<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 2000
REGISTRATION NO. 333-33516
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
DYNACS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8731 59-2521756
(STATE OR JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
35111 U.S. HIGHWAY 19 NORTH, SUITE 300
PALM HARBOR, FL 34684
(727) 787-1245
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
------------------------
DR. RAMENDRA P. SINGH, PRESIDENT
DYNACS INC.
35111 U.S. HIGHWAY 19 NORTH, SUITE 300
PALM HARBOR, FL 34684
(727) 787-1245
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GARY A. SCHONWALD, ESQ. RUBI FINKELSTEIN, ESQ.
FRANKFURT, GARBUS, KURNIT, KLEIN & SELZ, P.C. ORRICK, HERRINGTON & SUTCLIFFE, LLP
488 MADISON AVENUE 666 FIFTH AVENUE
NEW YORK, NY 10022 NEW YORK, NY 10103
(212) 980-0120 (212) 506-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(2)........... 3,450,000 $11.00 $37,950,000 $10,018.80
----------------------------------------------------------------------------------------------------------------------
Representatives' Warrants(3).............. 300,000 $13.20 $ 3,960,000 $ 1,045.44
----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(4)(5)........ 300,000 (6) (6) (6)
----------------------------------------------------------------------------------------------------------------------
Total..................................... -- -- $41,910,000 $11,064.24(7)
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes a maximum of 450,000 shares that may be purchased by the
underwriters to cover over-allotments, if any.
(3) Issued to the Representatives of the underwriters.
(4) Issuable upon the exercise of the Representatives' Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers an
indeterminable number of additional shares of Common Stock issuable as a
result of any future anti-dilution adjustments in accordance with the terms
of the Representatives' Warrants.
(6) Pursuant to Rule 457(g), no additional registration fee is required for
these shares of Common Stock.
(7) $9,200.20 of this Registration Fee was paid by the Registrant upon the
Registrant's initial filing of this Registration Statement with the
Securities and Exchange Commission on March 29, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
Subject to completion, dated July 17, 2000.
3,000,000 SHARES
DYNACS INC.
COMMON STOCK
Dynacs Inc. is offering 3,000,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
Dynacs' common stock.
At the request of Dynacs, the underwriters have reserved at the initial
public offering price up to 300,000 shares of common stock for sale to
employees, customers and other business associates of Dynacs.
It is anticipated that the public offering price will be between $9.00 and
$11.00 per share. The common stock has been approved for listing on the Nasdaq
National Market under the symbol DNAC.
We and eight selling stockholders have granted the underwriters a 45-day
option to purchase an additional 450,000 shares of common stock to cover
over-allotments, if any. If this option is exercised in full, the total public
offering price, underwriting discounts and commissions, and proceeds to us and
the eight selling stockholders from this offering will be $ ,
$ , $ and $ , respectively.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR FACTORS YOU SHOULD CONSIDER
BEFORE INVESTING IN SHARES OF DYNACS.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price.....................
Underwriting discounts and commissions....
Proceeds, before expenses, to Dynacs......
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters expect delivery and payment for the shares will be on
, 2000.
-------------------------
H. C. WAINWRIGHT & CO., INC. ROTH CAPITAL PARTNERS, INC.
-------------------------
Prospectus dated , 2000.
<PAGE> 3
DESCRIPTION OF INSIDE FRONT COVER GRAPHIC:
The graphic at the top center of the page depicts Dynacs Inc.'s logo,
"Dynacs," with the tag line "Digital Studios". Underneath the tag line, appears
the following text: "(2.5% of revenues and 84.3% of capital asset investment for
the nine-month period ended September 30, 1999)." Below this are 3 black and
white and 3 color, single frame images of video material: 2 images (1 black and
white, 1 color) from the television series "Bewitched", 2 images (1 black and
white, 1 color) from the television series "I Dream of Jeannie" and 2 images (1
black and white, 1 color) from historical film footage depicting Roosevelt,
Churchill and Stalin. These images depict examples of the work the company
performs in converting black & white video material to color video material. To
the upper-left of these images are the words "From Black & White..." and to the
lower-right of these images are the words "...to Color" and "Digital Color
Re-mastering."
The graphic at the center-right of the page is an image from the animated
short "Monkey Love" which depicts an example of Dynacs' work in providing
digital services related to the production and restoration of animated cartoons.
To the left of this image are the words "Digital Ink & Paint" and directly below
the image are the words "Digital Cartoon Restoration."
The graphics at the lower-left of the page are two images: the first is a
single frame image from a "Gatorade" commercial and the second a single frame
image from an episode of the television series "The X-Files." These images
depict examples of Dynacs' work providing digital color special effects for
television series, commercials and music videos. Next to these images are the
words "Digital Color Special Effects for Television Series, Commercials and
Music Videos."
At the lower-right portion of the page is an image of Dynacs Inc.'s logo for
its web site www.MarketYourMedia.com. The logo consists of an image of a
television directly to the left of the words "marketyourmedia.com." Directly
below this logo are the tag line words "Enabling the Digital Film & Video
Future." Below this are four black and white images arranged and bordered to
appear to be a part of a physical piece of film footage. The four images are the
Hindenburg airship burning; a newsreel cameraman with a motion picture camera;
two locomotive trains colliding; and a historical image of Roosevelt, Churchill
and Stalin. Each image is a still image from film footage contained in the
Sherman Grinberg Film Libraries and is representative of the historical,
newsworthy and archival footage contained in the library. Below these images are
the words "Web-based Digital Media Archive;" "E-cataloguing & On-line
Distribution"; and "Owned, Licensed & Third-Party Representation."
DESCRIPTION OF INSIDE BACK COVER GRAPHIC:
The graphic at the top center of the back inside cover of the prospectus
depicts the Dynacs Inc.'s logo, "Dynacs," with the tag line "Information &
Applied Technology." Underneath the tag line, appears the following text:
"(97.5% of revenues and 15.7% of capital asset investment for the nine-month
period ended September 30, 1999)." Below the logo and tag line are three images:
on the left, an artist rendering of the International Space Station; in the
center, a photograph of a Space Shuttle launch; and to the right, a photograph
of the launch operations center at the NASA Kennedy Space Center. Below the
image of the International Space Station are the words "From Design &
Launch....."; "Systems Integration"; "Simulation & Modeling"; "Satellite Systems
& Operations"; and "Spaceflight Hardware and Software." Above the image of the
launch operations center are the words "Internet Enablement"; "Information
Systems Development"; "Website Database Design & Implementation"; "Information
Systems Sustaining Engineering"; and "..... To Operations."
In the center-lower left of the page are three images representing Dynacs'
on-going efforts in the commercialization of technologies utilized by us in the
performance of contracts with NASA and the Department of Defense. To the right
of these three images are the words "Application of Aerospace Technologies in
the Private Sector." The first image graphically depicts the multi-colored
computational fluid dynamic (CFD) solution of the aerodynamic flow field of a
wing of an aircraft and a tractor trailer cab. Within this image are the words:
"High Speed Research Program CFD Solution for HSR Ref H Configuration"; and "CFD
Analysis of Truck Vehicle Performance." To the left of this image are the words
"Aerodynamic Modeling Technologies." Below this is the image of a computer
screen entitled "Database Structure Module Hierarchy." This image is
representative of the information technology products and services Dynacs
provides to its clients. Below this image are the words "Business Systems
Re-engineering & Internet Enablement." To the right of this is an image of a
computer screen of the Dycolor software application, which is a software
application developed and utilized by us to colorize digital film and video
material. Below this are the words "Image Processing & Application Development."
In the lower-right area of the page are the words "Innovation and Technology
Growth" and three rectangles ordered left to right from smallest to largest with
an upwardly sweeping arrow behind the three rectangles. The three rectangles and
arrow depict the growth of technologies and technical competencies within
Dynacs. The smallest rectangle is entitled "1985" and contains the following
words: "Dynamics"; "Modeling & Simulation"; "3D/2D Visualization"; "Computer
Graphics"; "Control Systems"; and "Guidance & Navigation" and has the word
"Technology" going down the left side of the rectangle. The center rectangle
contains the following words: "Smart Structures"; "Vibration Control"; "Laser
Imaging"; "Structural Dynamics"; "Pointing & Shape Control"; "Computa-
<PAGE> 4
tional Mechanics"; and "Combined Structure & Control Design" and has the word
"Technology" going down the left side of the rectangle. The largest rectangle is
entitled "2000" and contains the following words: Information Technologies";
"Computer Science Technologies"; "Internet Infrastructure -- Design & Dev.";
"Technical/Business Re-engineering"; "Programming & SW Development"; "Graphic &
Information Design"; "Real-time Video & Audio Servers"; "Client-Data Server
Technologies"; "Digital Special Effects Technologies"; "Automatic Source Code
Generation"; "Autonomous & Intelligent Systems"; "Applied Technologies";
"Project Management Technologies"; "System and Subsystem Engineering"; "Space
Propulsion Technologies"; "Combustion Analysis & Flow Fields"; "Operations
Software & Systems"; "Hardware Fabrication and Test"; "Computational Fluid
Dynamics"; "Commercial Aircraft Technologies"; "Experimental Aerodynamics";
"Digital Media Storage Systems"; and "Medical Diagnostics & Imaging" and has the
word "Technology" going down the left side of the rectangle.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 12
Use of Proceeds............................................. 19
Dividend Policy............................................. 21
Capitalization.............................................. 21
Dilution.................................................... 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 39
Management.................................................. 59
Principal and Selling Stockholders.......................... 66
Certain Transactions........................................ 68
Description of Securities................................... 72
Shares Eligible for Future Sale............................. 75
Underwriting................................................ 79
Legal Matters............................................... 82
Experts..................................................... 82
Available Information....................................... 82
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Dynacs' financial statements and the notes to those statements
appearing elsewhere in this prospectus.
In this prospectus,"Dynacs," the "Company," "we," "us" and "our" refer to
Dynacs Inc. and its subsidiaries, and the Securities Act of 1933, as amended, is
referred to as the "Securities Act."
References in this prospectus to backlog include funded and unfunded
backlog. Funded backlog consists of the dollar amount of contracts in our
information systems and aerospace/satellite systems and operations business that
is currently appropriated by the customer and allocated to the contract or
otherwise authorized for payment upon completion of a particular portion of the
work. Unfunded backlog consists of the full contract award value of these
contracts and includes renewals or extensions that have been priced but as to
which the customer retains funding discretion. References in this prospectus to
the term of any contract include the basic term and the term of any option
periods, whether or not the relevant options have been exercised.
OUR BUSINESS
We develop, apply and provide services utilizing advanced technologies in
the areas of information systems and aerospace/satellite systems and operations
for U.S. Government agencies and private sector clients. More recently, we have
begun providing information technology and digital content development and
production services to the media and entertainment industry through our Digital
Media and Entertainment Division. Our business strategy is to develop commercial
applications for the technologies and know-how developed by us in our
information and aerospace businesses to create and grow new businesses with
strong profit potential. To date, the most significant commercial application of
our proprietary technologies has been our use of these technologies to convert
and reformat black-and-white film footage, including full length feature films
and television series, and shorter length media, including cartoons, television
commercials, music videos and short films and videos, into digital color
material. We utilize these technologies to provide digital conversion and
reformatting services to others as well as to enhance or modify other content,
which was originally created for other purposes, for which we can then obtain a
copyright. We believe that the digital distribution of visual media content
utilizing internet technologies presents another significant commercial
application of our know-how. To further our business strategy, we have:
- spent over $4.0 million in the twelve-month period ended December 31,
1999 to build the infrastructure to grow our digital media and
entertainment business, including the development of specialized software
and computer hardware systems used for digital conversion, cataloguing
and archiving of digital media content, and to convert full and short
length media into digital color material, as well as for upgrading
existing facilities, and
- pursued an acquisition strategy aimed at acquiring media assets to which
we can apply our technologies to enhance their earnings potential and
create new, copyrighted visual media.
We believe that we are the only provider of cost-effective processes to
convert black-and-white full length films into digital color material. We
believe that we are also the leading provider of converting the combined group
of full length films and shorter length media, including cartoons, television
commercials, music videos and short films and videos, into digital color
material. Our past and current clients for these services include, among others,
The Walt Disney Company (which generated 0.1% of our revenues for the nine-month
period ended September 30, 1998 and 0.0% of our revenues for the six-month
period ended March 31, 2000) and Columbia Pictures Television Group, a division
of Sony Corporation (which generated 0.6% of our revenues for the nine-month
period ended September 30, 1998 and 1.9% of our revenues for the six-month
period ended March 31, 2000). We intend to use our information and digital
technologies to develop Internet-based
4
<PAGE> 7
distribution and business-to-business and business-to-consumer delivery of both
our own and third-party owned digital media products and services through our
MarketYourMedia.com web site.
In 1998, as part of our media and entertainment business expansion, we
began to acquire for our own account, directly and through joint projects, media
products for colorization, while continuing to provide work-for-hire
colorization services. We have entered into a non-binding letter of intent to
acquire the Sherman Grinberg Film Libraries, Inc., one of the earliest and
largest commercial newsreel film collections in the world. The libraries contain
approximately 15.0 million feet of film footage and include, among other
footage, the Pathe and Paramount Newsreels, as well as series such as "The
Greatest Headlines of the Century." As a result of the acquisition of the
Sherman Grinberg Film Libraries, Inc., if completed, Dynacs will acquire a 50.0%
interest in, and the perpetual exclusive license to operate, the Pathe film
collection consisting of 7.0 million feet of 35mm film dating from 1896 to 1957.
We intend to pursue a digital production and distribution strategy utilizing our
proprietary technologies, including colorization technologies, and our
MarketYourMedia.com website to enhance the earnings potential and value of this
asset.
For the twelve-month period ended December 31, 1999, our gross revenues
exceeded $72.9 million, of which $71.3 million, or 97.8%, were attributable to
information systems and aerospace/satellite systems and operations contracts and
$1.6 million, or 2.2%, were attributable to digital media and entertainment
contracts. For the nine months ended September 30, 1999, total revenues were
$55.3 million, of which $53.9 million, or 97.5%, were attributable to
information systems and aerospace/satellite systems and operations contracts,
and $1.4 million, or 2.5%, were attributable to digital media and entertainment
contracts. For the six-month period ended March 31, 2000, total revenues were
$36.6 million, of which $35.7 million, or 97.5% were attributable to information
systems and aerospace/satellite systems and operations contracts, and $0.9
million, or 2.5%, were attributable to digital/media and entertainment
contracts.
OUR CORE TECHNOLOGIES
Our Information and Applied Technology Division and Digital Media and
Entertainment Division each utilizes one or more of our core technologies. Our
core technologies include:
- 3-D VISUALIZATION AND ANIMATION TECHNOLOGIES, USED TO REPRESENT STILL AND
MOVING OBJECTS FOR THE AEROSPACE AND MEDIA INDUSTRIES. For example, under
our $173.6 million, five-year contract with NASA's Kennedy Space Center
ending September 30, 2002, our services include multimedia development
and training, computer graphics and animation, and web site development
and implementation services.
- DIGITAL IMAGE PROCESSING AND IMAGE MANIPULATION TECHNOLOGIES USED TO
CREATE AND ENHANCE IMAGES. For example, under our $2.9 million, 63-month
contract with the U.S. Air Force Phillips Laboratory ending December 31,
2001, we have developed techniques to improve laser imaging of objects in
space.
- DESIGN, SIMULATION AND MODELING OF THREE-DIMENSIONAL OBJECTS IN MOTION,
INCLUDING SATELLITES AND OTHER SPACECRAFT, MOTOR VEHICLES AND SAILBOATS.
For example, under our five-year, $3.5 million contract with NASA ending
September 30, 2000, we are developing spacecraft computer models for the
Johnson Space Center.
- INTERNET ENABLING AND COMPUTER TECHNOLOGIES USED IN THE MANAGEMENT OF
INFORMATION SYSTEMS AND PROCESSES. For example, under our seven-year,
$64.6 million subcontract with The Boeing Company ending September 30,
2001, we are integrating information systems for NASA's International
Space Station.
- SATELLITE OPERATING SOFTWARE. For example, under our 54-month, $5.3
million contract with TRW Inc. ending March 31, 2001, we develop software
to operate satellite systems.
5
<PAGE> 8
DIGITAL MEDIA AND ENTERTAINMENT
We developed our digital media and entertainment business based on the same
information management, visualization technologies and know-how initially
developed by us for the aerospace industry. Through the use of our advanced
proprietary technologies and our low cost overseas production facilities, we
believe that we are able to provide clients with a realistic and aesthetically
pleasing product on a faster production schedule and a more cost-effective basis
than other currently available methods. We have also developed technologies for
converting visual media into material for high definition television and
theatrical projection. To date, we have completed film and television projects
for The Walt Disney Company (0.1% of our revenues for the nine-month period
ended September 30, 1998 and 0.0% of our revenues for the six-month period ended
March 31, 2000) and Columbia Picture Television Group, a division of Sony
Corporation (0.6% of our revenues for the nine-month period ended September 30,
1998 and 1.9% of our revenues for the six-month period ended March 31, 2000),
and others, and have also created special color effects for commercials, music
videos and documentaries.
We seek to leverage our information management, visualization technologies
and know-how initially developed by us for the aerospace industry to complete
the development of our web site, "MarketYourMedia.com," and to enable us to
establish ourselves as a leader in the visual content industry. Through
MarketYourMedia.com, we intend to position Dynacs as a seller and distributor of
visual media assets over the Internet. Once our web site is in operation, we
plan to use this web site as an on-line media library and marketplace where we
and other owners of digitized visual media can sell material to prospective
licensees and consumers. We anticipate receiving fees from media owners for
scanning, digitizing, colorizing, cataloging and archiving their materials.
Prospective licensees will be able to search an on-line catalog of available
materials and down-load selected materials for viewing. For third party owners
of visual media, we will act as an intermediary and receive fees for properties
licensed through the MarketYourMedia.com web-site.
MARKETS
According to International Data Corporation (IDC), a leading provider of
information technology industry analysis and market data, the commercial market
for the type of services that we provide in the area of information systems
management and development is projected to sustain annual double-digit growth
through 2004, with the U.S. remaining the largest regional market for
information technology services. We believe that this substantial growth will
result from the increasing dependency of businesses and governmental agencies on
information technologies and the trend toward outsourcing of these services,
which is particularly acute for companies whose information technology personnel
lack the requisite skills and abilities to implement new technologies.
The commercial markets for the type of services that we can provide in the
area of aerospace/satellite systems and operations are expected to grow to $81.1
billion worldwide between 2000 and 2009, according to the Teal Group
Corporation. The anticipated market demand reflects the dramatic growth
projected in the global communications and information industry and the
availability of new supporting technologies.
Currently, the primary focus of our media and entertainment business is the
world-wide market for digitally reformatted black-and-white television
programming with an initial emphasis on family, children's and documentary
programming. This market constitutes only a portion of the commercial markets
for all television programming.
6
<PAGE> 9
GROWTH STRATEGY
We intend to grow our business by:
- expanding our work in the field of digital media and entertainment by
acquiring, colorizing, developing and distributing libraries of
black-and-white television series, feature films and stock footage to
network and cable television and for broad-band Internet presentation;
- developing an on-line digital library and marketplace, under the name
"MarketYourMedia.com," for the distribution of visual digital and other
media content;
- expanding our work in digital conversion and cataloguing, archiving of
visual media content and digital film restoration, animation, and
colorization;
- identifying and pursuing further commercial applications of technologies
and know-how which we have developed in our work, which may include joint
ventures with or acquisitions of companies in related businesses; and
- continuing to provide services to U.S. Government agencies on projects
with high visibility as a means of developing new technologies and
enhancing our reputation.
7
<PAGE> 10
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Dynacs............... 3,000,000 shares
Shares to be outstanding after this
offering............................. 13,347,765 shares
Use of proceeds........................ - Acquisition and development of rights in
media assets
- Expand and upgrade U.S. and overseas
facilities and equipment and build new
U.S. and overseas facilities
- Repayment of line of credit
- Hire additional marketing, technical and
production personnel
- Research and development
- Repayment of related party debt
- Marketing
- Loan to related party
- Working capital and general corporate
purposes
See "Use of Proceeds."
NASDAQ National Market symbol.......... DNAC
</TABLE>
The information throughout this prospectus gives effect to a 1,750-to-one
stock split of our common stock on August 11, 1999, a 1.12299-to-one stock split
on March 28, 2000 and a 1.3-to-one stock split on July 14, 2000.
Unless otherwise specifically stated, information throughout this
prospectus assumes:
- an initial public offering price of $10.00 per share;
- no exercise of the underwriters' over-allotment option, the
representatives' warrants or other outstanding options and warrants other
than the Mezzanine Warrants (as defined below);
- the automatic conversion, at the effective date of this offering, of the
equity interest of certain parties in our subsidiary, Cerulean FXs, Inc.,
into 912,064 shares of our common stock;
- the acquisition of the issued and outstanding capital stock of Sherman
Grinberg Film Libraries, Inc. in exchange for 1,085,000 shares of our
common stock;
- the issuance of 5,000 shares of our common stock to Film Archive Finance
Company, Inc., the parent company of Sherman Grinberg Film Libraries,
Inc., in consideration for a covenant not to compete;
- the issuance of 10,000 shares of our common stock to an executive officer
of Film Archive Finance Company, Inc. in consideration for entering into
a non-competition agreement with us;
- that the holders of unsecured promissory notes ("Mezzanine Notes") issued
in connection with our November 1999 and January 2000 and February and
March 2000 mezzanine financings (collectively, the "Mezzanine
Financings") have elected to convert their Mezzanine Notes into an
aggregate of 483,334 shares of our common stock;
- that the warrants ("Mezzanine Warrants") issued in connection with the
Mezzanine Financings to the holders of the Mezzanine Notes have been
exercised for an aggregate of 635,050 shares of our common stock;
8
<PAGE> 11
- that the warrants granted to H.C. Wainwright & Co., Inc., a
representative of the underwriters in this offering, in consideration for
services rendered as placement agent of the Mezzanine Financings for
62,834 shares of our common stock have been canceled;
- 255,480 shares of common stock issuable upon the exercise of options at
$.02 per share; and
- no additional issuance of securities under our 1999 Long-Term Incentive
Plan.
We have excluded the following shares in calculating the number of shares
of common stock that will be outstanding after the completion of this offering,
- 470,088 shares of common stock that will be issuable upon the exercise of
options we intend to issue upon the consummation of this offering to our
employees under our 1999 Long-Term Incentive Plan at an exercise price
equal to the initial public offering price of the common stock per share;
- 255,480 shares of common stock that will be issuable upon the exercise of
options we intend to issue upon the consummation of this offering to
particular parties under our 1999 Long-Term Incentive Plan at an exercise
price equal to the initial public offering price of the common stock per
share in connection with our acquisition in August 1999 of Cerulean
Colorization L.L.C.;
- 51,097 shares of common stock that will be issuable upon the exercise of
options we intend to issue upon the consummation of this offering to a
director-nominee under our 1999 Long-Term Incentive Plan at an exercise
price equal to the initial public offering price of the common stock per
share in connection with our acquisition of Cerulean Colorization L.L.C.,
subject to Dynacs meeting specific performance targets;
- 82,727 shares of common stock issuable to director-nominees and
consultants upon the exercise of options we intend to issue pursuant to
our 1999 Long-Term Incentive Plan at an exercise price equal to the
initial public offering price of the common stock per share;
- 300,000 shares of common stock that will be issuable upon the exercise of
warrants we intend to grant to a representative of the underwriters of
this offering in consideration for services rendered; and
- 450,000 shares of common stock issuable upon the exercise of an option we
and the selling stockholders intend to grant to the underwriters upon the
consummation of this offering to cover over-allotments, if any, in this
offering.
9
<PAGE> 12
SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary condensed consolidated financial
information with respect to Dynacs and has been derived from (1) the audited
financial statements of Dynacs for the nine-month period ended September 30,
1999, and for the fiscal years ended December 31, 1998 and 1997, included
elsewhere in this prospectus, and (2) the unaudited financial statements of
Dynacs for the nine-month period ended September 30, 1998 and the six-month
periods ended March 31, 2000 and 1999. You should note that in 1999, we changed
our fiscal year from a calendar year to a year ending September 30, with the
result that our 1999 fiscal year consists of nine months. The information set
forth below should be read in conjunction with "Selected Consolidated Financial
Data," "Pro Forma Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Dynacs
consolidated financial statements and the notes thereto, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------------------------------
PRO FORMA
1997 1998 1998 1999 1999(1)
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total Revenues....... $26,960,839 $60,946,686 $42,791,452 $55,295,085 $57,157,827
Operating Income
(Loss)............. 491,822 277,505 745,801 (2,447,265) (1,741,859)
Net Income (Loss).... 263,533 41,016 342,107 (1,606,411) (2,917,177)
Diluted Net Income
(Loss) per share... 0.03 0.00 0.03 (0.23) (0.29)
Diluted Weighted
Average Common and
Common Equivalent
Shares............. 10,219,209 10,219,209 10,219,209 6,859,644(2) 10,238,231
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------------------
PRO FORMA
1999 2000 2000(1)
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total Revenues....... $35,928,887 $36,611,442 $36,815,654
Operating Income
(Loss)............. (502,610) 37,274 (372,507)
Net Income (Loss).... (377,664) (343,310) (669,732)
Diluted Net Income
(Loss) per share... (0.06) (0.05) (0.06)
Diluted Weighted
Average Common and
Common Equivalent
Shares............. 6,804,290 6,961,837 10,497,765
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(3)
----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital............................................. $(3,869,234) $(2,734,397) $24,115,603
Total Assets................................................ 14,450,153 24,803,660 51,653,660
Long-Term Debt (including current portion).................. 3,866,114 365,114 365,114
Total Stockholders' Equity.................................. 1,862,450 15,262,012 42,112,012
</TABLE>
-------------------------
(1) Pro forma gives effect to certain pro forma adjustments including (i) the
proposed acquisition of Sherman Grinberg Film Libraries, Inc., (ii) the use
of certain net proceeds of this offering, (iii) the issuance of common stock
to the sellers of Cerulean Colorization, L.L.C., (iv) the exercise of
options by the Company's President, and (v) the revaluation of the Mezzanine
Notes issued prior to March 31, 2000 upon the consummation of this offering.
See the Pro Forma Consolidated Financial Statements and the notes thereto
for a description of the pro forma adjustments.
(2) Reflects the voluntary surrendering of 3,576,724 options by Ramendra P.
Singh, the President and Chief Executive Officer of Dynacs.
(3) Adjusted to reflect the consummation of the offering and the application of
the estimated net proceeds by Dynacs therefrom. See "Use of Proceeds" for a
further description of the application of the net proceeds from this
offering.
10
<PAGE> 13
THE COMPANY
We were organized in the State of Florida in April 1985 and reincorporated
in the State of Delaware in February 2000. Our principal executive offices are
located at 35111 U.S. Highway 19 North, Suite 300, Palm Harbor, FL 34684, and
our telephone number is (727) 787-1245. We maintain World Wide Web sites at
www.dynacs.com and at www.MarketYourMedia.com.
