EXECUTION VERSION
EXHIBIT 99.7
NOTE PURCHASE AGREEMENT
BETWEEN
DYNTEK, INC.
AND
THE PURCHASERS NAMED IN SCHEDULE I
DATED AS OF MARCH 8, 2006
INDEX TO SCHEDULES
SCHEDULE I Schedule of Purchasers
SCHEDULE II Trade Creditors
SCHEDULE III Note Holders
SCHEDULE IV Disclosure Schedules
SCHEDULE V Use of Proceeds
INDEX TO EXHIBITS
EXHIBIT A Form of Senior Note
EXHIBIT B Form of Settlement and Release Agreement
EXHIBIT C Form of Conversion and Settlement Agreement
EXHIBIT D Form of Warrant
EXHIBIT E Form of Security and Pledge Agreement (Senior Notes)
EXHIBIT F Form of Junior Note
EXHIBIT G Form of Security and Pledge Agreement (Junior Notes)
THIS NOTE PURCHASE AGREEMENT (the "Agreement") is dated as of March 8,
2006, between DynTek, Inc., a Delaware corporation (the "Company"), and the
purchasers named in the attached Schedule I (each individually a "Purchaser" and
collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to an
aggregate of $6,700,000 in principal amount of its senior secured promissory
notes; and
WHEREAS, the Company wishes to issue and sell to a Purchaser up to an
aggregate of $3,000,000 in principal amount of a junior secured promissory note;
and
WHEREAS, the Purchasers, severally, wish to purchase the notes on the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND TERMS OF NOTES
SECTION 1.01. THE SENIOR NOTES. The Company has authorized the issuance and
sale to the Purchasers, in the respective amounts set forth in the Schedule of
Purchasers attached hereto in Schedule I, of the Company's Senior Secured
Promissory Notes, due March 1, 2010 (the "Senior Note Maturity Date"), in the
original aggregate principal amount of up to $6,700,000. The Senior Notes will
be substantially in the form set forth in Exhibit A hereto and are herein
referred to individually as a "Senior Note" and collectively as the "Senior
Notes," which terms will also include any notes delivered in exchange or
replacement therefor.
SECTION 1.02. THE JUNIOR NOTE. The Company has authorized the issuance and
sale to the Purchaser, set forth in the Schedule of Purchasers attached hereto
in Schedule I, of the Company's Junior Secured Convertible Promissory Note (the
"Junior Note", and collectively with the Senior Notes referred to as the
"Notes," which term will also include any notes delivered in exchange or
replacement therefor), due March 1, 2011 (the "Junior Note Maturity Date"), in
the original aggregate principal amount of up to $3,000,000. The Junior Note
will be substantially in the form set forth in Exhibit F hereto.
SECTION 1.03. PURCHASE AND SALE OF NOTES. The Company agrees to issue and
sell to the Purchasers, and, subject to and in reliance upon the
representations, warranties, terms and conditions of this Agreement, the
Purchasers, severally and not jointly, agree to purchase, the Notes set forth
opposite their respective names in the Schedule of Purchasers attached as
Schedule I for the aggregate purchase price set forth therein. The consideration
to be paid for the Notes will consist of $9,700,000 cash. The closing of such
purchase and sale (the "Closing") will be held at the office of Paul, Hastings,
▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇, on March 8,
2006 (the "Closing Date") at 10:00 A.M., Pacific Standard Time, or on such other
date and at such time as may be mutually agreed upon. At the Closing, the
Company will issue and deliver to each Purchaser one Senior Note or one Junior
Note, as the case may be, payable to the order of such Purchaser, in the
principal amount set forth opposite such Purchaser's name in the Schedule of
Purchasers attached as Schedule I against delivery to the Company of a check
payable to the order of the Company, in the amount set forth opposite the name
of such Purchaser under the heading "Aggregate Purchase Price for Notes" on
Schedule I, less the Purchaser's reasonable estimated expenses to be paid by the
Company pursuant to Section 7.01, transference of such sum to the account of the
Company by wire transfer, or delivery or transference of such sum to the Company
by any combination of such methods of payment.
SECTION 1.04. PAYMENTS AND ENDORSEMENTS. Payments of principal and interest
on the Notes will be made directly by check duly mailed or delivered to the
Purchasers at their addresses referred to in the Schedule of Purchasers attached
as Schedule I or made to the account of the Purchaser by wire transfer referred
to in the Schedule of Purchasers attached as Schedule I or indicated in any
notice delivered by a Purchaser to the Company, without any presentment or
notation of payment, except that prior to any transfer of any Note, the holder
of record will endorse on such Note a record of the date to which interest has
been paid and all payments made on account of principal of such Note.
SECTION 1.05. INTEREST RATE FOR SENIOR NOTE; PAYMENT OF PRINCIPAL AND
INTEREST FOR SENIOR NOTE. The Senior Notes will accrue interest at the rate of
8% per annum if paid in cash or 11% per annum if paid in kind. The Company in
its sole discretion may elect to pay in cash or in kind until March 31, 2009,
after which interest will be paid in cash. Interest will be due and payable
quarterly in arrears on the last day of each fiscal quarter (each, a "Senior
Note Interest Payment Date"), with the first interest payment due June 30, 2006.
If the Company chooses to make interest payments in kind, the amount of accrued
interest to be so paid will be added to the principal amount of the Senior Notes
on the applicable Senior Note Interest Payment Date. Principal will be amortized
over three years and payable in equal monthly installments on the last day of
each month beginning on March 31, 2009. The Senior Notes and all accrued but
unpaid interest thereon shall be due and payable in full at the Senior Note
Maturity Date unless earlier redeemed pursuant to the terms and conditions set
forth in Section 1.06 herein.
SECTION 1.06. PREPAYMENT OF SENIOR NOTES. The Senior Notes will be payable
by the Company prior to the Senior Note Maturity Date as follows (all
prepayments made by the Company to the Senior Note holders under this Agreement
shall be made by wire transfer of immediately available funds in the lawful
currency of the United States without setoff or withholding of any kind):
(A) Voluntary Prepayment by the Company. At any time until the Senior
Notes have been repaid in full, the Company may, at its sole option, redeem the
entire outstanding principal amount of the Senior Notes (including any and all
accrued but unpaid interest on such principal amount) through the date of
repayment on such principal amount (such entire outstanding principal amount,
plus all such accrued but unpaid interest, hereinafter referred to for purposes
of this Section 1.06 as the "Redemption Amount") by paying to the holders of the
Senior Notes 105% of the Redemption Amount, with such payments to be apportioned
ratably among the Purchasers or their transferees according to the unpaid
principal balance and accrued but unpaid interest thereon to which such payments
relate.
(B) Prepayment on Change of Control. At any time until the Senior
Notes have been repaid in full, the Company will redeem the Senior Notes in
their entirety upon the occurrence of a Change of Control by paying to the
holders of the Senior Notes 105% of the Redemption Amount on the closing date of
the Change of Control. Such payments will be apportioned ratably among the
Senior Note holders according to the unpaid principal balance and accrued but
unpaid interest thereon to which such payments relate. For purposes of this
Section 1.06(b), "Change of Control" means the event of (i) a merger,
consolidation, recapitalization or share exchange in which the holders of the
voting stock of the Company immediately prior to such merger, consolidation,
recapitalization or share exchange will not own 50% or more of the voting stock
of the continuing or surviving corporation or other entity, or the parent
company of such corporation or other entity, immediately after such merger,
consolidation, recapitalization or share exchange, (ii) the sale, assignment,
conveyance, transfer, lease or other disposition (other than the grant of a
security interest) of all or substantially all of the assets of Company to any
person or group of related persons, or (iii) any sale or other disposition of
the voting stock of the Company representing 50% or more of the total voting
power of the Company's outstanding capital stock in a single transaction or a
series of related transactions to any person, or group of related persons;
provided, however that none of the following events shall be deemed to be a
Change of Control for
purposes of this Agreement: (A) the Company's issuance of shares of its Common
Stock, $0.0001 par value (the "Common Stock") to any of its existing unsecured
trade creditors set forth on Schedule II which opt to convert trade debt (as of
the date of this Agreement) up to the amount set forth on Schedule II into
Common Stock at a conversion rate of $0.02 per share within three business days
of the date immediately following the effective date of the Reverse Stock Split
(as defined below in Section 1.15(g)), or June 30, 2006, whichever is earlier,
pursuant to a Settlement and Release Agreement substantially in the form set
forth as Exhibit B; and (B) the Company's issuance of Common Stock within the
earlier of (i) three business days of the effective date of the Reverse Stock
Split, or (ii) June 30, 2006, pursuant to a conversion and settlement agreement,
substantially in the form of Exhibit C hereto (a "Conversion and Settlement
Agreement"), with each and all of the holders (all of such holders are set forth
on Schedule III) of the Company's: (a) 9% Senior Subordinated Convertible Notes
dated as of October 15, 2004 (the "9% Notes"), (b) Amended and Restated 9%
Senior Subordinated Convertible Notes dated as of October 26, 2005 (the "Amended
9% Notes"), (c) Secured Promissory Notes dated as of October 26, 2005 (the
"Bridge Notes"), and (d) Secured Promissory Notes dated as of September 20, 2005
issued to the former shareholders of Integration Technologies, Inc. (the
"Acquisition Notes" and together with the 9% Notes, the Amended 9% Notes and the
Bridge Notes, the "Outstanding Notes").
(C) Prepayment on Sale of Assets. At any time until the Senior Notes
have been repaid in full, the Company will redeem all or a portion of the
Redemption Amount immediately upon the occurrence of a Substantial Asset Sale as
follows: Upon the occurrence of a Substantial Asset Sale, (i) 50% of the gross
proceeds of such sale (the "Asset Sale Prepayment Amount") will be paid to the
Purchasers or subsequent transferees of the Senior Notes in respect of the
Redemption Amount; and (ii) a prepayment penalty equal to 2% of the Asset Sale
Prepayment Amount will be paid by the Company to the Purchasers or subsequent
transferees of the Senior Notes. Such payments will be apportioned ratably among
the Senior Note holders according to the unpaid principal balance and accrued
but unpaid interest thereon to which such payments relate. For purposes of this
Section 1.06(c), a "Substantial Asset Sale" is any voluntary or involuntary sale
or series of sales of the Company's assets (including casualty losses or
condemnations) which generate(s) (i) gross proceeds of $100,000 or more in the
case of a single-asset sale, or (ii) aggregate gross proceeds of $100,000 or
more over any 12-month period in the case of a series of asset sales.
SECTION 1.07. WARRANTS FOR SENIOR NOTES. At the Closing, the Company will
issue to the Purchasers of Senior Notes pro rata, according to each Purchaser's
proportion of the aggregate principal amount of the Senior Notes, warrants for
the purchase of an aggregate of 19.9% of the Common Stock of the Company,
exercisable at $0.001 per share, in the form set forth as Exhibit D.
SECTION 1.08. INTEREST RATE FOR JUNIOR NOTE; PAYMENT OF PRINCIPAL AND
INTEREST FOR JUNIOR NOTE. The Junior Note will accrue interest at the rate of
ten percent (10%) per annum, compounding quarterly. The said interest shall
become due quarterly in arrears and shall be payable on the last day of each
fiscal quarter (each, an "Interest Payment Date") in respect of the immediately
preceding completed fiscal quarter. The first Interest Payment Date will be June
30, 2006. At the Company's sole option, all interest payments due and payable
through June 30, 2009 may be paid in kind at the rate of fourteen percent (14%)
per annum, compounding quarterly, in which case the accrued interest will be
added to the principal amount of the Junior Note on the applicable Interest
Payment Date, and interest will accrue on the aggregate principal amount. All
interest payments due and payable after June 30, 2009 must be paid in cash. The
Junior Note shall be due and payable in full at the Junior Note Maturity Date
unless earlier converted in accordance with Section 3 of the Junior Note.
SECTION 1.09. REDEMPTION OF JUNIOR NOTE. Until March 1, 2010, the Company
may not prepay the Junior Note in whole or in part without the prior written
consent of the holder thereto, which may be given or withheld in such holder's
sole discretion. At anytime from March 1, 2010 until the
Junior Note Maturity Date, the Company may prepay this Junior Note in whole or
in part at any time without penalty.
SECTION 1.10. CONVERSION OF JUNIOR NOTE. All or any part of the principal
plus accrued but unpaid interest on the Junior Note may be converted at any time
into a number of fully paid and nonassessable shares of Common Stock of the
Company, at the sole option of the holder of the Junior Note, pursuant to the
terms and conditions of conversion set forth in the Junior Note.
SECTION 1.11. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made
will be due on a Saturday, Sunday or a public holiday under the laws of the
State of California, such payment may be made on the next succeeding business
day, and such extension of time will in such case be included in the computation
of payment of interest due.
