NY 10016 ................... 1,666,667 13.8%
Thomas W. Busch (7)
11618 Tavernay Parkway
Charlotte, North Carolina ............ 866,666 7.8%
Raymon Valdes(8)
3080 East Bay Drive
Largo, Florida 33771 ................. 740,000 6.4%
Claudale Limited (9)
c/o T&T Management Services Limited
28 Irish Town, Gibraltar ............. 693,333 6.3%
(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 266,666 shares of common stock.
(3) Consists of 206,666 shares of common stock.
(4) 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.(c) 100,000 shares from a stock purchase agreement on June 29, 2006.(d)
400,000 shares from a stock purchase agreement on July 10, 2006
25
(5) 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.
(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 866,666 shares of common stock.
(8) Consists of (a) 340,000 shares of common stock and (b) 400,000 shares
issuable upon exercise of the convertible feature of a note.
(9) 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.
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. As of August 31, 2006, 11,298,174 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 4,746,491 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 a post effective amendment to the existing
registration statement covering sale of the shares issuable under the
transaction documents dated March 2, 2005. Such registration statement was
timely filed on April 13, 2006, but has not yet become effective. In addition,
we agreed to file a new registration statement covering the sale of those shares
issuable under the Modification and Waiver Agreement the sale of which are not
covered by the existing registration statement. Such additional registration
statement was timely filed on May 12, 2006 but has not yet become effective. As
a result, the Company may be subject to the payment of liquidated damages to the
note Holders, although the Company is currently negotiating for additional
financing with them.
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 Rozynko LLP of San
Francisco, California, nor the Company's Independent Registered Public
Accounting Firms, Salberg & Company, P.A. of Boca Raton, Florida or Pender
Newkirk & Company, LLP of Tampa, Florida (which performed audits of Changes in
L'Attitudes, Inc., Island Resort Tours, Inc. and International Travel and
Resorts, Inc.), 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.
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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
Since January 2006, our current operations are in the travel industry.
Historical Operations
- ---------------------
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.
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On March 31, 1994, we consummated the acquisition of all of the issued
and outstanding shares of capital stock of DynEco International . 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. 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 an exclusive license
agreement with Parker-Hannifin Corporation granting 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. 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. 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. Consequently,
the Company's then-directors sought a business partner to save the Company from
ceasing operations, which ultimately required that the Company change its
business plan.
Current Operations
- ------------------
In January 2006, we entered into a Stock Exchange Agreement with the
former shareholders of Dynamic Leisure Group, Inc., a privately-held Florida
corporation now known as Dynamic Leisure Group North America, Inc., under which
the Company acquired all of the outstanding capital stock of Dynamic, and
Dynamic became a wholly-owned subsidiary of the Company. Dynamic Leisure Group,
North America, Inc 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 operate in the wholesale and retail
travel industries. For further information on the Stock Exchange Agreement with
Dynamic Leisure Group, Inc. and the corporate name change, see Exhibit 10.22.
For audited financial statements of Dynamic Leisure Group Inc., see the
Company's 8-K/A filed with the SEC on March 29, 2006 and such financial
statements are also included in this SB-2.
The Company, operating primarily through the wholly-owned subsidiary,
Dynamic Leisure Group North America, Inc., and its subsidiaries and 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.
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We believe we have developed and acquired the infrastructure necessary
to implement our Internet business strategy. Specifically, we have:
- developed and acquired technologies, including but not limited to
TourScape;
- developed specialized knowledge and experience concerning certain
geographic destinations, in particular Caribbean destinations, which knowledge
and experience may also be shared by some of our competitors but which we
developed over several decades by our wholly-owned subsidiaries, Changes in
L'Attitudes, Inc., International Travel and Resorts, Inc., and Island Resort
Tours, Inc., and the principals thereof, as well as the international travel
experience garnered by our CEO, Daniel Brandano, during his travel career; and
- established relationships with travel suppliers that enable us to
offer a large inventory base at competitive rates, including but not limited to
hoteliers such as Hilton, Marriott, Leading Hotels, Starwood, Accor (Sofitel,
Novotel, Mercure and Ibis), Best Western and hundreds of individual hotels;
including but not limited to airlines such as American Airlines, British
Airways, Delta, Air France, US Air, Alitalia, Continental, SAS, AirJamaica,
SwissAir, Iberia, and Air Canada; and including but not limited to multiple car
rental companies and cruise companies. Many of these contracts are "net" or
"bulk" contracts, which allow us competitive pricing with valuable margins. Over
recent months, many airlines have withdrawn or limited such contracts to our
competitors, but these contracts are not exclusive to us.
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 bundled leisure travel products
that traditionally have had higher margins than airline ticket sales, including,
among others, vacation packages and tours. The Company's varied supplier
contracts (air, hotel/land, and car) permit true dynamic packaging, which allows
customers to bundle air, land and car products to create vacation packages
unique to each customer, and allows the Company to cross-sell its products and
generate margins on bundled products that may be superior to margins available
on only one product. The individual products themselves are not exclusive to the
Company, although the final bundled product is unique to each customer and our
favorable supplier contracts allow packaged sales that may be more
cost-competitive than those offered by many competitors. 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, as our TourScape software and favorable
supplier contracts, we believe, may give us an advantage over competitors with
less updated and flexible software and who may not possess the same bulk fare
contracts that we enjoy. Our strategy is to focus on the sale and distribution
of travel products, such as bundled vacation packages and tours, which
traditionally have had higher margins than airline ticket sales alone. By
bundling our air, hotel and car products, we hope to be able to generate higher
revenues through cross-selling and higher margins by selling more-profitable
products with less-profitable ones.
Our Internet business strategy is centered on the development,
implementation and integration of several websites. We currently operate over
one hundred (100) websites, most of which have been operating for at least five
years, and which have served successfully as a primary marketing vehicle for our
acquired subsidiaries, Changes in L'Attitudes, Island Resort Tours, and
International Travel and Resorts. Our sites, many currently in development, are
being designed and updated to attract a loyal customer base in the United
States, Europe, Asia and Latin America for these brands and for our new Dynamic
Leisure and eCasual brands, scheduled to be launched in fall 2006, and to
convert these potential customers into leisure travel buyers.
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We are currently installing TourScape, and we already enjoy favorable
URL's, as stated above, as well as many "bulk" contracts, also described above.
Complete installation and integration is expected by the end of 2006. Because we
employ the programmers and technicians who are installing TourScape, we
anticipate only limited installation costs above our current payroll costs.
OUR INTERNET BUSINESS STRATEGY
We believe that in order to become profitable we must begin selling
travel products such as bundled vacation packages and tours, which
traditionally have had higher margin than airline ticket sales alone, which
often generate only limited commissions. 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 and tours 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, allows online booking,
greater and speedier information flow to our reservation agents, and flexible
accounting. TourScape should improve our productivity, efficiency,
record-keeping and business tracking, and reduce operator training and booking
time. It also supports multiple product lines, multiple currencies, unlimited
packaging capabilities, numerous pricing and costing methods and various
commission levels.
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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
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 are not exclusive and 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 bundled vacation packages and tours 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.
Our favorable URL's should permit us increased sales once online
booking is fully integrated.
Our favorable "bulk" contracts should permit us competitive pricing not
enjoyed by many of our competitors.
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.
We believe that the Company's true dynamic packaging software allows
customers to bundle air, land and car products to create vacation packages
unique to each customer, although the products themselves are not exclusive to
the Company.
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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
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. As of yet, we have not yet
established online partnerships or private label agreements, although we hope to
do so beginning in Fall 2006.
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. At this time we have not yet
established an affiliate program, although as of September 2006 we are in the
process of implementing affiliate links.
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. To that end, we have completed term sheets to acquire
two travel companies with European experience, including one located outside of
London, England, and another located in Florida.
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.
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Advantages of suppliers over their agency counterparts include, among
others,
- Well-established brands and consumer confidence in those brands;
- Customer loyalty;
- 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:
- Orbitz
- 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 car 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.
35
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 AND RECAPITALIZATION
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(Skycars), 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 website
and bundle with packages on the Company's other Internet sites. As of the date
of this filing, a limited number of booking have been processed under this
agreement. Skycars is currently paying us $6,000 per month to processes these
booking. As the volume grows the agreement calls for Skycars to pay 35% of the
gross margin of a booking. The GSA will be utilized more as the European market
is launched in the second half of the year with the Company being able to
provide an air, hotel and car rental packages.
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
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. This transaction was treated as a recapitalization of
Dynamic Leisure Group, North America, Inc. for accounting purposes.
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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 $2,090,680. 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 Promissory Note 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 $4,783,000. 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. However, as our business
plan changed significantly in January 2006, investors should review the
Company's quarterly financial statement for first and second quarters of 2006,
as well as the audited financial statements of Changes in L'Attitudes, Inc.,
International Travel and Resorts, Inc., and Island Resort Tours, Inc.
GENERAL
Through January 13, 2006, we were engaged primarily in developing and
commercializing patented high efficiency low-pressure non-lubricated air
compressors and hydrogen.
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, in a transaction for accounting purposes that was
treated as a recapitalization of Dynamic Leisure Group, North American, Inc.
Dynamic Leisure Group, North American, Inc is now considered the historical
registrant. Following the agreement, the Company changed 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, the Caribbean,
Mexico, Central and South America, and the United Kingdom and Europe. As part of
the Stock Exchange Agreement with Dynamic, we issued 6,566,667 shares of our
common stock.
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.
37
CRITICAL ACCOUNTING ESTIMATES
Stock-Based Compensation Plans
We have one active stock-based compensation plans and two inactive
stock-based compensation plans. The board of directors administers this plan 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. This valuation was done using
a risk free interest rate of 3.9%, an expected life on 3.0 years, a volatility
of 294% and no expected dividends.
On January 1, 2006, the Company implemented Statement of Financial
Accounting Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment"
which replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R)
requires the fair value of all stock-based employee compensation awarded to
employees to be recorded as an expense over the related vesting period. The
statement also requires the recognition of compensation expense for the fair
value of any unvested stock option awards outstanding at the date of adoption.
During 2006, all employee stock compensation is recorded at fair value using the
Black Scholes Pricing Model. In adopting SFAS 123(R), the Company used the
modified prospective application ("MPA"). MPA requires the Company to account
for all new stock compensation to employees using fair value. For any portion of
awards prior to January 1, 2006 for which the requisite service has not been
rendered and the options remain outstanding as of January 1, 2006, the Company
shall recognize the compensation cost for that portion of the award for which
the requisite service was rendered on or after January 1, 2006. The fair value
for these awards is determined based on the grant-date. There was no cumulative
effect of applying SFAS 123R at January 1, 2006.
Accounts Receivable
Accounts Receivable result from amounts for either the sale of travel
products or agreements with various hotels, for amounts such as co-op
advertising support. The Company evaluates the collectibility of accounts
receivable while working with its individual customer and vendors. A majority of
the Accounts receivable for travel products are collected prior to travel
departure.
Goodwill and Other Intangibles
The Company accounts for goodwill in a purchase business combination as
the excess of the cost over the fair value of net assets acquired. Business
combinations can also result in other intangible assets being recognized.
Amortization of intangible assets, if applicable, occurs over their estimated
useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment
on an annual basis (or interim basis if an event occurs that might reduce the
fair value of a reporting unit below its carrying value). The Company conducts
the annual review for all of its reporting units during the fourth quarter of
the calendar year.
Revenue Recognition
The Company follows the criteria for the United States Securities and
Exchange Commission Staff Accounting Bulletin 104 and EITF 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent" for revenue recognition.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery of product has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured.
38
The Company records merchant sales transactions at the gross purchase
price generally at the date of travel. For transactions recorded at gross, the
Company acts as the merchant of record in the package transaction consisting of
several products from different vendors causing the Company to be the primary
obligor to the customer. In these transactions the Company also controls selling
prices, and is solely responsible for making payments to vendors. The Company
records transactions at net were the Company is not the merchant of record or
the product is not sold as a package. The Company records revenue and related
costs of products when travel occurs or for certain products, when the service
is completed. Travel insurance revenue is always shown net since the Company
currently acts as an agent for the insurance company. It is the Company's policy
to be paid by the customer in advance, with monies received in advance of travel
recorded as a deferred revenue liability. The Company may receive cash or hotel
room credits in exchange for providing cooperative advertising for its vendors.
The Company records accounts receivable for these amounts and offsets the
applicable advertising expense. Once the advertising expense is reduced to zero,
any excess cooperative advertising fees are recorded as revenue.
The Company is not required to buy a specific number of lodging
occupancies but has pre-purchased lodging occupancies, creating inventory risk,
over the past several years. The Company is not expressly required to buy a
specific number of bulk airline tickets, although the Company's primary airline
supplier eliminated approximately 80% of bulk rate contracts, which creates a
implied minimum of ticket sales requirement.
Principles of Consolidation
The consolidated financial statements include the accounts of Dynamic
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounting for Derivatives
The Company evaluates its convertible debt, options, warrants or other
contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under Statement
of Financial Accounting Standards 133 "Accounting for Derivative Instruments and
Hedging Activities" and related interpretations including EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock".
The result of this accounting treatment is that the fair value of the
embedded derivative is marked-to-market each balance sheet date and recorded as
a liability. In the event that the fair value is recorded as a liability, the
change in fair value is recorded in the consolidated statement of operations as
an other income or expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity. Equity instruments that are
initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification.
Warrant Liability
During our efforts to raise capital from external investments, we have
issued secured and unsecured Convertible Promissory Notes that include
provisions requiring us to register related shares of common stock. Per SFAS 133
and EITF 00-19 we are required to record the value of warrants issued in
connection with these Promissory Notes as a warrant liability.
The valuation of the warrant liability is based on a Black Scholes
model and will vary, potentially significantly, based on factors such as the
remaining time left to exercise the warrants, recent volatility (change) in the
price of Dynamic's common stock, and the market price of our common stock.
Changes in the valuation of the warrant liability are recorded as other income
or expense in the period of the change.
39
The value of the warrant liability was $2,804,877 at June 30, 2006 for
both the MMA and DynEco March 2005 financing. The MMA was valued at $2,432,126
using the following assumptions: $1.25 Stock Price, $1.00 exercise price, 2.5
year term, 271% volatility, 5.07% discount rate. The DynEco March 2005 warrants
were valued at $372,751 using the following assumptions: $1.25 Stock Price,
$1.00 exercise price. 2.75 expected term, 271% volatility, 5.07% discount rate.
During the three months ended June 30, 2006 there was warrant valuation income
of $1,441,491. For the six months ended June, the warrant valuation was an
expense of $778,551.
Concentration of Credit Risk and Other Concentrations
Nearly all of the Company's current travel products are for
destinations in the Caribbean and Mexico. This concentration potentially exposes
us to both political and weather risks of this region.
The Company has a diverse US customer base, including consumers
purchasing products through travel agencies and purchasing directly via the
Internet.
The Company has very little credit risk since the vast majority of its
travel products are paid for in advance.
The Company has negotiated contracts with airlines that provide the
Company with wholesale structure that allows the Company to price certain
products more favorably than its competitors. The loss of such contracts could
have a negative effect on the Company.
Surety Bond
The Company has outstanding at June 30, 2006 a surety bond for $70,000
related to the Airlines Reporting Corporation to allow the purchase of airline
tickets through its computerized ticket system. As part of the letter of credit
agreement the Company is required to keep a collateral deposit of $22,500. The
deposit is included in Other Assets Deposits on the accompanying balance sheet.
Letter of Credit
As of June 30, 2006, the Company had three letters of credit totaling
$150,000 payable to the Airline Reporting Corporation to allow the purchase of
airline tickets through it computerized ticket system. As part of the letter of
credit agreement, certificates of deposit are required with the issuer for
approximately the amount of the letter of credit and are reflected as short-term
investments, restricted, on the accompanying balance sheet.
Stock-Based Compensation
The Company has one active stock-based compensation plan and two
inactive stock-based compensation plans. On January 1,2006, Dynamic implemented
Statement of Financial Accounting Standard 123 (revised 2004) ("SFAS 123(R)"),
"Share-Based Payment" which replaced SFAS 123 "Accounting for Stock-Based
Compensation" and superseded APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123(R) requires the fair value of all stock-based employee
compensation awarded to employees to be recorded as an expense over the related
vesting period. The statement also requires the recognition of compensation
expense for the fair value of any unvested stock option awards outstanding at
the date of adoption. Effective January 1, 2006, all employee stock compensation
is recorded at fair value using the Black Scholes Pricing Model. In adopting
SFAS 123(R), the Company used the modified prospective application ("MPA"). MPA
requires us to account for all new stock compensation to employees using fair
value. For any portion of awards prior to January 1, 2006 for which the
requisite service has not been rendered and the options remain outstanding as of
January 1, 2006, the Company shall recognize the compensation cost for that
portion of the award for which the requisite service was rendered on or after
January 1, 2006. The fair value for these awards is determined based on the
grant-date. There was no cumulative effect of applying SFAS 123R at January 1,
2006.
40
RESULTS OF OPERATIONS
As a result of the recapitalization on January 13, 2006, Dynamic
Leisure Group, Inc., now known as Dynamic Leisure Group North America, Inc.,
became the accounting acquirer of DynEco Corporation. DynEco then changed its
name to Dynamic Leisure Corporation. Therefore, the discussion below is focused
on the Dynamic Leisure Group North America, Inc. (the operating subsidiary)in
2005 and Dynamic Leisure Corporation in 2006.
PERIOD FROM MAY 16,2005 (INCEPTION) TO DECEMBER 31, 2005
During the period from May 16 to the end of the year, Dynamic Leisure
Group North America did not produce any revenue or have any cost of product. The
Company was focused on identification of acquisition targets, the purchase of
the TourScape system, identification and securing of short term and long term
financing and the legal structure of the Company. In the pursuit of these
activities the Company incurred $455,954 of expense with $276,233 of salaries,
professional fees of $78,114 and travel of $59,218 making up the majority.
In addition to the expenses detailed above the Company incurred $29,360
in interest expense related to the notes obtained for short term financing
resulting in a loss of $485,314 or 0.47 per share.
THE FIRST SIX MONTHS OF 2006
As noted above the Company was founded on May 16th, 2005 and therefore
did not have operations for the first quarter of 2005. The results for the first
quarter of 2006 include the Dynamic Leisure Group NA from January 1, DynEco from
its recapitalization on January 13, Changes in L'Attitudes from its purchase on
February 8, 2006 and IRT-ITR from their purchases on March 6th, 2006.
Our revenues for 2006 were derived from the acquisitions of Changes in
L'Attitudes, Inc. and IRT-ITR as we begin to expand in the leisure travel
market. Operating expenses for the three months and six months ended June 30,
2006 are a combination of the operating expenses included in the acquisitions
and the concurrent establishment of administrative technology, and operations
functions to support the planned growth of the business.
A net loss of $4,693,304 was reported for the period, primarily as a
result of significant expenses recognized for the recording of warrant valuation
expense and related liability for detachable warrants issued with convertible
notes payable, interest expense from amortization of discounts on convertible
promissory notes and charges incurred for the extinguishment of debt for part of
the outstanding balance of a convertible note payable from investors in the
Company.
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE PERIOD FROM INCEPTION (MAY 16,
2005) TO JUNE 30,2005.
With an inception date of May 16, 2005, Dynamic Leisure Group, Inc was
in a developmental state during the second quarter of Fiscal 2005 and as such
did not generate any revenue. Of the $49,825 in general and administrative
expenses incurred during the second quarter last year the vast majority were
salaries of $33,500 and professional fees of $15,750, which mostly related to
capital rising efforts.
During the first quarter of 2006, the Company moved from the
developmental stage by to the operational stage by acquiring Changes in
L'Attitudes, Inc (CIL). on February 8, 2006 and IRT-ITR on March 6, 2006. The
operating results for our three months ended June 30, 2006 include activity from
these acquisitions for the whole quarter. We had $1,904,547 in revenues, and
gross profit of $564,299 for the three months ended June 30,2006. Our revenue is
derived primarily from the value of travel packages paid for and traveled during
the period, the sale of certain airline tickets when issued, and certain fees or
commissions considered earned by the customer during the period.
41
Operating expenses were $1,534,873 for the second quarter of 2006
compared to $831,028 in the first quarter of 2006 as the Company builds its
infrastructure to support a larger multi-location organization and due to the
CIL and IRT -ITR expenses being included for the whole quarter. Corporate
expenses were $389,822 higher in the second quarter of 2006 due to $80,161
professional fees, $81,027 of salaries , $73,272 of amortization , $36,685 of
recruiting expenses and $24,875 of travel. As we increase the volume of our
business and relationships with suppliers, and sell more products directly to
the traveling customer over the Internet, we anticipate operating expenses as a
percentage of revenue to decrease.
Interest expense for the three months ended June 30, 2006 was
$1,002,449. This amount was lower than the first quarter of 2006 by $179,447 due
the conversion of several notes payable to stock during the year which reduce
the debt discount amortization and by the write down on the debt discount of the
March 2005 in the first quarter of 2006 from the Modification and Waiver
agreement.
The Warrant valuation for the second quarter of 2006 was income of
$1,441,491 from the reduction of the Company stock price from $1.85 to $1.25 and
a reduction is the volatility from 335% to 271%. The valuation of the warrant
liability is a non-cash income or expense to the Company.
Mainly due to the change from expense of the warrant liability from a
$2,220,042 in the first quarter of 2006 to an income of $1,441,491 the Company's
net loss reduced to $532,995.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE PERIOD FROM INCEPTION (MAY 16,
2005) TO JUNE 30,2005.
With an inception date of May 16, 2005, Dynamic Leisure Group, Inc was
in a developmental stage during the second quarter of last year and as such did
not generate any revenue. Of the $49,825 in expenses incurred during the second
quarter last year the vast majority were salaries of $33,500 and professional
fees of $15,750, which mostly related to capital rising efforts.
During the first quarter the Company moved from the developmental stage
to the operational stage by acquiring Changes in L'Attitudes, Inc. on February
8, 2006 and IRT-ITR on March 6, 2006. The operating results for our six months
ended June 30, 2006 include activity from the date of these acquisitions to June
30, 2006.
We had $2,997,045 in revenues, and gross profit of $839,473 in the
first six months of 2006. Our revenue is derived primarily from the value of
travel packages paid for and traveled during the period, the sale of certain
airline tickets when issued, and certain fees or commissions considered earned
by the customer during the period.
Operating expenses were $2,365,901 for the first six months of 2006, as
the Company builds its infrastructure to support a larger multi-location
organization. As we increase the volume of our business and relationships with
suppliers, and sell more products directly to the traveling customer over the
Internet, we anticipate operating expenses as a percentage of revenue to
decrease.
Interest expense for the first six months of 2006 was $2,184,895.
Interest expense through June 30, 2006 included $1,694,036 of amortization of
debt discount on notes payable and discounts of notes payable. The holders of
the outstanding convertible notes have the option to receive the interest
payments in either cash or common stock. While we expect the interest to be paid
with our common stock, there is no guarantee that will occur.
For the six months ended June 30, 2006, we incurred a $208,452 loss on
extinguishment of debt, and $778,551 of warrant valuation expense related to the
issuance of new warrants as part of a financing transaction in the six months
ended June 30, 2006 and the revaluation of warrants previously issued. The
amounts recorded for loss on extinguishment of debt, and warrant valuation
expense were non-cash transactions, which did not affect our use of cash
resources, but created significant increases in other expenses during the
period. Therefore, our net loss was $4,693,304 for the first six months of 2006.
42
Financial Condition - Liquidity and Capital Resources
PERIOD FROM MAY 16, 2005 (INCEPTION) TO DECEMBER 31, 2005
During the period of May 16, 2005 to December 31, 2005, the Company was
able to rise $987,500 in financing by issuing $847,500 of convertible notes and
$140,000 of term notes payable. The Company paid most of the term notes off with
the $2,000,000 MMA financing on January 13, 2006. Most of the convertible notes
are expected to be converted into common stock. The company use the proceeds
from these notes to purchase the TourScape system for $641,347 with the
remainder used to fund ongoing operations.
