Allied Defense will settle $30 million PIPE; DynTek raises $10.5 million from stock, debt sale

By Sheri Kasprzak

New York, March 9 - With hopes to repay an $18 million credit facility and beef up its available working capital, The Allied Defense Group, Inc. is gearing up to close a $30 million senior convertible note placement. The company said it is also in talks with at least two banks to provide a senior secured facility for at least $10 million and up to $20 million.

A group of investors including Kings Road Investments Ltd., Portside Growth & Opportunity Fund, Castlerigg Master Investments Ltd. and LBI Group Inc. agreed to buy the 7.5% notes. SG Cowen & Co., LLC is the placement agent.

The notes are convertible at $26.46 each, a 14.8% premium to the company's closing stock price of $23.05 on March 8.

The senior subordinated step-down notes are due in 2011, and the coupon of the notes will be reduced to 5% upon the completion of certain milestones.

In addition to the notes, the investors will receive warrants for 226,800 shares, exercisable at $27.68 each.

Word of the offering nudged the company's stock down slightly. The stock lost 5 cents, or 0.22%, to finish the day at $23.00 (Amex: ADG). On March 6, the company's stock advanced 23 cents to close at $23.13 and gained another 12 cents on March 7 to end at $23.25. On March 8, however, the stock fell 20 cents to finish at $23.05.

The placement sent trading volume of the company's stock through the roof with 48,800 shares traded compared with the average volume of 11,419 shares.

Company chief financial officer Robert Dowski said in a conference call held Thursday that the milestones the company must achieve in order to have the coupon reduced are having the registration statement covering the underlying shares declared effective by the Securities and Exchange Commission and to bring the company's EBITDA into positive levels.

Also, the company has had trouble releasing its financing statements because its auditor, Grant Thornton, LLP, resigned in November. The company had also delayed the filing of its form 10-Q for the period ended Sept. 30, 2005 and was required to restate its financials for the periods ended March 30, 2005 and June 30, 2005.

"These are the things the investors wanted to see and they're the things we wanted to see in terms of the coupon," said Dowski in the call.

According to the company's latest earnings statement, Allied reported a net loss of $4,292,000 for the quarter ended Sept. 30, 2005, compared with $567,000 for the same period of 2004. The company reported revenue of $23,476,000 for the quarter ended Sept. 30, 2005, compared with revenue of $34,926,000 for the same quarter of 2004.

Earnings fueled PIPE

Because of the company's lack of audited financial statements and because of a negative EBITDA position at the end of 2005, Dowski said in the conference call that Allied was limited to the types of facilities from which it could choose.

"We were really limited in the choices we could make to provide working capital because we had a disappointing performance [in 2005] when we went from positive to negative EBITDA and due to the fact that, in essence, we did not have any audited financial statements in [2005]," said Dowski.

Allied was in violation of its EBITDA ratio under its senior credit agreement as of Sept. 30, 2005 and had been in talks with its lenders to waive the violation.

Proceeds will be used to repay an $18 million credit facility due November 2010 held by Patriot Capital Fund, Inc. with the remainder being used for working capital and general corporate purposes.

"We are very pleased with the terms of this financing, which enables us to retire a much higher coupon senior note, thereby allowing us to retain cash that we would have otherwise paid out in 2006 and eliminating the constraints on our operations imposed by the covenants of the previous note," said John Marcello, the company's chief executive officer, in a statement.

"Our goal is to enhance the strength of our balance sheet and provide flexibility to pursue our growth strategies. We appreciate the support of our new institutional investors and believe this financing serves as a further indication of Allied potential for growth in 2006 and beyond."

As to the senior secured facility, Dowski said the company has already entered into a term sheet with one bank and is in talks with another bank for a potential revolving facility for between $5 million and $10 million that may be increased to $20 million. The coupon on that facility, Dowski said, may be between Libor plus 200 basis points and Libor plus 300 basis points.