SECTION 1.12. REGISTRATION OF NOTES. The Company will maintain at its
principal office a register of the Notes and will record therein the names and
addresses of the registered holders of the Notes, the address to which notices
are to be sent and the address to which payments are to be made as designated by
the registered holder if other than the address of the holder, and the
particulars of all transfers, exchanges and replacements of Notes. No transfer
of a Note will be valid unless made on such register for the registered holder
or his executors or administrators or his or their duly appointed attorney, upon
surrender therefor for exchange as hereinafter provided, accompanied by an
instrument in writing, in form and execution reasonably satisfactory to the
Company. Each Note issued hereunder, whether originally or upon transfer,
exchange or replacement of a Note or Notes, will be registered on the date of
execution thereof by the Company and will be dated the date to which interest
has been paid on such Notes or Note. The registered holder of a Note will be
that person in whose name the Note has been so registered by the Company. A
registered holder will be deemed the owner of a Note for all purposes of this
Agreement and, subject to the provisions hereof, will be entitled to the
principal and interest evidenced by such Note free from all equities or rights
of setoff or counterclaim between the Company and the transferor of such
registered holder or any previous registered holder of such Note.
SECTION 1.13. TRANSFER AND EXCHANGE OF NOTES. The registered holder of any
Note or Notes may, prior to maturity or prepayment thereof, surrender such Note
or Notes at the principal office of the Company for transfer or exchange;
provided, however, the registered holder of any Note or Notes will not transfer
any such Note (a) to any person or entity which is not an "accredited investor"
within the meaning of Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"), (b) to any person or entity that could result in the loss of
the exemption from registration under the Securities Act applicable to the
original sale of the Notes, as determined in the reasonable discretion of the
Company pursuant to a written opinion of the Company's counsel, and (c) so long
as no Event of Default has occurred, without the consent of the Company, which
consent will not be unreasonably withheld. Within a reasonable time after notice
to the Company from a registered holder of its intention to make such exchange
and without expense (other than transfer taxes, if any) to such registered
holder, subject to the Company's consent, if such consent is required by this
Section 1.13, the Company will issue in exchange therefor another Note or Notes,
in such denominations as requested by the registered holder, for the same
aggregate principal amount as the unpaid principal amount of the Note or Notes
so surrendered and having the same maturity and rate of interest, containing the
same provisions and subject to the same terms and conditions as the Note or
Notes so surrendered. Each new Note will be made payable to such person or
persons, or registered assigns, as the registered holder of such surrendered
Note or Notes may designate, and such transfer or exchange will be made in such
a manner that no gain or loss of principal or interest will result therefrom.
SECTION 1.14. REPLACEMENT OF NOTES. Upon receipt of evidence satisfactory
to the Company of the loss, theft, destruction or mutilation of any Note and, if
requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity bond or other
agreement or security reasonably satisfactory to the Company, or, in the case of
any such mutilation, upon surrender and cancellation of such Note, the Company
will issue a new Note, of like tenor and amount and dated the date to which
interest has been paid, in lieu of such lost, stolen, destroyed or mutilated
Note; provided, however, if any Note of which a Purchaser whose name is set
forth in the Schedule of Purchasers attached as Schedule I, its nominee, or any
of its partners is the registered holder is lost, stolen or destroyed, the
affidavit of the President, Treasurer or any Assistant Treasurer or any other
authorized representative of the registered holder setting forth the
circumstances with respect to such loss, theft or destruction will be accepted
as satisfactory evidence thereof, and no indemnification bond or other security
will be required as a condition to the execution and delivery by the Company of
a new Note in replacement of such lost, stolen or destroyed Note other than the
registered holder's written agreement to indemnify the Company.
SECTION 1.15. EVENTS OF DEFAULT. If any of the following events ("Events of
Default") shall occur and be continuing:
(A) The Company will fail to pay any installment of principal of, or
interest due on, any of the Notes within five (5) calendar days of the date such
installment is due;
(B) Any material representation or warranty made by the Company in
this Agreement or the Security and Pledge Agreements (as hereinafter defined),
or by the Company (or any officers of the Company) in any certificate,
instrument or written statement contemplated by or made or delivered pursuant to
or in connection with this Agreement or the Security and Pledge Agreements will
prove to have been incorrect when made in any material respect;
(C) The Company will fail to perform or observe any other material
term, covenant or agreement contained in this Agreement, the Security and Pledge
Agreements, the Notes or any agreement executed and delivered by the Company in
connection with this Agreement or the Security and Pledge Agreements on its part
to be performed or observed and any such failure remains unremedied for ten (10)
business days after written notice thereof will have been given to the Company
by any registered holder of the Notes;
(D) The Company will fail to pay any indebtedness in excess of an
aggregate of $100,000 for borrowed money (other than as evidenced by the Notes)
owing by the Company, or any interest or premium thereon, when due (or, if
permitted by the terms of the relevant document, within any applicable grace
period), whether such indebtedness will become due by scheduled maturity, by
required prepayment, by acceleration, by demand or otherwise, or will fail to
perform any term, covenant or agreement on its part to be performed under any
agreement or instrument evidencing or securing or relating to any indebtedness
in excess of an aggregate of $100,000 owing by the Company when required to be
performed (or, if permitted by the terms of the relevant document, within any
applicable grace period), if the effect of such failure to pay or perform is to
accelerate, or to permit the holder or holders of such indebtedness, or the
trustee or trustees under any such agreement or instrument to accelerate, the
maturity of such indebtedness, unless such failure to pay or perform will be
waived by the holder or holders of such indebtedness or such trustee or
trustees;
(E) The Company will be involved in financial difficulties as
evidenced (i) by its admitting in writing its inability to pay its debts
generally as they become due; (ii) by its commencement of a voluntary case under
Title 11 of the United States Code as from time to time in effect, or by its
authorizing, by appropriate proceedings of its Board of Directors or other
governing body, the commencement of such a voluntary case which is not dismissed
within sixty (60) days; (iii) by its filing an answer or other pleading
admitting or failing to deny the material allegations of a petition filed
against it commencing an involuntary case under said Title 11, or seeking,
consenting to or acquiescing in the
relief therein provided, or by its failing to controvert timely the material
allegations of any such petition; (iv) by the entry of an order for relief in
any involuntary case commenced under said Title 11; (v) by its seeking relief as
a debtor under any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors, or by its consenting to or acquiescing
in such relief; (vi) by the entry of an order by a court of competent
jurisdiction (a) finding it to be bankrupt or insolvent, (b) ordering or
approving its liquidation, reorganization or any modification or alteration of
the rights of its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property;
(F) The Company shall fail to perform any of its obligations under
Section 5.21, Section 5.22, Section 5.23 or Article VI of this Agreement;
(G) The Company shall fail to effect a one-for-ten reverse stock split
of its Common Stock (the "Reverse Stock Split") within 90 days following the
Closing Date;
(H) The Company shall fail to reduce Chief Executive Officer ▇▇▇▇▇▇
▇▇▇▇▇▇'▇ salary by $100,000 ratably over the 48 months within 15 days following
the Closing Date, with such reduction to be set forth in a written agreement
between the Company and ▇▇. ▇▇▇▇▇▇ in form and substance reasonably satisfactory
to the Purchasers;
(I) The Company shall fail to complete the conversion of all of the
obligations outstanding under the Outstanding Notes into Common Stock of the
Company at a conversion rate of $0.02 per share on or before the earlier of (a)
three business days following the effective date of the Reverse Stock Split, or
(b) June 30, 2006;
(J) Any judgment, writ, warrant of attachment or execution or similar
process will be issued or levied against a substantial part of the property of
the Company and such judgment, writ, or similar process will not be released,
vacated or fully bonded within sixty (60) days after its issue or levy; or
(K) The Company shall fail to effect, as set forth on Schedule C of
the respective Security and Pledge Agreements, the termination within (i) ten
(10) calendar days of the Closing Date of each of those certain financing
statements on file by Laurus Master Fund, Ltd., ▇.▇. ▇▇▇▇▇▇, ▇▇. Trust, ▇▇▇▇
▇▇▇▇▇▇▇▇, and ▇▇▇▇ ▇▇▇▇▇▇▇▇ in any jurisdiction purporting to evidence a
security interest in any assets of the Company or its affiliates and (ii) thirty
(30) calendar days of the Closing Date of any and all other financing statements
on file in any jurisdiction purporting to evidence a security interest in any
assets of the Company or its affiliates, other than the financing statements
evidencing the security interests of the Purchasers pursuant to the Security and
Pledge Agreements.
then, and in any such event, any holder of any Note may, by notice to the
Company, declare the entire unpaid principal amount of the Note, all interest
accrued and unpaid thereon and all other amounts payable under this Agreement to
be forthwith due and payable, whereupon the Note, all such accrued interest and
all such amounts will become and be forthwith due and payable (unless there will
have occurred an Event of Default under subsection 1.15(e) in which case all
such amounts will automatically become due and payable), without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that, as of the
Closing and except as set forth in the Disclosure Schedule attached as Schedule
IV (which Disclosure Schedule makes explicit reference to the particular
representation or warranty as to which exception is taken, which in each case
will constitute the sole representation and warranty as to which such exception
will apply):
SECTION 2.01. ORGANIZATION, QUALIFICATIONS AND CORPORATE POWER.
(A) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification, except where the failure to be so
licensed or qualified does not have a material adverse effect on the Company's
business or financial condition. The Company has the corporate power and
authority to own and hold its properties and to carry on its business as now
conducted and as proposed to be conducted, to execute, deliver and perform this
Agreement and the Security and Pledge Agreements, and to issue, sell and deliver
the Notes and the Warrants.
(B) The Company has no subsidiaries, other than as set forth on
Schedule IV. The Company does not (i) own of record or beneficially, directly or
indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity, other than as set forth on
Schedule IV.
SECTION 2.02. AUTHORIZATION OF AGREEMENTS, ETC.
(A) The execution and delivery by the Company of this Agreement and
the Security and Pledge Agreements, the performance by the Company of its
obligations hereunder and thereunder, the issuance, sale and delivery of the
Notes and the Warrants have been duly authorized by all requisite corporate
action and will not (i) violate any provision of law, any order of any court or
other agency of government, (ii) violate the Certificate of Incorporation or the
By-laws of the Company, each as amended, (iii) violate any provision of any
indenture, agreement or other instrument to which the Company or any of its
properties or assets is bound, (iv) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or (v) result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company, except in the
case of clauses (i), (iii), (iv) and (v), as would not have a material adverse
effect on the Company.
(B) The Notes and the Warrants have been duly authorized and, when
issued in accordance with this Agreement, will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the
Company. Except as set forth on Schedule IV, the issuance, sale and delivery of
the Notes and the Warrants are not subject to any preemptive right of
shareholders of the Company or to any right of first refusal or other right in
favor of any person.
SECTION 2.03. VALIDITY. Each of this Agreement, the Security and Pledge
Agreements and the Notes and the Warrants have been duly executed and delivered
by the Company and constitute the legal, valid and binding obligations of the
Company, enforceable in accordance with their terms.
SECTION 2.04. AUTHORIZED CAPITAL STOCK. The authorized capital stock of the
Company consists of 450,000,000 shares of Common Stock, $.0001 par value per
share, and 10,000,000 shares of preferred stock, $0.0001 par value per share
("Preferred Stock"). As of the date of this Agreement, 81,164,636 shares of
Common Stock and no shares of Preferred Stock were validly issued and
outstanding, fully paid and nonassessable. Except as disclosed in SEC Reports
(as defined below), there are no options, warrants and convertible securities of
the Company, and any other rights to acquire securities of the Company. All
outstanding securities of the Company are validly issued, fully paid and
nonassessable. No stockholder of the Company is entitled to any preemptive
rights with respect to the purchase of or sale of any securities of the Company.
SECTION 2.05. SEC FILINGS, OTHER FILINGS AND REGULATORY COMPLIANCE. Since
January 1, 2002, the Company has timely made all filings required to be made by
it under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company has delivered or made accessible to the Purchasers true, accurate
and complete copies of (a) the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2005, (b) the Company's Quarterly Reports on Form
10-Q for the fiscal quarters ended September 30, 2005 and December 31, 2005, (c)
the Company's definitive proxy statement dated November 17, 2005 relating to its
Annual Meeting of Stockholders, and (d) all the Company's Current Reports on
Form 8-K filed since July 1, 2005 (collectively, the "SEC Reports"). The SEC
Reports when filed, complied in all material respects with all applicable
requirements of the Exchange Act and the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002, if and to
the extent applicable, and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder applicable to the SEC Reports. None
of the SEC Reports, at the time of filing, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading in light of
the circumstances in which they were made. The Company has taken, or will have
taken prior to the Closing, all necessary actions to maintain eligibility of its
Common Stock for trading on OTC Bulletin Board under all currently effective
inclusion requirements. Each balance sheet included in the SEC Reports
(including any related notes and schedules) fairly presents in all material
respects the consolidated financial position of the Company as of its date, and
each of the other financial statements included in the SEC Reports (including
any related notes and schedules) fairly presents in all material respect the
consolidated results of operations of the Company for the periods or as of the
dates therein set forth in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods indicated or as a
result of year end adjustments and except as may be indicated in the notes
thereto or, in the case of interim consolidated financial statements, where
information and footnotes contained in such financial statements are not
required to be in compliance with GAAP). Such financial statements included in
the SEC Reports were, at the time they were filed, consistent with the books and
records of the Company in all material respects and complied as to form in all
material respects with then applicable accounting requirements and with the
rules and regulations of the SEC with respect thereto. The Company keeps
accounting records in which all material assets and liabilities, and all
material transactions, including off-balance sheet transactions, of the Company
are recorded in accordance with GAAP.
