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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File No. 33-55254-03
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DYNAMIC ASSOCIATES, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 87-0473323
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6955 E. Caballo Dr.
PARADISE VALLEY, ARIZONA 85253
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 483-8700
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Issuer's revenues for 1998 were $12,498,922.
As of April 14, 1999, the approximate market value of the voting
stock held by non-affiliates of the registrant was $116,797 based
on an average bid price of $.1797 per share.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date.
Class Outstanding as of April 7,1999
------------------------------------ ------------------------------
$.001 PAR VALUE CLASS A COMMON STOCK 18,386,429 SHARES
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PART I
ITEM 1. Business.
Overview
Dynamic Associates, Inc., a Nevada corporation (the "Company" or
"Dynamic") was incorporated on July 20, 1989 for the purpose of
developing venture businesses. Dynamic was previously a
development stage company through 1995. Through acquisitions,
Dynamic has become a holding company for a variety of entities as
detailed below. The Company operates two health care management
businesses specializing in geriatric and psychiatric care through
its other wholly owned subsidiaries, Genesis Health Management
Corporation ("Genesis") and Geriatric Care Centers of America
("GCCA").
The Company formerly owned two microwave technologies
subsidiaries, P&H Laboratories, Inc. ("P&H"), a microwave research
and production company, and Microwave Medical Corp. ("MMC"), which
develops microwave technology for various medical treatments. As
of March 11, 1998, the Company has spun off MMC and P&H to a newly
incorporated Nevada Corporation, MW Medical, Inc. ("MW" or "MW
Medical"). The spin-off was completed by the distribution of MW
shares to all Dynamic shareholders on record (the "Record Date") as
of the close of business on February 25, 1998. Each such holder
received one share of MW Common Stock for every one share of
Dynamic common stock held on the Record Date. (See Section on
Spin Off)
The Company's executive offices are located at 6955 E. Caballo
Dr. Paradise Valley, Arizona 85253 telephone number at this
location is (602) 483-8700 and the telefax number is (602) 443-
1235. Jan Wallace is the current President and a Director, Grace
Sim is the Secretary/Treasurer, William H. Means, Jr., and Elliot
Smith are Directors.
Genesis Health Management Corporation
The Company entered into an Acquisition Agreement on August 1,
1996 to acquire 100% of Genesis Health Management Corporation,
("Genesis"), of Bossier City Louisiana, for $15,000,000.00, and
3,000,000 common shares of stock of the Company. The final
agreement provided that the Company pay $12,000,000.00, issue a
Promissory Note for $3,000,000.00 and issue 3,000,000 shares of
common stock of the Company. The Promissory Note, (including
interest) was paid in full on March 3, 1997. Genesis is in the
business of managing and operating both in-patient and outpatient
geriatric and psychiatric units in various hospitals. Genesis
manages and operates 23 geriatric and psychiatric units in various
hospitals on both an in-patient and outpatient basis.
Geriatric Care Centers of America, Inc. (GCCA)
On March 13, 1997, Geriatric Care Centers of America
("Geriatric"), a corporation organized pursuant to the laws of the
state of Tennessee, merged with Geriatric Care Centers Acquisition
Corporation, for $500,000 in cash and 150,000 shares of Common
Stock of the Company. The surviving corporation is Geriatric Care
Centers of America, Inc. ("GCCA"), with its registered office at
1613 Jimmie Davis Highway, Bossier City, Louisiana, 71112. The
Company owns 100% of GCCA. GCCA is also in the business of
managing and operating psychiatric/geriatric units in hospitals. At
December 31, 1998, GCCA had two (2) operating units.
Narrative Description of Business
Genesis Health Management Corporation is a Louisiana Company
that was established on July 23, 1994 to provide elderly healthcare
and gero-psychology to small healthcare facilities unable to
provide the service in house. Genesis manages these geriatric
psychiatric units through Genesis Health Management Corporation and
Geriatric Care Centers of America, Inc. Gero-psych treatment is
primarily geared to low-functioning patients requiring only
medication management and patients without medical complications.
Elderly people frequently have medical and psychiatric problems,
including severe depression, due to the natural aging process,
traumatic losses, strokes and various other causes. Psychiatric
problems are being treated on gero-psych units and medical problems
are being treated on acute care units, many times exceeding
authorized lengths of stay, and have become a burden for the
hospital's financial resources.
In order to resolve these problems, Genesis has developed a
program that it has operated in various hospitals. Aggressive
management has treated the psychiatric diagnosis and at the same
time treated the secondary medical problems, allowing for higher
medical acuity. In addition to treating the primary diagnosis, the
Genesis Program assists the host hospital in lowering lengths of
stays on the acute care side of the hospital. Furthermore, the
acute care physician is able to resolve many medical problems, as
opposed to just stabilizing them. This method of treatment
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results in an overall reduction in the frequency of a patient's
returns to the hospital and increases the patient's quality of
life.
Genesis's Senior Care Program provides comprehensive care for
elderly patients experiencing acute psychiatric disorders,
cognitive impairment and age-related psychological difficulties
while concurrently encouraging resolution of medical problems
contributing to or inhibiting the resolution of acute care
emotional or psychiatric problems. This program targets higher-
functioning patients with acute emotional problems, allowing the
therapeutic milieu to be effective, as opposed to focusing on
lower-functioning patients (who only require medication
management). This method achieves maximum therapeutic results after
10-18 days of treatment. Senior Care Units are allowed to treat
patients with higher medical acuity than regular geriatric-
psychiatric programs, thus producing higher ancillary costs while
providing a higher standard of care for the patients.
The Genesis treatment program conforms to the guidelines of the
JCAHO Accreditation Manual for Hospitals and Medicare Standards.
The program is reimbursed at cost by Medicare when established as a
distinct part unit of a hospital that qualifies for an exemption
from the Medicare Prospective Payment System. That PPS exemption
provides for a cost plus reimbursement system for the unit, which
allows the hospital to receive full reimbursement of the direct
operating expenses, plus an allocation to the unit of a substantial
portion of the hospital's overall overhead and capital costs.
Spin Off
The Company has completed the spin-off of MW Medical, Inc.
effective March 11, 1998. MW Medical is the owner of P&H and MMC,
each of which was a subsidiary of the Company until completion of
the spin-off. MW Medical is a Nevada corporation incorporated on
December 4, 1997. The businesses of P&H and MMC are summarized as
follows:
(A) P&H Laboratories
----------------
P&H is engaged in the business of manufacturing various
types of devices utilizing microwave technology. The
devices include isolators, circulators, power monitor
devices, filters, diplexers, switching diplexers, multi-
junction circulators, microwave sub-systems and integrated
packages and subsystems. P&H also provides special
engineering services to customers with specific microwave
technology requirements.
(B) Microwave Medical Corp.
-----------------------
MMC is in the business of developing proprietary technology
relating to the use of microwave energy for medical
applications. MMC has a patent pending entitled, "Method
and Apparatus for Treating Subcutaneous Histological
Features" which focuses on the application of microwave
energy to the treatment of spider veins and for use in hair
removal. MMC has no revenues and has not completed
development of its technology.
MW Medical acquired each of P&H and MMC pursuant to a
Contribution Agreement, Plan and Agreement of Reorganization and
Distribution between Dynamic and MW Medical, dated as of March 11,
1998 ("Contribution Agreement"). Under the terms of the
Contribution Agreement, the Company transferred to MW Medical the
following assets in consideration for the issue by MW Medical of
14,223,929 common shares of MW Medical:
(A) all of the shares of P&H;
(B) all of the shares of MMC;
(C) all shareholders loans of P&H and MMC to the Company; and
(D) the agreement of the Company to provide initial funding
in the amount of $200,000.
As of March 21, 1999, Dynamic has paid the first $50,000 of the
$200,000 of this promissory note.
The spin-off was completed by the distribution by the Company to
the shareholders of the Company of one common share of MW Medical
for each common share of the Company held by the shareholder. The
distribution was completed on March 11, 1998 to shareholders of the
Company of record on February 25, 1998. No consideration was
paid by Dynamic shareholders for shares of MW Common Stock.
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MW Medical, Inc. has been approved by the NASD to trade its
shares on the Over The Counter, Bulletin Board (OTC BB) under the
symbol MWMD.
Merger
On March 30, 1999, Dynamic Associates, Inc. (the "Company")
entered into a Capital Contribution Agreement with ACS2, Inc.
("ACS") and Advanced Clinical Systems, Inc. ("Advanced") under
which the Company contributed its operating subsidiaries, Genesis
Health Management Company ("Genesis") and Geriatric Care Centers of
America, Inc. ("GCCA"), and ACS contributed its subsidiary,
Advanced, and the operating subsidiaries of Advanced to a newly
formed Nevada Limited Liability Company known as Advanced-Dynamic,
LLC ("LLC"). In consideration of which, each of the Company and
ACS received a fifty percent (50%) equity interest in the LLC.
Genesis and GCCA are referred to together as the "Dynamic
Subsidiaries" and Advanced and all of the subsidiaries of Advanced
are referred to together as the "Advanced Subsidiaries". The
Capital Contribution Agreement and the contributions to the LLC
were completed contemporaneously on March 30, 1999 with the parties
agreement to the LLC's Operating Agreement. The LLC's Operating
Agreement sets forth the agreement of the Company and ACS with
respect to the ownership and management of the LLC, the Dynamic
Subsidiaries and the Advanced Subsidiaries pending consummation of
a proposed merger of ACS into Dynamic Acquisition Corporation
("DAC"), a newly formed, wholly owned subsidiary of Dynamic (the
"Merger"). The LLC's Operating Agreement also sets forth the
agreement of the Company and ACS to dissolve the LLC and return the
subsidiaries to their respective companies in the event that the
Merger (more fully described below) is not consummated by December
15, 1999. All the terms and conditions of the Capital Contribution
Agreement and the LLC Operating Agreement are attached hereto as
Exhibits 1 and 3 respectively, and incorporated by this reference.
On the same date (March 30, 1999), the Company, DAC, ACS and
Advance also entered into an agreement and plan of Merger (the
"Merger Agreement"). This Merger Agreement contemplated that upon
approval by the holders of a majority of the outstanding shares of
common stock of the Company at the Annual Meeting of shareholders
to be held on June 4, 1999 (and the satisfaction or waiver of the
other conditions of the Merger and Contribution Agreements), a
merger will take place between DAC and ACS. Upon completion of the
Merger, DAC will be the surviving company and will remain a wholly
owned subsidiary of the Company. ACS will cease to exist and the
ACS shareholders will become shareholders of the Company based on
an exchange of shares that will provide existing ACS shareholders
with newly issued common stock representing approximately 55% of
the outstanding shares of the Company. Thereafter, the Company
will directly or indirectly, be the sole controlling shareholder of
all the Advanced and Dynamic Subsidiaries. All the terms and
conditions upon which the Merger is to be effected are set forth in
the Merger Agreement.