FIRST SIX MONTHS OF 2006
During the six months ended June 30, 2006, the Company came to own
proprietary software technology, proprietary engineering technology, and
operations in the wholesale leisure travel market. Our financial condition
relies on continuing debt and equity investment until the Company is able
profitably to grow our wholesale leisure travel business. During the first six
months of 2006 travel revenue and income from operations was not enough to
offset financing expenses related to the Stock Exchange Agreement, subsequent
financing expenses related to an investment by MMA Capital, acquisition costs
for CLA and IRT-ITR, and professional fees.
During the first six months of the year, the Company's main sources of
liquidity were from the issuance of convertible notes payable and common stock
issuances. The Company issued three convertible notes for total proceeds of
$2,060,000 with the MMA note of $2,000,000 on January 13, 2006 representing the
vast majority. The common stock proceeds for the six months ended June 30, 2006
were $285,739. The main uses of these proceeds was to fund the cash operating
deficit of $1,728,848, repayment of debt of $344,632, debt issue costs of
$176,322, investing activities of 65,762 and a increase in the level of cash of
$101,077.
For the six months ended June 30, 2006, we had a net loss of
$4,693,304. The loss was primarily the result of other expense of $3,166,876 for
the six months ended June 30, 2006. The other income/loss consisted of interest
expense $2,184,895, loss on extinguishment of debt $208,452, other expense of
$8,020 and $778,551 in warrant valuation expense. While the warrant valuation
expense was charged to expense it did not result in cash outlays as of June 30,
2006. In addition, amortization of debt discount for the six months ended June
30, 2006 was $1,694,036 which is also a non-cash charge.
As of June 30, 2006, our primary source of liquidity was $139,776 of
cash and $266,275 of accounts receivable. There is a working capital deficit of
$8,711,794 at June 30, 2006, primarily due to a warrant liability of $2,804,877,
acquisitions payable of $1,440,000, convertible notes payable, net of discount
of $2,087,008, and convertible notes payable - related party of $750,000. The
convertible notes payable and convertible notes payable - related parties,
consists of promissory notes convertible to Dynamic's common stock. While we
expect these notes to be converted into Dynamic's common stock, reducing the
amount of cash payments for the liabilities, we have no guarantee that this will
occur. We had total assets of $9,541,955 of which long-term assets of $7,779,875
consisted of goodwill of $5,115,696 intangible assets of $2,472,446, other
assets of $96,651, debt issue cost of $95,082 and $851,455 of property and
equipment. Of our total liabilities of $9,833,178, long term liabilities total
$210,759 including $117,370 of notes payable, $15,501 of loans payable and
$77,888 of long term capital lease. Total shareholders' deficit was $291,223. At
June 30, 2006, we had an accumulated deficit of $5,178,618. We were in default
on $2,155,158 in notes payable at June 30, 2006. On August 16, 2006 we entered
in to a Modification of the MMA note, which deferred the interest payments until
January 13, 2007. In return for this deferral, MMA was granted 100,000 shares of
Company stock and the interest rate was increased retroactively from 8% to 10%.
The Company is accruing the default interest rate of 10% on the remaining
$155,158 from the March 2005 DynEco financing.
We are also in default of the repayment terms on unsecured notes
payable aggregating $35,000 at June 30, 2005 and 2006, initially issued by
DynEco. No extension has been granted by the debt holders. We had anticipated
settling the balance owing on these notes payable through issuance of common
stock in 2005 however as of June 30, 2006 this had not yet occurred nor is there
any assurance that this will take place.
43
Four convertible notes totaling $140,000 were due on June 30, 2006 and
were not paid on that date. Subsequent to June 30, 2006 one holder has converted
and the other three are in discussion to convert to stock. There were repayments
during the first quarter of $204,632 of convertible promissory notes and
$140,000 of non-convertible promissory notes. In addition, there were
conversions to common stock of promissory notes of $325,000 during the first six
months of 2006.(See financial statement note 8).
We have limited historical results, and only a limited time of combined
operations with Dynamic, DLG, CLA, and IRT-ITR. We have relied upon equity
financing in order to fund operations. During the six months ended June 30,
2006, there were limited activities or resources to provide cash flow in excess
of immediately needed funding. Our inability to generate cash flow in excess of
immediately needed funds may create a situation where we are likely to require
additional capital from external sources. There is no guarantee that we will be
able to obtain any necessary financing on terms favorable to us, if at all.
As of June 30, 2006, and the date of this filing, our sources of
internal and external financing are limited. Additionally, as part of the
acquisitions of CLA and IRT-ITR, we issued an additional 1,040,000 shares of
Dynamic common stock, agreed to pay $1,440,000 in additional cash, and
$2,050,000 of secured Convertible Notes payable. While we anticipate all of the
Convertible Notes Payable to convert to shares of Dynamic's common stock, should
this occur and reduce our potential cash payment for the notes, we would issue
additional shares of stock that would further dilute our existing shareholders
holdings. 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 Dynamic's common stock and exercise of various outstanding stock
warrants and stock options. We are hopeful that the continued listing of our
shares on the OTC Bulletin Board and expansion of our business opportunities
further in the leisure travel market, which should help increase the Company's
market capitalization, encourage the exercise of outstanding warrants and
attract new sources of financing. 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.
As we continue to expand our business and deploy our technology in our
leisure travel business, our current monthly cash flow requirements will exceed
our near term cash flow from operations. We are still unable to quantify the
amount of revenue anticipated from commercializing UniVane products through
Parker Hannifin however, we do not believe that it will be material to meeting
our cash requirements going forward. Even if we are not required to meet our
financing and interest payment needs from cash, and instead our investors
convert their outstanding convertible notes to common stock, our available cash
resources and anticipated cash flow from operations are insufficient to satisfy
our anticipated costs associated with new product development, deployment of
software technology and integration of acquisitions in the near future. 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,
or anticipated additional acquisitions. 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 historical earnings, our prior success in attracting
additional funding has been limited to transactions in which our equity is used
as currency. In light of the availability of this type of financing, and the
lack of alternative proposals, our board of directors has determined that the
continued use of our equity for these purposes may be necessary if we are to
sustain operations. Equity financings of the type we have been required to
pursue are dilutive to our stockholders and may adversely impact the market
price for our shares. However, we have no commitments for borrowings or
additional sales of equity, the precise terms upon which we may be able to
attract additional funding is not known at this time, and there can be no
assurance that we will be successful in consummating any such future financing
transactions on terms satisfactory to us, or at all.
44
OFF BALANCE SHEET ARRANGEMENTS
Under SEC regulations, we are required to disclose our off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. An off-balance sheet
arrangement means a transaction, agreement or contractual arrangement to which
any entity that is not consolidated with us is a party, under which we have:
o Any obligation under certain guarantee contracts;
o Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
o Any obligation under a contract that would be accounted for as a
derivative instrument, except that it is both indexed to our stock
and classified in stockholder's equity in our statement of financial
position; and
o Any obligation arising out of a material variable interest held by
us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing,
hedging or research and development services with us.
On May 15, 2006, the Company entered into a five-year lease of the
premises located at 5680A W. Cypress Street, Tampa, Florida 33607. The Company
moved into these offices on July 1, 2006. This lease is not reasonably likely to
have a material effect on the Company's current and future financial condition.
As of the date of this Report, the Company has no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Current Year Financing
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,
45
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 sale 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.
In June and July 2006, we were able to arrange bridge financing
totaling $500,000 from MMA Capital, LLC. Under two Common Stock Purchase
Agreements, MMA agreed to purchase, and the Company agreed to sell and issue to
the Purchaser, Five Hundred Thousand (500,000) shares of the Company's common
stock, at a purchase price of Five Hundred Thousand Dollars ($500,000.00), a
rate of $1.00 per share for the common stock. The Agreement was a private
offering of unregistered securities and did not involve the issuance of any debt
or promissory note, convertible or otherwise, nor any warrants to purchase stock
of the Company. The Company did agree to file a new registration statement (on
Form SB-2 or otherwise) on or before October 2, 2006, or within thirty (30) days
of the effective date of this post-effective amendment no. 2, whichever comes
first. The Company agreed to pay all of the costs and expenses of preparing and
filing the registration statement.
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 historic 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.
SEASONALITY AND INFLATION
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
The corporate offices were moved on July 1, 2006 to 5680A W. Cypress
Street, Tampa, Florida 33607, where we recently signed a five year lease.
46
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 superseded 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 supersedes 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.
47
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
- ---------------------------------------- -------- -------
July 1, 2006 to September 12, 2006 ..... $ 1.60 $ 1.00
April 1, 2006 to June 30, 2006 ......... $ 2.60 $ 1.22
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 August 31, 2006, there were 695 shareholders of record who owned
11,298,174 shares of our common stock that was issued and outstanding. We have
also reserved a total of 9,396,292 shares for issuance upon conversion of
convertible promissory notes and exercise of outstanding common stock purchase
warrants, and 104,539 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 sale pursuant to Rule 144 promulgated under the Securities
Act. The sale 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 sale 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.
48
Unless covered by an effective registration statement, the sale 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 sale), 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 September 13, 2006:
49
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 0*
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 11,055
*The 1993 Corporate Stock Option Plan has expired.
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. ..... 3,333 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.
50
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
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. This Corporate Stock Option Plan has expired.
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.
51
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 August 31, 2006, 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 $11.25 per share and expiration dates ranges from September
2006 to June 2010.
The grants of these options were approved on a case-by-case basis by
the board of directors, and are within the limits of the number of shares that
we are authorized to issue. The grant of these options and warrants were not
authorized by our shareholders. We may, in the future, authorize the grant of
additional options and/or issuance of additional warrants for the foregoing
purposes and other valid corporate purposes.
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 2005 to each person named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING UNEXERCISED AT FY-END ($)
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
52
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
- --------------------- ------ ----------- ----- ------------ ------- ------- ------------
Daniel G. Brandano, CEO 2006 $225,000* Tbd* Tbd* -0- -0- $7,207**
Robert A.G. LeVine, Sec'y 2006 $100,000*** Tbd Tbd -0- -0- $7,944**
Thomas C. Edwards 2005 $ 56,806 -0- -0- 3,333 shares -0- -0-
Chief Executive 2004 $ 60,000 -0- -0- -0- -0- 0
Officer and President 2003 $ 60,000 -0- -0- -0- -0- 0
* Estimated annual salary for 2006; bonus and other compensation to be
determined based upon performance
** Estimated annual Company contribution for health insurance benefits
*** Modified on August 31, 2006 from $150,000 annually
No monetary compensation is currently provided by the Company to
directors. On August 31, 2006, the Board granted 200,000 shares of common stock
to Len Sculler for his services as Director.
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.
53
FINANCIAL STATEMENTS
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Dynamic Leisure Corporation and Subsidiaries Unaudited
Consolidated Financial Statements for the three and six
months June 30, 2006 ......................................... F-2 to F-25
DynEco Corporation and Subsidiary Restated Consolidated
Financial Statements for the Years Ended December 31, 2005
and 2004 ..................................................... F-26 to F-57
Dynamic Leisure Group, Inc. Financial Statements for the
Period from May 16, 2005 (inception) to December 31, 2005 .... F-58 to F-80
Changes In L'Attitudes, Inc. Financial Statements for the
Years Ended December 31, 2005 and 2004 ....................... F-81 to F-92
Changes In L'Attitudes, Inc. Unaudited Pro Forma Combined
Condensed Financial Statements for the Year Ended
December 31, 2005 ............................................ F-93 to F-98
Island Resort Tours, Inc., and International Travel and Resorts,
Inc. Combined Financial Statements for the Years Ended
December 31, 2005 and 2004 ................................... F-99 to F-112
Island Resort Tours, Inc., and International Travel and Resorts,
Inc. Unaudited Pro Forma Financial Statements for the Year
Ended December 31, 2005 ...................................... F-113 to F-115
F-1
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 2006
(Unaudited)
ASSETS
Current Assets
Cash ........................................................... $ 139,776
Investments, restricted ........................................ 155,133
Accounts receivable ............................................ 266,275
Prepaid travel ................................................. 236,550
Other current assets ........................................... 112,891
-----------
Total Current Assets ......................................... 910,625
Property and equipment, net ...................................... 851,455
Other Assets
Goodwill ....................................................... 5,115,696
Intangible ..................................................... 2,472,446
Deposits ....................................................... 96,651
Debt issue costs ............................................... 95,082
-----------
Total Other Assets ........................................... 7,779,875
Total Assets ................................................. $ 9,541,955
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible notes payable, net of discount( see note 6) ........ $ 2,087,008
Convertible notes payable related parties ...................... 750,000
Notes payable .................................................. 39,063
Accounts payable ............................................... 648,795
Accrued compensation ........................................... 54,115
Accrued interest ............................................... 204,026
Overdraft liability ............................................ 63,337
Other accrued liabilities ...................................... 132,419
Short term capital lease ....................................... 36,052
Deferred revenue ............................................... 609,663
Customer deposit ............................................... 261,854
Loan payable ................................................... 226,325
Loan payable - Bank ............................................ 214,653
Acquisition payable ............................................ 1,440,000
Taxes payable .................................................. 232
Due to employee ................................................ 50,000
Warrant liability .............................................. 2,804,877
-----------
Total Current Liabilities .................................... 9,622,419
Long Term Liabilities
Loans payable - Bank, net of current portion ................... 15,501
Non convertible notes payable, net of current portion .......... 117,370
Capital lease .................................................. 77,888
-----------
Total Long Term Liabilities .................................. 210,759
Total Liabilities ............................................ $ 9,833,178
-----------
Commitments and contingencies(Note 7)
Stockholders' Deficit
Preferred stock, $0.01 par value, 20,000,000 shares authorized,
none issued and outstanding .................................. $ -
Common stock, $0.01 par value, 300,000,000 shares authorized,
9,403,133 issued and outstanding ............................. 94,031
Common stock issuable, at par value (322,267 shares) ............ 3,226
Additional paid-in capital ..................................... 4,805,138
Stock subscription receivable .................................. (15,000)
Accumulated deficit ............................................ (5,178,618)
Total Stockholders' Deficit .................................. (291,223)
-----------
Total Liabilities and Stockholders' Deficit .................. $ 9,541,955
===========
See accompanying notes to the unaudited consolidated financial statements
F-2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three From Inception For the Six From Inception
Months Ended (May 16, 2005) Months Ended (May 16, 2005)
June 30, 2006 To June 30, 2005 June 30, 2006 To June 30, 2005
------------- ---------------- ------------- ----------------
Total Revenues .............................. $ 1,904,547 $ - $ 2,997,045 $ -
Cost of revenues ............................ 1,340,248 - 2,157,572 -
Gross Profit .............................. 564,299 - 839,473 -
Operating Expenses
General and administrative ................ 1,454,825 49,825 2,281,340 49,825
Depreciation and amortization Expense ..... 80,048 - 84,561 -
Total Operating Expenses ................ 1,534,873 49,825 2,365,901 49,825
----------- ----------- ----------- -----------
Loss from Operations .................... (970,574) (49,825) (1,526,428) (49,825)
Other (Income) Expense
Interest income ........................... (6,557) - (13,042) -
Interest expense .......................... 1,002,449 115 2,184,895 115
Loss on extinguishment of debt ............ - - 208,452 -
Other Expense ............................. 8,020 - 8,020 -
Warrant valuation (income) expense ........ (1,441,491) - 778,551 -
Total Other Expense, (income) net ....... (437,579) 115 3,166,876 115
----------- ----------- ----------- -----------
Net Loss ................................ $ (532,995) $ (49,940) $(4,693,304) $ (49,940)
=========== =========== =========== ===========
Net Loss Per Share - Basic and Diluted ...... $ (0.06) $ (0.05) $ (0.53) $ (0.05)
=========== =========== =========== ===========
Weighted average number of shares outstanding
during the period - basic and diluted ..... 9,601,630 1,100,000 8,841,327 1,100,000
=========== =========== =========== ===========
See accompanying notes to the unaudited consolidated financial statements
F-3
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six From May 16,
Months Ended 2005 (inception)
June 30,2006 to June 30,2005
------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(4,693,304) $ (49,825)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 84,562 -
Amortization of debt issue costs ................. 81,141 -
Interest accretion and debt discount amortization
on loan payable ................................. 2,019,746 -
Loss on extinguishment of debt ................... 208,452 -
Amortization of consultant warrants .............. 42,035 -
Warrant valuation expense ........................ 778,551 -
(Increase) decrease in assets:
Accounts receivable .............................. 196,703 -
Prepaid travel ................................... (16,558) -
Other current assets ............................. (61,890) -
Other assets .................................... (43,235) -
Increase (decrease) in liabilities:
Accounts payable ................................. 80,700 -
Accrued salaries ................................. 17,211 -
Accrued interest payable ......................... 58,639 -
Deferred revenue ................................. (77,476) -
Customer deposit ................................. (384,088) -
Taxes payable .................................... (223) -
Other accrued liabilities ........................ (19,814) -
Net Cash Used In Operating Activities ............ (1,728,848) (49,825)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ................ (24,685) (100,000)
Acquisition of business .............................. (41,077) -
Net Cash Used In Investing Activities ............ (65,762) (100,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes ........... 2,060,000 160,000
Repayment of convertible promissory notes ............ (344,632) -
Proceeds from overdraft .............................. 63,337 -
Proceeds from line of credit ......................... 10,000 -
Debt issue costs ..................................... (176,223) -
Repayment of capital leases .......................... (2,600) -
Proceeds from common stock issuance .................. 285,805 -
Net Cash Provided By Financing Activities ........ 1,895,687 160,000
----------- -----------
Net Increase in Cash ................................... 101,077 10,175
Cash at Beginning of Period ............................ 38,699 -
----------- -----------
Cash at End of Period .................................. $ 139,776 $ 10,175
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ......... $ - $ -
=========== ===========
Cash paid during the period for interest ............. $ 91,943 $ -
=========== ===========
Supplemental Disclosure of non-cash investing and
financing activities:
Debt and stock issue in acquisitions ................. $ 6,173,980 $ -
=========== ===========
Assets received on Capital Lease ..................... $ 116,540 $ -
=========== ===========
Discount on promissory notes ......................... $ 2,000,000 $ -
=========== ===========
Conversion liability related to promissory note ...... $ 1,793,382 $ -
=========== ===========
See accompanying notes to the unaudited consolidated financial statements
F-4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the United States
Securities and Exchange Commission for interim consolidated financial
information. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of consolidated financial position
and results of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are necessary
for a fair consolidated financial statement presentation. The results for the
interim period are not necessarily indicative of the results to be expected for
the year.
All share and per share data in the accompanying consolidated financial
statements for the period ended June 30, 2006 have been adjusted retroactively
for the effect of a recapitalization transaction between DynEco Corporation
(DynEco), n/k/a Dynamic Leisure Corporation ("Dynamic"), and Dynamic Leisure
Group, Inc. ("DLG") in January 2006 and the subsequent one-for-thirty reverse
stock split. (See Note 12)
For further information, refer to the audited financial statements and
footnotes of DLG, Changes in L'Attitudes, Inc., and Island Resort Tours, Inc.
and International Travel and Resorts, Inc. included in the Company's 8-KA
filings in 2006 and the Form 10-KSB for DynEco Corporation for the year ended
December 31, 2005.
In 2005, DLG had been presented as a development stage company. As
such, the focus was on acquiring financing, setting up a corporate structure and
researching acquisitions. During the six months ended June 30, 2006, the Company
acquired operating companies with revenue and is not in the development stage.
NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is focusing on entering the wholesale travel business,
specializing in leisure travelers to popular destinations in the US, Caribbean,
Mexico, the UK, and Europe. A growth strategy was developed to grow revenue by
establishing a scalable, single operating system platform to assimilate and
leverage a combination of strategic acquisitions and internal growth, the first
of which occurred in the first quarter, 2006. On February 8, 2006 Changes in
L'Attitudes, Inc. ("CLA") was purchased, and on March 6, 2006, Island Resort
Tours, Inc. and International Travel and Resorts, Inc. ("IRT/ITR") were
purchased. (See Note 13)
Use of Estimates
Our condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
("GAAP"). These accounting principles require us to make certain estimates,
F-5
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
judgments and assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information available
to us at the time that these estimates, judgments and assumptions are made.
These estimates, judgments and assumptions can affect the reported amounts of
assets and liabilities as of the date of our condensed financial statements as
well as the reported amounts of revenues and expenses during the periods
presented. Our condensed consolidated financial statements would be affected to
the extent there are material differences between these estimates and actual
results. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result.
Significant estimates in 2006 include the valuation of accounts receivable,
valuation of goodwill, valuation of stock based transactions, valuation of
derivatives, estimates of allowances for customer refunds and the estimate of
the valuation allowance on deferred tax assets.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, trade receivables, trade
payables and debt approximates carrying value due to the short maturity of such
instruments.
Accounts Receivable
Accounts Receivable result from amounts for either the sale of travel
products or agreements with various hotels, for amounts such as co-op
advertising support. The Company evaluates the collectibility of accounts
receivable while working with its individual customer and vendors. A majority of
the Accounts receivable for travel products are collected prior to travel
departure.
Goodwill and Other Intangibles
The Company accounts for goodwill in a purchase business combination as
the excess of the cost over the fair value of net assets acquired. Business
combinations can also result in other intangible assets being recognized.
Amortization of intangible assets, if applicable, occurs over their estimated
useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment
on an annual basis (or interim basis if an event occurs that might reduce the
fair value of a reporting unit below its carrying value). The Company conducts
the annual review for all of its reporting units during the fourth quarter of
the calendar year.
Revenue Recognition
The Company follows the criteria for the United States Securities and
Exchange Commission Staff Accounting Bulletin 104 and EITF 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent" for revenue recognition.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery of product has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured.
F-6
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Company records merchant sales transactions at the gross purchase
price generally at the date of travel. For transactions recorded at gross, the
Company acts as the merchant of record in the package transaction consisting of
several products from different vendors causing the Company to be the primary
obligor to the customer. In these transactions the Company also controls selling
prices, and is solely responsible for making payments to vendors. The Company
records transactions at net were the Company is not the merchant of record or
the product is not sold as a package. The Company records revenue and related
costs of products when travel occurs or for certain products, when the service
is completed. Travel insurance revenue is always shown net since the Company
currently acts as an agent for the insurance company. It is the Company's policy
to be paid by the customer in advance, with monies received in advance of travel
recorded as a deferred revenue liability. The Company may receive cash or hotel
room credits in exchange for providing cooperative advertising for its vendors.
The Company records accounts receivable for these amounts and offsets the
applicable advertising expense. Once the advertising expense is reduced to zero,
any excess cooperative advertising fees are recorded as revenue.
Principles of Consolidation
The consolidated financial statements include the accounts of Dynamic
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounting for Derivatives
The Company evaluates its convertible debt, options, warrants or other
contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under Statement
of Financial Accounting Standards 133 "Accounting for Derivative Instruments and
Hedging Activities" and related interpretations including EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock".
The result of this accounting treatment is that the fair value of the
embedded derivative is marked-to-market each balance sheet date and recorded as
a liability. In the event that the fair value is recorded as a liability, the
change in fair value is recorded in the consolidated statement of operations as
an other income or expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity. Equity instruments that are
initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification date.
Concentration of Credit Risk and Other Concentrations
Nearly all of the Company's current travel products are for
destinations in the Caribbean and Mexico. This concentration potentially exposes
us to both political and weather risks of this region.
The Company has a diverse US customer base, including consumers
purchasing products through travel agencies and purchasing directly via the
Internet.