11
<PAGE> 14
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below, in addition to the other information included in this
prospectus, including the financial statements and notes thereto, before you
decide whether to buy our common stock. If any of the following risks were to
occur, our business, financial condition or results of operations would be
likely to materially suffer and would raise doubt whether we could proceed with
our current business plan. In that event, you could lose all or a part of your
investment.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Dynacs and our
industry. These forward-looking statements involve risks and uncertainties.
Dynacs' actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, as more fully
described throughout this prospectus.
It is especially important to keep these risk factors in mind when you read
forward-looking statements.
Generally, the words "anticipates," "believes," "expects," "plans,"
"estimates," "intends," "may," "will," "should" and "contemplates," and similar
expressions identify forward-looking statements. These statements are based on
our beliefs as well as assumptions we made using information currently available
to us. Forward-looking statements involve risks and uncertainties, and our
actual results could differ materially from the results discussed in the
forward-looking statements because of these and other unforeseeable factors.
Some, but not all, of the factors that may cause results to materially differ
include those discussed in this Risk Factors section.
You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this prospectus.
RISKS RELATED TO OUR INFORMATION AND APPLIED TECHNOLOGY DIVISION
SUBSTANTIALLY ALL OUR REVENUES WOULD BE THREATENED IF OUR RELATIONSHIPS WITH
U.S. GOVERNMENT AGENCIES WERE HARMED.
During our 1999, 1998, and 1997 fiscal years, we derived approximately
96.0%, 97.5% and 90.0%, respectively, of our total revenues from contracts with
NASA and the U.S. Air Force, either as a prime contractor or subcontractor. We
anticipate that contracts with these U.S. Government agencies are likely to
continue to account for a significant portion of our revenues in the foreseeable
future. Most of our contracts with U.S. Government agencies can be terminated at
any time "for convenience of the Government." The unexpected termination or
nonrenewal of one or more of our significant contracts could significantly
reduce our revenues.
OUR FINANCIAL PERFORMANCE WILL BE ADVERSELY AFFECTED IF WE DO NOT REALIZE MOST
OF THE REVENUES INCLUDED IN OUR BACKLOG.
Although our total contract backlog was approximately $173.2 million as of
June 30, 2000, we may not realize all or even a substantial portion of this
backlog as revenue. Our funded backlog of $27.1 million (or 15.6% of the total
backlog) consists of the dollar amount of contracts in our information systems
and aerospace/satellite systems and operations that is currently appropriated by
the customer and allocated to the contract or otherwise authorized for payment
by the customer upon completion of a particular portion of the work. Our
unfunded backlog of $146.1 million (or 84.4% of the backlog) consists of the
stated award value of these contracts and includes renewals or extensions that
have been priced but as to which the contracting agency retains funding
discretion. If any of the
12
<PAGE> 15
following events occur, we may fail to realize a significant portion of the
revenues included in our backlog:
- The U.S. Government's failure to fund all of the years of a multi-year
contract;
- The U.S. Government's failure to exercise its option to extend the term
of a contract;
- The U.S. Government's failure to request any services under contracts
pursuant to which we provide services on a per-request basis; and
- The U.S. Government's decision to decrease the size or scope of a
contract or to terminate a contract.
OUR FAILURE TO COMPLY WITH, OR SUCCESSFULLY ADAPT TO CHANGES IN, LAWS AND
REGULATIONS AFFECTING U.S. GOVERNMENT CONTRACTING COULD SLOW OUR GROWTH OR
REDUCE OUR CHANCES OF BECOMING PROFITABLE.
As a contractor and subcontractor with U.S. Government agencies, we are
subject to various U.S. Government laws and regulations. These regulations
affect how our customers and we do business and, in some instances, impose added
costs on our businesses. Our failure to comply with, or successfully adapt to
changes in, applicable laws could result in contract termination, price or fee
reductions or suspension or debarment from contracting with the U.S. Government,
which could slow our growth or reduce our chances of becoming profitable.
AUDITS OF OUR U.S. GOVERNMENT CONTRACTS COULD CAUSE A MATERIAL NEGATIVE
ADJUSTMENT TO OUR REVENUES.
U.S. Government agencies routinely audit government contracts. Any costs
found to be improperly allocated to a specific contract will not be reimbursed,
while improper costs already reimbursed will be recouped by the U.S. Government
agency. Any finding of improper billing or other financial irregularity pursuant
to an audit of our U.S. Government contracts could result in a negative material
adjustment to our revenues and adversely impact our business.
THE LOSS OF OUR STATUS AS A SMALL BUSINESS OR SMALL DISADVANTAGED BUSINESS COULD
IMPAIR OUR ABILITY TO OBTAIN U.S. GOVERNMENT CONTRACTS.
We have derived significant benefits from our status as a small business
and a small disadvantaged business, and from our participation in the Section
8(a) Program of the U.S. Small Business Administration when bidding on contracts
with the U.S. Government, the primary customer of our Information and Applied
Technology Division's services. The U.S. Government allocates a specified
percentage of contracts to small businesses and small disadvantaged businesses,
and has the right to increase bid prices of bidders which are not small
disadvantaged businesses by up to 10.0%. Our participation in the Section 8(a)
Program was automatically terminated in October 1998. However, we have retained
our status as a small disadvantaged business since October 1998, and may retain
it until October 2000. Although we have applied to the U.S. Small Business
Administration for continuing certification for an additional three year period,
upon the consummation of this offering, we will lose our status as a small
disadvantaged business if a majority of our stock is not held by a
"disadvantaged" group. If we lose our status as a small disadvantaged business,
we will be unable to avail ourselves of the benefits derived from being a small
disadvantaged business when bidding on U.S. Government contracts in the future.
Our loss of our small disadvantaged business status could impair our ability to
obtain U.S. Government contracts which could have a material adverse affect on
our Information and Applied Technology Division and overall business. See
"Business; Our Divisions -- Competition for U.S. Government Projects;
and -- Section 8(a) Program; Effect of Graduation from Section 8(a) Program on
Our Business and Ability to Compete."
13
<PAGE> 16
WE MAY EXPERIENCE LOSSES FROM OUR TIME-AND-MATERIALS CONTRACTS.
Under some of our contracts, we are compensated on a cost-reimbursable
basis. We deem these to be low-risk contracts. However, a growing percentage of
our contracts are time-and-materials contracts which provide for the customer to
pay a pre-set specified rate per hour of labor dedicated to the project. These
contracts are deemed to be higher-risk contracts since market or other
conditions may require us to increase our employees' salaries or other costs
without any proportional increases passed through to our customers which could
significantly reduce our net profit or cause a loss on these contracts.
RISKS RELATED TO OUR OPERATIONS GENERALLY
OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
TECHNICAL PERSONNEL.
Our future success in our growth strategy will depend to a significant
extent on our ability to attract, train, motivate and retain highly skilled
information and applied technology, software, and other professionals in the
United States as well as in India and Indonesia, where our media production and
software development facilities are located. The market for these professionals
in the United States is highly competitive, and the market in India is becoming
more competitive as an increasing number of multi-national corporations are
establishing information technology operations there. We meet a substantial
portion of our personnel requirements overseas by contracting with agencies
which provide us with technical personnel on a contract basis. As a result of
these factors, we cannot assure you that we will be able to attract, assimilate
and retain new employees or personnel on a contract basis as our business
continues to grow. Our failure to attract or retain qualified technical
personnel in sufficient numbers could impair our ability to complete existing
contracts on a timely basis and/or accept new projects.
LOSS OF ANY OF OUR SENIOR MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS
BECAUSE OF THEIR TECHNOLOGICAL EXPERTISE.
Our success is substantially dependent on the ability and technical
expertise of our senior management and other key personnel, many of whom would
be difficult to replace. Upon the consummation of this offering, we will enter
into an employment agreement with each senior management employee, including
Ramendra P. Singh, Ravi Venugopal, Harry W. Schubele III, Jayant Ramakrishnan,
Javier E. Benavente and Robert Rodriguez, pursuant to which these individuals
will be employed as executive officers of Dynacs. We maintain $1.0 million in
insurance on the life of Ramendra P. Singh, our President and Chief Executive
Officer, and $250,000 in insurance on each of the lives of our Senior Vice
Presidents, Javier E. Benavente, Jayant Ramakrishnan, Harry W. Schubele III and
Ravi Venugopal and our Chief Financial Officer, Robert Rodriguez. The loss of
any member of our management team or other key employee would disrupt our
business and may alter our current business strategy. See "Certain
Transactions."
BECAUSE OUR DIGITAL PRODUCTION AND SOFTWARE DEVELOPMENT FACILITIES ARE LOCATED
IN INDIA AND INDONESIA, WE FACE ADDITIONAL RISKS RELATED TO FOREIGN POLITICAL
AND ECONOMIC CONDITIONS.
A significant element of our business strategy is to continue to leverage
our overseas digital production facilities in India and Indonesia. Our business
strategy of utilizing the more cost-effective overseas production facilities
could be materially adversely affected by changes in wage costs, laws or
regulations affecting foreign investments, including reduction in scope or
elimination of tax incentives,
14
<PAGE> 17
increased tax rates and currency exchange rates. We are also subject to social
instability and all other negative political, economic or diplomatic
developments in or affecting India or Indonesia. The loss of our work force in
India or Indonesia or the shift of a substantial portion of our workforce from
India and Indonesia to the United States or other countries where wages are
significantly higher would decrease our chances of becoming profitable and cause
us to be less competitive. See "Government Regulation -- India and Indonesia."
OUR LOSS OF OUR U.S. GOVERNMENT CONTRACTS COULD ADVERSELY AFFECT OUR ABILITY TO
DEVELOP NEW INTELLECTUAL PROPERTY.
We have developed some of our proprietary technology pursuant to
development contracts, including contracts with U.S. Government agencies. Our
strategy is to continue to develop a significant portion of our proprietary
technology pursuant to customer-funded research and development contracts with
the U.S. Government. There can be no assurance that we will be able to continue
to obtain this type of contract, or that, if we do, that we will obtain rights
to technology sufficient to permit us to develop and market new technologies or
prevent third parties from developing or using these technologies.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.
Our success and ability to compete are substantially dependent on our
internally developed technologies, which we seek to protect through a
combination of copyrights, trade secret, trademark, and, to some extent, patent
laws. However, our efforts to establish and protect our intellectual property
rights may be inadequate, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States. Furthermore, we rely substantially on some technologies that are
not proprietary and are therefore available to our competitors. We also rely on
proprietary trade secrets and know-how that are not patentable or that we do not
patent in order to maintain confidentiality. Although we have taken steps to
protect our unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with our employees, consultants and other parties and
controlled access to proprietary information, there can be no assurance that
such agreements will not be breached, that we would have adequate remedies for
any breach, or that our trade secrets will not otherwise become known or be
independently developed or discovered by competitors.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE AND INTEGRATE NEWLY ACQUIRED
COMPANIES, WHICH COULD INTERRUPT OUR BUSINESS OR HARM OUR OPERATING RESULTS.
We intend to continue acquiring or entering into relationships with
complementary businesses, services or technologies, including black-and-white
film libraries. If we acquire other businesses, we could have difficulty in
assimilating the acquired services or technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
OUR GROWTH MAY SLOW OR STOP IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING IF
NEEDED.
Although we believe that the net proceeds from this offering, together with
cash flows from operations and available lines of credit, will be sufficient to
meet our capital requirements for at least the next 12 months, we may seek
additional equity or debt financing to grow our Digital Media and
15
<PAGE> 18
Entertainment Division and our Information and Applied Technology Division. Our
ability to secure additional financing will be subject to a number of factors,
including:
- market conditions;
- our operating performance; and
- investor sentiment, particularly for companies with Internet-related
business segments.
If we are unable to secure additional financing, if needed, we may not to
be able to grow our business.
RISKS RELATED TO OUR DIGITAL MEDIA AND ENTERTAINMENT DIVISION
THE DIGITAL MEDIA MARKET IS HIGHLY COMPETITIVE AND OUR COMPETITORS MAY HAVE
GREATER RESOURCES THAN US.
The digital media industry is highly competitive and competition is
increasing. Although we believe we currently have no competition in converting
full length black-and-white media, including feature films and television
series, into digital color material, we believe we have substantial competition
in providing these services for short length media, including cartoons,
commercials, videos and shorter length films, by companies which are better
established and have substantially better research and development staffs than
us. If we are unable to compete effectively in obtaining digital colorization
work for short length films or if competition grows for full length media, our
Digital Media and Entertainment Division may not grow.
IF SUITABLE PRODUCT IS NOT AVAILABLE ON ECONOMICALLY FEASIBLE TERMS, OUR
COLORIZATION BUSINESS MAY NOT SUCCEED.
Our success in digital reformatting is contingent upon finding and
acquiring, on economically feasible terms, enough product suitable for
colorization. If suitable product for colorization is not available in the
future on economically feasible terms, our colorization business will not
succeed.
OUR FAILURE TO COMPLETE OUR PROPOSED ACQUISITION OF SHERMAN GRINBERG FILM
LIBRARIES, INC. COULD IMPAIR OUR ABILITY TO COMPETE IF RIGHTS TO ITS FILM
LIBRARY ARE LATER ACQUIRED AND COMMERCIALIZED BY ONE OR MORE OF OUR COMPETITORS.
The future success of our Digital Media and Entertainment Division will
depend, in part, upon our ability to obtain access to film footage which can be
converted into digital content and resold to potential purchasers of content. To
date, we have entered into a non-binding letter of intent to acquire all of the
issued and outstanding capital stock of Sherman Grinberg Film Libraries, Inc.
upon the consummation of this offering. When and if completed, this acquisition
will give us access to the Sherman Grinberg Film Libraries, one of the largest
commercial newreel film collections in the world, consisting of approximately
15.0 million feet of 35mm film dating from 1896 to 1957. Our ability to complete
this acquisition will depend upon specific closing conditions being met by both
parties. If we fail to complete this acquisition, we will not have access to the
libraries' potentially commercially valuable newsreel film collections which
could be purchased by one or more of our competitors.
16
<PAGE> 19
OUR FAILURE TO COMMERCIALIZE THE FILM FOOTAGE CONTAINED IN THE SHERMAN GRINBERG
FILM LIBRARIES MAY IMPAIR OUR ABILITY TO MAXIMIZE OUR FINANCIAL AND STRATEGIC
POSITION.
We have entered into a non-binding letter of intent to acquire the Sherman
Grinberg Film Libraries. If we complete this acquisition, our inability to
successfully commercialize the film footage contained in the Sherman Grinberg
Film Libraries may impair our ability to establish and develop our Digital Media
and Entertainment Division by making it more difficult to market our services or
to acquire or license additional libraries in the future. Our inability may also
cause significant operating inefficiencies and adversely affect our
profitability by diverting management's attention away from other projects
relating to our Digital Media and Entertainment Division.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY FUTURE ACQUISITION CANDIDATES, WHICH
MAY HARM OUR GROWTH STRATEGY AND OPERATING RESULTS.
We intend to continue acquiring or entering into relationships with
complementary businesses, services or technologies, including black-and-white
film libraries. We cannot assure you that we will be able to identify additional
acquisition candidates. If we are unable to identify potential acquisition
candidates, we may not be able to grow our Digital Media and Entertainment
Division.
OUR INABILITY TO SECURE PROPER DISTRIBUTION CHANNELS MAY LIMIT THE GROWTH OF OUR
DIGITAL MEDIA AND ENTERTAINMENT DIVISION.
We have limited experience in the highly competitive industry of film and
television product distribution. Our success will depend in great part on our
ability to hire qualified personnel to perform distribution services, or in the
alternative, to negotiate agreements with established distribution companies. We
cannot assure you that we will be successful in developing these distribution
channels. If we cannot secure satisfactory distribution channels or hire or
retain skilled personnel to assist us with distribution, the growth of our
Digital Media and Entertainment Division may be limited.
RISKS RELATED TO OUR PLANNED INTERNET MEDIA LIBRARY AND
MARKETPLACE, "MARKETYOURMEDIA.COM"
THE BUSINESS MODEL FOR OUR MARKETYOURMEDIA.COM BUSINESS IS UNPROVEN AND MAY NOT
BE VIABLE.
The on-line market we hope to create through MarketYourMedia.com is new and
unproven. We intend to acquire or obtain the rights to license visual media from
third parties and to act as an intermediary for the sale and distribution of
rights to visual media held by third parties. We believe that the successful
development of our MarketYourMedia.com Internet business also depends on finding
enough product for our library and marketplace. If we are unable to obtain
quality visual media in sufficient quantity and on acceptable terms,
MarketYourMedia.com may not become a financially viable business or otherwise
succeed.
THE VIABILITY OF MARKETYOURMEDIA.COM DEPENDS ON THE CONTINUED DEVELOPMENT OF
INTERNET BROADBAND CAPACITY.
The success of MarketYourMedia.com will depend upon continued developments
in broadband capacity on the Internet. If we cannot deliver sufficient
quantities of media over the Internet to meet demand, or if a large proportion
of our customers cannot receive our material online, MarketYourMedia.com may
never develop into a viable business.
17
<PAGE> 20
OUR INABILITY TO CONTINUALLY IMPLEMENT NEW INTERNET TECHNOLOGIES OR RESPOND TO
SHIFTING CUSTOMER DEMANDS MAY IMPAIR OUR ABILITY TO GROW MARKETYOURMEDIA.COM.
The success of our MarketYourMedia.com business will require that we
continually develop, enhance and improve the features of our web site. Our
success in this business will require us to respond, on a cost-effective and
timely basis, to rapid technological advances and emerging industry standards
and practices, including advances in technology used to distribute visual media
and entertainment over the Internet. To the extent that we are unable to keep up
with advances made by competitors or meet shifting customer tastes and demands,
MarketYourMedia.com's growth will be limited or substantially impaired.
RISKS RELATED TO THE OFFERING AND OUR COMMON STOCK
OUR OFFICERS AND DIRECTORS WILL BENEFICIALLY OWN 56.6% OF OUR STOCK UPON
COMPLETION OF THIS OFFERING AND MAY CONTROL MATTERS SUBMITTED TO STOCKHOLDERS
FOR THEIR APPROVAL.
Upon the completion of this offering, our officers and directors will
beneficially own 56.6% of our outstanding common stock, or 53.8% if the
underwriter's over-allotment option is exercised in full. Our management will
collectively be able to control decisions on corporate matters, including
election of directors, increases in our authorized capital stock, dissolution
and merger or sale of assets, and may be able generally to direct our affairs.
This concentration of ownership may also have the effect of delaying, deferring
or preventing a change in control of Dynacs and making transactions more
difficult or impossible, absent the support of these stockholders, including
proxy contests, mergers involving Dynacs, tender offers, open-market purchase
programs or other purchases of our common stock that could have a depressive
effect on the trading price of our common stock. See "Principal and Selling
Stockholders."
18
<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds to Dynacs from the sale of the shares of
common stock in this offering will be approximately $26,850,000 (after deducting
estimated offering expenses and underwriting discounts and commissions of
$3,150,000) or $28,690,000 if the underwriters' over-allotment option is
exercised in full, after deducting estimated offering expenses and underwriting
discounts and commissions of $3,310,000. We will not receive any proceeds from
the shares of common stock to be sold by the selling stockholders if the
over-allotment option is exercised.
We intend to use the net proceeds of this offering (assuming the
underwriters do not exercise their over-allotment option) as described in the
following table:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
------------ -------------
<S> <C> <C>
Acquisition and development of rights in media assets...... $ 7,800,000(1) 29.1%
Expand and upgrade U.S. and overseas facilities and
equipment and build new U.S. and overseas facilities..... 5,800,000 21.6%
Repayment of line of credit................................ 2,000,000(2) 7.4%
Hire additional marketing, technical and production
personnel................................................ 1,800,000 6.7%
Research and development................................... 1,750,000 6.5%
Repayment of related party debt............................ 1,500,000(3) 5.6%
Marketing.................................................. 600,000 2.2%
Loan to related party...................................... 50,000(4) 0.2%
Working capital and general corporate purposes............. 5,550,000(5) 20.7%
----------- ------
$26,850,000 100.0%
=========== ======
</TABLE>
-------------------------
(1) Includes expenditures to commercialize the Sherman Grinberg Film Libraries.
(2) We currently have a $4.0 million revolving line of credit with First
National Bank of Florida which bears interest at the Banks' prime rate plus
2.0% per annum (11.5% at July 7, 2000) and is secured by all of our assets.
As of June 30, 2000, an aggregate principal amount and accrued unpaid
interest of $3,246,306 was outstanding under this line of credit. We intend
to use $2.0 million of the net proceeds of this offering to repay this
indebtedness, and at that time, the same amount will become available to us
to borrow in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Cash Flow -- Cash Flow from
Financing Activities."
(3) We intend to use $1.5 million of the net proceeds of this offering to repay
the following indebtedness:
- An aggregate amount of $585,000 outstanding as of June 30, 2000
pursuant to a loan agreement, dated May 10, 1999, between Dynacs and
Ramesh Venugopal, the brother of Ravi Venugopal, a Senior Vice
President and the Secretary of Dynacs, bearing interest at the rate of
10% per annum with no maturity date.
- A promissory note, dated October 6, 1997, issued by Dynacs to
Venugopal Srinivasan and Ranjini Srinivasan, the brother and
sister-in-law of Ravi Venugopal, a Senior Vice President and the
Secretary of Dynacs, in the principal amount of $200,000, bearing
interest at the rate of 10.5% per annum and maturing on October 6,
2000. The outstanding balance at June 30, 2000 was $25,000.
19
<PAGE> 22
- A promissory note, dated February 15, 1999, issued by Dynacs to
Venugopal Srinivasan in the principal amount of $110,000, bearing
interest at the rate of 12.0% per annum with an extended maturity of
August 15, 2000.
- A promissory note, dated March 30, 1999, issued by Dynacs to Dr.
Ramendra Singh, Dynacs' President, Chief Executive Officer and a
principal stockholder, in the principal amount of $160,000, bearing
interest at the rate of 12.0% per annum with an extended maturity of
September 30, 2000.
- A promissory note, dated February 23, 1999, issued by Dynacs to Ravi
Venugopal in the principal amount of $248,000, bearing interest at the
rate of 12.0% per annum with an extended maturity of August 23, 2000.
- A promissory note, dated February 23, 1999, issued by Dynacs to Anil
Singh, Dr. Singh's nephew, in the principal amount of $89,000, bearing
interest at the rate of 12.0% per annum with an extended maturity of
August 23, 2000.
- A promissory note, dated September 30, 1999, issued by Dynacs to
George Benham in the principal amount of $250,000, bearing interest at
the rate of 14.5% per annum with an extended maturity of September 30,
2000.
The proceeds of the foregoing indebtedness were used for working capital
purposes. See "Certain Transactions -- Related Party Loans to Dynacs."
(4) We intend to loan $50,000 to Michael Burns, a director-nominee of Dynacs,
pursuant to the terms of our acquisition of Cerulean Colorization, L.L.C. in
August 1999. See "Certain Transactions -- Acquisition of Cerulean
Colorization, L.L.C."
(5) In November 1999 and January 2000 and February and March 2000, we issued
Mezzanine Notes for an aggregate principal amount of $2.9 million. The
Mezzanine Notes bear interest at the initial rate of 8.0% per annum during
the first 120 days of issuance and thereafter at the rate of 15.0% until the
Mezzanine Notes are either converted into shares of common stock of Dynacs
or repaid, at the election of the holder. Throughout this prospectus, we
have assumed that all of the holders of the Mezzanine Notes have elected to
convert their Mezzanine Notes into shares of our common stock. However, if
in the event that any of the holders of the Mezzanine Notes elect to be
repaid instead of converting their Mezzanine Notes, we reserve the right to
use up to $1.0 million otherwise allocated to working capital to repay the
Mezzanine Notes. If necessary, any additional funds needed to repay the
Mezzanine Notes will be used from operating cash flows. Interest on the
Mezzanine Notes is being paid quarterly out of operating cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cash Flow -- Cash Flow from Financing Activities."
A portion of the net proceeds may also be used for possible future
strategic alliances and acquisitions. This would reduce the use of the net
proceeds for one or more of the uses indicated in the preceding table. We
currently do not have any understandings, commitments or agreements concerning
these types of transactions.
We have complete discretion over how to use the net proceeds of this
offering. Our use of the net proceeds may vary substantially from that indicated
in the preceding table due to unforeseen events or changed business conditions.
Pending these uses, we intend to invest the net proceeds temporarily in
short-term, investment grade, interest-bearing securities or guaranteed
obligations of the U.S. Government.
20
<PAGE> 23
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock nor
do we expect to do so in the foreseeable future. We currently intend to retain
all of our earnings, if any, to finance the expansion of our business and do not
expect to declare or pay any cash dividends in the foreseeable future. Future
cash dividends, if any, will be paid at the discretion of our board of
directors.
CAPITALIZATION
The following table provides, as of March 31, 2000, the
(i) pro-forma capitalization of Dynacs reflecting:
- the acquisition of Sherman Grinberg Film Libraries, Inc. in exchange
for 1,085,000 shares of Dynacs common stock valued at $10,850,000. The
acquisition will be accounted for under the purchase method of
accounting and will result in $3,558,809 of goodwill being recorded;
- the issuance of 5,000 shares of common stock to Film Archive Finance
Company, Inc., the parent company of Sherman Grinberg Film Libraries,
Inc. in consideration for a covenant not to compete; and
- the issuance of 10,000 shares of common stock to an executive officer
of Film Archive Finance Company, Inc. in consideration for entering
into a non-competition agreement.
- the issuance of 912,064 shares of common stock to sellers of the
equity interests in Cerulean Colorization, L.L.C. upon closing of this
offering and a reclassification of the $393,452 minority interest into
$9,121 of common stock and $384,331 of additional paid-in-capital; and
- the $348,000 revaluation of warrants and recording of the $1,653,000
beneficial conversion feature upon the consummation of this offering;
- the conversion of the Mezzanine Notes into 483,334 shares of common
stock resulting in an increase in common stock of $4,833 and a
decrease in additional paid-in-capital of $4,833;
- the exercise of warrants issued in connection with the Mezzanine Notes
into 635,050 shares of common stock resulting in an increase in common
stock of $6,351 and a decrease in additional paid-in-capital of
$6,351; and
- 255,480 shares of common stock issuable upon the exercise of options
at $.02 per share.
(ii) pro-forma as adjusted to reflect receipt of the net proceeds of
$26,850,000 from our sale of common stock in this offering, at an
initial public offering price of $10.00 per share, after deducting
underwriting discounts and fees and our estimated offering expenses.