The Company has also agreed to enter into a Registration Rights
Agreement with the ACS Stockholders upon closing of the Merger (the
"Registration Rights Agreement"). Under this agreement, the Company
will grant registration rights to the ACS Stockholders covering 50%
of the shares of the Company's common stock to be issued upon
consummation of the Merger. These rights will require the Company
to file a registration statement pursuant to the Securities Act of
1933 to qualify 25% of the shares issued to the ACS stockholders
within 90 days of closing of the Merger, and an additional
registration statement covering an additional 25% of the shares at
the one year anniversary of the Merger.
The number of shares of the Company issued to the ACS
Stockholders upon consummation of the Merger will be subject to
adjustment based on the fiscal performance of the Advanced
Subsidiaries and the Dynamic Subsidiaries for the year ending
December 31, 1999. The Company and the ACS Stockholders will
therefore also enter into an escrow agreement upon consummation of
the Merger that sets forth the terms of this adjustment (the
"Escrow Agreement").
The terms and conditions of the Capital Contribution Agreement,
the Operating Agreement, the Merger Agreement, the Registration
Rights Agreement and the Escrow Agreement were determined through
arms-length negotiations between the representatives of the Company
and ACS.
Additional information will be in the Proxy Statement to be
filed near the end of April 1999.
ITEM 2. Properties
Dynamic Associates
Dynamic is headquartered in the premises located at 6955 E.
Caballo Dr., Paradise Valley, Arizona 85253. The Company is not
committed to any rent but does share expenses with another company
located in the same address. The Company owns no other property.
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Genesis Health Management Corporation
The head office for Genesis is located at 1613 Jimmie Davis
Highway, Suite No. 1, Bossier City, Louisiana, 71112. The Genesis
head office is approximately 3,000 square feet and is leased for a
period of two years. Genesis is in the business of managing and
operating geriatric and psychiatric units for various hospitals in
the southern United States. The business is ongoing and certain
financial information is provided under Item 7.
Geriatric Care Centers of America
The head office for GCCA is located within the offices of
Genesis at 1613 Jimmie Davis Highway, Suite No. 1, Bossier City,
Louisiana, 71112. GCCA is also in the business of managing and
operating geriatric and psychiatric units, mostly in hospitals
situated in Tennessee. The head office for GCCA is located within
the offices of Genesis at 1613 Jimmie Davis Highway, Suite No. 1,
Bossier City, Louisiana, 71112. GCCA is also in the business of
managing and operating geriatric and psychiatric units, mostly in
hospitals situated in Tennessee.
ITEM 3. Legal Proceedings.
The Company and any of its subsidiaries and any of their
property are not involved in any material pending legal proceeding.
At this time, neither the Company, nor any of its subsidiaries, has
any material bankruptcy, receivership, or similar proceeding
pending.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Annual Shareholders Meeting is to be held on June 4, 1999.
Proxy statements will be mailed out to all shareholders of record
effective April 9, 1999.
No other matter was submitted to the Company's security holders
for a vote during the fiscal year ending December 31, 1998.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholders Matters.
The Company's common stock is listed on the NASDAQ-OTC system,
under the trading symbol "DYAS". The common stock is also listed
on the Frankfurt and Berlin Exchanges in Germany, under the trading
symbol "DYA".
The following table lists the high and low sales prices for the
common stock of the company during the two most recent fiscal
years:
NASDAQ-OTC
High Sales Low Sales
Price Price
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1997 First Quarter $4.38 $ 2.69
Second Quarter 3.93 2.06
Third Quarter 4.50 2.38
Fourth Quarter 2.63 1.00
1998 First Quarter .875 .7187
Second Quarter .875 .3437
Third Quarter 1.0625 .1875
Fourth Quarter .42 .16
As of December 31, 1998 there were 394 record holders of the
Company's common stock.
The Company has not previously declared or paid any dividends on
its common stock and does not anticipate declaring any dividends in
the foreseeable future.
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
This discussion covers the years 1996 through 1998, the years in
which the Company had operations and was doing business. Prior to
1995, the Company was a development stage company and was not
engaged in any substantial business.
On December 10, 1998, in contemplation of a merger between
Dynamic and Advanced Clinical Systems, Inc. (the "Merger"), the
Company presented an offer to the 10% Note Holders, holding
$17,001,500 of unsecured notes (the "Unsecured Notes") to purchase
all Unsecured Notes in consideration of the issue to the Note
Holders of a new 7.5% convertible secured notes (the "Secured
Notes"). The Secured Notes will be of a principal amount equal to
one-half of the principal amount of the Unsecured Notes. In
consideration of the reduction to the principal amount of the
Unsecured Notes, the Company will issue to each accepting Note
Holder:
a) one common share of the Company for each $2.00 reduction of the
principal amount of the Unsecured Notes (the "Shares");
b) one warrant to purchase one common share of the Company at a
price of $1.50 per share (the "Warrants") for each $1.00
reduction of the principal amount of the Unsecured Notes.
This offer was accepted by $16,650,000 principal value of the
Secured Note holders. In turn the Company issued 7.5% Secured
Notes for $8,325,000, 4,162,500 shares of common stock of the
Company and 8,325,000 warrants at $1.50 per share. The warrants
will expire on December 31, 2000.
The consolidated financial statements for 1998 include the
accounts of the Company, its wholly owned subsidiaries, Genesis and
GCCA. All significant intercompany balances and transactions have
been eliminated in the consolidation.
Management fees for 1998 decreased to $12,498,922 from
$14,619,951. The 14.5% decrease resulted from cancelled contracts
and adjustments to billings made necessary by Medicare reductions.
As disclosed more fully in the financial statements, the Company
reported significantly greater revenue in 1997 than 1998. This is
primarily due to the fact that Genesis and GCCA reported
significant growth in 1997 with the addition of fifteen new
hospital contracts. Many of these agreements represented monthly
billings of up to $65,000 per contract. Management fee revenue for
1996 is not a valid comparison to 1998 performance as this reflects
only one month of operations for Genesis and GCCA.
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General and administrative expenses were $9,845,647 for 1998,
down from $10,609,090 in 1997. The Company was able to eliminate
or reduce some of its expenses in 1998 to achieve the decline. The
Company worked aggressively to minimize its administrative expenses
in 1998, concluding that such reductions were necessary due to the
impact of the changes in the Medicare reimbursement schedules as
discussed below. A comparison of General and Administrative
Expenses, which is incorporated into the financial statements, is
presented below (figures are reported in thousands):
G & A Cateory 1998 1997
------------- ---- ----
Consulting & Contract Services: 2,933 2,932
Wages, Benefits & Taxes: 5,117 5,207
Automobiles: 106 227
Insurance: 137 122
Office Rent: 69 61
Telephone: 171 167
Key Person Compensation: 285 232
Aircraft Leasing: 275 323
Legal & Accounting: 159 233
Travel & Entertainment: 403 578
Operating Supplies: 77 74
Office and Other Expenses: 114 453
---- ----
Total: 9,846 10,609
During 1998, the Company charged to bad debt expense $2,169,806
that it had loaned to its former subsidiary MMC. This caused the
net other income (expense) of $3,871,661 to be significantly higher
than the $2,328,539 expense for 1997.
Medicare reductions and other problems also caused the Company
to record bad debt expense for Genesis & GCCA of $2,193,300 for
1998, a significant increase over the $590,125 for 1997. As
disclosed more fully in Note 2 of the financial statements, the
Company took a charge to earnings due to the change required in its
contractual arrangements with hospitals. The Company recognizes
revenue on an accrual basis and carefully monitors appropriate
allowances for bad debt. The allowance account is indirectly
affected whenever the U.S. government issues new policies regarding
Medicare reimbursement to its contracted hospitals. Such hospital
agreements require the Company to renegotiate its fee agreements,
and result in the recording of additional bad debt via the
adjustments to the allowance account due to the change in the
underlying Medicare reimbursement schedules between the contracted
hospitals and the U.S. government. The $2,193,300 charge to 1998
earnings was a result, to a great extent, of sweeping effects of
the Medicare provisions contained in the Balanced Budget
Reconciliation Act of 1997. Although the Company does not bill
Medicare directly, its contract billing arrangement with the
hospitals is impaired when the hospitals are unable to recover fees
due to U.S. government changes in Medicare reimbursement for
services performed by the hospital.
Working capital at December 31, 1998 is $3,101,048, a decrease
of $2,659,700 from the $5,760,748 at December 31, 1998. The
decrease is mainly due to the decline in cash and receivables.
The Company is dependent on the operating performance of its
Genesis and GCCA subsidiaries. These subsidiaries do not have any
physician practice management (PPM) relationships. As a material
segment of the business, Genesis and GCCA would be adversely
affected by the loss of one or more key hospital contracts. In
addition, the subsidiaries would be adversely affected by changes
in U.S. government polices regarding hospital reimbursements under
Medicare. Facing lower realization with hospital billings to
Medicare, Genesis and GCCA would be required to renegotiate its
contracts with key hospitals. Such Medicare policy changes would,
therefore, have an adverse impact on the Company. After December
31, 1998, the Company suffered various losses, including the
termination of contracts with the following key hospitals (one or
more represents greater than a five percent contribution to
management fee revenue): Morehouse Hospital in Bastrop, Louisiana;
Dardanelle Hospital in Dardanelle, Arkansas; Choctaw County Medical
Center in Ackerman, Mississippi; Jefferson County Hospital in
Fayette, Mississippi; and Minden Medical Center in Minden,
Louisiana. The Company recorded losses incurred by the Company in
1999 as a direct result of such terminated hospital contracts as
the losses were realized. Moreover, in 1999, the Company suffered
losses with increased competition in key markets. In addition to
the growing strength of its key competitors, Horizon Health
Management, Cornerstone Health Management, and Sunrise Health
Management; a large number of smaller competitors entered the
market. Such competitors offer hospitals a narrowly targeted and
limited consulting service in the health management field. Such
companies are able to successfully compete with the Company as they
provide a smaller fee commitment associated with a more limited
engagement.
IMPACT OF THE YEAR 2000 ISSUE. The "Year 2000 Problem" arose
because many existing computer programs use only the last two
digits to refer to a year. Therefore, these computer programs do
not properly recognize a
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year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous
results. The extent of the potential impact of the Year 2000 problem
is not yet known, and if not timely corrected, it could affect the global
economy. The Company believes that its computer programs are Y2K compliant
and does not expect to be adversely affected by the issue.
ITEM 7. Financial Statements and Supplementary Data.
See Item 13.
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
No independent accountant previously engaged as the principal
accountant to audit the Company's financial statements, nor an
independent accountant who was previously engaged to audit a
significant subsidiary and on whom the principal accountant
expressed reliance in its report, has resigned or was dismissed.
The Company has not changed accountants nor has it had any
disagreements with any accountants.