The Company has very little credit risk since the vast majority of its
travel products are paid for in advance.
F-7
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Company has negotiated contracts with airlines that provide the
Company with wholesale structure that allows the Company to price certain
products more favorably than its competitors. The loss of such contracts could
have a negative effect on the Company.
Surety Bond
The Company has outstanding at June 30, 2006 a surety bond for $70,000
related to the Airlines Reporting Corporation to allow the purchase of airline
tickets through its computerized ticket system. As part of the letter of credit
agreement the Company is required to keep a collateral deposit of $22,500. The
deposit is included in Other Assets Deposits on the accompanying balance sheet.
Letter of Credit
As of June 30, 2006, the Company had three letters of credit totaling
$150,000 payable to the Airline Reporting Corporation to allow the purchase of
airline tickets through it computerized ticket system. As part of the letter of
credit agreement, certificates of deposit are required with the issuer for
approximately the amount of the letter of credit and are reflected as short-term
investments, restricted, on the accompanying balance sheet.
Stock-Based Compensation
The Company has one active stock-based compensation plan and two
inactive stock-based compensation plans. On January 1,2006, Dynamic implemented
Statement of Financial Accounting Standard 123 (revised 2004) ("SFAS 123(R)"),
"Share-Based Payment" which replaced SFAS 123 "Accounting for Stock-Based
Compensation" and superseded APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123(R) requires the fair value of all stock-based employee
compensation awarded to employees to be recorded as an expense over the related
vesting period. The statement also requires the recognition of compensation
expense for the fair value of any unvested stock option awards outstanding at
the date of adoption. Effective January 1, 2006, all employee stock compensation
is recorded at fair value using the Black Scholes Pricing Model. In adopting
SFAS 123(R), the Company used the modified prospective application ("MPA"). MPA
requires us to account for all new stock compensation to employees using fair
value. For any portion of awards prior to January 1, 2006 for which the
requisite service has not been rendered and the options remain outstanding as of
January 1, 2006, the Company shall recognize the compensation cost for that
portion of the award for which the requisite service was rendered on or after
January 1, 2006. The fair value for these awards is determined based on the
grant-date. There was no cumulative effect of applying SFAS 123R at January 1,
2006.
NOTE 3 GOING CONCERN
The Company has a net loss of $4,693,304 for the six months ended June
30, 2006 and net cash used in operations of $1,728,848 for the six months ended
June 30, 2006, and a working capital deficiency of $8,711,794 accumulated
deficit of $5,178,618, and a stockholders' deficiency of $291,223 at June 30,
2006. Because the Company has not yet achieved or acquired sufficient 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.
F-8
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
As of June 30, 2006, the Company has outstanding $4,337,658 in
convertible Notes Payable to third parties. While the Company expects
substantially all of the note holders to convert the receipt of cash to a
receipt of common stock, there is no guarantee that this will occur. As of June
30, 2006 the Company did not have adequate working capital to meet these
obligations with cash payments.
Management believes that its plans will allow for adequate funding of
the Company's cash requirements through December 31, 2006, although there is no
assurance regarding this belief nor the success of these efforts.
The Company is working on trying to secure additional capital. The
financial statements do not contain any adjustments, which might be necessary if
the Company is unable to continue as a going concern.
NOTE 4 PREPAID TRAVEL
The Company is required to pay for certain travel (mainly hotels) in
advance. Payments made to these vendors in advance are recorded to the prepaid
travel. The Company recognizes the expense when the associated revenue is
recognized. As of June 30, 2006, the Company had $236,550 in prepaid travel.
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2006:
Estimated
June 30, Useful Life
2006 in Years
--------- -----------
Office furniture and equipment .... $ 172,980 3-5
Software .......................... 15,075 5
Leasehold Improvements ............ 41,422 10
Software in Development ........... 641,347
---------
Total property and equipment ...... $ 870,824
Less accumulated depreciation ..... (19,369)
---------
Property and equipment, net ....... $ 851,455
=========
During the quarter, the Company entered into $116,540 of capital lease
commitments for computer and telephone equipment. Depreciation expense was
$14,081 for the second quarter of 2006 and $18,594 for the first six months of
2006.
Software in Development consists of the purchase of worldwide rights
and source code to proprietary software for use in the wholesale travel
industry. The Company intends to configure and deploy the software in the second
half of 2006 and use it as the basis for an integrated operating system
platform. Per the terms of the purchase agreement for the Software, the Company
agreed not to sell or license the Software to any unaffiliated third party until
approximately June 30, 2006 without the prior written consent of the seller.
F-9
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 6 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, NOTES PAYABLE, and LOANS
PAYABLE
In addition to the MMA financing discussed below, two convertible
promissory notes totaling $60,000 were issued to two individual investors during
the six months ended June 30, 2006. The Company recorded a debt discount of
$60,000 ($50,000 and $10,000) for a beneficial conversion value, which will be
amortized over the life of the notes.
Notes payable consisted of the following at June 30, 2006:
Convertible Promissory Notes
Convertible Promissory notes, interest rate 9%, secured ........ $ 1,450,000
Convertible Promissory note, interest rate 9%, secured ......... 600,000
Convertible Promissory notes, interest rate 10%, unsecured ..... 155,158
Convertible Promissory note, interest rate 10%, secured ........ 2,000,000
Convertible Promissory note, interest rate 10%, unsecured ...... 75,000
Convertible Promissory note, interest rate 10%, unsecured ...... 50,000
Convertible Promissory note, interest rate 10%, unsecured ...... 25,000
Convertible Promissory notes, interest rate 10%, unsecured ..... 12,500
Convertible Promissory notes, interest rate 10%, unsecured ..... 10,000
Convertible Promissory notes, interest rate 10%, unsecured ..... 10,000
-----------
Total Convertible notes payable ................................ 4,337,658
Debt Discounts ................................................. (2,250,650)
-----------
Total convertible notes payable, net ........................... $ 2,087,008
===========
Related Party Convertible Promissory Notes
Convertible Promissory note, interest rate 10%, unsecured ...... $ 400,000
Convertible Promissory note, interest rate 10%, unsecured ...... 350,000
-----------
Total Convertible notes payable related parties ................ $ 750,000
===========
All convertible notes payable were current as of June 30, 2006. The
amortization of the debt discount was $1,694,036 for the six months ended June
30,2006
Convertible notes due to Street Venture Partners, LLC and to a related
party principal stockholder due on January 3, 2007 and September 8, 2006,
respectively were $350,000 and $400,000, respectively. (See Note 11)
The Maturity dates of the Convertible notes payable and notes payable
range from June 30, 2006 to March 6, 2007. The weighted average interest rate of
all current interest bearing notes was 9.6 % at June 30, 2006.
Four convertible note totaling $140,000 were due on June 30, 2006 and
were not paid on that date. Subsequent to June 30, 2006 one holder has converted
and the other three are in discussion to convert to stock. There were repayments
during the first quarter of $204,632 of convertible promissory notes and
$140,000 of non-convertible promissory notes. In addition, there were
conversions to common stock of promissory notes of $325,000 during the first six
months of 2006.(See note 8)
The convertible note holders have the right to convert the debt to
common stock at a fixed conversion rate ranging from $0.75 to $1.50.
F-10
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Additionally, the convertible note holders and note holders who have
been repaid hold detachable warrants to purchase up to 3,370,554 shares of the
Company's stock at prices ranging from $0.68 to $1.00.
Notes Payable
Notes payable consist of the following:
Interest bearing at rates ranging from
5% to 15% unsecured and due at various
dates through August 2007 ..................................... $ 156,433
Less Current maturities ........................................ (39,063)
-----------
Long-term portion of notes payable ......................... $ 117,370
===========
At June 30, 2006, 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 June 30, 2006.
Capital Leases
During the six months period ending June 30, 2006 the Company entered
into capital equipment leases with a gross value of $116,540. The term of the
leases range from 3 years to five year, with the interest rates ranging from
4.99% to 11.44%.
As of June 30, 2006 the capital lease consist of the following:
Total Capital Leases ............................ $ 113,940
Less Current capital leases ..................... (36,052)
---------
Long-term portion of capital leases .......... $ 77,888
=========
Loan payable Bank
As of June 30, 2006 the loan payable bank consist of the following:
Total loan payable bank ......................... $ 230,154
Less Current portion ............................ 214,653
---------
Long-term portion of loan payable, bank ...... $ 15,501
=========
The loan payable bank consists of a line of credit that IRT - IRT has
with a balance of $210,000 and a bank loan assumed from DynEco of $20,154 in the
recapitalization.
Loan 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.
F-11
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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. The
accreted balance due as of June 30, 2006 was $226,325 and is included in loans
payable in the accompanying balance sheet.
MMA Capital, LLC
On January 13, 2006, DynEco executed a series of documents with MMA
Capital, LLC ("MMA"), under which the Company borrowed $2,000,000 and issued to
MMA a Secured Convertible Promissory Note in the principal amount of $2,000,000.
We defaulted on the MMA note as of June 30, 2006.
On August 8, 2006 the Company entered into an agreement with MMA to
defer interest payments due each quarter until the end of the term of the loan
on January 11, 2007. In exchange for this deferral the Company agreed to
increase the interest rate retroactively from 8% to 10% and to issue MMA 100,000
shares of the Company's common stock. In accordance with EITF 96-19, this
transaction was treated a modification of debt since the extra consideration
given in the agreement did not amount to more than a ten percent change in the
present value of the amount due to MMA over the life of the promissory note.
This means that the increase in interest rate and the additional consideration
will be accounted for prospectively from the date of the modification.
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 Dynamic at the rate of $1.00 per share, subject to adjustment in
the event Dynamic issues 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 the Company 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 Dynamic's
common stock. The Company's obligations under the promissory note are
collateralized by a security interest in substantially all of the Company's
assets.
In connection with the transaction, a common stock purchase warrant in
favor of MMA Capital was issued to purchase up to 2,000,000 shares of common
stock, exercisable for a period of three years, at an exercise price of $1.00
per share, subject to adjustment in the event shares are issued 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.
F-12
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 was recorded as a deferred debt issuance cost asset and is being
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 due to the liquidated
damages provision in the registration rights agreement at their initial fair
value of approximately $1,793,382 with a corresponding charge to debt discount.
The beneficial conversion value of $206,618 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, and amortization was $920,548 for
the six months ended June 30, 2006.
The warrant liability revaluation at June 30, 2006 indicated an
increase from the initial recording on January 13, 2006. The estimated fair
value of the warrant liability was $2,432,126,using the Black-Scholes model with
the following assumptions: common stock price of $1.25, 2.5 years expected term,
zero expected dividends, volatility of 271% (based on historical volatility) and
a discount rate of 5.07%. Accordingly, the net change in the fair value of the
warrant liability during the six months ended June 30, 2006 resulted in warrant
valuation expense of $638,744. For the three months ended the net change in the
fair values resulted in income of $1,243,447.
March 2, 2005 Convertible Notes and Modification and Waiver Agreement
On January 13, 2006, DynEco 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,
DynEco 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 were to commence on June 1, 2006. As of June 30, 2006 the
Company is in default with the terms of the Modification and Waiver agreement
because the June 1, 2006 payment has not been made. According, the Company has
accrued the default interest rate of 10% from the date of default of 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 were paid a total of
$232,210, consisting of $154,632 in principal amount of promissory notes and a
premium in the amount of $77,578. The premium was recorded as additional expense
in the fourth quarter of 2005 by DynEco. The notes are convertible at $0.75 per
share, subject to certain adjustments under control of the Company. These
include anti-dilution adjustments and an adjustment if the Company issues common
stock or the rights to purchase common stock at a price below $0.75 per share.
As part of the terms of the Financing Transaction, the note holders released
their security interest in the Company's assets.
F-13
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, DynEco issued an aggregate of 200,000
shares of 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 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 DynEco and DLG,
(c) the number of shares issuable upon exercise of those warrants to the
investors cannot be reduced to less than 300,000 shares, resulting in an
issuance of 45,000 additional warrants. Under the Modification and Waiver
Agreement, under certain circumstances, the Company 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.
The Company 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 was required to 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. This document was filed on April 12, 2006. In addition, the
Company 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 was required to be filed by May 13, 2006 and become
effective not later than 60 days after the date of filing, or will be subject to
the payment of liquidated damages to the note holders. This document was filed
on May 12, 2006. A Form 8-K/A, including the audited financial statements of the
Company was filed on March 29, 2006, prior to April 5, 2006 as required. The
document did not become effective in the required 60 days due to an SEC letter
comment process. As of this filing the debt holders have not taken any action on
this deficiency
During the first quarter, the Company recorded a non-cash loss of
extinguishment of debt for $208,442 for the value of the 200,000 shares of
common stock issued (valued at $.90 per share on the date of the Modification
and Waiver Agreement, based on the closing price of common stock), additional
warrants issued, and to write off deferred debt issue costs. The Company treated
the modification as a cancellation of warrants (which resulted in a
reclassification of $240,592 of warrant liability to equity) and issuance of new
warrants. The new warrants were valued at $232,944 at the modification date.
At June 30, 2006 in accordance with SFAS 133, the Company revalued the
total 304,000 warrants underlying the warrant liability which total value was
$372,751 using the following Black-Scholes assumptions: common stock price of
$1.25, 2.75 years expected term, zero expected dividends, volatility of 271%
(based on historical volatility) and a discount rate of 5.07%. The Company
recorded income of $198,044 and an expense of $139,807 for the three and six
months ended June 30,2006, respectively. In accordance with SFAS 133, the
Company intends to continue to evaluate the nature of the Convertible Notes and
Warrants in the future, and record any changes as appropriate.
F-14
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 7 COMMITMENTS AND CONTINGENCIES
There are no material commitments or contingencies by the Company or
its subsidiaries, for purchasing goods or services that are not reported in the
consolidated financial statements, notes, or other disclosures at June 30, 2006.
NOTE 8 STOCKHOLDERS' DEFICIT
Modification and Waiver Agreement
On January 13, 2006 DynEco issued 200,000 shares to convertible note
holders as part of the Modification and Waiver Agreement (See Note 6).
Common Stock Issued Pursuant to Recapitalization
The Company is deemed to have issued 1,157,951 shares of common stock
to the shareholders of DynEco common stock, as part of the Stock Exchange
Agreement. Liabilities of $855,704 were also assumed (See Note 12).
Common Stock Issued in Acquisitions
On March 6, 2006, the Company issued 340,000 shares of common stock to
Raymon Valdes, as part of the acquisition price of Changes in L'Attitudes, Inc.
The shares were valued at a total of $850,680, $2.50 per share, the average
closing price of the Company's stock on the 5 days before and 5 days after the
acquisition period.
On March 6, 2006 the Company issued 700,000 shares of Dynamic's common
stock to Stephen A. Hicks, as part of the acquisition price of IRT-ITR. The
shares were valued at a total of $1,833,300, $2.62 per share, the average
closing price of the Company's stock on the 5 days before and 5 days after the
acquisition period.
Common Stock Issued in Warrant Exercise
On March 15, 2006, the Company issued 133,332 shares of common stock
for $90,000, on a conversion of common stock warrants at $0.675 per share.
On April 14, 2006, the Company received $45,000 for 66,600 shares of
common stock in a Warrant exercise at $0.675 per share. As June 30, 2006 these
shares were in common stock issuable.
Common Stock Issued for Cash
On April 25, 2006, the Company received $50,000 for 50,000 shares of
common stock. In addition the security holder received warrants to purchase an
addition 50,000 shares for $1.00 per share. The 50,000 shares are reflected as
issuable at June 30, 2006.
On May 31, 2006, the Company issued 10,000 shares of common stock for
$10,000. In addition the security holder received warrants to purchase an
addition 10,000 shares for $1.00 per share.
On June 29, 2006, the Company received $100,000 for 100,000 shares
common . As part of the transaction the Company paid a finder fee of $9,800 to a
third party, which was charged to additional paid in capital. As of June 30,
2006 the shares were in common stock issuable.
F-15
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Common Stock Issued in Conversion of Convertible Notes Payable
For the six months ended June 30, 2006 the Company issued a total of
386,210 shares of common stock on the conversion of six convertible notes
payable, totaling $325,000 plus accrued interest, at $.90 per share. Of this
amount 91,027 shares were reflected as common stock issuable at June 30,2006.
Common Stock Warrants:
During the six months ended June 30, 2006, the Company issued 200,000
warrants with a strike price of $1.25 to a financial consultant. The warrants
were valued at $185,976 using a Black-Scholes valuation model with the following
assumptions: $0.93 stock price, 5 year term, 343% volatility rate, and 4.27%
discount rate. The options are being amortized over the life of the agreement.
The amortization for the first six months of the year was $42,035.
In additional a total of 110,000 warrants were issued in common stock
for cash transactions listed above.
At June 30, 2006, the Company had immediately exercisable 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
2,000,000 $ 1.00 January 2009
109,000 $ 4.31 March 2010
50,000 $ 5.40 March 2010
100,000 $ 3.00 March 2010
133,333 $ 0.90 June 2010
3,333 $ 3.75 June 2010
3,333 $ 7.50 June 2010
3,334 $ 11.25 June 2010
100,000 $ 0.675 July 2010
444,444 $ 0.675 September 2010
200,000 $ 0.675 October 2010
13,333 $ 0.675 November 2010
13,889 $ 0.675 December 2010
10,000 $ 0.75 January 2011
388,889 $ 0.90 January 2011
50,000 $ 1.00 January 2011
200,000 $ 1.25 January 2011
60,000 $ 1.00 May 2011
---------
4,473,225
=========
F-16
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
A summary of changes in stock warrants during 2006:
2006
----
Outstanding at beginning of year ........ 1,104,989
Stock Exchange Agreement ................ 859,337
Granted ................................. 2,708,897
Exercised ............................... (199,998)
Expired or Cancelled .................... -
----------
Balance at June 30, 2006 ............... 4,473,225
==========
NOTE 9 WARRANT LIABILITY
The Company recorded a warrant liability related to Convertible Notes
Payable in the Modification and Waiver Agreement and the financing with MMA
Capital LLC due to the liquidated damages provision in the registration rights
agreement (See Note 6).
The remaining warrant liability will continue to be valued up until
expiration date with ranges from March 2009 to January 2011, with any changes in
valuation recorded as warrant valuation income or expense.
NOTE 10 DEFERRED REVENUE
Deferred revenue represents primarily money received from customers as
either a deposit or full payment for trips not yet traveled or services earned.
The balance at June 30, 2006 was $609,663.
NOTE 11 RELATED PARTIES AND SIGNIFICANT SHAREHOLDERS
Diversified Acquisition Trust, LLC
Geoffrey J. Eiten is the sole beneficial owner of Diversified
Acquisition Trust, LLC ("DAT"). Mr. Eiten, through the Trustee, exercises sole
investment and voting powers over the Trust. On September 5, 2005 for an
investment of $400,000, the Trust was issued a convertible Promissory Note,
bearing 10% annual interest, convertible to Dynamic's common stock at a $0.68
per share. In addition, the Company issued a warrant to purchase common stock at
a price of $0.68 per share.
DAT had also provided the Company with short-term loans held unsecured
promissory notes in the amounts of $10,000, $30,000, and $25,000 all with a
maturity date of February 28, 2006, and bearing an annual interest rate of
10.0%. The loans were repaid during the first quarter of 2006.
DAT owns 1,906,667 shares of the Company's stock as of June 30, 2006.
Mr. Eiten was a shareholder and investor but was not employed by the
Company at any time through June 30, 2006.
F-17
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Street Venture Partners, LLC
Street Venture Partners, LLC is a privately-held company owned equally
by Daniel G. Brandano, the Company's CEO and Chairman, and his spouse. As of
June 30, 2006, Street Venture Partners LLC owned 1,066,667 shares of Dynamic's
common stock.
See Note 13 for purchase of asset from this related party.
Claudale Ltd.
Claudale Limited is a Gibraltar-based company that manages a family
trust (which owns no shares of the Company's common stock) for Mr. Daniel G.
Brandano, the Company's CEO and Chairman. Mr. Brandano has no ownership interest
in Claudale Limited and disclaims beneficial ownership or control of any shares
of the Company's common stock owned by Claudale Limited.
At June 30, 2006, Claudale Ltd. owned 693,333 shares of the Company's
common stock.
Brian J. Brandano
At June 30, 2006, Brian J. Brandano owned 333,333 shares of the
Company's common stock. Brian J. Brandano was employed by the Company at June
30, 2006, and is the son of Daniel G. Brandano, the Company's CEO and Chairman.
Payable to Stephen A. Hicks
At June 30, 2006 there is $50,000 payable to Stephen A. Hicks, former
100% shareholder of IRT-ITR, for advances made to IRT-ITR prior to the
acquisition by the Company. There is currently no interest being charged for the
use of the advance, nor is any interest anticipated to be paid.
NOTE 12 RECAPITALIZATION OF DYNAMIC LEISURE GROUP
On January 13, 2006, DynEco entered into an agreement with the former
shareholders of DLG, under which DynEco acquired all of the outstanding capital
stock of DLG, and DLG became a wholly-owned subsidiary of DynEco.
As consideration for its acquisition of the outstanding capital stock
of DLG, DynEco issued an aggregate of 197,000 shares of its Series A Preferred
Stock to the former shareholders of DLG.
Issuance of the Series A Preferred Stock in exchange for the
outstanding capital stock of DLG pursuant to the Stock Exchange Agreement
resulted in a change in control of DynEco where (a) the former shareholders of
DLG acquired voting rights over approximately 83% of the currently outstanding
voting securities of DynEco, and (b) the designees of the former shareholders of
DLG 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 DynEco when DynEco's Articles of Incorporation
were amended to increase the number of authorized shares of DynEco common stock
sufficient to permit full conversion of the Series A Preferred Stock. DynEco
also agreed that the currently outstanding options and warrants of DLG would be
exchanged for options and warrants to purchase an aggregate of 1,493,887
post-reverse shares of common stock of DynEco, and that the then-outstanding
convertible promissory notes of DLG would become convertible into 1,386,111
post-reverse shares of common stock of DynEco.
F-18
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 transaction is treated as a recapitalization of DLG. 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 DLG, and the operations of DynEco from the
recapitalization date.
NOTE 13 BUSINESS ACQUISITIONS AND ACQUISITION LIABILITIES
Casual Car
On January 3, 2006, Street Venture Partners, LLC (See Note 9), sold the
US rights to the Casual Car General Service Agreement ("GSA") to DLG for an
unsecured convertible Promissory Note in the amount of $350,000, and a warrant
to purchase 388,889 shares of common stock at a fixed price of $.90 per share.
The Promissory Note is convertible to Dynamic's common stock at $.90 per share
and paying 10% interest annually. The agreement was recorded as an Intangible
Asset at a value of $348,413, and a short term deposit of $1,587 and will be
amortized over 2.5 years. 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.
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 $2,090,680. CLA is in the travel industry, specializing
in providing resort destination travel packages to the Caribbean and Eastern
Mexico. Almost all of its business originates through the Internet via its
on-line site. CLA is located in Largo, Florida. It has since been incorporated
into the corporate office in Tampa, Florida. The purchase price consists of a
combination of cash ($640,000), 340,000 shares of Dynamic's common stock, valued
at $2.50 per share or the average closing price of Dynamic's common stock 5 days
before and after the announcement of the purchase ($850,680), and a one-year
secured Convertible Promissory Note 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. As of June 30, 2006, the remaining cash portion of the agreement has
not been paid. There is no penalty associated with this default status.
Additional shares of 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 Dynamic's common stock at a rate of less than $1.50 per
share. The Company agreed to include resale of the shares issued and those
issuable upon conversion of the Note in the next registration statement filed by
the Company. That registration statement was filed with the SEC on May 12, 2006.