21
<PAGE> 24
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current portion of long-term debt.............. $ 3,754,174 $ 365,114 $ 365,114
Long-term debt, less current portion........... 111,940 -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized; no shares issued and
outstanding, actual, pro forma and pro
forma as adjusted......................... -- -- --
Common stock; $.01 par value, 25,000,000
shares authorized; 6,961,837 shares issued
and outstanding, actual; 10,347,765 shares
issued and outstanding, pro forma; and
13,347,765 shares issued and outstanding,
pro forma as adjusted..................... 69,618 103,478 133,478
Additional paid-in-capital................... 3,858,136 17,223,838 44,043,838
Note receivable for common stock............. (1,125,700) (1,125,700) (1,125,700)
Accumulated other comprehensive income....... (119) (119) (119)
Retained deficit............................. (939,485) (939,485) (939,485)
----------- ----------- -----------
Total stockholders' equity..................... 1,862,450 15,262,012 42,112,012
----------- ----------- -----------
Total capitalization........................... $ 5,728,564 $15,627,126 $42,477,126
=========== =========== ===========
</TABLE>
22
<PAGE> 25
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock from
the initial public offering price. Net tangible book value per share represents
the amount of Dynacs' total tangible assets less its total liabilities, divided
by the number of shares of common stock issued and outstanding. At March 31,
2000, Dynacs had a net tangible book value of $(9,205,927) or $(1.32) per share
of common stock. After giving effect to the sale of shares of common stock
offered by Dynacs, at an assumed initial public offering price of $10.00 per
share and after deducting underwriting discounts and fees and estimated offering
expenses, Dynacs' net tangible book value as of March 31, 2000, would have been
$2,145,073 or $.16 per share. This represents an immediate increase in net
tangible book value of $1.48 per share to existing stockholders and an immediate
and substantial dilution of $9.84 per share to new investors purchasing shares
in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share of common stock............ $10.00
Consolidated net tangible book value per share before
offering............................................... (1.32)
Increase in pro forma net tangible book value per share
attributed to the estimated net proceeds of the
offering............................................... 1.48
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ .16
------
Dilution of net tangible book value per share of common
stock to investors in the offering........................ $ 9.84
======
</TABLE>
The following table summarizes as of March 31, 2000, the differences in
total consideration paid, or attributable to, and the average price per share of
Dynacs common stock paid by, or attributable to, existing securityholders
(including shares issuable upon the conversion of 20.0% of the common stock of
Cerulean FXs, Inc. into 912,064 shares of Dynacs common stock upon consummation
of this offering, the issuance of 1,100,000 shares of Dynacs common stock
issuable upon Dynacs' acquisition of Sherman Grinberg Film Libraries, Inc. upon
the consummation of this offering (including 5,000 shares of common stock
issuable to Film Archive Finance Company, Inc., the parent company of Sherman
Grinberg Film Libraries, Inc., and 10,000 shares of common stock issuable to an
executive officer of Film Archive Finance Company, Inc., in consideration for
entering into a non-compete agreement) the exercise of options to purchase
255,480 shares of common stock by Dynacs' President, 483,334 shares issuable
upon the conversion of the Mezzanine Notes and 635,050 shares of common stock
issuable upon the exercise of the warrants issued to the holders of the
Mezzanine Notes) and new investors after giving effect to the sale of 3,000,000
shares of common stock in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------ PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Securityholders........ 10,347,765 77.5% 9,408,364 23.9% $ .91
New Investors................... 3,000,000 22.5% 30,000,000 76.1% $10.00
---------- ----- ---------- -----
Total................. 13,347,765 100.0% 39,408,364 100.0%
========== ===== ========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing shareholders will be reduced to
10,097,765 shares, or 77.1% of the total number of shares of common stock to be
outstanding after this offering, and the number of shares of common stock held
by new investors will increase to 3,200,000 shares, or 24.1% of the total number
of shares of common stock to be outstanding after this offering. See "Principal
and Selling Stockholders."
23
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data contains certain financial and
operating data and is qualified by the more detailed Consolidated Financial
Statements and notes thereto included elsewhere in this prospectus. The Balance
Sheet Data as of December 31, 1998 and September 30, 1999 and the Statement of
Operations Data for the year ended December 31, 1998 and nine-months ended
September 30, 1999 were derived from the Consolidated Financial Statements and
notes thereto that have been audited by Arthur Andersen LLP, independent
certified public accountants, and are included elsewhere in this prospectus. The
Balance Sheet Data as of December 31, 1997 and the Statement of Operations Data
for the year ended December 31, 1997 have been derived from the Consolidated
Financial Statements and notes thereto that have been audited by Hoyman, Dobson
& Company, P.A., independent certified public accountants, and are included
elsewhere in this prospectus. The Balance Sheet Data as of December 31, 1995 and
1996, September 30, 1998 and March 31, 2000 and Statement of Operations Data for
the twelve-month periods ended December 31, 1995 and 1996, nine-month period
ended September 30, 1998 and the six-month periods ended March 31, 1999 and 2000
have been derived from the unaudited financial statements of Dynacs which, in
the opinion of management, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, which management considers necessary for a fair presentation of the
selected financial data shown. The financial data shown should be read in
conjunction with the Consolidated Financial Statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The historical
results presented herein are not necessarily indicative of future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Information and Applied
Technology.................. $11,663,375 $17,106,886 $26,068,005 $59,615,270 $42,324,852 $53,896,828
Media and Entertainment....... -- -- 892,834 1,331,416 466,600 1,398,257
----------- ----------- ----------- ----------- ----------- -----------
TOTAL REVENUES.................. 11,663,375 17,106,886 26,960,839 60,946,686 42,791,452 55,295,085
COST OF REVENUES
Information and Applied
Technology.................. 10,819,915 15,612,556 22,980,525 56,211,548 39,758,667 51,233,756
Media and Entertainment....... -- -- 1,007,667 1,817,647 1,018,374 3,063,995
----------- ----------- ----------- ----------- ----------- -----------
TOTAL COST OF REVENUES.......... 10,819,915 15,612,556 23,988,192 58,029,195 40,777,041 54,297,751
----------- ----------- ----------- ----------- ----------- -----------
Gross Profit.................... 843,460 1,494,330 2,972,647 2,917,491 2,014,411 997,334
General and Administrative
Expenses...................... 296,871 1,113,124 2,480,825 2,639,986 1,268,610 3,444,599
----------- ----------- ----------- ----------- ----------- -----------
Operating Income (Loss)......... 546,589 381,206 491,822 277,505 745,801 (2,447,265)
Interest Expense, net........... 30,795 12,159 46,522 204,450 109,415 491,279
Loss on Equity Method
Investment.................... -- -- 3,196 67,039 50,279 27,867
----------- ----------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Tax
Benefit (Provision)........... 515,794 369,047 442,104 6,016 586,107 (2,966,411)
Income Tax(Provision) Benefit... (207,205) (151,500) (178,571) 35,000 (244,000) 1,360,000
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss)............... $ 308,589 $ 217,547 $ 263,533 $ 41,016 $ 342,107 $(1,606,411)
=========== =========== =========== =========== =========== ===========
Diluted Net Income (Loss) per
share:........................ $ 0.05 $ 0.02 $ 0.03 $ 0.00 $ 0.03 $ (0.23)
=========== =========== =========== =========== =========== ===========
Diluted Weighted Average Common
and Common Equivalent
Shares:....................... 6,387,005 10,219,209 10,219,209 10,219,209 10,219,209 6,859,644
=========== =========== =========== =========== =========== ===========
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Information and Applied
Technology.................. $34,489,144 $35,708,540
Media and Entertainment....... 1,439,743 902,902
----------- -----------
TOTAL REVENUES.................. 35,928,887 36,611,442
COST OF REVENUES
Information and Applied
Technology.................. 32,803,430 31,798,637
Media and Entertainment....... 1,677,765 1,722,728
----------- -----------
TOTAL COST OF REVENUES.......... 34,481,195 33,521,365
----------- -----------
Gross Profit.................... 1,447,692 3,090,077
General and Administrative
Expenses...................... 1,950,302 3,052,803
----------- -----------
Operating Income (Loss)......... (502,610) 37,274
Interest Expense, net........... 223,704 543,361
Loss on Equity Method
Investment.................... 26,049 23,223
----------- -----------
Income (Loss) Before Income Tax
Benefit (Provision)........... (752,363) (529,310)
Income Tax(Provision) Benefit... 374,699 186,000
----------- -----------
Net Income (Loss)............... $ (377,664) $ (343,310)
=========== ===========
Diluted Net Income (Loss) per
share:........................ $ (0.06) $ (0.05)
=========== ===========
Diluted Weighted Average Common
and Common Equivalent
Shares:....................... 6,804,290 6,961,837
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, MARCH 31,
----------------------------------------------------- -------------------------- -----------
1995 1996 1997 1998 1998 1999 1999
----------- ----------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.............. $ 231,347 $ 318,538 $ 206,509 $ (722,137) $ 636,255 $(3,879,271) $(1,126,818)
Total Assets................. 1,784,105 2,705,313 5,311,299 11,301,057 11,878,913 14,271,505 10,681,568
Long-Term Debt (including
current portion)........... 32,328 4,852 439,675 1,621,836 1,683,387 3,149,745 1,577,303
Total Stockholders' Equity... 462,380 679,927 943,460 1,048,480 1,626,817 1,300,820 937,459
<CAPTION>
MARCH 31,
-----------
2000
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working Capital.............. $(3,869,234)
Total Assets................. 14,450,153
Long-Term Debt (including
current portion)........... 3,866,114
Total Stockholders' Equity... 1,862,450
</TABLE>
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes to those statements and other financial information
appearing elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain
forward-looking information that involves risks and uncertainties. Dynacs'
actual results could differ materially from those anticipated by the
forward-looking information due to various factors, including, but not limited
to, those set forth under the heading "Risk Factors" and elsewhere in this
prospectus.
THE DISCUSSION BELOW OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BEGINS WITH A DESCRIPTION OF CERTAIN FEATURES OF OUR BUSINESS WHICH AFFECT OUR
FINANCIAL CONDITION AND RESULTS. YOU SHOULD NOTE THAT IN 1999 WE CHANGED OUR
FISCAL YEAR FROM A CALENDAR YEAR TO A YEAR ENDING SEPTEMBER 30, WITH THE RESULT
THAT OUR 1999 FISCAL YEAR IS A NINE-MONTH YEAR. YEAR-TO-YEAR COMPARISONS
INCLUDING THE FISCAL YEAR ENDED SEPTEMBER 30, 1999, ACCORDINGLY, MAY NOT BE
REPRESENTATIVE OF OUR FINANCIAL CONDITION OR RESULTS.
OVERVIEW
Dynacs, which began its operations in 1985, is a company which develops,
applies and provides services utilizing advanced technologies in the areas of
information systems and aerospace/satellite systems and operations for U.S.
Government agencies and private sector clients. Commencing in October 1996,
Dynacs began to broaden the scope of its growth strategy by developing its media
and entertainment business, initially by providing colorization services on a
"work-for-hire basis," based upon technologies developed by us for the aerospace
industry. "Work-for-hire" contracts involve Dynacs receiving a fee for the
services provided, typically at a rate per minute of colorization or "colorized"
material. The most significant commercial applications that form the basis of
our Digital Media and Entertainment Division to date are our proprietary digital
color reformatting and digital altering technologies used to convert
black-and-white film footage, including full length feature films and television
series, and shorter length media, including cartoons, television commercials,
music videos and shorter films and videos, into digital color content. In
connection with our shift in our growth strategy in the fiscal year ended
December 31, 1996, we began developing our colorization facilities, specifically
in Patna, India. In August 1999, we acquired Cerulean Colorization, L.L.C., a
company in the business of providing digital color effects for film and videos.
In addition, during 1999, we opened an additional colorization facility in
Batam, Indonesia and further expanded our Patna, India and U.S. based
facilities. We believe that the digital distribution of visual media content
utilizing internet technologies presents another significant commercial
application of our know-how. To further our business strategy, we have:
- spent over $4.0 million in the twelve-month period ended December 31,
1999 to build the infrastructure to grow our digital media and
entertainment business, including the development of specialized software
and computer hardware systems used to convert full and short length media
into digital color material and upgrading existing facilities, and
- pursued an acquisition strategy aimed at acquiring media assets to which
we can apply our technologies to enhance their earnings potential and
create new, copyrighted visual media.
25
<PAGE> 28
REVENUE RECOGNITION
INFORMATION AND APPLIED TECHNOLOGY DIVISION. Most of our revenues are
generated by our Information and Applied Technology Division and are derived
substantially from contracts with customers in our information systems and
aerospace/satellite systems and operations business. Approximately 97.5% of our
revenues for the six-month period ended March 31, 2000 were derived from our
Information and Applied Technology Division. We typically enter into two types
of contracts: cost-reimbursable and time-and-materials. Although fixed price
contracts are also awarded by the U.S. Government, we are not party to any of
these types of agreements at this time. Cost-reimbursable contracts provide for
the reimbursement of costs plus the payment of a fixed fee. Revenues for
cost-reimbursable contracts are recognized under the percentage of completion
method. We bill for our services under these contracts on a monthly basis, with
our covered costs separately billed within two weeks from the date on which we
incur these costs. Under time-and-materials contracts, we are reimbursed for
labor hours at negotiated hourly billing rates and reimbursed for travel and
other direct expenses at actual cost and for applied indirect, general and
administrative expenses. A growing percentage of our contracts are
time-and-materials contracts. Under these contracts, revenues are recognized as
service hours are incurred.
DIGITAL MEDIA AND ENTERTAINMENT DIVISION. Revenues from our media and
entertainment division are derived from two contract types, work-for-hire and
royalties. Approximately 2.5% of our revenues for the six-month period ended
March 31, 2000 were derived from our Digital Media and Entertainment Division.
Work-for-hire consists of contracts in which the Company receives a fee based on
the number of minutes of digital reformatting services provided, including
colorization and special effects. Revenues from work-for-hire contracts are
recognized under the percentage of completion method. Contract costs include
direct labor and overhead costs specifically related to the production
activities. Royalties contracts include the sales of exhibition rights for films
included in the Company's film library. Revenue is recognized on these contracts
when all of the following conditions have been met:
- the royalty fee for each film is known;
- the cost of each film is known or reasonably determinable;
- collectibility of the full royalty fee is reasonably assured;
- the film has been accepted by the licensee in accordance with the
conditions of the contract; and
- the film is available for its first showing or telecast.
COST OF PROCUREMENT
INFORMATION AND APPLIED TECHNOLOGY DIVISION. We obtain technical service
contracts with U.S. Government agencies as well as technical service contracts
with private sector clients in the aerospace industry, primarily through
competitive bidding or procurements. Realization of Information and Applied
Technology Division revenues from contracts may range from a few days to up to
18 months, after we incur expenses for preparing our bids. Although the cost of
preparing bids for particular contracts vary, the costs of preparing bids for
complex contracts can exceed $500,000. We have found, however, that proposals of
this magnitude, if successful, generate substantial revenues. We also bid on
smaller Information and Applied Technology Division projects involving bidding
costs between $5,000 and $50,000. Projects awarded to our Information and
Applied Technology Division vary in total contract value from $10,000 to over
$100.0 million. For example, when our Engineering Development Contract with the
NASA Kennedy Space Center ("EDC Contract") was awarded to
26
<PAGE> 29
Dynacs in September 1997, it had a contract value of over $164.7 million which
was subsequently raised to approximately $173.6 million. Aggregate revenues from
this contract since commencement in October 1997 through March 31, 2000 were
approximately $58.2 million. The magnitude of some proposal costs and the
typical six to twelve-month lag in time (which could be as long as 18 to 24
months in some instances) between the preparation of a bid and recognition of
related income, if any, can have a material effect on our financial results.
This is especially true when substantial proposal costs are incurred in one
fiscal year and revenues stemming from the proposal are recognized in one or
more subsequent years. During the fiscal years ended December 31, 1997 to
September 30, 1999, we provided technical services under an average of 29
contracts.
DIGITAL MEDIA AND ENTERTAINMENT DIVISION. Our Digital Media and
Entertainment Division generates revenue by providing digital colorization
services primarily to owners of television programming under work-for-hire
contracts. In 1998, as part of our plan to expand our media and entertainment
business, we began entering into arrangements with owners of black-and-white
serial television programming. Under these arrangements, we provide colorization
work at reduced rates rather than at our customary commercial rates, and, in
return, we acquire an ownership interest in the new colorized version which is
copyrighted and have the right to receive related licensing fees. The costs of
these projects include funding a portion of the acquisition and development
costs of the programming, and adding significant digital reformatting capacity
at our overseas facilities. The impact of these costs has been particularly
significant during the twelve months ended December 31, 1999, with cost of
revenue of approximately $4.2 million, when the shift from work-for-hire to
royalty-based projects reduced the division's revenues and the higher costs
associated with supporting these projects exceeded the revenues of the division.
We believe that over time we will receive greater revenues from our ownership
interest in the colorized media properties than we have received from
colorization services provided on a work-for-hire basis. Furthermore, to date,
there has also been a delay of six to twelve-months between the time we complete
the work for colorized assets and the time when we begin receiving revenue from
licensing fees on television series. As a result, historic costs and revenues
may not be indicative of future costs and revenues of this division. In contrast
to the lengthy procurement cycle of Information and Applied Technology Division
contracts, the procurement cycle for the work-for-hire contracts of the Digital
Media and Entertainment Division is typically measured in days or weeks to
complete an individual television commercial, and months and possibly a year to
complete a television series or a feature-length film.
COSTS AND EXPENSES
COSTS OF REVENUES. Costs of revenues include direct labor, material,
travel and fees payable under subcontracts as well as applied overhead, which
consists of allocated employee benefits and general operating costs, (including
depreciation and facility costs, when applicable). We record expenses associated
with the operations of the Digital Media and Entertainment Division differently,
depending upon whether we provide colorization services on a work-for-hire or a
royalty basis. Expenses of colorization work performed on a work-for-hire basis
are recognized as they are incurred. Expenses of colorizing assets in which we
acquire an interest are capitalized and amortized based on the individual film
forecast method, which measures the ratio of current year revenues to estimated
total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. The general and administrative
expenses of Dynacs consist of marketing, administrative, legal, professional
fees, bid and proposal costs. These costs are expensed as incurred.
RESEARCH AND DEVELOPMENT. Virtually all the revenues of our Information
and Applied Technology Division are generated under contracts providing research
and development work for our
27
<PAGE> 30
clients. All costs of this research and development are client-funded and are
treated as costs of revenue. Our internal development costs borne directly by us
during the fiscal years ended September 30, 1999, December 31, 1998 and December
31, 1997 were $4,941, $10,800 and $14,400, respectively.
NON-RECURRING COSTS AND EXPENSES. During the six-month period ended March
31, 2000, we incurred approximately $700,000 in legal fees and expenses in
conjunction with the arbitration proceedings with Juno Pix and New Lines
Productions. During the nine-month period ended September 30, 1999, we incurred
approximately $500,000 in legal fees and expenses in conjunction with the
arbitration proceedings with Juno Pix and New Lines Productions and $200,000 in
legal fees and expenses in connection with the settlement of an employee's
claims alleged against Dynacs. See "Legal Proceedings."
RESULTS OF OPERATIONS
SUMMARY SELECTED FINANCIAL DATA
(VALUES AS A PERCENT OF TOTAL REVENUE)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
-------------- -------------- --------------
1997 1998 1998 1999 1999 2000
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Information and Applied
Technology....................... 96.7% 97.8% 98.9% 97.5% 96.0% 97.5%
Media and Entertainment............. 3.3 2.2 1.1 2.5 4.0 2.5
----- ----- ----- ----- ----- -----
TOTAL REVENUES........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
COST OF REVENUES
Information and Applied
Technology....................... 85.2 92.2 92.9 92.7 91.3 86.9
Media and Entertainment............. 3.7 3.0 2.4 5.5 4.7 4.7
----- ----- ----- ----- ----- -----
TOTAL COST OF REVENUES................ 88.9 95.2 95.3 98.2 96.0 91.6
----- ----- ----- ----- ----- -----
Gross Profit.......................... 11.1 4.8 4.7 1.8 4.0 8.4
General and Administrative Expenses... 9.2 4.3 3.0 6.2 5.4 8.3
----- ----- ----- ----- ----- -----
Operating Income (Loss)............... 1.9 0.5 1.7 (4.4) (1.4) 0.1
Interest Expense, net................. 0.2 0.4 0.3 0.9 0.6 1.5
Loss on Equity Method Investment...... 0.0 0.1 0.1 0.0 0.1 0.1
----- ----- ----- ----- ----- -----
Income (Loss) Before Income Tax
Benefit (Provision)................. 1.7 0.0 1.3 (5.3) (2.1) (1.5)
Income Tax (Provision) Benefit........ (0.7) 0.1 (0.6) 2.5 1.0 0.1
----- ----- ----- ----- ----- -----
Net Income (Loss)..................... 1.0% 0.1% 0.7% (2.8)% (1.1)% (1.4)%
===== ===== ===== ===== ===== =====
</TABLE>
From 1997 to 1999, most of our revenue was derived from U.S. Government
contracts entered into by our Information and Applied Technology Division. Total
revenue for the six-months ended March 31, 2000, the nine-months ended September
30, 1999 and for the fiscal years ended
28
<PAGE> 31
December 31, 1998 and 1997 were $36.6 million, $55.3 million, $60.9 million and
$27.0 million, respectively, of which $35.7 million, or 97.5%, $53.9 million, or
97.5%, $59.6 million, 97.8%, and $26.1 million, or 96.7% respectively, were
generated by our Information and Applied Technology Division. For the six-months
ended March 31, 2000, the nine-months ended September 30, 1999 and for the
fiscal years ended December 31, 1999 and 1997 revenue attributable to our
Digital Media and Entertainment Division was $0.9 million, $1.4 million, $1.3
million and $0.9 million, respectively. The increases in our total revenue and
changes in our revenue by division from 1997 through the six month period ended
March 31, 2000 are illustrated by the following table:
<TABLE>
<CAPTION>
REVENUE (IN MILLIONS)
---------------------------------------------
NINE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
-------------- ------------- ----------
1997 1998 1999 2000
----- ----- ------------- ----------
<S> <C> <C> <C> <C>
Information and Applied Technology........... $26.1 $59.6 $53.9 $35.7
Digital Media and
Entertainment.............................. 0.9 1.3 1.4 0.9
----- ----- ----- -----
Total Revenue:............................... $27.0 $60.9 $55.3 $36.6
===== ===== ===== =====
</TABLE>
The significant increases in revenue from our Information and Applied
Technology Division from the twelve months ended December 31, 1997 to the twelve
months ended December 31, 1998 and from the twelve months ended December 31,
1998 to the twelve months ended December 31, 1999, are attributable to the fact
that we commenced working on our three largest U.S. Government contracts at
different times. We worked on only the first of the three contracts until
October 1997. Thereafter, we commenced working on the second contract and by
June 1998, we were working on all three of these U.S. Government contracts.
SIX MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE SIX MONTHS ENDED MARCH 31,
1999
REVENUE. Revenue of the Information and Applied Division for the six-month
period ended March 31, 2000 was approximately $35.7 million, as compared to
$34.5 million for the six-month period ended March 31, 1999, representing an
increase of 3.5%. Of this revenue, we recognized $31.6 million from our three
largest government contracts and $4.1 million from other information and applied
technology contracts in the six-month period ended March 31, 2000 and $29.4
million from our three largest government contracts and $5.1 million from other
information and applied technology contracts in the six-month period ended March
31, 1999.
Revenues attributed to our Digital Media and Entertainment Division were
$0.9 million for the six-month period ended March 31, 2000 as compared to $1.4
million for the six-month period ended March 31, 1999, representing a decrease
of 35.7%, resulting from the Company's decision to maximize revenues from
content ownership rather than through work-for-hire contracts. As such, the
six-month period revenues are lower for March 31, 2000 by $0.5 million as
compared to March 31, 1999. This reflects the delays due to the creation of more
content ownership and the shift of these revenues to later periods.
COST OF REVENUE. Cost of revenue of the Information and Applied Technology
Division for the six-month period ended March 31, 2000 was $31.8 million, as
compared to $32.8 million for the six-month period ended March 31, 1999,
representing a decrease of 3.0%. For the six-month period ended March 31, 2000,
$28.8 million, or 90.6%, in cost of revenue was attributable to our three
largest government contracts and the balance of $3.0 million to other
information and applied technology contracts. In contrast, $29.9 million, or
91.2% of the cost of revenue for the six-month period ended March 31, 1999 was
attributable to those three U.S. Government contracts, while $2.9
29
<PAGE> 32
million of our cost of revenue was attributable to other information and applied
technology contracts. The decrease in cost of revenue for the six-month period
ended March 31, 2000 as compared to the six-month period ended March 31, 1999
was primarily due to higher gross profit margins of our other information and
applied technology contracts.
Cost of revenue of the Digital Media and Entertainment Division for the
six-month period ended March 31, 2000 was $1.7 million, as compared to $1.7
million for the six-month period ended March 31, 1999, representing no increase
in cost. Although the cost for each of 1999 and 2000 reflect enhancements made
to our media production software, equipment upgrades and increased production
capacity, we were able to lower other direct costs of the Digital Media and
Entertainment Division to offset these costs of enhancements.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $3.1 million for the six-month period ended March 31, 2000 as
compared to $2.0 million for the six-month period ended March 31, 1999. The
57.9% increase in cost was due to continued legal expenses in connection with
the litigation against Juno Pix and New Line Productions, which amounted to
approximately $0.7 million for the six-month period ended March 31, 2000.
INTEREST EXPENSE. Net interest expense for the six-month period ended
March 31, 2000 was $0.5 million, as compared with interest expense of $0.2
million for the six-month period ended March 31, 1999, representing an increase
of 150.0%. This increase in interest expense was due primarily to:
- our increased use of our bank line of credit resulting in an increase in
interest expense of approximately $101,000;
- increased financing of production costs associated with the acquisition
and development of digital media assets resulting in an increase in
interest expense of approximately $85,000;
- increases of approximately $68,000 in interest expense associated with
additional capital financing from related party loans; and
- interest expense relating to a mezzanine financing of approximately
$46,000 incurred during the six-month period ended March 31, 2000.
