AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2006
REGISTRATION NO. 333-124283
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
POST-EFFECTIVE AMENDMENT NO. 3
TO
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
__________
DYNAMIC LEISURE CORPORATION
(FORMERLY KNOWN AS DYNECO CORPORATION)
(Exact 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, including zip code, and telephone number,
including area code, of agent for service)
________________________________________________________________________________
COPIES TO:
CRONE ROZYNKO LLP
101 MONTGOMERY STREET, SUITE 1950
SAN FRANCISCO, CA 94104
__________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
================================================================================
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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 statement 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: |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
________________________________________________________________________________
CALCULATION OF REGISTRATION FEE
________________________________________________________________________________
PROPOSED
AMOUNT TO MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT (2) OFFERING PRICE(2) FEE
- ----------------------------------------- ------------- -------------- ----------------- ------------
Common Stock, par value $.01 per share .. 15,000 $ .66 $ 9,900 $ 1.06
Common Stock, par value $.01 per share,
underlying convertible notes .......... 163,500 (3) $ .75 $ 122,625 $ 13.12
This prospectus relates to the
underlying warrants ................... 109,000 (4) $ 4.31 $ 469,790 $ 50.27
Common Stock, par value $.01 per share,
underlying warrants ................... 50,000 (4) $ 7.50 $ 375,000 $ 40.13
Common Stock, par value $.01 per share,
underlying warrants ................... 100,000 (4) $ 3.00 $ 300,000 $ 32.10
Common Stock, par value $.01 per share,
underlying warrants ................... 7,500 (4) $ 4.50 $ 33,750 $ 3.61
--------
Total Registration Fee .................. $ 140.29*
========
* This Registration Fee was paid along with the original filing of the
Registration Statement in 2005.
- ----------
1) In the event of a stock split, stock dividend or similar transaction
involving our common stock, in order to prevent dilution, the number of
shares registered shall be automatically increased to cover the additional
shares in accordance with Rule 416(a).
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended based
on the greater of the conversion price of the notes or the exercise price
of the warrants and the average of the bid and asked price of the Company's
common stock as reported on the Over-The-Counter Bulletin Board on December
13, 2006.
(3) The number of shares of our Common Stock registered hereunder represents a
good faith estimate by us of the number of shares of our Common Stock
issuable upon the conversion of the callable secured convertible notes. For
purposes of estimating the number of shares of our Common Stock to be
included in this registration statement, we calculated a good faith
estimate of the number of shares that we believe will be issuable upon
conversion of the callable secured convertible notes to account for market
fluctuations, anti-dilution and price protection adjustments. Should the
conversion ratio result in our having insufficient shares, we will not rely
upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(4) The number of shares of our Common Stock registered hereunder represents a
good faith estimate by us of the number of shares of our Common Stock
issuable upon the exercise of warrants. For purposes of estimating the
number of shares of our Common Stock to be included in this registration
statement, we calculated a good faith estimate of the number of shares that
we believe will be issuable upon exercise of warrants to account for
anti-dilution and price protection adjustments. Should the conversion ratio
result in our having insufficient shares, we will not rely upon Rule 416,
but will file a new registration statement to cover the resale of such
additional shares should that become necessary.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
ii
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 of which are issuable upon conversion of outstanding
convertible promissory notes, and 266,500 shares of which are issuable upon
exercise of outstanding warrants. The selling security holders listed on page 21
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.
We are not selling any shares of common stock in this offering and therefore we
will not receive any proceeds from this offering. We will, however, receive the
exercise price of the warrants if and when those warrants are exercised by the
selling stockholders. None of the warrants has been exercised as of the date of
this prospectus.
The shares included in this prospectus may be offered and resold directly by the
selling stockholders in the open market at prevailing prices or in individually
negotiated transactions, through agents designated from time to time or through
underwriters or dealers. We will not control or determine the price at which a
selling stockholder decides to resell its shares. Brokers or dealers effecting
transactions in these shares should confirm that the shares are registered under
applicable state law or that an exemption from registration is available. See
page 23, "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 23, "Plan of Distribution."
Our common stock is traded on the over-the-counter bulletin board under the
symbol "DYLI." On November 30, 2006, the closing price of our common stock was
$0.55 per share.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. YOU SHOULD PURCHASE
THESE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______, 2006
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. 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.
1
TABLE OF CONTENTS
Page
----
About this Prospectus....................................................... 3
Forward-Looking Statements.................................................. 3
Summary Information and Risk Factors........................................ 3
Use of Proceeds............................................................. 21
Selling Security Holders.................................................... 21
Plan of Distribution........................................................ 23
Legal Proceedings........................................................... 24
Directors, Executive Officers, Promoters and Control Persons................ 25
Security Ownership of Certain Beneficial Owners and Management.............. 27
Description of Securities................................................... 30
Interest of Named Experts and Counsel....................................... 32
Business.................................................................... 33
Management's Discussion and Analysis or Plan of Operation................... 41
Description of Property..................................................... 48
Certain Relationships and Related Transactions.............................. 49
Market for Common Equity and Related Stockholder Matters.................... 51
Executive Compensation...................................................... 53
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 53
Financial Statements........................................................ F-1
2
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. 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".
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.
All information contained in this prospectus is adjusted to reflect a 1-for-30
reverse split of our common stock effected in March 2006.
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), Dynamic Leisure Technologies, Inc.
(currently inactive), Changes in L'Attitudes, Inc., Island Resort Tours, Inc.,
and International Travel and Resorts, Inc.
COMPANY OVERVIEW
Dynamic Leisure Corporation is engaged in the business of marketing, selling and
distributing a variety of vacation packages, cruises, domestic and international
airline tickets, car rental services and accommodation products and services on
a wholesale basis to travel agencies and other travel resellers and on a retail
basis directly to consumers. For the nine months ended September 30, 2006,
substantially all of the Company's travel products were for destinations in the
Caribbean and Mexico.
3
Through our websites and customer service center, customers can search for,
inquire about, price and purchase vacation packages and other travel-related
products. We have experienced travel consultants and customer service
representatives available to both our wholesale and retail customers via
toll-free telephone or e-mail to assist customers in selecting and purchasing
vacation packages and stand-along travel related products. We expect to increase
the number of our customer representatives by the end of 2006.
Through our websites, www.Changes.com and www.eCasual.com, consumers can search
for and price cruises and vacation packages. Through our website
www.IslandResortTours.com, travel agencies and other travel resellers can search
for and price vacation packages for their clients. We have eight travel
consultants and customer service representatives headquartered in our 10,000
square foot facility in Tampa, Florida and six travel consultants and customer
service representatives in our New York office with whom both our wholesale and
retail customers may contact via toll-free telephone or email to purchase
vacation packages.
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 intends to grow in 2007 by continuing to focus on the leisure travel
markets of the Caribbean and Mexico, by expanding its travel products for
destinations in Florida, Las Vegas, Hawaii, Europe, and Central and Southern
America, and by developing a more prominent Internet presence.
We are a Minnesota corporation with our principal executive offices located at
5680A W. Cypress Street Tampa, Florida 33607. Our telephone number is (813)
877-6300.
The auditors' report with respect to our financial statements for the fiscal
year ended December 31, 2005 includes an explanatory paragraph wherein the
auditors expressed substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustment that might
result from the outcome of these uncertainties. Dynamic Leisure Group, Inc. had
no revenues and a net loss of $485,314 for the period from its May 16, 2005
(inception) to December 31, 2005. For the nine months ended September 30, 2006,
the Company had revenues of $4,307,315 and a net loss of $7,312,316.
Corporate History of Reverse Merger
Prior to January 2006, the Company was a development-stage company in the
business of developing 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.
On January 13, 2006, the Company entered into a Stock Exchange Agreement with
the former shareholders of Dynamic Leisure Group, Inc. ("DLG") pursuant to which
we acquired all of the outstanding capital stock of DLG and DLG became a
wholly-owned subsidiary of the Company (the "Stock Exchange"). Upon the closing
of the Stock Exchange, the former shareholders of DLG became the holders of
approximately 83% of the outstanding shares of the Company and the Company
changed its name to Dynamic Leisure Corporation.
On October 5, 2006, the Company entered into an agreement with Buccaneer
Exploration, Inc. pursuant to which the Company agreed to sell, assign and
transfer to Buccaneer Exploration, Inc. all of the Company's right, title and
interest in its compressor and pump technologies. The consummation of this
transaction is subject to the approval of Technology Research Development
Authority of the State of Florida ("TRDA").
Because the shareholders of DLG became the controlling shareholders of the
Company after the Stock Exchange, DLG was treated as the acquirer for accounting
purposes, and therefore the transaction was accounted for as a reverse merger.
Accordingly, for accounting purposes, the historical financial statements
presented are those of DLG. Additionally, the prior operating results of the
Company are not indicative of our future operations, and none of the assets or
liabilities on our balance sheet as of December 31, 2005 or December 31, 2004
relate to the Company prior to the Stock Exchange.
4
THE OFFERING
Common Stock Offered: Up to an aggregate of 445,000(1)
Common stock outstanding: 12,481,195(2)
Use of Proceeds: We will not receive any proceeds from the
sale of the 445,000 shares of common stock
subject to sale by the selling stockholders
under this prospectus. See "Use of
Proceeds."
Risk Factors: See "Risk Factors" beginning on page 9 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 23.
OTC Bulletin Board Symbol: DYLI
(1) Includes: (i) 15,000 shares that are issued and outstanding, (2) 163,500
shares issuable upon conversion of outstanding convertible promissory notes, and
(3) 266,500 shares issuable upon exercise of outstanding warrants.
(2) Does not include (a) approximately 125,000 shares of our common stock
issuable upon the exercise of outstanding options; (b) up to approximately 5.5
million shares of our common stock issuable upon conversion of outstanding
convertible promissory notes; and (c) up to approximately 9.7 million shares of
our common stock issuable upon exercise of outstanding warrants.
BACKGROUND OF THE TRANSACTIONS WITH THE SELLING STOCKHOLDERS
This prospectus covers the sale of 445,000 shares of our common stock -- 15,000
shares of which are issued and outstanding, 163,500 shares of which are issuable
upon conversion of outstanding convertible promissory notes, and 266,500 shares
of which 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 a 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 were used for
general working capital purposes.
5
The registration statement of which this prospectus forms a part covers the sale
of the shares, including the shares underlying the 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, (c) five year warrants
to purchase 100,000 shares at an exercise price of $3.00 per share, subject to
adjustment, and (d) three year warrants to purchase 7,500 shares at an exercise
price of $4.50 per share, 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.
6
SELECTED FINANCIAL DATA
The following is a summary of our financial information for (i) the period from
May 16, 2005 (Inception) to December 31, 2005 for Dynamic Leisure Group, Inc.,
the accounting acquirer and, effectively, the registrant, and (ii) for the years
ended December 31, 2005 and 2004 for DynEco Corporation. This summary financial
information 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
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
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 nine
months ending September 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.
7
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------
(UNAUDITED)
From
Inception
For the Nine (May 16,
For the Three Months Ended Months Ended 2005) to
September 30 September 30, September 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Total Revenues .............................. $ 1,299,505 - $ 4,307,315 --
Cost of Revenues ............................ 876,138 - 3,041,475 --
------------ ------------ ------------ ------------
Gross Profit ................................ 423,367 - 1,265,840 --
Operating Expenses
General and administrative ............... 2,149,014 161,010 4,430,354 210,835
Depreciation and amortization expense .... 336,221 - 420,782 --
Bad debt expense ......................... 3,657 - 3,657 --
------------ ------------ ------------ ------------
Total Operating Expenses .................... 2,488,892 161,010 4,854,793 210,835
------------ ------------ ------------ ------------
Loss from Operations ........................ (2,065,525) (161,010) (3,588,953) (210,835)
Other (Income) Expense
Interest income .......................... (2,668) - (15,710) --
Interest expense ......................... 1,333,589 8,697 3,518,484 8,812
Other Expense ............................ - - 8,020 --
Loss on disposal of assets ............... 42,667 - 42,667 --
Loss on extinguishment of debt ........... - - 208,452 --
------------ ------------ ------------ ------------
Conversion Option expense ................... - - - --
------------ ------------ ------------ ------------
Warrant valuation (income) expense .......... (817,101) - (38,550) --
------------ ------------ ------------ ------------
Total Other Expense, (income) net ........... 556,487 8,697 3,723,363 8,812
------------ ------------ ------------ ------------
Net Loss .................................... $ (2,622,012) $ (169,707) $ (7,312,316) $ (219,647)
============ ============ ============ ============
Net Loss Per Share - Basic and Diluted ...... $ (0.24) $ (0.15) $ (0.77) $ (0.20)
============ ============ ============ ============
Weighted average number of shares outstanding
during the period - basic and diluted ...... 10,925,261 1,100,000 9,543,607 1,100,000
============ ============ ============ ============
8
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.
From May 16, 2005 through December 31, 2005, Dynamic Leisure Group, Inc.
experienced net losses of $485,314. In addition, at December 31, 2005, Dynamic
Leisure Group, Inc. had a stockholders' deficit of $477,814. 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 $7,312,316 for the nine months ended September 30,
2006 and net cash used in operations of $2,381,546 for the nine months ended
September 30, 2006, and a working capital deficiency of $9,061,268 and a
stockholders' deficiency of $786,015 at September 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, sold common stock for cash of approximately $787,000
through September 2006 and obtained bridge financing of approximately $850,000
through November 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.
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
9
unable to generate interest in our shares among broker-dealers until we generate
meaningful revenues and profits from operations. Until that time occurs, if it
does at all, purchasers of our shares may be unable to sell them publicly. In
the absence of an active trading market:
o Investors may have difficulty buying and selling our shares or obtaining
market quotations;
o Market visibility for our common stock may be limited; and
o A lack of visibility for our common stock may depress the market price for
our shares.
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 November 30, 2006, we have executed convertible promissory notes, granted
options, issued warrants to the same promissory noteholders and others and
reserved shares for employment contracts and options to be granted upon
formation of a stock option plan to purchase an aggregate of 20,172,411 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 common stock
in the past 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 2,900,000 shares being offered by existing
stockholders, including 2,700,000 shares issuable upon 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.
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
10
auditors. In the event that we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence
in the reliability of our financial statements, and our ability to obtain equity
or debt financing could suffer.
EVOLVING GOVERNMENT REGULATION COULD IMPOSE TAXES OR OTHER BURDENS ON OUR
BUSINESS, WHICH COULD INCREASE OUR COSTS OR DECREASE DEMAND FOR OUR PRODUCTS.
We must comply with laws and regulations applicable to online commerce.
Increased regulation of the Internet or different application of existing laws
might slow the growth in the use of the Internet and commercial online services,
which could decrease demand for our products, increase the cost of doing
business or otherwise reduce our sales and revenues. The statutes and case law
governing online commerce are still evolving, and new laws, regulations or
judicial decisions may impose on us additional risks and costs of operations. In
addition, new regulations, domestic and/or international, regarding the privacy
of our users' personally identifiable information may impose on us additional
costs and operational constraints.
BECAUSE THE TRAVEL MARKET IS SEASONAL, OUR QUARTERLY RESULTS MAY FLUCTUATE.
Our business experiences seasonal fluctuations, reflecting seasonal trends for
the products offered by our websites, as well as Internet services generally.
For example, traditional leisure travel bookings 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.
o We compete with online travel retailers including Expedia, Orbitz,
Travelocity, and many smaller companies in providing online travel
products.
o 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.
o We compete with local, regional, national and international traditional
travel agencies.
o We compete with consolidators and wholesalers of airline tickets, lodging
and other travel products, including Cheaptickets.com, Priceline.com,
Hotwire, Hotels.com, and TravelWeb.
o 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.
o 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.
11
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 are critical
aspects 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 the first quarter of 2007), and maintaining and
enhancing brand recognition of Changes in L'Attitudes, Island Resort Tours,
International Travel and Resorts, and any other brands that we may acquire
through future acquisitions. Currently, our Changes.com website enjoys favorable
organic placement with respect to "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 2006 and are expected to increase significantly during the
fourth quarter of 2006. (See "Business - Strategy" - page 35). However, we
cannot assure you that these expenditures will be effective in promoting our
brands or that our marketing efforts will achieve our goals.
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE TRAVEL
COMMERCE.
Our sales and revenues will not grow as we plan if consumers do not purchase
significantly more travel products online than they currently do and if the use
of the Internet as a medium of commerce for travel products does not continue to
grow or grows more slowly than expected. Consumers have traditionally relied on
travel agents and travel suppliers and are accustomed to a high degree of human
interaction in purchasing travel products. The success of our business is
dependent on significant increase in the number of consumers who use the
Internet to purchase travel products.
OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD.
Consumer concerns over the security of transactions conducted on the Internet or
the privacy of users may inhibit the growth of the Internet and online commerce.
To transmit confidential information such as customer credit card numbers
securely, we rely on encryption and authentication technology. 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
12
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.
OUR BUSINESS BENEFITS FROM FAVORABLE "NET" OR "BULK" CONTRACTS, AND CANCELLATION
OR LIMITATION ON USE OF THESE CONTRACTS COULD ADVERSELY AFFECT OUR BUSINESS.
Our Company holds "net" or "bulk" air contracts with American Airlines, British
Airways, Delta, Air France, US Air, Alitalia, Continental, SAS, Air Jamaica,
SwissAir, Iberia, Air Canada; Air Italia and Lan Chile. These contracts permit
the Company to create and sell air and bundled travel packages that are less
expensive to consumers and more profitable for the Company than packages based
upon "scheduled" airfare. In Spring 2006, one major airline informed us that it
recently cancelled wholesale bulk contracts with many of our competitors.
Although no airline has cancelled or limited our bulk contracts, the contracts
are terminable and modifiable at the will of the airlines, in which case our
business could be adversely affected.
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.
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.
13
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 websites, technology and systems may become obsolete. Our future
success will depend on our ability to do the following:
o enhance our existing products;
o develop and license new products and technologies 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
o 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 comparison to the search and
display functionality of our competitors' websites. If we face material delays
in introducing new services, products and enhancements, our customers may forego
the use of our products and use those of our competitors. The technology and
methodologies to attract customers to specific websites is constantly changing.
Customer preferences on which websites to use and the comfort level regarding
reliability, safety of personal information, and ease of use continues to
evolve. If we are unable to attract customers to our website or to achieve
follow-through purchases, our revenues will be adversely affected and we may not
be able to achieve profitability, 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
14
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.
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
15
difficulties with retention, hiring and training of key personnel, raise risks
associated with unanticipated problems or legal liabilities, and require
non-cash accounting charges associated with the amortization of acquired
intangible assets. Furthermore, although we conduct due diligence and generally
require representations, warranties and indemnification from the former owners
of acquired companies, those former owners may not accurately represent the
financial and operating conditions of their companies and may not have the means
to satisfy their indemnification obligations. If an acquired company's financial
or operating results were misrepresented, the acquisition could have a material
adverse affect on our business, financial condition and results of operations.
FINANCING OF FUTURE ACQUISITIONS WILL DILUTE EXISTING STOCKHOLDER OWNERSHIP.
We intend to finance future acquisitions by using shares of our common stock or
preferred stock for a substantial portion of the consideration to be paid. This
reliance upon the use of common stock or preferred stock as consideration will
dilute shareholders' interests in the Company.
OUR SUCCESS DEPENDS ON MAINTAINING THE INTEGRITY OF OUR SYSTEMS AND
INFRASTRUCTURE.
In order to be successful, we must continue to provide reliable, real-time
access to our systems for our customers and suppliers. As our operations
continue to grow in both size and scope, domestically and internationally, we
shall need to improve and upgrade our systems and infrastructure to offer an
increasing number of customers and travel suppliers enhanced products, services,
features and functionality. The expansion of our systems and infrastructure will
require us to commit substantial financial, operational and technical resources
before the volume of business will increase. Consumers and suppliers will not
tolerate a service hampered by slow delivery times, unreliable service levels or
insufficient capacity, any of which could have a material adverse effect on our
business, operating results and financial condition.
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:
o 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.
o 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.
16
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. For the nine months ended September 30, 2006,
substantially all of the Company's travel products were for destinations
in the Caribbean and Mexico. This concentration potentially exposes us to
both political and weather risks of this region.
o 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.
o 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.
o 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.
RISKS RELATED TO HOLDING OUR SECURITIES
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CALLABLE SECURED CONVERTIBLE
NOTES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of November 30, 2006, we had callable secured convertible notes outstanding
or an obligation to issue callable secured convertible notes that may be
converted into an estimated 5,541,473 shares of our Common Stock at current
market prices, and outstanding warrants or an obligation to issue warrants to
purchase 9,988,217 shares of our Common Stock. In addition, the number of shares
of our Common Stock issuable upon conversion of the outstanding callable secured
convertible notes may increase if there is an event of default. The sale of
these shares may adversely affect the market price of our Common Stock.
IF THERE IS AN EVENT OF DEFAULT, THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE
FEATURE OF OUR CALLABLE SECURED CONVERTIBLE NOTES BECOME APPLICABLE, WHICH COULD
HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
Upon an event of default, the callable secured convertible notes become
immediately due and payable and we will pay an amount equal to the greater of
(i) 140% times the sum of (w) the then outstanding principal amount of such note
plus (x) accrued and unpaid interest on the unpaid principal amount of such note
to the Mandatory Prepayment Date plus (y) Default Interest, if any, on the
amounts referred to in clauses (w) and/or (x) plus (z) the Default Sum; or (ii)
the Parity Value of the Default Sum to be repaid. The significant downward
pressure on the price of our Common Stock as the selling stockholder converts
and sells material amounts could have an adverse effect on our stock price. In
addition, not only the sale of shares issued upon conversion or exercise of
notes, warrants and options, but also the mere perception that these sales could
occur, may adversely affect the market price of our Common Stock.
17
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES
AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the callable secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their callable secured convertible notes and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
subsequently converting the remainder of their holdings. In this way, the
selling stockholders may sell more than 4.99% while never holding more than the
foregoing limit at any one time. There is no upper limit on the number of shares
that may be issued which may in effect further dilute the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CALLABLE SECURED
CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF
AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CALLABLE SECURED
CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH
COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
On January 13, 2006, we issued a convertible promissory note in the amount of
$2,000,000. This note bears simple interest at the rate of 8% per annum and is
due and payable with interest on January 13, 2007. In February and March we
issued convertible promissory notes in the aggregate principal amount of
$2,050,000. These notes bear interest at the rate of 9% and are due and payable
with interest in February and March 2007. On September 20, 2006, the Company
modified its $2,000,000 convertible promissory note, pursuant to which the
principal of the note was increased by $250,000 to $2,250,000. On November 9,
2006, we entered into a Security Purchase Agreement involving the sale of an
aggregate of $1,000,000 principal amount of callable secured convertible notes
and stock purchase warrants to buy 5,000,000 shares of our Common Stock. The
callable secured convertible notes are due and payable, with 6% interest, three
years from the date of issuance, unless sooner converted into shares of our
common stock. Although we currently have $600,000 callable secured convertible
notes outstanding pursuant to this financing, the investor is obligated to
purchase additional callable secured convertible notes in the aggregate amount
of $400,000.