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PART III
ITEM 9. Directors and Executive Officers of the Registrant.
The following table shows the positions held by the Company's
officers and directors. The directors were appointed and will
serve until the next annual meeting of the Company's stockholders,
and until their successors have been elected and have qualified.
The officers were appointed to their positions, and continue in
such positions at the discretion of the directors.
Name Age Position
----------- --- --------
Jan Wallace 43 President, Director
Grace Sim 38 Secretary-Treasurer
William H. Means, Jr. 43 Director
Elliot Smith 65 Director
Jan Wallace is a Director, President and Chief Operating Officer
of the Company. The Company has employed Ms. Wallace since April
1995, when she was elected to the Board of Directors and accepted
the position of Chief Operating Officer. Ms. Wallace was
previously Vice President of Active Systems, Inc. a Canadian
Company specializing in SGML Software an ISO standard in Ottawa,
Ontario. Prior to that she was President and Owner of Mailhouse
Plus, Ltd., an office equipment distribution company that was sold
to Ascom Corporation. She has also been in management with Pitney
Bowes-Canada and Bell Canada where she received its highest award
in Sales and Marketing. Ms. Wallace was educated at Queens
University in Kingston, Ontario and Carleton University, Ottawa,
Ontario in Political Science with a minor in Economics.
William H. Means, Jr. is a Director of the Company. Mr. Means
received his B.S. in Business Administration from Louisiana Tech
University in 1976 and his M.B.A. in Personnel Management from
Louisiana Tech in 1978. From 1978 to 1980, Mr. Means worked as an
Assistant Credit Manager, Salary Administrator and Commercial Loan
Review Analyst at Commercial National Bank in Shreveport,
Louisiana. From 1980 through 1984 he was the Vice President of
Commercial Loan Administration at Bossier Bank and Trust in Bossier
City, Louisiana. From 1984 through 1986 he was a Senior Vice
President at National Bank of Bossier and from 1986 through 1988 he
was a Senior Vice President at Bank of Mid-South in Bossier City,
Louisiana. From 1988 through 1989 he was a co-owner and Account
Executive at United Advertising Network and from 1989 through 1991
he was an Office and Site supervisor at McNeely Construction
Company. Mr. Means owned and operated Space Center Painting and
Construction Company, Space Center Mini Storage and Terrace Acres
Apartments from 1991 through 1994, when he joined Genesis as an
Executive Vice President.
Elliot Smith is a Director of the Company. Mr. Smith has held a
variety of senior management-level positions in some of the world's
most prestigious financial institutions during the past 40 years.
Mr. Smith began a 29-year career with Prudential Bache in 1954 when
he was hired as a Registered Representative in its Syracuse, New
York office. By 1973, Mr. Smith was elected to the Board of
Directors of Bache & Company Inc. In 1977, he was named Senior
Officer of Commodity Division and Metal Company and in 1980, was
elected President of Bach Haley Stuart Metal Company Inc. On
leaving Prudential-Bache in 1983, Mr. Smith served as Executive
Vice President at R. Lewis Securities, Inc., located in New York
City and from 1983 to 1995, was President of Whale Securities
Company, L.P., in New York. Since 1995, Mr. Smith has served as
President of the Equity Division of Rickel & Associates, Inc., an
investment company. Mr. Smith has also been elected to the Boards
of The Pennington School and Jullians Corporation. He is a former
Member and Director of the Chicago Board of Options Exchange;
Governor of the American Stock Exchange (AMEX); Governor and
Chairman of the AMEX Commodities Exchange; Director and Member of
the Executive Committee of the Securities Industry Automation Corp.
and a past President of the Association of Investment Brokers. Mr.
Smith is currently a Managing Director at Oscar Gruss & Son, Inc.
Grace Sim has been the Secretary/Treasurer of Dynamic
Associates, Inc. since October 10, 1997. Ms. Sim joined Dynamic in
January 1997. Prior to joining Dynamic, Ms. Sim owned an accounting
consulting company in Ottawa, Ontario, Canada. Ms. Sim received
her Bachelor of Mathematics with honors from the University of
Waterloo in Waterloo, Ontario.
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ITEM 10. Executive Compensation.
Annual Compensation Table
Annual Compensation Long-term Compensation
------------------- ----------------------
Other All
Annual Other
Com- Com-
Name and pen- Restricted pen-
Principal sa- Stock Options LTIP sa-
Position Year Salary Bonus($)tion Awarded /SARs payout tion
----------- ---- -------- ----- ------ ------- ------- -------- ----
Jan Wallace 1998 $180,000 $ 0 $3,250 $ 0 $100,000(1) $ 0 $ 0
President,
CEO, Director
Grace Sim 1998 $105,067 $ 0 $ 0 $ 0 $ 50,000(1) $ 0 $ 0
Secretary/
Treasurer
Elliot Smith 1998 $ 0 $ 0 $3,250 $ 0 $ 0 $ 0 $ 0
Director
William H.
Means Jr. 1998 $189,000 $ 0 $3,250 $ 0 $ 0 $ 0 $ 0
Director
There can be no assurance that the amounts of compensation
actually paid, or the persons to whom it is paid for 1999, will not
differ materially from the above 1998 amounts.
(1) Exercised in 1998.
In 1998, the Board of Directors canceled all options.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 1998,
information regarding the beneficial ownership of shares by each
person known by the Company to own five percent or more of the
outstanding shares, by each of the directors and by the officers
and by each director and officer as a group, consisting of:
Title Amount and
Of Name of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- ------------
Class A Common Cede & Co. 9,947,346 69.9%
P.O. Box 222
Bowling Green Station
New York, NY 10274 - 0000
Class A Common Vickie T. Lucky 2,370,000 16.7%
1613 Jimmie Davis Hwy.
Suite #1&2
Bossier City, LA 71112
Class A Common Jan Wallace 550,000 3.8%
(President & Director)
6929 East Cheney
Paradise Valley, AZ 85253
Class A Common William Means, Jr. (Director) 30,000 0.21%
1613 Jimmie Davis Hwy.
Suite #1&2
Bossier City, LA 71112
Class A Common Grace Sim 20,000 0.1%
(Secretary/Treasurer)
7373 North Scottsdale Road,
Suite B169
Scottsdale, AZ 85253
Class A Common Elliot Smith 50,000 .3%
(Director)
7373 North Scottsdale Road,
Suite B169
Scottsdale, AZ 85253
Class A Common All officers and directors 650,000 4.5%
as a group (4 persons)
10
<PAGE>
ITEM 12. Certain Relationships and Related Transactions.
During 1998 $180,000 was paid to the Company's President,
and $105,067 was paid or accrued to the current
Secretary/Treasurer. The former President of Genesis, who
is also a Director of the Company, was paid $189,000 in
1998. Such related party payments are considered by the
Company as reasonable compensation for professional
services rendered.
The Company moved out of its previously leased location
and now shares office expenses with another company in the
same premises. In 1998, the Company paid $69,700 in rent
and other fees for office administration to Amteck
Management Inc. Amteck is owned by Mr. Logan Anderson,
former corporate officer of Dynamic. During the 1998 year,
Mr. Anderson was not related to the Company as he was no
longer a corporate officer.
For 1999, the Company's President will receive $15,000
and the Secretary will receive $8,000 per month. The Vice
President of Operations of Genesis will receive $120,000 in
1999. Such related party payments are considered by the
Company as reasonable compensation for professional
services rendered.
Genesis pays a fee of $15,000 to another company on a
month-to-month basis for services provided to Genesis and
GCCA. This relates to aircraft leasing payments to Blue
Angel Aviation. Mr. William Lucky III, a relation of Mrs.
Vicky Lucky, a stockholder, owns this company. Also see
Note 9 "Related Party Transactions" of the financial
statement. At December 31, 1998, the Company terminated its
leasing agreement with Blue Angel Aviation.
Dynamic leases vehicles under operating leases expiring
through 2000. The future minimum lease payments are as
follows:
Year Ending
December 31, 1999 10,654
December 31, 2000 7,840
--------
$ 29,148
--------
Genesis leases equipment under operating leases. In
1999, the obligations for these leases total $3,978.
Genesis leases its facility at $2,800 per month through
September 30, 1999. Thereafter, the lease increases to
$3,000 per month through September 30, 2000. Genesis also
pays the taxes and utilities. Mr. A.L. Blondeau, former
corporate counsel for Dynamic, maintained an ownership
interest in the company that received facility and
equipment leasing payments from Dynamic.
11
<PAGE>
PART IV
ITEM 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements, financial statement
schedules and supplementary materials are included:
F-14 Independent Auditor's Report
Financial Statements:
F-15 Consolidated Balance Sheets - December 31, 1998 and 1997
F-16 Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996.
F-17 Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1998, 1997 and 1996.
F-18 Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996.
F-19 Notes to Financial Statements
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNAMIC ASSOCIATES, INC.
Date: December 6, 2000 By: /s/ Jan Wallace
--------------- ---------------------------------
Jan Wallace, President and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date: December 6, 2000 By: /s/ Jan Wallace
--------------- ---------------------------------
Jan Wallace, President and Director
Date: December 6, 2000 By: /s/ Grace Sim
--------------- ---------------------------------
Secretary/Treasurer
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic Associates, Inc.