NET INCOME (LOSS). We had a net loss of $(343,310), or $(.05) per share,
calculated on the basis of 6,961,837 shares, for the six-month period ended
March 31, 2000, as compared to a net loss of $(377,664), or (.06) per share,
calculated on the basis of 6,804,290 shares, for the six-month period ended
March 31, 1999. Although our Digital Media and Entertainment Division sustained
a larger operating loss, a $0.6 million increase, for the six-month period ended
March 31, 2000 as compared to the six-month period ended March 31, 1999, and our
general and administrative expenses were higher, an increase of $1.1 million,
the increases in costs sustained by our Digital Media and Entertainment Division
were more than offset by the higher margins of $2.2 million obtained from our
information and applied technology contracts during the period. Additionally, we
reflected the arbitration award to Juno Pix and New Line Productions of
approximately $370,000 within our general and administrative expenses for the
six-month period ended March 31, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue of the Information and Applied Technology Division for
the nine-month period ended September 30, 1999 was approximately $53.9 million,
as compared to $42.3 million for the nine-month period ended September 30, 1998,
representing an increase of 27.4%. Of this revenue,
30
<PAGE> 33
we recognized $47.1 million from our three largest U.S. Government contracts and
$6.8 million from other information and applied technology contracts in the
fiscal year ended September 30, 1999 and $32.4 million from our three largest
U.S. Government contracts and $9.9 million from other information and applied
technology contracts in the nine-month period ended September 30, 1998. The
increase in revenue of the Information and Applied Technology Division from the
nine-month period ended September 30, 1998 to the fiscal year ended September
30, 1999 is attributable, in part, to our recognition of a full nine-months of
revenue on our Scientific, Engineering, Technical, Administrative and Related
Task II contract with the NASA Glenn Research Center ("SETAR II Contract") in
the later period as compared to only four months of revenue during the
nine-month period ended September 30, 1998, since work on the SETAR II Contract
did not commence until June 1998.
Revenues attributed to our Digital Media and Entertainment Division were
$1.4 million for the fiscal year ended September 30, 1999 as compared to $0.5
million in the nine-month period ended September 30, 1998, representing an
increase of 180.0%. This increase in revenue was due, in part, to our
recognition of our work-for-hire revenues attributable to colorization work for
"The Adventures of Rin Tin Tin."
COSTS OF REVENUE. Costs of revenue of the Information and Applied
Technology Division for the nine-month period ended September 30, 1999 was $51.2
million, as compared to $39.8 million for the nine-month period ended September
30, 1998, representing an increase of 28.6%. For the nine-month period ended
September 30, 1999, $43.5 million, or 84.9%, in cost of revenues was
attributable to our three largest U.S. Government contracts and the balance of
$7.7 million was attributable to other information and applied technology
contracts. In contrast, $30.4 million, or 76.4%, of the cost of revenue for the
nine-months ended September 30, 1998 was attributable to those three contracts,
while $9.4 million, or 23.6%, of our cost of revenue was attributable to other
information and applied technology contracts. The increase in costs of revenues
from the nine-month period ended September 30, 1998 to the nine-month period
ended September 30, 1999 was primarily due to a proportionate increase in
information and applied technology revenues over the same period.
Cost of revenues of the Digital Media and Entertainment Division for the
nine-month period ended September 30, 1999 were $3.1 million, as compared to
$1.0 million for the nine-month period ended September 30, 1998, representing an
increase of 210.0%. This increase in the cost of revenue was attributable, in a
large part, to the startup of our Batam, Indonesia facility.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $3.4 million for the fiscal year ended September 30, 1999 as
compared to $1.3 million for the nine-month period ended September 30, 1998,
representing an increase of 161.5%. This increase is due primarily to bid and
proposal costs and fees incurred in connection with our litigation against Juno
Pix and New Line Productions. Bid and proposal costs totaled $0.5 million for
the nine-month period ended September 30, 1999, as compared to $0.4 million
during the nine-months ended September 30, 1998, while total legal fees and
expenses increased $1.1 million, over the same period. Of this amount, $0.5
million represents legal fees and expenses of the Juno Pix and New Line
Productions litigation and $0.2 million represents fees and expenses incurred in
connection with the settlement of an employee's claims alleged against us.
INTEREST EXPENSE. Net interest expense for the nine-month period ended
September 30, 1999 was $491,279 as compared to $109,415 for the nine-month
period ended September 30, 1998, representing an increase of 349.0%. This
increase in interest expense was due primarily to:
- our increased use of our bank line of credit, which caused interest
expense to increase by approximately $76,000;
31
<PAGE> 34
- increased financing of production costs associated with the acquisition
and development of digital media assets, which caused interest expense to
increase approximately $160,000; and
- financing start-up costs of our work on the SETAR II Contract, which
caused interest expense to increase by approximately $145,000.
NET INCOME (LOSS). We had a net loss of approximately $1,606,411, or
$(.23) per share calculated on the basis of 6,859,644 shares, for the nine month
period ended September 30, 1999, as compared to net income of $342,107, or $.03
per share (on a fully diluted basis), calculated on the basis of 10,219,209
shares, for the nine-month period ended September 30, 1998. This decrease in net
income was due primarily to significant increases in:
- professional fees and expenses of approximately $1.4 million, including
fees and expenses of acquiring Cerulean Colorization, L.L.C. in August
1999;
- depreciation expenses of approximately $0.6 million on fixed assets
related to acquisitions of approximately $3.9 million in capital
equipment for our Digital Media and Entertainment Division;
- bid and proposal costs of $61,028; and
- interest expense of $286,829.
FISCAL YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1997
REVENUE. Revenue of the Information and Applied Technology Division for
the fiscal year ended December 31, 1998 was approximately $59.6 million, as
compared to $26.1 million for the fiscal year ended December 31, 1997,
representing an increase of 128.4%. In 1998, we recognized $46.8 million from
our three largest U.S. Government contracts and $12.8 million from other
information and applied technology contracts as compared to approximately $14.7
million from these U.S. Government contracts in 1997. The increase in total
revenue and revenue of the Information and Applied Technology Division from 1997
to 1998 was primarily attributable to two factors: our recognition of a full
year of revenue on our Engineering Development Contract with the NASA Kennedy
Space Center in 1998, which generated revenue of $22.8 million, as compared to
only three months of revenue totaling $3.9 million from this contract in 1997;
and commencement of work on the SETAR II contract in June 1998, which produced
revenue of $16.4 million.
The revenue of our Digital Media and Entertainment Division was $1.3
million for the fiscal year ended December 31, 1998, as compared to $0.9 million
for the fiscal year ended December 31, 1997, representing an increase of 44.4%.
This increase was attributable to increased volume of work-for-hire contracts.
COSTS OF REVENUE. Costs of revenue of the Information and Applied
Technology Division for the fiscal year ended December 31, 1998 was $56.2
million, as compared to $23.0 million for the fiscal year ended December 31,
1997, representing an increase of 144.3%. For the fiscal year ended December 31,
1998, $45.0 million of costs was attributable to our three largest U.S.
Government contracts ($7.0 million from the Boeing ISS contract, $22.4 million
from the Engineering Development contract with the NASA Kennedy Space Center,
and $15.6 million from the SETAR II contract) and $11.2 million to other
information and applied technology contracts. In contrast, the costs of revenue
for the fiscal year ended December 31, 1997 was $23.0 million, of which $13.1
million was attributable to our three largest U.S. Government contracts ($9.4
million from the Boeing ISS contract, $3.7 million from the Engineering
Development contract with the
32
<PAGE> 35
NASA Kennedy Space Center, and $0.0 from the SETAR II contract) and $9.9 million
to other information and applied technology contracts. These increases from 1997
to 1998 in the cost of revenue of our Information and Applied Technology
Division were attributable to the commencement of, or increase in the amount of
work we provided under our three largest U.S. Government contracts.
Cost of revenue of the Digital Media and Entertainment Division for the
fiscal year ended December 31, 1998 was $1.8 million, as compared to $1.0
million for the fiscal year ended December 31, 1997, representing an increase of
80.0%. This substantial increase in the cost of revenue is attributable to the
costs of training new staff to produce colorization work at greater efficiency
and approximately $300,000 in depreciation resulting from our investment in
upgrading and expanding our digital colorization facilities in Patna, India
during the fiscal year ended December 31, 1998 as part of our ongoing effort to
build up the infrastructure for this Division.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $2.6 million in the fiscal year ended December 31, 1998 as
compared to $2.5 million in the fiscal year ended December 31, 1997,
representing an increase of 4.0%. This increase is due primarily to an increase
in professional fees to $335,000 in the fiscal year ended December 31, 1998 from
$189,000 in the fiscal year ended December 31, 1997.
INTEREST EXPENSE. Interest expense for the fiscal year ended December 31,
1998 was $204,450 as compared to $46,522 for the fiscal year ended December 31,
1997, representing an increase of 339.5%. This increase is due primarily to the
costs of financing:
- approximately $2.0 million of additional investment in our overseas
production facilities which caused interest expense to increase by
approximately $109,000, and
- $1.5 million in payroll costs for the SETAR II Contract, whose term
commenced in June 1998 which caused interest expense to increase by
approximately $48,000.
NET INCOME. We had net income of $41,016, or $0.00 per share (on a fully
diluted basis), calculated on the basis of 10,219,209 shares, for the fiscal
year ended December 31, 1998, as compared to net income of $263,533, or $0.03
per share (on a fully diluted basis), calculated on the basis of 10,219,209
shares, for the fiscal year ended December 31, 1997. The decrease in net income
from the fiscal year ended December 31, 1997 to the fiscal year ended December
31, 1998 was due primarily to lower billing rates on our Defense and Space Group
Purchase Contract with the Boeing Company ("Boeing ISS Contract") and increased
operating expenses of our overseas production facilities. We negotiated higher
billing rates for the Boeing ISS Contract for the fourth quarter of 1998 and the
fiscal year ended September 30, 1999. Additionally, we sustained a loss of
$67,039 on our equity investment in Dynacs Properties, Inc., in which we have a
50.0% ownership interest. This company was formed for the acquisition of the
building where our corporate headquarters is located. The company was formed and
the building was purchased in 1997 and substantial renovations were made in
1998. Due to these renovations, a large portion of the facility was not occupied
until 1999 which caused us to incur material losses during this start-up period.
The building is now approximately 95.0% occupied, and losses, if any, should be
minimized in subsequent periods, should occupancy remain fairly stable. Income
tax expense of ($178,571) was recognized for the fiscal year ended December 31,
1997 compared to an income tax benefit of $35,000, for the fiscal year ended
December 31, 1998.
33
<PAGE> 36
QUARTERLY RESULTS OF OPERATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are outside our control. These
factors include:
- our ability to attract and retain customers and maintain customer
satisfaction for our existing and future businesses;
- our ability to attract new personnel and retain existing personnel;
- our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
- our ability to upgrade and develop our systems and infrastructure;
- new services or products introduced by our competitors;
- delays in contract start or end dates due to competitors protesting a
contract award by the U.S. Government;
- the timing and uncertainty of sales and contract procurement cycles;
- the timing and uncertainty of customers accepting delivery of our
products;
- the timing and uncertainty in U.S. Government budget appropriations;
- the timing and number of legal and customary holidays in a quarter;
- the timing of normally scheduled plant shutdowns by our customers;
- the dilutive effect of acquisitions; and
- general economic conditions and economic conditions specific to our
industries.
As a result, our operating results for any one particular quarter may not
be indicative of future operating results.
34
<PAGE> 37
The following table sets forth unaudited quarterly consolidated statement
of operations data for each of the four calendar quarters in 1998 and 1999 and
for the first calendar quarter in 2000. In the opinion of management, this
information has been prepared substantially on the same basis as the audited
consolidated financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
consolidated quarterly results. The quarterly data should be read in conjunction
with our audited consolidated financial statements for the periods ended
December 31, 1998 and nine-months ended September 30, 1999 and the unaudited
financial statements for the six months ended March 31, 2000 and the notes to
those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Information and Applied
Technology............. $9,556,910 $12,685,463 $20,082,479 $17,290,418 $17,198,726 $17,435,961 $19,262,141
Media and
Entertainment.......... 55,000 258,500 153,100 864,816 574,927 -- 823,330
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenues.......... 9,611,910 12,943,963 20,235,579 18,155,234 17,773,653 17,435,961 20,085,471
Cost of Revenues
Information and Applied
Technology............. 9,028,568 11,965,694 18,764,405 16,452,881 16,350,549 16,426,349 18,456,858
Media and
Entertainment........ 218,588 414,042 385,744 799,273 878,492 848,695 1,336,808
---------- ----------- ----------- ----------- ----------- ----------- -----------
Total Cost of
Revenues............... 9,247,156 12,379,736 19,150,149 17,252,154 17,229,041 17,275,044 19,793,666
---------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit............ 364,754 564,227 1,085,430 903,080 544,612 160,917 291,805
General and
Administrative
Expenses............. 342,480 326,677 599,453 1,371,376 578,926 1,314,247 1,551,426
---------- ----------- ----------- ----------- ----------- ----------- -----------
Operating Income
(Loss)................. 22,274 237,550 485,977 (468,296) (34,314) (1,153,330) (1,259,621)
Interest Expense, net... 22,014 49,715 37,686 95,035 128,669 189,689 172,921
Loss on Equity Method
Investment............. 16,759 16,761 16,759 16,760 9,289 9,289 9,289
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income (Loss) before
Income Tax Benefit
(Provision)............ (16,499) 171,074 431,532 (580,091) (172,272) (1,352,308) (1,441,831)
Income Tax (Provision)
Benefit................ 6,863 (71,167) (179,696) 279,000 95,699 378,980 885,321
---------- ----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss)....... $ (9,636) $ 99,907 $ 251,836 $ (301,091) $ (76,573) $ (973,328) $ (556,510)
========== =========== =========== =========== =========== =========== ===========
Diluted Net Income
(Loss) per share....... $ (0.00) $ 0.01 $ 0.02 $ (0.05) $ (0.01) $ (0.14) $ (0.08)
========== =========== =========== =========== =========== =========== ===========
Diluted Weighted Average
Common and Common
Equivalent shares...... 6,387,005 10,219,209 10,219,209 6,387,005 6,719,129 6,910,740 6,961,837
========== =========== =========== =========== =========== =========== ===========
<CAPTION>
THREE MONTHS ENDED
-------------------------
DEC. 31, MARCH 31,
1999 2000
----------- -----------
<S> <C> <C>
Revenues
Information and Applied
Technology............. $17,363,517 $18,345,023
Media and
Entertainment.......... 266,742 636,160
----------- -----------
Total Revenues.......... 17,630,259 18,981,183
Cost of Revenues
Information and Applied
Technology............. 15,120,030 16,678,607
Media and
Entertainment........ 1,124,644 598,084
----------- -----------
Total Cost of
Revenues............... 16,244,674 17,276,691
----------- -----------
Gross Profit............ 1,385,585 1,704,492
General and
Administrative
Expenses............. 1,442,538 1,610,265
----------- -----------
Operating Income
(Loss)................. (56,953) 94,227
Interest Expense, net... 188,209 355,152
Loss on Equity Method
Investment............. 33,518 (10,295)
----------- -----------
Income (Loss) before
Income Tax Benefit
(Provision)............ (278,680) (250,630)
Income Tax (Provision)
Benefit................ 69,000 117,000
----------- -----------
Net Income (Loss)....... $ (209,680) (133,630)
=========== ===========
Diluted Net Income
(Loss) per share....... $ (0.03) $ (0.02)
=========== ===========
Diluted Weighted Average
Common and Common
Equivalent shares...... 6,961,837 6,961,837
=========== ===========
</TABLE>
35
<PAGE> 38
LIQUIDITY AND CAPITAL RESOURCES
GENERALLY
We have, historically, financed capital expenditures and working capital
requirements with revenues under our contracts and borrowings from related
parties and financial institutions. See "Certain Transactions." In January 1999,
we received an increase to our revolving credit loan facility from First
National Bank of Florida, which allows us to borrow ninety percent of our
receivables from engineering services (excluding commercial film colorization
receivables), up to a maximum loan of $4.0 million bearing interest at the
bank's prime rate plus 2.0% per annum (11.5% as of May 31, 2000). As of June 30,
2000, an aggregate amount of $3,246,306 was outstanding under this credit
facility. The line of credit is secured by all of the assets of Dynacs. Dr.
Ramendra Singh, our President and Chief Executive Officer, has also provided a
personal guaranty with respect to the credit line. The line which matured on
March 18, 2000 had been extended to June 18, 2000. On July 7, 2000, we entered
into a new $4.0 million revolving credit loan facility with First National Bank
of Florida, replacing the existing facility, which allows us to borrow up to
eighty percent of our receivables from engineering sources (excluding commercial
film colorization receivables) at the bank's prime rate plus 2.0% per year
(11.5% as of July 7, 2000) which is payable on demand. Dr. Ramendra P. Singh has
personally guaranteed this new credit line. We have an outstanding term loan
with First National Bank of Florida in the amount of $89,222 as of June 30, 2000
which matures November 2000. The loan, which was in the original amount of
$400,000, is secured by certain assets of Dynacs and is personally guaranteed by
Dr. Singh.
Due to the relatively long procurement cycles of our information and
applied technology contracts, we can ordinarily anticipate specific payroll
financing needs under an information and applied technology contract and can
accordingly arrange an increase in short-term line of credit financing which
becomes effective upon the award of that contract to us. The increased
short-term financing is secured by the accounts receivable to be generated by
that particular contract.
The development and growth of our Digital Media and Entertainment Division
has, since 1997, required expenditures that are highly capital intensive. These
expenditures included investments in production facilities, equipment, and the
cost of hiring and training personnel. In addition, we have required financing
in order to secure rights to media properties which we began acquiring in June
1998. We have employed a combination of income from operations, bank financing,
and loans from related parties to finance start-up costs and acquisition
expenses for our Digital Media and Entertainment Division since starting this
division in the year ended December 31, 1996.
In order to finance our working capital shortfalls subsequent to September
30, 1999, we issued $2.9 million of Mezzanine Notes, before offering expenses of
$320,000, the net proceeds of which were used to fund working capital. This debt
is convertible into 483,334 shares of our common stock, assuming all of the debt
is converted. In addition, we issued to the purchasers of the Mezzanine Notes
warrants to purchase 635,050 shares of common stock at an exercise price equal
to 70.0% of the initial public offering price of the common stock per share. The
conversion feature of the Mezzanine Notes and the warrants were valued by Dynacs
at approximately $1.7 million and approximately $1.2 million, respectively. Upon
the consummation of this offering, Dynacs will be required to recognize a charge
of approximately $1.7 million to interest expense related to the Mezzanine
Notes. After consummation of this offering, if the Mezzanine Notes are
converted, any unamortized discount will be netted against the principal amount
of the Mezzanine Notes and reclassified as stockholders' equity. Although this
prospectus assumes conversion of the Mezzanine Notes, if the Mezzanine Notes are
not converted and are repaid, Dynacs will recognize a charge to earnings of up
to approximately $1.0 million, less any amount of original issue discount
amortized prior to the date of repayment. However, the valuation will have no
effect on Dynacs' cash flows. Upon conversion of the Mezzanine Notes, Dynacs'
repayment and interest obligations will be
36
<PAGE> 39
eliminated, creating a positive impact on Dynacs' cash flows and a corresponding
reduction to interest expense. In consideration for serving as placement agent
of the foregoing mezzanine financing, we issued to H.C. Wainwright & Co., Inc.,
the managing underwriter of this offering, warrants to purchase 62,834 shares of
our common stock at an exercise price equal to 70.0% of the initial public
offering price of the common stock per share. The warrants issued to H.C.
Wainwright & Co., Inc. will be cancelled prior to completion of this offering.
See "Description of Company Securities -- Mezzanine Securities" and
"Underwriting."
CASH FLOW
The following is a summary of our cash flows. This summary is not intended
to replace the Consolidated Statements of Cash Flows included in the financial
statements accompanying this prospectus, but is instead intended to highlight
and facilitate understanding of the principal cash flow elements.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash provided by or (used in) our
operations for the six-month period ended March 31, 2000, the nine-month period
ended September 30, 1999 and fiscal years ended December 31, 1998 and December
31, 1997 was $(898,438), $331,097, $(832,594) and $12,523, respectively. The
change in cash flow for the six-month period ended March 31, 2000 resulted
primarily from a pay down of accounts payable and an increase in prepaid
expenses. This change in cash flow between 1998 and 1999 resulted primarily from
a decrease in unbilled revenues, hence more payments received. The significant
change in our cash flow between 1997 and 1998 resulted primarily from the
following: the substantial costs of start-up, transition and payroll
requirements for the SETAR II Contract beginning in June 1998; continued
expansion of digital production facilities for our Digital Media and
Entertainment Division in 1998; and the substantial costs of bids on prospective
contracts.
CASH FLOWS USED IN INVESTING ACTIVITIES. For the six-month period ended
March 31, 2000, cash flows used in investing activities were approximately
$(618,219) for continued expansion of our Digital Media and Entertainment
Division. For the nine-month period ended September 30, 1999, cash flows used in
investing activities were $(1,556,904). For the fiscal years ended December 31,
1998 and 1997, cash flows used in investing activities were $(2,139,658) and
$(933,863), respectively. Expenditures during the fiscal years ended December
31, 1998 and December 31, 1997 were approximately $2,196,925 for continued
expansion and upgrading of our overseas digital production facilities, including
purchases of digital video production equipment and computer systems, and
approximately $500,000 for purchases of computers and other equipment to be used
under the SETAR II Contract. We anticipate spending approximately $2.75 million
in the fiscal year ended September 30, 2000 in continuing upgrades to our
facilities in Batam, Indonesia, Patna, India, and Hollywood, California, as we
expand our digital reformatting work handled by our Digital Media and
Entertainment Division.
We also expect to continue funding additional capital expenditures and
working capital requirements from the proceeds of this offering, internally
generated cash flow, draw-downs on existing credit facilities and through future
debt and/or equity offerings.
CASH FLOWS FROM FINANCING ACTIVITIES. For the six-month period ended March
31, 2000, net cash flows provided by financing activities were $415,927. During
the six-month period ended March 31, 2000, we issued Mezzanine Notes of $2.9
million and retired $1.5 million of our long-term debt and $1.2 million under
our line of credit through the net proceeds of $2,580,000 from the Mezzanine
Notes and through loans from unrelated parties. For the nine-month period ended
September 30, 1999, cash flows provided by financing activities were $2,147,103.
During the nine-month period ended September 30, 1999, we borrowed an additional
$752,571 under our line of credit and a net amount of $1,887,395 through loans
from related and unrelated parties. For the fiscal years
37
<PAGE> 40
ended December 31, 1998 and 1997, cash flows provided by financing activities
were $2,605,890 and $887,658, respectively. The significant increase from 1997
to 1998 was due primarily to the start-up of facilities in Patna, India and
Batam, Indonesia in 1998 for our work in film colorization, the purchase of
approximately 225 computers and various other audio and video equipment, in
addition to building renovations for a facility occupied in Patna, India.
We believe that cash flows from operations and proceeds from this offering
will be sufficient to meet any cash flow requirements of our operations,
requirements for funding of construction and development of capital assets, and
requirements for acquisitions of media assets for a period of at least twelve
months.
YEAR 2000 COMPLIANCE
We completed our assessment of internal systems that could be affected by
the Year 2000 issue prior to December 31, 1999 and found that our computer
systems would properly utilize dates past December 31, 1999. To date, we have
not experienced any Year 2000 computer problems. We have initiated
communications with our significant suppliers to determine the extent to which
we are vulnerable to those parties' failure to solve their own Year 2000 issues.
We will develop contingency plans in the event we become aware that one or more
of these third parties fails to solve their Year 2000 issues in a way which
would affect our operations. If significant numbers of these third parties
experience failures in their computer systems or equipment due to Year 2000
non-compliance, it could affect our ability to engage in normal business
activities.
The statement contained in the foregoing Year 2000 readiness disclosure is
subject to protection under the Year 2000 Information and Readiness Disclosure
Act.
PRINCIPLES OF CURRENCY TRANSLATION
In the year ended December 31, 1998 substantially all of our revenue was
generated in U.S. dollars. In the same year we incurred the majority of our
expenses in U.S. dollars and the balance in Indian Rupees or Indonesian Rupiahs.
Items required to be included in our financial statements are translated into
U.S. dollars using the average monthly exchange rate for revenues and expenses
and the period end rate for assets and liabilities. Gains and losses resulting
from this translation are reported in our financial statements as accumulated
other comprehensive loss, a separate component of stockholders' equity. We
expect that a majority of our revenue will continue to be generated in U.S.
dollars for the foreseeable future and that a majority of our expenses,
including personnel costs as well as capital and operating expenditures, will
continue to be denominated in U.S. dollars. In the short term, consequently, we
do not anticipate that our results of operations will be significantly affected
to the extent that the Rupee and/or Rupiah appreciate or depreciate against the
dollar.
EFFECTS OF INFLATION
The effects of inflation and changing prices have not had a significant
impact on our revenues or income from continuing operations during our last
three fiscal years. As a developer of applied technologies, the most significant
of our costs to date are the salaries and related benefits for our employees and
temporary personnel. As with other technology-based service providers, we must
anticipate adequate increases in wages and other costs, particularly for our
long-term contracts. Historically, our wage costs in India and Indonesia have
been significantly lower than prevailing wage costs in the United States for
comparably-skilled workers, although wage costs in India and Indonesia are
currently increasing at a faster rate than those in the United States. We cannot
assure you that we will be able to recover increases in these costs by
increasing the prices we charge for our services.
38
<PAGE> 41
BUSINESS
We develop, apply and provide services utilizing advanced technologies in
the areas of information systems and aerospace/satellite systems and operations
for U.S. Government agencies and private sector clients. More recently, we have
begun providing information technology and digital content development and
production services to the media and entertainment industry. Our business
strategy is to develop commercial applications for the technologies and know-how
developed by us in our information and aerospace businesses to create and grow
new businesses with strong profit potential.
To date, the most significant commercial applications of our proprietary
technologies have been our ability to use these technologies to convert and
reformat black-and-white full length film footage and other shorter length
media, including cartoons and television commercials, into digital color
material. We utilize these technologies to provide digital conversion and
reformatting services to others as well as to enhance or modify other content
that was originally used for other purposes, for which we can then obtain a
copyright. We believe that the digital distribution of visual media content
utilizing internet technologies presents another significant commercial
application of our know-how. To further our business strategy, we have:
- spent over $4.0 million in the twelve-month period ended December 31,
1999 to build the infrastructure to grow our digital media and
entertainment business, including the development of specialized software
and computer hardware systems used to convert full and short length media
into digital color material and upgrading existing facilities, and
- pursued an acquisition strategy aimed at acquiring media assets to which
we can apply our technologies to enhance their earnings potential and
create new, copyrighted visual media.
We believe that we are the only provider of cost-effective processes to
convert black-and-white full length films into digital color material. We
believe that we are also the leading provider of converting the combined group
of full length films and shorter length media, including cartoons, television
commercials, music videos and short films and videos into digital color
material. Our past and current clients for these services include, among others,
The Walt Disney Company (which generated 0.1% of our revenue for the nine-month
period ended September 30, 1998 and 0.0% of our revenues for the six-month
period ended March 31, 2000) and Columbia Pictures Television Group, a division
of Sony Corporation (which generated 0.6% of our revenues for the nine-month
period ended September 30, 1998 and 1.9% of our revenues for the six-month
period ended March 31, 2000). We intend to leverage our information and digital
server technologies to develop Internet-based distribution and
business-to-business and business-to-consumer delivery of both our own and
third-party owned digital media products and services through our
MarketYourMedia.com website.