Any event of default such as our failure to repay the principal or interest when
due, our failure to issue shares of common stock upon conversion by the holder,
our failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against us in
excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization
or liquidation proceeding against us and the delisting of our common stock could
require the early repayment of the callable secured convertible notes, including
a default interest rate on the outstanding principal balance of the notes if the
default is not cured within the specified grace period. We anticipate that the
full amount of the callable secured convertible notes will be converted into
shares of our common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured convertible
notes, we would be required to use our limited working capital and raise
additional funds. If we were unable to repay the notes when required, the note
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
18
On November 13, 2006, the Company was named as a principal party to proceedings
brought in the name of Raymon Valdes seeking approximately $440,000 on breach of
contract theories and declaring the Company in default under the convertible
promissory notes issued in connection with its acquisition of Changes In
L'Attitudes. On November 22, 2006, the Company was also named as a principal
party to proceedings brought by MMA Capital, LLC seeking approximately
$2,250,000 on breach of contract theories and declaring the Company in default
under the convertible promissory notes issued to this investor. If we are unable
to resolve these matters, the note holders could proceed with these legal
actions against us and foreclose on all of our assets to recover the amounts
due. Any such action would require us to curtail or cease operations.
OUR COMMON STOCK COULD BE CONSIDERED A "PENNY STOCK."
Our common stock is considered to be a "penny stock" because it meets one or
more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section
15(g) of the Securities Exchange Act of 1934, as amended. These include but are
not limited to, the following: (i) the stock trades at a price less than $5.00
per share; (ii) it is not traded on a "recognized" national exchange; (iii) it
is not quoted on The Nasdaq Stock Market, or even if quoted, has a price less
than $5.00 per share; or (iv) is issued by a company with net tangible assets
less than $2.0 million, if in business more than a continuous three years, or
with average revenues of less than $6.0 million for the past three years. The
principal result or effect of being designated a "penny stock" is that
securities broker-dealers cannot recommend the stock but must trade it on an
unsolicited basis.
BROKER-DEALER REQUIREMENTS MAY AFFECT TRADING AND LIQUIDITY.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's account.
Potential investors in our common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stocks." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
WE HAVE THE RIGHT TO ISSUE UP TO 20,000,000 SHARES OF "BLANK CHECK" PREFERRED
STOCK, WHICH MAY ADVERSELY AFFECT THE VOTING POWER OF THE HOLDERS OR OTHER OF
OUR SECURITIES AND MAY DETER HOSTILE TAKEOVERS OR DELAY CHANGES IN MANAGEMENT
CONTROL.
We may issue up to 20,000,000 shares of our preferred stock from time to time in
one or more series, and with such rights, preferences and designations as our
board of directors may determinate from time to time. To date, we have not
issued any shares of preferred stock. Our board of directors, without further
approval of our common stockholders, is authorized to fix the dividend rights
and terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any series of our
preferred stock. Issuances of additional shares of preferred stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of other of our securities and may, under certain
circumstances, have the effect of deterring hostile takeovers or delaying
changes in management control.
19
OUR COMMON STOCK MAY BE VOLATILE, WHICH SUBSTANTIALLY INCREASES THE RISK THAT
YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PRICE THAT YOU MAY PAY
FOR THE SHARES.
Because of the limited trading market expected to develop for our common stock,
and because of the possible price volatility, you may not be able to sell your
shares of common stock when you desire to do so. The inability to sell your
shares in a rapidly declining market may substantially increase your risk of
loss because of such illiquidity and because the price for our common stock may
suffer greater declines because of its price volatility.
The price of our common stock that will prevail in the market after this
offering may be higher or lower than the price you may pay. Certain factors,
some of which are beyond our control, that may cause our share price to
fluctuate significantly include, but are not limited to, the following:
o variations in our quarterly operating results;
o loss of a key relationship or failure to complete significant
transactions;
o additions or departures of key personnel; and
o fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the
over-the-counter markets in particular, have experienced extreme price and
volume fluctuations. In some cases, these fluctuations are unrelated or
disproportionate to the operating performance of the underlying company. These
market and industry factors may materially and adversely affect our stock price,
regardless of our operating performance.
In the past, class action litigation often has been brought against companies
following periods of volatility in the market price of those companies' common
stock. If we become involved in this type of litigation in the future, it could
result in substantial costs and diversion of management attention and resources,
which could have a further negative effect on your investment in our stock.
MANY OF OUR SHARES OF COMMON STOCK WILL IN THE FUTURE BE AVAILABLE FOR SALE. ANY
SALES OF OUR COMMON STOCK, IF IN SIGNIFICANT AMOUNTS, ARE LIKELY TO DEPRESS THE
MARKET PRICE OF OUR SHARES.
Assuming all of the 455,000 shares of common stock issued and issuable to the
selling stockholders are sold, we would have 12,641,923 shares that are freely
tradable without the requirement of registration under the Securities Act of
1933 (including 11,465,167 shares registered under separate registration
statements). Currently, 11,304,439 shares of our common stock are "restricted
securities" as defined under Rule 144 of the Securities Act of 1933 and
1,176,756 remaining shares are a part of the public float for a total of
12,481,195 shares. Of these shares, 3,677,777 are owned by our officers and
directors. These individuals may only sell their shares, absent registration, in
accordance with the provisions of Rule 144.
Restricted securities may only be publicly sold pursuant to registration under
the Securities Act of 1933, or pursuant to Rule 144 or some other exemption that
may be available from the registration requirements of the Securities Act of
1933. Rule 144 entitles each person holding restricted securities for a period
of one year, and affiliates who own non-restricted shares of our common stock,
to sell every three months in ordinary brokerage transactions an amount of
shares which does not exceed the greater of 1% of the shares of our common stock
outstanding or, assuming the shares of common stock are then traded on Nasdaq,
the average weekly trading volume during the four calendar weeks prior to said
sale. Any substantial sales pursuant to Rule 144, including the potential sale
of our affiliates' shares of our common stock, may have an adverse effect on the
market price of shares of our common stock, and may hinder our ability to
arrange subsequent equity or debt financing or affect the terms and time of such
financing.
WE HAVE NOT PAID, AND DO NOT INTEND TO PAY, CASH DIVIDENDS IN THE FORESEEABLE
FUTURE.
We have not paid any cash dividends on our common stock and do not intend to pay
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, for reinvestment in the development and expansion of our business.
Dividend payments in the future may also be limited by other loan agreements or
20
covenants contained in other securities which we may issue. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and depend on our financial condition, results of operations, capital
and legal requirements and such other factors as our board of directors deems
relevant.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by the
selling stockholders pursuant to this prospectus.
SELLING SECURITY HOLDERS
We agreed to register for sale shares of common stock by the selling
stockholders listed below. The selling stockholders may from time to time offer
and sell any or all of their shares that are registered under this prospectus.
All expenses incurred with respect to the registration of the common stock will
be borne by us, but we will not be obligated to pay any underwriting fees,
discounts, commissions or other expenses incurred by the selling stockholders in
connection with the sale of such shares.
The following table sets forth information with respect to the maximum number of
shares of common stock beneficially owned by the selling stockholders named
below and as adjusted to give effect to the sale of the shares offered hereby.
The shares beneficially owned have been determined in accordance with rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The information in the table below
is current as of the date of this prospectus. All information contained in the
table below is based upon information provided to us by the selling stockholders
and we have not independently verified this information. The selling
stockholders are not making any representation that any shares covered by the
prospectus will be offered for sale. The selling stockholders may from time to
time offer and sell pursuant to this prospectus any or all of the common stock
being registered.
Except as indicated below, none of the selling stockholders has held any
position or office with us, nor are any of the selling stockholders associates
or affiliates of any of our officers or directors. Except as indicated below, no
selling stockholder is the beneficial owner of any additional shares of common
stock or other equity securities issued by us or any securities convertible
into, or exercisable or exchangeable for, our equity securities. No selling
stockholder is a registered broker-dealer or an affiliate of a broker-dealer.
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.
21
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 .. 429,801 (1)(12) 266,667 (2)(3) -- --
JM Investors .......... 270,200 (4)(12) 144,583 (5)(3) -- --
Libra Finance S.A. .... 8,333 (6)(12) 8,333 -- --
RJ Prager Corp. ....... 2,917 (7)(12) 2,917 -- --
Ralph Beisner ......... 5,000 (8) 5,000 -- --
Jason W. Sanders ...... 2,500 (9) 2,500 -- --
Mitchell Levy ......... 2,500 (10) 2,500 -- --
Norman Nick ........... 12,500 (11) 12,500 -- --
------- ------- ------- -------
TOTAL ................. 733,751 445,000 -- --
======= =======
- ------------------------------
(1) Consists of 100,000 shares of common stock outstanding, 133,334 shares of
common stock issuable upon conversion of promissory notes, and 196,467 shares
issuable upon exercise of currently exercisable warrants. Of these shares,
115,700 are covered by registration statement 333-139438 filed with the SEC on
December 15, 2006. The address of the selling security holder is Pradafant 7,
9490 Furstentums, Vaduz, Lichtenstein. Konrad Ackerman and Rainer Posch make
decisions as to the voting and disposition of the securities.
(2) 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.
(3) Assumes all shares covered by this prospectus and the shares covered the by
prospectus included in registration statement 333-139438 filed with the SEC on
December 15, 2006 are sold.
(4) Consists of 100,000 shares of common stock issued and outstanding, 66,667
shares of common stock issuable upon conversion of promissory notes, and 103,533
shares issuable upon exercise of currently exercisable warrants. Of these
shares, 115,700 are covered by registration statement 333-139438 filed with the
SEC on December 15, 2006. 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9 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.
(10) 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.
22
(11) 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.
(12) 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.
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 sell 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 Act, or
Regulation S under the 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.
23
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
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. Each of the selling stockholders
acquired the securities offered hereby in the ordinary course of business and
have advised us that they have not entered into any agreements, understandings
or arrangements with any underwriters or broker-dealers regarding the sale of
their shares of common stock, nor is there an underwriter or coordinating broker
acting in connection with a proposed sale of shares of common stock by any
selling stockholder. If we are notified by any selling stockholder that any
material arrangement has been entered into with a broker-dealer for the sale of
shares of common stock, if required, we will file a supplement to this
prospectus. If the selling stockholders use this prospectus for any sale of the
shares of common stock, they will be subject to the prospectus delivery
requirements of the Securities Act of 1933.
We are required to pay all fees and expenses incident to the registration of the
shares of common stock. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933.
The anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
stockholders.
LEGAL PROCEEDINGS
The Company has been named as a principal party to proceedings brought in the
name of Raymon Valdes and in the name of Changes In L'Attitudes, Inc. in
Hillsborough County, Florida, Circuit Court. The proceedings began on November
13, 2006. The Company recently received service of the complaint and is
reviewing its contents. The complaint seeks approximately $440,000 on breach of
contract theories relating to the Company's acquisition of Changes In
L'Attitudes. The Company is in the process of retaining counsel to respond to
24
the complaint and anticipates issuing additional comment on its legal position
after full review of the matter. An acquisition payable of $440,000 and interest
expense totaling $81,000 has been accrued as of September 30, 2006, relative to
this proceeding.
The Company has been named as a principal party to proceedings brought by MMA
Capital, LLC in United States District Court for the Northern District of
California. The proceedings began on November 22, 2006. The Company recently
received service of the complaint and is reviewing its contents. The complaint
seeks approximately $2,250,000 on breach of contract theories relating to the
alleged failure of the Company to register shares of its common stock pursuant
to an agreement to convert debt payable under a secured note into common stock.
The Company has been named as a principal party to proceedings brought by MBN
Consulting, LLC in Hillsborough County, Florida, Circuit Court. The proceedings
began on November 22, 2006. The Company recently received service of the
complaint and is reviewing its contents. The complaint seeks approximately
$75,500 on the grounds of an alleged breach of consulting agreement. The Company
has retained counsel to evaluate the complaint and to prepare a responsive
pleading.
We are not a party to any other pending legal proceeding, nor are we aware of
any other legal proceedings being contemplated against us by any governmental
authority. We are not aware of any other 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
The following table includes the names, positions held, and ages of our current
executive officers and directors:
NAME AGE POSITION DIRECTOR SINCE
- -------------------------- ----- -------------------------- -----------------
Daniel G. Brandano 57 President, Chief Executive
Officer, acting Chief
Financial Officer and
Director January 2006
Mark E. Crone 42 Secretary and Director November 6, 2006
Eric H. Winston 59 Director November 6, 2006
Ben J. Dyer 58 Director December 1, 2006
Nigel P. Osborne 56 Executive Vice President
Daniel Brandano, Director, President and Chief Executive Officer. Mr. Brandano
has been the President and Chief Executive Officer and Director of the Company
since January 13, 2006. From May 2005 until January 2006 he 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.). From 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.
Mark Crone, Director. Mr. Crone has been a Director of the Company since
November 6, 2006. Mr. Crone has been a partner in the law firm of Crone Rozynko,
LLP since July 1, 2004. From January 1, 2001 to June 30, 2004, Mr. Crone was the
principal of The Crone Law Group. He has practiced corporate and securities law
since 1995 and is admitted to practice law in California and Connecticut. Mr.
Crone received an B.A. from Trinity College, Hartford, Connecticut in 1992 and a
J.D. from The University of Santa Clara School of Law in 1995.
Eric H. Winston, Director. Mr. Winston has been a Director of the Company since
November 6, 2006. Mr. Winston is the founder and President of E. H. Winston &
Associates, a management consultant in the areas of operational and financial
restructuring, strategic validation and profitable business growth, established
in 1985. Mr. Winston has also served as the President and Chief Executive
25
Officer of Inisoft Corporation, a software development company, since 1999. From
1997 through 1998 Mr. Winston was also President and Chief Executive Officer of
Microforum, Inc., an online enterprise solutions developer. From 1994 through
1996 Mr. Winston was President and Chief Operating Officer of Sound Source
Interactive, Inc., an interactive CD-Rom publisher of entertainment content. Mr.
Winston was President and Chief Executive Officer of Computer Data Information
Systems, Inc., an enterprise software developer, from 1985 to 1991. Mr. Winston
received a B. A. in Business Administration from Memphis State University,
Memphis, TN in 1969.
Ben J. Dyer, Director. Mr. Dyer is a General Partner of Cordova Intellimedia
Ventures, a $41 million seed capital fund that actively manages nine
investments. Mr. Dyer is also the president of Jackson Capital, LLC, which
provides corporate finance services to early-stage and mid-market companies.
Jackson Capital is an affiliate of Jackson Securities Incorporated. Dyer is also
a General Partner in a related entity, Southeast Ventures, a co-investment
growth fund targeted for minority vendors to Fortune 1000 companies. He is the
president of Innovations Publishing, LLC, a research firm which catalogs and
follows emerging privately-held ventures in the Southeast. Subscribers to its
online service include investors, entrepreneurs, and service providers. He is
also Chairman of Intellimedia Commerce, Inc., which was formed in January 1996
and is privately held. Intellimedia has engaged in the businesses of software
development and of incubating emerging technology companies. The genesis of the
company's original technical team was Intellimedia Sports, which Dyer founded in
1992 to create and own the sports instruction category in the then promising
CD-ROM industry. He was previously Chairman and CEO of Comsell, Inc., a
pioneering multimedia development firm, from its founding in 1983 until 1988,
when Comsell was acquired by Rupert Murdoch's News Corporation. Mr. Dyer was a
founder of Peachtree Software, Inc. and served as its president from inception
in 1977 through September 1983. The company was one of the top ten PC software
companies during his tenure and was sold to Management Science America in June
1981. After it was later sold to a venture group, Dyer returned as a director
until its April 1994 acquisition by ADP. Mr. Dyer served as president, chairman,
and a director of the de novo Enterprise National Bank during his interim
between Comsell and the creation of Intellimedia Sports. He is currently on the
boards of privately held FundRaisingInfo.com and of Teamstaff (TSTF), where he
chairs the audit committee. Dyer has concentrated his community activities on
higher education. He has been president of the Georgia Tech Alumni Association,
a director of the Georgia Tech Foundation, and chairman of the Alumni Advisory
Board for Tech's School of Industrial & Systems Engineering. He served a
30-month term as Chairman of the Georgia Tech Research Corporation. He is
currently on the External Advisory Council of the Georgia Tech Research
Institute. In March 2006 he received the Joseph Mayo Petit Alumni Distinguished
Service Award, Georgia Tech's highest honor for its alumni. On October 19, 1998
Dyer was inducted as the 14th member of Georgia's Technology Hall of Fame. Dyer
holds a Bachelor of Industrial Engineering degree with highest honor from
Georgia Tech, and an MBA in finance from Georgia State University, also with
highest honor.
Nigel P. Osborne, Executive Vice President. Mr. Osborne has been the Executive
Vice President of the Company since October 2006. From April 2002 to October
2005 Mr. Osborne was the President of Destination Europe, a travel company
specializing in European vacations. From March 2000 to April 2002, Mr. Osborne
was a Vice President, Sales and Marketing for Holland America Line Westours
where he led the company's expansion into Alaska. From 1995 to 2000, Mr. Osborne
was the President of Insight International Tours, a Boston-based tour company.
Mr. Osborne received a degree in Hotel Management and Tourism from Oxford
Polytechnic in Oxford England.
All directors serve for one year or until their successors are duly elected and
qualified. Directors do not presently receive monetary compensation for serving
as directors but do receive equity compensation in the form of stock or stock
options. On November 6, 2006, the Board granted Mr. Winston a one-time grant of
200,000 vested shares of common stock for his services as director. On November
6, 2006, the Board granted Mr. Crone an option to purchase 200,000 shares of the
Company's common stock at a purchase price of $0.70 per share, the closing price
of the Company's common stock on the date of grant, for his services as a
director. Also, on November 6, 2006, the Company granted options to purchase
800,000 shares of its common stock at an exercise price of $0.70 per share, the
closing price of the Company's common stock on the date of grant, to attorneys
with Crone Rozynko, LLP, of which Mr. Crone is a partner, in compensation for
professional fees. On December 1, 2006, the Board granted Mr. Dyer a one-time
26
grant of 200,000 vested shares of common stock for his services as director,
which are covered by the registration statement of which this prospectus is a
part.
Officers are appointed by the board of directors, and, subject to employment
agreements, the officers serve at the discretion of the board of directors.
There are no family relationships between any of our officers or directors.
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. Given the limited
scope of our operations to date, the Board of Directors believes that we do not
currently need to have an audit committee. 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
four members. We are not currently subject to any law, rule or regulation
requiring that all or any portion of our board of directors include
"independent" directors.
Audit Committee Financial Expert. The board of directors has not yet established
an audit committee and, as a result, 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 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.
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us as of November 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 5%
of our outstanding common stock;
o each director;
o each executive officer listed in the Summary Compensation Table; and
o all current executive officers and directors as a group.
27
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.
The number of shares and the percentage of shares beneficially owned by each
such person or group, as set forth below, include shares of common stock that
such person or group has the right to acquire on or within sixty days after
December 7, 2006 pursuant to the exercise of options or warrants. As of December
7, 2006, 12,481,195 shares of our common stock were issued and outstanding.
NUMBER OF PERCENT OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
NAMED EXECUTIVE OFFICERS AND DIRECTORS: --------------- ------------
Daniel G. Brandano ........................... 2,677,777(1) 20.2%
Mark E Crone ................................. 600,000(2) 4.6%
Eric H. Winston .............................. 200,000(3) 1.6%
Ben J. Dyer .................................. 200,000(3) 1.6%
Nigel P. Osborne ............................. - -
All Executive Officers and Directors as
a Group (5 persons) ......................... 3,677,777 28.0%
5% HOLDERS:
MMA Capital, LLC(4)
456 Montgomery Street, Ste. 2200
San Francisco, CA 94104 ...................... 6,130,000 36.1%
Diversified Acquisition Trust, LLC(5)
50 Braintree Hill Park, Ste. 108
Braintree, MA ................................ 1,839,506 14.2%
Stephen A. Hicks(6)
300 East 40th Street
New York, NY 10016 ........................... 1,666,667 12.4%
Thomas W. Busch
11618 Tavernay Parkway
Charlotte, North Carolina .................... 866,667 6.9%
Raymon Valdes(7)
3080 East Bay Drive
Largo, Florida 33771 ......................... 740,000 5.7%
Claudale Limited(8)
c/o T&T Management Services Limited
28 Irish Town, Gibraltar ..................... 693,333 5.6%
AJW Partners, LLC
AJW Offshore, Ltd.
AJW Qualified Partners, LLC
New Millenium Capital Partners, II, LLC ...... 622,811(9)(10) 4.9%
- ------------------
(1) Includes (a) 833,333 shares held by Mr. Brandano, (b) 1,066,666 shares of
common stock held by Street Ventures Partners, LLC, a limited liability
company in which Mr. Brandano shares equal ownership with his spouse, (c)
388,889 shares issuable upon exercise of the convertible feature of a note
held by Street Venture Partners, LLC, and (d) 388,889 shares issuable upon
exercise of currently exercisable warrants held by Street Venture Partners,
LLC. Does not include shares issuable upon conversion of accrued interest,
which is convertible at the option of the holder.
28
(2) Includes 600,000 shares subject to options that are currently exercisable
or exercisable within 60 days of December 7, 2006.
(3) The shares are subject to a repurchase option in favor of the Company. 25%
of the share repurchase rights lapsed on the grant and an additional 25% of
the Company's share repurchase option lapses at the beginning of each
quarter thereafter.
(4) Consists of (a) 2,250,000 shares issuable upon exercise of the convertible
feature of a note, (b) 2,250,000 shares issuable upon exercise of
outstanding warrants, (c) 1,000,000 shares transferred to MMC Capital from
Diversified Acquisition Trust, LLC related to a private transaction between
the parties pursuant to the recapitalization of the Company on January 13,
2006, (d) 100,000 shares from a stock purchase agreement on June 29, 2006,
(e) 400,000 shares from a stock purchase agreement on July 10, 2006, (f)
100,000 shares issued on August 16, 2006, pursuant to a Loan Modification
and Amendment Agreement and (g) 30,000 shares issued August 21, 2006,
pursuant to a consulting agreement with the Company. Does not include
shares issuable upon conversion of accrued interest, which is convertible
at the option of the holder.
(5) Geoffrey J. Eiten is the sole beneficial owner of Diversified Acquisition
Trust, LLC. Consists of (a) 1,395,066 shares of common stock, and (b)
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. Does not
include shares issuable upon conversion of accrued interest, which is
convertible at the option of the holder.
(7) Consists of (a) 340,000 shares of common stock and (b) 400,000 shares
issuable upon exercise of the convertible feature of a note. Does not
include shares issuable upon conversion of accrued interest, which is
convertible at the option of the holder.
(8) Claudale Limited is a Gibraltar company which owns 693,333 shares of common
stock. Claudale Limited also manages a family trust for Mr. Daniel
Brandano. Mr. Brandano has no ownership interest in Claudale Limited and
disclaims beneficial ownership or control of any of the Company's shares
owned by Claudale Limited.
(9) Consists of 622,811 shares issuable upon conversion of outstanding
convertible promissory notes. The selling stockholders are affiliates of
each other because they are under common control. AJW Partners, LLC is a
private investment fund that is owned by its investors and managed by SMS
Group, LLC. SMS Group, LLC, of which Mr. Corey S. Ribotsky is the fund
manager, has voting and investment control over the shares owned by AJW
Partners, LLC. AJW Offshore, Ltd., formerly known as AJW/New Millennium
Offshore, Ltd., is a private investment fund that is owned by its investors
and managed by First Street Manager II, LLC. First Street Manager II, LLC,
of which Corey S. Ribotsky is the fund manager, has voting and investment
control over the shares owned by AJW Offshore, Ltd. AJW Qualified Partners,
LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager,
LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Qualified Partners, LLC.