F-19
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Convertible Promissory Note is payable with interest at the rate of
9% per annum, and matures on February 7, 2007 ("Maturity Date"). The Note is
convertible into Dynamic 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 $2,500,000 or more, early repayment of 50%
of the outstanding balance on the Promissory Note 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 Promissory 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 the Company. The Convertible Promissory Note is secured by a lien on
the assets of CLA. A beneficial conversion value of $480,000 was recorded as a
debt discount to be amortized over the life of the debt term.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The allocation
includes estimates that were not finalized at June 30, 2006. Purchase price
adjustments following the closing are customary.
February 8, 2006
----------------
Current assets ....................... $ 836,330
Other assets ......................... 53,011
Intangible assets..................... 590,000
Goodwill ............................. 1,610,336
----------
Total assets ......................... 3,089,677
Current liabilities .................. 998,997
----------
Net assets acquired .................. $2,090,680
==========
The goodwill of $ 1,610,336 is expected to be deductible over 15 years
for tax purposes. The Intangible asset relates to the values of certain web
based assets that drive inquires to the Company. With the increased resources of
the Company in comparison to CLA the conversion of these inquires to sales will
increase over time.
The results of CLA operations are included in the consolidated
financial statements beginning with the date of acquisition.
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 $4,783,300. 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. IRT and ITR
are both located in New York, New York.
F-20
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The purchase price consists of a combination of cash ($1,500,000),
700,000 shares of Dynamic common stock ($1,833,300), 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
2005. The Company is currently in discussion with the former owner of IRT - ITR
to reduce the cash portion of the payment. The agreed upon amount will be paid
when an agreement is reached.
Additional shares of Dynamic common stock may be issued if the Company,
as part of any subsequent business acquisitions on or before December 31, 2006,
issues Dynamic 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 Dynamic common stock could be issued as a result of
this adjustment provision.
The common stock was valued at $2.62 based on the average closing price
of Dynamic's common stock for the five days before and after the acquisition was
agreed to an announced, multiplied by the number of shares of common stock
issued.
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 Dynamic'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. A beneficial value of $1,208,334 was recorded as a debt
discount to the amortized over the life of the debt term.
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 the
Company receives 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 agreed to include resale of the shares
issued and those issuable upon conversion of the Note in the next registration
statement filed by the Company. That registration statement was filed with the
SEC on May 12, 2006.
The Convertible Note is secured by a lien on assets of IRT and ITR
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The allocation
includes estimates that were not finalized at June 30, 2006. Purchase price
adjustments following the closing are customary.
F-21
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
March 6, 2006
-------------
Current assets ........................ $ 708,167
Other assets .......................... 80,236
Intangible............................. 1,600,000
Goodwill .............................. 3,505,360
----------
Total assets .......................... 5,893,763
Current liabilities ................... 1,110,463
----------
Net assets acquired ................... $4,783,300
==========
The goodwill of $3,482,956 is expected to be deductible over 15 years
for tax purposes.
The intangible represents the value of certain airline contacts that
the Company assumed in the purchase of IRT / ITR. These contacts allow the
Company to purchase airline ticket on a wholesale basis with in many cases
better pricing and will be amortized over a term of 32 months beginning July 1,
2006.
The results of IRT/ITR operations are included in the consolidated
financial statements beginning with the date of acquisition.
The table below summarizes the unaudited pro forma information of the
consolidated results of operations for the six months end June 30, 2006 and 2005
as though the CLA and IRT-ITR business combinations had been completed as of the
beginning of the period reported on:
2006 2005
---- ----
Revenues $ 3,927,581 $ 3,337,425
Cost of Revenue 2,717,509 2,259,377
Gross Profit 1,210,072 1,078,048
Operating Expenses 2,698,320 1,220,888
Operating Loss (1,488,248) (142,840)
Other Expenses 3,219,066 3,219,066
Net Loss (4,707,314) (3,076,226)
Net Loss per share $0.54 $0.35
The main difference in the net loss between 2006 and 2005 is due to
Dynamic Leisure being a start up last year with minimal expenses last year. This
year expenses were incurred in acquisition related expenditures, set up of a
company structure, expenditures related to being a public company and the
building of a corporate staff.
NOTE 14 OTHER MATTERS
Separation Agreement dated January 13, 2006
In connection with the transactions contemplated by the Stock Exchange
Agreement described elsewhere in this Report, DynEco 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 Dynamic Corporation. As of March 31, 2006,
$283,625 in deferred compensation payable to Dr. Edwards was accrued;
F-22
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 Dynamic's facilities in
Rockledge, Florida, and Dr. Edwards assumed all of Dynamic'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 resulted in the forfeiture of accrued
compensation of $283,625 by Dr. Edwards in 2006, and the transfer to him of
$33,418 recorded net value of fixed assets, both of these items were written off
the balance sheet of DynEco prior to the recapitalization that occurred on
January 13,2006.
MANAGEMENT OF DYNAMIC
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 Dynamic 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 Meeting of Shareholders.
At the Meeting of Shareholders, the following persons were elected to
serve as directors of DynEco Corporation 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 were appointed to serve as officers of DynEco, 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
F-23
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
EXCLUSIVE PATENT AND KNOW-HOW LICENSE AGREEMENT DATED JANUARY 12, 2006
On January 12, 2006, DynEco and Dr. Thomas C. Edwards, then CEO entered
into an Exclusive Patent and Know-How License Agreement that amends and
superseded the Exclusive Patent and Know-How License Agreement dated February 4,
2004, by and between DynEco and Dr. Edwards. The 1994 Agreement granted DynEco
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 DynEco all of his right, title and interest
under the Exclusive Patent and Know-How License Agreement dated February 4,
2004. The Company acquired the right, title and interest as part of the Stock
Exchange Agreement.
ARTICLES OF CORRECTION TO CHANGE DYNECO CORPORATION'S NAME
On February 28, 2006, DynEco filed Articles of Correction with the
Secretary of State of Minnesota, to change DynEco'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 effect related to this filing.
NOTE 15 SUBSEQUENT EVENTS
On July 1, 2006, the Company entered into an agreement Redwood
Consultants LLC to provide investor relation services to the Company As part of
this agreement the Company issued 400,000 shares of stock, the fair value of
$500,000 will be amortized over the one year term of the agreement. The fair
value was determined using the market stock price as of the date of the
agreement.
On July 1, 2006, the Company issued 100,000 shares of common stock
pursuant to a stock purchase agreement with MMA Capital, LLC. On July 12, 2006,
the Company issued 100,000 additional shares of common stock pursuant to a stock
purchase agreement with MMA Capital, LLC. The shares were issued in reliance on
the exemption from registration provided by section 4(2) of the Act, on the
basis that their issuance did not involve a public offering, that no
underwriting fees or commissions were paid by us in connection with such sale,
and that the Purchaser represented to us that it was an "accredited investor" as
defined in the Act.
On July 10, 2006, the Company entered into a Subscription Agreement
with David O. Jensen to purchase 15,000 shares of the Company's common stock,
plus 15,000 warrants to purchase the Company's common stock at $1.00 per share.
The Agreement was a private offering of unregistered securities. The shares were
issued in reliance on the exemption from registration provided by section 4(2)
of the Act, on the basis that their issuance did not involve a public offering,
that no underwriting fees or commissions were paid by us in connection with such
sale, and that the Purchaser represented to us that he was an "accredited
investor" as defined in the Act.
F-24
On July 11, 2006, the Company entered into an agreement with The
Research Works, LLC to provide equity research about the Company. As part of the
agreement the Company agreed to issue 80,000 shares of stock, the fair value of
$128,000 will be amortized over the term of the agreement from July 11, 2006 to
August 1, 2007. The fair value was determined using the market stock price as of
the date of the agreement.
On July 28, 2006, the Company issued 250,000 shares of common stock
pursuant to a stock purchase agreement with Miller Investments, LLC. In
connection with the Stock Purchase Agreement, on July 28, 2006 the Company also
issued to the Purchaser warrants to purchase Two Hundred Fifty Thousand
(250,000) shares of common stock of the Company at an exercise price of One
Dollar ($1.00) per share, subject to potential adjustment(s) in the exercise
price as set forth in the Warrant to Purchase Shares of Common Stock. The
warrants are exercisable for a period of five (5) years from the date of
issuance. The shares were issued in reliance on the exemption from registration
provided by section 4(2) of the Act, on the basis that their issuance did not
involve a public offering, that no underwriting fees or commissions were paid by
us in connection with such sale, and that the Purchaser represented to us that
it was an "accredited investor" as defined in the Act.
On August 8, 2006 the Company entered into an agreement with MMA to
defer interest payments due each quarter until the end of the term of the loan
on January 11, 2007. In exchange for this deferral the Company agreed to
increase the interest rate retroactively from 8% to 10% and to issue MMA 100,000
shares of the Company's stock. In accordance with EITF 96-19, this transaction
was treated a modification of debt since the extra consideration give in the
agreement did not amount to more than a ten percent change in the present value
of the amount due to MMA over the life of the promissory note. This means that
the increase in interest rate and the additional consideration will be accounted
for prospectively from the date of the modification.
F-25
DYNECO CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Page(s)
-------
Report of Independent Registered Public Accounting Firm ............... F-27
Consolidated Balance Sheets ........................................... F-28
Consolidated Statement of Operations .................................. F-29
Consolidated Statement of Changes in Stockholders' Deficiency ......... F-30
Consolidated Statement of Cash Flows .................................. F-31
Notes to Financial Statements .........................................F-32 - 57
F-26
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.
As more fully described in Note 14, subsequent to the issuance of the Company's
December 31, 2005 financial statements included in the Company's 2005 Form
10-KSB and the SB-2, as amended, of Dynamic Leisure Corporation and our report
thereon dated March 20, 2006, we became aware that a premium penalty payment
that is due under the convertible promissory notes, in the event of default,
should have been accrued as of December 31, 2005. In our related report we
expressed an unqualified opinion with an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern. Our opinion on the revised financials, as expressed herein,
remains unqualified with an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern.
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 $603,773,
net cash used in operations in 2005 of $355,352, and working capital deficit of
$1,111,143 accumulated deficit of $8,738,601 and stockholders' deficiency of
$1,183,489 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 (except for Note 14, as to which the date is July 14, 2006)
F-27
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004
ASSETS
2005 2004
----------- -----------
(RESTATED,
SEE NOTE 14)
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
Accrued default premium ............................................. 77,578 -
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 ......................................... 1,111,143 667,232
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 ................................................. $ 1,245,862 $ 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 (40,000 shares) ................. - 67
Additional paid-in capital .......................................... 7,543,532 7,404,527
Accumulated deficit ................................................. (8,738,601) (8,134,828)
----------- -----------
Total Stockholders' Deficit ....................................... (1,183,489) (719,196)
----------- -----------
Total Liabilities and Stockholders' Deficit ....................... $ 62,373 $ 88,921
=========== ===========
See accompanying notes to the financial statements
F-28
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004
----------- -----------
(RESTATED,
SEE NOTE 14)
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 ............................... (276,619) (35,427)
Warrant valuation income ....................... 86,408 -
----------- -----------
Total Other Expense, net ..................... (106,075) (35,114)
----------- -----------
Net Loss ..................................... $ (603,773) $ (434,523)
=========== ===========
Net Loss Per Share - Basic and Diluted ........... $ (0.54) $ (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-29
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2005 and 2004
Additional 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
(Restated, see Note 14) ........ - - - - - (603,773) (603,773)
---------- -------- ------- ---- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2005
(Restated see Note 14) ........ 1,157,951 $ 11,580 $ - $ - $ 7,543,532 $(8,738,601) $(1,183,489)
========== ======== ======= ==== =========== =========== ===========
See accompanying notes to the financial statements
F-30
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
YEARS ENDED DECEMBER 31,
2005 2004
--------- ---------
(RESTATED,
SEE NOTE 14)
Cash Flows from Operating Activities:
Net loss ............................................................ $(603,773) $(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
Warrants issued for services ................................ - 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 -
Accrued default premium ......................................... 77,578 -
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-31
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-32
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-33
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 .................. $ (603,773) $ (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 ..................... $ (673,073) $ (434,523)
========== ==========
Basic and diluted per share information:
Net loss per share, as reported ........ $ (0.54) $ (0.39)
========== ==========
Net loss per share, pro forma .......... $ (0.60) $ (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
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 $100,383 and $145,171 in 2005 and 2004, respectively.
F-34
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-35
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-36
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 2 GOING CONCERN - (Restated, see Note 14)
The Company has a net loss of $603,773 and net cash used in operations
of $355,352 for the year ended December 31, 2005, a working capital
deficiency of $1,111,143, accumulated deficit of $8,738,601, and a
stockholders' deficiency of $1,183,489 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 13). 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-37
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-38
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 6 CONVERTIBLE PROMISSORY NOTES & WARRANTS - (Restated, see Note 14)
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-39
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 $3.60
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-40
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-41
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. As per the Modification and Waiver
Agreement, the Company accrued $77,578 in penalty premium related to
obtaining over $1,500,000 in financing which occurred on January 13th,
2006 with the MMA Capital Convertible Secured Promissory Note for
$2,000,000 and to clear the default that existed as of December 31,
2005 (see Note 14).
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 no related sales have
yet occurred, and there are no minimum payments required. The
February 2004 agreement was superseded by a Exclusive Patent and
Know-How License Agreement dated January 12, 2006. (See Note 13)
F-42
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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 - (Restated, see Note 14)
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.
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
F-43
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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:
The following summaries warrants issued for cash, with debt, for
debt settlement and for service through December 31, 2005. In 2004,
3,333 warrants, exercisable at $5.40 per share, were issued to a
consultant for services rendered and a expense of $11,000 was
recognized based in a Black-Scholes option pricing model using the
following assumptions: stock price $3.60, expected term two years,
volatility 281%, zero expected dividends and a 3.43% discount rate.
In 2005, there were 10,000 warrants, exercisable at $7.50, issued to
consultants for services rendered, valued at $27,000 and recognized
as consulting expense. The warrants were valued using a
Black-Scholes option pricing model with the following assumptions:
stock price $2.70, expected term of five years, volatility of 337%,
no expected dividends and an interest rate of 3.72%
All other warrants issued in 2005 and 2004 were issued for cash or
in connection with convertible debt. In 2005, all warrants issued
with debt are discussed in Note 6. Also in 2005, 44,167 warrants
were issued with the sale of 48,333 common shares for an aggregate
total of $85,000 and therefore such warrants are recorded as
additional paid in capital as part of the common stock sale.
At December 31, 2005, the Company had warrants outstanding as
follows:
Warrants Exercisable
----------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise Outstanding at Exercise Price per Remaining Exercisable at Exercise Price
Price December 31,2005 Share Contracted Life December 31,2006 per Share
- -------- ---------------- ------------------ ---------------- ---------------- ----------------
$5.40 133,333 $ 5.40 0.92 years 133,333 $ 5.40
$5.40 3,333 $ 5.40 0.75 years 3,333 $ 5.40
$4.50 7,500 $ 4.50 1.00 years 7,500 $ 4.50
$5.40 406,171 $ 5.40 1.50 years 406,171 $ 5.40
$3.00 40,000 $ 3.00 2.75 years 40,000 $ 3.00
$4.31 109,000 $ 4.31 4.25 years 109,000 $ 4.31
$5.40 50,000 $ 5.40 4.25 years 50,000 $ 5.40
$3.00 100,000 $ 3.00 4.25 years 100,000 $ 3.00
$3.75 3,333 $ 3.75 4.50 years 3,333 $ 3.75
$7.50 3,333 $ 7.50 4.50 years 3,333 $ 7.50
$11.25 3,334 $11.25 4.50 years 3,334 $11.25
- ------ ------- ------ ---------- ------- ------
859,337 859,337
======= =======
F-44
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
A summary of all warrants issued as of December 31, 2005 and 2004
and changes during the years is presented below:
2005 2004
------------------- -------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Warrants Price Warrants Price
--------- -------- --------- --------
Stock Warrants .......................
Balance at beginning of period ....... 546,170 $ 5.39 540,504 $ 5.40
Granted .............................. 313,167 $ 4.00 6,666 $ 4.95
Exercised ............................ - $ - - $ -
Forfeited ............................ - $ - (1,000) $ 5.40
--------- -------- --------- --------
Balance at end of period ............. 859,337 $ 4.89 546,170 $ 5.39
========= ======== ========= ========
Warrants exercisable at end of period 859,337 $ 4.89 546,170 $ 5.39
--------- -------- --------- --------
Weighted average fair value of
warrants granted during the period . $ 4.00 $ 4.95
======== ========
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.
The Company issued 19,167 options to non-employees for consulting
services and recorded $56,925 of expense. This valuation was done
using a Black-Scholes model with a risk free interest rate of 3.9%,
an expected life of 3.0 years, a volatility of 294% and no expected
dividends.
The Company granted 23,333 options to employees in 2005 with an
exercise price of $3.00 per share and 3,333 options in 2004 at an
exercise price of $3.00 per share. There was no compensation expense
recorded as the exercise price was equal to the fair market value of
the common shares at the grant date.
F-45
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
At December 31, 2005, the Company had the following non-qualified
options outstanding and exercisable as follows:
Outstanding Options Exercisable Options
--------------------------------------- --------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Price 2005 Life Price 2005 Price
- -------- -------------- --------- -------- -------------- --------
$ 3.00 20,000 0.1 Years $ 3.00 20,000 $ 3.00
$ 1.50 1,111 0.5 Years $ 1.50 1,111 $ 1.50
$ 3.00 3,333 0.6 Years $ 3.00 3,333 $ 3.00
$ 11.40 333 1.4 Years $ 11.40 333 $ 11.40
$ 3.00 42,500 2.3 Years $ 3.00 42,500 $ 3.00
$ 11.40 50,595 2.9 Years $ 11.40 50,595 $ 11.40
$ 3.60 6,667 3.0 Years $ 3.60 6,667 $ 3.60
------- -------
124,539 124,539
======= =======
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).
F-46
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 12 INCOME TAXES - (Restated, see Note 14)
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 3.8 5.1
Net operating loss carryforward .............. 30.2 28.9
----- ----
Income tax provision ......................... - % - %
===== ====
The tax effect of temporary differences at December 31 were as follows:
2005 2004
----------- -----------
Asset:
Net operating loss carryforward .... $ 2,592,814 $ 2,389,507
Other individually immaterial items 60,657 81,125
----------- -----------
Net deferred tax asset before valuation
allowance ............................ 2,653,471 2,470,632
Less valuation allowance .............. (2,653,471) (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 672,000
-----------
$ 8,517,000
===========
F-47
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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.
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 agreement was recorded
in the first quarter of 2006 as an intangible asset at a value of
$348,413, which will be amortized over 30 months and a short term
deposit of $1,587. over three years. 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-48
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 resulted in the forfeiture of accrued
compensation of $283,625 by Dr. Edwards in 2006, and transfer to him of
fixed assets of $33,418 recorded net value both of which were written
off the balance sheet of the Company prior to the recapitalization that
occurred on January 13, 2006.
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-49
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 $232,734 to the note holders, consisting of
approximately $155,156 in principal amount of promissory notes and a
premium in the amount of $77,578. The notes are convertible at $.75
per share, subject to certain adjustments under the control of the
Company. These include anti-dilution adjustments, and an adjustment if
the Company issues common stock or the right to purchase common stock
at a price lower than $0.75 per share. 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-50
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.
The Company recorded in the first quarter of 2006 a non-cash loss of
extinguishment of debt for $208,442 for the value of the 200,000 shares
of common stock issued (valued at $.90 per share on the date of the
Modification and Waiver Agreement, based on the closing price of common
stock), additional warrants issued, and to write off deferred debt
issue costs. The Company treated the modification as a cancellation of
warrants (which resulted in a reclassification of $240,592 of warrant
liability to equity) and issuance of new warrants. The new warrants
were valued at $233,227 at the modification date.
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.
F-51
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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
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.
F-52
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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 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. These adjustments would occur in the Company issues
common shares lower than $0.75 per share or the right to buy shares at
a rate lower than $0.75 per share, and to reflect the occurrence of a
forward or reverse common stock split, 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 $2,090,680. CLA is in the travel
industry, specializing in providing resort destination travel packages
to the Caribbean and Eastern Mexico. Almost all of its business
originates through the Internet via its on-line site. CLA is located in
Largo, Florida. The purchase price consists of a combination of cash
($640,000), 340,000 shares of Dynamic's common stock, valued at $2.50
F-53
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
per share or the average closing price of Dynamic's common stock 5 days
before and after the purchase ($850,680), and a one-year secured
Convertible Promissory Note 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, using a measurement date of May 31, 2006.
Additional shares of 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 Dynamic's common stock at a rate of less
than $1.50 per share. The Company agreed to include resale of the
shares issued and those issuable upon conversion of the Note in the
next registration statement filed by the Company. That registration
statement was filed with the SEC on May 12, 2006.
The Convertible Promissory Note is payable with interest at the rate of
9% per annum, and matures on February 7, 2007 ("Maturity Date"). The
Note is convertible into Dynamic 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 $2,500,000 or more, early
repayment of 50% of the outstanding balance on the Promissory Note 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 Promissory 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
the Company. The Convertible Promissory Note is secured by a lien on
the assets of CLA. A beneficial conversion value of $480,000 was
recorded as a debt discount to be amortized over the life of the debt
term.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The
allocation includes estimates that were not finalized at March 31,
2006. Purchase price adjustments following the closing are customary.
February 8, 2006
----------------
Current assets ....................... $ 836,330
Other assets ......................... 53,011
Goodwill ............................. 2,200,336
----------
Total assets ......................... 3,089,677
Current liabilities .................. 998,997
----------
Net assets acquired .................. $2,090,680
==========
The goodwill of $2,200,336 is expected to be deductible over 15 years
for tax purposes.
The results of CLA operations will be included in the consolidated
financial statements beginning with the date of acquisition.
F-54
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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.
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
$4,783,300. 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. IRT and ITR are both
located in New York, New York.
The purchase price consists of a combination of cash ($1,500,000),
700,000 shares of Dynamic common stock ($1,833,300), 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 2005. The balance of the cash payment
will be reduced by any trade payables in excess of short-term liquid
assets as of April 30, 2006. As of May 12, 2006, the additional cash
F-55
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
payment had not been made pending the completion of the audits for, and
final determination of amount if any of adjustment, to the balance of
the cash payment. Additional shares of Dynamic common stock may be
issued if the Company, as part of any subsequent business acquisitions
on or before December 31, 2006, issues Dynamic 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 Dynamic common stock could be issued as a
result of this adjustment provision.
The common stock was valued at $2.62 based on the average closing price
of Dynamic's common stock for the five days before and after the
acquisition was agreed to and announced, multiplied by the number of
shares of common stock issued.
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 Dynamic'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. A
beneficial value of $1,208,334 was recorded as a debt discount to the
amortized over the life of the debt term.
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 the Company receives 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 agreed to include resale of the shares issued and those
issuable upon conversion of the Note in the next registration statement
filed by the Company. That registration statement was filed with the
SEC on May 12, 2006.
The Convertible Note is secured by a lien on assets of IRT and ITR
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The
allocation includes estimates that were not finalized at March 31,
2006. Purchase price adjustments following the closing are customary.
The goodwill of $5,055,656 is expected to be deductible over 15 years
for tax purposes.
The results of IRT/ITR operations will be included in the consolidated
financial statements beginning with the date of acquisition.
F-56
March 6, 2006
-------------
Current assets ........................ $ 708,167
Other assets .......................... 80,236
Goodwill .............................. 5,055,656
----------
Total assets .......................... 5,844,059
Current liabilities ................... 1,060,759
----------
Net assets acquired ................... $4,783,300
NOTE 14 RESTATEMENT
Subsequent to the issuance of the Company's December 31,2005
consolidated financial statements, management became aware that a
default premium paid in 2006 in connection with the Modification and
Waiver agreement should have been accrued by DynEco at December 31,
2005.Therefore the consolidated financials statements have been
adjusted to accrue the $77,578 default premium. The net loss was
increased from $526,195 or $0.47 per share to $603,773 or $0.54 per
share.