SECTION 2.06. GOVERNMENTAL APPROVALS. Subject to the accuracy of the
representations and warranties of the Purchasers set forth in Article III, no
registration or filing with, or consent or approval of or other action by, any
federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the issuance, sale and delivery of the Notes and the Warrants,
other than filings pursuant to state securities laws (all of which filings have
been made by the Company, other than those which are required or permitted to be
made after the Closing and which will be duly made on a timely basis) in
connection with the sale of the Notes and the Warrants.
SECTION 2.07. OFFERING OF THE NOTES. Except for the filing of a
registration statement on Form S-1 with the SEC on November 25, 2005 in
connection with a proposed rights offering, which registration statement was
withdrawn as of February 3, 2006, neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
Securities Act of the issuance of the Notes and the Warrants to the Purchasers.
Based upon the policy position of the SEC, as described in the SEC staff's
No-Action Letters dated June 26, 1990 to Black Box Incorporated and February 28,
1992 to Squadron, Ellenoff, Pleasant & ▇▇▇▇▇▇, and the Purchasers'
representations in Article III, the issuance of the Notes and the Warrants to
the Purchasers will not be integrated with any other issuance of the Company's
securities (past, current or future) for purposes of the Securities Act.
SECTION 2.08. MATERIAL CHANGES. Except as set forth in Schedule IV attached
hereto, since June 30, 2005, there has not been (i) any direct or indirect
redemption, purchase or other acquisition by the Company of any shares of Common
Stock; (ii) any declaration, setting aside or payment of any dividend or other
distribution by the Company with respect to the Common Stock; (iii) any material
liabilities (absolute, accrued or contingent) incurred or assumed by the
Company, other than current liabilities incurred in the ordinary course of
business, liabilities under contracts entered into in the ordinary course of
business, purchase price payment obligations incurred in connection with the
acquisition of Red Rock Communications Solutions, Inc. and Integration
Technologies, Inc. and liabilities not required to be reflected on the Company's
financial statements pursuant to GAAP; or (iv) any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof, and
the filing of or agreement to give any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction in connection with such
mortgage, pledge, security interest, encumbrance, lien or charge) (each, a
"Lien") or adverse claim on any of the Company's properties or assets, except
for Liens for taxes not yet due and payable, interest of lessors under operating
capital leases, purchase money liens, amounts deposited for security for surety
bonds, Liens incurred in connection with the Company's credit facility with New
England Technology Finance, LLC, Liens incurred in the ordinary course of
business or Liens that are not material in amount to the Company and its
subsidiaries.
SECTION 2.09. LITIGATION. Except as disclosed in the Schedule IV attached
hereto, there is no action, suit, proceeding or investigation pending or, to the
Company's knowledge, currently threatened against the Company or any of its
subsidiaries that questions the validity of this Agreement or the right of the
Company to enter into it, or to consummate the transactions contemplated hereby,
or that could reasonably be expected to result, either individually or in the
aggregate, in a material adverse effect on the Company. The foregoing includes,
without limitation, actions pending or, to the Company's knowledge, threatened
involving the prior employment of any of the Company's employees or their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers. Neither the Company nor
any of its subsidiaries is a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or governmental authority.
Except as disclosed in Schedule IV attached hereto, there is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or any of its subsidiaries currently intends to
initiate, which could reasonably be expected to have a material adverse effect.
SECTION 2.10. OWNERSHIP OF PROPERTY; LIENS. The Company and each of its
subsidiaries has good and marketable title in fee simple, or a valid leasehold
interest in, all of its real property; and good title to, or a valid leasehold
interest in, all of its other property, and none such property is subject to any
Lien except as set forth on Schedule IV attached hereto.
SECTION 2.11. INTELLECTUAL PROPERTY RIGHTS. To the best of its knowledge,
the Company owns or possesses the licenses or rights to use all patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks,
trademark applications, service marks, service names, trade names and copyrights
necessary to enable it to conduct its business as now operated (the
"Intellectual Property"). Except as set forth in Schedule IV attached hereto,
there are no material outstanding options, licenses or agreements relating to
the Intellectual Property, nor is the Company bound by or a party to any
material options, licenses or agreements relating to the patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks,
trademark applications, service marks, service names, trade names or copyrights
of any other person or entity. Except as set forth in Schedule IV attached
hereto, there is no claim or action or proceeding pending or, to the Company's
knowledge, threatened that challenges the right of the Company with respect to
any Intellectual Property. Except as set forth in Schedule IV attached hereto,
to the knowledge of the Company, the Company's Intellectual Property does not
infringe any intellectual property rights of any other person which, if the
subject of an unfavorable decision, ruling or finding would have a material
adverse effect.
SECTION 2.12. INSURANCE. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged.
SECTION 2.13. BROKERS. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.14. NON-OPERATIONAL SUBSIDIARIES. Neither ▇▇▇▇▇▇▇▇▇.▇▇▇, Inc.,
TekInsight e-Government Services, Inc., nor TekInsight Research, Inc. operates
any business, nor does any such entity own any material assets.
SECTION 2.15. FEDERAL RESERVE REGULATIONS. The Company is not engaged in
the business of extending credit for the purpose of purchasing or carrying
margin securities (within the meaning of Regulation G of the Board of Governors
of the Federal Reserve System), and no part of the proceeds of the Notes will be
used to purchase or carry any margin security or to extend credit to others for
the purpose of purchasing or carrying any margin security or in any other manner
which would involve a violation of any of the regulations of the Board of
Governors of the Federal Reserve System.
SECTION 2.16. OFFICE HEADQUARTERS. The sole lease agreement now currently
in full force and effect for the Company's principal place of business is that
certain Office Lease Agreement, made and entered into as of the 21st day of
July, 2003, by and between CA-▇▇▇▇▇▇▇▇▇ Corporate Center Limited Partnership, a
Delaware limited partnership, as landlord, and Integration Technologies, Inc., a
California corporation, tenant (as amended, supplemented, or otherwise modified
from time to time) (the "Office Lease").
SECTION 2.17. REPRESENTATIONS COMPLETE. The representations and warranties
made by the Company in this Agreement, the statements made in any certificates
furnished by the Company pursuant to this Agreement, and the statements made by
the Company in any documents mailed, delivered or furnished to the Purchasers in
connection with this Agreement, taken as a whole, do not contain and will not
contain, as of their respective dates and as of the Closing Date, any
misstatements of material fact or omit to state any material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants (except, with respect to
the first sentence of (f) below, as to which ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III and Trust A-4
- ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, make no representation or warranty) to the Company that:
(A) it is a "large institutional accredited investor" as such term is
used in the SEC staff's No-Action Letter dated February 28, 1992 to Squadron,
Ellenoff, Pleasant & ▇▇▇▇▇▇, or, if a Purchaser is not an institution, it
beneficially owns and invests on a discretionary basis at least $100,000,000 in
securities of issuers that are not affiliated with such Purchaser, and was not
organized for the specific purpose of acquiring the Notes;
(B) it has sufficient knowledge and experience in investing in
companies similar to the Company in terms of the Company's stage of development
so as to be able to evaluate the risks and merits of its investment in the
Company and it is able financially to bear the risks thereof;
(C) it has had an opportunity to discuss the Company's business,
management and financial affairs with the Company's management;
(D) the Notes being purchased by it are being acquired for its own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof;
(E) it understands that (i) the Notes have not been registered under
the Securities Act, by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
or Rule 505 or 506 promulgated under the Securities Act, (ii) the Notes must be
held indefinitely unless a subsequent disposition thereof is registered under
the Securities Act or is exempt from such registration, (iii) the Notes will
bear a legend to such effect and (iv) the Company will make a notation on its
transfer books to such effect;
(F) in the case of SACC Partners, L.P., all limited partnership action
on the part of such Purchaser and its partners necessary for the performance of
such Purchaser's obligations under this Agreement and the Security and Pledge
Agreements, and the transactions contemplated hereby and thereby, will be taken
prior to the Closing. This Agreement and the Security and Pledge AgreementS are
valid, binding and enforceable obligations of Purchaser, subject to applicable
bankruptcy, insolvency, reorganization or similar laws relating to or affecting
the enforcement of creditor's rights and to the availability of the remedy of
specific performance. The Purchaser has all requisite legal and limited
partnership power to execute and deliver this Agreement and the Security and
Pledge Agreements;
(G) it understands that (i) the Notes are being offered and sold to
Purchaser in reliance upon specific exemptions from the registration
requirements of United States federal and state securities laws, and (ii) that
the Company is relying upon the truth and accuracy of, and Purchaser's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of Purchaser to acquire the
Notes;
(H) The Company or its counsel have made available all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Notes which have been specifically
requested by such Purchaser. Each Purchaser has been afforded the opportunity to
ask questions of the Company, was permitted to meet with the Company's officers
and has
received what such Purchaser believes to be complete and satisfactory answers to
any such inquiries. Neither such inquiries nor any other due diligence
investigation conducted by the Purchasers or any of their respective
representations will modify, amend or affect such Purchaser's right to rely on
the Company's representations and warranties contained herein. Each Purchaser
understands that such Purchaser's investment in the Securities involves a high
degree of risk, including without limitation the risks and uncertainties
disclosed in the SEC Documents. Each Purchaser acknowledges it has reviewed the
disclosures presented under the caption "Risk Factors" in the Company's Form
10-Qs and Form 10-Ks;
(I) it understands that no United States federal or state agency or
any other government or governmental agency has passed upon or made any
recommendation or endorsement of the Notes; and
(J) it is a resident of the jurisdiction set forth under Purchaser's
name on Schedule I hereto.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Notes being
purchased by it on the Closing Date is, at its option, subject to the
satisfaction, on or before the Closing Date of the following conditions:
(A) SECURITY AND PLEDGE AGREEMENTS. A Security and Pledge Agreement by
and among the Company, DynTek Services, Inc., and the holders of the Senior
Notes, in the form attached as Exhibit E (the "Senior Security and Pledge
Agreement"), and all related financing statements and a Security and Pledge
Agreement by and among the Company, DynTek Services, Inc. and the holders of the
Junior Note, in the Form attached as Exhibit G (the "Junior Security and Pledge
Agreement", and collectively with the Senior Security and Pledge Agreement, the
"Security and Pledge Agreements") and other similar instruments and documents,
will have been executed and delivered to the Purchasers by a duly authorized
officer of the Company and a duly authorized officer of each of the subsidiaries
of the Company party thereto.
(B) LEGAL OPINION. The Purchasers will have received an opinion of the
Company's counsel, dated the Closing Date, with respect to legal matters
customary for transactions of this type, in a form reasonably acceptable to the
Purchasers.
(C) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties contained in Article II will be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date (except to
the extent that the representation or warranty speaks to a specific date), and
the President and Chief Financial Officer of the Company will have certified to
such effect to the Purchasers in writing.
(D) PERFORMANCE. The Company will have performed and complied in all
material respects with all covenants and agreements contained herein required to
be performed or complied with by it prior to or at the Closing Date and the
President and Chief Financial Officer of the Company will have certified to the
Purchasers in writing to such effect and to the further effect that all of the
conditions set forth in this Article IV have been satisfied.
(E) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto will be satisfactory in
form and substance to the Purchasers and their counsel, and the Purchasers and
their counsel will have received all such counterpart originals or certified or
other copies of such documents as they reasonably may request.
(F) SUPPORTING DOCUMENTS. The Purchasers and their counsel will have
received copies of the following documents:
(i) (A) the Certificate of Incorporation of the Company, as
amended, certified as of a recent date by the Secretary of State of the State of
Delaware, and (B) a certificate of said Secretary dated as of a recent date as
to the due incorporation and good standing of the Company, the payment of all
excise taxes by the Company and listing all documents of the Company on file
with said Secretary;
(ii) a certificate of the Secretary or an Assistant Secretary of
the Company dated the Closing and certifying: (A) that attached thereto is a
true and complete copy of the Bylaws of the Company as in effect on the date of
such certification; (B) that attached thereto is a true and complete copy of all
resolutions adopted by the Board of Directors of the Company authorizing the
execution, delivery and performance of this Agreement and the Security and
Pledge Agreements, the issuance, sale and delivery of the Notes and the
Warrants, and that all such resolutions are in full force and effect and are all
the resolutions adopted in connection with the transactions contemplated by this
Agreement; (C) that the Certificate of Incorporation of the Company has not been
amended since the date of the last amendment referred to in the certificate
delivered pursuant to clause (i)(B) above; and (D) to the incumbency and
specimen signature of each officer of the Company executing any of this
Agreement, the Security and Pledge Agreements, the Notes, the Warrants and any
certificate or instrument furnished pursuant hereto, and a certification by
another officer of the Company as to the incumbency and signature of the officer
signing the certificate referred to in this clause (ii); and
(iii) such additional supporting documents and other information
with respect to the operations and affairs of the Company as the Purchasers or
their counsel reasonably may request.