New Millennium Capital Partners II, LLC, is a private investment fund that
is owned by its investors and managed by First Street Manager II, LLC.
First Street Manager II, LLC, of which Corey S. Ribotsky is the fund
manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. Does not include shares issuable upon
conversion of accrued interest, which is convertible at the option of the
holder.
(10) The holders have contractually agreed to restrict their ability to convert
their convertible promissory notes or exercise their warrants and receive
shares of our common stock such that the number of shares of common stock
held by them and their affiliates after such conversion or exercise does
not exceed 4.99% of the then issued and outstanding shares of common stock.
29
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 December 7, 2006, 12,481,195 shares of common stock are issued and
outstanding.
COMMON STOCK
Holders of shares of common stock are entitled to share, on a ratable basis,
such dividends as may be declared by the board of directors out of funds,
legally available therefore. Upon our liquidation, dissolution or winding up,
after payment to creditors, our assets will be divided pro rata on a per share
basis among the holders of our common stock. Each share of common stock entitles
the holders thereof to one vote. Holders of common stock do not have cumulative
voting rights which means that the holders of more than 50% of the shares voting
for the election of directors can elect all of the directors if they choose to
do so, and, in such event, the holders of the remaining shares will not be able
to elect any directors. Our By-Laws require that only a majority of our issued
and outstanding shares need be represented to constitute a quorum and to
transact business at a stockholders' meeting. Our common stock has no
preemptive, subscription or conversion rights and is not redeemable by us.
PREFERRED STOCK
We are authorized to issue 20,000,000 shares of preferred stock, par value $.01
per share, having such designations, rights, preferences, powers and limitations
as may be determined by the board of directors at the time of designation. As of
December 7, 2006, no shares of preferred stock are issued and outstanding.
COMMON STOCK PURCHASE WARRANTS
There are currently outstanding common stock purchase warrants to purchase an
aggregate of 9,988,217 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 [need to include the warrants issued to the NIR group] 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
March 2005 Notes
In March 2005, we issued secured convertible promissory notes in the aggregate
principal amount of $300,000 to Alpha Capital Aktiengesellschaft, JM Investors,
LLC, Libra Finance, S.A. and RG Prager Corporation. The notes are convertible at
the option of the holder into shares of our common stock, at a price of $0.75
per share, subject to adjustment. On January 13, 2006, the Company issued
convertible promissory notes in the aggregate principal amount of $327,000
pursuant to a Modification and Waiver Agreement with Alpha Capital
Aktiengesellschaft, JM Investors, LLC, Libra Finance, S.A. and RG Prager
Corporation. The convertible promissory notes bear interest at the rate of 5%
30
per annum payable 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 payable beginning June 1, 2006. The notes
are convertible at a fixed price of $.75 per share, subject to certain
adjustments. Provided an Event of Default has not occurred, the Company may
prepay part or all of the outstanding principal amount of the promissory notes
by paying a sum equal to 150% of the principal amount to be redeemed plus any
accrued but unpaid interest.
Other 2005 Notes
From October to December 2005, the Company issued unsecured convertible
promissory notes in the aggregate principal amount of $132,500. The notes bear
interest at the rate of 10% per annum and are convertible into shares of the
Company's common stock at the conversion price of $0.90 per share. These notes
matured on June 30, 2006 Street Venture Partners
On January 3, 2006, the Company issued an unsecured convertible promissory note
in the principal amount of $350,000 to Street Venture Partners, LLC, a related
party in consideration for the purchase of the Casual Car General Service
Agreement (GSA). The note earns interest at an annual rate of 10% and matures on
January 3, 2007. As of September 30, 2006, the Note had an outstanding balance
of $350,000.
MMA Capital Notes
On January 13, 2006, the Company issued a secured convertible promissory note to
MMA Capital LLC, in the principal amount of $2,000,000. The note bears interest
at the rate of 8% per annum, and is convertible into shares of the Company's
common stock at a conversion price of $1.00 per share. 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
consideration for this deferral the Company agreed to increase the interest rate
retroactively from 8% to 10%.
Changes in L'Attitudes
On February 8, 2006, the Company issued a secured convertible promissory note in
the principal amount of $600,000 to Ramon Valdes in connection with the
acquisition of Changes in L'Attitudes. The note bears interest at the rate of 9%
per annum and is convertible at the option of the holder into to up to 654,000
shares of the Company's common stock.
Island Resort Tours
On March 6, 2006, the Company issued a secured convertible promissory note in
the principal amount of $1,450,000 to Stephen A. Hicks in connection with the
acquisition of Island Resort Tours, Inc. and International Travel and Resorts,
Inc. The note bears interest at the rate of 9% per annum and is convertible at
the option of the holder into up to 1,580,500 shares of the Company's common
stock.
November 2006 Notes
On November 9, 2006, the Company entered into a Securities Purchase Agreement
with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW
Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners, II,
LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are collectively
referred to as the "Purchasers". Pursuant to the Securities Purchase Agreement,
the Company issued and sold to the Purchasers Secured Convertible Term Notes
(the "Notes") in the aggregate principal amount of $1,000,000. The Notes bear
interest at 6% per annum, unless the common stock of the Company is greater than
$1.25 per share for each trading day of a month, in which event no interest is
payable during such month. The Notes are convertible into common stock of the
Company at a 50% discount to the average of the three lowest trading prices of
the common stock during the 20 trading day period prior to conversion; provided,
however, that the Notes are convertible into common stock of the Company at a
45% discount in the event that the Registration Statement covering the sale of
securities underlying the Notes ("Registration Statement"), is filed on or
before December 11, 2006; and (ii) a 40% discount in the event that the
Registration Statement becomes effective on or before March 9, 2007. In
connection with the offering, the Company issued an aggregate of 5,000,000
31
warrants to purchase common stock at a price of $1.50 per share ("Warrants").
The Warrants are exercisable for a period of seven years. The number of shares
subject to the Warrant and the exercise price are subject to adjustment for
stock splits, stock combinations and certain dilutive issuances, including the
issuance of shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or
underwriting discounts or allowances in connection therewith) less than the
5-day average of the last reported sales of the Company's Common Stock. In
addition, in certain circumstances the warrant exercise price will be adjusted
if after the Registration Statement is declared effective, the closing price for
the Company's Common Stock closes below $1.00. The issuance of the shares and
warrants was exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, as
transactions by an issuer not involving any public offering.
REGISTRATION RIGHTS
We agreed to file a post effective amendment to the existing registration
statement covering sale of the shares issuable upon conversion of the March 2005
Notes. 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 was withdrawn in November 2006. 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.
The holders of approximately 6.2 million shares of our common stock issuable
upon exercise of warrants and conversion of convertible promissory notes are
entitled to registration rights with respect to their shares.
Under the terms of a private placement that we completed on November 9, 2006, we
are required to register certain shares of our common stock that may be issued
in the future upon exercise of the warrants and conversion of outstanding
promissory notes that were acquired by the investors in this offering. We are
required to use our best efforts to maintain the effectiveness of the
registration statement of which this prospectus is a part until the earlier of
(i) the date on which all of the shares covered by the registration statement
have been sold and (ii) the date on which the shares (in the opinion of counsel
to the Initial Investors) may be immediately sold to the public without
registration or restriction (including, without limitation, as to volume by each
holder thereof) under the 1933 Act, except that we will be permitted to suspend
the use of the registration statement during certain periods under certain
circumstances. We will bear all registration expenses, other than underwriting
discounts and commissions.
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
Mark E. Crone, a director of the registrant, is a partner of Crone Rozynko, LLP,
which has given an opinion as to the validity of the securities being registered
by this Registration Statement. The Company granted to Mr. Crone options to
purchase up to 600,000 shares of the Company's common stock at the purchase
price of $0.70 per share. 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 no interest in the Company.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION 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.
32
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.
BUSINESS
COMPANY HISTORY
We were incorporated under the laws of the State of Minnesota in December 1984,
under the name TERTM, Inc. In 1989, we changed our name to TERTM Technology
Corporation and, in December 1993, again changed our name to DynEco Corporation.
Most recently, in March 2006, we again changed our name to Dynamic Leisure
Corporation.
Prior to 1991, we engaged in the design, development, manufacture and marketing
of certain proprietary products using a proprietary production process known as
the Thermal Expansion Resin Transfer Molding Process. We also marketed and
licensed a design engineering and contract manufacturing capability of products
using the TERTM process to third parties. We discontinued these operations in
1991 and, until the acquisition of the compressor assets and business of DynEco
International, Inc. ("DynEco International") in March 1994, we only engaged in
licensing the TERTM process and providing application engineering consulting
with respect to those licenses. We ceased all TERTM-related activities in March
1994.
In January 1993, we were introduced to DynEco International, a development-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.
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
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have been made to date, and we cannot predict whether Parker-Hannifin will
successfully sell licensed products incorporating this 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.
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 dynamic packaging software. 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.
On October 5, 2006, the Company entered into an Assignment and Assumption
Agreement with Buccaneer Exploration, Inc. pursuant to which the Company agreed
to sell, assign and transfer to Buccaneer Exploration, Inc. all of the Company's
right, title and interest in the Exclusive Worldwide License Agreement between
the Company and Parker Hannifin Corporation dated May 1, 2003, and Buccaneer
Exploration agreed to assume all of the Company's obligations under the License
Agreement, including repayment of any amounts the Company expended in
association with the License Agreement. The consummation of this transaction is
subject to the approval of TRDA, which has not yet been granted as of the date
of this filing.
On October 5, 2006, the Company entered into a second Assignment and Assumption
Agreement with Buccaneer Exploration, Inc. pursuant to which the Company agreed
to sell, assign and transfer to Buccaneer Exploration, Inc. all of the Company's
right, title and interest in the TRDA Funding Agreement dated November 20, 2002
with the Technology Research Development Authority of the State of Florida
("TRDA"), and Buccaneer Exploration has agreed to assume all of the Company's
obligations under the Funding Agreement, including payment of the Company's TRDA
loan payable - TRDA. The consummation of this transaction is subject to the
approval of TRDA, which has not yet been granted by TRDA as of the date of this
filing. On October 5, 2006, the Company entered into a third Assignment and
Assumption Agreement with Buccaneer Exploration, Inc. pursuant to which the
Company agreed to sell, assign and transfer to Buccaneer Exploration, Inc. all
of the Company's right, title and interest in the Exclusive Patent and Know-How
License Agreement dated January 12, 2006, by and between DynEco Corporation
(n/k/a Dynamic) and Dr. Thomas C. Edwards, and Buccaneer Exploration agreed to
assume all of the Company's obligations under the Edwards Patent Agreement.
CURRENT OPERATIONS
The Company is engaged in the business of marketing, selling and distributing a
variety of travel products and services either as bundled vacation packages or
as stand-alone products. The Company markets and sells its products and services
on a wholesale basis to travel agencies and other travel resellers and on a
retail basis directly to consumers.
Through our websites and customer service center, customers can search for,
inquire about, price and purchase vacation packages and other travel-related
products. We have experienced travel consultants and customer service
representatives available to both our wholesale and retail customers via
toll-free telephone or e-mail to assist customers in selecting and purchasing
vacation packages and stand-along travel related products. We expect to increase
the number of our customer representatives by the end of 2006.
We have established relationships with leading hotels, car rental agencies and
cruise lines that enable us to offer competitive rates at thousands of hotel
properties, 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, and numerous car rental companies and
cruise lines. In addition, we have entered into agreements with a number of
leading airlines such as American Airlines, British Airways, Delta, Air France,
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US Air, Alitalia, Continental, SAS, AirJamaica, SwissAir, Iberia, and Air Canada
Air Canada; Air Italia and Lan Chile. Many of these contracts are "net" or
"bulk" contracts, which allow us to offer competitive pricing with reasonable
margins. In Spring 2006, one major airline informed us that it recently
cancelled wholesale bulk contracts with many of our competitors. No airline has
cancelled or limited the Company's access to or use of our wholesale bulk
contracts. However, these contracts are not exclusive to us and may be modified
or cancelled in the airline's discretion. Our agreements with leading airlines,
allow us to offer consumers what we believe to be the largest selection of low
fares generally available to the public.
In addition, as a result of our long standing relationships with our suppliers,
we have been able to negotiate a number of bulk contracts with these suppliers.
STRATEGY
Our objective is to become a leading distributor of bundled travel products. The
key elements of our strategy include the following:
Implement Innovative Technology Platform. In 2005 we acquired the rights to
TourScape, a dynamic packaging reservation and purchasing software system
developed by the SABRE group. TourScape provides our customers greater
flexibility and advanced functionality in searching for, pricing and purchasing
bundled vacation packages online. Tourscape also provides faster information
flow to our reservation agents, and can be integrated into our accounting and
other business systems. It also supports multiple product lines, multiple
currencies, unlimited packaging capabilities, numerous pricing and costing
methods and various commission levels. We believe that TourScape will improve
our productivity, efficiency, record-keeping and business tracking, and reduce
operator training and booking time. We are in the process of implementing
TourScape and expect that it will be fully operational by the end of 2006.
Increase Sales of Bundled Vacation Packages. We believe that in order to become
profitable we must increase sales of our bundled vacation packages, which have
higher margins than stand-alone travel related products. We intend to achieve
this objective by:
o Offering attractive prices on personalized vacation packages and tours;
o Expanding our product offerings by developing relationships with suppliers
in new destinations;
o Increasing awareness of our travel products by travel agencies and travel
resellers through developing and distributing printed and online marketing
materials, attending trade shows and networking with existing industry
contracts.
Expand our Customer Base Our goal is to increase our customer base by acquiring
new customers in a cost-effective manner and increasing our market share in the
rapidly growing online travel industry. We intend to achieve this objective by:
o Emphasizing online advertising and other targeted marketing strategies;
o Cost-effectively building our brand through traditional broadcast and
print channels;
o Generating increased transactions from frequent customers using direct
mail recognition programs and encouraging infrequent bookers to purchase
more travel from us using supplier incentives;
o Implementing strategies to drive traffic to our websites. We currently own
over one hundred (100) uniform resource locators (URL's), most of which
have been operating for at least five years. These URL's direct visitors
to one of 30 websites and are currently registering monthly traffic
ranging from 400 to 140,000 unique visitors per month. We are in the
process of updating our existing websites and developing new websites to
attract new customers based in the United States, Europe, Asia and Latin
America.
o Increasing brand awareness of our websites and travel products.
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o Target international customers. We believe Europe represents a large
market for vacation packages to U.S. destinations. We intend to target
international customers through our wholly-owned subsidiary Dynamic
Leisure Europe Limited located in London, England.
Expand Relationships With Suppliers. As a result of our long-established
relationships with travel industry vendors, we have been able to secure bulk
contracts with a number of our suppliers, which permits us to price our products
competitively while maintaining our gross margins. Our goal is to leverage these
relationships and our reputation as an established wholesale travel supplier to
increase the number of relationships we have with travel suppliers with the goal
of increasing the number of bulk contracts that we have with our suppliers.
Improve Cross-Selling and Marketing Techniques: We have increased and intend to
continue to increase cross-selling of lodging and car rental products by
presenting air customers at the point of sale with an improved matrix display of
lodging and car rental choices, based on their selected air travel itinerary. We
are also increasing consumer awareness of our non-air travel offerings through
targeted direct marketing of these products to our registered user base and
other potential customers. A portion of our recent broadcast advertising has
focused on our hotel initiatives and we expect to continue this targeted
advertising.
Retain Customers by Providing a Superior Experience Our goal is to offer
consumers the broadest selection of travel options, the largest selection of low
fares generally available to the public and a wide array of competitive rates on
other travel products. We believe these factors will generate a high degree of
customer loyalty and result in high customer retention rates. Key initiatives to
promote higher customer retention include:
o Continue to maintain strong supplier relationships to ensure the largest
selection of low fares generally available to the public and a wide array
of competitive rates on other travel products;
o Have specialized vacation package inventory available to consumers;
o Utilize online tools that help facilitate complex leisure travel
purchases; and
o Provide the customer service, both online and off, that is necessary to
make the customer feel comfortable booking our bundled leisure travel
packages online.
Pursue New Business Opportunities We plan to use our innovative technology and
our relationships with travel suppliers to expand into new business
opportunities that enhance our growth prospects.
In order to pursue these business opportunities and our other growth
initiatives, we may make strategic acquisitions of other businesses, products
and technologies. The discussion of our strategy in this section reflects our
current view of the ways we intend to develop our business in the future. Many
of the initiatives we describe above are at an early stage, and we continue to
review them in light of changing business conditions. We may change our plans,
and future developments could differ from those we intend or expect to occur.
Foster Strategic Partnerships And Private Label Programs. We believe that one of
the most important aspects of developing a successful online travel website is
the process of creating and managing the requisite strategic partnerships and
alliances. Strategic partnerships with web portals, e-commerce companies and
content providers have the potential to generate revenue from transactions and
advertisements, and also place the brand in front of Internet users. We intend
to pursue these types of strategic online partnerships as a means to generate
traffic, customer acquisition and revenue. We intend to enter into private label
agreements to provide fulfillment on all travel purchased on several heavily
trafficked e-commerce websites.
Establish A Dynamic Affiliate Program. Thousands of websites are currently
utilizing the affiliate (also known as associate or referral) programs of online
vendors to offer their visitors the opportunity to buy everything from books to
sporting goods to cars. These programs allow any website owner to create banner
links that transport visitors to the affiliate e-commerce website in the hope
36
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 began the process of
implementing affiliate links.
SALES AND MARKETING
We use various forms of marketing, including traditional advertising such as
print publications and Internet advertising, placement on search engine websites
such as Google and targeted online marketing efforts. For example, in June 2006,
the Company initiated a targeted email marketing campaign to existing customers
and individuals selected based on demographics and travel history. We expect to
continue to use online advertising as our primary marketing vehicle. A smaller
portion of our marketing budget is dedicated to traditional advertising such as
print publications.
In addition, we participate in industry trade shows such as American Society of
Travel Agents and the National Association of Commissioned Travel Agents to
introduce our products and brands to the industry.
Creating our brands is a critical aspect of developing our business model and
resulting sales. We intend to continue to utilize a combination of advertising
strategies to market our brands, including the use of targeted e-mail campaigns,
promotions, special offers, and newsletters.
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 cruise
lines. Advantages of suppliers over their agency counterparts include, among
others,
o Well-established brands and consumer confidence in those brands;
o Customer loyalty;
o Existing operational infrastructure and fulfillment of capabilities;
o Access to additional inventories and pricing incentives;
o Other incentives such as frequent flyer miles programs; and
o Availability of extensive financial resources to invest in Internet
initiatives.
Travel Agencies. Travel agencies with an online presence are comprised of both
online companies and established brick-and mortar operations. According to
studies of online travel by such companies and/or publications as PhoCuswright,
Inc., Forrest Research, Jupiter Research and Research Works, some of the leaders
in online travel include, among others:
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o Orbitz
o Travelocity
o Expedia
o GetThere.com
o Travel Network
o Uniglobe Travel
o 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
The services we provide are subject to various federal, state and local
regulations. For example, our travel service is subject to laws governing the
offer and/or sale of travel services as well as laws requiring us to register as
a "seller of travel." In addition, our services may be subject to various state
and local taxing regulations. See "Risk Factors - Uncertainty regarding state
and local taxes".
In addition, our business is indirectly affected by regulatory and legal
uncertainties affecting travel suppliers and global distribution systems. In
2004, the Department of Transportation (the "DOT") published a Final Rule,
abolishing the rules governing global distribution systems. As a part of the
Final Rule, the DOT rejected proposals to regulate online travel service
providers' fare displays. However, the DOT deferred consideration of a proposal
to amend its policies regarding advertising of air tickets, to require that
agency service fees be stated separately from the price being charged by the
airlines. Our current service fee disclosure practices differ from those
proposed by the DOT. If the DOT were to resume consideration of and adopt the
service fee proposal, we may have less flexibility regarding merchandising air
travel on our websites.
We are subject to federal, state and international laws that require protection
of user privacy and user data. In our processing of travel transactions, we
receive and store a large volume of personally identifiable data. This data is
increasingly subject to legislation and regulations in numerous jurisdictions
around the world, including the Commission of the European Union through its
Data Protection Directive and variations of that directive in the member states
of the European Union. Such government action is typically intended to protect
the privacy of personal data that is collected, processed and transmitted in or
from the governing jurisdiction. We are currently developing a privacy policy
that is being designed to ensure the protection of the privacy of our customers
and that we intend to be in compliance with the federal, state and international
laws applicable to the Company. We also intend to take the necessary measures to
ensure that our websites comply with industry standards relating to user
privacy.
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All of our services are subject to federal and state consumer protection laws
and regulations prohibiting unfair and deceptive trade practices.
We are also subject to regulations applicable to businesses conducting online
commerce. Today there are relatively few laws specifically directed toward
online services. However, due to the increasing popularity and use of the
Internet and online services, it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and
regulations could cover issues such as online contracts, user privacy, freedom
of expression, pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is developing, but any such new legislation could
have significant implications on how we conduct online business. In addition,
some states may require us to qualify in that state to do business as a foreign
corporation because our service is available in that state over the Internet.
Recently telephone carriers have requested the Federal Communications Commission
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. See "Risk Factors - Regulatory and legal
uncertainties could harm our business," and "Uncertainty Regarding State Taxes."
RECENT ACQUISITIONS AND RECAPITALIZATION
Casual Car General Service Agreement
On January 3, 2006, Street Venture Partners, LLC, sold the U.S. 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 utilize its rights under the Casual Car GSA to market and sell car rental
services direct to the final consumer via the Internet under the Casual Car
rental brand website and to bundle car rental services with packages on the
Company's other Internet sites. 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. We believe the volume of rental
cars provided under the GSA will increase when the Company adds air and hotel
travel products to the Casual Car rental website in the first quarter of 2007.
Stock Exchange Agreement
On January 13, 2006, we entered into a Stock Exchange Agreement with the former
shareholders of Dynamic Leisure Group, Inc. 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 converted into 6,566,667 shares of common stock in February 2006.
See Exhibit 10.19. This transaction was treated as a recapitalization of Dynamic
Leisure Group, North America, Inc. for accounting purposes.
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. ("CIL"), for a
purchase price of $2,090,680. The purchase price consisted of a combination of
$640,000 in cash, a one-year secured convertible promissory note in the
principal amount of $600,000 and 340,000 shares of our common stock. The
acquisition of CIL is expected to provide the Company with a direct-to-consumer
selling channel via the Internet to the strategically desirable Caribbean
leisure market. Revenue from the date of acquisition through September 30, 2006
from this business was $3,234,708. See Exhibit 10.26.
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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
consisted of a combination of $1,500,000 in cash, a one-year secured convertible
promissory note in the principal amount of $1,450,000, and 700,000 shares of the
Company's common stock. 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. Revenue from the date of acquisition
through September 30, 2006 from this business was $1,018,627. See Exhibit 10.28.
EMPLOYEES
As of the date of this Prospectus, the Company employed approximately 40 people
and is actively hiring additional personnel, particularly customer service
representatives and travel consultants. No employee is a party to a collective
bargaining agreement.
40
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 the first three 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. As part of the Stock
Exchange Agreement with Dynamic, we issued 6,566,667 shares of our common stock.
Following the recapitalization, the Company changed the focus of its business
strategy to pursue opportunities in the leisure travel market, primarily as a
wholesaler of bundled 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.
In February and March 2006 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. ("IRT") 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. We expect to
produce initial revenue growth via opportunities in the leisure travel market,
including developing a more prominent Internet presence.