We have audited the accompanying consolidated balance sheets of
Dynamic Associates, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for the years ended December
31, 1998, 1997, and 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit
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
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 financial position
of Dynamic Associates, Inc. and Subsidiaries as of December 31, 1998
and 1997, and the results of their operations, changes in
stockholders' equity, and their cash flows for the years ended
December 31, 1998, 1997, and 1996, in conformity with generally
accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
Salt Lake City, Utah
March 19, 1999, except for Note 20,
which is dated April 14, 1999
F-14
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 478,418 $ 2,616,174
Accounts receivable (less allowance for
doubtful accounts of $2,552,100 in 1998
and $1,350,050 in 1997) 3,741,260 4,191,850
Loans receivable - related parties (Note 7) 52,500 52,500
Other receivables 86,662 71,625
Inventories (Note 2) 0 809,977
Prepaid expense and other current assets 109,950 57,257
Deferred tax benefit (Note 12) 300,000 300,000
----------- -----------
TOTAL CURRENT ASSETS 4,768,790 8,099,383
PROPERTY, PLANT & EQUIPMENT (Note 6) 228,733 1,000,898
OTHER ASSETS
Deferred debt issue costs (less amortization
of $387,550) (Note 2) 1,331,307 1,530,999
Investment - restricted stock 17,000 29,800
Deferred tax benefit (Note 12) 0 0
Goodwill (less amortization of $5,263,000)
(Note 2) 19,594,775 22,140,055
Deposits 410 10,619
Organization Costs (Note 2) 0 28,440
----------- -----------
20,943,492 23,739,913
----------- -----------
$25,941,015 $32,840,194
=========== ===========
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable $ 596,812 $ 549,854
Accrued expenses 275,101 635,060
Current portion of long-term debt (Note 10) 3,978 108,542
Bridge loans (Note 8) 0 0
Income taxes payable (Note 12) 0 253,328
Accrued interest payable 791,851 791,851
----------- -----------
TOTAL CURRENT LIABILITIES 1,667,742 2,338,635
----------- -----------
Long-term debt (Note 10) 10,206 346,639
Convertible notes (Note 11) 17,001,500 17,001,500
Deferred income tax (Notes 2 and 12) 0 0
----------- -----------
17,011,706 17,348,139
----------- -----------
TOTAL LIABILITIES 18,679,448 19,686,774
Minority interest in subsidiary (Note 4) 0 0
Commitments and contingencies (Note 14) 0 0
STOCKHOLDERS' EQUITY
Common Stock $.001 par value:
Authorized - 25,000,000 shares
Issued and outstanding 14,223,929 shares
(13,973,929 in 1997) 14,224 13,974
Additional paid-in capital 18,512,330 18,262,580
Retained deficit (11,264,987) (5,123,134)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,261,567 13,153,420
----------- -----------
$25,941,015 $32,840,194
=========== ===========
F-15
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------
1998 1997 1996
----------- ----------- -----------
Management fees $12,498,922 $14,619,951 $ 1,122,500
----------- ----------- -----------
12,498,922 14,619,951 1,122,500
General & administrative expenses 9,845,647 10,609,090 1,829,065
Depreciation and amortization 2,603,039 2,594,651 250,281
Bad debts 2,193,300 590,125 2,300
----------- ----------- -----------
14,641,986 13,793,866 2,081,646
----------- ----------- -----------
NET OPERATING INCOME (LOSS) (2,143,064) 826,085 (959,146)
OTHER INCOME (EXPENSE)
Interest income 18,006 60,957 67,899
Interest expense (1,946,558) (1,983,591) (252,415)
Miscellaneous income 0 1,328 0
Bad debts - former subsidiaries
(Note 18) (2,169,806) 0 0
Disposition of subsidiaries 256,493 0 0
Loss on disposal of equipment (16,996) (23,986) 0
Unrealized decline in investment (12,800) (383,247) (41,400)
----------- ----------- -----------
(3,871,661) (2,328,539) (225,916)
----------- ----------- -----------
NET (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST (6,014,725) (1,502,454) (1,185,062)
INCOME TAX EXPENSE (BENEFIT) (Note 12) 127,128 790,913 (759,355)
----------- ----------- -----------
LOSS FROM
CONTINUING OPERATIONS (6,141,853) (2,293,367) (425,707)
DISCONTINUED OPERATIONS,
NET OF INCOME TAXES
P&H operations 0 (124,804) 128,409
MMC operations 0 (1,127,675) (595,318)
----------- ----------- -----------
0 (1,252,479) (466,909)
----------- ----------- -----------
NET (LOSS) BEFORE
MINORITY INTEREST (6,141,853) (3,545,846) (892,616)
MINORITY INTEREST 0 0 64,205
----------- ----------- -----------
NET (LOSS) $(6,141,853) $(3,545,846) $ (956,821)
=========== =========== ===========
Net (loss) per weighted average
share - continuing operations $ (.43) $ (.18) $ (.05)
Net (loss) per weighted average
share - discontinued operations .00 (.09) (.06)
----------- ----------- -----------
$ (.43) $ (.27) $ (.11)
=========== =========== ===========
Weighted average number of common
shares used to compute net income
(loss) per weighted average share 14,185,573 13,057,008 8,377,442
=========== =========== ===========
F-16
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
-----------------
Par Value $.001 Additional
----------------- Paid-in Retained
Shares Amount Capital Deficit
---------- ------- ----------- ------------
Balances at 12/31/95 7,000,000 $ 7,000 $ 1,310,000 $ (620,467)
Sale of common stock
(Regulation S) at $2.00
per share 12,500 13 24,987
Sale of common stock
(Regulation S) at $1.75
per share 1,822,400 1,822 3,187,377
Sale of common stock (S-8)
at $1.00 per share 184,000 184 183,816
Issuance of common stock
(restricted) at $1.00
per share for expense 40,000 40 39,960
Acquisition of subsidiary
(P & H) (225,026)
Issuance of common stock
(restricted) related to
Genesis acquisition 3,100,000 3,100 10,319,900
Expenses related to
capital raising (75,776)
Net loss for year (956,821)
---------- ------- ----------- ------------
Balances at 12/31/96 12,158,900 12,159 14,765,238 (1,577,288)
Sale of common stock
(S-8) at $1.00 per share 1,022,600 1,023 1,021,577
Issuance of common stock
(restricted) at $2.00
per share for subsidiary
(Geriatric) 150,000 150 299,850
Issuance of common stock
(Reg S) to retire debt 428,142 428 1,352,861
Issuance of common stock
(restricted) at $3.50
per share for remaining
50% of subsidiary (P & H) 214,287 214 749,786
Capital raising and
subsidiary costs (16,327)
Minority interest adjustment 89,595
Net loss for year (3,545,846)
---------- ------- ----------- ------------
Balances at 12/31/97 13,973,929 13,974 18,262,580 (5,123,134)
Sale of common stock (S-8)
at $1.00 per share 250,000 250 249,750
Net loss for year (6,141,853)
---------- ------- ----------- ------------
Balances at 12/31/98 14,223,929 $ 14,224 $ 18,512,330 $(11,264,987)
========== ======= =========== ============
F-17
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES
Net (loss) $ (6,141,853) $ (3,545,846) $ (956,821)
Adjustments to reconcile net
(loss) to cash used by
operating activities:
Depreciation and amortization 2,802,731 2,921,571 311,178
Book value of assets
sold/disposed 53,017 120,346 0
Book value of spun-off
Subsidiaries 1,743,312 0 0
Bad debts 2,193,300 590,125 0
Minority interest 0 0 64,205
Stock issued for expense 0 0 40,000
Investment received as
interest income 0 (15,000) (50,000)
Unrealized decline in
Investment 12,800 383,247 41,400
Deferred taxes 0 500,500 (801,500)
Changes in assets and liabilities:
Accounts receivable (2,302,493) (2,519,886) 6,117
Inventories 0 (92,150) (129,024)
Prepaid expenses and other (70,522) 67,853 (120,587)
Accounts payable and accrued
Expenses 62,253 (549,923) 931,268
Income taxes payable (253,328) 163,468 (52,945)
Accrued interest payable 0 604,355 186,274
----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (1,900,783) (1,371,340) (450,435)
INVESTING ACTIVITIES
Loans to related party and
accrued interest 0 90,246 (246,480)
Loan - other (34,861) 91,953 (91,953)
Purchase of equipment (14,951) (892,674) (155,821)
Refund of option 0 0 30,000
Deposits (11,496) 12,418 (1,312)
Purchase of subsidiaries 0 0 (12,102,233)
Goodwill 0 (500,000) (3,947,775)
Organization costs 0 (27,800) 0
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (61,308) (1,225,857) (16,515,574)
FINANCING ACTIVITIES
Deferred debt issue costs 0 (340,356) (1,566,721)
Cash from (to) subsidiaries (387,982) 41,518 674,440
Principal payments on debt (37,683) (3,297,713) (301,571)
Principal payments on capital
lease obligation 0 0 (519)
Proceeds from sale of common stock 250,000 1,022,600 3,322,423
Loan proceeds 0 347,303 3,000,000
Loans - related parties 150,000 0 0
Repayments - related parties (150,000) 0 0
Capital raising costs 0 (3,000) 0
Convertible note proceeds 0 3,996,000 14,504,000
----------- ----------- -----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (175,665) 1,766,352 19,632,052
----------- ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (2,137,756) (830,845) 2,666,043
Cash and cash equivalents at
beginning of year 2,616,174 3,447,019 780,976
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 478,418 $ 2,616,174 $ 3,447,019
============ ============ ============
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 1,747,044 $ 1,204,709 $ 70,391
Cash paid for income taxes 271,595 157,753 169,390
F-18
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE 1: BUSINESS ACTIVITY
The Company was incorporated under the laws of the state of
Nevada on July 20, 1989 and had been in the development stage
through 1995. The Company is now engaged in the acquisition of
microwave technologies for medical purposes through Microwave
Medical Corp. ("MMC"), in the business of managing the operation
of geriatric/psychiatric units for various hospitals through
Genesis Health Management Corporation ("Genesis") and Geriatric
Care Centers of America, Inc. ("GCCA") and the manufacturing of
highly technologically advanced components and subsystems for
the communications and aerospace industries through P & H
Laboratories ("P & H"). In early 1998, the Company spun-off MMC
and P&H.
Genesis has contracts with hospitals in the states of Louisiana,
Arkansas, Mississippi, and Tennessee. The contracts range from
three to five years. At December 31, 1998, Genesis had twenty-
three active contracts with monthly billings of $788,300. GCCA
has contracts with hospitals in Tennessee. At December 31,
1998, GCCA had two active contracts with average monthly
billings of $75,000. The contracts range from three to five
years.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principals of Consolidation
---------------------------
The consolidated financial statements for 1998 include the
accounts of the Company; and its wholly owned subsidiaries
Genesis and GCCA.
The consolidated financial statements for 1997 include the
accounts of the Company; its wholly owned subsidiaries, MMC and
MMC's Germany based subsidiary Microwave Medical GmBH ("GmBH"),
which was formed in late 1997, Genesis, GCCA, which was acquired
in March of 1997, and P & H. The Statement of Operations for
1997 includes the operations of GCCA for the last three quarters
of 1997.
The consolidated financial statements for 1996 include the
accounts of the Company; its wholly owned subsidiaries, MMC
(which was incorporated September 15, 1995 under the laws of the
State of California) and Genesis (which was incorporated on
October 15, 1996 in Louisiana as Genesis Acquisition
Corporation, merged with Genesis Health Management Corporation
on December 2, 1996 and changed its name to Genesis Health
Management Corporation on December 5, 1996); and a 50% owned
subsidiary, P & H. The Company acquired 50% of P & H on May 6,
1996 pursuant to an option agreement dated December 12, 1995.
The Company acquired the remaining 50% of P & H in 1997.
The Statement of Operations for 1996 includes the operations of
P & H for all of 1996 (unaudited net income for the quarter
ended March 31, 1996 (prior to being acquired by Dynamic) was
$38,860) and the operations of Genesis for the month of
December, 1996.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Accounting Methods
------------------
The Company recognizes income and expenses based on the accrual
method of accounting.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-
out) or market. At December 31, 1998 and 1997, inventories were
comprised of the following:
1998 1997
------------ ------------
Raw materials $ 0 $ 344,909
Work in progress 0 465,068
----------- -----------
$ 0 $ 809,977
=========== ===========
F-19
<PAGE>
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Research and Development Costs
------------------------------
Research and development costs were $1,103,831 for 1997 and were
all incurred by MMC and GmBH ($605,599 in 1996 and all incurred
by MMC).