All such documents will be satisfactory in form and substance to the
Purchasers and their counsel.
(G) PREEMPTIVE AND FIRST REFUSAL RIGHTS. All stockholders of the
Company having any preemptive or first refusal rights with respect to the
issuance of the Notes will have irrevocably waived the same in writing or all
such rights will have expired.
(H) FEES OF PURCHASERS' COUNSEL. The Company will have paid in
accordance with Section 7.01 the fees and disbursements of each Purchaser's
counsel invoiced at the Closing; provided, however, that the Purchasers may
deduct such amounts from the consideration to be delivered to the Company for
the purchase of the Notes pursuant to Section 1.03.
(I) TERMINATION BY EITHER PURCHASER. Neither Purchaser will be
obligated to complete the purchase of the Notes if the other Purchaser elects
not to complete the transaction.
(J) CONVERSION OF EXISTING DEBT. On or before the Closing Date, the
Company shall have entered into a binding, written Conversion and Settlement
Agreement, substantially in the form of Exhibit C with each and every holder of
the 9% Notes, the Amended 9% Notes, the Bridge Notes and the Acquisition Notes,
respectively.
(K) BOARD OF DIRECTORS. Effective as of the Closing Date, ▇▇▇▇▇▇
▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ shall have resigned from the Company's Board of
Directors, and ▇▇▇▇ ▇▇▇▇ shall have been appointed to the Company's Board of
Directors.
(L) RENEGOTIATION OF TRADE DEBT. At least $575,000 in face amount of
the Company's existing unsecured trade debt set forth on Schedule II shall have
been renegotiated pursuant to the terms of a Settlement and Release Agreement
substantially in the form of Exhibit B, and such Settlement and Release
Agreements shall have been duly entered into by the Company with those certain
trade creditors pursuant to binding, written agreements.
(M) EQUITY INVESTMENT. A private placement of the Company's Common
Stock of at least $1,000,000 at a price per share of $0.02 by Network 1
Financial Services, Inc. (the "Private Placement") shall be subject to a
binding, written agreement with the Company which shall close before the closing
of this Agreement.
(N) WARRANT. The Company shall have issued to the Purchasers of Senior
Notes pro rata, according to each such Purchaser's proportion of the aggregate
principal amount of the Senior Notes, warrants for the purchase of an aggregate
of 19.9% of the Common Stock of the Company, exercisable at $0.001 per share, in
the form set forth as Exhibit D.
ARTICLE V
COVENANTS OF THE COMPANY
The Company agrees that, so long as any Notes are outstanding, except to
the extent compliance in any case or cases is waived in writing by the holders
of the entire aggregate unpaid principal amount of the Notes then outstanding:
SECTION 5.01. FINANCIAL STATEMENTS, REPORTS, ETC. The Company will furnish
to each Purchaser:
(A) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of such fiscal year and the related consolidated statements
of income for the fiscal year then ended, prepared in accordance with GAAP and
certified by a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the Company;
(B) within forty five (45) days after the end of each fiscal quarter
in each fiscal year a consolidated balance sheet of the Company and its
subsidiaries, if any, and the related consolidated statements of income
unaudited but prepared in accordance with generally accepted accounting
principles and certified by the Chief Financial Officer of the Company, such
consolidated balance sheet to be as of the end of such fiscal quarter and such
consolidated statements of income to be for such fiscal quarter and for the
period from the beginning of the fiscal year to the end of such fiscal quarter;
(C) promptly after the commencement thereof, notice of all actions,
suits, claims, proceedings, investigations and inquiries of the type described
in Section 2.09 of this Agreement that could materially adversely affect the
Company or any of its subsidiaries, if any;
(D) promptly upon sending, making available or filing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the SEC; and
(E) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of the
Company and its subsidiaries as such Purchaser reasonably may request.
Notwithstanding this Section 5.01, so long as the Company is required to
make filings pursuant to the Exchange Act and makes such filings in a timely
manner, the Company will be deemed to have furnished to the Purchasers the
financial statements and other reports required by this Section 5.01.
SECTION 5.02. CORPORATE EXISTENCE; MAINTENANCE OF BUSINESS. The Company
will, and will cause each of its subsidiaries to, preserve and maintain its
existence. The Company will, and will cause each of its subsidiaries to,
preserve and keep in force and effect all licenses, permits, franchises,
approvals, patents, trademarks, trade names, trade styles, copyrights, and other
proprietary rights necessary to the conduct of its business where the failure to
do so could reasonably be expected to have a material adverse effect.
SECTION 5.03. PROPERTIES, INSURANCE. The Company will maintain as to its
properties and business, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
will be deemed by the Company to be sufficient.
SECTION 5.04. USE OF PROCEEDS. The Company will use the proceeds from the
sale of the Senior Notes, less the amounts withheld pursuant to Section 7.01,
solely to repay all outstanding obligations of the Company to the Laurus Master
Fund Ltd,. as set forth on Schedule V. The Company will use the proceeds from
the sale of the Junior Note, less the amounts withheld pursuant to Section 7.01,
solely to repay any remaining outstanding obligations to the Laurus Master Fund,
Ltd. after the proceeds of the Senior Notes are depleted, with any remaining
proceeds from the Junior Notes to be used solely for the purposes set forth on
Schedule V.
SECTION 5.05. COMPLIANCE WITH LAWS. The Company will comply with all
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
SECTION 5.06. KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company will
keep adequate records and books of account, in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company, and in which, for
each fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business will be made.
SECTION 5.07. DIVIDENDS AND CERTAIN OTHER RESTRICTED PAYMENTS. The Company
will not, nor will it permit any of its subsidiaries to, (a) declare or pay any
dividends on or make any other distributions in respect of any class or series
of its capital stock or other equity interests or (b) directly or indirectly
purchase, redeem, or otherwise acquire or retire any of its capital stock or
other equity interests or any warrants, options, or similar instruments to
acquire the same.
SECTION 5.08. MATERIAL CONTRACTS. The Company will not, nor will it permit
any of its subsidiaries to, enter into any contract, agreement or business
arrangement which requires annual expenditures of $2,500,000 or more.
SECTION 5.09. CAPITAL EXPENDITURES. The Company will not, nor will it
permit any of its subsidiaries to, incur any Capital Expenditures other than in
the ordinary course consistent with past practice. For purposes of this
Agreement, "Capital Expenditures" means, with respect to any person or entity
for any period, the aggregate amount of all expenditures (whether paid in cash
or accrued as a liability) by such person or entity during that period for the
acquisition or leasing (pursuant to a capital lease) of fixed or capital assets
or additions to property, plant, or equipment (including replacements,
capitalized repairs, and improvements) which should be capitalized on the
balance sheet of such person or entity in accordance with GAAP.
SECTION 5.10. MERGERS, CONSOLIDATIONS AND ASSET SALES. The Company will
not, nor will it permit any of its subsidiaries to, be a party to any merger or
consolidation, or sell, transfer, lease or otherwise dispose of all or any
substantial part of its assets; provided, however, that the Company shall have
the sole discretion to discontinue its or any of its subsidiaries' Business,
Process Outsourcing, or BPO, services segment at any time. The Company will not,
nor will it permit any of its subsidiaries to sell, transfer, lease or otherwise
make any Substantial Asset Sale (as such term is defined in Section 1.06) for
consideration other than cash while the Notes or any part thereof remain
outstanding.
SECTION 5.11. ACQUISITIONS. The Company will not, nor will it permit any of
its subsidiaries to, directly or indirectly, acquire all or any substantial part
of the assets or business of any other entity or division thereof.
SECTION 5.12. PREPAYMENT OF INDEBTEDNESS. The Company will not, nor will it
permit any of its subsidiaries, to prepay any indebtedness for borrowed money;
provided, however, that this Section 5.12 will not prohibit the Company from
redeeming the Notes pursuant to the terms of this Agreement.
SECTION 5.13. ISSUANCE OF SHARES. The Company will not, nor will it permit
any of its subsidiaries to issue, assign, sell or transfer any shares of capital
stock or other equity interests of the Company or such subsidiary; provided,
however, that the foregoing will not operate to prevent (a) Liens on the capital
stock or other equity interests of subsidiaries of the Company pursuant to the
amended and restated Security and Pledge Agreements; (b) the issuance, sale, and
transfer to any person of any shares of Common Stock of the Company pursuant to
(i) the Private Placement or warrants issued in connection therewith or the
issuance by the Company of shares of Common Stock upon the exercise of such
warrants, (ii) execution and consummation of the terms of the Conversion and
Settlement Agreements, or (iii) the Settlement and Release Agreements; (c) the
issuance of the Junior Note to the Purchaser set forth on Schedule I hereto, or
the issuance of Common Stock upon conversion thereof; (d) the issuance by the
Company to the Purchasers of the warrants in the form set forth in Exhibit D
hereto, or the issuance by the Company of shares of Common Stock upon the
exercise of such warrants; (e) the issuance of options or rights to purchase
Common Stock under the Company's equity incentive plans, as amended, in effect
as of the date hereof; or (f) the issuance of shares upon the exercise or
conversion of securities exercisable or convertible into shares of the Company's
Common Stock that are outstanding as of the date hereof or otherwise permitted
to be issued under this Section 5.13.
SECTION 5.14. EXECUTIVE AND OFFICER COMPENSATION. The Company will not, nor
will it permit any of its subsidiaries to, grant any increase in the
compensation of officers or executive employees (excluding any such increase
required under a currently effective employment agreement by and between such
officer or executive employee and the Company).
SECTION 5.15. CHANGE IN THE NATURE OF BUSINESS. The Company will not, nor
will it permit any of its subsidiaries to, engage in any business or activity
other than the general nature of the business engaged in by it as of the Closing
Date or discontinue its engagement in any business or activity
engaged in by it as of the Closing Date; provided, however, that the Company
shall have the sole discretion to discontinue its or any of its subsidiaries'
BPO services segment at any time.
SECTION 5.16. RENEGOTIATION OF TRADE DEBT. The Company will continue to use
its reasonable best efforts to renegotiate the entire amount of its trade debt
set forth on Schedule II.
SECTION 5.17. REVERSE STOCK SPLIT. The Company will use its reasonable best
efforts to effect the Reverse Stock Split within 90 days following the Closing
Date.
SECTION 5.18. VOTING RIGHTS FOR WARRANTS AND JUNIOR NOTE. Unless
enforcement of this covenant is waived in writing by written notice to the
Company given by all of the Senior Note holders not later than thirty (30)
calendar days prior to the record date of the Company's next Annual Meeting of
Stockholders, the Company, at its next Annual Meeting of Stockholders will use
reasonable best efforts to obtain stockholder approval of an amendment to the
Company's Second Amended and Restated Certificate of Incorporation to confer
upon the holder of (i) the Warrants the power to vote, in respect to the
corporate affairs and management of the Company, that number of shares of Common
Stock into which such Purchaser's Warrant may then be exercised in accordance
with Section 221 of the General Corporation Law of the State of Delaware and
(ii) the Junior Note the power to vote, in respect to the corporate affairs and
management of the Company, that number of shares of Common Stock into which such
Junior Note may then be converted in accordance with Section 221 of the General
Corporation Law of the State of Delaware
SECTION 5.19. COMPLIANCE WITH SECURITY AND PLEDGE AGREEMENTS. The Company
will comply at all times with all of the terms and conditions of the Security
and Pledge Agreements.
SECTION 5.20. TERMINATION OF FINANCING STATEMENTS. Either within ten (10)
calendar days after the Closing Date or thirty (30) calendar days after the
Closing Date, as more specifically set forth on Schedule C of the respective
Security and Pledge Agreements, the Company will take all necessary actions to
terminate all financing statements in any jurisdiction which purport to evidence
a security interest in any asset of the Company or its affiliates in respect of
all entities set forth on Schedule C of the respective Security and Pledge
Agreements, including, without limitation, in favor of the Laurus Master Fund,
Ltd. or any affiliate thereof; provided, however, the Company will not terminate
any financing statement evidencing a security interest of any of the Purchasers
pursuant to the Security and Pledge Agreements.