CRITICAL ACCOUNTING ESTIMATES
Stock-Based Compensation Plans
We have one active stock-based compensation plan 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,
41
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.
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.
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. 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.
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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 in the price of the
Company 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. In the three months ended September 30, 2006, the
Company's revaluation of its warrant liability resulted in income of $817,101
due to the reduction in volatility of the Company's common stock. The Company
remeasured the volatility of its stock as of September 30, 2006 by evaluating
changes in stock price from January 13, 2006, the recapitalization date, to
September 30, 2006. Formerly, volatility was measured by the inclusion of years
prior to the merger. As a result, volatility was reduced from 271% as of June
30, 2006 to 142% as of September 30, 2006. The valuation of the warrant
liability is a non-cash income or expense to the Company.
The change in the volatility is a result of the change in the expected term of
the warrants due to the passage of time which results in a change in the time
frame from which the stock price data points to compute volatility were
selected. Since volatility has been computed based on historical volatility of
the corporation, less data points were selected from the beginning of the period
and more data points were selected to update through June 30, 2006. This
resulted in a decrease of volatility from 335% to 270% at June 30th 2006.
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, 2005, 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.
Nine Months Ended September 30, 2006
Because DLG was founded in May 2005, there exists limited operating and no
comparable financial results in prior years for the three months ended March 31,
2005. The comparable 2005 results begin at our inception date of May 16, 2005.
The operating results of the Company are included beginning January 13, 2006,
the operating results of CIL and IRT-ITR are included beginning February 8, 2006
and March 6, 2006, respectively, the date of acquisition by the Company.
Revenues for the near term will depend upon our ability to continue existing
revenue streams from leisure travel businesses and execute on our plans for
additional revenue growth.
Our revenues for 2006 were derived from CIL and IRT-ITR as we began to expand in
the leisure travel market. Operating expenses for the three months and nine
months ended September 30, 2006 are a combination of the operating expenses from
CIL and ITR-IRT as a result of their acquisition and the concurrent
establishment of corporate infrastructure, technology, and operational functions
to support the planned growth of the business.
43
A net loss of $7,312,316 was reported for the nine months ended September 30,
2006, in part was the result of significant non-cash based general and
administrative expenses, depreciation and amortization, 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 September 30, 2006 Compared To The Period From Inception (May
16, 2005) To September 30, 2005.
With an inception date of May 16, 2005, Dynamic Leisure Group, Inc was a
development-stage company and did not generate any revenue in 2005. DLG had
$161,010 in general and administrative expenses incurred during the third
quarter of 2005 consisting primarily of salaries of $100,500 and professional
fees of $19,000, mostly related to capital raising efforts.
During the first quarter of 2006, the Company moved from the development-stage
to the operational stage by acquiring CIL on February 8, 2006 and IRT-ITR on
March 6, 2006. The operating results for our three months ended September 30,
2006 include activity from these acquisitions for the entire quarter.
Revenues for the three months ended September 30, 2006 were $1,299,505. Our
revenue was derived primarily from the sale of vacation packages, the sale of
airline tickets, recorded on a net revenue basis, and certain fees or
commissions earned. Revenues from the sale of vacation packages was $1,044,177
and revenues from the sale of airline tickets and other fees and commissions
earned was $248,003.
Gross profit from the sale of vacation packages totaled $208,804 or 20% of
related revenues. Gross profit from the sale of airline tickets, recorded on a
net revenue basis, and certain fees and commissions totaled $201,973 or 81.4% of
related revenue, with costs of revenue consisting of commissions payable to
independent travel agents and certain third party processing fees.
General and administrative expenses for the three months ended September 30,
2006 were $2,149,014 compared to $1,534,873 and $831,028 for the second and
first and second quarters of 2006, respectively. During the third quarter, the
Company recorded non-cash expenses totaling $711,140, as compared $42,036 in the
first two quarters of 2006. The non-cash expenses consisted of the value of
common stock and warrants, recorded at fair value, issued to service providers
and a director. These non-cash expenses included public relation fees of
$157,100, financial consultant fees of $284,040 and stock issued to a former
director valued at $270,000.
All other general and administrative expenses for the three months ended
September 30, 2006 were $1,437,874 as compared to $1,412,789 and $826,515 for
the second and first quarters of 2006, respectively. These expenses increased
from the first to second and third quarter as a result of the acquisitions of
CIL and IRT/ITR and costs related to integrating those operations consisting of
professional fees and increased personnel costs. General and administrative
expenses for the third quarter consisted of accounting fees of $124,439 in the
third quarter compared to $123,890 and $52,046 in the second and first quarters,
respectively; legal fees of $50,411 compared to $10,515 and $15,396 in the
second and first quarters, respectively; financial and technology contractor
services expense was $33,509 compared to $110,602 and $118,749 in the second and
first quarters, respectively; payroll and related taxes and benefits were
$658,316 compared to $722,006 and $445,125 in the second and first quarters,
respectively; and the balance of the general and administrative expenses were
$571,199 compared to $487,812 and $153,163 in the second and first quarters,
respectively.
As we increase the volume of our business and contracts with suppliers, and sell
more products directly to the traveling customer over the Internet, we
anticipate general and administrative expenses as a percentage of revenue to
decrease.
Interest expense for the three months ended September 30, 2006 was $1,333,589.
This amount consists of interest expense accrued on outstanding loans of
$133,202 and interest recorded on purchase price payables of $81,000 plus
non-cash interest expense items consisting of the amortization of debt discount
of $994,387 and common stock valued at $125,000 and issued as consideration for
the modification of debt agreements.
44
The warrant valuation for the third quarter of 2006 resulted in income of
$817,101 due to the reduction of the volatility of the Company's common stock to
142%. The Company remeasured the volatility of its stock as of September 30,
2006 by evaluating changes in stock price from January 13, 2006, the
recapitalization date, to September 30, 2006. Formerly, volatility was measured
by the inclusion of years prior to the merger. As a result, volatility was
reduced from 271% as of June 30, 2006 (as previously reported) to 142% as of
September 30, 2006. This remeasurement as been recorded as a change in estimate
in the three months ended September 30, 2006. The valuation of the warrant
liability is a non-cash income or expense to the Company.
Net loss in the three months ended September 30, 2006 was $2,622,012 as
compared to $532,995 in the second quarter of 2006. The third quarter net loss
includes non-cash general and administrative expenses of $711,140, depreciation
and amortization expense of $336,221 and non-cash interest expense of $1,119,387
attributed to the issuance of securities.
Nine Months Ended September 30, 2006 Compared To The Period From Inception (May
16, 2005) To September 30, 2005.
With an inception date of May 16, 2005, Dynamic Leisure Group, Inc was a
development-stage company during 2005 and did not generate any revenue. DLG had
general and administrative expenses the $210,835 during the first nine months of
2005 consisting of salaries of $134,000 and professional fees of $34,750,
primarily related to capital raising efforts.
During the first quarter of 2006 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 nine months
ended September 30, 2006 include activity from the date of these acquisitions to
September 30, 2006.
Revenues for the nine months ended September 30, 2006 were $4,307,315 and gross
profit was $1,265,840. Our revenues were derived primarily from the sale of
vacation packages of $3,547,323, and the sale of airline tickets, recorded on a
net revenue basis, when issued, and certain fees or commissions considered
earned during the period, of $706,012.
Gross profit from the sale of travel packages was $688,613 or 19.4% of related
revenues. Gross profit from the sale of airline tickets, recorded on a net
revenue basis, and certain fees and commissions was $525,747 or 74.5% of related
revenue, with costs of revenue consisting of commissions payable to independent
travel agents and certain third party processing fees.
General and administrative expenses for the nine months ended September 30, 2006
were $4,430,354 compared to $210,835 for the same period in 2005. The increase
is the result of Company acquiring CIL and IRT/ITR on February 8, 2006 and March
6, 2006, respectively and expanding its corporate operations. During the nine
months ended September 30, 2006, the Company recorded certain non-cash expenses
of $753,176 related to the value of common stock and warrants recorded at fair
value, and issued to service providers and a former director. These non-cash
expenses included public relation fees of $157,100, financial consultant fees of
$326,076 and stock issued to a former director valued at $270,000.
All other general and administrative expenses for the nine months ended
September 30, 2006 were $3,677,178 and including costs related to integrating
the operations of CIL and IRT-ITR, which increased professional fees and
personnel costs. More specifically, accounting fees were $300,375, legal fees
were $76,322, financial and technology contractor services were $262,860, and
payroll and related taxes and benefits were $1,825,447. The remaining general
and administrative expenses totaled $1,212,174. 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 general and
administrative expenses as a percentage of revenue to decrease.
Interest expense for the first nine months of 2006 was $3,518,484. This amount
consists of interest accrued on outstanding loans of $203,460 and interest
recorded on purchase price payables of $81,000 plus non-cash interest expense
items including the amortization of debt discount of $2,688,414, the value of
common stock of $305,018 issued as consideration for the modification of debt
agreements and $240,592 related to warrant liability. The holders of the
45
outstanding convertible notes have the option to receive the interest payments
in either cash or common stock. While we expect the interest on convertible
notes payable to be paid in common stock, there is no guarantee that this will
occur.
For the nine months ended September 30, 2006, we incurred a $208,452 loss on
extinguishment of debt, and $38,550 of warrant valuation income related to the
issuance of new warrants as part of financing transactions and the revaluation
of warrants previously issued.
Net loss was $7,312,316 for the nine months ended September 30, 2006 and
includes non-cash general and administrative expenses of $753,176, depreciation
and amortization of $420,782 and non-cash interest expense of $3,234,024
attributed to the issuance of securities.
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 used the proceeds from
these notes to purchase the TourScape system for $641,347 with the remainder
used to fund ongoing operations.
Nine Months Ended September 30, 2006
During the nine months ended September 30, 2006, the Company acquired
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 nine
months of 2006 travel revenue and income from operations was not enough to
offset financing expenses related to the Company's recapitalization, subsequent
financing expenses related to an investment by MMA Capital, acquisition costs
for CIL and IRT/ITR, and professional fees.
During the nine months ended September 30, 2006, the Company's main sources of
liquidity were from the issuance of convertible promissory notes and the sale of
shares of its common stock. During the nine months ended September 30, 2006, the
Company issued three convertible promissory notes for total proceeds of
$2,310,000. During this period net proceeds from sales of the Company's common
stock were $923,156. The primary use of these proceeds was to fund the Company's
cash operating deficit of $2,381,546, to repay debt of $345,158, to pay debt
issuance costs of $202,223. In addition, the Company had investing activities of
$121,045 and an increase in the level of cash of $255,871.
For the nine months ended September 30, 2006, the Company used cash in operating
activities of $2,381,546. Cash was used to fund a net loss of $7,312,316 that
was then off set by non cash expenses consisting of general and administrative
expenses of $753,176, depreciation and amortization expense of $420,782 and non
cash interest expense of $3,234,024 attributed to the issuance of securities.
Cash used for operations included an increase in other assets of $111,947 and an
increase in prepaid customer travel costs of $89,754. Cash was generated from
operations by decreasing accounts receivable by $260,561 and increasing current
liabilities by $141,504.
As of September 30, 2006, our primary source of liquidity was $294,570 of cash
and $202,417 of accounts receivable. At September 30, 2006, the Company had a
working capital deficit of $9,061,268, primarily due to warrant liability of
$2,224,596, acquisitions payable of $1,440,000, convertible notes payable, net
of discount of $3,096,512, and convertible notes payable - related party of
$350,000. The convertible notes payable and convertible notes payable to a
related parties, consists of promissory notes convertible into the Company's
common stock. While we expect these notes to be converted into the Company's
common stock, thereby reducing liabilities, there is no assurance this will
occur.
46
At September 30, 2006, the Company had total assets of $9,494,503, of which
long-term assets of $7,572,498 consisted of goodwill of $5,115,696, intangible
assets of $2,279,887, deposits of $100,251, debt issue cost of $76,664 and
$801,769 of property and equipment, including $641,347 relating to our TourScape
software being implemented as of September 30, 2006. Total liabilities were
$10,280,518, including long term liabilities of $99,014. Total shareholders'
deficit was $786,015.
We were formerly in default on $2,155,158 in notes payable. On August 16, 2006
we entered in to a Modification of the $2,000,000 MMA note, which deferred the
interest payments until January 13, 2007. In return for this deferral, MMA was
granted 100,000 shares of the Company's common stock and the interest rate was
increased retroactively from 8% to 10%. The Company is accruing the default
interest rate of 10% on notes from March 2005 DynEco financing with the
aggregate outstanding balance at September 30,2006 of $155,158.
We are also in default of the repayment terms on unsecured notes payable
aggregating $35,000 at September 30, 2006, initially issued by DynEco prior to
the January 13, 2006 recapitalization. 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; however, as of September 30, 2006, this had
not yet occurred nor is there any assurance that this will take place.
Five convertible notes totaling $132,500 were due on June 30, 2006 and were not
paid on that date. The Company is currently in discussions with the note holders
to convert these past due notes to common stock. There were repayments during
the nine months ended September 30, 2006, of $345,158 of convertible promissory
notes. In addition, there were conversions to common stock of promissory notes
and related accrued interest totaling $786,652 during the first nine months of
2006.
We have limited historical results, and only a limited time of combined
operations with Dynamic, DLG, CIL, and IRT/ITR. We have relied upon equity
financing in order to fund operations. During the nine 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 has created a situation where we will 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 September 30, 2006, and the date of this filing, our sources of internal
and external financing are limited. Additionally, as part of the acquisitions of
CIL and IRT/ITR, we issued an additional 1,040,000 shares of the Company's
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 the Company's common stock, which would
reduce our potential cash payment for the notes, the issuance of additional
shares of our common 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 the Company'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, will 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. 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 that
we will be able to generate sufficient cash from operations in future periods to
satisfy our capital requirements. 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
47
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.
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.
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
Our principal executive offices are in Tampa, Florida, where we lease
approximately 10,000 square feet under a lease scheduled to expire on June 30,
2011, with monthly rental payments of approximately $14,000.
We also lease approximately 5,000 square feet in New York City under a lease
scheduled to expire in April 2008, with monthly rental payments of approximately
$11,000.
48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 3, 2006, DLG issued a Convertible Promissory Note to Street Venture
Partners, LLC in the amount of $350,000. The Note bears interest at the rate of
ten percent (10%) per annum and is due and payable on January 3, 2007. The Note
is convertible into shares of the Company's common stock at the rate of $0.90
per share. In connection with this transaction, the Company issued Street
Venture Partners a warrant exercisable for up to 388,500 shares of the Company's
common stock at an exercise price $0.90 per share. The offer and sale of the
Note and warrant were made pursuant to an exemption from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering. Street Ventures Partners, LLC, is a limited liability company owned by
Mr. Brandano and his spouse.
On January 13, 2006, DynEco entered into a Stock Exchange Agreement with all of
the shareholders of DLG. As part of the transaction, and to cure a default with
two of the selling security holders, the Company issued 100,000 shares of common
stock to Alpha Capital Aktiengesellschaft and 100,000 shares of common stock to
JM Investors, LLC. The Company is required to register a number of shares of its
common stock equal to one hundred fifty percent (150%) of the common stock
issued. In addition, under the terms of the anti-dilution terms of the
Restructured Financing, Alpha Capital Aktiengesellschaft has been granted an
additional 29,800 warrants, and JM Investors, LLC has been granted an additional
15,700 warrants, both covered by a registration statement.
In January 2006 the Company issued a Secured Convertible Promissory Note to MMA
Capital LLC, a Delaware limited liability company, in the principal amount of
$2,000,000, with simple interest at the rate of eight percent (8%) per annum,
convertible into shares of 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 common stock at an exercise price of one dollar
($1.00) per share.
In connection with the purchase of Island Resort Tours, Inc. and International
Travel and Resorts, Inc., on March 6, 2006 the Company issued 700,000 shares of
Dynamic common stock to Stephen A. Hicks. In addition, under the Purchase
Agreement governing that transaction, the Company issued Mr. Hicks a convertible
promissory note in the amount of $1,450,000, bearing an annual interest rate of
9%, maturing one year from the acquisition date, convertible into Dynamic's
common stock at the rate of $1.50 per share.
On June 29, 2006, the Company issued and sold 100,000 shares of its common stock
to MMA Capital, LLC, a Delaware Limited Liability Company for an aggregate
purchase price of $100,000.
Between July 12, 2006 and September 6, 2006, the Company issued and sold 400,000
shares of its common stock to MMA Capital, LLC, at the aggregate purchase price
of $400,000.
On August 8, 2006 the Company entered into an agreement with MMA Capital, LLC to
defer interest payments due each quarter until the end of the term of the loan
on January 11, 2007. In consideration for this deferral the Company agreed to
increase the interest rate retroactively from 8% to 10% and to issue MMA Capital
100,000 shares of its common stock. The stock was valued at $1.25 per share or
an aggregate $125,000 based on contemporaneous cash sales of Company common
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. The value of the shares was
recognized immediately as a modification expense classified as interest. The
retroactive portion of the increase in interest of $22,685 was also recognized
immediately.
On August 21, 2006, the Company issued 30,000 shares of common stock to MMA
Capital for consulting services valued at $36,900 or $1.23 per share (the
closing market price of the Company's common stock on the day of issuance).
On September 1, 2006, the Company issued 200,000 shares of its common stock to
Leonard Sculler, a former director, valued at $270,000 or $1.35 per share (the
closing market price of the Company's common stock on the day of issuance).
49
On September 5, 2006, the Company issued 488,400 shares of common stock
Diversified Acquisition Trust, LLC on conversion of a related party convertible
note aggregating $400,000 plus accrued interest of $39,560, based on a
conversion rate of $.90 per share.
On September 20, 2006, the Company issued 100,000 shares of common stock to
IMS-GA, LLC, an entity affiliated through common management with MMA Capital for
consulting services valued at $125,000 or $1.25 per share (the closing market
price of the Company's common stock on the day of issuance).
On November 6, 2006, the Company issued Eric H. Winston, a newly appointed
member of the Board of Directors, 200,000 shares of common stock valued at
$140,000 or $.70 per share (based on the closing price of the Company's common
stock on the date of issuance). The shares are subject to a repurchase right in
favor of the Company which right lapses as to 50,000 shares each quarter
beginning on the date of grant.
On November 6, 2006, the Company issued Mark E. Crone, as a newly appointed
member of the Board of Directors, an option to purchase 200,000 shares of the
Company's common stock at a purchase price of $0.70 per share, the closing price
of the Company's common stock on the date of grant. The shares underlying the
option are exercisable at the rate of 50,000 shares each quarter beginning on
the date of grant.
On November 6, 2006, the Company issued Mark E. Crone an option to purchase
400,000 shares of the Company's common stock at a purchase price of $0.70 per
share, the closing price of the Company's common stock on the date of grant as
compensation for professional fees.
During fiscal year 2006, the law firm of Crone Rozynko, LLP acted as principal
outside legal counsel to the Company. Mark E. Crone, a director of the Company,
is a partner in Crone Rozynko, LLP. Aggregate fees billed to us by Crone
Rozynko, LLP for legal services rendered, including general corporate
counseling, litigation services and merger and acquisition related services,
during fiscal year 2006 were $69,613. We believe that the services rendered to
us by Crone Rozynko, LLP were on terms no more or less favorable than those with
unrelated parties.
On November 9, 2006, the Company entered into a Securities Purchase Agreement
with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW
Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners, II,
LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are collectively
referred to as the "Purchasers". Pursuant to the Securities Purchase Agreement,
the Company issued and sold to the Purchasers Secured Convertible Term Notes
(the "Notes") in the aggregate principal amount of $1,000,000. The Notes bear
interest at 6% per annum, unless the common stock of the Company is greater than
1.25 per share for each trading day of a month, in which event no interest is
payable during such month. The Notes are convertible into common stock of the
Company at a 50% discount to the average of the three lowest trading prices of
the common stock during the 20 trading day period prior to conversion; provided,
however, that the Notes are convertible into common stock of the Company at a
45% discount in the event that the Registration Statement covering the sale of
securities underlying the Notes ("Registration Statement"), is filed on or
before December 11, 2006; and (ii) a 40% discount in the event that the
Registration Statement becomes effective on or before March 9, 2007. In
connection with the offering, the Company issued an aggregate of 5,000,000
warrants to purchase common stock at a price of $1.50 per share ("Warrants").
The Warrants are exercisable for a period of seven years. The number of shares
subject to the Warrant and the exercise price are subject to adjustment for
stock splits, stock combinations and certain dilutive issuances, including the
issuance of shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or
underwriting discounts or allowances in connection therewith) less than the
5-day average of the last reported sales of the Company's Common Stock. In
addition, in certain circumstances the warrant exercise price will be adjusted
if after the Registration Statement is declared effective, the closing price for
the Company's Common Stock closes below $1.00. The issuance of the shares and
warrants was exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, as
transactions by an issuer not involving any public offering.
The conversion of the Notes is subject to an effective Registration Statement
pursuant to the terms of a Registration Rights Agreement. The Company has the
50
right to redeem the Notes under certain circumstances, as well as the right to
pay monthly cash payments to prevent any conversion of the Notes during such
month. The Notes are secured by all of the Company's assets pursuant to the
terms of a Security Agreement and Intellectual Property Security Agreement. The
proceeds of the offering will be used to repay certain indebtedness and for
working capital. The offer and sale of the Notes and warrants were made pursuant
to an exemption from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, as
transactions by an issuer not involving any public offering.
On December 1, 2006, the Company issued Ben J. Dyer, a newly appointed member of
the Board of Directors, 200,000 shares of common stock valued at $110,000 or
$.55 per share (based on the closing price of the Company's common stock on the
date of grant). The shares are subject to a repurchase right in favor of the
Company which right lapses as to 50,000 shares each quarter beginning on the
date of grant.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock has been traded on the OTC Bulletin Board over-the-counter
market since March 6, 2006 under the symbol "DYLI." Prior to the Stock Exchange
in which Dynamic Leisure Group became our wholly owned subsidiary on January 13,
2006, our common stock was listed on the OTC Bulletin Board over-the-counter
market under the symbol "DYCO." 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 September 30, 2006. The bid prices are inter-dealer prices, without
retail markup, markdown or commission, and may not reflect actual transactions.
QUARTER ENDING HIGH BID LOW BID
- ---------------------------------------------- -------- --------
2006
September 30, 2006 ........................... $ 1.65 $ 1.00
June 30, 2006 ................................ $ 2.60 $ 1.22
March 31, 2006 ............................... $ 4.00 $ 0.81
2005
December 31, 2005 ............................ $ 2.25 $ 0.30
September 30, 2005 ........................... $ 3.30 $ 1.35
June 30, 2005 ................................ $ 4.20 $ 2.46
March 31, 2005 ............................... $ 6.00 $ 2.43
2004
December 31, 2004 ............................ $ 5.40 $ 2.40
September 30, 2004 ........................... $ 5.40 $ 3.00
June 30, 2004 ................................ $ 6.30 $ 3.60
March 31, 2004 ............................... $ 8.10 $ 5.10
SHAREHOLDERS OF RECORD
As of November 30, 2006, there were approximately 1,287 holders of record of our
common stock, not including holders who hold their shares in street name.
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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
At December 31, 2005, Dynamic Leisure Group had no outstanding equity
compensation plans. On January 13, 2006, in conjunction with the
recapitalization, the Company assumed DynEco's obligations under DynEco's
outstanding equity compensation plans. The following table sets forth
information relating to our outstanding equity compensation plans assumed by the
Company from DynEco as previously reported by DynEco as of December 31, 2005.