In 1998, as part of our media and entertainment business expansion, we
began to acquire for our own account, directly and through joint projects, media
products for colorization, while continuing to provide work-for-hire
colorization services. We have entered into a non-binding letter of intent to
acquire the Sherman Grinberg Film Libraries, one of the earliest and largest
commercial newsreel film collections in the world. The libraries contain
approximately 15.0 million feet of film footage and includes, among other
footage, the Pathe and Paramount Newsreels, as well as series such as "The
Greatest Headlines of the Century." We intend to pursue a digital production and
distribution strategy utilizing our proprietary technologies, including
colorization technologies, and our MarketYourMedia.com website to enhance the
earnings potential and value of this asset.
For the six-month period ended March 31, 2000, gross revenues exceeded
$36.6 million, and our total contract backlog was $189.9 million. Of this
amount, $43.5 million represented funded backlog and $146.4 million represented
unfunded backlog.
39
<PAGE> 42
OUR DIVISIONS
Through the application of our core technologies, our business has evolved
into two divisions:
- Information and Applied Technology Division; and
- Digital Media and Entertainment Division.
The business of each division, including the markets for our services and
our competitors, is described below.
INFORMATION AND APPLIED TECHNOLOGY DIVISION
We operate our Information and Applied Technology Division to focus on the
functional business needs of information systems management and development and
on satellite/aerospace systems and operation.
INFORMATION SYSTEMS MANAGEMENT AND DEVELOPMENT SERVICES OFFERED. Our work
in the area of information systems management and development includes:
- INTERNET ENABLEMENT. We provide services to update old computerized
information systems, such as those which predate the Internet, to enable
them to work with the latest Internet technology, in place of installing
entirely new software systems which would be at much greater expense.
- WEB SITE DATABASE DESIGN AND IMPLEMENTATION. We offer interactive web
site development services to companies that require database and tool
development. We currently offer these services directly to our customers
and through a joint-marketing effort with Rimric Corporation, an
award-winning web site design firm that focuses on the aesthetic appeal
of their clients' web sites.
- INFORMATION SYSTEM MAINTENANCE/SUSTAINING ENGINEERING. Although
companies often maintain and upgrade software applications they have
acquired in the marketplace, it is becoming more and more common for
companies to use outside consultants to perform this service. We offer
these services, which are often referred to as application development,
software maintenance and user support. Dynacs has performed application
development and computer maintenance services for HMC, Inc., CST, Zen
Entertainment, The Netherlands Development Organization and Medical High
Technology International. Although we feel this is an emerging market for
us, the revenues recognized in prior periods have not been material,
falling below 1.0% of our total revenues in any previous period.
We offer clients substantial cost-savings for the more labor-intensive
aspects of our information systems and development services provided to clients
by using the resources of our software development facility in Bangalore, India.
Our clients include U.S. Government agencies and private clients in a broad
spectrum of businesses. Additional applications of our information technology
services for public and private sector clients include:
- SYSTEMS INTEGRATION FOR INTERNATIONAL SPACE STATION. We are integrating
certain information systems for the International Space Station under
multiple contracts with The Boeing Company. The International Space
Station program represents the combined efforts of hundreds of
contractors and suppliers from 15 different countries. It is the largest
international
40
<PAGE> 43
aerospace project ever undertaken. Other contributions by Dynacs under
these contracts include:
-- Integration of communications data used by various participants;
-- Integration of physical systems, including parts of the International
Space Station that will be assembled on Earth and in space; and
-- Work on the International Space Station Software Verification
Facility for testing flight operations control software.
- BUSINESS SYSTEMS INTEGRATION AND RE-ENGINEERING FOR SPACE SHUTTLE. Under
a three-year contract for the Shuttle Program at the Johnson Space
Center, we are undertaking business systems integration and
re-engineering to enable NASA to manage data regarding multiple contracts
kept on different information systems.
- BUSINESS CASE SOFTWARE RE-ENGINEERING FOR COMMERCIAL CLIENT. We
re-engineered software applications for HMC Inc., a management consulting
firm that advises Fortune 1,000 companies on their information systems.
COMMERCIAL MARKETS FOR INFORMATION SYSTEMS MANAGEMENT AND DEVELOPMENT DIVISION
INDUSTRY OVERVIEW. In the increasingly competitive business environment,
companies have become dependent on information technologies to maintain
day-to-day operations as a strategic tool to enable them to re-engineer business
processes, restructure organizations and react quickly to changes in competitive
conditions, regulatory requirements and advances in technology. Information
technologies are being utilized throughout the global economy. The information
technology services sector in which Dynacs competes is broad and includes
computer system outsourcing services; internet and web development services;
computer-based, integrated implementations of new and existing business
processes; computer software application and packaged software development
services; database software development and customization services; and
application development services for small devices, including instruments,
hand-held computer devices and computers mounted and networked together in
consumer appliances.
Competitors in the information technology sector include large, established
firms, mid-sized firms, small businesses and individuals. The largest
information technology service providers include IBM Global Services, Electronic
Data Systems, Fujitsu, Anderson Consulting and Computer Sciences Corporation.
Large packaged software application providers include Microsoft, BMC Software
and Compuware. Large database software providers include Oracle, IBM, Informix
and Sybase. We believe that industry shifts in the focus from information
technology services provided around products to information technology services
provided around business processes, coupled with growth in information
technology spending by companies with fewer than 100 employees, has created
increased market opportunities for smaller information technology service
providers, such as Dynacs, who are often perceived as providing innovative
information technology solutions and as being more responsive to the system
customization needs of smaller businesses.
As companies and U.S. Government agencies have become increasingly reliant
on their information systems, the challenge of managing such systems has also
grown. Not only must companies and governments implement new technologies such
as hand-held computer devices and advanced interactive databases, they must also
maintain and update legacy systems to work with the latest software and
hardware. Now that Year 2000 computer issues and the European Union's currency
conversion issues are of substantially less concern to business and the U.S.
Government, information technology spending is focusing on services that
improve, rejuvenate or reinvent processes which define businesses.
41
<PAGE> 44
MARKET SIZE. As businesses and governments have become more dependent on
information technologies, corporate budgets for consulting, development,
integration and outsourcing of information technology services have grown
dramatically. According to the GartnerGroup, a leading authority on information
technology, total information technology spending worldwide will increase from
$2.2 trillion in 1999 to $3.3 trillion in 2002. International Data Corporation
(IDC), a leading provider of information technology industry analysis and market
data, projects that the worldwide information technology services market will
sustain annual double-digit growth through 2004, forecasting that spending will
increase from $349.0 billion in 1999 to over $584.5 billion in 2004, with the
United States remaining the largest regional market for information technology
services.
Growth in internet commerce, which Dynacs believes will increase the market
opportunities for its information technology services, is accelerating and,
according to IDC, will exceed $1.6 trillion worldwide by 2003. The need to
outsource is particularly acute for companies whose information technology
personnel lack the requisite skills and abilities in project and technical
management to implement new technologies. Outsourcing is also growing among U.S.
Government agencies operating under reductions of staffing budgets. As a result,
these companies and U.S. Government agencies seek third-party service providers
to implement new technologies and upgrade old computerized information systems
to enable them to work with the most recent information technologies.
The markets for our technologies and services in the areas of information
systems management and development include agencies of the U.S. Government,
primarily NASA. According to the GartnerGroup, a leading authority on
information technology, spending for U.S. e-government hardware, software and
internal and external services is projected to grow from $1.5 billion in 2000 to
$6.2 billion in 2005. U.S. Government agencies are currently outsourcing a
substantial portion of this type of work and are expected to continue to do so.
In addition, we are currently providing information technologies and services to
NASA and the U.S. Air Force under a number of multi-year contracts. See
"Satellite and Aerospace Systems and Operations Division" and "Government
Markets for Satellite/Aerospace Systems and Operations -- Major Client."
COMPETITION IN COMMERCIAL MARKETS
The market for information technology services is highly competitive. Our
competitors include companies that specialize in providing services in the area
of information technologies, large international accounting firms and their
consulting affiliates, systems consulting and integration firms, temporary
employment agencies, other technology companies and in-house client MIS
departments. Our competitors include international firms as well as national,
regional and local firms located in the United States, Europe, Asia and South
America.
We expect that future competition will increasingly include firms with
operations in other countries, potentially including countries with lower
personnel costs than those prevailing in India. Part of our current competitive
advantage is a cost advantage relative to other service providers in the United
States and Western Europe.
SATELLITE AND AEROSPACE SYSTEMS AND OPERATIONS
We have undertaken sophisticated research and development, analysis and
testing for numerous private and public sector clients in the U.S. and European
satellite and aerospace industries. Although we began as an engineering firm
with expertise focused in the area of computer modeling of structures to better
understand their motion and methods of regulating their motion, we have greatly
expanded the scope of our technical expertise. We are now involved in many
high-profile U.S. space programs and cutting-edge research projects. We also
develop technologies and applications in the
42
<PAGE> 45
areas of satellite systems and operations from launch through orbit and landing.
In this field, we also develop information systems and training software and
procedures for the systems we provide.
SERVICES PROVIDED. Representative applications of our technologies in this
area for public and private sector clients are:
- Development of hardware and software to upgrade rocket launch systems at
the Kennedy Space Center under our EDC Contract (which generated
$12,914,566, or 35.3%, of our revenues for the six-month period ended
March 31, 2000 and $19,340,348, or 35.0%, of our revenues for the
nine-month period ended September 30, 1999);
- Development of information systems for operation of satellites launched
under NASA's Mission to Planet Earth under a subcontract with TRW Inc.
(which generated $533,161, or 1.5%, of our revenues for the six-month
period ended March 31, 2000 and $888,523, or 1.6%, of our revenues for
the nine-month period ended September 30, 1999);
- Development and application of simulation software allowing parallel
processing, independent use of systems to perform different functions
simultaneously, for NASA's Johnson Space Center (which generated
$355,770, or 1.0%, of our revenues for the six-month period ended March
31, 2000 and $589,157, or 1.1%, of our revenues for the nine-month period
ended September 30, 1999); and
- Enhancement of satellite operating software for Hughes Space and
Communications Group, a division of General Motors (which generated
$199,669, or 0.5%, of our revenues for the six-month period ended March
31, 2000 and $155,929, or 0.3%, of our revenues for the nine-month period
ended September 30, 1999).
MARKETS FOR SATELLITE/AEROSPACE SYSTEMS AND OPERATIONS
The markets for Dynacs' satellite and aerospace systems and operations are
the global information and communications industry, the orbital systems and
exploration market, for which U.S. and European governments are the primary
customers, and to a much smaller extent, U.S. Government defense agencies, of
which only the Air Force is a current Dynacs customer. The worldwide commercial
markets for the type of services we provide in the area of aerospace/satellite
systems and operations is expected to grow to $81.1 billion in 2009 according to
the Teal Group Corporation. This figure includes the $56.1 billion estimated
value of the 899 new satellites expected to be launched and $25.0 billion in
estimated value of related launch services. The anticipated growth reflects the
dramatic growth projected in the global communications and information industry
and the availability of new supporting technologies.
GOVERNMENT MARKETS FOR SATELLITE/AEROSPACE SYSTEMS AND OPERATIONS
MAJOR CLIENT. The bulk of the services provided to date by our information
systems management and development and satellite/aerospace systems and
operations divisions have been provided to U.S. Government agencies. Revenues
from services we provided as a contractor or subcontractor to U.S. Government
agencies, primarily through our information technology and satellite/aerospace
businesses, represented the following portions of our total revenue: 97.5% for
the six-month period ended March 31, 2000, or $35.7 million, 97.5% for the
nine-month period ended September 30, 1999, or $53.9 million, 97.8% for the year
ended December 31, 1998, or $59.6 million; and 96.7% for the year ended December
31, 1997, or $26.1 million. Accordingly, a substantial portion of our revenues
are subject to inherent risks, including uncertainty of economic conditions,
changes in government policies and requirements that may reflect rapidly
changing military and political developments and the availability of funds.
43
<PAGE> 46
During the nine months ending September 30, 1999, our three largest
contracts represented the following portions of our total revenue: 40.3%, for
the SETAR II Contract; 34.9%, for the EDC Contract; and 10.0%, for the Boeing
ISS Contract. For the six months ending March 31, 2000, our three largest
contracts represented the following portions of our total revenue: 38.7%, for
the SETAR II Contract; 35.3%, for the EDC Contract; and 12.2%, for the Boeing
ISS Contract.
NASA is our direct customer on the SETAR II Contract and EDC Contract and
is indirectly our customer under the Boeing ISS contract; hence, NASA
effectively is our customer under our three largest contracts. For the nine
months ending September 30, 1999, our three largest contracts represented a
total of 85.2%, or $47.1 million, of our revenues. For the six months ending
March 31, 2000, our three largest contracts represented 86.2%, or $31.6 million,
of our revenues.
The industry is also characterized by difficulty in forecasting costs and
schedules when bidding on developmental and highly sophisticated technical work.
Particular risks inherent in the current U.S. Government contracting environment
for information technology and aerospace services are discussed in the sections
of this prospectus entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
U.S. GOVERNMENT CONTRACTS. There are three types of U.S. Government
contracts under which we may serve as a prime contractor or subcontractor:
- cost reimbursable contracts;
- time-and-materials contracts; and
- fixed price contracts.
We currently have cost reimbursable contracts and time-and-materials
contracts.
Our cost reimbursable contracts include both cost plus fixed fee contracts
and cost plus award fee contracts.
Under cost plus fixed fee contracts, we receive a fee which is fixed by the
contract and reimbursement of costs to the extent allowed under Federal
Acquisition Regulations. Under cost plus award fee contracts, we are reimbursed
for costs on the same basis and receive a fee which varies, depending upon cost,
quality, delivery and the agency's subjective evaluation of the work. Under
time-and-materials contracts, we receive a fixed amount by labor category for
services performed and are reimbursed for the cost of materials we purchase to
perform the contract. Under fixed price contracts, contractors for the U.S.
Government receive a fixed amount regardless of the costs incurred by the
contractor. Our costs and fees under U.S. Government contracts are subject to
adjustment as a result of audits by the Defense Contract Audit Agency.
TERMINATION BY THE U.S. GOVERNMENT. A substantial portion of our revenue
is currently generated from contracts with NASA and, to a lesser extent, the
U.S. Air Force. These contracts are conditioned by their terms upon the receipt
by NASA of an adequate appropriation of funds from the U.S. Congress each year.
In the event that NASA fails to receive funds from Congress or Congress
withdraws prior appropriations, NASA may terminate its contracts with us "for
convenience." Upon termination of a government contract "for convenience," we,
like other U.S. Government contractors and subcontractors, would be entitled to
be reimbursed for allowable costs and profits to the date of termination.
Contracts with agencies of the U.S. Government are also subject to reduction or
modification in the event of changes in U.S. Government requirements or
budgetary constraints. For each of the U.S. Government's 1999 fiscal year and
2000 fiscal year, Congress authorized $13.7 billion in appropriations for NASA,
the International Space Station, launch vehicles and payload
44
<PAGE> 47
operations, including funding for the Kennedy Space Center, and for science,
aeronautics and technology.
BACKLOG
Our backlog under contracts with customers in our Information and Applied
Technology Division is comprised of funded and unfunded components. As of June
30, 2000, the total dollar amount of contract backlog was approximately $173.2
million, of which $27.1 million, or 15.6%, was funded backlog, and $146.1
million, or 84.4%, was unfunded backlog. Unfunded backlog can include an amount
up to the stated award value of the contract, including renewals or extensions
that have been priced, but as to which the agency retains authority to fund or
not to fund. Because many of our contracts are multi-year contracts, total
backlog may include revenue expected to be realized several years into the
future. The unfunded backlog may not be an indicator of future contract revenue
or earnings because funding of the unfunded portion cannot be assured. Many of
the U.S. Government programs in which we participate may extend for several
years, but they are normally funded on an annual basis by Congressional
appropriations.
COMPETITION FOR U.S. GOVERNMENT PROJECTS
We may obtain a U.S. Government contract after the solicitation by the
relevant U.S. Government agencies, in "free and open" competition, or in
competition only with other companies that qualify as small businesses or small
disadvantaged businesses. Most U.S. Government agencies are authorized to enter
into contracts based on negotiation rather than sealed bids. Negotiated
contracts may or may not involve the solicitation of competitive proposals.
Generally, negotiated contracts are entered into without competitive
solicitation when the services or supplies desired by a U.S. Government agency
can reasonably be obtained from only one available source. In most non-
competitive procurements, a U.S. Government agency solicits a proposal from the
contractor and then negotiates the price and other terms in accordance with
applicable U.S. Government regulations.
U.S. Government contracting laws also provide that the U.S. Government is
to do business only with responsible contractors. In this regard, U.S.
Government agencies have the authority, under certain circumstances, to suspend
or debar a contractor or subcontractor from further U.S. Government contracting
for a certain period "to protect the U.S. Government's interest." This action
may be taken for various reasons, including commission of fraud or a criminal
offense in connection with a U.S. Government contract or subcontract. A
suspension may also be imposed if a contractor is indicted for any matters.
Our Information and Applied Technology Division competes with many other
companies for contracts covering a variety of U.S. Government projects and
programs in the areas of information, satellite and aerospace technologies. We
now compete for these contracts where bidding is "free and open" and not
restricted, and where bidding is restricted to small disadvantaged businesses or
small disadvantaged businesses. Our ability to compete successfully for and
retain U.S. Government contracting business is highly dependent on technical
excellence, management proficiency, strategic alliances, cost-effective
performance and the ability to recruit and retain key personnel.
Our competitors for U.S. Government contracts are typically much larger
firms with substantial assets, some of which have become considerably larger in
recent years as the result of substantial consolidation of the industry.
On-going consolidation of the U.S. and global defense and aerospace companies
has resulted in a reduction of the number of prime contractors for NASA and the
U.S. Air Force. As a result of this consolidation, we frequently enter into
joint venture arrangements on various programs with companies that are our
competitors on other programs.
45
<PAGE> 48
SECTION 8(a) PROGRAM; EFFECT OF GRADUATION FROM SECTION 8(a) PROGRAM ON OUR
BUSINESS AND ABILITY TO COMPETE.
Dynacs has been a small business and a small disadvantaged business since
1985, and a participant in the Section 8(a) Program certified as a small
disadvantaged business by the Small Business Administration from October 1989
through October 1998. Companies may qualify as small businesses if they have
less than the number of employees assigned to the particular standard industrial
classification, or SIC code, applicable to a U.S. Government contract. The SIC
codes applicable to the contracts for which we submit bids, as a small
disadvantaged business or small business, involve limits of 1,000 or 1,500
employees. Although we currently have fewer than 1,000 employees, if we pursue
our intended growth strategy, we anticipate that we may have more than 1,000
employees by 2001, and more than 1,500 by 2002. We have derived various benefits
in securing work as a prime contractor or subcontractor for U.S. Government
agencies from our status as a small business or small disadvantaged business and
our participation in the Section 8(a) Program, because many U.S. Government
contracts require that a specified percentage of the work be performed by small
businesses or small disadvantaged businesses. Another benefit of small
disadvantaged business status results from the U.S. Government's prerogative of
adding up to 10.0% to the bid prices of non-small disadvantaged business bidders
in evaluating all bids received for a project.
Through our performance under U.S. Government contracts awarded to us prior
to our graduation from the Section 8(a) Program, we established our reputation
for expertise in the aerospace and information technology fields. As a result,
we continued to receive contract awards from NASA and the U.S. Air Force on many
important programs, such as the International Space Station at NASA's Johnson
Space Center after the automatic termination of our participation in the Section
8(a) program. During our participation in the Section 8(a) Program, our
technical competence and expertise in various sub-fields of the aerospace
industry was recognized by numerous awards and honors from both U.S. Government
agencies and private industry.
We believe that our demonstrated expertise in information technology has
been critical to our receiving work on a large number of U.S. Government
projects, including those projects for which bidding was restricted to small
disadvantaged businesses participating in the Section 8(a) Program. Although we
ceased to participate in this Program for new contracts in October 1998, upon
automatic termination of our allowed term of participation, we remain a small
disadvantaged business certified by the Small Business Administration for
purposes of performing contracts awarded under bids we submitted prior to
October 1998 and we remain subject to applicable U.S. Government regulations as
to U.S. Government contracts already awarded to us on the basis of this
participation. We do not believe that our continued participation in the Section
8(a) Program is material to our continued success in securing work on U.S.
Government projects or in securing work in the private sector. We do believe,
however, that our ability to continue performing under U.S. Government contracts
currently in progress, in particular those awarded to us as a small
disadvantaged business participating in the Section 8(a) Program, will be
material to our financial condition and results of operations through 2002. Our
total funded and unfunded backlog under these Section 8(a) Program contracts is
$133.6 million. A loss of a significant portion of this backlog would have a
material adverse effect on our business.
Since the automatic termination of our participation in the nine-year
Section 8(a) Program, we have retained the status of a small disadvantaged
business certified by the Small Business Administration and may maintain that
status until October 2000. We have applied to the Small Business Administration
for continuing certification for an additional three year period. Our status as
a small disadvantaged business is based, in part, upon ownership of a majority
of our outstanding stock by a member of a "disadvantaged" group. We have
satisfied the equity ownership requirement for a small disadvantaged business on
the basis of ownership of more than 50.0% of our outstanding
46
<PAGE> 49
common stock by Dr. Singh, our President and Chief Executive Officer. However,
Dr. Singh's stock ownership will fall below 50.0% upon the consummation of this
offering. When companies that participate in the Section 8(a) Program no longer
satisfy the stock ownership requirement, Federal regulations mandate termination
of contracts in progress that were previously awarded on the basis of this
participation, unless the Small Business Administration waives the stock
ownership requirement. We applied for and received a waiver from the Small
Business Administration of the stock ownership requirement in September 1999,
such waiver is in effect for the duration of the existing contracts awarded on
the basis of our participation in the Section 8(a) Program.
DIGITAL MEDIA AND ENTERTAINMENT DIVISION
SERVICES OFFERED. Through our production facilities in India and
Indonesia, we offer digital reformatting, color effects and animation services
for media owners worldwide, including the following:
- DIGITAL CONVERSION OF BLACK-AND-WHITE FILM MEDIA. We convert
black-and-white media, including motion pictures, television series and
film clips of historic and newsworthy events, to color;
- DIGITAL COLOR SPECIAL ENHANCEMENTS AND EFFECTS. We provide digital color
treatments and special effects for producers of television commercials
and music videos;
- ELECTRONIC PAINTING OF ANIMATED MEDIA. We utilize digital computer
software to apply color to animated cartoons. This service is referred to
in the industry as "digital ink and paint";
- FILM AND VIDEO RESTORATION. Our restoration services utilize digital
processes to enhance and improve the appearance of degraded films and
videos; and
- 2-D AND 3-D ANIMATION. Our animation services utilize two and three
dimensional computer graphics tools and software applications to produce
animated media in both the entertainment and applied technology areas of
our business.
Examples of the application of our digital reformatting, color effects and
animation technologies and services include the following:
- Digital color reformatting of black-and-white feature films, such as "The
Absent Minded Professor" for The Walt Disney Company and "Le Trou
Normand" for Roissy Films;
- Digital color reformatting of black-and-white television series, such as
"I Dream of Jeannie" and "Bewitched" for Columbia Pictures Television
Group, a division of Sony Corporation;
- Digital color reformatting of black-and-white film clips showing the
crash of The Hindenburg Airship and The Battle of Midway;
- Color special effects for television series, such as "The X-Files" and
for numerous television commercials, including ten Gatorade commercials
and one Coca-Cola commercial;
- Color special effects for music videos, including one featuring the
pop-musical performer, Tatyana, produced by Sony Music and "Celebrity
Skin" produced by Crash Films, featuring Courtney Love;
- Digital ink and paint services, such as that provided for the animated
short film "Monkey Love" and the On-line Cartoon Network;
47
<PAGE> 50
- Digital restoration of black-and-white film clips of famous World War II
battles and the digital disassembly, restoration and re-assembly of
cartoon animation, such as "Woody Woodpecker"; and
- Digital video production, digital photography, 3-D animation and web-site
development and implementation services, such as that provided for the
Multi-media Laboratory at NASA's Kennedy Space Center.
COLORIZATION AND ANIMATION TECHNOLOGIES. The primary benefits of our
digital color reformatting and animation services are cost effectiveness, high
delivery speed for long-form media, and worldwide access to real-time production
information, all without sacrificing quality. Our technologies were designed to
address deficiencies in the pioneering colorization technologies which were
developed as early as two decades ago. Deficiencies in the early technologies
included:
- poor, unrealistic quality, particularly in the early analog technology
which was only capable of producing 8 to 16 colors;
- inefficiencies resulting from small production capacity and length of
time required for completion of colorized material; and
- high production costs.
Currently available technologies, including ours, have made it possible to
produce digital color images in over 16 million colors that are realistic and
aesthetically pleasing. The inefficiencies and expense of early colorization
technologies resulted from the use of highly skilled artists, whose services
were costly and time-consuming. These inefficiencies were less apparent for work
on short form media (which is comprised of hundreds to thousands of frames and
includes television commercials, music videos and short films and videos) as
compared to long form material (which is comprised of hundreds of thousands to
millions of frames and includes full length feature films and film and/or
television series).
Our proprietary technologies reduce labor costs by using computers, rather
than skilled artists, to handle substantial portions of the colorization.
Although our colorization processes are still labor intensive, they are far less
labor intensive than other colorization technologies. We also achieved further
savings in labor and other production costs by establishing overseas production
facilities in Patna, India and the Indonesian Island of Batam, which we continue
to expand. See "Facilities" and "Government Regulation -- India and Indonesia."
Through our digital ink and paint technology, we are able to add color to
animated videos and films electronically, rather than the traditional method of
painting each character that appears in a frame on a separate celluloid sheet.
In addition to saving labor costs, this technology greatly speeds up the process
of colorizing animated media and creates further cost efficiencies by
eliminating the need for celluloid frames which scratch, become degraded over
time and require shipping.
Our computerized technologies also enable us to divide the millions of
frames of a television series or feature film or the thousands of frames
comprising a commercial, into many separate projects that can each be worked on
simultaneously by different workers. This feature not only allows us to
distribute the work equally among our production workers, but in doing so, also
significantly shortens the time required to complete a project. As a result, we
believe our labor and other production costs are far lower than those of our
competitors.
REAL TIME PRODUCTION INFORMATION. Another significant feature of our
digital production technology is worldwide access to real-time production
management information. Our web-based production management tools allow our
production supervisors and managers to monitor, in real-time,
48
<PAGE> 51
the status of work in process, including individual frames and shots, from their
desktop computer. This technology allows us to monitor and better manage our
facilities and labor abroad with substantial cost savings.