F-57
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
December 31, 2005
Page(s)
-------
Report of Independent Registered Public Accounting Firm ............... F-59
Balance Sheet ......................................................... F-60
Statement of Operations ............................................... F-61
Statement of Changes in Stockholders' Deficiency ...................... F-62
Statement of Cash Flows ............................................... F-63
Notes to Financial Statements .........................................F-60 - 80
F-58
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of:
Dynamic Leisure Group, Inc. (A Development Stage Company)
We have audited the accompanying balance sheet of Dynamic Leisure Group, Inc. (a
development stage company) as of December 31, 2005 and the related statements of
operations, changes in stockholders' deficit and cash flows for the period from
May 16, 2005 (inception) to December 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Dynamic Leisure Group, Inc. (a
development stage company) as of December 31, 2005, and the results of its
operations, changes in stockholders' deficit and cash flows for the period from
May 16, 2005 (inception) to December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has a net loss of $485,314 and net cash used
in operations of $320,450 for the period from May 16, 2005 (inception) to
December 31, 2005, and a working capital deficiency, stockholders deficit and
deficit accumulated during the development stage of $1,126,287, $477,814 and
$485,314, respectively, at December 31, 2005. These matters raise substantial
doubt about its ability to continue as a going concern. Management's Plan in
regards to these matters is also described in Note 2. The 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-59
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2005
ASSETS
Current Assets
Cash ........................................................... $ 19,563
Prepaid expenses ............................................... 19,136
-----------
Total Current Assets ......................................... 38,699
Property and equipment, net ...................................... 646,713
Deposits ......................................................... 1,760
-----------
Total Assets ................................................. $ 687,172
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable ............................................... $ 81,347
Accrued interest ............................................... 29,360
Other accrued liabilities ...................................... 33,146
Accrued payroll taxes .......................................... 33,633
Convertible notes payable ...................................... 847,500
Notes payable .................................................. 140,000
-----------
Total Current Liabilities .................................... 1,164,986
Total Liabilities ............................................ 1,164,986
-----------
Commitments and contingencies (Note 6)
Stockholders' Deficit
Preferred stock, $0.01 par value, 20,000,000 shares authorized,
Preferred series A 350,000 authorized, none issued and
outstanding .................................................. -
Common stock, $0.01 par value, 300,000,000 shares authorized,
6,566,667 shares issued and outstanding ...................... 65,666
Additional paid-in capital ..................................... (57,629)
Stock subscription receivable .................................. (537)
Deficit accumulated during development stage ................... (485,314)
-----------
Total Stockholders' Deficit .................................. (477,814)
-----------
Total Liabilities and Stockholders' Deficit .................. $ 687,172
===========
See accompanying notes to financial statements
F-60
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Period from May 16, 2005 (Inception) to December 31, 2005
Operating Expenses
Compensation and benefits ................................. $ 276,233
General and administrative ................................ 179,721
-----------
Total Operating Expenses ................................ 455,954
-----------
Loss from Operations .................................... (455,954)
Other Expense
Interest expense .......................................... (29,360)
-----------
Total Other Expense ..................................... (29,360)
-----------
Net Loss ................................................ $ (485,314)
===========
Net Loss Per Share - Basic and Diluted ...................... $ (0.47)
===========
Weighted average number of shares outstanding
during the period - basic and diluted ..................... 1,033,625
===========
See accompanying notes to financial statements
F-61
DYNAMIC LEISURE GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(A DEVELOPMENT STAGE COMPANY)
For the Period from May 16, 2005 (Inception) to December 31, 2005
Deficit
Accumulated
Common Stock Additional During Total
-------------------- Paid-In Development Subscription Stockholders'
Shares Amount Capital Stage Receivable Deficit
--------- -------- ---------- ----------- ------------ -------------
Balance at May 16, 2005 ........ - $ - $ - $ - $ - $ -
Common stock issued to founders 5,966,667 59,666 (59,129) - (537) -
Common stock issued for services 600,000 6,000 1,500 - - 7,500
Net loss, December 31, 2005 .... (485,314) (485,314)
--------- -------- --------- ---------- ------ ----------
BALANCE, DECEMBER 31, 2005 ..... 6,566,667 $ 65,666 $ (57,629) $ (485,314) $ (537) $ (477,814)
========= ======== ========= ========== ====== ==========
See accompanying notes to financial statements
F-62
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Period from May 16, 2005 (Inception) to December 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $(485,314)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 774
Common stock issued for services ........................... 7,500
(Increase) decrease in operating assets:
Prepaids ................................................... (19,136)
Deposits ................................................... (1,760)
Increase (decrease) in operating liabilities:
Accounts payable ........................................... 81,347
Accrued expenses ........................................... 66,779
Accrued interest payable ................................... 29,360
---------
Net Cash Used In Operating Activities ...................... (320,450)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ......................... (647,487)
---------
Net Cash Used In Investing Activities ...................... (647,487)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes ........................................... 987,500
---------
Net Cash Provided By Financing Activities .................. 987,500
---------
Net Increase in Cash ............................................ 19,563
Cash at Beginning of Period ..................................... -
---------
Cash at End of Period ........................................... $ 19,563
=========
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest ...................... $ -
=========
Cash paid during the period for taxes ......................... $ -
=========
See accompanying notes to financial statements
F-63
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Dynamic Leisure Group, Inc. ("Dynamic" or the "Company") was
incorporated on May 16, 2005 with the purpose of entering the
wholesale travel business, specializing in leisure travelers to
popular destinations in the US, Caribbean, Mexico, the UK, and
Europe. A growth strategy was developed to grow revenue by
establishing a scalable, single operating system platform to
assimilate and leverage a combination of strategic acquisitions and
internal growth.
Activities during the development stage include developing a
business plan, raising capital, acquisition of assets, and due
diligence on potential business combinations.
Basis of Presentation
All share and per share data in the accompanying financial
statements for the period ended December 31, 2005 have been
retroactively adjusted for the effect of the recapitalization
transaction with DynEco in fiscal 2006 and the subsequent
one-for-thirty reverse stock split. (See Note 10)
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 include an estimate of useful lives of
assets, impairment of long-lived assets, and the deferred tax
valuation allowance.
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 is five years.
Expenditures for additions and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
F-64
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Impairment of Other Long-Lived Assets:
The Company will review 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. There were no
long-lived assets recorded at December 31, 2005.
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 expects to record 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 Company had no revenues for the period ended December 31, 2005.
Stock Based Compensation:
The Company follows the fair value method under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123R,
"Accounting for Stock-Based Compensation," in accounting for
stock-based transactions with employees and non-employees.
In December 2004, the FASB issued SFAS No. 123 ("SFAS 123") (revised
2004) "Share-Based Payment" ("SFAS 123R"). This Statement requires
that the cost resulting from all share-based transactions be
recorded in the financial statements. The Statement establishes fair
value as the measurement objective in accounting for share-based
payment arrangements and requires all entities to apply a
fair-value-based measurement in accounting for share-based payment
transactions with employees. The Statement also establishes fair
value as the measurement objective for transactions in which an
entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No. 25
"Accounting for Stock Issued to Employees". As December 31, 2005,
the company adopted the provisions of SFAS No. 123R.
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.
F-65
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 was debt convertible into 997,222 common shares and warrants
for 1,104,998 common shares which may dilute future earnings per
share. There is no calculation of fully diluted earnings per share
in 2005 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
The Company maintains its cash in bank deposit accounts, which, at
times, exceed federally insured limits. As of December 31, 2005, the
Company did not have any deposits in excess of federally insured
limits. The Company has not experienced any losses in such accounts
through December 31, 2005.
The Company had no accounts receivable at December 31, 2005.
The Company is relying on its ability to obtain adequate external
financing and complete strategic acquisitions of leisure travel
businesses to develop future revenue.
The Company has purchased proprietary software that it plans to use
as its primary integrated operating platform. The software and
related database comprise the majority of the Company's fixed assets
and total assets. As of December 31, 2005, the software was not yet
placed into service. (See Note 4)
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 payable,
accrued liabilities, and notes payable. 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 are not readily
available, but the carrying values are believed to approximate fair
value.
F-66
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
New Accounting Pronouncements:
The Financial Accounting Standards Board has recently issued a new
accounting pronouncement, 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.
NOTE 2 GOING CONCERN
The Company has a net loss of $485,314 and net cash used in operations
of $320,450 for the year ended December 31, 2005, a working capital
deficiency of $1,126,287, accumulated deficit of $485,314, and a
stockholders' deficiency of $477,814 at December 31, 2005. Because the
Company has not yet achieved or acquired sufficient 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.
The Company is working on trying to secure additional capital. The
financial statements do not contain any adjustments, which might be
necessary if the Company is unable to continue as a going concern.
The Company has issued $140,000 of Notes Payable and $847,500 in
convertible Notes Payable. While the Company expects substantially all
of the note holders to convert the receipt of cash to a receipt of
common stock, there is no guarantee that this will occur. As of
December 31, 2005 the Company did not have adequate working capital to
meet these obligations with cash payments.
F-67
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
NOTE 3 PREPAID EXPENSES
The Company paid retainers of $10,000 each, a total of $20,000, for
accounting and legal services during the period. The balance of $19,136
at December 31, 2005 is expected to be used in calendar 2006 to offset
actual billings, and charged to expense as incurred.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2005:
Estimated
Useful Life
2005 in Years
--------- -----------
Office furniture and equipment .. $ 6,141 5
Software ........................ 641,346 5
---------
Total property and equipment .... $ 647,487
Less accumulated depreciation ... (774)
---------
Property and equipment, net ..... $ 646,713
=========
Depreciation expense was $774 in 2005. The software was not yet placed
into service in 2005 and therefore no depreciation has been recorded on
the software during 2005.
Software consists primarily of the purchase of worldwide rights and
source code to proprietary software for use in the wholesale travel
industry. The Company intends to configure and deploy the software in
2006 and use it as the basis for an integrated operating system
platform. Per the terms of the purchase agreement the Company agreed
not to sell or license the Software to any unaffiliated third party for
nine months (approximately June 30, 2006) without the prior written
consent of the seller.
NOTE 5 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, AND NOTES PAYABLE
Convertible Notes payable - consisted of the following at December 31,
2005:
Convertible Promissory note payable, interest rate 5%,
unsecured ............................................. $ 50,000
Convertible Promissory notes, interest rate 10%,
unsecured ............................................. 797,500
---------
Total convertible notes payable ........................ $ 847,500
=========
Notes payable - consisted of the following at December 31, 2005:
Promissory notes, interest rate 8% to 10%, unsecured ... $ 140,000
---------
Total notes payable .................................... $ 140,000
=========
F-68
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Convertible notes and notes payable above due to a related party
principal stockholder were $400,000 and $65,000 at December 31, 2005.
(See Note 9)
The Maturity dates of the Convertible notes payable and notes payable
range from February 28, 2006 to June 30, 2006. There were no repayments
of convertible note or note payable during 2005. The weighted average
interest rate of all short-term notes was 9.6 % at December 31, 2005.
The convertible note holders have the right to convert the debt to
common stock at a fixed conversion rate ranging from $.45 to $.90.
Additionally, the convertible note holders received warrants to
purchase up to 1,104,998 shares of the Company's stock at prices
ranging from $.68 to $.90.
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 are
therefore not considered derivatives. The Company then reviewed the
notes for any beneficial conversion values that existed under EITF 98-5
and 00-27, and determined that based on the lack of a historical market
for the common stock, negative working capital, and no operating
revenues, there was nominal fair value to the common stock and such
nominal value was significantly less than the conversion price of the
notes. Accordingly, there was no beneficial conversion value of the
convertible promissory notes at the issuance dates.
The Company evaluated whether or not the warrants meet the definition
of derivatives under SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities" and related interpretations. The Company
concluded that since the repayment is only in common stock and at a
fixed price within the Company's control, the warrants were not
considered to be derivatives under SFAS 133 or EITF 05-4, or EITF
00-19.
For the same reasons as there being no value assigned to the beneficial
conversion feature of the Notes, no value was allocated to the warrants
at December 31, 2005.
The Company agreed to include the shares issuable upon conversion or
payment of the notes and exercise of the warrants, in the next
applicable registration statement.
In accordance with SFAS 133, the Company intends to continue to
evaluate the nature of the Convertible Notes and Warrants in the
future, and record any changes as appropriate.
NOTE 6 COMMITMENTS AND CONTINGENCIES
Operating Lease:
The Company currently leases space on a month-to-month basis since
December 2005. Prior to that date the Company rented space from a
related party. Rent expense for the period ending December 31, 2005
was $18,465 of which $16,277 was paid to the related party (see Note
9).
F-69
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
NOTE 7 STOCKHOLDERS' DEFICIT
Common Stock Issued for Cash:
On May 16, 2005 the Company issued 833,333 and on December 23, 2005,
issued 5,133,334 shares of common stock to founders for $.0001 per
share or $537 which is reflected as a subscription receivable at
December 31, 2005.
Common Stock Issued for Debt and Services:
All shares of common stock issued in settlement for payment of
services received were valued at an estimated value of the services
to be rendered.
On December 23, 2005, the Company issued 600,000 shares of common
stock having a fair value of $7,500 to its consultants for services
rendered. The shares were valued at approximately $0.0125 per share,
reflecting an estimate of the services' value since the Company's
common stock was not publicly traded and no other reliable estimate
of fair value of the common stock existed.
Common Stock Warrants:
At December 31, 2005, the Company had immediately exercisable
warrants outstanding as follows:
Common Shares Exercise Price Expiration
Under Warrant Per Share Date
------------- -------------- --------------
133,333 $.675 June 2010
133,333 $.900 June 2010
100,000 $.675 July 2010
66,666 $.675 August 2010
444,444 $.675 September 2010
200,000 $.675 October 2010
13,333 $.675 November 2010
13,889 $.675 December 2010
------------
1,104,998
============
A summary of changes in stock warrants during 2005:
2005
---------
Outstanding at beginning of year ............ (0)
Granted ..................................... 1,104,998
Expired or Cancelled ........................ (0)
---------
Balance at December 31, 2005 ................ 1,104,998
=========
NOTE 8 INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate
as a result of the following items:
F-70
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
2005
------
Tax benefit computed at the maximum
federal statutory rate ...................... (34.0)%
Net (increase) due to various basis
differences in assets and liabilities ....... 0.0
Change in valuation allowance .................. 34.0
------
Income tax provision ........................... - %
======
The tax effect of temporary differences at December 31 were as follows:
2005
----------
Asset:
Net operating loss .............................. $ 165,007
Net deferred tax asset before valuation allowance .. 165,007
Less valuation allowance ........................... (165,007)
----------
Net deferred tax asset ............................. $ -
==========
For financial statement purposes, no tax benefit has been reported in
2005 as the Company has had a net operating loss since inception and
realization of the tax benefits is uncertain. Accordingly, a valuation
allowance has been established for the full amount of the deferred tax
asset. The change in the valuation allowance was an increase of
approximately $165,007 in 2005. At December 31, 2005 the Company has a
net operating loss of approximately $485,314 available to offset future
taxable income through the year 2025.
The utilization of the carryforward is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In
addition, utilization of the carryforward may be limited due to
ownership changes as defined in the Internal Revenue Code.
NOTE 9 RELATED PARTIES
Diversified Acquisition Trust, LLC
Geoffrey J. Eiten is the sole beneficial owner of Diversified
Acquisition Trust, LLC ("DAT"). Mr. Eiten, through the Trustee,
exercises sole investment and voting powers over the Trust. On
September 5, 2005 for an investment of $400,000, the Trust was
issued a convertible Promissory Note, bearing 10% annual interest,
convertible to the Company's common stock at a $.90 per share. In
addition, the Company issued a warrant to purchase the Company's
common stock at a price of $.90 per share.
DAT had also provided the Company with short-term loans and at
December 31, 2005 held unsecured promissory notes in the amounts of
$10,000, $30,000, and $25,000 all with a maturity date of February
28, 2006, and bearing an annual interest rate of 10.0%.
DAT owns 1,906,667 shares of the Company's stock as of December 31,
2005.
F-71
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Mr. Eiten was a shareholder and investor but was not employed by the
Company as of December 31, 2005.
Street Venture Partners
Street Venture Partners, LLC is a privately help company owned
equally by Daniel G. Brandano, Dynamic's CEO and Chairman, and his
spouse. At December 31, 2005 Street Venture Partners LLC owned
1,066,667 shares of the Company's common stock.
During 2005 the Company paid office rent to Street Venture Partners,
LLC of $16,277. (See Note 6)
See Note 10 for purchase of asset from this related party.
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.
Claudale Ltd.
Claudale Limited is a Gibraltar-based company that manages a family
trust (which owns no shares of the Company's common stock) for Mr.
Daniel G. Brandano, the Company's CEO and Chairman. Mr. Brandano has
no ownership interest in Claudale Limited and disclaims beneficial
ownership or control of any shares of the Company's common stock
owned by Claudale Limited.
At December 31, 2005, Claudale Ltd. owned 693,333 shares of the
Company's common stock.
Brian J. Brandano
At December 31, 2005, Brian J. Brandano owned 333,333 shares of the
Company's common stock. Brian J. Brandano was not employed by the
Company at December 31, 2005, and is the son of Daniel G. Brandano,
the Company's CEO and Chairman.
NOTE 10 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 the Company 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.
F-72
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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, DynEco Corporation ("DynEco") entered into an
agreement with the former shareholders of the Company, under which
DynEco acquired all of the outstanding capital stock of the Company,
and the Company became a wholly owned subsidiary of DynEco.
As consideration for its acquisition of the outstanding capital
stock of the Company, DynEco issued an aggregate of 197,000 shares
of its Series A Preferred Stock to the former shareholders of the
Company.
Issuance of the Series A Preferred Stock in exchange for the
outstanding capital stock of the Company pursuant to the Stock
Exchange Agreement resulted in a change in control of DynEco where
(a) the former shareholders of the Company acquired voting rights
over approximately 83% of the currently outstanding voting
securities of DynEco and (b) the designees of the former
shareholders of the Company 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 DynEco when DynEco's Articles of Incorporation were amended to
increase the number of authorized shares of DynEco common stock
sufficient to permit full conversion of the Series A Preferred
Stock. DynEco also agreed that the currently outstanding options and
warrants of the Company would be exchanged for options and warrants
to purchase an aggregate of 1,493,887 post reverse shares of common
stock of DynEco, and that the currently outstanding convertible
promissory notes of the Company would become convertible into
1,386,111 post reverse shares of common stock of DynEco.
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 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 the Company, and the operations of 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:
F-73
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 DynEco 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 DynEco Corporation
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.
At the Special Meeting of Shareholders, the following persons were
elected to serve as directors of DynEco Corporation 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
F-74
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 DynEco Corporation, 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, DynEco 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, DynEco
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 DynEco 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, DynEco 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 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,
DynEco 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.
F-75
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
DynEco has 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 DynEco
will be subject to the payment of liquidated damages to the note
holders. In addition, DynEco has 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 DynEco
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 the Company 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, DynEco 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 DynEco and Dr. Edwards. The 1994
Agreement granted DynEco 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. DynEco
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 DynEco
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 DynEco are set forth in Articles of
Amendment to DynEco'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
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 DynEco'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 DynEco'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 DynEco common stock
F-76
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
at such time as DynEco 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 DynEco's 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 the Company 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 DynEco. Subsequent to the increase in
the number of shares of common stock DynEco is authorized to issue,
the 197,000 outstanding shares of Series A Preferred Stock were
exchanged for 6,566,667 shares of DynEco 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 DynEco is authorized to issue to
300,000,000. On February 2, 2006, DynEco 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 DynEco 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, DynEco entered into a series of documents with
MMA Capital, LLC, under which DynEco 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 DynEco at the rate of $1.00 per
share, subject to adjustment in the event DynEco issues 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. DynEco 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 DynEco 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,
F-77
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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. DynEco's obligations under the promissory note are
collateralized by a security interest in substantially all of
DynEco's assets.
In connection with the transaction, DynEco issued a common stock
purchase warrant in favor of MMA Capital to purchase up to 2,000,000
shares of DynEco'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 DynEco issues 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 DynEco
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.
Additional shares of DynEco 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 DynEco
common stock at a rate of less than $1.50 per share.
F-78
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 DynEco common stock, on or before the Maturity
Date, at a rate of $1.50 per share. The conversion rate may be
adjusted downward if DynEco, 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 DynEco 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 DynEco 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. DynEco has agreed to
include resale of the shares issued, and those issuable upon
conversion of the Debenture in the next registration statement filed
by DynEco. 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, DynEco filed Articles of Correction with the
Secretary of State of Minnesota, to change DynEco'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
DynEco's common stock. On February 28, 2006, DynEco 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 Dynamic Leisure
Corporation's 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 Dynamic Leisure
Corporation (DLC) by its transfer agent.
F-79
DYNAMIC LEISURE GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
The accompanying financial statements for the period from May 16,
2005 (inception) to December 31, 2005 have been retroactively
adjusted for the subsequent affect of the reverse stock split and
the Stock Exchange Agreement of January 13, 2006 with DynEco
Corporation.
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 DLC 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 DLC common stock may be issued if DLC, as part
of any subsequent business acquisitions on or before December 31,
2006, issues DLC 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 DLC
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 DLC'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 DLC, 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 DLC 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 DLC receives 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. DLC has
agreed to include resale of the shares issued and those issuable
upon conversion of the Note in the next registration statement filed
by DLC.
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-80
CHANGES IN L'ATTITUDES, INC.
INDEX TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
Page(s)
-------
Report of Independent Registered Public Accounting Firm F-82
Balance Sheets F-83
Statements of Operations F-84
Statements of Changes in Stockholder's Equity F-85
Statements of Cash Flows F-86
Notes to Financial Statements F-87 - 92
F-81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Changes in L'Attitudes, Inc.
Tampa, Florida
We have audited the accompanying balance sheets of Changes In L'Attitudes, Inc.
as of December 31, 2005 and 2004 and the related statements of operations,
changes in stockholder's equity, and cash flows for the years then ended. These
financial statements are the responsibility of the management of Changes In
L'Attitudes, Inc. Our responsibility is to express an opinion on these 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
financial statements are free of material misstatement. The Company is not
required at this time, to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Changes in L'Attitudes, Inc. as
of December 31, 2005 and 2004 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
April 21, 2006
F-82
Changes in L'Attitudes, Inc.
Balance Sheets
As of December 31, 2005 and 2004
ASSETS
2005 2004
---- ----
Current Assets
Cash ............................................ $ 546,725 $ 692,054
Short term investments, restricted .............. 69,548 68,007
Prepaid travel .................................. 142,110 733,954
Other current assets ............................ 18,467 9,441
---------- ----------
Total Current Assets ......................... 776,850 1,503,456
Property and equipment, net ........................ 54,455 67,160
---------- ----------
Total Assets ................................. $ 831,305 $1,570,616
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and other accrued liabilities .. $ 57,613 $ 62,713
Deferred revenue ................................ 594,698 1,242,061
Customer deposits ............................... 111,886 70,448
---------- ----------
Total Current Liabilities .................... 764,197 1,375,222
---------- ----------
Total Liabilities ............................ $ 764,197 $1,375,222
---------- ----------
Commitments and contingencies (see Note 5)
Stockholder's Equity
Common stock, $1.00 par value, 7,500 shares
authorized, issued and outstanding ........... $ 7,500 $ 7,500
Retained earnings ............................... 59,608 187,894
---------- ----------
Total Stockholder's Equity ................... 67,108 195,394
---------- ----------
Total Liabilities and Stockholder's Equity ... $ 831,305 $1,570,616
========== ==========
See accompanying notes to the financial statements
F-83
Changes in L'Attitudes, Inc.