51
AVAILABLE FOR
FUTURE
ISSUANCE UNDER
NUMBER OF EQUITY
SECURITIES TO BE WEIGHTED-AVERAGE COMPENSATION
ISSUED UPON EXERCISE PRICE PLANS
EXERCISE OF OF OUTSTANDING (EXCLUDING
OUTSTANDING OPTIONS, SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED IN
AND RIGHTS RIGHTS 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 $5.99 11,055
* The 1993 Corporate Stock Option and 1993 Advisors Stock Option Plans have
expired.
Option Grants In 2005 For Dyneco
The following table sets forth information concerning DynEco's option grants to
purchase shares of our common stock during the fiscal year ended December 31,
2005 assumed by the Company on January 13, 2006 through the recapitalization to
each person named in the Summary Compensation table.
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTION/SARS
OPTION/SARS GRANTED TO EXERCISE OR
GRANTS EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE
- ------------------------ ----------- ------------ ----------- ----------
Thomas C. Edwards, Ph.D 3,333 7.8% 3.00 April 2008
Former Dyneco 2001 Equity Incentive Plan
Under the 2001 Equity Incentive Plan, the Company 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.
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.
Former Dyneco 1993 Corporate Stock Option Plan
Under the 1993 Corporate Stock Option Plan, DynEco 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.
Former Dyneco 1993 Advisors Stock Option Plan
Under the 1993 Advisors Stock Option Plan, DynEco 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.
52
Absent registration under the Securities Act of 1933, as amended, or the
availability of an applicable exemption therefrom, shares of common stock issued
upon the exercise of options are subject to restrictions on sale or transfer. As
of the date of this report, options to purchase 6,667 shares had been granted
and are outstanding under the 1993 Advisors Stock Option Plan. The 1993 Advisors
Stock Option Plan has terminated and no further awards may be made thereunder,
however, outstanding awards of 6,667 shares remain effective until their
termination date on December 31, 2008.
Other Plans
Other plans include equity compensation plans not approved by shareholders.
These plans are comprised of options granted and/or warrants issued to employees
and non-employees, including directors, consultants, advisers, suppliers,
vendors, customers and lenders for purposes including to provide continued
incentives, as compensation for services and/or to satisfy outstanding
indebtedness to them.
As of December 31, 2005, the Company had no other plans.
The grants of other options are 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 other options and warrants are 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.
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(1) Tbd(2) Tbd(2) - - $7,207(3)
2005 $152,795 - - - - -
Thomas C. Edwards, former 3,333
CEO and President........ 2005 $ 56,806 - - shares - -
2004 $ 60,000 - - - - -
2003 $ 60,000 - - - - -
1. Estimated annual salary for 2006.
2. Bonus and other compensation to be determined based upon performance.
3. Estimated annual Company contribution for health insurance benefits.
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 nine
months ended September 30, 2006 .............................. F-2 to F-31
DynEco Corporation and Subsidiary Restated Consolidated
Financial Statements for the Years Ended December 31, 2005
and 2004 ..................................................... F-31 to F-62
Dynamic Leisure Group, Inc. Financial Statements for the
Period from May 16, 2005 (inception) to December 31, 2005 .... F-63 to F-85
Changes In L'Attitudes, Inc. Financial Statements for the
Years Ended December 31, 2005 and 2004 ....................... F-86 to F-97
Island Resort Tours, Inc., and International Travel and Resorts,
Inc. Combined Financial Statements for the Years Ended
December 31, 2005 and 2004 ................................... F-98 to F-111
Dynamic Leisure Corporation and Subsidiaries Unaudited Pro Forma
Combined Condensed Financial Statements for the Nine months
Ended September 30, 2006 and Year Ended December 31, 2005 .... F-112 to F-118
F-1
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 2006
(Unaudited)
ASSETS
Current Assets
Cash .......................................................... $ 294,570
Investments, restricted ....................................... 197,390
Accounts receivable ........................................... 202,417
Prepaid travel ................................................ 309,746
Other current assets .......................................... 116,113
------------
Total Current Assets ........................................ 1,120,236
Property and equipment, net ..................................... 801,769
Other Assets
Goodwill ...................................................... 5,115,696
Intangible .................................................... 2,279,887
Deposits ...................................................... 100,251
Debt issue costs .............................................. 76,664
------------
Total Other Assets .......................................... 7,572,498
Total Assets ................................................ $ 9,494,503
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible promissory notes, net of discount of $1,491,146 ... $ 3,096,512
Convertible promissory note to related party .................. 350,000
Notes payable, current portion ................................ 371,086
Loan payable - TRDA ........................................... 235,138
Acquisition payable ........................................... 1,440,000
Accounts payable .............................................. 895,947
Accrued compensation .......................................... 86,359
Accrued interest .............................................. 359,692
Other accrued liabilities ..................................... 133,823
Short term capital lease ...................................... 32,580
Deferred revenue .............................................. 654,769
Customer deposit .............................................. 251,002
Due to employee ............................................... 50,000
Warrant liability ............................................. 2,224,596
------------
Total Current Liabilities ................................... 10,181,504
Long Term Liabilities
Notes payable, net of current portion ......................... 15,501
Capital lease ................................................. 83,513
------------
Total Long Term Liabilities ................................. 99,014
Total Liabilities ........................................... $ 10,280,518
------------
Commitments and contingencies (Note 8)
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,
11,962,085 issued and outstanding ........................... 119,621
Common stock issuable, at par value (80,000 shares) ............ 800
Additional paid-in capital ..................................... 7,476,694
Deferred Consulting Fees ....................................... (585,500)
Accumulated deficit ............................................ (7,797,630)
------------
Total Stockholders' Deficit ................................. (786,015)
------------
Total Liabilities and Stockholders' Deficit ................. $ 9,494,503
============
See accompanying notes to the unaudited consolidated financial statements
F-2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three For the Nine From Inception
Months Ended Months Ended Months Ended (May 16, 2005)
Sept 30, 2006 Sept 30, 2005 Sept 30, 2006 To Sept 30, 2005
------------- ------------- ------------- ----------------
Total Revenues .............................. $ 1,299,505 $ - $ 4,307,315 $ -
Cost of revenues ............................ 876,138 - 3,041,475 -
------------ ------------ ------------ ------------
Gross Profit .............................. 423,367 - 1,265,840 -
Operating Expenses
General and administrative ................ 2,149,014 161,010 4,430,354 210,835
Depreciation and amortization expense ..... 336,221 - 420,782 -
Bad debt expense .......................... 3,657 - 3,657 -
------------ ------------ ------------ ------------
Total Operating Expenses ................ 2,488,892 161,010 4,854,793 210,835
------------ ------------ ------------ ------------
Loss from Operations .................... (2,065,525) (161,010) (3,588,953) (210,835)
Other (Income) Expense
Interest income ........................... (2,668) - (15,710) -
Interest expense .......................... 1,333,589 8,697 3,518,484 8,812
Other Expense ............................. - - 8,020 -
Loss on disposal of assets ................ 42,667 - 42,667 -
Loss on extinguishment of debt ............ - - 208,452 -
------------ ------------ ------------ ------------
Conversion Option expense ................. - - - -
Warrant valuation (income) expense ........ (817,101) - (38,550) -
Total Other Expense, (income) net ....... 556,487 8,697 3,723,363 8,812
------------ ------------ ------------ ------------
Net Loss ................................ $ (2,622,012) $ (169,707) $ (7,312,316) $ (219,647)
============ ============ ============ ============
Net Loss Per Share - Basic and Diluted ...... $ (0.24) $ (0.15) $ (0.77) $ (.20)
============ ============ ============ ============
Weighted average number of shares outstanding
during the period - basic and diluted ..... 10,925,261 1,100,000 9,543,607 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 Nine From May 16,
Months Ended 2005 (inception)
Sept 30, 2006 to Sept 30, 2005
------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $(7,312,316) $ (219,647)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................ 36,697 -
Amortization of intangible assets ........... 258,526 -
Amortization of debt issue costs ............ 125,559 -
Loss on extinguishment of debt .............. 208,452 -
Interest accretion on loan payable .......... 3,131,379 -
Common stock and warrants for services ...... 965,676 -
Warrant valuation expense (income) .......... (38,550) -
Loss on disposal of assets .................. 42,667 -
(Increase) decrease in assets and liabilities:
Accounts receivable ......................... 260,561 -
Prepaid travel .............................. (89,754) -
Other assets ............................... (111,947) -
Accounts payable ............................ 291,396 91,347
Accrued expenses ............................ 277,418 -
Deferred revenue ............................ (32,370) 8,812
Customer deposit ............................ (394,940) -
----------- -----------
Net Cash Used In Operating Activities ....... (2,381,546) (119,488)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in investments ........................... (44,200) -
Acquisition of property and equipment ........... (35,768) (544,642)
Acquisition of business ......................... (41,077) -
----------- -----------
Net Cash Used In Investing Activities ....... (121,045) (544,642)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes ...... 2,310,000 685,000
Repayment of convertible promissory notes ....... (345,158) -
Proceeds from notes payable and line of credit .. 75,214 -
Repayments of notes payable ..................... (1,848) -
Proceeds from overdraft ......................... (232) -
Debt issue costs ................................ (202,223) -
Repayment of capital leases ..................... (447) -
Proceeds from common stock issuance ............. 923,156 -
----------- -----------
Net Cash Provided By Financing Activities ... 2,758,462 685,000
----------- -----------
Net Increase in Cash .............................. 255,871 20,870
Cash at Beginning of Period ....................... 38,699 -
----------- -----------
Cash at End of Period ............................. $ 294,570 $ 20,870
=========== ===========
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 $ -
=========== ===========
Notes payable and accrued interest converted to
common stock ................................. $ 786,652 $ -
=========== ===========
Assets purchased under Capital Lease .......... $ 116,540 $ -
=========== ===========
Purchase of GSA agreement and deposits for
note payable .................................. $ 350,000 $ -
=========== ===========
Discount on promissory notes .................... $ 2,030,202 $ -
=========== ===========
Conversion liability related to promissory note . $ 1,954,950 $ -
=========== ===========
See accompanying notes to the unaudited consolidated financial statements
F-4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 30, 2006
(Unaudited)
Common
Stock Additional Deferred
Common Stock Subscription Paid In Consulting Accumulated Total
Common Stock Issuable Receivable Capital Fees Deficit Stockholders'
--------------------- --------------- ------------ ----------- ---------- ----------- Equity
Shares Amount Shares Amount Amount Amount Amount Amount (Deficit)
---------- -------- ------ ------ ------------ ----------- ---------- ----------- -------------
BALANCE AT
DECEMBER 31, 2005 6,566,667 $ 65,666 - $ - $ (537) $ (57,629) $ - $ (485,314) $ (477,814)
Deemed issuance
for prior
shareholders of
DynEco .......... 1,157,951 11,580 - - - (944,862) - - (933,282)
Common stock
issued in
acquisitions .... 1,040,000 10,400 - - - 2,673,580 - - 2,683,980
Common stock
issued in note
payable
modification and
waiver agreement 300,000 3,000 - - - 302,018 - - 305,018
Common stock
issued for cash . 845,000 8,450 - - 537 777,770 - - 786,757
Common stock
issued in warrant
exercise ........ 199,932 1,999 - - - 134,400 - - 136,399
Common stock
issued in
conversion of
notes payable ... 872,535 8,726 - - - 777,926 - - 786,652
Common stock
issued for
services ........ 980,000 9,800 80,000 800 - 1,354,600 (585,500) - 779,700
Value of warrants
issued to
consultants ..... - - - - - 185,976 - - 185,976
Beneficial
conversion
feature ......... - - - - - 2,032,323 - - 2,032,323
Extinguishment of
debt related
warrant
liability ....... - - - - - 240,592 - - 240,592
Net Loss ......... - - - - - - - (7,312,316) (7,312,316)
---------- -------- ------ ------ ------ ----------- --------- ----------- ------------
BALANCE AT
SEPTEMBER 30, 2006 11,962,085 $119,621 80,000 $ 800 $ - $ 7,476,694 $(585,500) $(7,797,630) $ (786,015)
========== ======== ====== ====== ====== =========== ========= =========== ============
See accompanying notes to the unaudited consolidated financial statements
F-5
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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., Island Resort Tours, Inc. and
International Travel and Resorts, Inc. included in the Company's 8-K filings in
2006 and the Form 10-KSB for DynEco Corporation for the year ended December 31,
2005.
In 2005, DLG was a development-stage company, with its focus on
acquiring financing, setting up a corporate structure and researching
acquisitions. During the nine months ended September 30, 2006, the Company
acquired operating companies with revenue and is no longer a development-stage
company.
NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company's business is focused on the wholesale travel business,
specializing in leisure travel to popular destinations in the US, Caribbean,
Mexico, the UK, and Europe. The Company plans 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, the Company acquired
Changes in L'Attitudes, Inc. ("CIL"), and on March 6, 2006, the Company acquired
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
("IRT/ITR"). (See Note 13)
Use of Estimates
Our 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, 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.
F-6
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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 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.
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. In addition, receivables from
merchant banks for credit card transactions are included as a cash equivalent as
they are considered deposits in transit. Credit card receivables included in
cash and cash equivalents at September 30, 2006 were $12,572.
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-7
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The Company records merchant sales transactions at the gross purchase
price generally at the date of travel. For transactions recorded at their gross
purchase price, the Company acts as the merchant of record in the package
transaction, which consists of several products from different vendors, and the
Company is 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 the net purchase price
where 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 at 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. If the fair value is recorded as a liability, the change in fair
value is recorded in the consolidated statement of operations as other income or
expense. Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and its 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.
The Company has negotiated contracts with airlines 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.
F-8
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Surety Bond
At September 30, 2006, the Company had outstanding a surety bond for
$70,000 in favor of the Airlines Reporting Corporation (ARC), which allows the
Company to purchase airline tickets through the ARC's computerized ticket
system. The terms of the surety bond agreement with the ARC requires the
Company to maintain a collateral deposit of $22,500 with the ARC. The deposit is
included in Other Assets Deposits on the accompanying balance sheet.
Letters of Credit
At September 30, 2006, the Company had three outstanding letters of
credit totaling $150,000 payable to the ARC to allow the Company to purchase
airline tickets through the ARC's computerized ticket system. The terms of the
letter of credit agreements require the Company to maintain certificates of
deposit with the issuer of the letters of credit in the amount of the letters of
credit. These certificates of deposit 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, 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. 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.
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 September 30, 2006, there were warrants
convertible into 4,988,217 common shares and debt convertible into 3,970,766
common shares which may dilute future earnings per share. There is no
calculation of fully diluted earnings per share for the three and nine months
ended September 30, 2006 and 2005 due to the Company reporting a net loss and
the exercise or conversion of common stock equivalents would have been
anti-dilutive.
NOTE 3 GOING CONCERN
For the nine months ended September 30, 2006, the Company had a net
loss of $7,312,316 , used net cash in operations of $2,381,546, a working
capital deficiency of $9,061,268, an accumulated deficit of $7,797,630 and a
stockholders' deficiency of $786,015. 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-9
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
As of September 30, 2006, the Company had $4,587,658 in outstanding
Convertible Notes payable to third parties, which are convertible into 3,970,766
shares of the Company's common stock. While the Company expects substantially
all of these note holders to convert the Notes into shares of the Company's
common stock, there is no guarantee that this will occur. As of September 30,
2006 the Company did not have adequate working capital to meet these obligations
with cash payments.
Management believes that its plans to raise additional capital will
allow for adequate funding of the Company's cash requirements through December
31, 2006, although there is no assurance regarding this belief nor that the
Company will be successful in these efforts.
The Company is 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 as an asset in
the prepaid travel account. The Company recognizes the expense when the
associated revenue is recognized.
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30,
2006:
Estimated
Sept 30, Useful Life
2006 in Years
--------- -----------
Office furniture and equipment .... $ 171,026 3-5
Software .......................... 21,077 5
Leasehold Improvements ............ - 10
Software in Development ........... 641,347
---------
Total property and equipment ...... $ 833,450
Less accumulated depreciation ..... (31,681)
---------
Property and equipment, net ....... $ 801,769
=========
During 2006, the Company entered into $116,540 of capital lease
commitments for computer and telephone equipment. Depreciation expense was
$18,103 for the third quarter of 2006 and $36,697 for the first nine months of
2006.
Software in Development consists of the purchase of worldwide rights
and source code to Tourscape, a proprietary software for use in the wholesale
travel industry for $500,000, the purchase of third party database software for
$91,346 and related implementation costs of $50,001. The software was fully
operational upon purchase and accordingly is capitalizable as internal use
software pursuant to Statement of Position 98-1 "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). The
Company intends to implement the software in the fourth quarter 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 Tourscape software to any unaffiliated third party until
approximately June 30, 2006 without the prior written consent of the seller. If
the Company determines at a future date to sell or licensee the software,
proceeds received from the license of the software, net of direct incremental
costs of marketing, will be applied against the carrying value of the software
in accordance with SOP 98-1.
F-10
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 6 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, NOTES PAYABLE, LOANS
PAYABLE AND CAPITAL LEASES PAYABLE
Notes and loans payable and capital leases payable consisted of the
following at September 30, 2006:
Convertible Promissory Notes
- ----------------------------
Original Debt Discount Components
------------------------------------ Cumulative
Beneficial Amortization
Interest Original Notes Note Balance Conversion Warrant As Of
Rate Principal Converted Repayments 9/30/2006 Feature Liability Total 9/30/2006
- -------- ---------- --------- ---------- ----------- ---------- ---------- ---------- ------------
9% (S) $1,450,000 - - $ 1,450,000 $1,208,332 - $1,208,332 $ 688,584
9% (S) 600,000 - - 600,000 480,000 - 480,000 308,571
10% (S) 2,250,000 - - 2,250,000 206,618 2,030,202 2,236,820 1,449,738
10% (U) 310,316 - (155,158) 155,158 77,372 232,944 310,316 303,402
10% (U) 50,000 (50,000) - - 50,000 - 50,000 50,000
10% (U) 10,000 - - 10,000 10,000 - 10,000 4,027
10% (U) 100,000 (100,000) - - - - - -
5% (U) 50,000 - (50,000) - - - - -
10% (U) 75,000 (75,000) - - - - - -
10% (U) 25,000 (25,000) - - - - - -
10% (U) 25,000 (25,000) - - - - - -
10% (U) 50,000 (50,000) - - - - - -
10% (U) 25,000 - - 25,000 - - - -
10% (U) 75,000 - - 75,000 - - - -
10% (U) 10,000 - - 10,000 - - - -
10% (U) 30,000 - (30,000) - - - - -
10% (U) 50,000 - (50,000) - - - - -
10% (U) 12,500 - - 12,500 - - - -
10% (U) 25,000 - (25,000) - - - - -
10% (U) 10,000 - (10,000) - - - - -
10% (U) 25,000 - (25,000) - - - - -
---------- -------- --------- ----------- ---------- ---------- ---------- -----------
$5,267,816 $325,000 $ 345,158 $ 4,587,658 $2,032,322 $2,263,146 $4,295,468 $ 2,804,322
========== ======== ========= ========== ========== ========== ===========
Net Unamortized Debt Discount (1,491,146)
-----------
Total convertible notes payable, net $ 3,096,512
===========
(S) - Secured
(U) - Unsecured
F-11
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Terms and Original Debt Discount Assumptions
Original Warrant Liability
Convertible Promissory Notes Black-Scholes Valuation Assumptions
- -------------------------------------------------------- ---------------------------------------------------
Interest Balance Maturity Conversion Exercise Expected Voli- Discount
Rate 9/30/2006 Date Payments Price Shares Price Life(Yr) tility Rate
- -------- ---------- -------- -------- ---------- --------- -------- -------- ------ --------
9% (S) $1,450,000 3/6/07 (A) $1.50 - - - - -
9% (S) 600,000 2/8/07 (B) 1.50 - - - - -
10% (S) 2,250,000 1/11/07 (C) 1.00 2,000,000 1.00 3.0 271% 5.07%
- - - - (D) 1.00 250,000 1.00 2.25 142% 5.03%
10% (U) 155,158 6/30/07 (E) .75 304,000 .90 3.0 354% 3.96%
10% (U) 10,000 6/30/06 (F) .90 - - - - -
10% (U) 25,000 6/30/06 (F) .90 - - - - -
10% (U) 75,000 6/30/06 (F) .90 - - - - -
10% (U) 10,000 6/30/06 (F) .90 - - - - -
10% (U) 12,500 6/30/06 (F) .90 - - - - -
----------
$4,587,658
==========
(A) - Balance due on the maturity date.
(B) - Balance as due 2/8/2007. However, a second cash payment representing down
payment was due 6/6/2006 totaling $440,000. No payment was made on the
$440,000, see Note 15.
(C) - Balance due on the maturity date.
(D) - Relates to $250,000 additional borrowings from MMA on 9/20/2006 on the
original $2,000,000 convertible note payable.
(E) - Monthly principal payments of $29,700 were to commence 6/1/2006. No
payments have been made and the loan is in default.
(F) - Balance is past due and loan is in default. The Company is in negotiations
to extend the maturity date or have the note converted.
(G) - Beneficial conversion feature is determined by multiplying the shares to
be issued upon 100% conversion by the difference between the market price
per share and the exercise price on the date of issuance of the
convertible note.
All debt discounts are amortized over the terms of the respective note
or loan. The amortization of the debt discount was $2,688,414 for the nine
months ended September 30, 2006 and was included in interest expense in the
accompanying consolidated financial statements.
Convertible Promissory Note, Related Party:
- -------------------------------------------
On January 3, 2006, the Company issued a Convertible Promissory Note in
the principal amount of $350,000 to Street Venture Partners, LLC, a related
party in conjunction with the purchase of the Casual Car General Service
Agreement (GSA). The Note earns interest at an annual rate of 10% and matures on
January 3, 2007. As of September 30, 2006, the Note had an outstanding balance
of $350,000. (See Note 11 and 13)
F-12
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
In addition, the holders of convertible notes and other notes that have
been repaid in full were issued warrants to purchase up to 3,970,766 shares of
the Company's common stock at prices ranging from $0.68 to $1.50.
Notes Payable
- -------------
Notes payable consists of the following:
Notes Payable - Bearing interest at rates ranging from 5% to 15%
unsecured and due at various dates through August 2007 .......... $ 156,433
Notes payable assumed from DynEco ................................ 20,154
Line of credit - IRT/ITR ......................................... 210,000
-----------
$ 386,587
Less Current portion ............................................. (371,086)
-----------
Notes payable, net of current portion ........................ $ 15,501
===========
At September 30, 2006, the Company was in default of the repayment
terms on certain 5% to 15% unsecured notes aggregating $35,000. This amount is
included in notes payable, current portion on the accompanying consolidated
balance sheet at September 30, 2006.
Loan Payable - TRDA
- -------------------
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. The terms of the agreement require the Company 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 Company received the entire $150,000 funding
commitment. 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 September 30, 2006
was $235,138 and is included as loan payable - TRDA in the accompanying
consolidated balance sheet.
Capital Leases
- --------------
During the nine months period ending September 30, 2006 the Company
entered into capital equipment leases with an aggregate gross value of $116,540.
The term of the leases range from three to five years, with interest rates
ranging from 4.99% to 11.44%.