SECTION 5.21. DEPOSIT ACCOUNT. Within (i) ten (10) business days after the
Closing Date, the Company shall take all necessary actions to execute, deliver
and establish a control agreement by and for the benefit of the Purchasers in
respect of that certain deposit account held by the Company at LaSalle Bank
Midwest N.A.(Account No. 6856286387 and ABA No. 07200805) and such control
agreement shall be in form and substance reasonably satisfactory to the
Purchasers and accompanied by an opinion of counsel to the Company addressed to
the Purchasers regarding the creation and perfection of the Purchasers'
respective security interests in such deposit account and such other matters as
the Purchasers may reasonably request and (ii) fifteen (15) business days after
the Closing Date, the Company shall use commercially reasonable best efforts to
execute, deliver and establish a control agreement by and for the benefit of the
Purchasers in respect of that certain escrow account established in connection
with an Escrow Agreement, dated as of September 22, 1997, by and among, Dyntek,
Inc. (f/k/a Data Systems Network Corporation, a predecessor entity to Dyntek,
Inc.), ▇▇▇▇▇▇ ▇▇▇▇▇▇, Inc. and JPMorgan Chase Bank, N.A. (f/k/a NBD Bank which
was a predecessor entity to JPMorgan Chase Bank, N.A.) (as amended, supplemented
or modified from time to time) (the "Escrow Account") and such control agreement
shall be in form and substance reasonably satisfactory to the Purchasers and
accompanied by an opinion of counsel to the Company addressed to the Purchasers
regarding the creation and perfection
of the Purchasers' respective security interests in such Escrow Account and such
other matters as the Purchasers may reasonably request.
SECTION 5.22. MORTGAGE LEASEHOLD. Within thirty (30) business days after
the Closing Date, the Company shall use its reasonable best efforts to take all
action necessary to execute, deliver and establish a mortgage over the Company's
leasehold interest in its office headquarters referred to in Section 2.16 hereof
for the benefit of the Purchasers, with such mortgage to be in form and
substance satisfactory to the Purchasers and accompanied by an opinion of
counsel to the Company addressed to the Purchasers regarding the creation and
perfection of the Purchasers' respective security interests in such leasehold
interest and such other matters as the Purchasers may reasonably request.
SECTION 5.23. DELIVERY OF CERTIFICATES. Within five (5) business days of
the Closing Date, the Company shall deliver to the Purchasers the certificates
for all shares or units of DynTek Services, Inc. evidenced by a certificate duly
endorsed in blank for transfer or accompanied by an appropriate assignment or an
appropriate undated stock power or powers, in every case sufficient to transfer
title thereto.
ARTICLE VI
REGISTRATION
SECTION 6.01. PIGGYBACK REGISTRATION. If, prior to June 30, 2006, the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Purchasers) the sale of any of
its securities under the Securities Act, then the Company will promptly give the
Purchasers written notice thereof and will use its reasonable best efforts to
include in such registration (A) all or any part of the shares of Common Stock
issuable by the Company upon the exercise of warrants or conversion of notes
(including, for the avoidance of doubt, the Junior Note) issued by the Company
to SACC Partners L.P., ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III and the Purchasers hereto (i) on
October 26, 2005 and (ii) on the Closing Date; and (B) all Conversion Shares (as
such term is defined in those certain Conversion and Settlement Agreements
executed as of the date hereof by and between (x) the Company and SACC Partners,
L.P. and (y) the Company and ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III) (collectively, the
"Registrable Securities"). This requirement does not apply to Company
registrations on Form S-4 or S-8 or their equivalents relating to equity
securities to be issued solely in connection with an acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans. Each Purchaser must give its request for
registration under this paragraph to the Company in writing within 10 days after
receipt from the Company of notice of such pending registration. If the
registration for which the Company gives notice is a public offering involving
an underwriting, the Company will so advise the Purchasers as part of the
above-described written notice. In that event, if the managing underwriter(s) of
the public offering impose a limitation on the number of shares of Common Stock
that may be included in the Registration Statement because, in such
underwriter(s)' judgment, such limitation would be necessary to effect an
orderly public distribution, then the Company will be obligated to include only
such limited portion, if any, of the Registrable Securities with respect to
which the Purchasers have requested inclusion hereunder. Any exclusion of
Registrable Securities will be made pro rata among all holders of the Company's
securities seeking to include shares of Common Stock in proportion to the number
of shares of Common Stock sought to be included by those holders. However, the
Company will not exclude any Registrable Securities unless the Company has first
excluded all outstanding securities the holders of which are not entitled by
right to inclusion of such securities in such Registration Statement or are not
entitled pro rata inclusion with the Registrable Securities.
SECTION 6.02. MANDATORY REGISTRATION. If, at anytime on or after June 30,
2006, the resale of any Registrable Securities have not been registered by the
Company pursuant to Section 6.01
hereof, the Purchasers may deliver notice to the Company to require that the
Company register all Registrable Securities on a registration statement on Form
S-1, or other form then available to the Company under applicable SEC rules and
regulations (the "Registration Statement"), covering the resale of all of the
Registrable Securities. The date on which the Company receives such notice is
referred to herein as the "Demand Date." The Company shall use commercially
reasonable best efforts (i) to cause such Registration Statement to be filed
under the Securities Act as promptly as practicable after receipt of notice of
such demand, but in any event not more than 30 days following the Demand Date
and (ii) to cause such Registration Statement to be declared effective under the
Securities Act as promptly as practicable, but in any event no later than 90
days following the Demand Date (the "Demand Effective Date"). However, so long
as the Company has filed the Registration Statement within 30 days after the
Demand Date, (a) if the SEC takes the position that registration of the resale
of the Registrable Securities by the Purchasers is not available under
applicable laws, rules and regulations and that the Company must register the
offering of the Registrable Securities as a primary offering by the Company, or
(b) if the Registration Statement receives SEC review, then the Demand Effective
Date will be the 120th day after the Demand Date. In the case the SEC takes the
position that resale registration is not available, the Company will, within 40
business days after the date the Company receives such SEC response, file a
Registration Statement as a primary offering. The Company's best efforts will
include, without limitation, promptly responding to all comments received from
the staff of the SEC. If the Company receives notification from the SEC that the
Registration Statement will receive no action or review from the SEC, then the
Company will cause the Registration Statement to become effective within five
business days after such SEC notification. Once the Registration Statement is
declared effective by the SEC, the Company will cause the Registration Statement
to remain effective throughout the Registration Period, except as permitted
under this Section. "Registration Period" means the period between the Demand
Date and the earlier of the date on (i) which (x) all of the Registrable
Securities have been sold by the Purchasers pursuant to a Registration Statement
and (y) are freely tradable under the Securities Act, or (ii) all the
Registrable Securities may be immediately sold by the Purchasers without
registration and without restriction as to the number of Registrable Securities
to be sold, pursuant to Rule 144 or otherwise. On the date of each monthly
anniversary of the date on which any breach of this Section 6.02 first occurs
(including failure to file a Registration Statement or to cause a Registration
Statement to be declared effective within the time periods set forth herein)
until the applicable default is cured (each, a "Payment Date"), the Company
shall issue to the Purchasers as damages additional shares of the Company's
Common Stock equal to 2.0% of the aggregate amount of the Registrable
Securities, and all such shares shall become Registrable Securities; provided,
however, that the total number of shares of the Company's Common Stock payable
pursuant to this Section 6.02 to any Purchaser shall not exceed the number of
shares, less one share, which, if issued, would have, at the time of the Closing
Date or Payment Date, required stockholder approval of such issuance pursuant to
Section 4350(i)(1)(D) of the Nasdaq Marketplace Rules if the Company is then
subject to such rule. In the event the number of shares of the Company's Common
Stock issuable under this Section 6.02 is restricted by the limitations of the
previous sentence, the Company may waive such limitation or, at the Company's
election, the balance of the damages payable by the Company pursuant to this
Section 6.02 may be paid in cash (valuing the shares not so issued at the
average of the closing prices of the Company's Common Stock over the twenty (20)
trading days immediately preceding the one-month anniversary of the default
which requires the issuance of shares) on the applicable Payment Date in
accordance with payment instructions provided by each Purchaser.
SECTION 6.03. CONTINUED EFFECTIVENESS OF REGISTRATION STATEMENT. Subject to
the limitations set forth in Section 6.08, the Company will keep the
Registration Statement covering the Registrable Securities effective under Rule
415 at all times during the Registration Period. In the event that the number of
shares available under a Registration Statement filed pursuant to this Agreement
is insufficient to cover all of the Registrable Securities issued, the Company
will (if permitted) amend the Registration Statement or file a new Registration
Statement (on the short form available therefor, if
applicable), or both, so as to cover all of the Registrable Securities. The
Company will file such amendment or new Registration Statement as soon as
practicable, but in no event later than 30 business days after the necessity
therefor arises (based upon the market price of the Common Stock and other
relevant factors on which the Company reasonably elects to rely). The Company
will use its best efforts to cause such amendment or new Registration Statement
to become effective as soon as is practicable after the filing thereof, but in
no event later than 90 days after the date on which the Company reasonably first
determines the need therefor.
SECTION 6.04. ACCURACY OF REGISTRATION STATEMENT. Any Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) filed by the Company covering Registrable Securities will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. The Company
will prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to permit
sales pursuant to the Registration Statement at all times during the
Registration Period, and, during such period, will comply with the provisions of
the Securities Act with respect to the disposition of all Registrable Securities
of the Company covered by the Registration Statement until the termination of
the Registration Period, or if earlier, until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement.
SECTION 6.05. FURNISHING DOCUMENTATION. The Company will furnish to the
Purchasers, or to their legal counsel, (a) promptly after such document is filed
with the SEC, one copy of any Registration Statement filed pursuant to this
Agreement and any amendments thereto, each preliminary prospectus and final
prospectus and each amendment or supplement thereto; and (b) a number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, and such other documents as the Purchasers may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by the Purchasers. The Company will promptly notify by facsimile or email
the Purchasers of the effectiveness of the Registration Statement and any
post-effective amendment.
SECTION 6.06. ADDITIONAL OBLIGATIONS. The Company will use its best efforts
to (a) register and qualify the Registrable Securities covered by a Registration
Statement under such other securities or blue sky laws of such jurisdictions as
the Purchasers reasonably request, (b) prepare and file in those jurisdictions
any amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain their
effectiveness during the Registration Period, (c) take any other actions
necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period, and (d) take any other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions. Notwithstanding the foregoing, the Company is not required, in
connection with such obligations, to (i) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 6.06, (ii) subject itself to general taxation in any such jurisdiction,
(iii) file a general consent to service of process in any such jurisdiction,
(iv) provide any undertakings that cause material expense or material burden to
the Company, or (v) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
SECTION 6.07. UNDERWRITTEN OFFERINGS. If the Purchasers select underwriters
reasonably acceptable to the Company for an underwritten offering, the Company
will enter into and perform its obligations under an underwriting agreement in
usual and customary form including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering.
SECTION 6.08. SUSPENSION OF REGISTRATION.
(A) The Company will notify (by telephone and also by facsimile and
reputable overnight courier) the Purchasers of the happening of any event of
which the Company has knowledge as a result of which the prospectus included in
the Registration Statement as then in effect includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company will make such notification as
promptly as practicable (but in no event more than two business days) after the
Company becomes aware of the event, will promptly (but in no event more than ten
business days) prepare and file a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and will deliver a
number of copies of such supplement or amendment to the Purchasers as they may
reasonably request.
(B) Notwithstanding the obligations under Section 6.08(a), if in the
good faith judgment of the Company, following consultation with legal counsel,
it would be detrimental to the Company and its stockholders for resales of
Registrable Securities to be made pursuant to the Registration Statement due to
the existence of a material development or potential material development
involving the Company which the Company would be obligated to disclose in the
Registration Statement, but which disclosure would be premature or otherwise
inadvisable at such time or would reasonably be expected to have a material
adverse effect upon the Company and its stockholders, the Company will have the
right to suspend the use of the Registration Statement for a period of not more
than forty-five (45) days; provided, however, that the Company may so defer or
suspend the use of the Registration Statement no more than one time in any
twelve-month period.
(C) Subject to the Company's rights under this Article VI, the Company
will use its reasonable best efforts to prevent the issuance of any stop order
or other suspension of effectiveness of a Registration Statement and, if such an
order is issued, will use its best efforts to obtain the withdrawal of such
order at the earliest possible time and to notify the Purchasers of the issuance
of such order and the resolution thereof.
(D) Notwithstanding anything to the contrary contained in this
Agreement, if the use of the Registration Statement is suspended by the Company,
the Company will promptly (but in no event more than two business days) give
notice of the suspension to the Purchasers, and will promptly (but in no event
more than two business days) notify the Purchasers as soon as the use of the
Registration Statement may be resumed.
SECTION 6.09. TRANSFER AGENT; REGISTRAR. The Company will provide a
transfer agent and registrar, which may be a single entity, for the Registrable
Securities not later than the effective date of the Registration Statement.
SECTION 6.10. SHARE CERTIFICATES. The Company will cooperate with the
Purchasers and with the managing underwriter(s), if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to a
Registration Statement and will enable such certificates to be in such
denominations or amounts as the case may be, and registered in such names as the
Purchasers or the managing underwriter(s), if any, may reasonably request.
SECTION 6.11. PLAN OF DISTRIBUTION. At the reasonable request of the
Purchasers, the Company will promptly prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement, and the prospectus used in connection with the
Registration Statement, as may be necessary in order to change the plan of
distribution set forth in such Registration Statement.