Statements of Operations
For the Years Ended December 31, 2005 and 2004
Years Ended December 31,
------------------------
2005 2004
---- ----
Revenues.................................... $5,737,408 $6,397,633
Cost of revenues ........................... 4,701,541 5,155,386
---------- ----------
Gross Profit ............................ 1,035,867 1,242,247
Operating Expenses:
General and administrative .............. 822,409 886,851
Depreciation ............................ 13,392 12,815
---------- ----------
Total Operating Expenses ............. 835,801 899,666
---------- ----------
Income from Operations ............... 200,066 342,581
Other Income
Interest income ......................... 15,194 5,179
---------- ----------
Net Income ........................... $ 215,260 $ 347,760
========== ==========
See accompanying notes to the financial statements
F-84
Changes in L'Attitudes, Inc.
Statement of Changes in Stockholder's Equity
For the Years Ended December 31, 2005 and 2004
Total
Common Stock Retained Stockholder's
Shares Amount Earnings Equity
---------------- ---------- -------------
BALANCE AT DECEMBER 31, 2003 7,500 $7,500 $ 18,739 $ 26,239
Distributions to stockholder - - (178,605) (178,605)
Net Income ................. - - 347,760 347,760
----- ------ ---------- ---------
BALANCE AT DECEMBER 31, 2004 7,500 7,500 187,894 195,394
Distributions to stockholder - - (343,546) (343,546)
Net Income ................. - - 215,260 215,260
----- ------ ---------- ---------
BALANCE AT DECEMBER 31, 2005 7,500 $7,500 $ 59,608 $ 67,108
===== ====== ========== =========
See accompanying notes to the financial statements
F-85
Changes in L'Attitudes, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
Year Ended December 31,
-----------------------
2005 2004
---- ----
Cash Flows from Operating Activities:
Net income ........................................ $ 215,260 $ 347,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................... 13,392 12,815
(Increase) decrease in current assets:
Prepaid travel costs ........................... 591,844 (230,453)
Other current assets ........................... (9,026) 7,977
Increase (decrease) in current liabilities:
Accounts payable and other accrued liabilities . (5,100) 20,873
Deferred revenue ............................... (647,363) 33,077
Customer deposits .............................. 41,438 (7,096)
--------- ---------
Net Cash Provided By Operating Activities ...... 200,445 184,953
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............. (687) (2,545)
--------- ---------
Net Cash Used In Investing Activities .......... (687) (2,545)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in short term instrument ............... (1,541) (68,007)
Distributions to stockholder ...................... (343,546) (178,605)
--------- ---------
Net Cash Used in Financing Activities ......... (345,087) (246,612)
--------- ---------
Net Decrease in Cash ................................. (145,329) (64,204)
Cash at Beginning of Year ............................ 692,054 756,258
--------- ---------
Cash at End of Year .................................. $ 546,725 $ 692,054
========= =========
See accompanying notes to the financial statements
F-86
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
NOTE 1 NATURE OF BUSINESS
Changes in L'Attitudes, Inc. ("CLA" or "the Company") is in the travel
industry, specializing in providing resort destination travel packages
to the Caribbean and Eastern Mexico. Almost all of its business
originates through the Internet via its on-line site. Founded in 1985,
the Company was incorporated in the state of Florida with its office
located at 3080 East Bay Drive, Largo, Florida.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
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.
Cash is maintained with in a single financial institution in the
United States. Deposits with this bank may exceed the amounts of
insurance provided on such deposits. Generally, the deposits may be
redeemed on demand and, therefore, bear minimal risk.
Short-term Investments, Restricted:
The Company has an investment in a certificate of deposit as part of
an agreement to have a letter of credit issued from the bank. This
certificate of deposit is classified as a short-term investment
since its six month term is greater than the three month term used
for consideration as a cash equivalent.
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,
ranging from three to ten years.
Expenditures for additions and improvements greater then $500 are
capitalized, while repairs and maintenance are expensed as incurred.
When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated deprecation account are
relieved, and any gain or loss is included in operations.
F-87
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
Revenue Recognition:
The Company follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" and EITF 99-19 "Reporting Revenue Gross as
a Principal versus Net as an Agent". In general, our Company's
revenue recognition policy is to report merchant sales transactions
at the gross purchase price at the date of travel, except for trip
insurance, which is recognized at the time of purchase, as the
insurance is non-refundable. Since it is also the Company's policy
to be paid by the customer in advance, monies received in advance of
a scheduled travel date are recorded as either deferred revenue, in
the case of payment for an entire trip, or as a customer deposit
(liability), if only partial payment has been received. The Company
believes that nearly all of its transactions should be recorded at
gross, since among other things, it acts as the merchant of record
in the wholesale transaction, is the primary obligor to the
customer, controls sole authority over selling prices, and is solely
responsible for making payments to vendors.
Income Taxes:
For the years ending December 31, 2005 and 2004, the Company was an
S-Corporation and therefore did not record income tax expense and
related deferrals since the income or loss in any given year are
passed through to the owner of the Company.
Concentration of Credit Risk and Other Concentrations
The Company has a diverse customer base since it sells to customers
on the Internet regardless of point of origination. There are no
customers who represent over ten percent of revenue. The Company
does have geographical risk with destinations since over 95% percent
of its business is travel to the Caribbean region with Jamaica
typically being 70% or greater. This concentration potentially
exposes the Company to both political and weather risks of this
region.
Two lodging suppliers, with 14 different properties, were
responsible for a combined total of approximately 36% and 38% of
total rooms provided in the years ended December 31, 2005 and 2004,
respectively.
The Company has very little credit risk since the vast majority of
its travel products are paid for in advance. The primary risk of
loss for the Company arises from potentially fraudulent purchases on
credit cards and from credit given to customers by credit card
companies. The loss for credit risk has historically been nominal,
therefore there is no reserve for losses recorded.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments
for which it is practicable to estimate the value. For purpose of
this disclosure, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
F-88
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
The Company's financial instruments include cash, short-term
investments, accounts payable, and accrued expenses. The fair values
of cash, short-term investments, accounts payable and accrued
expenses approximated carrying values due to the short-term nature
of these instruments.
Advertising
The primary vehicle for advertising the Company's products is its
Internet website. The Company occasionally also produces some
printed materials. Advertising expense is spent primarily on search
engine optimizing and website enhancement to increase visibility for
customers to find the website when searching for travel products,
and improve the features and functionality. Advertising costs are
expensed when incurred and amounted to approximately $28,441 and
$16,381 for the years ended December 31, 2005 and December 31, 2004,
respectively. Monies received from suppliers as co-operative
advertising incentives were used to offset advertising expense in
each of the years ending December 31, 2005 and 2004.
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.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
F-89
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
ESTIMATED
USEFUL LIFE
2005 2004 IN YEARS
--------- -------- -----------
Office furniture and equipment $ 32,639 $ 31,952 3-10
Leasehold improvements 76,809 76,809 10
--------- --------
Total property and equipment 109,448 108,761
Less accumulated depreciation (54,993) (41,601)
--------- --------
Property and equipment, net $ 54,455 $ 67,160
========= ========
Depreciation expense was $13,392 in 2005 and $12,815 in 2004.
NOTE 4 PREPAID TRAVEL
The Company is required to pay for hotels and airline tickets before
the trip occurs. Payments made to vendors in advance are recorded to
the prepaid travel account. The Company recognizes the expense when the
trip is taken. The balances at December 31, 2005 and 2004 were $142,110
and $733,954, respectively
NOTE 5 COMMITMENTS AND CONTINGENCIES
Letter of Credit
The Company has a letter of credit outstanding with a balance at
December 31, 2005 and 2004, of $70,000 and $67,600, respectively,
payable to the Airlines Reporting Corporation to allow the purchase of
airline tickets through a computerized ticket system. As part of the
letter of credit agreement, the Company is required to keep a
certificate of deposit with the issuer of the letter of credit for
approximately the amount of the letter of credit.
NOTE 6 RELATED PARTY TRANSACTIONS
Office Rental:
The Company currently rents its office space from its owner on a month
to month basis. The company paid rent of $42,616 and $42,579 in 2005
and 2004, respectively.
The above related party transaction is not necessarily indicative of
the amounts that would have been incurred had comparable transactions
been entered into with independent parties.
NOTE 7 DEFERRED REVENUE
The Company currently carries large deferred revenue balances related
to trips purchased and paid for by the customer, but for where the trip
has not been taken as of year end. The Company recognizes the revenue
when the trip is taken. The balances at December 31, 2005 and 2004 were
$594,698 and $1,242,061, respectively.
F-90
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
NOTE 8 CUSTOMER DEPOSITS
Customer deposits represent money received for trips not fully paid
for. When the trip is fully paid for the balance is transferred to
deferred revenue. The balances at December 31, 2005 and 2004 were
$111,886 and $70,448, respectively.
NOTE 9 INCOME TAXES
For the years ending December 31, 2005 and 2004, the Company was an
S-Corporation and therefore did not record income tax expense and
related deferrals, since the income or loss in any given year are
passed through to the owner of the Company.
The following table presents summary pro-forma information for the
years ended December 31, 2005 and 2004, as if the Company did not have
an S-Corporation status, and provided for taxes using an estimated tax
rate in each year of 37.63%
2005 2004
---- ----
Income before taxes, (audited) ....... $215,260 $347,760
Provision for income taxes (pro forma) 81,002 130,862
-------- --------
Net income (pro forma) ............... $134,258 $216,898
======== ========
NOTE 10 RETIREMENT PLAN
During 2005 and 2004, the Company had a Simple IRA retirement savings
plan available to employees. The Company provided a one for one match
on saving by the employee up to one percent of gross salary. The
expense related to this match for 2005 and 2004 was $2,771 and $3,084,
respectively.
NOTE 11 SUBSEQUENT EVENTS
On February 8, 2006 the owner of the Company consummated the sale of
all of the issued and outstanding capital stock of the Company to
Dynamic Leisure Corp., Inc (Dynamic Leisure), for a sale price of
$1,750,000. The sales price consists of a combination of cash
($640,000), shares of Dynamic Leisure 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 2005. The balance of the cash payment will
be reduced by any trade payables in excess of short term liquid assets.
Additional shares of Dynamic Leisure common stock may be issued to the
owner of the Company if Dynamic Leisure, as part of any subsequent
business acquisitions on or before December 31, 2006, issues to an
acquiree/seller Dynamic Leisure common stock at a rate of less than
$1.50 per share.
F-91
Changes in L'Attitudes, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
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 Dynamic Leisure common stock, on or before the
Maturity Date, at a rate of $1.50 per share. The conversion rate may be
adjusted downward if Dynamic Leisure, 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 Dynamic Leisure 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 Dynamic Leisure 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. Dynamic Leisure
has agreed to include resale of the shares issued, and those issuable
upon conversion of the Debenture in the next registration statement
filed by Dynamic Leisure. The Convertible Debenture is secured by a
lien on the assets of CLA.
Due to the sale noted above, the Company will lose its status as an
S-Corporation per US Federal Income Tax guidelines. Therefore, the
Company will be required to provide for any federal or state income
taxes owed, instead of being passed through to the owner.
F-92
Changes In L'Attitudes, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements
for the Year Ended December 31, 2005
Index
Page(s)
-------
Unaudited Pro Forma Combined Condensed Financial Statements Description. F-94
Unaudited Pro Forma Combined Condensed Statement of Income for the Period F-95
and Year Ended December 31, 2005.
Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31, F-96
2005.
Notes to the Unaudited Pro Forma Combined Condensed Statement of Income F-97-98
and Balance Sheet.
F-93
Dynamic Leisure Corporation
Unaudited Pro Forma Combined
Condensed Financial Statements
The following unaudited pro forma combined condensed financial statements relate
to DynEco Corporation, ("DynEco"), now known as Dynamic Leisure Corporation
("Dynamic"), the acquisition of all the issued and outstanding shares of capital
stock of Dynamic Leisure Group, Inc, on January 13, 2006 and the acquisition of
all the issued and outstanding shares of capital stock of Changes in
L'Attitudes, Inc ("CLA"), on February 8, 2006.
On January 13, 2006, DynEco acquired all of the outstanding capital stock of
Dynamic Leisure and Dynamic Leisure became a wholly owned subsidiary of DynEco.
As consideration for its acquisition of the outstanding capital stock of Dynamic
Leisure, DynEco issued an aggregate of 197,000 shares of its Series A Preferred
Stock to the former shareholders of Dynamic Leisure.
Issuance of the Series A Preferred Stock in exchange for the outstanding capital
stock of Dynamic Leisure pursuant to the Stock Exchange Agreement resulted in a
change in control of DynEco where (a) the former shareholders of Dynamic Leisure
acquired voting rights over approximately 83% of the currently outstanding
voting securities of DynEco and (b) the designees of the former shareholders of
Dynamic have been appointed as the executive officers and a majority of the
board of directors. The Series A Preferred Stock converted into 6,566,667 shares
of the common stock. At such time as DynEco's Articles of Incorporation were
amended to increase the number of shares of common stock DynEco is authorized to
issue sufficiently to permit full conversion of the Series A Preferred Stock.
Currently outstanding options and warrants of Dynamic Were exchanged for options
and warrants to purchase an aggregate of 1,493,887 shares of common stock, and
the currently outstanding convertible promissory notes of Dynamic would become
convertible into 1,386,111 shares of common stock.
On February 28, 2006, the Company 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.
On January 31, 2006, shareholders approved a 1:30 reverse split of DynEco's
common stock, to be effective at the close of business on March 3, 2006. As a
result of the reverse stock split, every thirty (30) shares of the Company's
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.
The historical financial statements of Dynamic Leisure Group, Inc. are for the
period from May 16, 2005 (Inception) to December 31, 2005. The historical
financial statements for DynEco Corporation and Changes in L'Attitudes are for
the 12 months ending December 31, 2005. The financial statements of both DynEco
and Dynamic have been adjusted for the subsequent affect of the 1:30 reverse
stock split.
The CLA purchase price of $1,750,000 consists of a combination of cash
($640,000), shares of Dynamic Leisure common stock (340,000 shares), and a
one-year secured Convertible Promissory Note 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 2005. The balance of the cash payment will be reduced by any trade payables
in excess of short term liquid assets.
F-94
Additional shares of Dynamic Leisure common stock may be issued to owners of the
Company, as part of any subsequent business acquisitions on or before December
31, 2006, issues to the acquiree/seller Dynamic Leisure common stock at a rate
of less than $1.50 per share.
The Convertible Promissory Note is payable with interest at the rate of 9% per
annum, and matures on February 7, 2007 ("Maturity Date"). The Promissory Note is
convertible into Dynamic Leisure common stock, on or before the Maturity Date,
at a rate of $1.50 per share. The conversion rate may be adjusted downward under
certain circumstances, but no lower than $1.00 per share. Early repayment of the
Convertible Promissory Note, may be required, based on certain levels of
additional financing received, up to 100% of the outstanding principal balance
if Dynamic receives in excess of $5,000,000 in cumulative net external
financing. The Convertible Debenture is secured by a lien on the assets of CLA.
The unaudited pro forma combined condensed financial statements of income
reflect the results of operations for the 12 months ended December 31, 2005 for
DynEco and CLA and for the period May 16 (inception) to December 31, 2005 for
Dynamic Leisure, with pro forma adjustments as if the acquisition of CLA had
occurred at the beginning of the period (January 1, 2005), and as if the
acquisition of Dynamic Leisure had occurred on May 16, 2005. The unaudited pro
forma combined condensed balance sheet is based upon the purchase method of
accounting and each company's individual historical financial position at
December 31, 2005 with pro forma adjustments as if the acquisitions had occurred
on December 31, 2005. The pro forma adjustments are described in the
accompanying notes and give effect to events that are (a) directly attributable
to the acquisitions, (b) factually supportable, and (c) expected to have a
continuing effect.
These pro forma combined condensed financial statements should be read in
conjunction with the audited consolidated financial statements and related
notes, included in Dyneco's 2005 Form 10-KSB, Dynamic Leisure's audited
financial statements, and CLA's audited financial statements.
The pro forma adjustments do not reflect anticipated additional benefits of
revenue growth or cost savings from synergies which may be realized nor
integration costs to be incurred subsequent to the acquisitions.
The unaudited pro forma combined condensed financial statements presented are
for informational purposes only and do not necessarily represent what the
Company's financial position or results of operations as of the dates or for the
periods presented would have been had the acquisition occurred on such dates
indicated, or to project the combined Company's financial position or results of
operations for any future date or period. For purposes of preparing the
Company's consolidated financial statements subsequent to the acquisition, the
Company will establish a new basis for CLA's assets and liabilities based upon
the fair values thereof and the purchase price, including the costs of the
acquisition. A final determination of the allocation of purchase price to the
assets acquired and liabilities assumed based on their respective fair values
has not yet been completed. Therefore, the pro forma adjustments included in the
pro forma combined condensed financial information should be treated as
preliminary and being made solely for the purpose of preparing the pro forma
combined condensed financial statements. Following an analysis of the fair value
of CLA's assets and liabilities, any appropriate purchase accounting adjustments
will be made and reported. The actual combined financial position and results of
operations will likely differ, possibly significantly, from the pro forma
amounts included herein.
F-95
Dynamic Leisure Corporation
Unaudited Pro Forma Combined Condensed Statement of Income
For the 12 months ended December 31, 2005
Pro Forma
Combined
Historical Statement
Historical Dynamic Historical Acquisitions of Income
DynEco (a) Leisure (a) Changes (a) Adjustments (a) Ref Total
---------- ----------- ----------- --------------- --- ----------
Revenue ................................... $ - $ - $5,737,408 $ - $5,737,408
Cost of revenue ........................... - - 4,701,541 - 4,701,541
---------- ---------- ---------- -------- ----------
Gross Profit .............................. - - 1,035,867 - 1,035,867
General and administrative expenses ....... 497,968 455,954 835,801 - 1,789,723
---------- ---------- ---------- -------- ----------
Income from operations .................... $ (497,968) $ (455,954) $ 200,066 $ - $ (753,856)
Other Income/(Expense)
Interest income ......................... 1,257 - 15,194 - 16,451
Interest expense ........................ (199,041) (29,360) - (93,600) (c) (322,001)
Other Income ............................ 169,287 - - - 169,287
---------- ---------- ---------- -------- ----------
Total Other Income/(Expense) .......... (28,497) (29,360) 15,194 (93,600) (136,263)
---------- ---------- ---------- -------- ----------
Income before taxes ................... (526,465) (485,314) 215,260 (93,600) (890,119)
Provision for income taxes ............ - - - - (d) -
---------- ---------- ---------- -------- ----------
Net income ............................ $ (526,465) $ (485,314) $ 215,260 $(93,600) $ (890,119)
Net Loss per share - Basic and Diluted .... $ (0.47) $ (.07) $ (.63) $ - $ (0.11)
Weighted average number of shares
outstanding during the period -
basic and diluted ....................... 1,125,327 6,566,667 340,000 - 8,031,994
See accompanying notes to unaudited pro forma combined condensed financial statements.
F-96
Dynamic Leisure Corporation
Unaudited Pro Forma Combined Condensed Balance Sheet
December 31, 2005
Pro Forma
Historical Acquisition Combined
Historical Dynamic Historical Adjustments Balance Sheet
Dyneco (b) Leisure (b) Changes (b) (b) Ref Total
----------- ----------- ----------- ----------- --- -------------
Cash .......................................... $ (232) $ 19,563 $ 546,725 $ (200,000) (e) $ 366,056
Short term investments, restricted ............ - - 69,548 - 69,548
Prepaid travel ................................ - - 142,110 - 142,110
Other Current Assets .......................... - 19,136 18,467 - 37,603
----------- ---------- --------- ---------- -----------
Total Current Assets ........................ (232) 38,699 776,850 (200,000) 615,317
Property and equipment, net ................... 33,418 646,713 54,455 - 734,586
Other Assets
Debt issue costs, net ....................... 521 - - - 521
Deposits .................................... 28,434 1,760 - - 30,194
Goodwill .................................... - - - 1,682,892 (e) 1,682,892
----------- ---------- --------- ---------- -----------
Total Other Assets .......................... 28,955 1,760 - 1,682,892 1,713,607
----------- ---------- --------- ---------- -----------
Total Assets ................................ $ 62,141 $ 687,172 831,305 $1,482,892 $ 3,063,510
Current Liabilities
Accounts payable and other accrued expenses . $ 366,575 $ 148,126 $ 57,613 $ - $ 572,314
Deferred Revenue ............................ - - 594,698 - 594,698
Customer deposits ........................... - - 111,886 - 111,886
Convertible promissory notes, net of discount 115,380 847,500 - 600,000 (e) 1,562,880
Warrant liability ........................... 240,592 - - - 240,592
Accrued Interest ............................ 59,930 29,360 - - 89,290
Loans payable ............................... 213,640 - - - 213,640
Notes Payable - Current ..................... 37,216 140,000 - 440,000 (e) 617,216
----------- ---------- --------- ---------- -----------
Total Current Liabilities ................... 1,033,333 1,164,986 764,197 1,040,000 4,002,516
Loans and Notes payable ....................... 134,719 - - - 134,719
----------- ---------- --------- ---------- -----------
Total Liabilities ........................... $ 1,168,052 $1,164,986 $ 764,197 $1,040,000 $ 4,137,235
Stockholder's Equity
Common Stock $.01 par value, 300,000,000
shares authorized, 9,331,016 issued and
outstanding ................................ 11,580 65,666 - 3,400 (e) 80,646
Paid in Capital ............................. 7,543,532 (57,629) 7,500 506,600 (e) 8,000,003
Stock subscription receivable ............... - (537) - - (537)
Retained Earnings/(Accumulated Deficit) ..... (8,661,023) (485,314) 59,608 (67,108) (e) (9,153,837)
----------- ---------- --------- ---------- -----------
Total Stockholders' Equity .................. (1,105,911) (477,814) 67,108 442,892 (1,073,725)
----------- ---------- --------- ---------- -----------
Total Liabilities and Stockholders' Equity .. 62,141 687,172 831,305 1,482,892 3,063,510
See accompanying notes to unaudited pro forma combined condensed financial statements.
F-97
Dynamic Leisure Corporation
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements
(a) The unaudited pro forma combined condensed statement of income reflects the
combined historical financial statements of Dynamic Leisure Group, Inc. for the
period from May 16, 2005 (inception) to December 31, 2005. The historical
financial statements for DynEco Corporation and Changes in L'Attitudes, Inc.,
("CLA") are for the 12 months ending December 31, 2005. The historical results
are presented in the unaudited pro forma income statement as if the acquisitions
had occurred at the beginning of the period or for Dynamic, at its inception.
The financial statements of both DynEco and Dynamic have been adjusted for the
subsequent affect of a 1:30 reverse stock split.
The pro forma adjustments do not reflect benefits of additional revenue or
reduced expenses from the combinations nor acquisition or integration costs
subsequent to the acquisitions, which will cause actual earnings results that
will vary from the pro forma earnings shown. A final determination of possible
required purchase accounting adjustments has not yet been made, which could also
affect the pro form earnings presented.
(b) The unaudited pro forma combined condensed balance sheet reflects the
combined historical financial position of DynEco Corporation, Dynamic Leisure
Group, Inc., and Changes in L'Attitudes, Inc., as if the acquisitions had
occurred on December 31, 2005. Certain reclassifications were made from
historical financial reports for comparability and consistency. Dynamic Leisure
Group, Inc, was acquired through a share exchange agreement, in which no cash or
new additional liabilities were assumed other then those already recorded by
Dynamic or DynEco. CLA was acquired for a total purchase price of $1,750,000
consisting of $200,000 in cash, a short term note payable of 440,000, a
convertible note payable of $600,000 and 340,000 shares of common stock, valued
at $510,000.