The Allied Defense Group, based in Vienna, Va., develops ammunition marketed to defense departments and also designs electronic and microwave security systems.

DynTek raises $10.5 million

Elsewhere in the tech sector, DynTek, Inc. settled a $10,459,140 stock and note deal that sent its stock down 25%.

The company sold $6.7 million in senior secured notes to SACC Partners, LP and Lloyd I. Miller, III and also issued a $3 million junior secured convertible note to other investors.

Upon news of the offering Thursday morning, DynTek's stock slipped $0.015, or 25%, to settle at $0.045 (OTCBB: DYTK).

The senior secured notes mature March 1, 2010 and bear interest at 8% if paid in cash or 11% if paid in stock.

SACC and Miller will receive warrants equal to 19.9% of the company's outstanding stock at the time of exercise. The warrants will be exercisable at $0.001 each through Dec. 31, 2016.

Proceeds from the senior secured note will be used to repay a portion of the outstanding principal and interest under a $6.8 million note held by Laurus Master Fund, Ltd.

The 10% junior secured convertible note matures on March 1, 2011 and is convertible into common shares at $0.02 each. The conversion price is a 67% discount to the company's closing stock price of $0.06 on March 8.

Proceeds from this note offering will be used to reduce additional debt.

DynTek also closed a $759,140 private placement of stock. The company issued 37,957,000 shares at $0.02 each.

The company had 81,164,636 outstanding common shares as of Feb. 13.

The company also issued warrants for 7,591,400 shares, exercisable at $0.02 each.

Placement agent Network 1 Financial Securities, Inc. may continue selling shares up to $4.5 million in proceeds.

The company has also entered into agreements with holders of $10.7 million in debt to convert $7.5 million into stock at $0.02 each.

Looking to its latest earnings statement, DynTek reported a net loss of $4,256,000 for the quarter ended Dec. 31, 2005, compared with a net loss of $7,004,000 for the same quarter in 2004.

Based in Irvine, Calif., DynTek provides professional technology services like voice-over-internet protocol services to mid-market clients like state and local governments and educational institutions.

Klondex leads Canadian PIPEs

Among Canadian issuers, Klondex Mines priced a C$6,187,500 unit offering. The deal, which is being placed through agent Quest Securities Corp., includes up to 2.75 million units at C$2.25 each.

The price per share is an 11.4% discount to the company's closing stock price of C$2.54 on March 8.

The units consist of one share and one half-share warrant. The whole warrants are exercisable at C$3.00 each for 18 months.

The deal was announced Thursday morning, and by the end of the day, the company's stock had advanced by 7.09%, or 18 cents, to close at C$2.72 (TSX Venture: KDX).

Quest has a greenshoe for up to 500,000 additional units.

Klondex plans to use the proceeds for ongoing work at the Fire Creek property and for working capital and general corporate purposes.

Based in Vancouver, B.C., Klondex is a mineral exploration company.

Kodiak Oil stock gains 7.6%

After wrapping a $40 million PIPE on Wednesday, Kodiak Oil & Gas Corp.'s stock advanced almost 7.6% Thursday.

The stock settled up 18 cents Thursday to end the day at C$2.55 (TSX Venture: KOG) after giving up more than 13% on Wednesday on word of the placement.

The gain comes after oil prices finally made some gains after posting losses throughout the week.

Oil prices moved up 45 cents to close at $60.47 Thursday after dropping below $60 per barrel Wednesday.

Under the terms of the placement, Kodiak sold shares at $2.05 each on a non-brokered basis.

"Because of the discount [of almost 25% from the company's closing stock price of C$2.73 on March 7], I really believe they moved because of oil in general," said one market source familiar with energy stocks.

The market source said that even though energy stocks in general didn't improve much Thursday, the capital infusion coupled with better oil prices may have helped to move Kodiak's stock.

Kodiak is a Denver-based oil explorer.

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