DIGITAL MEDIA & ENTERTAINMENT REVENUES. As a group, revenues from
providing digital media & entertainment services accounted for 2.5% of our total
revenues for the nine-month period ending September 30, 1999. In general, we are
paid for colorization work of full length feature films and television series by
each minute of footage that we process. For shorter length material, such as
television commercials and music videos, we receive revenues for our services on
a per-project basis. A typical project generates approximately $5,000 to $15,000
in revenues and can take 1 to 3 weeks to complete. Electronic painting of
animated media and digital restoration projects are priced on a similar,
full-length and short-length basis. We also accept reduced rates for
colorization work in exchange for a percentage of the ownership of the completed
work. As a part owner of digital color reformatted movies and TV series, we
receive a percentage of the licensing or distribution fees realized. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RECENTLY COMPLETED PROJECTS. We have colorized films and television series
for Columbia Pictures Television, Le Film Arianne, Roissy Films and The Walt
Disney Company. These projects included the TV series "I Dream of Jeannie,"
"Bewitched" and "The Adventures of Rin Tin Tin" for Columbia Pictures Television
Group, the Disney feature films "The Absent Minded Professor" and "Son of
Flubber," and the feature films "Le Boulanger de Valorgue" and "Le Trou
Normand," for Roissy and "Fan Fan Les Tulipe" for Le Film Arianne. Our
colorization work on commercials, music videos and special effects for
television includes special effects for the TV series, "The X-Files," and for TV
commercials advertising Gatorade, Miller Beer, Lexus, Mercedes Benz, Peugeot,
Lincoln Mercury and Pontiac, Tostitos, Woolite, Barclaycard, RCN Cable and ESPN.
Our own projects include a 13-episode series on World War II, "Annie Oakley" and
a joint project on "Circus Boy." We are currently considering offers to purchase
and colorize a television series, including "Lassie," "Route 66," "Naked City,"
and "Laurel and Hardy" as well as working with the Sherman Grinberg Film Library
to develop two additional series.
FUTURE DIGITAL MEDIA PROJECTS
DIGITAL CONTENT DEVELOPMENT AND REFORMATTING. We intend to utilize our
digital conversion and colorization technologies to enhance or modify content,
which was originally created for other purposes, for which we can then obtain a
copyright. For example, we began in November 1999 the development of a
13-episode series on World War II. This series contains archival film footage in
which we have applied digital color effects. For work that we perform for our
own account, we claim copyright protection where permissible on both the
underlying colorized black and white footage and compilations of colorized black
and white footage into completed series. We plan to generate revenues by
licensing the compilations to the television broadcasting market and the
underlying colorized footage in the stock footage market.
In pursuit of this objective, we entered into a non-binding letter of
intent to acquire the Sherman Grinberg Film Libraries. Pursuant to the
non-binding letter of intent, dated May 16, 2000, with Film Archive Finance
Company, Inc., we have agreed to purchase all of the issued and outstanding
capital stock of Sherman Grinberg Film Libraries, Inc. The libraries include,
among other footage, the Pathe and Paramount Newsreels. Founded in 1957 by
Sherman Grinberg, the libraries contain one of the earliest and largest
commercial newsreel film collections in the world. As a result of the
acquisition of the Sherman Grinberg Film Libraries, Inc., if completed, Dynacs
will acquire a 50.0% interest in, and the perpetual exclusive license to
operate, the Pathe film collection consisting of approximately 7.0
49
<PAGE> 52
million feet of 35mm film dating from 1896 to 1957. The Pathe collection
includes many classic newsreel images of the 20th century, ranging from the
Hindenburg airship disaster to John F. Kennedy's "Ich bin ein Berliner" speech.
The libraries also include a series entitled "The Greatest Headlines of the
Century," which consists of 260 three-minute films produced for television
syndication by Grinberg. These films were compiled from Pathe material and
feature some of the most memorable events between 1900 and 1957.
The Paramount Newsreels consist of approximately 5.7 million feet of 35mm
film. From 1927 through 1957, Paramount issued two newsreel editions a week,
typically from seven to nine minutes long, with each story occupying forty to
ninety seconds. The libraries also include unused out-takes and lesser
publicized footage, as well. The Sherman Grinberg Film Libraries collection also
includes approximately 2.0 million feet of material from various sources,
including early 1900's experimental film footage, shorts and silent films,
sports topics, early exploration (such as expeditions to the north and south
poles), industry topics, World War II era German propaganda footage and vintage
television commercials.
The purchase price for the shares is $3.35 million, subject to increases
based on:
- The availability of commercially usable film footage in the two
principal libraries in excess of 5.0 million linear feet and additional
commercially usable film footage in any of the other libraries to be
acquired;
- Certain minimum levels of gross revenues for 2001, 2002 and 2003
from the licensing or sale of footage as it presently exists in the
libraries or as it may be colorized by us; and
- Certain minimum levels of gross revenues for 2001, 2002, 2003 and
2004 from the sale or licensing of the libraries in all forms, including
footage which has been re-edited or compiled by us or colorized by us.
The maximum purchase price for the Grinberg shares is $10.85 million,
payable in our common stock, based on the greater of the offering price of our
common stock in this offering or $10 per share. Of the number of shares of our
common stock to be issued in consideration of the purchase price, $3.35 million
worth of our common stock will be delivered to the Film Archive Finance Company,
Inc. at closing and the remainder will be delivered into escrow, which will be
released after applicable purchase price adjustments described above are made
and will be subject to cancellation based on the Film Archive's indemnification
obligations as described below.
One half of the shares of Dynacs common stock to be delivered at the
closing ($1.675 million) and one half of the stock to be delivered based upon
available commercially usable footage ($1.5 million), along with all of the
shares of Dynacs common stock to be issued based upon gross revenues ($4.5
million) are subject to cancellation in the event Dynacs has indemnification
claims against the Film Archive Finance Company, Inc.
The Film Archive Finance Company, Inc. and an executive director of the
Film Archive Finance Company, Inc. are also receiving an aggregate of $150,000
in shares of Dynacs common stock based on the greater of the offering price of
our common stock in this offering or $10 per share for a three year covenant not
to compete. The executive officer will also enter into a one year employment
agreement with Dynacs pursuant to which the executive officer will be paid a
base salary plus bonuses if the executive officer is able to bring to Dynacs
additional corporate or film library acquisition opportunities which Dynacs
elects to acquire.
INTERNET-BASED MEDIA LIBRARY AND MARKETPLACE. We seek to leverage our
information management, visualization technologies and know-how initially
developed by us for the aerospace
50
<PAGE> 53
industry to complete the development of our web site, "MarketYourMedia.com," and
to enable us to establish ourselves as a leader in the visual content industry.
Through MarketYourMedia.com, we intend to position Dynacs as a seller and
distributor of electronic versions of traditional visual media, such as single
frame photographic images, motion picture films, videos and animations over the
Internet. Once our web site is in operation, we plan to use this web site as an
on-line media library and marketplace where we and other owners of digitized
visual media can sell material to prospective licensees and consumers. We
anticipate receiving fees from these media owners for scanning, digitizing,
preparing for internet-based delivery, cataloging, archiving, and, in some
cases, colorizing their materials. We also anticipate receiving revenues from
managing media owners' content over the internet, either by streaming their
digital content over the internet for immediate viewing or forwarding their
digital content to viewers' individual computers for storage and which can be
viewed upon demand. Prospective licenses will be able to search an on-line
catalog of available materials and down-load selected materials for viewing. For
third party owners of visual media, we will act as an intermediary and receive
fees for properties licensed through the MarketYourMedia.com web-site.
Dynacs technical personnel are currently developing the host site
implementation plan. The MarketYourMedia.com pre-launch site has been designed,
implemented and is currently on-line. In addition to entering into the letter of
intent to purchase all of the issued and outstanding capital stock of Sherman
Grinberg Film Libraries, Inc. we are continuing our discussions with third
parties regarding the acquisition and/or representation of visual media on-line.
LOCATION-BASED ENTERTAINMENT. We intend to market our technologies to
location-based entertainment sites which are out-of-home entertainment locations
featuring technology-driven, electronic entertainment, typically in the form of
electronic, virtual reality games and motion-ride simulation in 3D.
Location-based entertainment sites occupy sites ranging in size from 6,000
square feet or less to 100,000 square feet and are being developed by divisions
of the large entertainment studios such as The Walt Disney Company (DisneyQuest
Imagineers), Sony Corporation and Gameworks, a joint venture among DreamWorks
SKG, Sega Enterprises and Universal Studios, as well as many independent
operators.
Our primary target market is the independent location-based entertainment
site operators and entertainment conglomerates. We can provide cost efficiencies
to independent operators since most operators currently secure the different
technology components of their location-based entertainment sites from various
sources at significant expense. We intend to begin the service development,
marketing and sales efforts associated with penetrating the location-based
entertainment market within 12 months of the closing of this initial public
offering.
MARKETS FOR DIGITAL MEDIA AND ENTERTAINMENT DIVISION
The entertainment industry creates motion pictures, television programming
and interactive multimedia content for distribution through theaters, video
stores, pay and basic cable television stations, direct-to-home private cable,
broadcast television, on-line services, and location-based entertainment
centers. Television operators and producers purchase content through trade shows
and distributors. Film and television libraries may be released repeatedly in
distribution, while new content is typically released into a "first-run"
distribution channel and later into one or more additional channels or media.
Entertainment content produced in the United States is also exported.
Trends in the entertainment industry that affect the markets for our
digital media and entertainment products and services are:
- Growth in worldwide demand for entertainment content;
- Increasingly high demand in international markets for United States
entertainment content, including television programs;
- Development of new markets for existing content libraries; and
51
<PAGE> 54
- Wider application of digital technologies for manipulation and
distribution, including the emergence of new distribution channels.
TELEVISION MARKET. Programming for television is purchased by conventional
broadcast television networks, cable channels, satellite delivery systems, and
pay television. The demand for entertainment content generally has increased
significantly as a result of the growth in numbers and types of television
channels in the United States and worldwide. Higher levels of spending for
programming has resulted from demand by new television networks and cable
stations for more hours of programming and competition for new viewers.
Significant growth in worldwide television revenues has resulted from the
increased number of households with televisions and the increased growth of
cable and multi-channel access. The increased revenues have led to increased
expenditures for programming. We believe that colorized libraries of existing
black-and-white programs will become an attractive alternative for purchasers of
programming. We intend to position ourselves to be able to meet the increased
demand for these colorized libraries.
The privatization of broadcasting systems during the last decade or so, the
proliferation of broadcast licenses and the introduction of sophisticated
delivery technologies, including cable and satellite transmission systems and
the Internet, has led to significant growth of broadcast and cable television
markets outside North America. European governments have continuously encouraged
a major expansion of public and private broadcasting sectors. It has been our
experience that European television producers do not typically purchase
black-and-white content, and we believe that Western Europe is and will continue
to be an important market for content colorized by Dynacs. The markets for
television content are also growing in Asia and Eastern Europe.
The growth in demand for programming and the proliferation of television
channels is related to the substantial increase in the number of households with
televisions worldwide. According to figures released by Kagan.com, in 1999, over
888 million households had televisions, and the number of households with
television sets is expected to increase by 9.5% to more 972 million by the end
of 2003. A November 1999 report of Kagen Media Appraisals, Inc. projects that
between 1999 and 2003, growth in worldwide revenues of all types of television
channels as follows: over 30.0% in the United States; over 68.0% in the
Asia-Pacific market; over 61.0% in Latin America; over 39.0% in Western Europe;
and over 276.0% in Eastern Europe.
The number of broadcast networks and cable channels in the United States
and worldwide continues to increase. Since 1994 more than 165 new cable networks
have been introduced worldwide.
Programming budgets of basic cable networks identified as potential
purchasers of colorized television series from companies, including Dynacs, are
projected by Kagen Media Appraisals, Inc. to increase from $2.55 billion in 1999
to more than $3.75 billion in 2004.
There was significant growth in worldwide revenues for the television
industry resulting from the increasing number of households with televisions,
the number of households with multi-channel access, increases in the number of
basic cable television operators and increased television advertising revenues.
Spending for television advertising, which drives the sale of existing content
libraries and the production of new programming, is projected, according to a
Kagan/Solomon TV Programming Report, to increase by 38.5% to $170.0 billion
world wide in 2003 from $122.0 billion world wide in 1999.
The increasing programming budgets for the major networks create demand for
the new content. In view of the increasing costs attached to the creation of new
programming, the colorized libraries of existing black and white programming
have become an attractive option. We anticipate continuing to provide our
products and services to new programming content providers to capitalize on the
continued growth in this market.
52
<PAGE> 55
The proliferation of smaller, independent channels, domestic and
international, appealing to audiences of narrow demographics have comparatively
smaller programming budgets. These channels often resort to using material,
including, colorized black-and-white film footage, which was originally shot for
other purposes, to satisfy their needs for programming content. We anticipate
benefitting in two ways from this trend: 1) demand for new colorized content,
wherein we will provide our services to colorize the content, and 2) demand for
existing colorized content, wherein we will provide content owned or partially
owned by us.
The U.S. entertainment industry is also experiencing a broad transition
from traditional analog film processes to digital methods and approaches. We
believe that our ability to convert visual media in analog format to digital
formats positions us to take advantage of this transition.
VISUAL MEDIA CONTENT
We believe that the growth in demand for visual content during the
twentieth century can be attributed, in part, to technological improvements that
have made visual content more accessible and the proliferation of distribution
channels, including print, television and theatrical venues. We believe that
industry growth has been accelerated by the distribution and utilization of
still images and film footage on the Internet.
The visual content industry involves the creation, acquisition, storage,
distribution and end-use of both still images and film footage. Traditionally,
visual content has been captured and distributed in analog form. This has
required a lengthy process for the provider and has also been relatively
inefficient for the customer. Digital technologies capture visual content in a
form that can be electronically stored, manipulated and retrieved utilizing a
computer. While visual content providers continue to create and distribute
imagery in the analog format, they are increasingly using digital technologies.
Prior to the mid-1950s, most visual content was captured in
black-and-white. Worldwide, vast amounts of historical and newsworthy black and
white visual content exists in analog format, including film, which can be
converted to a digital format, upgraded to today's quality standards and
reformatted for use by business and consumer customers. In some cases,
colorization of black-and-white film footage generates a new U.S. copyright on
the colorized footage.
The migration toward digital technology has had implications for improving
the process both from a customer and content provider perspective. For the
customer, the digital image acquisition process is dramatically more efficient.
For providers, digitization provides an opportunity to achieve process
efficiencies and economy of scale benefits by consolidating and integrating a
widely-fragmented industry, thereby leveraging an increased and more efficient
offering of images to a wider range of business customers and consumers.
MULTIMEDIA INDUSTRY. The interactive multimedia industry encompasses video
games, on-line and interactive services, and location-based entertainment. While
some segments of this industry are well established, it is an emerging business
with significant growth potential. Improvements in technology, the availability
of communication bandwidth, the proliferation of distribution channels for
entertainment products and services and the involvement of large entertainment
companies are evidence of growth. Numerous companies provide web site design and
technologies that integrate various forms of media, including live action video,
animation, graphics and audio. Other interactive on-line services such as
video-on-demand are being deployed by cable television operators and some
regional telephone companies. Although we do not derive significant revenues
from these markets at the present time, we believe that our digital production,
visualization and simulation technologies will be marketable to the multimedia
industry for location-based entertainment, video compression, digitizing
material for video games and other on-line content, and development of more
complex applications, including digital versatile disk (DVD) and on-demand
downloading services.
53
<PAGE> 56
MARKETYOURMEDIA.COM. The market for our digital color library and
distribution services include the sector of the traditional television and film
industries that now purchase stock footage for documentaries and other
programming off-line from stock footage companies. These industries use stock
footage both to depict historical matter and to substitute existing footage,
where available, for new footage. Once our MarketYourMedia.com web site is in
operation, purchasers of stock footage will be able to purchase on-line stock
footage owned by Dynacs and third parties rather than through the current
inefficient process of selecting and purchasing stock footage off-line by
approaching each stock footage company individually, describing the type of
footage required, and waiting for delivery. Purchasers of stock footage will be
able to search a digitized catalog of footage, view it, and select and order
footage, all through our web site. They will also have access not only to the
footage owned by us, but also that of other stock footage owners, including
consumers for whom we will act as an intermediary. As an intermediary of visual
media, we anticipate receiving fees for digitizing, hosting and transacting
services and a licensing fee for each on-line sale.
Another market for this web-enabled business will be acquisitions of
television series and films for television and theatrical distribution. This
market is currently served through sales conventions, where sellers and buyers
meet to review video and film productions available for licensing. These
conventions typically last three or four days and are held only at discrete
times and locations during a year. Exhibitors at these markets range from small
independent producers and distributors, who budget anywhere from $10,000-$50,000
for the costs of exhibiting per market, to large television and motion picture
studios that send upwards of 50 to 75 people to each market with multi-million
dollar budgets for exhibiting. Additionally, when broadband technologies with
capacity for transmitting large volumes of visual media on-line with greater
capacity and efficiency are developed and gain widespread use, we will target
these traditional market participants with e-commerce and technology solutions
that will provide an efficient, on-line marketing and distribution of their
media assets. Revenues will be generated by a combination of fees paid for
technical services and transaction fees based on a percentage of sales
generated.
RESEARCH AND DEVELOPMENT
We distinguish between the research and development we conduct for the
benefit of our clients, which we refer to as "research and development," and
that which we conduct for our own benefit, which we refer to as "internal
development." We estimate that currently, over 95.0% of the revenue of our
Information and Applied Technology Division is generated under contracts
providing research and development work for our clients. All costs of this
research and development are client-funded and treated as costs of revenue. Our
internal development costs borne directly by us during the fiscal years ended
September 30, 1999, December 31, 1998 and December 31, 1997 were $4,941, $10,800
and $14,400, respectively. While many of our Information and Applied Technology
Division's U.S. Government contracts require us to conduct research and
development on behalf of the U.S. Government, the contracts permit us to patent
or copyright intellectual property developed through our work thereunder. We
treat all work performed by us under these contracts as research and
development, and the associated costs as costs of revenues, even if we exercise
our rights to patent or copyright any of this intellectual property. As a
result, our internal development costs are minimal. However, when internal
development produces an identifiable asset of some value, we capitalize these
costs and amortize them ratably over a period of time based upon the estimated
useful life of the asset.
INTELLECTUAL PROPERTY
Our businesses are dependent on our innovative technologies, and the skills
and technical knowledge of our professional staff. We rely upon a combination of
patent, trade secret, copyright and trademark laws and mandatory employee
confidentiality agreements to protect our intellectual
54
<PAGE> 57
property. We also limit access to our proprietary information. The steps we take
to protect our intellectual property, however, may not be adequate to deter
misappropriation of our proprietary information. We may be unable to detect
unauthorized uses of, or take appropriate steps to enforce, our intellectual
property rights.
In general, if we wish to claim exclusive commercial rights in intellectual
property we develop under a U.S. Government contract, we must do so within two
years. If we do not make any claim of exclusivity, which involves undertaking
obligations of exploitation, we must share the technology on a non-exclusive
basis with other commercial users. In addition, under the Federal Acquisition
Regulations (FAR), the U.S. Government has specific proprietary rights in
intellectual property that we develop in providing services under contracts or
subcontracts with U.S. Government agencies. The U.S. Government receives an
irrevocable, royalty-free, non-exclusive and non-transferrable license to this
property, and may share intellectual property we develop with third parties.
Assignment and licensing of our rights are also subject to FAR. These
regulations also give the U.S. Government the right to disclose information
about this intellectual property to third parties, including our competitors.
Our rights in any data remain subject to U.S. Government export control or
national security laws or regulations.
Dynacs claims copyright, trademark and common law rights in each of its
computer software programs and related documentation. We own the copyright to
each of three software programs utilized in the aerospace industry and for other
applications: TREETOPS, DYCOM and Gensoft, all of which are proprietary tools
for the design and analysis of multi-body dynamics. Our proprietary colorization
software is comprised of:
- Dycolor, the basic colorization program;
- ShotManager, the production management system which allows us to divide
colorization work into separate frames and distribute them to different
workers to work on simultaneously; and
- FlipBook, our real time playback system.
Through our acquisition of Cerulean Colorization, L.L.C., we also own the
copyrights and patents to particular colorization software and processes.
EMPLOYEES
Frequently when we commence work under new information and applied
technology contracts, we need to hire large numbers of workers in a relatively
short period of time. When this occurs, we fund the increased payroll costs
using our revolving bank line of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources". We meet the majority of the personnel requirements of our
Patna, India media production facility by hiring technical personnel on a
contract basis. The use of personnel on a contract basis lowers the
administrative costs of our overseas operations. From time to time, we also use
personnel on a contract basis to meet personnel needs in the United States.
References in this prospectus to employees refers only to our employees and not
personnel provided on a contract basis by third parties, unless otherwise
indicated. The majority of the production workforce employed at our Patna, India
facility are personnel provided on a contract basis through independent agencies
that are responsible for all compensation, benefits and tax-related aspects of
their services. We pay a negotiated hourly or weekly rate per worker provided on
a contract basis to such third parties. The number of personnel providing
services to our subsidiary in India on a contract basis is 351. This in addition
to the 32 direct Dynacs employees that we employ in India.
At July 12, 2000, Dynacs had a total of 744 employees, of which 32 were
part-time employees (working less than 30 hours per week) and the balance of
which are full-time employees. None of these 744 employees were contract or
temporary workers. The total number of employees includes
55
<PAGE> 58
650 in customer support operations and production, 12 in development, eight in
sales and marketing, and 74 in administration. Of these, 595 employees are
located in the United States, 32 in India and 117 in Batam.
We believe that our future success is dependent on attracting and retaining
highly skilled technical, sales and marketing, and senior management personnel.
Competition for skilled personnel is intense, and there can be no assurance that
we will continue to attract and retain high-caliber employees.
We are not subject to any collective bargaining agreements and believe that
our relationship with our employees is good.
FACILITIES
Our principal executive offices are located in Palm Harbor, Florida. These
offices are located in a building owned by Dynacs Properties, Inc., 50.0% of
which is owned by Dynacs and the remaining 50.0% is owned by H. James Lentz,
Esq., the owner of Lentz & Fair, P.A., a law firm. Dynacs entered into a lease
agreement with Dynacs Properties, Inc. for the rental of office space with a
lease expiration date of December 31, 2003. We have a 60,000 square foot
facility in Cleveland, Ohio which services the Glenn Research Center with a
lease expiration date of October 23, 2003. Our domestic leased facilities which
service the work of our Information and Applied Technology Division and Digital
Media and Entertainment Division include the following locations and with the
indicated number of employees as of July 12, 2000:
- Palm Harbor, Florida -- 6,312 square foot office space with 15 employees,
none of whom are part-time employees;
- Cleveland, Ohio -- U.S. Government furnished facilities consisting of
laboratories and office space, with 176 employees, 13 of whom are
part-time employees;
- Kennedy Space Center, Florida -- U.S. Government furnished facilities
consisting of laboratories, office space and launch facilities with 218
employees, six of whom are part-time employees;
- Albuquerque, New Mexico -- 1,000 square foot office space with 17
employees, four of whom are part-time employees;
- Cato, New York -- 750 square foot office space with two employees, none
of whom are part-time employees;
- Houston, Texas -- 4,500 square foot office space with 132 employees, four
of whom are part-time employees;
- Seattle, Washington -- 2,800 square foot office space with 11 employees,
two of whom are part-time employees;
- Hollywood, California -- 3,330 square foot office space with 23
employees, three of whom are part-time employees; and
- Laham, Maryland -- office space provided by subcontractor with one
full-time employee.
INTERNATIONAL: Our overseas software and digital media production
facilities, all of which are leased, consist of the following with the indicated
number of employees as of July 12, 2000:
- A facility of approximately 800 square feet located in Bangalore, India
with ten employees, which is leased by our subsidiary, Dynacs Engineering
Company (India) Pvt. Ltd., and used to provide software development
services. The term of the lease expires September 30, 2001;
56
<PAGE> 59
- A facility of approximately 20,000 square feet located in Patna, India
with 22 employees and 351 personnel on a contract basis, which is leased
for a 90 year term by our subsidiary, Dynacs Digital Studios, and
contains a high-speed digital colorization and restoration facility; and
- A facility of approximately 10,000 square feet located in Batam,
Indonesia with 117 employees, which is leased by our Indonesia
subsidiary, PT Dynacs Digital Studios, and used to provide digital
colorization and restoration services. The term of the lease expires
November 2, 2001 with an automatic renewal term of three years unless
either party gives six months prior notice of intent to terminate.
We also lease a facility in Hollywood, California, for our Digital Media
and Entertainment Division. This facility contains a digital film conversion
laboratory as well as office space.
GOVERNMENT REGULATION
UNITED STATES
We are subject to numerous laws and regulations applicable to those who
provide services under prime contracts and subcontracts to the U.S. Government.
These laws and regulations govern matters affecting payment and reimbursement of
contractors, U.S. Government audits, bidding procedures, and our rights in
intellectual property developed in the performance of services under these
contracts. See "Business -- Satellite and Aerospace Systems and
Operations -- Government Markets for Satellite/Aerospace Systems and Operations"
and "-- Competition for U.S. Government Projects" and "-- Intellectual
Property."
INDIA AND INDONESIA
INDIA -- BANGALORE. Our software development facility in Bangalore, India
is leased by our subsidiary, Dynacs Engineering (India) Pvt. Ltd., which was
organized under the laws of India. India's Ministry of Industry has classified
this subsidiary as an "Export Oriented Unit," or EOU, because most of its sales
are export sales. Because of this EOU classification, this subsidiary is exempt
from all taxes on earned profits for a period of five consecutive years during
the first eight years of operations pursuant to Section 10B of the Indian Tax
Act of 1961, as amended (the "Indian Tax Act"). This tax exemption is available
to this subsidiary from April 1996 through March 2001. After expiration of this
exemption, this subsidiary is eligible for the exemption from income tax on
export profits available for software exports under the Indian Tax Act.
INDIA -- PATNA. Our digital media production facility in Patna, India is
eligible for the same exemption from income tax on export profits under the
Indian Tax Act.
INDONESIA. Our subsidiary, PT Dynacs Digital Studios, operates a digital
colorization facility in the Batamindo Industrial Park on the island of Batam,
Indonesia. This subsidiary benefits from certain tax and other foreign
investment incentives, including a waiver of value added taxes.
LEGAL PROCEEDINGS
In November 1999, we were informed by NASA's Glenn Research Center of their
decision to award the MRDOC Contract to one of our competitors. We spent
approximately $740,000 in bid preparation costs for this contract. In December
1999, we filed a protest of this award with the General Accounting Office (GAO).
The GAO issued a stay of the award, pending resolution of the matter, which
typically takes 100 days from the date on which the protest is filed. On March
17, 2000, the GAO issued its decision to deny Dynacs' protest. On March 30, 2000
Dynacs subsequently filed a lawsuit against NASA in the U.S. Court of Federal
Claims. Oral arguments were held on
57
<PAGE> 60
June 29, 2000, and we are currently waiting to receive a final court decision.