As of September 30, 2006 the Company's capital leases consisted of the
following:
Total Capital Leases .......................... $ 116,093
Less Current Capital leases ................... (32,580)
---------
Long-term portion of Capital leases ........ $ 83,513
=========
F-13
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
MMA Capital, LLC Financings
- ---------------------------
On January 13, 2006, the Company issued a Secured Convertible
Promissory Note with the principal balance of $2,000,000 to MMA Capital, LLC
("MMA"). As described below, on September 20, 2006, the parties amended this
Note to increase the principal amount by $250,000 to a total of $2,250,000.
On August 16, 2006, the Company entered into an agreement with MMA to
defer interest payments due on the Note each quarter until January 11, 2007, the
maturity date of the loan. In consideration 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 as 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. As a result, 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
Note and accrued but unpaid interest may be converted into shares of the
Company's common stock at the conversion rate of $1.00 per share, subject to
adjustment in the event the Company issues shares for a consideration less than
$1.00 per share and to reflect the occurrence of forward or reverse stock
splits, corporate reorganizations or certain other corporate events. In
connection with this transaction, the Company agreed to file a registration
statement under the Securities Act of 1933, as amended, (the "Act") to register
the shares issuable upon conversion of the Note. It constitutes an event of
default under the Note and subjects the Company to liquidated damages if the
Company does not complete an effective registration statement within 180 days of
the effective date of the execution of a common stock subscription agreement,
which would be executed when the lender provides notice of conversion of all or
a portion of the debt, and if the Company does not maintain that effective
registration statement for at least 90 days. For each week of non-compliance,
liquidated damages are 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 the Company's assets.
In connection with the transaction, the Company issued to MMA a warrant
to purchase up to 2,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The warrant is exercisable for a period of three years
and the number of warrant shares and the exercise price are subject to
adjustment in the event the Company issues shares for a consideration less than
$1.00 per share and to reflect the occurrence of forward or reverse stock
splits, corporate reorganizations or certain other corporate events. If, at the
time of exercise, there is not an effective registration statement covering the
sale 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 finder's fee equal to 8% of the proceeds ($160,000) was paid in cash
to Forte Capital Partners LLC, in connection with the transaction. The
transaction was exempt from the registration requirements of the Act by reason
of Section 4(2) 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.
On September 20, 2006, the Company and MMA entered into a Second
Modification of Secured Convertible Promissory Note, pursuant to which the
principal of the Note was increased by $250,000 to $2,250,000. Further, on
September 20, 2006, the Company and MMA entered into a Modification of Warrant
to Purchase Shares of Common Stock, pursuant to which the number of warrant
shares was increased by 250,000 shares to 2,250,000 shares.
F-14
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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 warrant is are classified as a liability ("warrant liability")
(see Note 7) due to the liquidated damages provision in the registration rights
agreement at its initial fair value with a corresponding charge to debt
discount. The beneficial conversion value associated with the convertible debt
is recorded as a debt discount and additional paid in capital.
In accordance with SFAS 133, the warrants underlying the warrant
liability are revalued quarterly based on assumptions in effect on that date
using the Black-Scholes model. See Note 7 for the assumptions related to the
revaluation and the related effect on the warrant liability and warrant
valuation income (expense) during the period.
DynEco March 2, 2005 Convertible Notes and Modification and Waiver Agreement
- ----------------------------------------------------------------------------
On January 13, 2006, the Company and Alpha Capital Aktiengesellschaft,
JM Investors, LLC, Libra Finance, S.A. and RG Prager Corporation entered into a
Modification and Waiver Agreement pursuant to which Convertible Promissory Notes
issued by the Company to these parties in the aggregate principal balance of
$327,000 on March 2, 2005 were amended to provide that interest on these Notes
at the rate of 5% per annum would be paid quarterly, commencing March 31, 2006.
Monthly principal amortization payments of approximately $29,700 were to
commence on June 1, 2006. As of September 30, 2006, the Company is in default of
the terms of the Modification and Waiver Agreement. Accordingly, the Company has
accrued default interest at the rate of 10% from the date of default of June 1,
2006.
As consideration for the Modification and Waiver Agreement, the Company
paid these noteholders a total of $232,210, consisting of $154,632 in principal
payments and a premium in the amount of $77,578. The Company recorded the
premium as additional expense in the fourth quarter of 2005 . The notes are
convertible at the conversion rate of $0.75 per share, subject to adjustments,
including anti-dilution adjustments and an adjustment if the Company issues
common stock or 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. As of September 30,
2006, there was $155,158 in outstanding principal remaining on these notes.
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, the Company issued the investors an
aggregate of 200,000 shares of its common stock. 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 were 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 for three years from January 23, 2006 and (c) the
number of shares issuable upon exercise of these warrants 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 warrants in
full. The Company may prepay the remaining principal balance of the notes at
150% of the principle, plus interests and other amounts due, through the
redemption date but only if an effective registration statement exists.
F-15
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The Company agreed to file an amendment to the existing registration
statement covering the sale of the shares issuable upon conversion of these
notes and exercise of the warrants. 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 would be subject to the payment of
liquidated damages to the note holders. The registration statement was filed on
April 12, 2006 and was required to become effective by June 13, 2006. In
addition, the Company agreed to file a new registration statement covering the
sale of the shares issuable pursuant to the Modification and Waiver Agreement
the sale of which was 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 the Company
would be subject to the payment of liquidated damages. The registration
statement was filed on May 12, 2006 and was required to become effective by July
13, 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
post-effective amended registration statement and the additional registration
statement did not become effective in the required 60 days due to comments
received from the SEC with respect to the registration statement. The
Modification and Waiver Agreement provides for liquidated damages payable to the
note holders of an amount equal to two percent (2%) of the Purchase Price of the
Notes remaining unconverted for each thirty (30)days or part thereof, that a
registration statement is not effective. The Company must pay the liquidated
damages in cash. The liquidated damages must be paid within ten (10) days after
the end of each thirty (30) day period or shorter part thereof for which
liquidated damages are payable. As of this filing, the note holders have not
taken any action on this deficiency and the Company has accrued $22,444 as of
September 30, 2006, in liquidated damages recorded as an operating expense.
During the first quarter, the Company recorded a non-cash loss relating
to (i) the extinguishment of debt of $208,442, (ii) 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),
(iii) issuance of additional warrants, and (iv) the write-off of 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.
In accordance with SFAS 133, the warrants underlying the warrant
liability are revalued quarterly based on assumptions in effect on that date
using the Black-Scholes model. See Note 7 for the assumptions related to the
revaluation and the related effect on the warrant liability and warrant
valuation income (expense) during the period.
NOTE 7 WARRANT LIABILITY
The Company recorded a warrant liability related to Convertible Notes
issued on March 5, 2005 in connection with the Modification and Waiver Agreement
of January 13, 2006 and the MMA Capital LLC financing due to the liquidated
damages provision in the registration rights agreement requiring liability
treatment under EITF 00-19(See Note 6). The remaining warrant liability will
continue to be revalued until the expiration date of the debt with any changes
in valuation recorded as warrant valuation income or expense.
F-16
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
The Company's warrant liability and related revaluation assumptions are
as follows:
3/2/05
Convertible Total Warranty
Note MMA Warranty (Income)
Holders Capital Liability Expense
----------- ----------- ----------- ----------
Balance 12/31/2005 $ 232,944 $ - $ 232,944 $ -
MMA transaction ... - 1,793,382 1,783,382 -
Change in value ... 337,851 1,882,191 2,220,242 2,220,242
--------- ----------- ----------- ----------
Balance 3/31/06 ... 570,795 3,675,573 4,246,368 2,220,242
Change in value ... (198,044) (1,243,447) (1,441,491) (1,441,491)
--------- ----------- ----------- ----------
Balance at 6/30/06 372,751 2,432,126 2,804,877 778,551
MMA transaction ... - 236,820 236,820 -
Change in value ... (100,248) (716,853) (817,101) (817,101)
--------- ----------- ----------- ----------
Balance at 9/30/06 272,503 1,952,093 2,224,596 (38,550)
========= =========== =========== ==========
March 31, 2006
- --------------
Warrants ............ 304,500 2,000,000
Exercise price ...... $.90 $1.00
Market price ........ $1.85 $1.85
Expected life (years) 3.0 2.75
Volatility .......... 354% 354%
Discount rate ....... 4.29 4.29
June 30, 2006
- -------------
Warrants ............ 304,500 2,000,000
Exercise price ...... $.90 $1.00
Market price ........ $1.25 $1.25
Expected life (years) 2.75 2.5
Volatility .......... 271% 271%
Discount rate ....... 5.07 5.07
September 30, 2006
- ------------------
Warrants ............ 304,500 2,250,000
Exercise price ...... $.90 $1.00
Market price ........ $1.16 $1.16
Expected life (years) 2.5 2.25
Volatility (A) ...... 142% 142%
Discount rate ....... 5.03 5.03
The Company recalculated the volatility percentage on September 30, 2006 by
excluding stock prices prior to the merger date of January 13, 2006, from the
calculation as the Company believes the period of January 13, 2006, through
September 30, 2006, is a representative period to measure post merger
volatility. Any change in the warranty liability as a result of the change in
the period used to measure volatility was recorded as a change in estimate and
charged to earnings in the third quarter of 2006.
F-17
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 8 COMMITMENTS AND CONTINGENCIES
Neither the Company nor its subsidiaries have material commitments or
contingencies for purchasing goods or services that are not reported in the
Company's consolidated financial statements, notes, or other disclosures at
September 30, 2006.
The Company has been named as a principal party to proceedings brought
by Raymon Valdes and Changes In L'Attitudes, Inc. in Hillsborough County,
Florida, Circuit Court. The proceedings began on November 13, 2006. The Company
recently received service of the complaint and is reviewing its contents. The
complaint seeks approximately $440,000 on breach of contract damages relating to
the Company's acquisition of Changes In L'Attitudes. The Company is in the
process of retaining counsel to respond to the complaint and anticipates issuing
additional comment on its legal position after full review of the matter. An
acquisition payable of $440,000 and interest expense totaling $81,000 has been
accrued as of September 30, 2006, relative to this claim.
NOTE 9 STOCKHOLDERS' DEFICIT
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, as part of the Stock Exchange Agreement. In
addition, the Company assumed liabilities of $855,704 (See Note 12).
Common Stock Issued in Acquisitions
- -----------------------------------
On March 6, 2006, the Company issued 340,000 shares of its common stock
to Raymon Valdes, pursuant to the acquisition of Changes in L'Attitudes, Inc.
The shares were valued at $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)
for an aggregate value of $850,680.
On March 6, 2006, the Company issued 700,000 shares of its common stock
to Stephen A. Hicks, pursuant to the acquisition of IRT-ITR. The shares were
valued at $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) for an aggregate
value of$1,833,300.
Modification and Waiver Agreement
- ---------------------------------
On January 13, 2006, the Company issued 200,000 shares of its common
stock to convertible note holders pursuant to the Modification and Waiver
Agreement (See Note 6). The shares were valued at $.90 per share for an
aggregate value of $180,018 based on contemporaneous cash sales of Company
common stock.
On August 8, 2006, the Company entered into an agreement with MMA to
defer interest payments due each quarter until January 11, 2007, the maturity
date of the Notes. In consideration for this deferral the Company agreed to
increase the interest rate retroactively from 8% to 10% and to issue MMA 100,000
shares of its common stock. The stock was valued at $1.25 per share for an
aggregate value of $125,000 based on contemporaneous cash sales of Company
common stock. In accordance with EITF 96-19, this transaction was treated as a
modification of debt since the 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. As a result, the increase in
interest rate and the additional consideration will be accounted for
prospectively from the date of the modification. The value of the shares was
recognized immediately as a modification expense. The retroactive portion of the
increase in interest of $22,685 was also recognized immediately.
F-18
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Common Stock Issued for Cash
- ----------------------------
On April 25, 2006, the Company issued and sold 50,000 shares of its
common stock for $1.00 per share and issued a warrant to purchase an additional
50,000 shares of the Company's common stock at an exercise price of $1.00 per
share.
On May 31, 2006, the Company issued and sold 10,000 shares of its
common stock for $1.00 per share and issued a warrant to purchase an additional
10,000 shares of the Company's common stock at an exercise price of $1.00 per
share.
On June 29, 2006, the Company issued 100,000 shares of its common stock
for $1.00 per share to MMA Capital. In connection with this transaction, the
Company paid a finder's fee of $9,800 in cash and 80,000 shares of its common
stock to Forte Capital. The 80,000 shares were valued at $82,000 or $1.16 per
share determined using the market stock price as of issuance, recorded as common
stock issuable at the common stock's par value and charged to operations as
consulting expense.
On June 29, 2006, the Company issued and sold 15,000 shares of its
common stock for $1.00 per share and issued a warrant to purchase an additional
15,000 shares of the Company's common stock at an exercise price of $1.00 per
share. The warrants are exercisable for a period of five (5) years from the date
of issuance.
On July 10, 2006, the Company issued and sold 400,000 shares of its
common stock for $1.00 per share to MMA Capital. In connection with this
transaction, the Company paid a finder's fee of $49,000 in cash to Forte
Capital, LLC. In connection with this transaction, the Company agreed to file a
new registration statement covering the sale of these shares on or before
October 2, 2006, or within thirty (30) days of the effective date of the
Company's pending post-effective amendment(s), whichever comes first, and to
cause the registration statement to become effective within sixty (60) days of
its filing with the SEC. The Company is subject to liquidated damages if the
registration statement is not timely filed or should the registration statement
not be declared effective within the above-stated time period, of two percent
(2%) of the committed capital investment, in cash or common stock of the Company
at current market price, at the Purchaser's discretion, for each one (1)
calendar month of delay in either filing or effectiveness, or both. This
late-filing/late-effectiveness provision also applies to the Common Stock
Purchase Agreement between MMA Capital and the Company dated June 29, 2006 as
set forth in the Company's Current Report on Form 8-K filed with the SEC on July
6, 2006. As of November 17, 2006, the Company has not filed a registration
statement to register these shares and liquidated damages will be accrued
beginning in the forth quarter of 2006.
On July 28, 2006, the Company issued and sold 250,000 shares of its
common stock to Miller Investments, LLC for $1.00 per share and warrants to
purchase 250,000 shares of common stock at an exercise price of $1.00 per share.
The warrants are exercisable for a period of five (5) years from the date of
issuance.
On August 9, 2006, the Company issued and sold 20,000 shares of its
common stock for $1.00 per share and warrants to purchase an additional 10,000
shares at an exercise price of $1.00 per share.
Common Stock Issued Pursuant to Warrant Exercise
- ------------------------------------------------
On March 15, 2006, the Company issued 133,332 shares of its common
stock pursuant to the exercise of common stock warrants at an exercise price of
$0.675 per share for an aggregate exercise price of $90,000.
F-19
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
On April 14, 2006, the Company issued 66,600 shares of its common stock
pursuant to the exercise of common stock warrants at an exercise price of $0.675
per share for an aggregate exercise price of $45,000.
Common Stock Issued in Conversion of Convertible Notes Payable
- --------------------------------------------------------------
For the nine months ended September 30, 2006 the Company issued a total
of 384,135 shares of its common stock pursuant to the conversion of six
convertible promissory notes in the aggregate principal amount of $325,000 plus
accrued interest of $22,092, at a conversion rate of $.90 per share. The Company
expensed any remaining unamortized debt discount related to these notes upon
conversion.
On September 5, 2006, the Company issued 488,400 shares of its common
stock pursuant to the conversion a related party convertible promissory note in
the principal amount of $400,000 plus accrued interest of $39,560, at a
conversion rate of $.90 per share.
Common Stock Issued For Services:
- --------------------------------
On July 1, 2006, the Company entered into an agreement with Redwood
Consultants LLC to provide investor relation services to the Company. Pursuant
to this agreement, the Company issued Redwood Consultants 400,000 vested shares
of the Company's common stock valued at $500,000 or $1.25 per share determined
using the market stock price as of the date of the agreement. The fair value of
$500,000 will be amortized over the one year term of the agreement. The
amortized value of $125,000 of this agreement at September 30, 2006 has been
charged to operations as an expense and the remaining balance recorded as
deferred consulting fees treated as a reduction in additional paid-in capital.
On July 11, 2006, the Company entered into an agreement with The
Research Works, LLC to provide equity research about the Company. Pursuant to
the Agreement, the Company issued The Research Works 80,000 vested shares of the
Company's common stock valued at $128,000 or $1.60 per share determined using
the market stock price as of the date of the agreement. The fair value of
$128,000 will be amortized over the term of the agreement from July 11, 2006 to
August 1, 2007. The amortized value of $32,100 of this agreement at September
30, 2006 has been charged to operations as an expense and the remaining balance
recorded as deferred consulting fees treated as a reduction in additional
paid-in capital.
On August 21, 2006, the Company issued 30,000 shares of its common
stock to MMA Capital as payment for consulting services valued at $36,900 or
$1.23 per share determined using the market stock price as of issuance. The
value of these shares was expensed upon issuance.
On August 29, 2006, the Company issued 170,000 shares of its common
stock to Forte Capital as payment for consulting services valued at $212,500 or
$1.25 per share determined using the market stock price as of issuance. The
value of these shares was expensed upon issuance.
On September 1, 2006, the Company issued 200,000 shares of its common
stock to Len Sculler, a former director of the Company valued at $270,000 or
$1.35 per share determined using the market stock price as of issuance. The
value of these shares was expensed as director fees upon issuance.
On September 20, 2006, the Company issued 100,000 shares of its common
stock to IMS-GA, LLC, an entity affiliated through common management with MMA,
as payment for consulting services valued at $125,000 or $1.25 per share
determined using the market stock price as of issuance. The fair value of the
$125,000 will be amortized over the one year term of the agreement. The
amortized value of this agreement of $10,400 as of September 30, 2006 has been
recorded as equity and charged to operations as an expense and the remaining
balance recorded as deferred consulting fees treated as a reduction in
additional paid-in capital.
F-20
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Common Stock Warrants and Valuation:
- ------------------------------------
As of September 30, 2006, the Company had outstanding warrants
exercisable for a total of 4,988,217 shares of common stock.
The Company estimates the value of awards of share-based payments using
the Black-Scholes option pricing method that uses assumptions in effect on the
date of grant. The assumptions of volatility are based on historical volatility
since the Company does not have traded options on which to base any estimate of
implied volatility. The assumptions of expected term are based on the
contractual term since the Company has no reliable history to measure the
expected term. The risk free rate for periods within the expected term of the
option are based on the U.S. treasury yield curve in effect at the time of the
grant. From January 13, 2006, the merger date, to June 30, 2006, the Company
used pre-merger and post merger stock prices for estimating volatility.
Beginning in the quarter ended September 30, 2006, the Company calculated
volatility by excluding stock prices prior to the merger date as the Company
believes the post merger period of January 13, 2006 to the period end is now a
representative period for measuring post merger volatility.
Common Stock Warrants Issued to Non-Employees:
- ---------------------------------------------
A summary of warrant activity as of September 30, 2006 and changes
during the nine months ended September 30, 2006 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Non-Employee Warrants Shares Price Term Value
- --------------------- ------- -------- ----------- ---------
Outstanding at January 1, 2006 .. 0 0.00 0.00 -
Granted ......................... 200,000 1.25 5.00 -
Exercised ....................... 0 0.00 - -
Forfeited or expired ............ 0 - - -
Outstanding at September 30, 2006 200,000 1.25 5.00 -
Exercisable at September 30, 2006 200,000 1.25 5.00 -
The weighted-average grant-date fair value of warrants granted to
non-employees during the nine months ended September 30, 2006 and 2005 was
$185,976 and $0, respectively.
Effective January 16, 2006, the Company granted warrants exercisable
for 200,000 shares of its common stock valued at $185,976 to MBN Consulting, LLC
as payment for consulting services. The consulting agreement had a term of two
years and contained termination provisions, including the Company's right to
terminate the agreement upon 60 days written notice. The value of the warrants
were determined based on the following assumptions: an exercise price of $1.25,
an expected term equal to the warrant exercise period of 5 years, an expected
volatility of 335%, no expected dividends and a risk free rate of 4.07. The
value of the warrants of $185,976 was being amortized over the two year life of
the consulting agreement. On July 18, 2006, the Company issued a written notice
of termination and the consulting agreement was terminated on September 17,
2006. The remaining unamortized consulting fee was charged to operations upon
termination.
F-21
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Warrants Issued for Cash
- ------------------------
A summary of warrant activity for warrants sold for cash as of
September 30, 2006 and changes during the nine months ended September 30, 2006
are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Warrants Issued for Cash Shares Price Term Value
- ------------------------ --------- -------- ----------- ---------
Outstanding at January 1, 2006 .. 1,104,923 0.70 3.99 -
Granted ......................... 3,023,889 0.99 3.99 -
Issued in recapitalization ...... 859,337 4.89 2.27 -
Exercised ....................... (199,932) 0.68 - -
Forfeited or expired ............ - - - -
Outstanding at September 30, 2006 4,788,217 1.63 3.29 -
Exercisable at September 30, 2006 4,788,217 1.69 3.54 -
The weighted average valuation assumptions as of September 30, 2006 are
as follows:
Expected volatility ............. 343%
Weighted average volatility ..... 343%
Expected dividends .............. 0
Expected term (in years) ........ 5
Risk-free rate .................. 4.27%
On January 3, 2006, pursuant to the agreement with Street Venture
Partners, LLC, a related party (see Note 13), the Company issued warrants
exercisable for 388,889 shares of its common stock, at an exercise price of
$0.90 per share.
On January 13, 2006, the Company issued warrants exercisable for
859,337 shares of its common stock at exercise prices ranging from $3.00 to
$11.25 per share to the original shareholders of DynEco Corporation as part of
the Company's recapitalization.
On January 13, 2006 and September 20, 2006, pursuant to the Company's
agreements with MMA Capital, the Company issued warrants exercisable for
2,000,000 and 250,000 shares of its common stock, respectively, at the exercise
price of $1.00 per share (see Note 6). The value of the warrants were recorded
as debt discount and are being amortized over the remaining term of the MMA
convertible notes payable. (See Notes 6 and 7)
On July 28, 2006, pursuant to the Company's agreement with Miller
Investments, LLC, the Company issued warrants exercisable for 250,000 shares of
its common stock at an exercise price of $1.00 per share issued. The warrants
are exercisable for a period of five (5) years from the date of issuance.
On July 15, 2006, pursuant to the sale of shares of its common stock,
the Company issued warrants exercisable for 15,000 shares of its common stock at
an exercise price of $1.00 per share. The warrants are exercisable for a period
of five (5) years from the date of issuance.
During the nine months ended September 30, 2006, pursuant to the
conversion of outstanding promissory notes, the Company issued warrants
exercisable for 120,000 shares of its common stock at exercise prices ranging
from $.75 to $1.00 per share.
F-22
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 10 DEFERRED REVENUE
Deferred revenue primarily represents money received from customers as
either a deposit on, or full payment for, trips not yet traveled or services not
yet earned. Total deferred revenue at September 30, 2006 was $654,769.
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, the Company
issued the Trust a convertible promissory note in the principal amount of
$400,000. The Note bears interest at 10% per annum and is convertible into
shares of the Company's common stock at a conversion rate of $0.68 per share. In
connection with this transaction, the Company also issued a warrant exercisable
for shares of its common stock at the exercise price of $0.68 per share. On
September 5, 2006, the convertible promissory note and all accrued interest were
converted into 488,400 shares of the Company's common stock.
DAT also 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 1,395,066 shares or approximately 12% of the Company's issued
and outstanding common stock as of September 30, 2006.
Mr. Eiten was not employed by the Company at any time through September
30, 2006.