(c) Adjustment represents interest income to finance the acquisition of CLA, as
if amounts due for both a short term note payable of $440,000 and a convertible
note payable in the amount of $600,000 were outstanding for the entire 12 month
period, accruing interest at the 9% annual stated rate.
(d) There is no provision or benefit for income taxes recorded, based on the
historical operating losses previously reported by DynEco and Dynamic.
(e) Under the purchase method of accounting, assets and liabilities are reported
at their estimated fair value, which may result in an increase or decrease from
previously reported amounts. There are no adjustments presented to the value of
existing assets or liabilities of CLA, based on an initial valuation that they
are already reported at their estimated fair value. However, the analysis of
purchase accounting valuations is still continuing and may or may not result in
future adjustments. The amount of the CLA purchase price that exceeded net
assets is presented as goodwill, and prior CLA equity that represents the book
value of net assets acquired was eliminated.
F-98
Island Resort Tours, Inc., and International Travel and Resorts, Inc.
COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
INDEX
Page(s)
-------
Report of Independent Registered Public Accounting Firm ............... F-100
Combined Balance Sheets ............................................... F-101
Combined Statements of Operations ..................................... F-102
Combined Statement of Changes in Stockholder's (Deficit) Equity ....... F-103
Combined Statements of Cash Flows ..................................... F-104
Notes to Combined Financial Statements ................................F-105-112
F-99
Report of Independent Registered Public Accounting Firm
________________________________________________________________________________
Board of Directors
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
New York, New York
We have audited the accompanying combined balance sheets of Island Resort Tours,
Inc. and International Travel and Resorts, Inc. (the "Companies") as of December
31, 2005 and 2004 and the related combined statements of operations, changes in
stockholder's (deficit) equity, and cash flows for the years then ended. These
combined financial statements are the responsibility of the management of the
Companies. Our responsibility is to express an opinion on these combined
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 combined
financial statements are free of material misstatement. The Companies are not
required at this time to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companies' internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall combined financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Companies as of
December 31, 2005 and 2004 and the results of their operations and cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying combined financial statements have been prepared assuming that
the Companies will continue as going concerns. As discussed in Note 2, the
Companies incurred net losses of $510,961 and $91,061 during the years ended
December 31, 2005 and 2004, respectively, have used cash in operations of
$252,422 and $504,911 for the years ended December 31, 2005 and 2004,
respectively, and has a working capital deficiency of $384,384 and an
accumulated deficit of $451,402 at December 31, 2005. These factors, among
others, raise substantial doubt about the Companies' ability to continue as
going concerns. Management's plans in regard to these matters are also described
in Note 2. The combined financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
May 1, 2006
F-100
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
Combined Balance Sheets
As of December 31, 2005 and 2004
ASSETS
2005 2004
---- ----
Current Assets
Cash .................................................. $ 201,174 $ 221,879
Short term investments, restricted .................... 83,133 86,495
Accounts Receivable, net of allowance for
doubtful accounts of $14,515 at 2005 and 2004 ....... 247,271 250,311
Other current assets .................................. 75,356 119,533
Taxes Receivable ...................................... - 55,000
--------- ---------
Total Current Assets ................................ 606,934 733,218
Property and equipment, net ............................. 32,558 35,835
--------- ---------
Deposits ................................................ 51,135 51,135
--------- ---------
Total Assets ........................................ $ 690,627 $ 820,188
========= =========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current Liabilities
Accounts payable ...................................... $ 346,212 $ 213,231
Other accrued liabilities ............................. 77,907 66,562
Deferred revenue ...................................... 78,290 82,635
Customer deposits ..................................... 238,454 247,490
Line of credit ........................................ 200,000 -
Due to stockholder .................................... 50,000 -
Taxes payable ......................................... 455 -
--------- ---------
Total Current Liabilities ........................... 991,318 609,918
--------- ---------
Total Liabilities ................................... $ 991,318 $ 609,918
--------- ---------
Commitments and contingencies (see note 6)
Stockholder's (Deficit) Equity
Common stock .......................................... $ 11,000 $ 11,000
Contributed Capital ................................... 139,711 139,711
Accumulated (Deficit) Retained Earnings ............... (451,402) 59,559
--------- ---------
Total Stockholder's (Deficit) Equity ............... (300,691) 210,270
--------- ---------
Total Liabilities and Stockholder's (Deficit) Equity $ 690,627 $ 820,188
========= =========
See accompanying notes to the combined financial statements
F-101
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
Combined Statements of Operations
For the Years Ended December 31, 2005 and 2004
Years Ended December 31,
-----------------------------
2005 2004
---- ----
Total Revenues ............................. $ 2,579,641 $ 3,115,163
Cost of Revenues ........................... 1,518,548 1,370,386
----------- -----------
Gross Profit ............................... 1,061,093 1,744,777
Operating Expenses
General and administrative ............... 1,543,094 1,866,894
Depreciation ............................. 24,922 25,766
----------- -----------
Total Operating Expenses ............... 1,568,016 1,892,660
----------- -----------
Loss from Operations ................... (506,923) (147,883)
Other (income) expense
Interest income .......................... (2,235) (1,296)
Interest expense ......................... 7,658 -
----------- -----------
Total Other(Income) Expense ........... 5,423 (1,296)
----------- -----------
Net loss before income taxes ........... (512,346) (146,587)
Income tax benefit ..................... (1,385) (55,526)
Net Loss ............................... $ (510,961) $ (91,061)
=========== ===========
See accompanying notes to the combined financial statements
F-102
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
Combined Statement of Changes in Stockholder's (Deficit) Equity
For the Years Ended December 31, 2005 and 2004
Retained
Earnings Total
Common Stock ------------ Stockholders'
------------------- Contributed (Accumulated Equity
Shares Amount Capital Deficit) (Deficit)
------ -------- ----------- ------------ -------------
Balance at December 31, 2003 300 $ 11,000 $ 139,711 $ 150,620 $ 301,331
Net loss ................... - - - (91,061) (91,061)
------ -------- --------- --------- ---------
Balance at December 31, 2004 300 11,000 139,711 59,559 210,270
Net loss ................... - - - (510,961) (510,961)
------ -------- --------- --------- ---------
Balance at December 31, 2005 300 $ 11,000 $ 139,711 $(451,402) $(300,691)
====== ======== ========= ========= =========
See accompanying notes to the combined financial statements
F-103
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
Combined Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
Year Ended December 31,
-----------------------
2005 2004
---- ----
Cash Flows from Operating Activities:
Net loss ........................................... $(510,961) $ (91,061)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation ................................... 24,922 25,766
Changes in operating assets and liabilities
Accounts receivable ............................ 3,040 220,742
Other current assets ........................... 44,177 (45,455)
Other assets ................................... - (22,500)
Taxes receivable ............................... 55,000 (55,000)
Taxes payable .................................. 455 (106,986)
Accounts payable ............................... 132,981 (298,654)
Other accrued liabilities ...................... 11,345 (64,491)
Deferred revenue ............................... (4,345) 46,770
Customer deposits .............................. (9,036) (114,042)
--------- ---------
Net Cash Used By Operating Activities .......... (252,422) (504,911)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .............. (21,645) (16,064)
Proceeds from short term instrument ................ 3,362 -
Investment in short term instrument ................ - (6,415)
--------- ---------
Net Cash Used In Investing Activities .......... (18,283) (22,479)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit ....................... 200,000 -
Stockholder advances ............................... 50,000 -
--------- ---------
Net Cash Provided by Financing Activities ...... 250,000 -
--------- ---------
Net Decrease in Cash ................................. (20,705) (527,390)
Cash at Beginning of Year ............................ 221,879 749,269
--------- ---------
Cash at End of Year .................................. $ 201,174 $ 221,879
========= =========
SUPPLEMENTAL DISCLOSURESE OF CASH FLOW INFORMATION
- --------------------------------------------------
Cash paid during the year for:
Interest ....................................... 7,658 -
Income taxes ................................... - 136,847
See accompanying notes to the combined financial statements
F-104
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1 NATURE OF BUSINESS
Island Resort Tours, Inc.("IRT") and International Travel and Resorts,
Inc. ("ITR") (combined to be known as the "Companies") are wholesalers
of Caribbean travel primarily through established networks of travel
agencies, and a provider of telephone and marketing support to a
variety of Caribbean locations. International Travel and Resorts, Inc.
was founded in 1975, and is incorporated in the state of New York.
Island Resort Tours, Inc. was founded in 1989 and is also incorporated
in the state of New York. Both companies are located at 300 East 40th
Street, New York, New York.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Companies as a going concern.
However, the Companies have a net loss of $510,961 and $91,061 and net
cash used in operations of $252,422 and $504,911 for the years ended
December 31,2005 and December 31,2004, respectively. There is a working
capital deficiency of $384,384, accumulated deficit of $451,402, and a
stockholders' deficiency of $300,691 at December 31, 2005. These
factors raise substantial doubt about the Companies' ability to
continue as a going concern.
Management believes that its profitability was unusually hindered in
2005 due to severe weather conditions in the Caribbean and Southeast
region of the United States, and that with current plans to provide
additional product content and expand its customer base that it will be
able to provide more profitable operating results. However, because the
Companies has had net loss from operations for the last two years, used
most of their available credit line and given these financial results
along with the Companies' expected cash requirements in 2006, unless
the Companies quickly return to profitability, additional capital
investment may be necessary to sustain the Company's operations.
The financial statements do not contain any adjustments, which might be
necessary if the Companies are unable to continue as a going concern.
Subsequent to December 31, 2005, on March 6, 2006, the Companies were
acquired by Dynamic Leisure Corporation (See Note 13)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These combined statements as of December 31, 2005 and 2004 and for the
years then ended, present the combined results of Island Resort Tours,
Inc. and International Travel and Resorts, Inc. Accounting principles
generally accepted in the United States of America require that
combined financial statements of commonly owned companies within
similar industries be combined when such presentation is more
meaningful to the users. All significant intercompany accounts and
transactions have been eliminated.
F-105
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Use of Estimates:
The preparation of combined 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 combined financial
statements.
Cash and Cash Equivalents:
For the purpose of the cash flow statement, the Companies consider
all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents.
Cash is maintained with a single financial institution in the United
States. Deposits with this bank may exceed the amounts of insurance
provided on such deposits. Generally, the deposits may be redeemed
on demand and, therefore, bear minimal risk.
Short-term Investments, Restricted:
The Companies have investments in certificates of deposit as part of
an agreement to have a letter of credit issued from the bank. These
certificates of deposit are classified as a short-term investment
since their six month terms are greater than the three month term
used for consideration as a cash equivalent.
Accounts Receivable
Accounts Receivable result from amounts for either the sale of
travel products or agreements with various hotels, for amounts such
as co-op advertising support. The Companies regularly evaluate the
collectibility of accounts receivable on an individual customer or
supplier level, based on factors such as recent payment history and
create an allowance as considered necessary. At December 31, 2005
and December 31, 2004 the allowance for doubtful accounts was
$14,515.
Accounts receivable for co-op advertising is generally also recorded
as deferred revenue at its full value until used. Therefore, there
is typically no allowance recorded.
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,
ranging from three to five years.
Expenditures for additions and improvements greater than $1,000 are
capitalized, while repairs and maintenance are expensed as incurred.
When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated deprecation account are
relieved, and any gain or loss is included in operations.
F-106
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Revenue Recognition:
The Companies follow the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 104 "Revenue Recognition
in Financial Statements" in which we recognize revenue when it is
earned and realizable based on the following criteria: persuasive
evidence of an arrangement exists, services have been rendered, the
price is fixed or determinable and collectibility is reasonably
assured. The Company also follows EITF 99-19 "Reporting Revenue
Gross as a Principal versus Net as an Agent".
Merchant sales transactions are recorded at the gross selling price
of travel products such as lodging on the date of customer travel.
In a merchant sales transaction, the Companies provide travel
products or services to consumers or travel agencies through a
network of contractual arrangements with airlines, hotels, and other
travel providers. Monies received by customers in advance of travel
dates are recorded as a liability (Customer Deposits), until
reported as revenue on the actual travel date.
The Companies reported all other transactions at net, or the sales
price of the product less the Companies' cost.
Revenue from airline tickets is recognized when the tickets are
issued. Revenue for other services paid as a retainer, fixed dollar,
or fixed percentage amount are recognized when the service is
provided.
Income Taxes:
The Companies account 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.
Concentration of Credit Risk and Other Concentrations:
The Companies' ability to provide airline service availability to it
customers at favorable prices is a key component of its ability to
provide customers with travel packages and products. Gross bookings
from three Airlines, American Airlines, Continental and Delta
airline tickets accounted for approximately 54%, 18%, and 13%
respectively of all tickets sold in 2005 and 51% 20% and 10%
respectively in 2004. The Companies have negotiated rates and
products with the airlines, that allow it to price certain products
more favorably than some of its competitors. The loss of such
contracts could have a negative affect on the Companies' business.
F-107
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
The Companies sell their travel products to travel agencies and also
directly to the end user. In 2005, two agencies accounted for more
than ten percent of total bookings. Magical Holidays accounted for
24.0% of bookings, while MCM Tour accounted for 17.0% of bookings.
In 2004, Magical Holidays and MCM Tour were each responsible for
15.5% of total bookings.
The Companies do have geographical risk with destinations since
essentially all of its business is travel to the Caribbean region.
This concentration potentially exposes the Companies to both
political and weather risks of this region.
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 Companies' financial instruments include cash, accounts
receivable, accounts payable, and accrued liabilities. The fair
values of cash, accounts receivable, accounts payable and accrued
liabilities approximated carrying values due to the short-term
nature of these instruments.
Advertising
The primary vehicle for advertising the Companies' products has been
printed materials such as informational or promotional brochures.
Advertising costs are expensed when incurred and amounted to
approximately $127,138 and $94,259 for the years ended December 31,
2005 and December 31, 2004, respectively.
New Accounting Pronouncements:
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements, which may apply to the Companies.
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,
F-108
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
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 Companies adopted this SFAS as of
January 1, 2006. There is no current impact on the Companies'
financial statements with the adoption of this FASB.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
Estimated
Useful Life
2005 2004 in Years
--------- --------- -----------
Office furniture and equipment $ 99,086 $ 89,108 3-5
Software ..................... 30,366 18,700 3-5
--------- ---------
Total property and equipment . 129,452 107,808
Less accumulated depreciation (96,894) (71,973)
--------- ---------
Property and equipment, net .. $ 32,558 $ 35,835
========= =========
Depreciation expense was $24,922 in 2005 and $25,766 in 2004.
NOTE 5 LINE OF CREDIT
IRT entered into a line of credit agreement with the Bank of New York
("the Bank") on December 5, 2001 for $200,000, which was later
increased to $210,000. The agreement was for one year with extensions
for a period of one year on the anniversary date unless the Bank elects
not to extend the line of credit. The line of credit is collateralized
by substantially all of the assets of IRT and a guarantee by the
stockholder. As of December 31, 2005 and 2004, the loan balance was
$200,000 and zero, respectively. The availability of the credit line
was $10,000 and $210,000 for December 31, 2005 and 2004, respectively.
The interest rate is variable and at December 31, 2005 was 8.25%.
NOTE 6 COMMITMENTS AND CONTINGENCIES
Surety Bond
IRT had outstanding at December 31, 2004 and 2005, a surety bond for
$70,000 related to the Airlines Reporting Corporation to allow the
purchase of airline tickets through a computerized ticket system. As
part of the letter of credit agreement IRT is required to keep a
collateral deposit in the amount of $22,500. The deposit is included in
Other Assets - Deposits on the accompanying balance sheets.
F-109
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Letters of Credit
There are two letters of credit outstanding at December 31, 2005 and
2004 totaling $80,000 each year and payable to the Airlines
Reporting Corporation to allow the purchase of airline tickets
through a computerized ticket system. As part of the letter of
credit agreement, certificates of deposit are required with the
issuer of the letter of credit for approximately the amount of the
letters of credit and are reflected as short-term investments,
restricted, on the accompanying balance sheets.
Operating Lease:
The Companies currently lease office space under a five year
extension agreement effective April 2003. The Companies currently
pay $11,167 per month. Rent expense for the years ending December
31, 2005 and 2004 were $139,166 and $138,821, respectively. Future
lease obligations for 2006, 2007 and 2008 are $135,790 and $138,506
and $46,472, respectively.
The Companies currently leases two vehicles, both on which terms
will end in 2007. Lease expense related to these vehicles was
$19,436 and $22,393 in 2005 and 2004, respectively. Future lease
obligations for 2006 and 2007 are $19,345 and $11,044, respectively.
NOTE 7 RELATED PARTY TRANSACTIONS
As of the end of the year, IRT had outstanding a $50,000 payable to the
stockholder of the Companies, classified as a short term liability.
There are no contractual terms of a repayment date, and no interest is
being accrued or expected to be paid related to the balance.
The above related party transaction is not necessarily indicative of
the amounts that would have been incurred had comparable transactions
been entered into with independent parties.
NOTE 8 DEFERRED REVENUE
The Companies work close with suppliers that agree contractually to
provide advertising or promotional support. The amount of the supplier
commitment is recorded in Accounts Receivable and Deferred Revenue and
amounted to $78,290 and $82,635 at December 31, 2005 and 2004
respectively.
NOTE 9 CUSTOMER DEPOSITS
Customer deposits represent money received for hotel bookings, future
dates of travel. The Companies recognize the revenue and the related
costs of product when the travel occurs. The balances at December 31,
2005 and 2004 were $238,454 and $247,490 respectively.
F-110
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 10 COMMON STOCK
As of December 31, 2005 and 2004, IRT had 100 shares of no par common
stock issued and outstanding. As of December 31, 2005 and 2004, ITR had
200 shares of no par common stock issued and outstanding.
NOTE 11 RETIREMENT PLAN
During 2005 and 2004, the Companies had a 401K retirement savings plan
available to employees. The Companies provided a uniform percentage of
the amount of saving by the employee up to three percent of gross
salary. The expense related to this match for 2005 and 2004 was $5,253
and $6,073, respectively.
NOTE 12 INCOME TAXES
The effective tax rate varies from the federal statutory rate as a
result of the following items:
2005 2004
---- ----
Tax benefit computed at the federal statutory
rate ...................................... $(174,198) $(49,840)
State and local taxes, net of federal benefit (57,485) (16,447)
Other ....................................... 14,598 (13,439)
Change in valuation allowance ............... 215,700 24,200
--------- --------
Income tax provision/(benefit) .............. $ (1,385) $(55,526)
The tax effect of temporary differences at December 31 were as follows:
2005 2004
---- ----
Asset:
Net operating loss carryforward $ 239,900 $ 24,200
Less: Valuation allowance ................... (239,900) (24,200)
--------- --------
Deferred tax asset .......................... $ 0.0 $ 0.0
Management has determined it is more likely than not that the above
carrryforwards will not be realized, and accordingly a valuation
allowance has been established for the full amount of the deferred tax
asset. The change in the valuation allowance was an increase of
approximately $215,700 in 2005. At December 31, 2005 the Companies had
a net operating loss of approximately $534,389 available to offset
future taxable income through the year 2025.
The utilization of the carryforward is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In
addition, utilization of the carryforward may be limited due to
ownership changes as defined in the Internal Revenue Code.
F-111
Island Resort Tours, Inc and International Travel and Resorts, Inc
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 13 SUBSEQUENT EVENTS
On March 6, 2006, the Dynamic Leisure Corporation ("Dynamic") purchased
all of the issued and outstanding capital stock of Island Resort Tours,
Inc. and International Travel and Resorts, Inc., for a purchase price
of $4,783,300.
The purchase price consists of a combination of cash ($1,500,000),
700,000 shares of Dynamic's common stock ($1,833,300 valued at the
average closing price of the Dynamic's common stock for the five days
before and five days after the acquisition dates), 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 the Companies 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 common stock may be issued to the shareholder of
the Companies, if as part of any subsequent business acquisitions on or
before December 31, 2006, Dynamic issues its 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 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 Dynamic's common stock on or before the Maturity Date
at a rate of $1.50 per share, and is secured by a lien on the assets of
the Companies. The conversion rate may be adjusted downward if Dynamic,
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 Dynamic 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 by the stockholder. If Dynamic receives 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 by the stockholder. Dynamic has agreed to include
resale of the shares issued and those issuable upon conversion of the
Note in the next registration statement.
F-112
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Dynamic Leisure Corporation, and Subsidiaries
Unaudited Pro Forma Combined Condensed Balance Sheet
December 31, 2005
Pro Forma
Combined
Historical Statements
Historical Dynamic Historical Historical Acquisition for
Dyneco Leisure Changes IRT-ITR Adjustments Ref Acquisitions
----------- ----------- ---------- ---------- ----------- --- ------------
Cash ............................. $ (232) $ 19,563 $546,725 $201,174 $ (700,000) (e) $ 67,230
Short term investments,
restricted ..................... - - 69,548 83,133 - 152,681
Accounts receivable, net ......... - - - 247,271 - 247,271
Prepaid travel ................... - - 142,110 - - 142,110
Other current assets ............. - 19,136 18,467 75,356 - 112,959
----------- ----------- -------- -------- ----------- -----------
Total Current Assets ........... (232) 38,699 776,850 606,934 (200,000) 722,251
Property and equipment, net ...... 33,418 646,713 54,455 32,558 - 767,144
Other Assets
Debt issue costs, net .......... 521 - - - - 521
Deposits ....................... 28,434 1,760 - 51,135 - 81,329
Goodwill ....................... - - - - 6,873,980 (e) 6,873,980
----------- ----------- -------- -------- ----------- -----------
Total Other Assets ............. 28,955 1,760 - 51,135 6,873,980 6,873,980
----------- ----------- -------- -------- ----------- -----------
Total Assets ................... $ 62,141 $ 687,172 $831,305 $690,627 $ 6,173,980 $ 8,445,225
=========== =========== ======== ======== =========== ===========
Current Liabilities
Accounts payable and other
accrued expenses ............. 366,575 148,126 57,613 424,119 - 996,433
Deferred revenue ............... - - 594,698 78,290 - 672,988
Customer deposits .............. - - 111,886 238,454 - 350,340
Convertible promissory notes,
net of discount .............. 115,380 847,500 - - 2,050,000 (e) 3,012,880
Line of credit ................. - - - 200,000 - 200,000
Warrant liability .............. 240,592 - - - - 240,592
Accrued Interest ............... 59,930 29,360 - - - 89,290
Loans payable .................. 213,640 - - - - 213,640
Other current liabilities ...... - - - 50,455 - 50,455
Notes payable - current ........ 37,216 140,000 - - 1,440,000 (e) 1,617,216
----------- ----------- -------- -------- ----------- -----------
Total Current Liabilities ...... 1,033,333 1,164,986 764,197 991,318 3,490,000 7,443,834
Loans and Notes payable .......... 134,719 - - - - 134,719
----------- ----------- -------- -------- ----------- -----------
Total Liabilities .............. 1,168,052 1,164,986 764,197 991,318 3,490,000 7,443,553
Stockholder's Equity
Common Stock ................... 11,580 65,666 - - 10,400 (e) 87,646
Paid in Capital ................ 7,543,532 (57,629) 7,500 150,711 2,673,580 (e) 10,317,694
Stock subscription receivable .. - (537) - - - (537)
Retained Earnings/
(Accumulated Deficit) ......... (8,661,023) (485,314) 59,608 (451,402) (67,108) (e) (9,538,131)
----------- ----------- -------- -------- ----------- -----------
Total Stockholders' Equity ..... (1,105,911) (477,814) 67,108 (300,691) 2,683,980 866,672
----------- ----------- -------- -------- ----------- -----------
Total Liabilities and
Stockholders' Equity .......... $ 62,141 $ 687,172 $831,305 $690,627 $ 6,173,980 $ 8,445,225
=========== =========== ======== ======== =========== ===========
See accompanying notes to unaudited pro forma combined condensed financial statements.