SECTION 6.12. SECURITIES LAWS COMPLIANCE. The Company will comply with all
applicable laws related to any Registration Statement relating to the offer and
sale of Registrable Securities and with all applicable rules and regulations of
governmental authorities in connection therewith (including, without limitation,
the Securities Act, the Exchange Act and the rules and regulations promulgated
by the SEC).
SECTION 6.13. FURTHER ASSURANCES. The Company will take all other
reasonable actions as the Purchasers or the underwriters, if any, may reasonably
request to expedite and facilitate disposition by such Purchaser of the
Registrable Securities pursuant to the Registration Statement.
SECTION 6.14. EXPENSES. The Company will bear all reasonable expenses,
other than underwriting discounts and commissions, and transfer taxes, if any,
incurred in connection with registrations, filings or qualifications pursuant to
Article VI of this Agreement, including, without limitation, all registration,
listing and qualifications fees, printers and accounting fees, the fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of the Purchasers' legal counsel.
SECTION 6.15. INDEMNIFICATION. In the event that any Registrable Securities
are included in a Registration Statement under this Agreement:
(A) To the extent permitted by law, the Company will indemnify, defend
and hold harmless each Purchaser that holds Registrable Securities, and agents,
employees, attorneys, accountants, underwriters (as defined in the Securities
Act) for such Purchasers and any directors or officers of such Purchasers or
such underwriter and any person who controls the Purchasers or such underwriter
within the meaning of the Securities Act or the Exchange Act (each, a "Purchaser
Indemnified Person") against any losses, claims, damages, expenses or
liabilities (collectively, and together with actions, proceedings or inquiries
by any regulatory or self-regulatory organization, whether commenced or
threatened in respect thereof, "Claims") to which any of them become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such Claims
arise out of or are based upon any of the following statements, omissions or
violations in a Registration Statement filed pursuant to this Agreement, any
post-effective amendment thereof or any prospectus included therein: (a) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereof or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, (b) any
untrue statement or alleged untrue statement of a material fact contained in the
prospectus or any preliminary prospectus (as it may be amended or supplemented)
or the omission or alleged omission to state therein any material fact necessary
to make the statements made therein, in light of the circumstances under which
the statements therein were made, not misleading, or (c) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act or any
other law, including without limitation any state securities law or any rule or
regulation thereunder (the matters in the foregoing clauses (a) through (c)
being, collectively, "Violations"). Subject to the restrictions set forth herein
with respect to the number of legal counsel, the Company will reimburse the
Purchasers and each such attorney, accountant, underwriter or controlling person
and each such other Purchaser Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification contained in this Section 6.15 (i) does not apply to a Claim by
a Purchaser Indemnified Person arising out of or based upon a Violation that
occurs in reliance upon and in conformity with information furnished in writing
to the Company by such Purchaser Indemnified Person expressly for use in the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus or supplement thereto was timely made available by the Company;
and (ii) does not apply to amounts paid in settlement of any Claim if such
settlement is made without the prior written consent of the Company, which
consent will not be unreasonably withheld. This indemnity obligation will remain
in full force and effect regardless of any investigation made by or on behalf of
the Purchaser Indemnified Persons and will survive the transfer of the
Registrable Securities by the Purchasers.
(B) In connection with any Registration Statement in which a Purchaser
is participating, each such Purchaser will indemnify and hold harmless, the
Company, each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder within the meaning of the
Securities Act or the Exchange Act (each a "Company Indemnified Person") against
any Claim to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claim arises out of or is based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Purchaser expressly for use in such
Registration Statement. Such Purchaser will promptly reimburse each Company
Indemnified Person for any legal or other expenses (promptly as such expenses
are incurred and due and payable) reasonably incurred by them in connection with
investigating or defending any such Claim. However, the indemnity agreement
contained in this section does not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Purchaser, which consent will not be unreasonably withheld, and no such
Purchaser will be liable under this Agreement for the amount of any Claim that
exceeds the net proceeds actually received by such Purchaser as a result of the
sale of Registrable Securities pursuant to such Registration Statement. This
indemnity will remain in full force and effect regardless of any investigation
made by or on behalf of a Company Indemnified Party and will survive the
transfer of the Registrable Securities by the Purchasers.
(C) If any proceeding shall be brought or any claim asserted against
any person entitled to indemnity hereunder (an "Indemnified Party"), such
Indemnified Party promptly shall notify the person from whom indemnity is sought
(the "Indemnifying Party") in writing, and the Indemnifying Party shall assume
the defense thereof, including the employment of counsel reasonably satisfactory
to the Indemnified Party and the payment of all reasonable fees and expenses
incurred in connection with defense thereof; provided, however, that the failure
of any Indemnified Party to give such notice shall not relieve the Indemnifying
Party of its obligations or liabilities pursuant to this Agreement, except (and
only) to the extent that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
(D) An Indemnified Party shall have the right to employ separate
counsel in any such proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Indemnified Parties unless: (i) the Indemnifying Party has
agreed in writing to pay such fees and expenses; (ii) the Indemnifying Party
shall have failed promptly to assume the defense of such proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any such
proceeding; or (iii) the named parties to any such proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and such counsel shall be at the reasonable expense of the
Indemnifying Party; provided, however, that in no event shall the Indemnifying
Party be responsible for the fees and expenses of more than one separate
counsel). The Indemnifying Party shall not be liable for any settlement of any
such proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on Claims that are the subject matter of such proceeding.
(E) Subject to the foregoing, all reasonable fees and expenses of the
Indemnified Party (including fees and expenses to the extent incurred in
connection with investigating or preparing to defend such proceeding in a manner
not inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) business days of written notice thereof to the
Indemnifying Party, which notice shall be delivered no more frequently than on a
monthly basis (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
SECTION 6.16. TRANSFER. The rights of the Purchasers hereunder, including
the right to have the Company register Registrable Securities pursuant to this
Agreement, may be assigned by the Purchasers to transferees or assignees of all
or any portion of the Registrable Securities, but only if (a) the Purchaser
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment, (b) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being transferred or assigned, (c) after such transfer
or assignment, the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence, the transferee or assignee agrees
in writing with the Company to be bound by all of the provisions contained
herein, (e) such transfer is made in accordance with the applicable requirements
of this Agreement, and (f) the transferee is an "accredited investor" as that
term is defined in Rule 501 of Regulation D.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. EXPENSES. Each party hereto will pay its own expenses in
connection with the transactions contemplated hereby, whether or not such
transactions will be consummated; provided, however, that the Company will pay
the reasonable fees and disbursements of each of the Purchasers' special
counsel, Paul, Hastings, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP and ▇▇▇▇▇▇▇ ▇▇▇▇▇ LLP, in
connection with such transactions and with the Bridge Loan, upon delivery of a
reasonably itemized invoice setting forth the services performed by such special
counsel in connection with such transactions. The Purchasers may deduct such
fees from the amount to be delivered for the purchase of the Notes pursuant to
Section 1.03. The Company shall also promptly pay upon demand the fees and
disbursements of each Purchaser's counsel incurred in connection with any
amendments, modifications, supplements or waivers in connection with this
Agreement or any ancillary document related thereto upon delivery of a
reasonably itemized invoice setting forth the services performed by such special
counsel in connection with such transactions.
SECTION 7.02. SURVIVAL OF AGREEMENTS. All covenants, agreements,
representations and warranties made in this Agreement, the Security and Pledge
Agreements or any certificate or instrument delivered to the Purchasers pursuant
to or in connection with this Agreement or the Security and Pledge Agreements
will survive the execution and delivery of this Agreement or the Security and
Pledge Agreements, the issuance, sale and delivery of the Notes and Warrants,
and with respect to the Notes, until the repayment of the Notes in full.
SECTION 7.03. BROKERAGE. Each party hereto will indemnify and hold harmless
the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 7.04. PARTIES IN INTEREST. All representations, covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto will bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchasers will inure to the benefit of any and all subsequent
holders from time to time of Notes and Warrants.
SECTION 7.05. NOTICES. All notices, requests, consents and other
communications hereunder will be in writing and will be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or recognized overnight courier service, addressed as follows:
if to the Company: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: Chief Financial Officer
with a copy to: ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇, Esq.
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to any Purchaser, at the address of such Purchaser set forth in Schedule I,
and
If to ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III, with a copy to: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇, Esq.
▇▇▇▇▇▇▇ ▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to SACC Partners LP, with a copy to: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Paul, Hastings, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇
LLP
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
fax: (▇▇▇) ▇▇▇-▇▇▇▇
SECTION 7.06. GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the substantive laws of the State of California
without regard for conflicts of laws or choice of laws principles.
SECTION 7.07. ENTIRE AGREEMENT. This Agreement, including the Schedules and
Exhibits hereto, along with the Notes, the Warrants and the Security and Pledge
Agreements, constitutes the sole and entire agreement of the parties with
respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference. There are no other agreements of the
parties and no party is relying on any representations of the other not
expressly set forth herein or any ancillary document related hereto or thereto.
All Schedules and Exhibits hereby are hereby incorporated herein by reference.
SECTION 7.08. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
SECTION 7.09. AMENDMENTS. This Agreement may not be amended or modified,
and no provisions hereof may be waived, without the written consent of the
Company and the holders of at least 66(2)/3% of the outstanding principal amount
of the Notes.
SECTION 7.10. SEVERABILITY. If any provision of this Agreement will be
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement will not be affected
thereby.
SECTION 7.11. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
SECTION 7.12. NO PUBLICITY. Except as expressly provided below, no party
will make, issue or release any public announcement, press release, statement or
acknowledgment (collectively, "Public Announcement") of the existence of, or
reveal publicly the terms, conditions and status of, the transactions
contemplated hereby, without the prior written consent of the other party as to
the content and time of release of and the media in which such Public
Announcement is to be made; provided, however, that in the case of a Public
Announcement which a party is required by law to make, issue or release, the
making, issuing or releasing of any such Public Announcement, by a party so
required to do so will not constitute a breach if such party has given, to the
extent reasonably possible, not less than two (2) business days prior notice to
the other party, and has attempted, to the extent reasonably possible, to allow
the other party to review and approve such Public Announcement; provided
further, however, that upon the Company's making of Public Announcement
regarding the existence of, or the terms, conditions and status of, the
transactions contemplated hereby, whether pursuant to the filing of a Form 8-K
or otherwise, subject to the consent of the Company, which consent may not be
unreasonably withheld, the Purchasers may advertise the closing of the
transactions contemplated by this Agreement, and make appropriate announcements
of the financial arrangements entered into among the parties hereto, including,
without limitation, announcements commonly known as tombstones, in such trade
publications, business journals, newspapers of general circulation and to such
selected parties as the Purchasers will deem reasonably appropriate.
SECTION 7.13. USURY SAVINGS CLAUSE. The parties intend to comply at all
times with applicable usury laws. If at any time such laws would render usurious
any amounts due under the Notes under applicable law, then it is the parties'
express intention that the Company not be required to pay interest on the Notes
at a rate in excess of the maximum lawful rate, that the provisions of this
Section 7.13 will control over all other provisions of the Notes which may be in
apparent conflict hereunder, that such excess amount will be immediately
credited to the principal balance of the Notes (or, if the Notes have been fully
paid, refunded by the Purchaser to the Company), and the provisions thereof will
immediately reformed and the amounts thereafter decreased, so as to comply with
the then applicable
usury law, but also so as to permit the recovery of the fullest amount otherwise
due under the Notes. The Company hereby represents and warrants that its assets
are sufficient to meet the requirements for exemption from the usury laws of the
State of California as provided by Section 25118 of the California Corporations
Code or any successor statute.
SECTION 7.14. FURTHER ASSURANCES. The Company agrees to (i) execute and
deliver, or cause to be executed and delivered, all such other and further
agreements, documents and instruments and (ii) take or cause to be taken all
such other and further actions as any Purchaser may reasonably request to
effectuate the intent and purposes, and carry out the terms, of this Agreement.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the Company and the Purchasers have executed this Note
Purchase Agreement as of the day and year first above written.
DYNTEK, INC.
By: ▇.▇. ▇▇▇▇▇▇, ▇▇.
------------------------------------
Name: ▇.▇. ▇▇▇▇▇▇, ▇▇.
Title: C.E.O.
PURCHASERS:
SACC PARTNERS, L.P.
By: ▇▇▇▇▇▇ ▇▇▇▇▇
---------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇
Title: General Partner
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III
By: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III
---------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III
TRUST A-4 - ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
By: PNC Bank, National Association,
Its: Trustee
By: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III
---------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III
Title: Investment Advisor to Trustee
DISCLOSURE SCHEDULES
OF
DYNTEK, INC.
IN CONNECTION WITH THE
NOTE PURCHASE AGREEMENT
BY AND AMONG
DYNTEK, INC.,
AND
THE PURCHASERS NAMED THEREIN
MARCH 8, 2006
DISCLOSURE SCHEDULES
These Disclosure Schedules (hereinafter called the "Schedule," and specific
sections within this Schedule may be referred to by Schedule number) are
furnished by DYNTEK, INC., a Delaware corporation (the "Company") pursuant to
that certain Note Purchase Agreement dated as of March 8, 2006 (the "Agreement")
by and between the Company and the purchasers named therein (the "Purchasers").