If the Federal court renders a decision in favor of Dynacs, Dynacs may be
reimbursed its bid preparation costs and legal costs, and possibly be awarded
the Contract. No assurance can be given, however, that the Federal court will
render a decision in Dynacs' favor, or that if it does, it will award us the
MRDOC Contract or reimbursement of all our bid preparation costs or legal costs.
As of May 31, 2000 Dynacs had incurred total legal fees related to this matter
in an amount of approximately $150,000.
In February 1998, Dynacs filed claims totaling $2,825,000 with the American
Arbitration Association in California against Juno Pix, Inc. for sums owed by
Juno in connection with colorization and other work completed by Dynacs for the
motion picture, "Pleasantville," prior to Juno's termination of our February
1997 agreement. Dynacs' claims included a demand for the termination fee payable
under the agreement, compensation for Juno's unauthorized use of Dynacs'
copyrighted technology following termination and injunctive relief for return of
its software. Dynacs' claims were made not only against Juno but also against
New Line Productions, Inc., as guarantor of Juno's performance, and New Line
Cinema, the parent of New Line Productions. Juno filed counterclaims against
Dynacs for damages for breach of contract, repudiation of the agreement, false
and misleading advertisement and false assurances and representations. Juno also
counterclaimed for treble damages where applicable under U.S. Government or
state law. As of March 31, 2000, Dynacs had incurred total legal fees related to
this matter in an amount equal to $1,615,608.
On April 3, 2000, the American Arbitration Association entered a unanimous
award resolving the affirmative claims by Dynacs and the counter-claims of Juno
Pix, Inc. and New Line Productions. The arbitrators granted the majority of
Dynacs' claims and ordered Juno Pix and New Line Productions to immediately
return to Dynacs the original software and all copies. The arbitrators also
awarded Juno Pix and New Line Productions certain of their counter-claims.
The net result of the monetary awards is that Dynacs was ordered to pay a
net total sum of $370,352 to Juno Pix and New Line Productions. Each side was
ordered to pay its own attorneys' fees, expense and costs of arbitration. The
panel assessed no interest on the net award, though interest may accrue from the
date of the award.
The award is not enforceable until either party files a petition with the
Los Angeles County Superior Court to confirm the arbitration award. The parties
also had until July 12, 2000 to request that the award be vacated or corrected
based on particular findings of corruption, miscalculation or prejudice. As of
July 12, 2000, the award was neither confirmed by the Superior Court nor did
either party move to vacate, correct or appeal the award. Dynacs has been
advised by counsel that vacating, correcting or appealing an arbitrator's award
is difficult and unlikely under California law.
In July 1999, the Company settled an administrative proceeding brought
against it by a former employee. The total legal fees incurred by the Company in
connection with this administrative proceeding were approximately $186,600 in
1999, of which $85,000 was incurred by the end of the second quarter of 1999 and
the balance of $101,000 was incurred between July 1, 1999 and the date hereof.
58
<PAGE> 61
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors, persons elected to serve as
directors upon consummation of this offering, and executive officers of Dynacs,
their ages and their positions with Dynacs as of July 12, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ramendra P. Singh....................... 55 Director, President and Chief Executive
Officer
Ravi Venugopal.......................... 37 Senior Vice President, Digital Media and
Entertainment, and Secretary
Harry W. Schubele III................... 41 Senior Vice President, Business and
Treasurer
Jayant Ramakrishnan..................... 40 Senior Vice President, Information and
Applied Technology
Javier E. Benavente..................... 40 Senior Vice President, Corporate
Business Development
Robert Rodriguez........................ 43 Chief Financial Officer
Peter Likins............................ 64 (1)(2)
Michael R. Burns........................ 41 (1)
Michael G. Bolton....................... 56 (1)(2)
Robert E. Skelton....................... 61 (1)(2)
</TABLE>
-------------------------
(1) Nominated to serve as a member of the board of directors upon the
consummation of this offering.
(2) Nominated to serve as a member of the audit committee of the board of
directors upon the consummation of this offering.
All directors serve for one-year terms until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
Each executive officer is elected by, and serves at the discretion of, the
board of directors. Each of Dynacs' executive officers and directors, other than
non-employee directors, devotes his full time to the affairs of Dynacs. There
are no family relationships among any of the directors or executive officers of
Dynacs. Michael R. Burns' election as director was made as a result of an
agreement with Dynacs in connection with the purchase of Cerulean Colorization,
L.L.C.
RAMENDRA P. SINGH, PH.D. Dr. Singh has been our President, Chief Executive
Officer and sole director since he co-founded Dynacs in 1985. Dr. Singh has also
served as sole director, President, Treasurer and Secretary of our subsidiary,
Dynacs Properties, Inc., since its formation in May 1997, and as a Director of
our subsidiary, Dynacs Technical Services, Inc., since its formation in August
1998, and as sole director and President of our subsidiary Dynacs Digital
Services, Inc. since its formation in July 1998. Dr. Singh has served as sole
director and President of Cerulean FXs, Inc. since its formation in April 1999.
Cerulean FX became our subsidiary in August 1999. Dr. Singh is an Associate
Fellow of the American Institute of Aeronautics and Astronautics and the 1996
Division Director of the International Society for Measurement and Control. Dr.
Singh received his Ph.D. in Engineering Mechanics from the University of
Alabama, Huntsville in 1981, and his Masters of Science in Mechanical
Engineering from the University of Miami in 1969. Dr. Singh is a recognized
technical expert and is the author of over 50 published journal papers and
articles.
59
<PAGE> 62
RAVI VENUGOPAL. Mr. Venugopal has been Dynacs' Senior Vice President,
Digital Media and Entertainment, since January, 1999. Mr. Venugopal has also
served as a director and Secretary of our subsidiary, Dynacs Technical Services,
Inc., since its formation in August 1998. He has also served as Secretary of our
subsidiary Dynacs Digital Services, Inc., since its formation in July 1998 and
our subsidiary Cerulean FXs, Inc., since its formation in April 1999. From
January 1996 through December 1998, Mr. Venugopal served as our Chief Scientist,
from January 1994 through December 1995 as Director of Product Development, and
from 1991 through 1993 as Director of Business Development. Prior to that, Mr.
Venugopal was a senior engineer from 1989 through 1990 and an engineer from the
time he joined Dynacs in 1987 through 1988. Mr. Venugopal received his Masters
degree in Computer Engineering from the University of Florida in 1987.
HARRY W. SCHUBELE III. Mr. Schubele has served as our Treasurer since 1993
and as Senior Vice President, Business, since January 1999. From March 1996
through January 1999, Mr. Schubele served as Director of both Seattle Operations
and Western Region Operations. From 1991 through 1995, he served as Director of
Engineering. Prior to that, he was a member of our technical staff from 1987
through 1990. He has also served as Treasurer of our subsidiaries, Dynacs
Technical Services, Inc. since its formation in August 1998, Dynacs Digital
Services, Inc., since its formation in July 1998, and Cerulean FXs, Inc., since
its formation in April 1999. Mr. Schubele graduated with honors from Oklahoma
State University in 1980 with a BS in Mechanical and Aerospace Engineering. He
is a senior member of the American Institute of Aeronautics and Astronautics and
has numerous publications, papers and conference presentations.
JAYANT RAMAKRISHNAN. Dr. Ramakrishnan has served as our Senior Vice
President, Engineering, since February 1999. Prior to that, he served as
Director of Houston Operations from July 1992 through February 1999. Dr.
Ramakrishnan received a Bachelors Degree in Mechanical Engineering from the
University of Madras in 1981, and Masters and Doctoral degrees in Mechanical
Engineering from the University of Missouri-Rolla in 1983 and 1987,
respectively.
JAVIER E. BENAVENTE. Mr. Benavente has been serving as Dynacs' Senior Vice
President, Corporate Business Development, since January 1999 and as President
and a director of Dynacs Technical Services, Inc. since September 1998. From May
1997 through December 1998, Mr. Benavente served on the senior staff to the
office of our President. From June 1995 through May 1997, he served as head of
our Digital Media and Entertainment Division and from February 1993 through June
1995 he served as our General Manager. Mr. Benavente served as our Manager,
European Operations, from January 1992 through February 1993. Prior to that he
served as a Dynacs' engineer from May 1988 through January 1992. Mr. Benavente
received his Bachelors Degree in Aeronautics and Astronautics in 1986, a Masters
Degree in Astronautical Engineering from Purdue University in 1988 and a Masters
in Engineering Management and Masters in Business Administration from the
Florida Institute of Technology in 1990 and 1991, respectively.
ROBERT RODRIGUEZ. Mr. Rodriguez has been our Chief Financial Officer since
joining Dynacs in January 1998. Prior to that, he was a partner in the
accounting firm of Doyle & Rodriguez, P.A. Mr. Rodriguez is a certified public
accountant and a member of the American Institute of Certified Public
Accountants. Mr. Rodriguez received his B.S./B.A. degree from the University of
Florida in 1978 and an M.B.A. degree in accounting from the University of Tampa
in 1981.
PETER LIKINS. Dr. Likins has been nominated to serve as a director of
Dynacs upon closing of this offering. He has been President of the University of
Arizona since 1997 and before that he was president of Lehigh University for
more than three years. He is a distinguished member of many national and
international advisory committees, including the White House Advisory Committee
on the Health of Universities. He has been a member of the Board of Directors of
COMSAT, a satellite telecommunications company, since 1987; Consolidated Edison,
a utility company; Parker-Hannifin, a global supplier of motion control systems
and equipment; St. Luke's Hospital, a University Medical
60
<PAGE> 63
Center; and Safeguard Scientifics, a software, communications and e-services
technology company. He is an Advisory Council Member for Dynacs. Dr. Likins is a
Fellow of the American Institute of Aeronautics and Astronautics and a member of
the National Academy of Engineering. Dr. Likins received his Bachelors Degree in
Civil Engineering, and a Ph.D. in Engineering Mechanics from Stanford
University, and a Masters in Civil Engineering from MIT.
MICHAEL R. BURNS. Mr. Burns has been nominated to serve as a director of
Dynacs upon closing of this offering. Mr. Burns' appointment to the Board of
Directors was made in connection with the acquisition of Cerulean Colorization,
L.L.C. by Dynacs. Mr. Burns has been serving as a managing director and the head
of the Los Angeles Investment Banking office of Prudential Securities
Incorporated, a brokerage firm, specializing in the media and entertainment
field, since 1991. Prior to joining Prudential Securities, Mr. Burns worked for
Shearson Lehman Brothers, Inc. (now Salomon Smith Barney), a brokerage firm, for
nine years. Mr. Burns co-founded, and currently serves as Co-Chairman of, the
Hollywood Stock Exchange (www.hsx.com), a web start-up, Chairman of Novica.com,
a web-based e-commerce site, and Chairman of Ignite Entertainment, a Los
Angeles-based entertainment content company. Mr. Burns was a managing member of
Cerulean Colorization, L.L.C., which we acquired in August 1999. Mr. Burns
currently serves as a member of the Board of Directors of The Harvey
Entertainment Company, a public company quoted on the Nasdaq National Market
System (Symbol: HRVY) which owns and exploits a library of celebrated characters
and other intellectual property assets and since March 2000, as the Vice
Chairman of the Board of Directors of Lion's Gate Entertainment an independent
film studio.
MICHAEL G. BOLTON. Mr. Bolton has been nominated to serve as a director of
Dynacs upon the closing of this offering. Mr. Bolton has been a managing
director of PA Early Stage Partners, a private investment firm for early stage
start-up companies, and Senior Vice President of Safeguard Scientifics, Inc., a
software communications and e-services technology company, since September 1997.
Prior to that, he served as the Vice President of Lehigh University from
February 1972 to August 1997. Mr. Bolton holds a B.A. in economics and an M.B.A.
from Lehigh University.
ROBERT E. SKELTON. Dr. Skelton has been nominated to serve as a director
of Dynacs upon closing of this offering. Dr. Skelton has served as president of
Dynamic Systems Research Inc., a firm owned by him that provides engineering
consulting services and seminars, since 1982. He has also been a Professor of
Engineering with the Department of Applied Mechanics and Engineering Sciences at
the University of California, San Diego, and the Director of its Structural
Systems and Control Lab from 1997 to the present. From 1975 to 1997, Dr. Skelton
was a Professor of Engineering at Purdue University. Prior to that, he served as
an engineering consultant to Sperry Rand Co., an information technology and
defense company, from 1965 through 1975. Dr. Skelton is one of Dynacs'
co-founders. Dr. Skelton served as an adviser to NASA for its "Mission to Mars"
project and for the Hubble Space Telescope.
BOARD COMMITTEES
Our board of directors has authorized creation of audit, compensation and
stock option committees upon effectiveness of the registration statement of
which this prospectus is a part.
The audit committee will have responsibility for reviewing the results and
scope of audits and other services provided by our auditors and oversight of our
system of internal accounting and financial controls. Nominees to serve on the
audit committee are Peter Likins, Michael G. Bolton and Robert E. Skelton.
The compensation committee will have authority to review and recommend to
the board of directors the cash compensation and other benefits to be provided
to our executive officers. This committee will also have responsibility for
general policies relating to compensation of our employees.
61
<PAGE> 64
Nominees to serve on the compensation committee are Michael R. Burns, Michael G.
Bolton and Peter Likins.
The option committee will be responsible for approving or recommending
option grants and administering our 1999 Long-Term Incentive Plan. Nominees to
serve on the option committee are Michael R. Burns, Peter Likins and Ramendra P.
Singh.
DIRECTOR COMPENSATION
Each non-employee director shall receive $8,000 per year plus $1,200 for
each board meeting attended and shall be reimbursed for his reasonable
out-of-pocket expenses incurred in attending meetings of the board of directors
or of any committee thereof. Upon the consummation of this offering Dynacs shall
grant Dr. Likins an option to purchase 38,931 shares of its common stock, to
vest over a two-year period, at an exercise price equal to the initial offering
price of the common stock per share. Upon the consummation of this offering
Dynacs shall grant Dr. Skelton options to purchase 19,465 shares of its common
stock to vest over a two-year period at an exercise price equal to the initial
offering price of the common stock per share. Upon the consummation of this
offering, the Company shall grant Mr. Bolton an option to purchase 4,866 shares
of its common stock, to vest over a one-year period at an exercise price equal
to the initial offering price of the common stock per share.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the 1997 and 1998 fiscal years and for the twelve month period ended December
31, 1999 to Dynacs' Chief Executive Officer and the other executive officers of
Dynacs whose annualized salary and bonus for 1999 exceeded a total of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------ ALL OTHER
NAME POSITION YEAR SALARY BONUS COMPENSATION (1)
---- ---------------------- ---- -------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Ramendra P. Singh............. Director, President 1999 $299,000 -0- $1,416
and Chief Executive 1998 260,000 -0- 1,152
Officer 1997 228,800 $60,000 1,152
Ravi Venugopal................ Senior Vice President 1999 $120,000 -0- $ 228
and Secretary 1998 97,136 -0- 190
1997 91,000 $5,000 174
Harry W. Schubele III......... Senior Vice President 1999 $120,000 -0- $ 308
and Treasurer 1998 98,800 -0- 301
1997 93,600 $5,000 181
Jayant Ramakrishnan........... Senior Vice President 1999 $120,000 -0- $ 308
1998 104,000 -0- 208
1997 101,000 $5,000 198
Javier E. Benavente........... Senior Vice President 1999 $120,000 -0- $ 308
1998 97,500 -0- 191
1997 91,000 $7,500 174
</TABLE>
-------------------------
(1) All other compensation consists of the imputed income associated with the
group term life insurance premium for policy values in excess of $50,000.
62
<PAGE> 65
OPTION GRANTS IN LAST FISCAL YEAR
No options to purchase shares of common stock were granted to the named
executive officers during the fiscal year ended September 30, 1999 and no
options were exercised.
The following table sets forth information regarding exercisable and
unexercisable stock options held as of September 30, 1999 by Dynacs' Chief
Executive Officer and all executive officers of Dynacs whose annualized salary
and bonus for the twelve-month period ending December 31, 1999 exceeded a total
of $100,000. There was no public trading market for our common stock as of
December 31, 1999. Accordingly, the value of Dynacs options has been calculated
by determining the difference between the exercise price per share and an
assumed initial public offering price of $10.00 per share.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END(#) OPTIONS AT FISCAL YEAR-END($)
NAME AND POSITION EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------- ----------------------------- -----------------------------
<S> <C> <C>
Ramendra P. Singh, Director, 255,480/0 $2,549,690/$0
President and Chief Executive
Officer
</TABLE>
1999 LONG-TERM INCENTIVE PLAN
GENERAL. In November 1999, our board of directors approved our 1999
Long-Term Incentive Plan. Pursuant to the plan, we may grant options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, non-qualified stock options, stock appreciation rights, restricted
stock, deferred stock, stock purchase rights or other stock-based awards. See
"Shares Eligible for Future Sale -- Stock Options."
SHARES RESERVED FOR ISSUANCE. A total of 1,124,113 shares of common stock
have been reserved for issuance under the plan. Appropriate adjustments in the
aggregate number of shares subject to the plan will be made in the event of any
recapitalization, dividend of stock or property other than cash, stock split,
reclassification or other change in corporate structure affecting the common
stock. As of December 31, 1999, options to purchase 306,577 shares of common
stock have been reserved under the plan to holders of the Cerulean FX shares in
connection with the acquisition of Cerulean Colorization, L.L.C. with Michael R.
Burns having the right to receive options to purchase 204,385 shares of common
stock. Also, Mr. Burns has the right to receive options to purchase 51,097
shares of common stock under the Plan upon the Company obtaining contracts for
colorization services in an aggregate amount of $10.0 million no later than
August 12, 2002.
ELIGIBILITY. Our employees, officers and directors and those of our
subsidiaries and affiliates who are responsible for or contribute to the
management, growth and/or profitability of our businesses are eligible to be
granted awards under the plan. Only our employees and those of our subsidiaries,
however, are eligible to receive incentive stock options.
ADMINISTRATION. Our stock option committee is authorized to administer the
plan, including determining the individuals eligible for grants under the plan
and the terms of grants.
63
<PAGE> 66
We may grant any of the following, or any combination of the following,
types of awards under the plan:
STOCK OPTIONS. The stock option committee determines the terms and
conditions of each incentive stock option and non-qualified stock option granted
under the plan, subject to the following conditions:
- the exercise price of a non-qualified stock option may be greater than
100.0% but not less than 85.0% of the fair market value of our common
stock on the date of grant, no less than 100.0% in the case of an
incentive stock option and 110.0% in the case of incentive stock options
granted to an employee who, at the time of grant, owns more than 10.0% of
our voting capital stock.
- no option can be exercisable ten years after the date of grant and five
years in the case of an employee who, at the time of grant, owns more
than 10.0% of our voting capital stock.
- incentive stock options will be treated as non-qualified stock options to
the extent that the aggregate market value of the underlying common stock
for the first time during any calendar year exceeds $100,000.
STOCK APPRECIATION RIGHTS. A stock appreciation right is the right to
surrender to us all or a portion of a stock option in exchange for an amount of
cash or common stock at the discretion of the option committee equal to the
difference between:
- the fair market value, as of the date any part of a stock option is
surrendered, of the shares of common stock underlying any part of a stock
option, subject to pricing provisions, and
- the aggregate exercise price of any part of a stock option.
A stock appreciation right granted with respect to a given stock option
shall terminate and no longer be exercisable upon the termination or exercise of
the related stock option, subject to provisions specified by the stock option
committee.
RESTRICTED STOCK. A restricted stock award entitles the holder to receive
shares of common stock at the end of a restricted period determined by the stock
option committee. During the restricted period, the holder is not permitted to
sell, transfer, pledge or assign shares of restricted stock. The stock option
committee may provide for the lapse of any restrictions in installments and may
accelerate or waive any restriction in whole or in part, based on service,
performance and other criteria as the stock option committee may determine.
DEFERRED STOCK. A deferred stock award entitles the holder to receive
shares of common stock at the end of a specified deferral period. The stock
option committee shall determine, among other things, the duration of the period
during which, and the conditions under which, receipt of the common stock will
be deferred.
OTHER STOCK-BASED AWARDS. We may also make other awards of common stock
and other awards that are valued in whole or in part by reference to, or are
otherwise based on, common stock, including performance shares, convertible
preferred stock, convertible debentures, exchangeable securities and stock
awards or options valued by reference to book value or our performance.
EMPLOYMENT AGREEMENTS
Upon the consummation of the offering, we will enter into an employment
agreement with Ramendra P. Singh, to continue to serve as President and Chief
Executive Officer of Dynacs, which provides for an initial term of three years
commencing on the closing date of this offering at an initial base salary of
$295,000, plus bonus payments as Dynacs' Compensation Committee may determine
from time to time. Dr. Singh's employment agreement will also contain provisions
that require
64
<PAGE> 67
Dynacs to pay his salary through the full term if he is terminated without cause
or if he terminates the agreement for "good reason" because of certain breaches
by Dynacs. Upon termination of Dr. Singh's employment agreement by Dynacs
without "cause" or by Dr. Singh for "good reason," Dr. Singh would be entitled
to a cash payment equal to twelve months of his salary at his highest salary
rate in effect during the twelve months immediately prior to termination. Dr.
Singh's contract will also contain non-competition provisions that prohibit him
from competing with us in the areas of information systems and
aerospace/satellite systems and operations for U.S. Government agencies for a
one-year period following the end of his contract or, if terminated for "cause,"
for a two-year period following the original term of his contract.
Upon the consummation of the offering, we will also enter into employment
agreements with each of Messrs. Ravi Venugopal, Harry W. Schubele III, Jayant
Ramakrishnan and Javier E. Benavente to continue to serve as senior vice
president of Dynacs for three years commencing on the date of this offering at
base annual salaries of $150,000 each. Upon consummation of the offering, we
will also enter into an employment agreement with Robert Rodriguez to continue
to serve as Chief Financial Officer of Dynacs at a base annual salary of
$100,000. Each executive's employment agreement will also provide that each such
employee shall be eligible to receive bonus payments as Dynacs' Compensation
Committee may determine from time to time. Each employment agreement will
contain non-competition provisions that prohibit the employee from competing
with Dynacs in the areas of information systems and aerospace/satellite systems
and operations for U.S. Government agencies: (i) for a six-month period, if such
employee is terminated without "cause" upon payment to such employee of six
months salary as severance, and (ii) for a two year period if the employee is
terminated with "cause" by Dynacs or if the employee terminates his employment
other than for "good reason". If an executive's employment agreement is
terminated by us for any reason other than for "cause," or long-term disability
or if the executive terminates his employment for "good reason," then he shall
be entitled to an additional cash payment equal to six months of his salary at
his highest salary rate in effect during the twelve months prior to termination.
65
<PAGE> 68
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of common stock by
each person (or group of affiliated persons) known by Dynacs to beneficially own
more than five percent of the outstanding shares of common stock, each director,
director-nominee and named executive officer of Dynacs, and all officers,
directors and director-nominees as a group without naming them and each selling
stockholder as of July 14, 2000 and as adjusted to reflect the sale of 3,000,000
shares of common stock offered hereby. Except as indicated in the notes to the
table, the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
BENEFICIALLY OWNED(2)
------------------------------------------
SHARES OF AFTER OFFERING
COMMON STOCK WITH
BENEFICIALLY BEFORE AFTER OVER-ALLOTMENT
NAME OF BENEFICIAL OWNER(1) OWNED(2) OFFERING(3) OFFERING(4) OPTION(5)
--------------------------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Ramendra P. Singh.................. 4,292,070(6)(7)(16) 52.8% 32.2% 30.1%
Ravi Venugopal..................... 715,345(16) 9.1% 5.4% 4.8%
Harry W. Schubele III.............. 255,480(16) 3.2% 1.9% 1.8%
Jayant Ramakrishnan................ 255,480(8)(16) 3.2% 1.9% 1.8%
Javier E. Benavente................ 235,850(9)(16) 3.0% 1.8% 1.6%
Michael G. Bolton(10).............. 0 -- -- --
Michael R. Burns(10)............... 769,000(11) 9.5% 5.7% 5.5%
Peter Likins(10)................... 510,961(16) 6.5% 3.8% 3.6%
Robert E. Skelton(10).............. 638,700(16) 8.1% 4.8% 4.5%
Ramesh Venugopal(12)............... 114,966(16) 1.5% * *
Film Archive Finance Company,
Inc.(13)......................... 1,090,000(14) -- 8.2% 7.9%
All officers and directors as a
group (9 persons)................ 7,672,886(15)(16) 92.1% 56.6% 53.8%
</TABLE>
-------------------------
* Less than 1.0%
(1) Unless otherwise indicated, the address for each person listed below is c/o
Dynacs Inc., 35111 U.S. Highway 19 North, Suite 300, Palm Harbor, FL 34684.
(2) Includes shares which the beneficial owner has the right to acquire within
60 days from the date hereof.
(3) Based on 7,873,901 shares outstanding, including 912,064 shares of common
stock issuable upon the conversion of certain parties' equity interest in
our subsidiary, Cerulean FXs, Inc.
(4) Based on 13,347,765 shares to be outstanding upon the consummation of the
offering, assuming that the underwriters do not exercise their
over-allotment option, and including 912,064 shares of common stock
issuable upon the automatic conversion of 4,000 shares of our subsidiary,
Cerulean FXs, Inc., upon the consummation of this offering, 483,334 shares
of common stock issuable upon the conversion of the Mezzanine Notes,
635,050 shares of common stock issuable upon the exercise of the warrants
issued to the holders of the Mezzanine Notes, 1,100,000 shares that will be
issued in connection with our acquisition of Sherman Grinberg Film
Libraries, Inc., if completed, immediately after the consummation of this
offering and 255,480 shares of common stock issuable upon the exercise of
options at $.02 per share.
66
<PAGE> 69
(5) Based on 13,797,765 shares to be outstanding upon the consummation of this
offering, assuming that the underwriters exercise their over-allotment
option to purchase 450,000 shares of common stock, and including 912,064
shares of common stock issuable upon the automatic conversion of 4,000
shares of our subsidiary, Cerulean FXs, Inc., upon the consummation of this
offering, 483,334 shares of common stock issuable upon the conversion of
the Mezzanine Notes, 635,050 shares of common stock issuable upon the
exercise of the warrants issued to the holders of the Mezzanine Notes,
1,100,000 shares that will be issued in connection with our acquisition of
Sherman Grinberg Film Libraries, Inc., if completed, immediately after the
consummation of this offering and 255,480 shares of common stock issuable
upon the exercise of options at $.02 per share.
(6) Includes 255,480 shares of common stock issuable upon the exercise of
options exercisable within 60 days from the date hereof.
(7) Includes 395,629 shares of common stock held by Dr. Singh's wife and
379,571 shares of common stock held by trusts for the benefit of certain
family members of Dr. Singh.
(8) Includes 29,198 shares of common stock held by trusts for the benefit of
certain family members of Mr. Ramakrishnan.