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
September 30, 2006, Street Venture Partners LLC owned 1,066,666 shares or
approximately 9% of the Company's issued and outstanding 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 September 30, 2006, Claudale Ltd. owned 693,333 shares or
approximately 5.8% of the Company's issued and outstanding common stock.
Brian J. Brandano
- -----------------
At September 30, 2006, Brian J. Brandano owned 333,333 shares or
approximately 2.8% of the Company's issued and outstanding common stock. Brian
J. Brandano is the son of Daniel G. Brandano, the Company's CEO and Chairman and
was employed by the Company until July 2006.
F-23
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Payable to Employee (Stephen A. Hicks)
- --------------------------------------
At September 30, 2006, the Company owed $50,000 to Stephen A. Hicks,
the former 100% shareholder of IRT-ITR, for advances made to IRT-ITR prior to
its 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, pursuant to 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 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 common stock of
the Company when the Company'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. 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 (after taking into account the
Company's 1 for 30 reverse stock split which was effected on January 13, 2006.
The transaction was exempt from the registration requirements of the
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 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 General Service Agreement
- ------------------------------------
On January 3, 2006, Street Venture Partners, LLC (See Note 9), sold the
U.S. 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 into the Company's common stock at $.90 per
share and bears interest at 10% per annum. 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 establish a foundation in certain desired
leisure travel markets with multiple product offerings.
F-24
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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. ("CIL"),
for a purchase price of $2,090,680. The purchase price included the acquisition
of intangible assets and goodwill related to CIL's position in the travel
industry as a specialist in providing resort destination travel packages to the
Caribbean and Eastern Mexico, its web based assets consisting of CIL's websites,
URL's, and search engine optimization abilities that drive inquiries to the
Company, and its management team and trained workforce. Almost all of its
business originates via the Internet. CIL is located in Largo, Florida. It has
since been integrated into the Company's corporate headquarters in Tampa,
Florida. The purchase price consisted of a combination of cash ($640,000),
340,000 shares of the Company's common stock, valued at $2.50 per share (the
average closing price of the Company's common stock during the acquisition
period ($850,680)), and a one-year secured Convertible Promissory Note in the
principal amount of $600,000 convertible into shares of the Company's common
stock at $1.50 per share. The cash portion of the purchase price was payable in
two tranches, $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 CIL for the years ended December 31, 2004, and December 31, 2005.
As of September 30, 2006, the remaining cash portion of the purchase price has
not been paid.
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 issuance of any additional shares will not result in a change to the
recorded value of this acquisition because the issuance of additional shares is
contingent upon a change in security price. The Company agreed to include the
sale 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 bears interest at the rate of 9% per
annum, and matures on February 7, 2007. The Note is convertible into shares of
the Company's common stock, on or before the maturity date, at the conversion
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 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 Note may be required. The Company has
agreed to include the sale of the shares issued, and those issuable upon
conversion of the Note in the next registration statement filed by the Company.
The Note is secured by a lien on the assets of CIL. A beneficial conversion
value of $480,000 was calculated by multiplying the expected number of shares to
be issued upon conversion of the debt by the difference between the conversion
price of $1.50 per share and the market value of the common stock on the debt
issuance date of $2.70 per share. The debt discount is being amortized over the
term of the debt.
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 September 30, 2006. Purchase price
adjustments following the closing are customary.
F-25
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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
==========
Goodwill of $1,610,336 is expected to be deductible over 15 years for
tax purposes. The intangible asset relates to a value assigned to CIL's web
based assets consisting of CIL's internet presence through its websites, URL's,
and search engine optimization abilities that drive inquires to the Company. The
amortization period is five years or 60 months from the acquisition date.
However, since the purchase price allocation was revised 5 months after the
acquisition, the amortization will occur over the remaining life of 55 months
beginning July 1, 2006. The web based assets acquired were valued based upon the
estimated annual number of inquiries resulting from CIL's internet presence
multiplied by an estimated cost per inquiry then projected over a 60 month
period.
The results of CIL operations are included in the consolidated
financial statements beginning with the date of acquisition.
On November 13, 2006, the seller filed a complaint in Hillsborough
County, Florida, Circuit Court against the Company seeking approximately
$420,000 in breach of contract damages relating to the Company's acquisition of
Changes In L'Attitudes. Interest expense of $81,000 relative to this claim has
been accrued as of September 30, 2006. (See Note 15)
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
purchase price included the acquisition of intangible assets and goodwill
related to its contacts and contracts with travel suppliers, expertise of its
management team and trained workforce. 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 consisted of a combination of cash ($1,500,000),
700,000 shares of the Company's common stock valued at $2.62 per share (the
average closing price of the Company's common stock during the acquisition
period ($1,833,300)), and a one-year secured Convertible Promissory Note in the
principal amount of $1,450,000. The cash portion of the purchase price is
payable in two tranches, $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.
F-26
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Additional shares of the Company's common stock may be issued if the
Company, as part of any subsequent business acquisitions on or before December
31, 2006, issues shares of its common stock at a rate less than $1.50 per share.
The issuance of any additional shares will not result in a change to the
recorded value of this acquisition because the issuance of additional shares is
contingent upon a change in security price. 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 the Company's common
stock could be issued as a result of this adjustment provision.
The Convertible Promissory Note bears interest at the rate of 9% per
annum and matures on March 6, 2007. The Note is convertible into shares of the
Company's common stock on or before the maturity date at a rate of $1.50 per
share. The conversion rate may be adjusted downward if the Company, in
subsequent acquisitions on or before December 31, 2006, provides consideration
that includes convertible securities with a conversion rate of less than $1.50
per share. In the event of any such adjustment, the conversion rate will be
adjusted to the most favorable rate offered, but no lower than $1.00 per share.
A beneficial value of $1,208,334 was calculated by multiplying the expected
number of shares to be issued upon conversion of the debt by the difference
between the conversion price of $1.50 per share and the market value of the
common stock on the debt issuance date of $2.70 per share. The debt discount is
being amortized over the term of the Note.
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 the sale 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 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 September 30, 2006. Purchase price
adjustments following the closing are customary.
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
==========
Goodwill of $3,505,360 is expected to be deductible over 15 years.
Intangible assets represents the value of certain airline contracts
that the Company assumed in the purchase of IRT/ITR. These contracts allow the
Company to purchase airline tickets on a wholesale basis. The amortization
period is three years or 36 months from the acquisition date. However, since the
purchase price allocation was revised four months after the acquisition, the
amortization will occur over the remaining life of 32 months beginning July 1,
2006. The airline contracts were valued based upon the expected net cash flow
from bulk airline ticket sales over three years.
F-27
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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 nine months ended September 30, 2006
and 2005 as though the CIL and IRT-ITR business combinations had been completed
as of the beginning of the period reported on:
2006 2005
---- ----
Revenues ................... $ 5,222,414 $ 6,237,787
Cost of Revenue ............ 3,575,595 4,665,067
Gross Profit ............... 1,646,819 1,572,720
Operating Expenses ......... 5,453,523 2,953,960
Operating Loss ............. (3,806,704) (1,381,240)
Other Expenses ............. (3,068,252) (1,078,217)
Net Loss ................... (6,874,956) (2,459,457)
Net Loss per share ......... $ (0.70) $ (0.18)
The main difference in the net loss between 2006 and 2005 is due to the
fact that in 2005 DLG was a development-stage company with minimal expenses. In
2006 expenses were incurred as a result of acquisitions, organizational costs
relating to establishing 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;
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.
F-28
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
MANAGEMENT OF THE COMPANY
- -------------------------
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, continued to serve as a director of the Company until his
resignation on November 6, 2006. 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 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 were 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
On June 5, 2006, Thomas W. Busch resigned as Director, Vice President,
Treasurer and Chief Financial Officer of Dynamic Leisure Corporation. Daniel G.
Brandano assumed the responsibilities of treasurer and chief financial officer.
On November 6, 2006, Len Sculler and Robert LeVine submitted their resignations,
effective immediately, from the Board of Directors of the Company. The
resignations were not as a result of any disagreement with the Company on any
matter relating to its operations, policies or practices. On November 6, 2006,
the Company's Board appointed Mark E. Crone and Eric H. Winston to fill the
Board vacancies created by the resignations of Mr. Sculler and Mr. LeVine.
EXCLUSIVE PATENT AND KNOW-HOW LICENSE AGREEMENT DATED JANUARY 12, 2006
- ----------------------------------------------------------------------
On January 12, 2006, DynEco and Dr. Thomas C. Edwards, the Company's
then CEO entered into an Exclusive Patent and Know-How License Agreement that
amended 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.
F-29
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
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.
On October 5, 2006, the Company entered into an Assignment and
Assumption Agreement, with Buccaneer Exploration, Inc. pursuant to which the
Company agreed to sell, assign and transfer to Buccaneers Exploration, Inc. all
of the Company's right, title and interest in the Exclusive Worldwide License
Agreement between the Company and Parker Hannifin Corporation dated May 1, 2003,
and Buccaneer Exploration agreed to assume all of the Company's obligations
under the License Agreement, including repayment of any amounts the Company
expended in association with the License Agreement. The consummation of this
transaction is subject to the approval of TRDA, which has not yet been granted
by TRDA as of the date of this filing.
On October 5, 2006, the Company entered into a second Assignment and
Assumption Agreement with Buccaneer Exploration, Inc. pursuant to which the
Company agreed to sell, assign and transfer to Buccaneer Exploration, Inc. all
of the Company's right, title and interest in the TRDA Funding Agreement dated
November 20, 2002 with the Technology Research Development Authority of the
State of Florida ("TRDA"), and Buccaneer Exploration has agreed to assume all of
the Company's obligations under the Funding Agreement, including payment of the
Company's TRDA loan payable - TRDA. The consummation of this transaction is
subject to the approval of TRDA, which has not yet been granted by TRDA as of
the date of this filing.
On October 5, 2006, the Company entered into a third Assignment and
Assumption Agreement with Buccaneer Exploration, Inc. pursuant to which the
Company agreed to sell, assign and transfer to Buccaneer Exploration, Inc. all
of the Company's right, title and interest in the Exclusive Patent and Know-How
License Agreement dated January 12, 2006, by and between DynEco Corporation
(n/k/a Dynamic) and Dr. Thomas C. Edwards, and Buccaneer Exploration agreed to
assume all of the Company's obligations under the Edwards Patent 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 AND CONTINGENCIES
On October 12, 2006, the Company sold 10,000 shares of common stock for
$10,000 or $1.00 per share.
On November 6, 2006, the Company's Board of Directors appointed Mark E.
Crone and Eric H. Winston to fill the vacancies created by the resignations of
Mr. Sculler and Mr. LeVine. The Company granted Eric H. Winston 200,000 shares
of common stock valued at $140,000 or $.70 per share (based on the closing price
of the Company's common stock on the date of issuance). The Company also granted
Mark E. Crone an option to purchase 200,000 shares of the Company's common stock
at a purchase price of $0.70 per share, the closing price of the Company's
common stock on the date of grant.
On November 6, 2006, the Company granted an option to purchase 800,000
shares of its common stock at an exercise price of $0.70 per share, the closing
price of the Company's common stock on the date of grant, to its attorneys as
compensation for professional fees.
F-30
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
On November 9, 2006, the Company entered into a Securities Purchase
Agreement with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"),
AJW Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners,
II, LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are
collectively referred to as the "Purchasers". Whereby the Company sold to the
Purchasers Secured Convertible Term Notes (the "Notes") in the aggregate
principal amount of One Million Dollars ($1,000,000). The $1,000,000 is to be
funded in two tranches ($600,000 on November 9, 2006, and $400,000 upon filing
the Registration Statement). The offering was made pursuant to Section 4(2) of
the Act, as amended. The Notes bear interest at 6% per annum, unless the common
stock of the Company is greater than $1.25 per share for each trading day of a
month, in which event no interest is payable during such month. The Notes are
convertible into common stock of the Company at a 50% discount to the average of
the three lowest trading prices of the common stock during the 20 trading day
period prior to conversion; provided, however, that the Notes are convertible
into common stock of the Company at a 45% discount in the event that the
Registration Statement covering the resale of securities underlying the Notes
("Registration Statement"), is filed on or before December 11, 2006; and (ii) a
40% discount in the event that the Registration Statement becomes effective on
or before March 9, 2007. In connection with the offering, the Company issued an
aggregate of 5,000,000 warrants to purchase common stock at a price of $1.50 per
share ("Warrants"). The Warrants are exercisable for a period of seven years.
The number of shares subject to the Warrant and the exercise price are subject
to adjustment for stock splits, stock combinations and certain dilutive
issuances, including the issuance of shares of Common Stock for no consideration
or for a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection therewith)
less than the 5-day average of the last reported sales of the Company's Common
Stock. In addition, in certain circumstances the warrant exercise price will be
adjusted if after the Registration Statement is declared effective, the closing
price for the Company's Common Stock closes below $1.00.
The conversion of the Notes is subject to an effective Registration
Statement pursuant to the terms of a Registration Rights Agreement. The Company
has the right to redeem the Notes under certain circumstances, as well as the
right to pay monthly cash payments to prevent any conversion of the Notes during
such month. The Notes are secured by all of the Company's assets pursuant to the
terms of a Security Agreement and Intellectual Property Security Agreement. The
proceeds of the offering will be used to repay certain indebtedness and for
working capital.
Due to the variable conversion price, the secured convertible term
notes will be bifurcated and recorded as two liability instruments, a debt
instrument and an embedded conversion option liability at fair value.
The Company has been named as a principal party to proceedings brought
by Raymon Valdes and Changes In L'Attitudes, Inc. in Hillsborough County,
Florida, Circuit Court. The proceedings began on November 13, 2006. The Company
recently received service of the complaint and is reviewing its contents. The
complaint seeks approximately $440,000 on breach of contract theories relating
to the Company's acquisition of Changes In L'Attitudes. The Company is in the
process of retaining counsel to respond to the complaint and anticipates issuing
additional comment on its legal position after full review of the matter. An
acquisition payable of $440,000 and interest expense totaling $81,000 has been
accrued as of September 30, 2006, relative to this proceeding.
F-31
DYNECO CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
Page(s)
-------
Report of Independent Registered Public Accounting Firm ............... F-33
Consolidated Balance Sheets ........................................... F-34
Consolidated Statement of Operations .................................. F-35
Consolidated Statement of Changes in Stockholders' Deficiency ......... F-36
Consolidated Statement of Cash Flows .................................. F-37
Notes to Financial Statements .........................................F-38 - 62
F-32
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-33
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-34
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-35
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-36
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-37
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-38
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-39
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 collectibility is reasonably assured. The
following policies reflect specific criteria for the various
revenues streams of the Company:
The Company had two sources of revenues totaling $0 and $286,900
during the years ended December 31, 2005 and 2004 respectively;
compressor revenues and contract consulting revenue.
Compressor revenues totaled $11,900 for 2004. Sales revenues for
customer orders of compressors are recognized at the time of order
completion, defined as when all Company manufacturing and internal
inspection obligations related to that order have been satisfied.
This occurs upon order shipment.
Contract consulting revenue totaled $275,000 for 2004 and related to
the Parker-Hannifin ("Parker") agreement stipulating a monthly fee
of $25,000 per month starting in June 2003. Contract consulting
revenue is recognized for service contracts at the time of
satisfaction of all obligations pursuant to the underlying contract.
That contract terminated after November 2004.
Research and Development:
In accordance with Statement of Financial Accounting Standards No. 2
"Accounting For Research and Development Costs," the Company
expenses all research and development costs. Research and
development expenses included in General and administrative expenses
were $100,383 and $145,171 in 2005 and 2004, respectively.
F-40
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-40
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-41
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-42
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-43
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-44
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 registrable 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 sales 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 principal 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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
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
Act by reason of Section 4(2) thereunder as a transaction by an issuer
not involving any public offering.
F-53
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-54
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-55
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 principal 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 sales 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 sales of those
shares issuable under the Modification and Waiver Agreement the sales
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-56
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-57
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 sale 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.
("CIL"), for a purchase price of $2,090,680. CIL 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. CIL 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-58
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 CIL 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 sale 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 sale 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 CIL. 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 CIL operations will be included in the consolidated
financial statements beginning with the date of acquisition.
F-59
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-60
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 sale 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-61
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-62
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-64
Balance Sheet ......................................................... F-65
Statement of Operations ............................................... F-66
Statement of Changes in Stockholders' Deficiency ...................... F-67
Statement of Cash Flows ............................................... F-68
Notes to Financial Statements .........................................F-69 - 85
F-63
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-64
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-65
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-66
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-67
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-68
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-69
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 collectibility 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-70
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-71
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-72
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 TourScape, a proprietary software for use in the
wholesale travel industry, for $500,000 and the purchase of third-party
database software for $91,346. 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 TourScape to any unaffiliated
third party for nine months (approximately June 30, 2006) without the
prior written consent of the seller. Future costs of application
development and deployment will be capitalized as provided for in SOP
98-1.
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-73
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-74
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-75
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-76
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-77
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-78
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-79
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 principal due, plus
interests and other amounts due, through the redemption date but
only if an effective registration statement exists.
F-80
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 sale 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
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 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-81
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-82
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 the sale 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. ("CIL"), 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 CIL 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-83
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 the sale 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 CIL.
The acquisition of CIL 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-84
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 the sale 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-85
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-87
Balance Sheets F-88
Statements of Operations F-89
Statements of Changes in Stockholder's Equity F-90
Statements of Cash Flows F-91
Notes to Financial Statements F-92 - 97
F-86
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-87
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-88
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-89
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-90
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-91
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. ("CIL" 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.
In addition, receivables from merchant banks for credit card
transactions are included as a cash equivalent as they are
considered deposits in transit.
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-92
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-93
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-94
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-95
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 CIL 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-96
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 the sale 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 CIL.
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-97
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-99
Combined Balance Sheets ............................................... F-100
Combined Statements of Operations ..................................... F-101
Combined Statement of Changes in Stockholder's (Deficit) Equity ....... F-102
Combined Statements of Cash Flows ..................................... F-103
Notes to Combined Financial Statements ................................F-104-111
F-98
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-99
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-100
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-101
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-102
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-103
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-104
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-105
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-106
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-107
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-108
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-109
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
carryforwards 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-110
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 the
sale of the shares issued and those issuable upon conversion of the
Note in the next registration statement.
F-111
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND YEAR ENDED DECEMBER 31, 2005
INDEX
Page(s)
-------
Unaudited Pro Forma Combined Condensed Financial Statements
Description .......................................................... F-113-114
Unaudited Pro Forma Combined Condensed Statement of Operations for the
Period and Year Ended December 31, 2005 .............................. F-115
Unaudited Pro Forma Combined Condensed Statement of Operations for the
Nine Months Ended September 30, 2006 ................................. F-116
Notes to the Unaudited Pro Forma Combined Condensed Statement of
Operations ........................................................... F-117-119
F-112
DYNAMIC LEISURE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements relate
to DynEco Corporation, ("DynEco"), the acquisition of all the issued and
outstanding shares of capital stock of Dynamic Leisure Group, Inc. ("DLG"), on
January 13, 2006 in a transaction accounted for as a reverse merger and
recapitalization where DLG was treated as the accounting acquirer of DynEco, the
acquisition of all the issued and outstanding shares of capital stock of Changes
in L'Attitudes, Inc ("CIL"), on February 8, 2006 and the acquisition of all the
issued and outstanding shares of capital stock of Island Resort Tours, Inc. and
International Travel and Resorts, Inc. ("IRT/ITR") on March 6, 2006. The
following unaudited pro forma combined condensed financial statements refer to
DLG as Dynamic Leisure Corporation ("Dynamic").
DynEco and DLG Merger
- ---------------------
On January 13, 2006, DLG and DynEco merged through a share exchange agreement in
which no cash or new additional liabilities were assumed other than those
already recorded by DLG or DynEco.
The issuance of the Series A Preferred Stock in exchange for the outstanding
capital stock of DLG pursuant to the recapitalization resulted in a change in
control of DynEco where (a) the former shareholders of DLG acquired voting
rights over approximately 83% of the then 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. The Series A
Preferred Stock converted into 6,566,667 shares of DynEco's common stock.
DynEco's Articles of incorporation were then 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.
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.
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.
CIL Acquisition
- ---------------
On February 8, 2006, the Company acquired all the outstanding capital stock of
CIL for a purchase price of $2,090,680 which consists of a combination of
$200,000 in cash paid at closing; an acquisition payable of $440,000; 340,000
shares of the Company's common stock valued at $850,680 and a one-year secured
convertible promissory note in the principal amount of $600,000 with interest at
9% per annum and a conversion rate of $1.50 per share. The cash portion of the
purchase price consisted of $200,000 delivered at closing with the acquisition
payable to be delivered after closing and adjusted for any short fall of trade
payables in excess of short-term liquid assets.
IRT/ITR Acquisition
- -------------------
On March 6, 2006, the Company acquired all the outstanding capital stock of
IRT/ITR for a purchase price of $4,783,300 consisting of $500,000 in cash paid
at closing; an acquisition payable of $1,000,000; 700,000 shares of common stock
valued at $1,833,300 and a one-year secured convertible note in the principal
amount of $1,450,000 with interest at 9% per annum and a conversion rate of
$1.50 per share. The cash portion of the purchase price consisted of $500,000
delivered at closing with the acquisition payable to be delivered after closing
and adjusted for any short fall of trade payables in excess of short-term liquid
assets.
F-113
DYNAMIC LEISURE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pro Forma Financial Statements and Pro Forma Adjustments
- --------------------------------------------------------
The historical results presented in the unaudited pro forma statement of
operations are as if the acquisitions had occurred at the beginning of 2005 or,
for DLG/Dynamic, at its inception. The historical financial statements for
DynEco are for the 12 months ending December 31, 2005 and from January 1 to the
date of the merger and recapitalization, January 13, 2006. The historical
financial statements for CIL are for the 12 months ending December 31, 2005 and
from January 1 to the date of its acquisition, February 8, 2006. The historical
financial statements for IRT/ITR are for the 12 months ending December 31, 2005
and from January 1 to the date of its acquisition, March 6, 2006. The historical
financial statements of DLG/Dynamic (the accounting acquirer in the merger and
recapitalization with DynEco) are for the period from May 16, 2005 (Inception)
to December 31, 2005 and from January 1 to September 30, 2006 which also
includes the consolidated results of operations of DynEco, CIL and IRT/ITR from
their acquisition dates through September 30, 2006.
Pro forma adjustments have been made to the historical results presented in the
unaudited pro forma statement of operations to reflect as if the merger,
recapitalization and acquisitions had occurred at the beginning of the 2005 or,
for DLG/Dynamic, at its inception. Certain reclassifications were made from
historical financial reports for comparability and consistency. The financial
statements of DynEco and DLG have been adjusted for the affect of the 1:30
reverse stock split that occurred on January 31, 2006. 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, CIL's audited financial statements and IRT/ITR'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 results of operations for any
future period. For purposes of preparing the Company's consolidated financial
statements subsequent to the acquisition, the Company will establish a new basis
for CIL and IRT/ITR'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 CIL and
IRT/ITR's assets and liabilities, any appropriate purchase accounting
adjustments will be made and reported. The actual combined results of operations
will likely differ, possibly significantly, from the pro forma amounts included
herein.