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings ascribed to them in the Agreement.
Terms of documents summarized herein are qualified in their entirety by the
documents themselves, provided that nothing is misleading in such summaries.
Each Section qualifies the correspondingly numbered section or subsection
thereof in Article IV of the Agreement, as applicable. The titles and headings
used herein are for reference purposes only and shall not in any manner limit
the construction of these Schedules, and any disclosure made under any
subheading hereunder is deemed made for all provisions of that corresponding
section in the Agreement.
SECTION 2.01
ORGANIZATION, QUALIFICATIONS AND CORPORATE POWER
(b) (1) Subsidiaries of DynTek, Inc.:
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
▇▇▇▇▇▇▇▇▇.▇▇▇, Inc. (*) Delaware
DynTek Services, Inc. ("DSI") (*) Delaware
TekInsight e-Government Services, Inc. (*) Delaware
TekInsight Research, Inc. (*) New York
(*) The Company owns 100% of the issued and outstanding capital stock of each
of the subsidiaries listed above.
(2) The Company owns approximately seventeen percent (17%) of the
outstanding common stock of TekInsight, LLC, a Delaware limited liability
company.
SECTION 2.02
AUTHORIZATION OF AGREEMENTS, ETC.
(a) 1. On November 15, 2004, the Company issued that certain Amended and
Restated Secured Convertible Term Note, as amended by that certain Agreement to
Amend the Amended and Restated Secured Convertible Term Note and Common Stock
Purchase Warrant dated October 26, 2005 (the "Laurus Note") to Laurus Master
Fund, Ltd., c/o Ironshore Corporate Services Ltd., ▇.▇. ▇▇▇ ▇▇▇▇ G.T.,
Queensgate House, South Church Street, Grand Cayman, Cayman Islands, ("Laurus"),
for an aggregate principal amount of $6,649,999. In connection with the issuance
of the Note, the Company and Laurus entered into that certain Security Agreement
dated January 30, 2004 (the "Security Agreement"), pursuant to which the Company
granted to Laurus a security interest in substantially all of the Company's
assets (the "Collateral") and covenanted to keep the Collateral free and clear
of all attachments, levies, taxes, liens, security interests and encumbrances of
every kind and nature.
Upon receipt of the consideration to be paid for the Notes, the Company
will pay Laurus $6,731,784.84 (the "Payoff Amount"), which sum equals the
Company's outstanding obligations under the Laurus Note, including the
outstanding principal amount plus all unpaid interest accrued through the payoff
date. Pursuant to the terms of that certain payoff letter dated February 23,
2006 (the "Payoff Letter"), issued by Laurus to the Company, Laurus acknowledges
and agrees that (i) receipt of the Payoff Amount will constitute payment in full
of the Company's outstanding obligations under the Laurus Note, (ii) Laurus will
release all security interests and liens which the Company may have granted to
Laurus, and (iii) Laurus will, at the Company's expense, terminate all of its
agreements with the Company, other than in respect of (x) indemnification and
expense reimbursement provisions of such agreements and such other provisions
thereof as expressly survive the payment in full of the Company's outstanding
obligations, or (y) any options and/or warrants received by Laurus from the
Company.
2. In connection with that certain 9% Senior Subordinated Convertible Note
Purchase Agreement, dated as of October 15, 2004, between the Company and the
purchasers named therein (the "9% Holders") (the "9% Agreement"), the Company
sold and issued an aggregate of $4,438,775 in principal amount of 9% Senior
Subordinated Convertible Notes originally due September 30, 2007 (each a "9%
Note" and collectively, the "9% Notes"). On October 26, 2005, DynTek amended and
restated the 9% Notes (the "Amended and Restated Notes") representing a majority
of the outstanding principal to defer the start of monthly principal payments
until January 1, 2007, but without changing the maturity date. Each 9% Note
provides that so long as the Company shall have any obligation under such 9%
Note, the Company shall not, without the written consent of the holders of a
majority of the then outstanding principal amount of the 9% Notes, create,
incur, assume or suffer to exist any liability for borrowed money senior or pari
passu in rank to the 9% Notes.
Each holder of a 9% Note, as set forth in Schedule III to the
Agreement, has entered into a conversion and settlement agreement, in
substantially the form as provided in Exhibit C to the Agreement (the
"Conversion and Settlement Agreement"), pursuant to which such holder agreed to
convert the outstanding principal amount and accrued but unpaid interest
thereunder (the "9% Payable Amount") into shares of Common Stock of the Company
at a conversion price of $0.02 per share (the "9% Conversion Shares"). By
executing the Conversion and Settlement Agreement, each 9% holder, among other
things, has agreed to waive and release all claims, known and unknown,
which it has or might have against the Company and any of the Company's
respective subsidiaries, affiliated corporations and/or business entities, as
well as their respective directors, officers, shareholders, agents and
employees, past and present, arising under or in connection with (a) all claims
relating in any way to any aspect of (i) the 9% Note, (ii) the 9% Agreement, or
(iii) the Registration Rights Agreement dated October 15, 2004, by and between
the Company and the investors named therein, as amended by that certain
Amendment No.1 to Registration Rights Agreement dated October 26, 2005, pursuant
to any applicable federal, state or local law, regulation or ordinance or public
policy, contract, tort or property law theory, or any other cause of action
whatsoever that arose on or before the effective date and (b) all claims
relating in any way to such holder's right to collect the 9% Payable Amount,
except for such holder's right to receive the 9% Conversion Shares and the
related rights of such holder under such Conversion and Settlement Agreement.
3. In connection with that certain Note Purchase Agreement, dated as of
October 26, 2005 (the "Bridge Agreement"), between the Company and the
purchasers named therein (the "Bridge Note Holders"), the Company sold and
issued an aggregate of $2,500,000 in principal amount of Secured Promissory
Notes due December 31, 2006 (each a "Bridge Note" and collectively, the "Bridge
Notes"). Pursuant to the terms of the Conversion and Settlement Agreement, in
substantially the form as provided in Exhibit C to the Agreement, each holder of
a Bridge Note, as set forth on Schedule III to the Agreement, has agreed to
convert the outstanding principal amount and accrued but unpaid interest
thereunder (the "Bridge Payable Amount") into shares of Common Stock of the
Company at a conversion price of $0.02 per share (the "Bridge Conversion
Shares"). By executing the Conversion and Settlement Agreement, each Bridge Note
Holder, among other things, has agreed to waive and release all claims relating
in any way to such holder's right to collect the Bridge Payable Amount, except
for such holder's right to receive the Bridge Conversion Shares and the related
rights of such holder under the Conversion and Settlement Agreement.
4. As of September 19, 2005, the Company had not paid certain shareholders
of Integration Technologies, Inc. their respective portions of the EBITDA
Earn-Out Consideration, the Revenue Earn-Out Consideration and other amounts
owed (the "Acquisition Payments") under that certain Agreement and Plan of
Merger dated October 14, 2004 (the "Merger Agreement"). To satisfy the
Acquisition Payments, the Company issued to such ITI shareholders secured
promissory notes (each an "ITI Note," and together, the "ITI Notes"), each
bearing simple interest at a rate of 8.9% per annum in the aggregate principal
amount of the Acquisition Payments (the "ITI Payable Amount"). Pursuant to the
terms of the Conversion and Settlement Agreement, in substantially the form as
provided in Exhibit C to the Agreement, each holder of an ITI Note, as set forth
on Schedule III to the Agreement, has agreed to convert the ITI Payable Amount
thereunder into shares of Common Stock of the Company at a conversion price of
$0.02 per share (the "ITI Conversion Shares"). By executing the Conversion and
Settlement Agreement, each ITI Note Holder, among other things, has agreed to
waive and release all claims, known and unknown, which it has or might have
against the Company and any of the Company's respective subsidiaries, affiliated
corporations and/or business entities, as well as their respective directors,
officers, shareholders, agents and employees, past and present, arising under or
in connection with (a) all claims relating in any way to any aspect of (i) the
ITI Note, or (ii) the Merger Agreement, pursuant to any applicable federal,
state or local law, regulation or ordinance or public policy, contract, tort or
property law theory, or any other cause of action whatsoever that arose on or
before the effective date and (b) all claims relating in any way to such
holder's right to collect the ITI Payable Amount, except for such holder's right
to receive the
ITI Conversion Shares and the related rights of such holder under the Conversion
and Settlement Agreement.
(b) The issuance of the Notes, with a conversion price of $0.02 per share, as
well as the issuance of the 19.9% Warrant at $0.001 per share, will trigger
certain anti-dilution provisions of outstanding warrants, thereby (a) reducing
the exercise price of such warrants to $0.02 per share or $0.001 per share, as
applicable, and (b) increasing the number of shares exercisable under such
warrant by the percentage decrease in the exercise price.
SECTION 2.04
AUTHORIZED CAPITAL STOCK
(1) Concurrent with the closing of the senior and junior debt financings with
SACC Partners, L.P. and ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III, or certain affiliates thereof, the
Company will enter into (i) a Common Stock Purchase Agreement with certain
accredited investors (the "Investors"), which provides for (i) the sale and
issuance of up to 75,000,000 shares of common stock, par value $0.0001 (the
"Common Stock") by the Company at a per share price equal to $0.02 per share and
(ii) the sale and issuance of warrants to purchase such number of shares of the
Company's Common Stock (the "Warrant Shares") equal to twenty percent (20%) of
the Common Shares, rounded down to the nearest whole share (the "First PIPE
Offering").
(2) The issuance of the Notes, with a conversion price of $0.02 per share, as
well as the issuance of the 19.9% Warrant at $0.001 per share, will trigger
certain anti-dilution provisions of outstanding warrants, thereby (a) reducing
the exercise price of such warrants to $0.02 per share or $0.001 per share, as
applicable, and (b) increasing the number of shares exercisable under such
warrant by the percentage decrease in the exercise price.
SECTION 2.08
MATERIAL CHANGES
(1) On July 13, 2005, the Company's board of directors approved, and the Company
entered into, an employment agreement with ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇., in connection
with his appointment as the Company's Chief Executive Officer. This agreement
supersedes his prior employment agreement and has an initial term of one year,
which term is automatically renewed for successive, additional one-year periods.
Pursuant to the employment agreement, ▇▇. ▇▇▇▇▇▇ is entitled to receive a base
salary of $250,000, an annual bonus based on the achievement of certain criteria
established by the board of directors, and an option to purchase 1,000,000
shares of the Company's Common Stock at a purchase price of $0.30 per share.
(2) On July 13, 2005, the Company's board of directors approved, and the Company
entered into, an employment agreement with ▇▇▇▇▇▇ ▇▇▇▇▇▇, in connection with his
appointment as the Company's President and Chief Financial Officer. This
agreement supersedes his prior employment agreement and has an initial term of
one year, which term is automatically renewed for successive, additional
one-year periods. Pursuant to the employment agreement, ▇▇. ▇▇▇▇▇▇ is entitled
to receive a base salary of $250,000, an annual bonus based on the achievement
of certain criteria established by the board of directors, and an option to
purchase 1,000,000 shares of the Company's Common Stock at a purchase price of
$0.30 per share.
(3) On August 8, 2005, the Company, and New England Technology Finance, LLC
("NETF"), an affiliate of Global Technology Finance, which operates in
partnership with Credit Suisse First Boston, CIT Group, Inc. and others, entered
into a series of related agreements that together provide a working capital
credit facility for the Company. The new credit facility is comprised of two
primary components.
First, pursuant to the terms of an Asset Purchase and Liability Assumption
Agreement (the "APLA"), NETF will finance certain of the Company's qualified
product purchases, the Company will assign its accounts receivable resulting
from the sale of such products to NETF, and NETF will assume liability for
payment to product vendors. As consideration for the product financing provided
by NETF, the Company will pay NETF a finance and servicing fee calculated on a
monthly basis depending on the Company's gross profit margin on such products,
and days sales outstanding, which fee is expected to be less than the fees
charged under the Company's prior financing arrangement with Textron. In
addition to the payment of the finance fee, as consideration for the product
financing and vendor services provided by NETF, the Company shall also provide
certain billing and collection services in connection with the purchased assets.
The Company has an obligation to repurchase accounts sold to NETF at a purchase
price equal to the outstanding face amount of such account under certain
conditions, which include, among others, if an account remains unpaid for a
certain period of time. The APLA also provides for a termination fee payable by
the Company if the APLA is terminated prior to the end of its term as a result
of the occurrence of certain events, which include, among others, any default by
the Company in the performance of its material obligations. The APLA has an
initial term of 3 years and is automatically extended for additional 1 year
periods unless terminated earlier pursuant to the terms of the agreement.