Warranty Costs
--------------
The Company provides, by a current charge to income, an amount
it estimates will be needed to cover future warranty obligations
for products sold during the year. The accrued liability for
warranty costs is included in accrued expenses in the
accompanying balance sheets.
Dividend Policy
---------------
The Company has not yet adopted any policy regarding payment of
dividends.
Stock Options
-------------
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee
stock options rather than adopting the alternative fair value
accounting provided for under Financial Accounting Standards
Board ("FASB") FASB Statement No. 123, Accounting for Stock
Based Compensation (SFAS 123).
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Allowance for Uncollectible Accounts
------------------------------------
The Company provides an allowance for uncollectible accounts
based upon prior experience and management's assessment of the
collectability of existing specific accounts.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentration of risk, consist of cash and investments. The
Company places its investments in highly rated commercial paper
obligations which limits the amount of credit exposure.
Historically, the Company has not experienced any losses related
to investments.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment is recorded at cost and is being
depreciated over a useful life of seventeen months to eight
years using the straight-line and accelerated methods.
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Company considers all
highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents.
Organization Costs
------------------
Organization costs of MMC and GmBH are being amortized over
sixty months.
Goodwill
--------
Goodwill relating to the acquisition of Genesis is being
amortized over ten years. Goodwill relating to the acquisition
of GCCA is being amortized over five years. The carrying value
of goodwill is reviewed periodically based on the un-discounted
cash flows of the entities acquired over the remaining
amortization period. Should this review indicate that goodwill
is impaired, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of un-discounted cash flows.
F-20
<PAGE>
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Deferred Debt Issue Costs
-------------------------
These costs are associated with raising money by issuing
convertible notes. The costs are being amortized over the life
of the notes (ten years). In the event the notes are converted
to common stock, the remaining unamortized costs will be charged
to additional paid-in capital.
Income Taxes
------------
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, and operating loss carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be
realized.The net change in the valuation allowance for the year
ended December 31, 1998 was $1,028,374 ($0 in 1997). See Note 12
for further details. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment. As of December 31, 1998, temporary
differences arose primarily from differences in the timing of
recognizing expenses for financial reporting and income tax
purposes. Such differences include depreciation, bad debt
allowance, and various accrued operating expenses.
Loss per Share
--------------
Loss per common share is computed by dividing net loss by the
weighted average shares outstanding during each period. The
convertible notes which are convertible to common stock have not
been considered in the calculation as their inclusion would be
antidilutive.
Reclassification of Certain Items
---------------------------------
The operations of P&H and MMC for 1997 and 1996 have been
reclassified in the discontinued operations section of the
statements of operations.
NOTE 3: CAPITALIZATION
The Company's authorized stock includes 25,000,000 shares of
Class "A" common stock at $.001 par value. Shareholders
approved 100,000,000 authorized shares but the appropriate
document has yet to be filed with the State of Nevada.
During 1998, the Company sold 250,000 shares of S-8 stock for
$250,000 cash.
During 1997, the Company sold 1,022,600 shares of S-8 stock at
$1.00 per share, issued 150,000 shares of restricted stock at
$2.00 per share in connection with the GCCA acquisition, issued
428,142 shares of Regulation S stock to retire debt of
$1,498,500 and issued 214,287 shares of restricted stock at
$3.50 per share for the remaining 50% of P & H. At the time of
the GCCA transaction, the free-trading price of the Company's
stock was $3.875 per share. However, due to the fact the stock
given was restricted and the value of the business being
acquired, the Company believes $2.00 per share is a reasonable
value. At the time of the P&H transaction, the free-trading
price of the Company's stock was $3.50 per share.
During 1996, the Company issued 40,000 shares of its common
stock for interest expense, at $1.00 per share, sold 12,500
shares of Regulation S stock at $2.00 per share, sold 1,822,400
of Regulation S stock at $1.75 per share, sold 184,000 shares of
S-8 stock at $1.00 per share, and issued 3,100,000 shares of
restricted stock at $3.33 per share in connection with the
Genesis acquisition. At the time of the Genesis transaction, the
free-trading price of the Company's stock was $3.6875 per share.
The Company feels the $3.33 per share value assigned is
reasonable based on the stock being restricted and based on the
overall value of the business being acquired.
NOTE 4: MINORITY INTEREST
At December 31, 1996, 50% of P & H was owned by other parties.
NOTE 5: OPTION
During 1995, the Company paid $30,000 for an option to purchase
50% of the outstanding common stock of P & H Laboratories, Inc.
("P & H") for a total price of $1,000,000. The $30,000 was
refunded when the option was exercised in May, 1996. The
Company had an option to purchase the remaining 50% of P & H
stock for $1,000,000. The option was modified to $750,000 and
was exercised in 1997 by issuing 214,287 shares of restricted
stock at an agreed value of $3.50 per share.
F-21
<PAGE>
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of December 31, 1998 and 1997
are summarized as follows:
Accumulated Net Book Value
------------------------
Cost Depreciation 1998 1997
--------- ------------ ------------------------
Transportation
Equipment $ 240,307 $ 92,669 $ 147,638 $ 230,042
Machinery &
Equipment 115,505 44,542 70,963 637,573
Furniture
& Fixtures 0 0 0 85,200
Leasehold
Improvements 16,493 6,361 10,132 48,083
--------- ------------ ----------- -----------
$ 372,305 $ 143,572 $ 228,733 $ 1,000,898
========= ============ =========== ===========
Depreciation expense is calculated under straight-line and
accelerated methods based on the estimated service lives of
depreciable assets. Depreciation expense for the year ended
December 31, 1998 amounted to $57,759, ($217,943 in 1997).
Included in machinery and equipment is $59,315 of equipment
under a capital lease at December 31, 1997. The related
accumulated depreciation at December 31, 1997 is $51,397.
NOTE 7: LOANS RECEIVABLE - RELATED PARTIES
1998 1997
Due From Amount Amount Interest Rate Due Date
----------------- ------ ------ ------------- -----------------
Officer of MMC(1) $52,500 52,500 0% December 31, 1997
(1)The $52,500 is due from a former officer/employee of MMC. The
Company expects to collect the amount in 1999, even though it is
past-due.
NOTE 8: BRIDGE LOANS
At December 31, 1996, the Company owed $3,000,000 under one
bridge loan and $150,000 under the other. The $3,000,000 loan
had an interest rate of 10%, payable monthly beginning January
2, 1997. All outstanding principal and interest was due
September 2, 1997. The loan was due to the former owners of
Genesis who at December 31, 1996 owned 24.7% of the Company's
common stock. The loan was collateralized by 51% of the common
stock of Genesis which is owned 100% by the Company. During
1997, the loan was paid in full with the final payment being
made on March 3, 1997.
The other $150,000 was due to a bank, had an interest rate of 9%
and was payable January 5, 1997. The loan was repaid in
January, 1997. The loan was guaranteed by two principals of
Genesis.
NOTE 9: RELATED PARTY TRANSACTIONS
During 1998, $180,000 was paid or accrued to the Company's
President and $105,067 was paid or accrued to the Company's
Secretary/Treasurer for services rendered to the Company.
During 1997 $145,000 was paid to the Company's President,
$140,000 was paid or accrued to the Company's former
Secretary/Treasurer, and $87,733 was paid or accrued to the
current Secretary/Treasurer for service rendered to the
Company. As discussed in greater detail in Note 14, Genesis
leased an aircraft from Blue Angel Aviation, an entity
controlled by William H. Means, Jr., one of the company's
directors. The Company terminated the lease effective December
31, 1998.
F-22
<PAGE>
NOTE 10: LONG-TERM DEBT
1998 1997
---- ----
Note payable - Bank. Payable in monthly
installments of $3,317 plus interest at
prime plus 1% per annum and secured
by accounts receivable, other rights to
payment, general intangibles, inventory,
and equipment of P & H. Debt matures
in December, 1999. $ 0 $ 72,954
Note payable - bank. Interest payments only until
May, 1998 at which time it is converted to 48
monthly installments of $7,235 plus interest at
prime (8.5% at December 31, 1997) plus 1% per
annum and secured by assets of P&H.
Debt matures in May 2002. The agreement
contains certain financial and restrictive
covenants. As of December 31, 1997,
P&H was not in compliance with certain
financial covenants. On March 2, 1998, the
bank waived such events of noncompliance as
of such date. 0 347,303
Genesis finances certain equipment for various items:
8.95% Note payable to bank in monthly installments
of $424, including interest through February 12,
2002. 14,184 0
9.40% Note payable to a lending institution
payable in monthly installments of
$927, plus interest through November29,
1999, secured by vehicle (paid off early) 0 17,890
GCCA finances certain equipment for various items:
10.25% Note payable to bank in monthly installments of
$368, including interest through November 1999,
secured by vehicle (Paid off in 1998) 0 7,355
10.25% Note payable to bank in monthly
installments of $432, including interest
through December 1999, secured by vehicle
(Paid off in 1998) 0 9,679
--------- ---------
14,184 455,181
Less current portion 3,978 (108,542)
--------- ---------
$ 10,206 $ 346,639
========= ==========
Scheduled maturities of these obligations are as follows:
Year ending December 31,
------------------------
1999 $ 3,978
2000 4,349
2001 4,754
2002 1,103
---------
$ 14,184
=========
F-23
<PAGE>
NOTE 11: CONVERTIBLE NOTES
At December 31, 1997, the Company owes $17,001,500 to various
entities in the form of convertible notes ($14,504,000 at
December 31, 1996). The notes bear interest at 10% per annum
and the interest is payable on January 16 and July 16 of each
year, beginning January 16, 1997. The notes are part of an
overall maximum $18,500,000 indenture.
Conversion
----------
The holder of any Note will have the right anytime prior to
maturity, to convert the principal thereof (or any portion
thereof that is an integral multiple of $1,000) into shares of
Common Stock at the conversion price of US $2.75 (the
"Conversion Price"), except that if a Note is called for
redemption, the conversion right will terminate at the close of
business on the business day immediately preceding the date
fixed for redemption. Upon conversion, no adjustment will be
made for interest or dividends, but if any holder surrenders a
Note for conversion between the record date for the payment of
an installment of interest and the next interest payment date,
then, notwithstanding such conversion, the interest payment on
such interest payment date will be paid to the registered holder
of such Note on such record date. In such event, such Note
which surrendered for conversion, must be accompanied by payment
of an amount equal to the interest payable on such interest
payment date on the portion so converted. No fractional shares
will be issued upon conversion but a cash adjustment will be
made for any fractional interest.
At December 31, 1998 the notes could have been converted into
6,182,364 shares of the Company's common stock.