F-113
Dynamic Leisure Corporation
Unaudited Pro Forma Combined Condensed Statement of Income
For the 12 months ended December 31, 2005
Historical
Historical Dynamic Historical Historical Acquisitions
DynEco (a) Leisure (a) Changes (a) IRT-ITR Adjustments (a) Ref Total
----------- ----------- ---------- ----------- --------------- --- -----------
Revenue ................................ $ - $ - $5,737,408 $ 2,579,641 $ - $ 8,317,049
Cost of revenue ........................ - - 4,701,541 1,518,548 - 6,220,089
----------- ----------- ---------- ----------- --------- -----------
Gross Profit ........................... - - 1,035,867 1,061,093 - 2,096,960
General and administrative expenses .... 497,968 455,954 835,801 1,892,660 - 3,682,383
----------- ----------- ---------- ----------- --------- -----------
Income (loss) from operations .......... (497,968) (455,954) 200,066 (506,923) - (1,585,423)
Other Income/(Expense)
Interest income ...................... 1,257 - 15,194 2,235 - 18,686
Interest expense ..................... (199,041) (29,360) - (7,658) (184,500) (c) (329,659)
Other Income ......................... 169,287 - - - - 169,287
----------- ----------- ---------- ----------- --------- -----------
Total Other Income/(Expense) ....... (28,497) (29,360) 15,194 (5,423) (184,500) (141,686)
----------- ----------- ---------- ----------- --------- -----------
Income before taxes ................ (526,465) (485,314) 215,260 (512,346) (184,500) (1,727,109)
Provision for income taxes ......... - - - 1,385 - (d) -
----------- ----------- ---------- ----------- --------- -----------
Net income ......................... $ (526,465) $ (485,314) $ 215,260 $ (510,961) $(184,500) $(1,727,109)
=========== =========== ========== =========== ========= ===========
Net Loss per share - Basic and Diluted . $ (0.47) $ (0.07) $ 0.63 $ (0.73) $ - $ (0.20)
=========== =========== ========== =========== ========= ===========
Weighted average number of shares
outstanding during the period
- basic and diluted .................. 1,125,327 6,566,667 340,000 700,000 - 8,731,994
=========== =========== ========== =========== ========= ===========
See accompanying notes to unaudited pro forma combined condensed financial statements.
F-114
Dynamic Leisure Group, Inc.
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements
(a) The unaudited pro forma combined condensed statement of income reflects the
combined historical financial statements of Dynamic Leisure Group, Inc. for the
period from May 16, 2005 (inception) to December 31, 2005. The historical
financial statements for DynEco Corporation, Changes in L'Attitudes ("CLA"),
Island Resort Tours, Inc. ("IRT") and International Travel and Resorts, Inc.
("ITR") are for the 12 months ending December 31, 2005. The historical results
are presented in the unaudited pro forma income statement as if the acquisitions
had occurred at the beginning of the period or for Dynamic, at its inception.
The financial statements of both DynEco and Dynamic have been adjusted for the
subsequent affect of a 1:30 reverse stock split.
The pro forma adjustments do not reflect benefits of additional revenue or
reduced expenses from the combinations nor acquisition or integration costs
subsequent to the acquisitions, which will cause actual earnings results that
will vary from the pro forma earnings shown. A final determination of possible
required purchase accounting adjustments has not yet been made, which could also
affect the pro form earnings presented.
(b) The unaudited pro forma combined condensed balance sheet reflects the
combined historical financial position of DynEco Corporation, Dynamic Leisure
Group, Inc., Changes in L'attitudes, Inc. and Island Resort Tours, Inc and
International Travel and Resorts, Inc., as if the acquisitions had occurred on
December 31, 2005. Certain reclassifications were made from historical financial
reports for comparability and consistency. Dynamic Leisure Group, Inc, was
acquired through a share exchange agreement, in which no cash or new additional
liabilities were assumed other then those already recorded by Dynamic or DynEco.
CLA was acquired for a total purchase price of $2,090,680 consisting of $200,000
in cash, an acquisition payable of 440,000, a convertible note payable of
$600,000 and 340,000 shares of common stock, valued at $850,680,000. IRT and ITR
were acquired for a total purchase price of $4,783,300 consisting of $500,000 in
cash, an acquisition payable of $1,000,000, a convertible note payable of
$1,450,000 and 700,000 shares of common stock valued at $1,833,300.
(c) Adjustment represents interest income to finance the acquisition of CLA and
IRT-ITR, as if amounts due for both convertible notes payable in the amount of
$2,050,000 were outstanding for the entire 12 month period, accruing interest
at the 9% annual stated rate.
(d) There is no provision or benefit for income taxes recorded, based on the
historical operating losses previously reported by DynEco and Dynamic.
(e) Under the purchase method of accounting, assets and liabilities are reported
at their estimated fair value, which may result in an increase or decrease from
previously reported amounts. There are no adjustments presented to the value of
existing assets or liabilities of CLA or IRT-ITR, based on an initial valuation
that they are already reported at their estimated fair value. However, the
analysis of purchase accounting valuations is still continuing and may or may
not result in future adjustments. The amount of the CLA and IRT-ITR purchase
price that exceeded net assets is presented as goodwill, and prior CLA and
IRT-ITR equity that represents the book value of net assets acquired was
eliminated.
F-115
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 Investors Stock Daily 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.
Prior to the Stock Exchange Agreement of January 13, 2006, Dynamic
Leisure Group, Inc., a privately-held Florida corporation ("DLG"), issued
securities to several investors in exchange for financing. Those securities were
automatically converted into securities of the Company on January 13, 2006 upon
closing of the Stock Exchange Agreement and related transactions.
On June 15, 2005, DLG issued to Richard T. Fisher a Convertible
Promissory Note in the amount of $100,000, with interest at the rate of ten
percent (10%) per annum, convertible into shares of the Company's common stock
at a conversion price of ninety cents ($0.90) per share. In addition, the
security holder were issued 133,200 warrants to purchase shares of the Company's
common stock at an exercise price of sixty-eight cents ($0.68) per share. On
March 15, 2006, the security holder converted the note and exercised the
warrants and was issued 252,525 shares of the Company's common stock. The
Company has reasonable grounds to believe that the security holder was an
II-7
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act. 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. 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.
On June 23, 2005, DLG issued a Convertible Promissory Note in the
amount of $50,000 to GRQ Consultants, Inc. 401K Plan. That Note has been fully
paid by the Company. The security holder still was issued 133,200 warrants to
purchase shares of the Company's common stock at an exercise price of ninety
cents ($0.90) per share, equivalent to 133,200 shares upon exercise. The Company
has reasonable grounds to believe that the security holder was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act. 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. 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.
On July 27, 2005, DLG issued to Timothy Minnehan a Convertible
Promissory Note in the amount of $75,000, with interest at the rate of ten
percent (10%) per annum, convertible into shares of the Company's common stock
at a conversion price of ninety cents ($0.90) per share. On April 3, 2006, the
security holder converted the note into 88,953 shares of the Company's common
stock. In addition, the security holder was issued 99,900 warrants to purchase
shares of the Company's common stock at an exercise price of sixty-eight cents
($0.68) per share. The Company has reasonable grounds to believe that the
security holder was an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act. 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. 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-8
On August 1, 2005, DLG issued to Paul D. Bemiss a Convertible
Promissory Note in the amount of $25,000, with interest at the rate of ten
percent (10%) per annum, convertible into shares of the Company's common stock
at a conversion price of ninety cents ($0.90) per share. On March 15, 2006, the
security holder converted the note into 29,470 shares of the Company's common
stock. In addition, the security holder was issued 36,963 warrants to purchase
shares of the Company's common stock at an exercise price of sixty-eight cents
($0.68) per share. The Company has reasonable grounds to believe that the
security holder was an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act. 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. 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.
On August 2, 2005, DLG issued to Gary Anderson a Convertible Promissory
Note in the amount of $25,000, with interest at the rate of ten percent (10%)
per annum, convertible into shares of the Company's common stock at a conversion
price of ninety cents ($0.90) per share. On March 8, 2006, the security holder
converted the note into 29,415 shares of the Company's common stock. In
addition, the security holder was issued 36,963 warrants to purchase shares of
the Company's common stock at an exercise price of sixty-eight cents ($0.68) per
share. The Company has reasonable grounds to believe that the security holder
was an "accredited investor" within the meaning of Rule 501 of Regulation D
under the Securities Act. 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. 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.
On September 5, 2005, DLG issued to Diversified Acquisition Trust a
Convertible Promissory Note in the amount of $400,000, with interest at the rate
of ten percent (10%) per annum, convertible into shares of the Company's common
stock at a conversion price of ninety cents ($0.90) per share. In addition, the
security holder was issued 444,000 warrants to purchase shares of the Company's
common stock at an exercise price of ninety cents ($0.90) per share. Should the
security holder decide to convert the note on the maturity date and exercise his
warrants, the Company would issue a total of 932,400 shares of common stock to
the security holder. The Company has reasonable grounds to believe that the
security holder was an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act. 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
II-9
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. 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.
On October 11, 2005, DLG issued to the Denno Family Limited Partnership
a Convertible Promissory Note in the amount of $50,000, with interest at the
rate of ten percent (10%) per annum, convertible into shares of the Company's
common stock at a conversion price of ninety cents ($0.90) per share. In
addition, the security holder was issued 66,600 warrants to purchase shares of
the Company's common stock at an exercise price of sixty-eight cents ($0.68))
per share. On April 14, 2006, the security holder converted the note and
exercised the warrants. The Company has issued a total of 128,205 shares to the
security holder. The Company has reasonable grounds to believe that the security
holder was an "accredited investor" within the meaning of Rule 501 of Regulation
D under the Securities Act. 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. 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.
On October 21, 2005, DLG issued to James D. Davidson a Convertible
Promissory Note in the amount of $25,000, with interest at the rate of ten
percent (10%) per annum, due and payable on June 30, 2006 but convertible into
shares of the Company's common stock at the rate of ninety cents ($0.90) per
share. In addition, the security holder was issued 33,300 warrants to purchase
shares of the Company's common stock at an exercise price of sixty-eight cents
($0.68) per share. Should the security holder decide to convert the note on the
maturity date and exercise his warrants, the Company would issue a total of
62,965 shares of common stock to the security holder. The Company has reasonable
grounds to believe that the security holder was an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act. 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. 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.
On October 27, 2005, DLG issued to Monarch Capital Fund, Ltd. a
Convertible Promissory Note in the amount of $75,000, with interest at the rate
of ten percent (10%) per annum, due and payable on June 30, 2006 but convertible
into shares of the Company's common stock at the rate of ninety cents ($0.90)
per share. In addition, the security holder was issued 99,900 warrants to
purchase shares of the Company's common stock at an exercise price of
II-10
sixty-eight cents ($0.68) per share. Should the security holder decide to
convert the note on the maturity date and exercise his warrants, the Company
would issue a total of 188,728 shares of common stock to the security holder.
The Company has reasonable grounds to believe that the security holder was an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act. 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. 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.
On November 21, 2005, DLG issued a Convertible Promissory Note to
Andrew Allen in the amount of $10,000, with interest at the rate of ten percent
(10%) per annum, due and payable on June 30, 2006 but convertible into shares of
the Company's common stock at the rate of ninety cents ($0.90) per share. In
addition, as a result of the November 21, 2005 transaction, the security holder
was issued 13,320 warrants to purchase shares of the Company's common stock at
an exercise price of sixty-eight cents ($0.68) per share. On February 3, 2006,
the Company issued a Convertible Promissory Note to this security holder in the
amount of $10,000, with interest at the rate of ten percent (10%) per annum,
convertible into shares of the Company's common stock at the rate of one dollar
($1.00) per share. The Company also issued the security holder 10,000 warrants
to purchase shares of the Company's common stock at an exercise price of one
dollar ($1.00) per share. Should the security holder decide to convert both
notes on their maturity dates and exercise all of his warrants, the Company
would issue a total of 46,097 shares of common stock to the security holder. The
Company has reasonable grounds to believe that the security holder was an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act. 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. 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.
On December 20, 2005, DLG issued a Convertible Promissory Note to Paul
Welch in the amount of $12,500, with interest at the rate of ten percent (10%)
per annum, due and payable on June 30, 2006 but convertible into shares of the
Company's common stock at the rate of ninety cents ($0.90) per share. In
addition, the security holder was issued 13,875 warrants to purchase shares of
the Company's common stock at an exercise price of sixty-eight cents ($0.68) per
share. Should the security holder decide to convert the note on the maturity
date and exercise his warrants, the Company would issue a total of 28,472 shares
of common stock to the security holder. The Company has reasonable grounds to
believe that the security holder was an "accredited investor" within the meaning
of Rule 501 of Regulation D under the Securities Act. 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"
II-11
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. 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.
On January 3, 2006, DLG issued a Convertible Promissory Note to Street
Venture Partners, LLC in the amount of $350,000, with interest at the rate of
ten percent (10%) per annum, due and payable on January 3, 2007 but convertible
into shares of the Company's common stock at the rate of ninety cents ($0.90)
per share. In addition, the security holder was issued 388,500 warrants to
purchase shares of the Company's common stock at an exercise price of ninety
cents ($0.90) per share. Should the security holder decide to convert the note
on the maturity date and exercise its warrants, the Company would issue a total
of 427,350 shares of common stock to the security holder. The Company has
reasonable grounds to believe that the security holder was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act. 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. 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.
On January 13, 2006, the Company entered into the Stock Exchange
Agreement (the "reverse merger") with all of the shareholders of Dynamic Leisure
Group, Inc.
As part of the reverse merger transaction, the Company issued preferred
shares to the former shareholders of Dynamic Leisure Group, which preferred
shares automatically converted each into 1,000 shares of common stock of the
Company. As a result, the following security holders have received the following
shares of common as a result of the reverse merger:
Daniel G. Brandano .................... 833,333
Thomas W. Busch ....................... 866,666
Robert A.G. LeVine .................... 266,666
Brian Brandano ........................ 333,333
Diversified Acquisition Trust ......... 1,906,666
Claudale Ltd. ......................... 693,333
GRQ Consultants, Inc. ................. 400,000
MBN Consulting, LLC ................... 200,000
Street Venture Partners ............... 1,066,666
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, 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
II-12
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.
As part of the reverse merger transaction, and to cure a default with
two of the selling security holders, the Company entered into a Modification and
Waiver Agreement under which 100,000 (post-reverse split) shares of common stock
were issued to Alpha Capital Aktiengesellschaft and another 100,000
(post-reverse split) shares of common stock were issued to JM Investors, LLC. In
connection with the reverse stock split effective at the close of business on
March 3, 2006, the Company issued additional warrants for the Company's common
stock, exercisable at one dollar ($1.00) per share, pursuant to the
anti-dilution provisions of the Restructured Financing, as follows: 29,800
warrants to Alpha Capital Aktiengesellschaft, and 15,700 warrants to JM
Investors, LLC. The Company had reasonable grounds to believe that the security
holder was an "accredited investor" within the meaning of Rule 501 of Regulation
D under the Securities Act. 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. 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.
Also as part of the reverse merger transaction, the Company issued a
Secured Convertible Promissory Note to MMA Capital LLC, a Delaware limited
liability company, in the amount of $2,000,000, with simple interest at the rate
of eight percent (8%) per annum, convertible into shares of the Company's common
stock at a conversion price of one dollar ($1.00) per share. In addition, the
Company issued warrants to MMA Capital, LLC to purchase 2,000,000 shares of the
Company's common stock at an exercise price of one dollar ($1.00) per share. The
Company had reasonable grounds to believe that the security holder was an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act. 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. 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.
On January 16, 2006, the Company entered into a Consulting Agreement
with MBN Consulting, LLC, under which the security holder was granted 200,000
warrants to purchase shares of the Company's common stock at an exercise price
of one dollar twenty-five cents ($1.25) per share. The Company had reasonable
grounds to believe that the security holder was an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act. 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
II-13
"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. 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.
On January 25, 2006, the Company issued a Convertible Promissory Note
in the amount of $50,000 to Peter H. Clark in exchange for financing. On March
9, 2006, the security holder converted the note, and the Company has issued
55,500 shares to the security holder. In addition, the security holder was
issued 50,000 warrants to purchase common stock of the Company at an exercise
price of one dollar ($1.00) per share. The Company had reasonable grounds to
believe that the security holder was an "accredited investor" within the meaning
of Rule 501 of Regulation D under the Securities Act. 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. 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.
On February 8, 2006, the Company entered into a Purchase Agreement with
Raymon Valdes to purchase all of the shares of Changes in L'Attitudes, Inc., a
Florida corporation. As a result of that transaction, the security holder has
been issued 340,000 shares of the Company's common stock and may be issued up to
an additional 170,000 shares of common stock if, in a future acquisition,
another person or entity is issued shares at a rate less than $1.50 per share.
In addition, as a result of that transaction, the security holder was issued a
Convertible Promissory Note in the amount of $600,000, with interest at the rate
of nine percent (9%) per annum, convertible to up to 654,000 shares of the
Company's common stock. 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.
On March 6, 2006, the Company entered into a Purchase Agreement with
Stephen A. Hicks to purchase all of the shares of Island Resort Tours, Inc. and
International Travel and Resorts, Inc., both New York corporations. As a result
of that transaction, the security holder has been issued 700,000 shares of the
Company's common stock and may be issued an additional 350,000 shares of common
stock if, in a future acquisition, another person or entity is issued shares at
a rate less than $1.50 per share. In addition, as a result of that transaction,
II-14
the security holder was issued a Convertible Promissory Note in the amount of
$1,450,000, with interest at the rate of nine percent (9%) per annum,
convertible up to 1,580,500 shares of the Company's common stock. 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.
On April 25, 2006, the Company entered into a Subscription Agreement
with David Halperin, under which the Company issued 50,000 shares of common
stock to the security holder. In addition, the security holder was issued 50,000
warrants to purchase the common stock of the Company at an exercise price of one
dollar ($1.00) per share. The 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.
On May 31, 2006, the Company entered into a Subscription Agreement with
Peter L. Johnson, under which the Company issued 10,000 shares of common stock
to the security holder. In addition, the security holder was issued 10,000
warrants to purchase the common stock of the Company at an exercise price of one
dollar ($1.00) per share. The 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.
On June 29, 2006, the Company entered into a Common Stock Purchase
Agreement with MMA Capital, LLC, a Delaware Limited Liability Company, under
which MMA agreed to purchase, and the Company agreed to sell and issue to the
Purchaser, One Hundred Thousand (100,000) shares of the Company's common stock,
at a purchase price of One Hundred Thousand Dollars ($100,000.00), a rate of
$1.00 per share for the common stock. On July 10, 2006, the Company entered into
a second Common Stock Purchase Agreement with MMA, under which MMA agreed to
purchase, and the Company agreed to sell and issue to the Purchaser, Four
Hundred Thousand (400,000) shares of the Company's common stock, at a purchase
price of Four Hundred Thousand Dollars ($400,000.00), a rate of $1.00 per share
for the common stock. The Agreements were private offerings of unregistered
securities and did not involve the issuance of any debt or promissory note,
convertible or otherwise, nor any warrants to purchase stock of the Company.
II-15
On July 1, 2006, the Company issued 400,000 shares of common stock
pursuant to a consulting agreement with Redwood Consultants, LLC. The shares
were issued in reliance on the exemption from registration provided by section
4(2) of the Act, on the basis that their issuance did not involve a public
offering, that no underwriting fees or commissions were paid by us in connection
with such sale, and that the Purchaser represented to us that he was an
"accredited investor" as defined in the Act.
On July 1, 2006, the Company issued 100,000 shares of common stock
pursuant to a stock purchase agreement with MMA Capital, LLC. On July 12, 2006,
the Company issued 100,000 additional shares of common stock pursuant to a stock
purchase agreement with MMA Capital, LLC. The shares were issued in reliance on
the exemption from registration provided by section 4(2) of the Act, on the
basis that their issuance did not involve a public offering, that no
underwriting fees or commissions were paid by us in connection with such sale,
and that the Purchaser represented to us that it was an "accredited investor" as
defined in the Act.
On July 10, 2006, the Company entered into a Subscription Agreement
with David O. Jensen to purchase 15,000 shares of the Company's common stock,
plus 15,000 warrants to purchase the Company's common stock at $1.00 per share.
The Agreement was a private offering of unregistered securities. The shares were
issued in reliance on the exemption from registration provided by section 4(2)
of the Act, on the basis that their issuance did not involve a public offering,
that no underwriting fees or commissions were paid by us in connection with such
sale, and that the Purchaser represented to us that he was an "accredited
investor" as defined in the Act.
On July 11, 2006, the Company issued 80,000 shares of common stock for
services through August 2007 to The Research Works, LLC. The shares were issued
in reliance on the exemption from registration provided by section 4(2) of the
Act, on the basis that their issuance did not involve a public offering, that no
underwriting fees or commissions were paid by us in connection with such sale,
and that the Purchaser represented to us that it was an "accredited investor" as
defined in the Act.
On July 28, 2006, the Company issued 250,000 shares of common stock
pursuant to a stock purchase agreement with Miller Investments, LLC. In
connection with the Stock Purchase Agreement, on July 28, 2006 the Company also
issued to the Purchaser warrants to purchase Two Hundred Fifty Thousand
(250,000) shares of common stock of the Company at an exercise price of One
Dollar ($1.00) per share, subject to potential adjustment(s) in the exercise
price as set forth in the Warrant to Purchase Shares of Common Stock. The
warrants are exercisable for a period of five (5) years from the date of
issuance. The shares were issued in reliance on the exemption from registration
provided by section 4(2) of the Act, on the basis that their issuance did not
involve a public offering, that no underwriting fees or commissions were paid by
us in connection with such sale, and that the Purchaser represented to us that
it was an "accredited investor" as defined in the Act.
II-16
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 Crone Rozynko LLP dated September 12, 2006
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 +++++
10.15 Form of Non-Callable Warrant used in connection with $300,000
financing transaction +++++
II-17
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 Crone Rozynko LLP (filed with Exhibit 5)
23.2 Consent of Salberg & Company, P.A. dated September 8, 2006
23.3 Consent of Salberg & Company, P.A. dated September 8, 2006
23.4 Consents of Pender Newkirk & Company, LLP dated September 8, 2006
II-18
__________________
* 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-19
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-20
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 sale of which is covered by a currently effective registration
statement.
EXPERTS
The consolidated financial statements of DynEco Corporation and
Subsidiary (now know as Dynamic Leisure Corporation) as of December 31, 2005 and
2004, respectively, and for each of the two years then ended and the financial
statements of Dynamic Leisure Group, Inc. for the period from May 16, 2005
(inception) to December 31,2005 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 reports thereon appearing
elsewhere in this prospectus, and are included in reliance upon these reports
given on the authority of such firm as experts in auditing and accounting.
The financial statements of Changes in L'Attitudes, Inc., Island Resort
Tours, Inc. and International Travel and Resorts, Inc., have been audited by
Pender Newkirk & Company, LLP, 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 100 F. Street, N.E., Washington, D.C. 20549. Copies of these
materials may also be obtained from the SEC's Public Reference at 100 F. Street,
N.E., 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-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Tampa, Florida on September 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 Post
Effective Amendment No. 2 to Form SB-2 registration statement has been signed by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Daniel G. Brandano President, September 13, 2006
- ---------------------- Chief Executive Officer, and
Daniel G. Brandano Director
/s/ Robert A.G. LeVine Secretary and September 13, 2006
- ---------------------- Director
Robert A.G. LeVine
/s/ Leonard Sculler Director September 13, 2006
- -------------------
Leonard Sculler