Second, pursuant to the terms of an Asset Purchase Agreement (the "APA"),
NETF purchased $7,500,000 of the Company's other qualified accounts receivables
(including services and products). Proceeds were used to pay off the
then-existing $4,800,000 balance of the Company's $7,000,000 credit line with
Textron, for acquisition debt, and general corporate purposes. In addition to
the accounts receivable purchased on August 8, 2005, NETF may purchase up to 80%
of the Company's additional qualified accounts receivable in the future on the
same terms.
(4) On September 20, 2005, the Company entered into promissory notes with three
former shareholders of ITI, including the Company's current chief executive
officer, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇., to defer an aggregate of $2,574,755 in payments due
in connection with the acquisition of ITI. Principal payments are due quarterly
beginning in September 2005, with the balance due on July 31, 2006 (the
"Maturity Date"). The Notes bear interest at a rate of 8.9%, which interest is
payable in shares of the Company's Common Stock at a price equal to the average
per share closing price for the 20 trading days ending on the second trading day
prior to the Maturity Date. In September 2005, the Company paid $643,688.85 due
under such Notes, with a principal balance of $1,931,066 still remaining. The
Company failed to pay the balance due on the Maturity Date.
Please see Section 2.02(a)(4) above. The ITI Notes, including the principal
amount remaining plus accrued but unpaid interest thereunder, will be converted
into shares of Common Stock of the Company at a conversion price of $0.02 per
share. The ITI Noteholders are entitled to certain registration rights in
connection with the receipt of the ITI Conversion Shares, as set forth in
Section 5 of the Conversion and Settlement Agreement. A description of the
release of any potential claims of the ITI noteholders against the Company is
also set forth in Section 2.02(a)(4) above, and is more fully described in
Section 6 of the applicable Conversion and Settlement Agreement.
(5) On October 26, 2005, the Company entered into a Note Purchase Agreement with
each of SACC Partners, L.P. and ▇▇▇▇▇ ▇▇▇▇▇▇, whereby it obtained an aggregate
loan of $2,500,000 pursuant to two Secured Promissory Notes (the "Bridge Notes")
each in the original principal amount of $1,250,000. The Bridge Notes bear
interest at a rate of 12% per annum until March 1, 2006, 14% per annum from
March 1, 2006 until April 1, 2006, 16% per annum from April 1, 2006 until May 1,
2006, 18% per annum from May 1, 2006 until June 1, 2006, and 20% per annum from
June 1, 2006 until they are due and payable on December 31, 2006. Payment of all
principal and interest under the Bridge Notes, as well as performance of the
obligations of the Company and DSI, are secured by a perfected security interest
under a Security and Pledge Agreement (the "Security Agreement") entered into on
October 26, 2005, between the holders of the Bridge Notes and the Company. The
Security Agreement grants the holders a lien to substantially all assets of the
Company, which lien is subordinated to the perfected security interests held by
existing secured lenders.
Please see Section 2.02(a)(3) above. The Bridge Notes, including the
principal amount remaining plus accrued but unpaid interest thereunder, will be
converted into shares of Common Stock of the Company at a conversion price of
$0.02 per share. The Bridge Noteholders are entitled to certain registration
rights in connection with the receipt of the Bridge Conversion Shares, as set
forth in Section 5 of the Conversion and Settlement Agreement. A description of
the release of any potential claims of the Bridge Payable Amount against the
Company is also set forth in Section 2.02(a)(3) above, and is more fully
described in Section 6 of the applicable Conversion and Settlement Agreement.
In connection with the issuance of the Bridge Notes, the Company also
issued warrants to purchase shares of its Common Stock (the "Bridge Warrants").
The Bridge Warrants are exercisable for an aggregate 1,000,000 shares of its
Common Stock at an initial exercise price equal to the greater of $0.10 per
share or the price per share at which Common Stock is sold in any rights
offering to record holders of its Common Stock. The Bridge Warrants expire on
October 26, 2015.
(6) On November 14, 2004, the Company issued the Laurus Note to Laurus for an
aggregate principal amount of $6,649,999, pursuant to which the Company was
obligated to make monthly principal payments beginning on December 1, 2005 (the
"First Amortization Date") and ending on January 30, 2007 (the "Maturity Date"),
on which date the aggregate principal amount of the Laurus Note plus any accrued
interest is required to have been paid in full. In connection with the issuance
of the Laurus Note, the Company issued Laurus a five-year Amended and Restated
Warrant (the "Laurus Warrant") to purchase 1,046,150 shares of the Company's
Common Stock, exercisable at $0.65 per share.
Pursuant to that certain Agreement to Amend the Amended and Restated
Secured Convertible Term Note and Common Stock Purchase Warrant, entered into on
October 26, 2005, Laurus agreed to defer the First Amortization Date and
Maturity Date under the Laurus Note each by three (3) months. Accordingly, the
First Amortization Date and start of monthly principal payments was to occur on
March 1, 2006 and the Maturity Date was extended to April 30, 2007. In addition,
in exchange for the deferral under the Laurus Note, the Company amended the
Laurus Warrant to reduce the initial exercise price thereof to $0.25 per share.
As described in Section 2.02(a)(1) above, the Laurus Note will be paid off
upon the Company's receipt of the consideration to be paid for the Notes issued
pursuant to this Agreement.
(7) On October 15, 2004, the Company issued the 9% Notes to the 9% Note Holders
for an aggregate principal amount of $4,500,000 and bearing 9% interest per
annum with a maturity of three (3) years. As issued, the 9% Notes were
convertible into shares of the Company's Common Stock at a conversion price of
$0.65 per share, subject to certain adjustments. As of October 31, 2005, $3.35
million of principal under the 9% Notes remained outstanding. In connection with
the issuance of the 9% Notes, DynTek issued warrants to purchase 3,461,538
shares of its Common Stock exercisable at $0.7475 per share (the "9% Warrants").
In addition, the Company entered into a Registration Rights Agreement (the
"Registration Agreement") obligating the Company to register for resale the
shares of its Common Stock issuable upon the conversion of the 9% Notes and the
exercise of the associated 9% Warrants.
On October 26, 2005, the Company amended and restated the 9% Notes
representing $2,898,000 in outstanding principal (the "Amended 9% Notes") to
defer the start of monthly principal payments until January 1, 2007, but without
changing the maturity date.
In exchange for deferral of principal payments, the Company (i) reduced the
conversion price under the Amended 9% Notes to $0.22 per share, (ii) amended the
9% Warrants to reduce the initial exercise price to $0.22 per share (the
"Amended 9% Warrants") and (iii) increased the number of shares purchaseable
under the Amended 9% Warrants by an aggregate of 491,400 shares. In connection
with the Amended 9% Notes, the Company agreed to amend warrants held by
Centrecourt Asset Management and its affiliated funds, to reduce the initial
exercise price of such warrants to $0.22 per share.
The Registration Agreement was amended to provide for mandatory
registration of the Company's Common Stock issuable upon conversion of the
Amended 9% Notes and exercise of the Amended 9% Warrants. The Company filed a
registration statement on Form S-1 with the Securities and Exchange Commission
on November 25, 2005 to register the shares of Company Common Stock issuable
upon the conversion or exercise of the Amended 9% Notes or Amended 9% Warrants,
as applicable, which such registration statement has been withdrawn effective as
of February 3, 2006.
Please see Section 2.02(a)(2) above. The 9% Notes, including the principal
amount remaining plus accrued but unpaid interest thereunder, will be converted
into shares of Common Stock of the Company at a conversion price of $0.02 per
share. The 9% Noteholders are entitled to certain registration rights in
connection with the receipt of the 9% Conversion Shares, as set forth in Section
5 of the Conversion and Settlement Agreement. A description of the release of
any potential claims of the 9% holders against the Company is also set forth in
Section 2.02(a)(4) above, and is more fully described in Section 6 of the
Conversion and Settlement Agreement.
(8) At the Annual Meeting of Stockholders of DynTek held on December 13, 2005,
the Company's stockholders (i) authorized the Board to amend the Company's
Second Amended and Restated Certificate of Incorporation to effect a reverse
stock split of the Company's outstanding Common Stock by a ratio of 1-for-10
(ii) authorized an amendment to the Company's Second Amended and Restated
Certificate of Incorporation to increase the number of shares of its capital
stock that the Company would have the authority to issue from 160,000,000 shares
to 460,000,000 shares, and its Common Stock that the Company would have
authority to issue from 150,000,000 shares to 450,000,000 shares, and (iii)
authorized an amendment to the Company's 2005 Stock Incentive Plan (the
"Incentive Plan") to (i) increase the number of shares of Common Stock issuable
thereunder by 25,000,000 shares, bringing the total number of shares issuable
thereunder to 30,000,000, and (ii) increase the total number of shares of Common
Stock that may be acquired by any one individual pursuant to options or
restricted stock awards granted under the 2005 Stock Incentive Plan in any one
calendar year from 1,500,000 shares to 7,500,000 shares.
(9) On December 9, 2005, DynTek amended its publicly-traded Class A Warrants
(the "Class A Warrants") to extend their expiration date from December 11, 2005
to December 11, 2007. In addition, on February 24, 2006, DynTek again amended
the Class A Warrants to reduce the exercise price from $2.00 per share to $0.02
per share.
SECTION 2.09
LITIGATION
None.
SECTION 2.10
OWNERSHIP OF PROPERTY; LIENS
(i) Please see disclosure in each of Sections 2.02(a), Section 2.08(3)-(5)
hereof.
(ii) As of the date hereof, the following nine UCC-1 Financing Statements,
copies of which have been provided to the Purchasers, have been filed against
the Company in the State of Delaware:
1. Secured Party: ▇▇▇▇▇▇ Micro, Inc.
Filing No.: 51002774
Filed: 04/01/05
Expires: 04/01/10
2. Secured Party: Laurus Master Fund, Ltd.
Filing No.: 51618215
Filed: 05/25/05
Expires: 05/25/10
3. Secured Party: New England Technology Finance, LLC
Filing No.: 52420843
Filed: 08/04/05
Expires: 08/04/10
4. Secured Party: New England Technology Finance, LLC
Filing No.: 52420868
Filed: 08/04/05
Expires: 08/04/10
5. Secured Party: New England Technology Finance, LLC
Filing No.: 52420884
Filed: 08/04/05
Expires: 08/04/10
6. Secured Party: SACC Partners, L.P. and ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Filing No.: 53415040
Filed: 10/27/05
Expires: 10/27/10
7. Secured Party: ▇.▇. ▇▇▇▇▇▇, ▇▇. Trust
Filing No.: 60283747
Filed: 01/24/06
Expires: 01/24/11
8. Secured Party: ▇▇▇▇ ▇▇▇▇▇▇▇▇
Filing No.: 60283150
Filed: 01/24/06
Expires: 01/24/11
9. Secured Party: ▇▇▇▇ ▇▇▇▇▇▇▇▇
Filing No.: 60283572
Filed: 01/24/06
Expires: 01/24/11
(iii) As of the date hereof, the following fourteen UCC-1 Financing Statements,
copies of which have been provided to the Purchasers, have been filed against
DSI in the State of Delaware:
1. Secured Party: Laurus Master Fund, Ltd.
Filing No.: 51618223
Filed: 05/25/05
Expires: 05/25/10
2. Secured Party: New England Technology Finance, LLC
Filing No.: 52420850
Filed: 08/04/05
Expires: 08/04/10
3. Secured Party: New England Technology Finance, LLC
Filing No.: 52420835
Filed: 08/04/05
Expires: 08/04/10
4. Secured Party: New England Technology Finance, LLC
Filing No.: 52420827
Filed: 08/04/05
Expires: 08/04/10
5. Secured Party: SACC Partners, L.P. and ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Filing No.: 53415040
Filed: 10/27/05
Expires: 10/27/10
6. Secured Party: Fidelity Leasing, a Div. of EAB Leasing Corp.
Filing No.: 21165384
Filed: 04/22/02
Expires: 04/22/07
7. Secured Party: ▇▇▇▇▇▇ Micro Inc.
Filing No.: 21196934
Filed: 05/14/02
Expires: 05/14/07
8. Secured Party: CCA Financial, LLC
Filing No.: 30489495
Filed: 02/27/03
Expires: 02/27/08
9. Secured Party: C Leasing Company, Subsidiary of Bank of the West
Filing No.: 40564338
Filed: 02/18/04
Expires: 02/18/09
10. Secured Party: E Plus Government, Inc.
Filing No.: 43687839
Filed: 12/30/04
Expires: 12/30/09
11. Secured Party: E Plus Government, Inc.
Filing No.: 52119502
Filed: 07/11/05
Expires: 07/11/10
12. Secured Party: E Plus Government, Inc.
Filing No.: 52119510
Filed: 07/11/05
Expires: 07/11/10
13. Secured Party: Hitachi Capital America Corp.
Filing No.: 51892661
Filed: 06/21/05
Expires: 06/21/10
14. Secured Party: Hitachi Capital America Corp.
Filing No.: 51892810
Filed: 06/21/05
Expires: 06/21/10
SECTION 2.11
INTELLECTUAL PROPERTY RIGHTS
None.
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