Optional Redemption
-------------------
The Notes will be redeemable at the option of the Company, in
whole or in part, at any time and from time to time, on and
after September 15, 1997, on not less than 15 nor more than 60
days' notice by first class mail, at the following redemption
prices (expressed as percentages of the principal amount) if
redeemed during the twelve-month period beginning September 15
of the year indicated below, in each case, together with accrued
interest thereon to the redemption date:
Year Percentage
---- ----------
1997 110.00%
1998 108.75%
1999 107.50%
2000 106.25%
2001 105.00%
2002 103.75%
2003 102.50%
2004 101.25%
2005 100.00%
If less than all the Notes are to be redeemed, the Trustee will
select Notes for redemption in any manner the Trustee deems fair
and appropriate. If any Note is to be redeemed in part only, a
new Note or Notes in principal amount equal to the unredeemed
principal portion thereof will be issued.
Subordination of Notes
----------------------
The Notes will be subordinate in right of payment to the extent
set forth in the Indenture to all existing and future Senior
Indebtedness (as defined in the Indenture) of the Company,
whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed, or guaranteed. Upon any
distribution of assets of the Company in any dissolution,
winding up, liquidation, or reorganization of the Company
(whether in an insolvency or bankruptcy proceeding or
otherwise), payment in full must be made on such Senior
Indebtedness before any payment is made on or in respect of the
Notes. Upon the happening and during the continuance of a
default in payment of interest on or principal of Senior
Indebtedness, or any other default with respect to such Senior
Indebtedness permitting the holder thereof to accelerate the
maturity thereof, no payment may be made by the Company on or in
respect of the Notes. No such subordination will prevent the
occurrence of any Event of Default (as defined in the
Indenture).
F-24
<PAGE>
NOTE 11: CONVERTIBLE NOTES (continued)
"Senior Indebtedness" includes (i) all indebtedness of the
Company (a) for borrowed money, (b) which is evidenced by a
note, debenture or similar instrument (including a purchase
money mortgage) given in connection with the acquisition of any
property or assets (other than inventory or similar property
acquired in the ordinary course of business), including
securities, or (c) for the payment of money relating to a
Capitalized Lease Obligation (as defined in the Indenture); (ii)
any liability of others described in the preceding clause which
the Company has guaranteed or which is otherwise its legal
liability; and (iii) any amendment, renewal, extension, or
refunding of any such liability; provided, however, that Senior
Indebtedness will not include any indebtedness of the Company to
a subsidiary or any indebtedness or guarantee of the Company
which, by its terms or the terms of the instrument creating or
evidencing it, is not superior in right of payment to the Notes.
The Indenture will not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company
can create, incur, assume, or guarantee, nor will the Indenture
limit the amount of indebtedness which any subsidiary can incur.
As a result of these subordination provisions, in the event of
insolvency, holders of the Notes may recover less ratably than
general creditors of the Company.
On March 17, 1999, the Company announced the restructuring of
its convertible notes. $351,500 of the original $17,001,500 debt
remains unchanged in its terms. Holders of $16,650,000 of
original debt accepted the Company's offer to convert to
$8,325,000 of 7.5% secured convertible notes due December 31,
2006. The holders also will receive one share of Dynamic's
common stock for each $2 of original debt and one warrant to
purchase Dynamic's common stock at $1.50 per share until
December 31, 2000. 4,162,500 shares of Dynamic's common stock
and 8,325,000 warrants will be issued to complete the
transaction.
Summary:
Before the transaction:
Principal Amount Interest Rate
---------------- -------------
$ 17,001,500 10.0%
After the transaction:
Principal Amount Interest Rate
---------------- -------------
$ 8,325,000 7.5%
351,500 10.0%
----------------
$ 8,676,500
================
The new convertible notes of $8,325,000 are secured by the
accounts receivable of Genesis and GCCA. The security interest
is subordinated to banks, financial institutions or any lender
or creditors as the Board of Directors may deem appropriate.
The holders of the new notes also waived the January, 1999
interest payment due under the terms of the old notes.
NOTE 12: INCOME TAXES
Components of income tax (benefit) are as follows:
1998 1997
---- ----
Current
Federal $ 0 $ 4,666
State 127,128 315,512
--------- ----------
127,128 320,178
--------- ----------
Deferred
Federal 0 487,500
State 0 0
--------- ----------
0 487,500
--------- ----------
Income tax (benefit) $127,128 $ 807,678
========= ==========
F-25
<PAGE>
NOTE 12: INCOME TAXES (continued)
A reconciliation of the provision for income tax expense with
the expected income tax computed by applying the federal
statutory income tax rate to income before provision for income
taxes is as follows:
1998 1997
--------------- ----------------
Income tax computed at federal
statutory tax rate $ (2,045,007) $ (510,834)
Change in valuation allowance for
deferred federal, state, &
local income tax assets 2,054,208 1,025,834
State taxes
(net of federal benefit) 117,927 292,678
--------------- ----------------
$ 127,128 $ 807,678
=============== ================
Significant components of the Company's deferred tax liabilities
and assets for income taxes consist of the following:
1998 1997
--------------- ----------------
Current deferred tax assets
Net operating loss $ 300,000 $ 300,000
--------------- ----------------
Net deferred current tax assets $ 300,000 $ 300,000
=============== ================
The deferred tax asset relates to Genesis. The Company expects
Genesis to realize a tax benefit in future years when Genesis
again becomes profitable. The Company itself has no operations
to offset its own losses and no deferred tax asset has been
recorded for the Company itself.
The net change in the valuation allowance for the year ended
December 31, 1998 was $1,028,374 ($0 in 1997).
At December 31, 1998, the Company has a federal net operating
loss carryover of approximately $3,145,100. The Federal loss
will expire as follows:
December 31, 2010 $ 1,100
December 31, 2011 1,061,000
December 31, 2018 2,083,000
------------
$ 3,145,100
============
NOTE 13: INCENTIVE STOCK OPTION PLAN / WARRANTS
During 1995, the Company established an incentive stock option
plan for employees and directors of the Company. The maximum
number of shares to be issued under the plan is 2,000,000. At
December 31, 1997, all 2,000,000 options have been granted. The
Company also can grant non-qualified stock options. The
aggregate fair market value (determined at the grant date) of
the shares to which options become exercisable for the first
time by an optionee during any calendar year shall not exceed
$100,000 for qualified options and $1,000,000 for non-qualified
options. For 10% shareholders, the option price shall not be
less than 100% of the fair market value of the shares on the
grant date and the exercise period shall not exceed 5 years from
the grant date. In the case of non-qualified stock options, the
option price shall not be less than $1.00 per share, or at a
price exceeding $1.00 per share at the discretion of the
Committee. During 1996 the following options were granted:
150,000 shares to the President
405,000 shares to the Secretary
200,000 shares to a Director
100,000 shares to a Director
200,000 shares to the Vice President of
Corporate Communications
945,000 shares to others
F-26
<PAGE>
NOTE 13: INCENTIVE STOCK OPTION PLAN / WARRANTS (continued)
The exercise price is $1.00 per share. During 1998, 250,000
shares were sold and during 1997, 1,022,600 shares were sold
pursuant to the plan.
During 1996, 184,000 shares were sold pursuant to the plan.
543,400 options were cancelled and 0 options remain unexercised
at December 31, 1998.
All 2,000,000 options discussed above were granted at $1.00 per
share which was above market price.
The Company has adopted only the disclosure provisions of FASB
No. 123, "Accounting for Stock-Based Compensation"(FAS123). It
applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related Interpretation in accounting for its
plans and does not recognize compensation expense for its stock-
based compensation plans other than for restricted stock. If
the Company had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed by FAS 123, the
Company's net income and earnings per share would be reduced to
the pro forma amounts indicated below:
Year Ended December 31,
1998 1997
--------------- ----------------
Net loss
As reported $ (6,141,853) $ (3,545,846)
Pro forma (6,141,853) (5,697,739)
Loss per common share
As reported $ (.43) $ (.27)
Pro forma (.43) (.44)
There are 117,500 options at an exercise price of $2.25 per
share which expire September 30, 2002.
An entity has 250,000 warrants to purchase the Company's common
stock at $.70 per share, prior to May 19, 2003. The warrants
were given for services performed by the entity.
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company is provided with office space and other management
services on a month-to-month basis by Amteck Management, Inc.,
an entity controlled by the Company's former Secretary. $69,700
was paid to Amteck in 1998. $124,221 was paid to Amteck during
1997. $1,000 per month was paid to Amteck as rent in 1997.
Other fees to Amteck will be based on services received.
Officers currently are receiving no salary but are being paid
management fees when services are provided. Various other
individuals are paid as services are performed.
For 1999, it is projected that the Company's President will
receive $15,000 monthly and the Secretary will receive $8,000
monthly. The Company feels this is reasonable compensation.
The Vice President of Operations for Genesis will receive
$120,000 in 1999.
Future scheduled payments under these employment related
commitments are as follows:
Year Ending
-----------------
December 31, 1999 $276,000
========
Genesis pays a management fee of $15,000 per month on a month-
to-month basis for services provided to Genesis and GCCA.
Genesis leases equipment under operating leases expiring through
1999.
Future minimum lease payments are as follows:
Year Ending
-----------------
December 31, 1999 $ 3,978
=========
Genesis leases its facility at $2,800 per month through
September 30, 1999 at which time the rent increases to $3,000
per month through September, 2000. Genesis also pays the taxes
and utilities.
Future minimum lease payments are as follows:
Year Ending
-----------------
December 31, 1999 $ 34,200
F-27
<PAGE>
December 31, 2000 27,000
----------
$ 61,200
==========
Genesis and GCCA together expect to pay about $2.5 million in
consulting fees in 1999.
Through November, 1998, Genesis leased an aircraft from a
related party on a monthly basis, but the payment was not
determined until the end of each month. During 1998, payments to
the entity were about $274,000. During 1997, payments to the
entity were about $323,000. . The lease was with Blue Angel
Aviation, an entity controlled by William H. Means, Jr., one of
the Company's directors. For 1998, terms of the lease were a
monthly fee of approximately $25,000 per month. The Company
terminated the lease effective December 1, 1998 and found
alternative methods to travel to distant client locations.
Rental expense for the year ended December 31, 1998 was $69,395
( $253,868 in 1997 and $203,299 in 1996) which includes $7,298
paid by MMC to P & H in 1997 ($7,120 in 1996).