F-114
DYNAMIC LEISURE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE 12 MONTHS ENDED DECEMBER 31, 2005
Historical
Historical Dynamic Historical Historical Acquisitions
Dyneco (a) Leisure (a) Changes(a) IRT-ITR (a) 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 1,568,016 656,031 (b) 4,013,500
---------- ----------- ---------- ---------- ------------- -----------
Income (loss) from operations .......... (497,968) (455,954) 200,066 (506,923) (656,031) (1,916,540)
Other Income (Expense)
Interest income ...................... 1,257 -- 15,194 2,235 -- 18,686
Interest expense ..................... (276,619) (29,360) -- (7,658) (1,367,003) (c) (1,680,640)
Other Income ......................... 83,879 -- -- -- -- 82,879
Warrant valuation income ............. 86,408 -- -- -- -- (d) 86,408
---------- ----------- ---------- ---------- ------------- -----------
Total Other Income (Expense) ....... (106,075) (29,360) 15,194 (5,423) (1,367,003) (1,492,667)
---------- ----------- ---------- ---------- ------------- -----------
Income before taxes .................... (603,773) (485,314) 215,260 (512,346) (2,023,034) (3,409,207)
Provision for income taxes ............. -- -- -- 1,385 (1,385) (e) --
---------- ----------- ---------- ---------- ------------- -----------
Net income ............................ $ (603,773) $ (485,314) $ 215,260 $ (510,961) $ (2,024,419) $(3,409,207)
========== =========== ========== ========== ============= ===========
Net Loss per share - Basic and Diluted . $ (0.54) $ (0.07) $ 0.63 $ (0.73) -- $ (0.39)
========== =========== ========== ========== ============= ===========
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-115
DYNAMIC LEISURE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Historical
Historical DLG/ Historical Historical Acquisitions
DynEco (a) Dynamic (a) CIL (a) IRT/ITR (a) Adjustments(a) Ref Total
---------- ----------- ---------- ----------- -------------- --- -----------
Revenue ................................ $ -- $ 4,307,315 $ 459,088 $ 456,011 $ -- $ 5,222,414
Cost of Revenue ........................ -- 3,041,475 374,672 159,448 -- 3,575,595
---------- ----------- ---------- ---------- ------------- -----------
Gross Profit ........................... -- 1,265,840 84,416 296,563 -- 1,646,819
General and Administrative Expenses .... -- 4,854,793 73,708 314,572 210,450 (b) 5,453,523
---------- ----------- ---------- --------- ------------- -----------
Income (Loss) from Operations .......... -- (3,588,953) 10,708 (18,009) (210,450) (3,806,704)
Other Income (Expense)
Interest income ...................... -- 15,710 4,082 1,010 -- 20,802
Interest expense ..................... (2,063) (3,518,484) -- (4,372) 656,454 (c) (2,868,465)
Other expense ........................ -- (8,020) -- - -- (8,020)
Loss on disposal of assets ........... -- (42,667) -- - -- (42,667)
Loss on extinguishment of debt ....... -- (208,452) -- - -- (208,452)
Warrant valuation income (expense) ... -- 38,550 -- - -- (d) (38,550)
---------- ----------- ---------- ---------- ------------- -----------
Total Other Income (Expense), net .. (2,063) (3,723,363) 4,082 (3,362) 656,454 (3,068,252)
---------- ----------- ---------- ---------- ------------- -----------
Net Income (Loss)................... $ (2,063) $(7,312,316) $ 14,790 $ (21,371) 446,004 $(6,874,956)
========== =========== ========== ========== ============= ===========
Net Loss per share - Basic and Diluted . $ -- $ (0.95) $ 0.04 $ (0.03) -- $ (0.70)
========== =========== ========== ========== ============= ===========
Weighted average number of shares
outstanding during the period
- basic and diluted .................. 1,125,327 7,681,015 340,000 700,000 -- 9,846,342
========== =========== ========== ========== ============= ===========
See accompanying notes to unaudited pro forma combined condensed financial statements.
F-116
DYNAMIC LEISURE GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(a) The historical results presented in the unaudited pro forma statement of
operations are as if the acquisitions had occurred at the beginning of 2005 or,
for DLG/Dynamic, at its inception. The historical financial statements for
DynEco are for the 12 months ending December 31, 2005 and from January 1 to the
date of the merger and recapitalization, January 13, 2006. The historical
financial statements for CIL are for the 12 months ending December 31, 2005 and
from January 1 to the date of its acquisition, February 8, 2006. The historical
financial statements for IRT/ITR are for the 12 months ending December 31, 2005
and from January 1 to the date of its acquisition, March 6, 2006. The historical
financial statements of DLG/Dynamic (the accounting acquirer in the merger and
recapitalization with DynEco) are for the period from May 16, 2005 (Inception)
to December 31, 2005 and from January 1 to September 30, 2006, which also
includes the consolidated results of operations of DynEco, CIL and IRT/ITR from
their acquisition dates through September 30, 2006.
Pro forma adjustments have been made to the historical results presented in the
unaudited pro forma statement of operations to reflect as if the merger,
recapitalization and acquisitions had occurred at the beginning of the 2005 or,
for DLG/Dynamic, at its inception. Certain reclassifications were made from
historical financial reports for comparability and consistency. The financial
statements of DynEco and DLG have been adjusted for the affect of the 1:30
reverse stock split that occurred on January 31, 2006. 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.
(b) Amortization expense was increased related to the amortization of intangible
assets acquired in the purchase of DLG, CIL and IRT/ITR as if the acquisitions
had occurred on January 1, 2005 and amortization commenced as of that date. The
pro forma adjustment for amortization expense for 2005 was $656,031 and $210,450
for the period from January 1 to September 30, 2006.
(c) The pro forma adjustments to interest expense resulted in interest expense
in 2005 increasing by $1,367,003 and interest expense for the nine months ended
September 30, 2006, decreasing by $656,454 as described below:
o Interest expense was increased related to the $2,000,000 borrowed under
a convertible promissory note from MMA Capital, LLC on January 13, 2006
at a rate of 10% per annum (the modified and amended interest rate) as
if it had been outstanding since January 1, 2005. The pro forma
adjustment to increase interest expense was $200,000 for the 12 months
ended December 31, 2005 and $7,123 for the period from January 1 to
January 13, 2006, the date the historical financial statements began
accruing interest on this note.
o Interest expense was increased related to the amortization of
$2,000,000 in debt discount related to warrants issued with the MMA
convertible note financing on January 13, 2006. The historical
amortization period was pro forma adjusted from the 12 months ended
January 13, 2007 to the period from January 1, 2005 to January 13,
2007. As a result, interest expense was increased by a pro forma
adjustment of $982,503 for 12 months ended December 31, 2005, and
$34,993 from January 1 to January 13, 2006, the date the historical
financial statements began amortizing debt discount relative to this
note. A pro forma adjustment was recorded to decrease the amortization
of debt discount from January 13, 2006 to September 30, 2006 of
$727,580 consisting of $702,557 pro forma amortization expense as
compared to $1,4230,137 of historical amortization for the same period.
The pro forma reduction in interest expense is required to reflect the
longer amortization period (January 1, 2005 to January 13, 2007)
assumed in the pro forma statement of operations.
F-117
o Interest expense was increased related to $2,050,000 in convertible
promissory notes ($1,450,000 and $600,000 due on the 9% secured
convertible promissory notes issued as a portion of the purchase price
for CIL and IRT/ITR, respectively) as if the amount due under these
convertible promissory notes were outstanding beginning on January 1,
2005. The pro forma adjustment for interest expense for 2005 was
$184,500, $19,714 for the period form January 1 to February 8, 2006 and
$9,296 for the period from February 8 to March 6, 2006 or $29,010 in
the aggregate for the nine months ended September 30, 2006. February 8,
2006 and March 6, 2006 are the dates the historical financial
statements of the Company begin to accrue interest on these convertible
promissory notes.
(d) The Company recorded a warrant liability on January 13, 2006 in connection
with the MMA Capital LLC $2,000,000 financing due to the liquidated damages
provision in the registration rights agreement requiring liability treatment
under EITF 00-10. A pro forma adjustment was made to record the $2,000,000
convertible promissory note as if the financing had occurred on January 1, 2005.
However, a pro forma adjustment was not recorded for the related warrant to
purchase 2,000,000 shares of the Company's common stock because a pro forma
adjustment to record the warrant value at January 1, 2005 and subsequent change
in the warrant liability would result in an inappropriate gain or warrant income
being recorded as a pro forma adjustment for 2005 and for the period of January
1, 2006 to January 13, 2006. A pro forma adjustment of warrant income would have
resulted through the remeasurement of the value of the warrant as of January 1,
2005 and the subsequent change in the value of the warrant liability in 2005 and
for the period of January 1, 2006 to January 13, 2006 only because the January
1, 2005 market price of the Company's common stock was substantially greater
than the historical market price of the Company's common stock on the actual
date of grant, January 13, 2006, and the exercise price of the warrant, which
was negotiated based on market conditions at January 13, 2006, would not have
been pro forma adjusted.
If the warrants were to be remeasured on a pro forma basis as of January 1,
2005, the following are the Black-Scholes option pricing method assumptions that
would apply:
As of January 1, 2005
- ---------------------
Warrants ............... 2,000,000
Exercise price ......... $1.00
Market price ........... $4.35
Expected life (years) .. 3.00
Volatility ............. 159%
Discount rate .......... 3.40
As of December 31, 2005
- -----------------------
Warrants ............... 2,000,000
Exercise price ......... $1.00
Market price ........... $.90
Expected life (years) .. 2.0
Volatility ............. 235%
Discount rate .......... 4.35
As of September 30, 2006
- ------------------------
Warrants ............... 2,000,000
Exercise price ......... $1.00
Market price ........... $1.16
Expected life (years) .. 1.25
Volatility ............. 142%
Discount rate .......... 5.03
(e) There is no provision or benefit for income taxes recorded, based on the
historical operating losses previously reported by DynEco and Dynamic.
F-118
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
We estimate that expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts or other
expenses relating to the sale of the shares by the selling shareholders) will be
as set forth below. We will pay all of the expenses with respect to the
distribution, and such amounts, with the exception of the Securities and
Exchange Commission registration fee, are estimates.
SEC Registration and Filing Fee ........................... $ 202.00
Legal Fees and Expenses ................................... $ 25,000.00
Accounting Fees and Expenses .............................. $ 5,000.00
Financial Printing ........................................ $ 2,500.00
Transfer Agent Fees ....................................... $ 1,500.00
Blue Sky Fees and Expenses ................................ -
Miscellaneous ............................................. $ 3,298.00
TOTAL ..................................................... $ 37,500.00
RECENT SALES OF UNREGISTERED SECURITIES
DyneCo Transactions
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
II-1
registered under the 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
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 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 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 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 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 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 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 Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, as transactions by an
issuer not involving any public offering.
II-2
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,
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 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 Act by reason of Sections 4(2) and 4(6) of
the 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 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 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 Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, as transactions by an
issuer not involving any public offering.
II-3
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 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 Act by reason of Section 4(2)
of the 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 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 Act of 1933, as amended, by reason of Section
4(2) thereof and the rules and regulations thereunder.
Dynamic Leisure Group, Inc.
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 "accredited investor" within the
meaning of Rule 501 of Regulation D under the 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 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 Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering.
II-4
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 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 Act by reason of Section 4(2) of the 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 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 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 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 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
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 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 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
II-5
"accredited investor" within the meaning of Rule 501 of Regulation D under the
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 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 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 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 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 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 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 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 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. 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 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.
II-6
The certificate evidencing securities issued to the investor included a legend
to the effect that the securities were not registered under the 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 Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering. In October 2006, Mr. Davidson converted all of the
outstanding principal and interest under the note into 29,110 shares of the
Company's common stock.
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 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 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 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 Act by reason of Section 4(2) of the 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
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 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 Act by reason of Section 4(2) of the 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
II-7
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 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 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 Act by
reason of Section 4(2) of the 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 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 Act by reason of Section 4(2) of the 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, LLC......................... 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 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 Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, as transactions by an
issuer not involving any public offering.
II-8
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
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 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 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
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 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 Act by reason of Section 4(2) of the 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 consultant 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 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 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 Act by
reason of Section 4(2) of the 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
II-9
Regulation D under the 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 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 Act by
reason of Section 4(2) of the 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 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 Act by reason of Section 4(2) of the 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,
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 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 Act by reason of Section 4(2)
of the 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, pursuant to which the Company issued and sold 50,000 shares of common
stock for an aggregate purchase price of $50,000 and warrants exercisable for
50,000 shares of common stock of the Company at an exercise price of $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 Act and could not be resold absent registration or the availability of an
applicable exemption from registration. No general solicitation or advertising
II-10
was used in connection with the transactions. The offer and sale of the shares
and warrants were made pursuant to an exemption from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering.
On May 31, 2006, the Company entered into a Subscription Agreement with Peter L.
Johnson, pursuant to which the Company issued and sold 10,000 shares of its
common stock for an aggregate purchase price of $10,000 and warrants exercisable
for 10,000 shares of its common stock at an exercise price of $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 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. The offer and sale of the shares and warrants were made
pursuant to an exemption from the registration requirements of the Act by reason
of Section 4(2) of the Act and the rules and regulations thereunder, as
transactions by an issuer not involving any public offering.
On June 29, 2006, the Company entered into a Common Stock Purchase Agreement
with MMA Capital, LLC, a Delaware Limited Liability Company, pursuant to which
the Company issued and sold 100,000 shares of its common stock for an aggregate
purchase price of $100,000.00. The offer and sale of the shares was made
pursuant to an exemption from the registration requirements of the Act by reason
of Section 4(2) of the Act and the rules and regulations thereunder, as
transaction by an issuer not involving any public offering.
On July 10, 2006, the Company entered into a second Common Stock Purchase
Agreement with MMA Capital, LLC, pursuant to which MMA agreed to purchase, and
the Company agreed to issue and sell 400,000 shares of the Company's common
stock, at the aggregate purchase price of $400,000.00. These shares of common
stock pursuant to this agreement were issued and sold on July 12, 2006 (100,000
shares), August 21, 2006 (225,000 shares) and September 6, 2006 (75,000 shares).
The offer and sale of the shares and warrants were made pursuant to an exemption
from the registration requirements of the Act by reason of Section 4(2) of the
Act and the rules and regulations thereunder, as transactions by an issuer not
involving any public offering.
On July 1, 2006, the Company issued 400,000 shares of its common stock to
Redwood Consultants, LLC for consulting services valued at $500,000 or $1.25 per
share (the closing market price of the Company's common stock on the day of
issuance). The offer and sale of the shares were made pursuant to an exemption
from the registration requirements of the Act by reason of Section 4(2) of the
Act and the rules and regulations thereunder, as transactions by an issuer not
involving any public offering.
On July 10, 2006, the Company entered into a Subscription Agreement with David
O. Jensen pursuant to which the Company issued and sold 15,000 shares of its
common stock for an aggregate purchase price of $15,000 and warrants exercisable
for 15,000 of the Company's common stock at $1.00 per share. The offer and sale
of the shares were made pursuant to an exemption from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering.
On July 11, 2006, the Company issued 80,000 shares of its common stock to The
Research Works, LLC for services rendered through August 2007 valued at $128,000
or $1.60 per share (the closing market price of the Company's common stock on
the day of issuance). The offer and sale of the shares were made pursuant to an
exemption from the registration requirements of the Act by reason of Section
4(2) of the Act and the rules and regulations thereunder, as transactions by an
issuer not involving any public offering.
On July 28, 2006, the Company entered into a stock purchase agreement with
Miller Investments, LLC pursuant to which the Company issued and sold 250,000
shares of its common stock for an aggregate purchase price of $250,000 and
warrants exercisable for up to 250,000 shares of the Company's common stock at
an exercise price of $1.00 per share, subject to potential adjustment(s) in the
exercise price as set forth in the warrant. The warrants are exercisable for a
II-11
period of five (5) years from the date of issuance. The offer and sale of the
shares were made pursuant to an exemption from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
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 consideration 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. The stock was valued at $1.25 per share or an
aggregate $125,000 based on contemporaneous cash sales of Company common 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. The value of the shares was recognized immediately as a
modification expense classified as interest. The retroactive portion of the
increase in interest of $22,685 was also recognized immediately.
On August 9, 2006, the Company issued and sold 20,000 shares of common stock for
an aggregate purchase price of $20,000 and warrants exercisable for 10,000
shares at an exercise price of $1.00 per share. The offer and sale of the shares
and warrants were made pursuant to an exemption from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering.
On August 21, 2006, the Company issued 30,000 shares of common stock to MMA
Capital for consulting services rendered valued at $36,900 or $1.23 per share
(the closing market price of the Company's common stock on the day of issuance).
The issuance of the shares was made pursuant to an exemption from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering.
On August 29, 2006, the Company issued 170,000 shares of common stock to Forte
Capital for consulting services rendered valued at $212,500 or $1.25 per share
(the closing market price of the Company's common stock on the day of issuance).
The issuance of the shares was made pursuant to an exemption from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering.
On September 1, 2006, the Company issued 200,000 shares of its common stock to a
director of the Company valued at $270,000 or $1.35 per share (the closing
market price of the Company's common stock on the day of issuance). The issuance
of the shares was made pursuant to an exemption from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering.
On September 5, 2006, the Company issued a total of 488,400 shares of common
stock on conversion of a related party convertible note aggregating $400,000
plus accrued interest of $39,560, based on a conversion rate of $.90 per share.
The issuance of the shares was exempt from the registration requirements of the
Act by reason of Section 3(a)(9) of the Act and the rules and regulations
thereunder.
On September 20, 2006, the Company issued 100,000 shares of common stock to
IMS-GA, LLC, an entity affiliated through common management with MMA for
consulting services valued at $125,000 or $1.25 per share (the closing market
price of the Company's common stock on the day of issuance). The issuance of the
shares was made pursuant to an exemption from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
On October 12, 2006, the Company issued and sold 10,000 shares of its common
stock for an aggregate purchase price of $10,000. The offer and sale of the
shares was made pursuant to an exemption from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
II-12
On November 6, 2006, the Company issued one member of the Board of Directors
200,000 shares of common stock valued at $140,000 or $.70 per share (based on
the closing price of the Company's common stock on the date of issuance). The
shares are subject to a repurchase right in favor of the Company which right
lapses as to 50,000 shares each quarter beginning on the date of grant. The
issuance of the common stock was exempt from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
On November 6, 2006, the Company issued one member of the Board of Directors an
option to purchase 200,000 shares of the Company's common stock at a purchase
price of $0.70 per share, the closing price of the Company's common stock on the
date of grant. The issuance of the options was exempt from the registration
requirements of the Act by reason of Section 4(2) of the Act and the rules and
regulations thereunder, as transactions by an issuer not involving any public
offering.
On November 6, 2006, the Company granted an option to purchase 800,000 shares of
its common stock at an exercise price of $0.70 per share, the closing price of
the Company's common stock on the date of grant, to its attorneys as
compensation for professional fees. The issuance of the options was exempt from
the registration requirements of the Act by reason of Section 4(2) of the Act
and the rules and regulations thereunder, as transactions by an issuer not
involving any public offering.
On November 9, 2006, the Company entered into a Securities Purchase Agreement
with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW
Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners, II,
LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are collectively
referred to as the "Purchasers". Pursuant to the Securities Purchase Agreement,
the Company issued and sold to the Purchasers Secured Convertible Term Notes
(the "Notes") in the aggregate principal amount of $1,000,000. The Notes bear
interest at 6% per annum, unless the common stock of the Company is greater than
1.25 per share for each trading day of a month, in which event no interest is
payable during such month. The Notes are convertible into common stock of the
Company at a 50% discount to the average of the three lowest trading prices of
the common stock during the 20 trading day period prior to conversion; provided,
however, that the Notes are convertible into common stock of the Company at a
45% discount in the event that the Registration Statement covering the sale of
securities underlying the Notes ("Registration Statement"), is filed on or
before December 11, 2006; and (ii) a 40% discount in the event that the
Registration Statement becomes effective on or before March 9, 2007. In
connection with the offering, the Company issued an aggregate of 5,000,000
warrants to purchase common stock at a price of $1.50 per share ("Warrants").
The Warrants are exercisable for a period of seven years. The number of shares
subject to the Warrant and the exercise price are subject to adjustment for
stock splits, stock combinations and certain dilutive issuances, including the
issuance of shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or
underwriting discounts or allowances in connection therewith) less than the
5-day average of the last reported sales of the Company's Common Stock. In
addition, in certain circumstances the warrant exercise price will be adjusted
if after the Registration Statement is declared effective, the closing price for
the Company's Common Stock closes below $1.00. The issuance of the shares and
warrants was exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, as
transactions by an issuer not involving any public offering.
The conversion of the Notes is subject to an effective Registration Statement
pursuant to the terms of a Registration Rights Agreement. The Company has the
right to redeem the Notes under certain circumstances, as well as the right to
pay monthly cash payments to prevent any conversion of the Notes during such
month. The Notes are secured by all of the Company's assets pursuant to the
terms of a Security Agreement and Intellectual Property Security Agreement. The
proceeds of the offering will be used to repay certain indebtedness and for
working capital.
The offer and sale of the Notes and warrants were made pursuant to an exemption
from the registration requirements of the Act by reason of Section 4(2) of the
Act and the rules and regulations thereunder, as transactions by an issuer not
involving any public offering.
II-13
On December 1, 2006, the Company issued one member of the Board of Directors
200,000 shares of common stock valued at $110,000 or $.55 per share (based on
the closing price of the Company's common stock on the date of issuance. The
shares are subject to a repurchase right in favor of the Company which right
lapses as to 50,000 shares each quarter beginning on the date of grant. The
issuance of the common stock was exempt from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, as transactions by an issuer not involving any public offering.
II-14
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
- ----------- -------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation +
3.2 Bylaws ++
3.3 Articles of Amendment Designating Series A Preferred Stock **
3.4 Certificate of Amendment of Amended Articles of Incorporation,
filed and effective February 2, 2006 (2)***
3.5 Articles of Correction, filed on February 28, 2006 and effective at
close of business on March 3, 2006 (3)****
3.6 Articles of Correction, filed on February 28, 2006 and effective at
close of business on March 3, 2006 (4)****
5.1 Legal Opinion of Crone Rozynko LLP dated December 15, 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 +++++
10.16 Form of Callable Warrant used in connection with $300,000 financing
transaction +++++
10.17 Modification and Waiver Agreement dated January 13, 2006**
10.22 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 Salberg & Company, P.A. dated December 14, 2006
23.2 Consent of Salberg & Company, P.A. dated December 14, 2006
23.3 Consents of Pender Newkirk & Company, LLP dated December 15, 2006
____________
* Compensatory Agreement.
II-15
** 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-16
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 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 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 "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 Act and is, therefore, unenforceable.
LEGAL MATTERS
The legality of the securities offered by this prospectus was passed upon for us
by Crone Rozynko LLP, San Francisco, California. See Exhibit 5. Members of Crone
Rozynko, LLP and their affiliates beneficially own an aggregate of 800,000
shares of our common stock issuable upon the exercise of outstanding options.
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.
II-17
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 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-18
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 this Post-Effective Amendment No. 3 on Form SB-2
and authorized this Post-Effective Amendment No. 3 to Registration Statement on
Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Tampa, Florida on December 18, 2006.
DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano
-----------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 3 to Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Daniel G. Brandano President, Chief December 18, 2006
- ------------------------- Executive Officer
Daniel G. Brandano and Director
/s/ Mark E. Crone Secretary and Director December 18, 2006
- -------------------------
Mark E. Crone
/s/ Eric H. Winston Director December 18, 2006
- -------------------------
Eric H. Winston
/s/ Ben J. Dyer Director December 18, 2006
- -------------------------
Ben J. Dyer
II-19