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, loans, and
interest receivable, accounts payable, accrued expenses and
interest payable approximate fair value due to the short
maturity periods of these instruments. The fair value of the
Company's long-term debt, based on the present value of the
debt, assuming interest rates as follows at December 31, 1998
was:
Note at 8.95% $ 10,616
Convertible notes at 10.0% 8,867,925
--------------
$ 8,878,541
==============
NOTE 16: INDUSTRY SEGMENTS
In 1998, the Company received its revenue from one source:
management fees earned by Genesis and GCCA. Information about
that segment for the year ended December 31, 1998 is as follows:
1998 Management
----
Fees Other (1) Consolidated
------------- -------------- -------------
Management fees $ 12,498,922 $ 0 $ 12,498,922
Operating profit
(loss) $ 1,472,195 $ (3,615,259) $ (2,143,064)
============= ============== =============
Identifiable
assets at
December 31, 1998 $ 3,969,993 $ 0 $ 3,969,993
Corporate assets 969,343 21,001,679 21,971,022
------------- -------------- -------------
Total assets at
December 31, 1998 $ 4,939,336 $ 21,001,679 $ 25,941,015
============= ============== =============
Prior to 1998, the Company received its revenue from two
sources: management fees earned by Genesis and GCCA and sales of
components and subsystems made by P & H. Information about
those segments for the years ended December 31, 1997 and 1996 is
as follows:
1997 Management
----
Fees Sales Other (2) Consolidated
------------ ----------- ------------ ------------
Sales and
Management fees $ 14,619,951 $ 3,382,388 $ 0 $ 18,002,339
Operating profit
(loss) $ 4,978,571 $ (102,777) (5,303,797) $ (428,003)
============ =========== ============ ============
Identifiable
assets at
December 31,
1997 $ 3,979,050 $ 1,911,239 $ 164,237 $ 6,054,526
Corporate assets 1,939,625 461,552 24,384,491 26,785,668
------------ ----------- ------------ ------------
Total assets at
December 31,
1997 $ 5,918,675 $ 2,372,791 $ 24,548,728 $ 32,840,194
============ =========== ============ ============
F-28
<PAGE>
NOTE 16: INDUSTRY SEGMENTS (continued)
1996 Management
----
Fees Sales Other (2) Consolidated
------------ ----------- ------------ ------------
Sales and
Management fees $ 1,122,500 $ 3,395,098 $ 0 $ 4,517,598
Operating profit
(loss) $ 440,487 $ 171,969 (1,985,389) $ (1,372,933)
============ =========== ============ ============
Identifiable
assets at
December 31,
1996 $ 1,451,361 $ 1,415,795 $ 79,322 $ 2,946,478
Corporate assets 329,033 782,854 29,896,455 31,008,342
------------ ----------- ------------ ------------
Total assets at
December 31,
1996 $ 1,780,394 $ 2,198,649 $ 29,975,777 $ 33,954,820
============ =========== ============ ============
Operating profit is total revenue less cost of goods sold,
selling, general and administrative expenses, research and
development and bad debts.
Identifiable assets are those used by each segment of the
Company's operations. Corporate assets are primarily cash,
commercial paper, deferred costs and intangibles.
(1)Reflects general and administrative expenses of the
Company which reduce operating profit of the segment
to an operating loss on a consolidated basis.
Amortization of goodwill in the amount of $2,545,280
is also included.
(2) Reflects general and administrative expenses,
research and development and bad debts of the Company
and MMC which reduce operating profit of the segments
to an operating loss on a consolidated basis.
Amortization of goodwill in the amount of $2,515,530
is also included.
(3)Reflects general and administrative expenses,
research and development and bad debts of the Company
and MMC which reduce operating profit of the segments
to an operating loss on a consolidated basis.
Amortization of goodwill in the amount of $202,190 is
also included.
Pre-consolidation net income (loss) is as follows:
1998 1997 1996
--------------- -------------- --------------
Dynamic $ (5,320,553) $ (5,531,798) $ (1,624,870)
MMC/GmBH 0 (1,127,675) (595,318)
P & H 0 (51,804) 128,409
Genesis (981,840) 2,845,514 258,829
GCCA 160,540 542,452 0
--------------- -------------- --------------
(6,141,853) (3,323,311) (1,832,950)
(Tax) benefit adjustment 0 (222,535) 940,334
Minority interest 0 0 (64,205)
--------------- -------------- --------------
Adjusted Net Loss $ (6,141,853) $ (3,545,846) $ (956,821)
=============== ============== ==============
For 1998, revenue from the following clients exceeded 5% of
total management fees: Bradley 6.2%, Franklin County 7.2%, Holly
Springs 5.7%, Lackey 5.7%, Morehouse 6.2%, Richardson 5.9%,
Tyler Holmes 6.1%, Senatobia 6.2%, North Sunflower 5.5%, Sharkey
5.9% , Aberdeen 5.9%, Montfort Jones 6.0%, Cumberland 6.2%, and
Dardanelle 6.0%.
For 1997, revenue from the following clients exceeded 5% of
total management fees: Bradley 5.3%, Franklin County 6.2%,
Morehouse 5.3%, Richardson 5.0%, Tyler Holmes 5.2%, Senatobia
5.3%, Sharkey 5.0%, Aberdeen 5.0%, Montfort Jones 5.1%,
Cumberland 5.3%, and Dardanelle 5.1%.
NOTE 17: ACQUISITION OF SUBSIDIARIES
During 1996, $1,000,000 cash was paid to acquire 50% of the
outstanding common stock of P & H in a purchase transaction.
The results of operations of P & H for all of 1996 are included
in the consolidated statements of operations.
During 1997, the remaining 50% of P&H was acquired in exchange
for 214,287 shares of stock with an agreed value of $750,000.
F-29
<PAGE>
NOTE 17: ACQUISITION OF SUBSIDIARIES (continued)
In December 1996, the Company purchased 100% of the outstanding
stock of Genesis for $25,373,000. $15,050,000 was paid in cash
or notes and accounts payable. $10,323,000 was paid by issuing
3,100,000 shares of restricted common stock at a value of $3.33
per share. $24,262,775 of the purchase price has been allocated
to goodwill which is being amortized over ten years. The
results of operations for Genesis for December 31, 1996 are
included in the consolidated statements of operations.
In March of 1997, the Company acquired GCCA as a wholly owned
subsidiary. Cash of $500,000 and 150,000 shares of restricted
stock valued at $2.00 per share were given for 100% of the
outstanding stock of GCCA. $595,000 of the purchase price has
been allocated to goodwill which is being amortized over five
years. The results of operations for GCCA for April thru
December 31, 1997 are included in the consolidated statements of
operations.
NOTE 18: 1998 EVENTS
On February 25, 1998, the Company announced that it would spin-
off two of its subsidiaries, MMC (which includes GmBH) and P&H,
into a new public entity to be called MW Medical, Inc. If the
spin-off had occurred on December 31, 1997, the consolidated
total assets would have been reduced by about $2.5 million and
consolidated total liabilities would have been reduced by about
$.8 million.
The loss associated with MMC and P&H for the year ended December
31, 1997 was about $1.18 million.
In 1998, Dynamic recorded a $2.17 million charge to bad debts to
reflect money due to it from MMC/GmBH which was not repaid. The
spin-off was accounted for as a gain on disposition of
subsidiaries in the amount of $256,493 which was a result of
recapture of negative basis of the investment in subsidiaries.
Each subsidiary maintained its own accounting records. There
was no allocation of assets or liabilities when the entities
were spun-off.
NOTE 19: SUBSEQUENT EVENTS
As discussed in Note 11, the Company in early 1999 was able to
reduce its long-term convertible debt by almost half. Had the
restructuring occurred prior to December 31, 1998, the following
accounts would have been affected:
Discharge of indebtedness income in the amount of
$7,782,603 would have been recorded consisting of debt
reduction of $8,325,000 and reduced interest payable of
$739,653 reduced by common stock of $4,162 and
additional paid-in capital of $1,277,888. The
$1,282,050 reflected for common stock and additional
paid-in capital is the value of the common stock and
warrants issued to restructure the debt. Interest
payable would have been reduced by $739,653. Deferred
debt issue costs would have been reduced by $651,402 and
charged to additional paid-in-capital as a capital
raising cost.
The discharge of indebtedness income will be non-
taxable as the Company is insolvent for tax purposes
under Code Section 108 of the Internal Revenue Code.
Net loss as stated $ (6,141,853)
Discharge of indebtedness income 7,782,603
-------------
Net income had event occurred in 1998 1,640,750
Convertible notes as stated 17,001,500
1999 restructuring (8,325,000)
-------------
Balance had event occurred in 1998 8,676,500
Deferred debt issue costs as stated 1,331,307
1999 restructuring (651,402)
------------
Balance had event occurred in 1998 679,905
Accrued interest payable as stated 791,851
1999 restructuring (739,653)
------------
Balance had event occurred in 1998 52,198
F-30
<PAGE>
NOTE 19: SUBSEQUENT EVENTS (continued)
Common stock as stated 14,224
1999 restructuring 4,162
------------
Balance had event occurred in 1998 18,386
Retained deficit as stated (11,264,987)
1999 restructuring 7,782,603
------------
Balance had event occurred in 1998 (3,482,384)
Additional paid-in-capital as stated 18,512,330
1999 restructuring 626,486
------------
Balance had event occurred in 1998 19,138,816
The discharge of indebtedness income will be reported as an
extraordinary item - gain on restructuring of debt. The
Company has given full consideration to EITF 96-19 "Debtor's
Accounting for a Modification or Exchange of Debt Instruments"
and believes the transaction has been reported properly,
including appropriate disclosures.
NOTE 20: SUBSEQUENT EVENTS - POSSIBLE MERGER
On March 30, 1999, the Company contributed the stock of Genesis
and Geriatric to a newly formed limited liability company
("LLC"). Another entity also contributed its shares of a
subsidiary to the LLC. Later in 1999, it is the intent of the
parties to effect a merger with a newly formed subsidiary of the
Company which is named Dynamic Acquisition Corporation. The
shareholders of the other entity will end up with 55% of the
outstanding stock of the Company which will result in a change
of control of the Company. The Company's shareholders have
untilDecember 15, 1999 to approve the above transactions.
NOTE 21: POSSIBLE LITIGATION
In December of 1998, the Company began a forensic audit to
determine whether its subsidiaries were using proper management
procedures in conducting its business operations. Upon
completion of the forensic audit, the Company will determine
whether legal proceedings against former officers and employees
of Genesis and GCCA are appropriate.
NOTE 22: PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
See the following pages for unaudited condensed consolidated
financial statements which assume the entities were together as
of the beginning of each period presented.
F-31
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET
December 31, 1995
Pro Forma Consolidated
Dynamic Genesis Adjustments Pro Forma
----------- ---------- ------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 959,843 $ 178,945(1)$ (500,000) $ 638,788
Short-term
commercial paper 329,157 0 329,157
Accounts receivable 810,825 589,500 1,400,325
Loans receivable -
related parties 272,300 0 272,300
Loans receivable 0 7,494 7,494
Accrued interest 4,202 0 4,202
Inventory 588,803 0 588,803
Prepaid expense 4,523 16,639 21,162
Deferred tax benefit 53,000 0 53,000
----------- ---------- ------------- ------------
TOTAL CURRENT ASSETS 3,022,653 792,578 (500,000) 3,315,231
PROPERTY, PLANT AND
EQUIPMENT 177,757 247,822 425,579
OTHER ASSETS
Goodwill 0 0(1) 12,000,000 25,257,080
(2) 3,000,000
(3) 10,323,000
(4) 50,000
(5) (115,920)
Deposits 21,315 200 21,515
Organization costs 1,120 0 1,120
----------- ---------- ------------- ------------
22,435 200 25,257,080 25,279,715
----------- ---------- ------------- ------------
$ 3,222,845 $1,040,600 $ 24,757,080 $ 29,020,525
=========== ========== ============= ============
F-32
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET (Continued)
December 31, 1995
Pro Forma Consolidated
Dynamic Genesis Adjustments Pro Forma
---------- ---------- ----------- ------------
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable
and accrued
expenses $ 320,254 $ 309,466(4)$ 50,000 $ 679,720
Bridge loan 220,000 0(2) 3,000,000 3,220,000
Current portion of
long-term debt 77,823 0 77,823
Income taxes payable 129,805 46,544 176,349
---------- ---------- ----------- ------------
TOTAL CURRENT LIABILITIES 747,882 356,010 3,050,000 4,153,892
Long-term debt 173,652 542,575(1) 11,500,000 12,216,227
Loan from shareholders 0 26,095 26,095
Deferred income taxes 54,000 0 54,000
---------- ---------- ----------- ------------
TOTAL LIABILITIES 975,534 924,680 14,550,000 16,450,214
Minority interest
in subsidiary 775,389 0 775,389
STOCKHOLDERS' EQUITY
Common stock $.001
par value:
Authorized -
25,000,000 shares
Issued and outstanding
7,000,000 shares 7,000 1,000(3) 3,100 10,100
(6) (1,000)
Additional paid-in
Capital 1,335,000 0(3) 10,319,900 11,539,980
(5) (115,920)
(6) 1,000
Earnings (deficit)
Accumulated during
the development
stage 129,922 114,920 244,842
----------- ---------- ----------- ------------
TOTAL STOCKHOLDERS'
EQUITY 1,471,922 115,920 10,207,080 11,794,922
----------- ---------- ----------- ------------
$ 3,222,845 $ 1,040,600 $24,757,080 $ 29,020,525
=========== =========== =========== ============
F-33
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
Year ended December 31, 1996
Pro Forma Consolidated
Dynamic Genesis Adjustments Pro Forma
---------- ---------- ----------- ------------
Net Sales $3,395,098 $ 0 $ $ 3,395,098
Management fee income 0 9,678,360 9,678,360
Cost of sales 2,496,997 0 2,496,997
---------- ---------- ----------- ------------
GROSS PROFIT 898,101 9,678,360 10,576,461
Selling and general
and administrative
expenses 2,103,622 6,085,933 8,189,555
Research and development 605,599 0 605,599
Bad debt 2,300 692,500 694,800
---------- ---------- ----------- ------------
2,711,521 6,778,433 9,489,954
---------- ---------- ----------- ------------
NET OPERATING INCOME
(LOSS) (1,813,420) 2,899,927 1,086,507
OTHER INCOME (EXPENSE)
Interest income 97,903 426 98,329
Interest expense (268,725) (16,239) (284,964)
Miscellaneous income 8,162 0 8,162
Unrealized decline
in investment (41,400) 0 (41,400)
---------- ---------- ----------- ------------
(204,060) (15,813) (219,873)
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE INCOME
TAXES AND
MINORITY INTEREST (2,017,480) 2,884,114 866,634
INCOME TAX EXPENSE
(BENEFIT) 73,500 180,980(7) (939,535) (685,055)
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE MINORITY
INTEREST (2,090,980) 2,703,134 939,535 1,551,689
MINORITY INTEREST (64,205) 0 (64,205)
---------- ---------- ----------- ------------
NET INCOME (LOSS) $(2,155,185) $ 2,703,134 $ 939,535 $ 1,487,484
========== ========== =========== ============
Net income (loss) per
weighted average
share $ (.26) $ 29.22 $ .18
========== ========== ============
Weighted average
number of common
shares used to
compute net income
(loss) per weighted
average share 8,377,442 92,500 8,377,442
========== ========== ============
* Includes the month of December, 1996 which is also included in the
audited Statements of Operations shown at Page F-3.
F-34
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
Year ended December 31, 1995
Pro Forma Consolidated
Dynamic Genesis Adjustments Pro Forma
---------- ---------- ----------- ------------
Net Sales $3,723,013 $ 0 $ $ 3,723,013
Management fee income 0 3,832,188 3,832,188
Cost of sales 2,370,168 0 2,370,168
---------- ---------- ----------- ------------
GROSS PROFIT 1,352,845 3,832,188 5,185,033
Selling and general
and administrative
expenses 1,407,527 3,543,293 4,950,820
Bad debts 58,380 47,425 105,805
---------- ---------- ----------- ------------
1,465,907 3,590,718 5,056,625
---------- ---------- ----------- ------------
NET OPERATING
INCOME (LOSS) (113,062) 241,470 128,408
OTHER INCOME (EXPENSE)
Interest income 28,543 24 28,567
Interest expense (24,579) (17,077) (41,656)
---------- ---------- ----------- ------------
3,964 (17,053) (13,089)
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE INCOME
TAXES AND
MINORITY INTEREST (109,098) 224,417 115,319
INCOME TAX EXPENSE 202,600 59,308 261,908
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE MINORITY
INTEREST (311,698) 165,109 (146,589)
MINORITY INTEREST (153,885) 0 (153,885)
---------- ---------- ----------- ------------
NET INCOME (LOSS) $ (465,583) $ 165,109 $ 0 $ (300,474)
========== ========== =========== ============
Net income (loss)
per weighted
average share $ (.18) $ 16.51 $ (.05)
========== ========== ============
Weighted average number
of common shares used
to compute net income
(loss) per weighted
average share 2,641,213 10,000 5,741,213
========== ========== ============
F-35
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The preceding pro forma consolidated condensed balance sheet has been
derived from the balance sheets of the Company and Genesis Health
Management Corporation ("Genesis") at December 31, 1995. The balance
sheet assumes that the Company acquired 100% of the outstanding stock
of Genesis on January 1, 1995. The Balance Sheet column for December
31, 1995 labeled Dynamic also assumes the Company had acquired 50% of
the outstanding stock of P & H Laboratories on January 1, 1995.
(1) Reflects $12,000,000 cash paid to acquire 100% of the outstanding
stock of Genesis and cash acquired by issuance of convertible notes.
(2) Reflects issuance of $3,000,000 note payable for the balance of
the purchase price.
(3) Reflects the issuance of 3,000,000 restricted common shares as
part of purchase price at $3.33 per share and 100,000 restricted
common shares for a finder's fee at $3.33 per share.
(4) Reflects a commission due on the transaction.
(5) Reflects the reduction of goodwill by the net assets purchased at
book value.
(6) Eliminates common stock of subsidiary.
(7) Reflects income tax benefit adjustment due to being able to file
a consolidated tax return with Genesis and expected future tax
savings produced by offsetting income from Genesis with the net
operating loss carryover of the Company.
The preceding pro forma consolidated condensed statements of
operations have been derived from the statements of operations of the
Company and Genesis as of December 31, 1996 and December 31, 1995, and
assumes the companies were consolidated as of the beginning of each
period presented. The Statement of Operations column labeled Dynamic
for 1995 assumes that Dynamic had acquired 50% of the outstanding
stock of P & H Laboratories on January 1, 1995.
F-36
<PAGE>
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
Year ended December 31, 1997
Pro Forma Consolidated
Dynamic GCCA* Adjustments Pro Forma
---------- ---------- ----------- ------------
Net Sales $ 3,382,388 $ 0 $ $ 3,382,388
Management fee income 14,619,951 244,125 14,864,076
Cost of sales 2,659,882 0 2,659,882
---------- ---------- ----------- ------------
GROSS PROFIT 15,342,457 244,125 15,586,582
Selling and general
and administrative
expenses 11,342,791 26,792 11,369,583
Depreciation and
Amortization 2,733,713 0 2,733,713
Research and development 1,103,831 0 1,103,831
Bad debts 590,125 0 590,125
---------- ---------- ----------- ------------
15,770,460 26,792 15,797,252
---------- ---------- ----------- ------------
NET OPERATING
INCOME (LOSS) (428,003) 217,333 (210,670)
OTHER INCOME (EXPENSE)
Interest income 89,323 0 89,323
Interest expense (2,000,258) 0 (2,000,258)
Miscellaneous income 8,003 0 8,003
Loss on disposal of
Equipment (23,986) 0 (23,986)
Unrealized decline
in investment (383,247) 0 (383,247)
---------- ---------- ----------- ------------
(2,310,165) 0 (2,310,165)
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE INCOME
TAXES AND
MINORITY INTEREST (2,738,168) 217,333 (2,520,835)
INCOME TAX EXPENSE
(BENEFIT) 807,678 13,000 (13,000) 807,678
---------- ---------- ----------- ------------
NET INCOME (LOSS)
BEFORE MINORITY
INTEREST (3,545,846) 204,333 13,000 (3,328,513)
MINORITY INTEREST 0 0 0
---------- ---------- ----------- ------------
NET INCOME (LOSS) $(3,545,846) $ 204,333 $ 13,000 $ (3,328,513)
========== ========== =========== ============
Net income (loss) per
weighted average
share $ (.27) $ (.25)
=========== ============
Weighted average
number of common
shares used to
compute net income
(loss) per weighted
average share 13,057,008 13,057,008
========== ===========
* Reflects activity for first quarter of 1997 (prior to acquisition)
which is not included in the audited Statements of Operations shown
at Page F-3.
F-37
<PAGE>
EXHIBIT 11
DYNAMIC ASSOCIATES, INC.
CALCULATION OF EARNINGS PER SHARE
Weighted
Common Months Average
Shares Outstanding Shares
------------ ----------- ------------
Year Ended December 31, 1998
Balance at December 31, 1997 13,973,929 12 13,973,929
Sale of stock 250,000 10.16 211,644
------------ ----------- ------------
Balance at December 31, 1998 14,223,929 14,185,573
Loss for year ended
December 31, 1998 $(6,141,853)
Loss per share $ (.43)
Year Ended December 31, 1997
Balance at December 31, 1996 12,158,900 12 12,158,900
Sale of stock 1,022,600 6.6 564,304
Issuance to acquire Geriatric 150,000 11.0 137,500
Issuance to retire debt 428,142 3.5 124,875
Issuance to acquire 50% of P&H 214,287 4.0 71,429
------------ ----------- ------------
Balance at December 31, 1997 13,973,929 13,057,008
Loss for year ended
December 31, 1997 $(3,545,846)
Loss per share $ (.27)
F-38