(9) Includes 38,321 shares of common stock held by trusts for the benefit of
certain family members of Mr. Benavente.
(10) Messrs. Bolton, Burns, Likins and Skelton have agreed to serve as directors
of Dynacs upon the consummation of this offering.
(11) Includes 564,615 shares to be received by Mr. Burns upon the automatic
conversion of his shares of Dynac's subsidiary, Cerulean FXs, Inc.,
pursuant to the terms of our acquisition of Cerulean Colorization, L.L.C.
in August 1999. See "Certain Transactions -- Acquisition of Cerulean
Colorization, L.L.C." Also includes 204,385 shares of common stock issuable
upon the exercise of options exercisable within 60 days from the date
hereof.
(12) Within the past three years, Ramesh Venugopal has provided consulting
services to Dynacs.
(13) The address for this reporting person is 60 East 42nd Street, New York, New
York 10165.
(14) Consists of 1,085,000 shares of Dynacs common stock that will be issued to
Film Archive Finance Company, Inc. in exchange for all of the issued and
outstanding capital stock of Sherman Grinberg Film Libraries, Inc., a
wholly-owned subsidiary of Film Archive Finance Company, Inc., and 5,000
shares of Dynacs common stock issuable to Film Archive Finance Company,
Inc. in consideration for entering into a non-compete agreement upon the
consummation of this offering. See "Certain Transactions -- Proposed
Acquisition of the Sherman Grinberg Film Libraries."
(15) Includes 564,615 shares to be received by Michael Burns upon the automatic
conversion of his shares of Dynacs' subsidiary, Cerulean FXs, Inc., and
459,865 shares of common stock issuable upon the exercise of options
exercisable within 60 days from the date hereof.
(16) Of the 450,000 shares of Dynacs common stock issuable upon the exercise of
the over-allotment option granted to the underwriters to cover
over-allotments, if any, 250,000 shares are being offered by the selling
stockholders. If the over-allotment option is exercised in full, Dr. Singh,
our Director, President and Chief Executive Officer, will sell 133,726
shares, Mr. Ravi Venugopal, our Senior Vice President, Digital Media and
Entertainment, and Secretary, will sell 51,600 shares, Mr. Schubele, our
Senior Vice President, Business and Treasurer, will sell 8,208 shares, Mr.
Ramakrishnan, our Senior Vice President, Information and Applied
Technology, will sell 8,208 shares, Mr. Benavente, our Senior Vice
President, Corporate Business Development, will sell 8,208 shares, Mr.
Likins, a director-nominee, will sell 16,175 shares, Mr. Skelton, a
director-nominee, will sell 20,250 shares and Mr. Ramesh Venugopal will
sell 3,625 shares.
67
<PAGE> 70
CERTAIN TRANSACTIONS
ACQUISITION OF CERULEAN COLORIZATION, L.L.C.
In August 1999, we acquired all of the membership interests in Cerulean
Colorization, L.L.C. by issuing to its members 20.0%, or 4,000 shares, of the
outstanding common stock of Cerulean FXs, Inc., a wholly-owned subsidiary of
Dynacs. As the owner of 62.0% of the membership interests of Cerulean
Colorization, L.L.C., Michael Burns received 2,480 of the 4,000 shares. The
shares of common stock of Cerulean FXs held by the former members of Cerulean
Colorization, L.L.C. will be automatically converted into 912,064 shares of
Dynacs' common stock upon the consummation of this offering, unless the shares
are sooner converted upon the exercise by the holders of conversion rights under
certain circumstances. The number of shares of Dynacs' common stock which the
holders of Cerulean FXs shares are entitled to receive is subject to adjustments
for stock splits, stock dividends, recapitalizations. The holders of these
shares have pre-emptive rights which terminate upon this offering. The former
Cerulean interest holders are party to the registration rights agreement
discussed below. In connection with our acquisition of the Cerulean interests,
we have agreed to issue the following options upon the consummation of this
offering:
- options to purchase 204,385 shares of common stock to Mr. Michael Burns
under our 1999 Long-Term Incentive Plan;
- options to purchase 38,321 shares of common stock to Mr. Steven Strick
under our 1999 Long-Term Incentive Plan; and
- options to purchase 12,774 shares of common stock to Mr. Tracy Pearce
under our 1999 Long-Term Incentive Plan.
Also, Mr. Burns has the right to receive options to purchase 51,097 shares
of common stock under our 1999 Long-Term Incentive Plan upon our obtaining
contracts for colorization services no later than August 12, 2002 resulting in
fees of an aggregate amount of no less than $10.0 million.
As part of the acquisition of Cerulean, Dynacs agreed to lend Mr. Burns an
aggregate of $600,000. Of this amount, Dynacs loaned him $300,000 in August 1999
and is obligated to lend him $150,000 in January 2000 and another $150,000 in
January 2001. Of the $150,000 which Dynacs was obligated to loan Mr. Burns in
January 2000, $100,000 was loaned to Mr. Burns on May 3, 2000, with the
remaining $50,000 due upon the consummation of this offering. The note
representing this indebtedness is non-recourse to Mr. Burns, bears interest at
the rate of 5.7% per annum and matures in August 2004. The loans are secured by
a pledge of all of Mr. Burns' stock in Cerulean FX (and in Dynacs' common stock
issuable upon the conversion of the Cerulean FXs stock into 912,064 shares of
common stock of Dynacs upon the effectiveness of this offering or at the
election of the holders thereof).
PROPOSED ACQUISITION OF THE SHERMAN GRINBERG FILM LIBRARIES
We entered into a non-binding letter of intent to acquire the Sherman
Grinberg Film Library. Pursuant to the letter of intent, dated May 16, 2000,
with Film Archive Finance Company, Inc. we have agreed to purchase all of the
issued and outstanding capital stock of Sherman Grinberg Film Libraries, Inc.
See "Business -- Digital Media and Entertainment Division -- Future Digital
Media Projects -- Digital Content Development and Reformatting."
The purchase price for the shares is $3.35 million, subject to increases
based on:
- The availability of commercially usable film footage in the two
principal libraries in excess of 5.0 million linear feet and additional
commercially usable film footage in any of the other libraries to be
acquired;
68
<PAGE> 71
- Certain minimum levels of gross revenues for 2001, 2002 and 2003
from the licensing or sale of footage as it presently exists in the
libraries or as it may be colorized by us; and
- Certain minimum levels of gross revenues for 2001, 2002, 2003 and
2004 from the sale or licensing of the libraries in all forms, including
footage which has been re-edited or compiled by us or colorized by us.
The maximum purchase price for the Grinberg shares is $10.85 million,
payable in our common stock, based on the greater of the offering price of our
common stock in this offering, or $10 per share. Of the number of shares of our
common stock to be issued in consideration of the purchase price, $3.35 million
worth of our common stock will be delivered to the Film Archive Finance Company,
Inc. at closing and the remainder will be delivered into escrow, which will be
released after applicable purchase price adjustments described above are made
and will be subject to cancellation based on the Film Archives' indemnification
obligations as described below.
One half of the shares of Dynacs common stock to be delivered at the
closing ($1.675 million) and one half of the stock to be delivered based upon
available commercially usable footage ($1.5 million), along with all of the
Dynacs common stock to be issued based upon gross revenues ($4.5 million) is
subject to cancellation in the event Dynacs has indemnification claims against
the Film Archive Finance Company, Inc.
The Film Archive Finance Company, Inc. and one of its executive officers
are also receiving an aggregate of $150,000 in shares of Dynacs common stock
based on the greater of the offering price of our common stock in this offering
or $10 per share for a three year covenant not to compete. The executive officer
will also enter into a one year employment agreement with Dynacs pursuant to
which the executive officer will be paid a base salary plus bonuses if the
executive officer is able to bring to Dynacs additional corporate or film
library acquisition opportunities which Dynacs elects to acquire.
CERTAIN RELATIONSHIPS WITH RAMESH VENUGOPAL
Ramesh Venugopal, is a businessman who conducts business in various
countries in Southeast Asia, including Singapore and Indonesia, and is the
brother of Ravi Venugopal, a Senior Vice President and the Secretary of Dynacs.
Ramesh Venugopal has been party to several significant transactions with Dynacs
as follows:
- In January and February 1998, Ramesh Venugopal advanced to Dynacs loans
aggregating $1.0 million, bearing interest at the rate of 11.25% per
annum. This loan when made was originally unsecured. In May 1999, Dynacs
and Mr. Venugopal consolidated the notes into a loan agreement for a
principal amount of $1.0 million, bearing interest at the rate of 10.0%
and without a maturity date. Dynacs secured the payment of the loan by a
pledge of Dynacs' share of proceeds from the syndication of the colorized
version of the TV series "I Dream of Jeannie." As of June 30, 2000, the
outstanding balance under this loan agreement was $585,000. Dynacs
intends to repay this amount from the net proceeds of this offering.
- In October 1998, Ramesh Venugopal advised Dynacs in connection with the
founding of its Batam, Indonesia facility. During the nine month period
ended September 30, 1999, Dynacs paid Mr. Venugopal $1,206,000 in
consideration for costs and services which he advanced on behalf of
Dynacs in connection with the startup of this facility.
- In August 1999, Dynacs issued 114,966 shares of common stock to Ramesh
Venugopal in payment for his services in supervising the construction of
the Batam, Indonesia facility and for managing it through December 31,
1999.
69
<PAGE> 72
RELATED PARTY LOANS TO DYNACS
Dynacs has borrowed funds from some of its officers, directors and
principal stockholders of the company, as follows:
- In September 1997, Ravi Venugopal, a Senior Vice President and
stockholder of Dynacs, made a loan to Dynacs of $150,000 pursuant to a
note bearing interest at a rate of 10.5% per annum, which Dynacs repaid
in November 1998.
- On October 6, 1997, Venugopal Srinivasan and Ranjini Srinivasan, the
brother and sister-in-law of Ravi Venugopal, a Senior Vice President and
the Secretary of Dynacs, loaned Dynacs $200,000 pursuant to a note
bearing interest at the rate of 10.5% per annum for a period of 36
months. The outstanding balance as of June 30, 2000 was $25,000. Dynacs
intends to repay this amount from the net proceeds of this offering.
- On February 15, 1999, Mr. Srinivasan, loaned Dynacs an aggregate of
$110,000 pursuant to a note, bearing interest at the rate of 12.0% per
annum with an extended maturity of August 15, 2000. Dynacs intends to
repay this amount from the net proceeds of this offering.
- On February 23, 1999, Ravi Venugopal loaned Dynacs $248,000 pursuant to a
note bearing interest at the rate of 12.0% per annum with an extended
maturity of August 23, 2000. Dynacs intends to repay this amount from the
net proceeds of this offering.
- On March 30, 1999, Dr. Ramendra Singh, our President, Chief Executive
Officer and a principal stockholder, loaned Dynacs $160,000 pursuant to a
note bearing interest at the rate of 12.0% per annum with an extended
maturity of September 30, 2000. Dynacs intends to repay this amount from
the net proceeds of this offering.
- On June 10, 1999, Dr. Peter Likins, a stockholder of Dynacs who has
agreed to serve as a director upon effectiveness of this offering, loaned
Dynacs $400,000 pursuant to a note bearing interest at the rate of 12.0%
per annum and which matured on April 1, 2000. Dynacs paid off this note
in April 2000 out of the proceeds of the Mezzanine Financings.
- On June 10, 1999, Robert Skelton, a stockholder of Dynacs who has agreed
to serve as a director upon the consummation of this offering, loaned
Dynacs $200,000 pursuant to a note bearing interest at the rate of 12.0%
per annum and which matured on April 1, 2000. Dynacs paid off this note
in April 2000 out of the proceeds of the Mezzanine Financings.
- On August 23, 1999, Anil Singh, Dr. Singh's nephew, loaned Dynacs $89,000
pursuant to a note bearing interest at 12.0% per annum with an extended
maturity of August 23, 2000. Dynacs intends to repay this amount from the
net proceeds of this offering.
Dynacs has borrowed an aggregate of approximately $3,765,600 during the
period of January 1997 through December 1999 from some of its officers,
directors, principal stockholders and/or members of their immediate family. See
"Principal Stockholders -- Certain Relationships with Ramesh Venugopal."
SALE OF SHARES OF COMMON STOCK TO RAVI VENUGOPAL
On January 25, 1999, Dynacs issued 459,866 shares of common stock to Ravi
Venugopal for the aggregate consideration of $1,127,700. Of this amount, Mr.
Venugopal paid $2,000 in cash and the balance of $1,125,700 by issuing to Dynacs
a promissory note of Mr. Venugopal which is also secured by a pledge of these
shares. This note bears interest at the prime rate per annum and matures on
January 25, 2002. No interest or principal is due until maturity.
70
<PAGE> 73
RELATIONSHIP WITH LENTZ & FAIR, P.A.
The office building in Palm Harbor, Florida, which houses our corporate
headquarters, is owned by Dynacs Properties, Inc., a company owned 50.0% by
Dynacs and 50.0% by H. James Lentz, Esq., the owner of Lentz & Fair, P.A., a law
firm. Dynacs entered into a lease agreement with Dynacs Properties, Inc. for the
rental of office space. The lease arrangement between Dynacs and Dynacs
Properties, Inc. was determined on an arms-length basis. Lentz & Fair has
represented Dynacs in numerous legal matters, including the litigation with Juno
Pix and New Line Productions described elsewhere in this prospectus. Lentz &
Fair has been paid legal fees in an aggregate amount of $385,360 for six-month
period ended March 31, 1999 and $382,773 for the nine-month period ended
September 30, 1999.
KEY MAN LIFE INSURANCE
Dynacs is the beneficiary of key man life insurance policies on behalf of
Ramendra P. Singh, Dynacs' Chief Executive Officer and President, and each of
Javier E. Benavente, Jayant Ramakrishnan, Harry W. Schubele III and Ravi
Venugopal, all of whom are Senior Vice Presidents of Dynacs, and Robert
Rodriguez, the Chief Financial Officer of Dynacs. In the event of Dr. Singh's
death or disability, Dynacs will receive $1.0 million. In the event of the death
or disability of any of Messrs. Benavente, Ramakrishnan, Schubele, Venugopal or
Rodriguez, Dynacs will receive $250,000.
REGISTRATION RIGHTS AGREEMENT
All stockholders of Dynacs at August 31, 1999, together with the former
holders of Cerulean Colorization, L.L.C. holding shares of common stock of
Cerulean FXs, Inc., are party to a registration rights agreement which provides
that if Dynacs proposes to register any of its securities under the Securities
Act, either for its own account or the account of any of its security holders,
the parties to this agreement are entitled to include their registrable shares
in such registration. However, in the event of a registration pursuant to an
underwritten public offering of common stock, the underwriters have the right to
limit the number of shares included in any registration. These rights terminate
for a holder once the holder is authorized to sell all of its shares under Rule
144(k) under the Securities Act.
OTHER MATTERS
Dynacs believes that the foregoing transactions were in its best interest.
The foregoing transactions were approved by Dynacs' board of directors. As a
matter of policy, all future transactions between Dynacs and any of its
officers, directors or principal stockholders will be approved by a majority of
the independent and disinterested members of the board of directors.
71
<PAGE> 74
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 30,000,000 shares of stock, of
which 25,000,000 shares are common stock, par value $.01 per share, and
5,000,000 shares are preferred stock, par value $.01 per share.
The following summary description of Dynacs' capital stock, as of the
closing of this offering, is not intended to be complete and is qualified by
reference to the provisions of applicable law and to Dynacs' amended and
restated certificate of incorporation and amended and restated by-laws filed as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Immediately prior to the consummation of this offering, there were
6,961,837 shares of common stock outstanding and held of record by 29
stockholders. Based upon the number of shares outstanding as of the consummation
of this offering and giving effect to the conversion of shares held by the
former members of Cerulean Colorization, L.L.C. into 912,064 shares of common
stock and the issuance of the shares of common stock offered by Dynacs in this
offering, there will be 13,347,765 shares of common stock outstanding upon the
consummation of this offering, assuming no exercise of the underwriters'
over-allotment option but including:
- an aggregate of 1,100,000 shares of common stock that will be issued in
connection with our acquisition of Sherman Film Libraries, Inc. upon the
consummation of this offering (including 5,000 shares of common stock
issuable to Film Archive Finance Company, Inc., the parent company of
Sherman Grinberg Film Libraries, Inc., and 10,000 shares of common stock
issuable to an executive officer of Film Archive Finance Company, Inc.,
in consideration for entering into a non-compete agreement);
- 483,334 shares issuable upon the conversion of the Mezzanine Notes;
- 635,050 shares issuable upon the exercise of the warrants issued to the
holders of the Mezzanine Notes; and
- 255,480 shares of common stock issuable upon the exercise of options at
$.02 per share.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Directors are elected by a plurality of the votes
of the shares present in person or by proxy at the meeting. The holders of
common stock are entitled to receive ratably any lawful dividends as may be
declared by the board of directors. However, all dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Dynacs, whether voluntarily or involuntarily, the holders of common
stock will be entitled to receive pro rata all of the remaining assets of Dynacs
available for distribution to its stockholders. Any pro rata distribution would
be subject to the rights of the holders of any outstanding shares of preferred
stock. The common stock has no preemptive, redemption, conversion or
subscription rights. The rights, powers, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock that Dynacs may designate
and issue in the future. Upon the closing of this offering, there will be no
shares of preferred stock outstanding.
PREFERRED STOCK
Immediately prior to the consummation of this offering, there were no
shares of preferred stock outstanding. The board of directors is authorized,
subject to any limitations prescribed by Delaware law, without further
stockholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock, in one or more series. The board of directors is also
authorized, subject to
72
<PAGE> 75
the limitations prescribed by Delaware law, to establish the number of shares to
be included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. The
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
Dynacs has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding common stock of Dynacs.
MEZZANINE FINANCINGS
MEZZANINE NOTES
In order to finance our working capital deficits during the period November
1999 through March 2000, we conducted two offerings of Mezzanine Notes for an
aggregate principal amount of $2.9 million. $1.0 million of the Mezzanine Notes
were sold in "Mezzanine I" from November 1999 to January 2000 and the remaining
$1.9 million were sold in "Mezzanine II" from February to March 2000. The
Mezzanine Notes are unsecured and subordinate to our currently existing
equipment financings, $4,000,000 line of credit with the First National Bank of
Florida and certain indebtedness aggregating $585,000, and are guaranteed by Dr.
Ramendra P. Singh, our Chief Executive Officer, President, director and a
principal stockholder. The Mezzanine Notes bear interest at the initial rate of
8.0% per annum from the date of issuance until and including the 120th day from
the date of issuance, and thereafter at the rate of 15.0% per annum and mature
on the one year anniversary of the date of grant, if not converted prior to this
date. Pursuant to the terms of the Mezzanine Notes, upon a "Liquidity Event,"
defined as the initial public offering of Dynacs' common stock and the sale of
all or substantially all of the assets of Dynacs, a holder of a Mezzanine Note
may convert such note into a number of shares of Dynacs' common stock equal to
the outstanding principal and accrued and unpaid interest of the note divided by
the conversion price. The conversion price of each Mezzanine Note is 60.0% of
the initial public offering price of the common stock. Also, in the event we
conduct a private offering of equity or equity-linked securities at any time
during which the Mezzanine Notes are outstanding, resulting in aggregate
proceeds of not less $2.0 million, we are obligated to either repay the
outstanding principal amount and accrued and unpaid interest on the Mezzanine
Notes or convert any Mezzanine Note, at the option of the holder, into the
securities issued in the private financing. The holders of the Mezzanine Notes
have unlimited piggyback registration rights with respect to the shares of
common stock issuable upon the exercise of the warrants and issuable upon
conversion of the notes and one demand registration right.
WARRANTS
Each initial holder of the Mezzanine Notes received five-year warrants to
purchase 21,899 shares of our common stock for each $100,000 denomination of
Mezzanine Notes purchased. We issued warrants to purchase an aggregate of
218,985 shares of common stock in Mezzanine I and 416,065 shares of common stock
in Mezzanine II. The warrants are exercisable at a price equal to 70.0% of the
initial public offering price of the common stock. The holders of the warrants
have unlimited piggyback registration rights with respect to the shares of
common stock they may purchase and one demand registration right.
PLACEMENT AGENT WARRANTS
We issued warrants to purchase an aggregate of 62,834 shares of common
stock to H.C. Wainwright & Co., Inc., a representative of the underwriters of
this offering, in consideration for
73
<PAGE> 76
services rendered as placement agent of the Mezzanine Financings. Such warrants
were issued on similar terms of the warrants issued to the Mezzanine Note
holders. The warrants issued to H.C. Wainwright will be cancelled prior to this
offering.
REGISTRATION RIGHTS AGREEMENT
All of the stockholders of Dynacs at March 28, 2000, together with the
former holders of Cerulean Colorization, L.L.C. holding shares of common stock
of Cerulean FXs, Inc., are party to a registration rights agreement dated August
13, 1999. This agreement is described in the section of this prospectus entitled
"Certain Transactions -- Registration Rights Agreement."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
DELAWARE LAW. We are subject to Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging in some transactions, defined under the Delaware
General Corporation Law as "business combinations," which include a merger or
sale of more than 10.0% of the corporation's assets, with any "interested
stockholder," or a stockholder who owns 15.0% or more of the corporation's
outstanding voting stock, as well as affiliates and associates of any of these
persons, for three years following the date of such stockholder became an
"interested stockholder" unless:
- the transaction in which the stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained this status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85.0% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by persons
who are directors and also officers; or
- on or after the date of business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
by the affirmative vote of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS. Provisions of our certificate
of incorporation and bylaws, which will be in effect upon the closing of this
offering may have the effect of deterring hostile takeovers or delaying changes
in control or management of Dynacs. For example, the certificate of
incorporation provides that stockholders are not entitled to cumulate their
votes for the election of directors. The certificate of incorporation also
authorizes undesignated preferred stock which makes it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of Dynacs. Our
by-laws also authorize the board of directors to fill vacancies on the board and
to increase the number of board members. In addition, our by-laws limit the
ability of stockholders to raise matters or nominate persons to serve as members
of the Board of Directors at a meeting of stockholders without giving advance
notice, except with the unanimous consent of all stockholders entitled to vote
at the meeting. These provisions may preclude stockholders from bringing matters
before an annual meeting of stockholders or from making nominations for
directors.
74
<PAGE> 77
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
To the extent permitted under Delaware law, the certificate of
incorporation limits the personal liability of our officers and directors to us
or our stockholders for monetary damages for any breach of fiduciary duty as our
officers and directors except for liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- payments of dividends or approval of stock repurchases or redemptions
that are prohibited by the Delaware General Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
Under Delaware law, our directors have a fiduciary duty to us that is not
eliminated by this provision of the certificate. This provision also does not
affect the directors' responsibilities under any other laws, including federal
securities laws.
Our certificate of incorporation provides full indemnification of officers
and directors by Dynacs to the fullest extent permitted by law.
STOCK TRANSFER AGENT
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. We cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have on
the prevailing market price of our common stock. Nevertheless, sales of
substantial amounts of our common stock in the public market at any one period
in time could adversely affect prevailing market prices of our common stock.
Furthermore, since some shares of common stock will not be available for sale
shortly after this offering because of the contractual and legal restrictions on
resale described below, sales of substantial amounts of common stock in the
public market at any one period in time after these restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future on favorable terms, if at all.
Upon completion of this offering, we will have outstanding an aggregate of
13,347,765 shares of our common stock, assuming the issuance of the following
shares of common stock:
- 912,064 shares of our common stock upon the automatic conversion of the
equity interests of certain parties in our subsidiary, Cerulean FXs,
Inc.;
- 1,100,000 shares of our common stock in connection with our acquisition
of the issued and outstanding capital stock of Sherman Grinberg Film
Libraries, Inc. (including 5,000 shares of common stock issuable to Film
Archive Finance Company, Inc., the parent company of Sherman Grinberg
Film Libraries, Inc., and 10,000 shares of common stock issuable to an
executive officer of Film Archive Finance Company, Inc., in consideration
for entering into a non-compete agreement);
- 483,334 shares of our common stock upon the conversion of all of the
Mezzanine Notes;
- 635,050 shares of our common stock upon the exercise of all of the
warrants issued in conjunction with the Mezzanine Notes; and
- 255,480 shares of common stock issuable upon the exercise of options at
$.02 per share.
75
<PAGE> 78
Of these shares, the 3,000,000 shares of common stock sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act and 10,347,765 shares will be deemed to be "restricted
securities" as that term is defined in Rule 144 under the Securities Act. Of
these shares, 6,961,837 shares could be sold pursuant to Rule 144 commencing 90
days after the effective date of this offering, subject to the restrictions of
the lock-up agreements. The remaining 3,130,448 shares could be sold pursuant to
Rule 144 commencing one year after the effective date of this offering.
LOCK-UP AGREEMENTS
Stockholders holding an aggregate of 11,207,158 shares of common stock,
including securities exercisable, convertible or exchangeable into shares of
common stock, including:
- all of our officers and directors who hold shares of common stock or
options to purchase shares of common stock; and
- the holders of the Mezzanine Notes and Mezzanine Warrants issued in
connection with the Mezzanine Financings
have signed lock-up agreements with the underwriters under which they agreed not
to transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock, for a period of 180 days after the date of this prospectus.
Transfers or dispositions can be made sooner only with the prior written
consent of H.C. Wainwright & Co., Inc.
Upon expiration of the lock-up period, 180 days after the date of this
prospectus, 11,207,158 shares of common stock, including securities exercisable,
convertible or exchangeable into shares of common stock, will be available for
resale to the public to the extent that Rule 144 is available.
In addition, in connection with our proposed acquisition of Sherman
Grinberg Film Libraries, Inc., 350,000 shares of common stock (including 5,000
shares of common stock issuable to Film Archive Finance Company, Inc., the
parent company of Sherman Grinberg Film Libraries, Inc., and 10,000 shares of
common stock issuable to an executive officer of Film Archive Finance Company,
Inc., in consideration for entering into a non-compete agreement) will be
subject to a lock-up agreement for a period of 12 months from the date of
issuance. The remaining 750,000 shares of common stock issuable to Film Archive
Finance Company, Inc. will be subject to a lock up agreement for a period of six
months from the date of issuance.
RULE 144
In general, pursuant to Rule 144 under the Securities Act as currently in
effect, beginning 90 days after the date of this prospectus, provided that
Dynacs is current in its reporting requirements, a person who has beneficially
owned shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1.0% of the number of shares of common stock then outstanding; or
- the average weekly trading volume of the common stock on Nasdaq during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
76
<PAGE> 79
RULE 144(k)
Pursuant to Rule 144(k) under the Securities Act, a person who has not been
one of our affiliates at any time during the three-months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner who was a non-affiliate,
is entitled to sell any shares without restrictions.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell the shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with various restrictions,
including the one-year holding period, contained in Rule 144. At the request of
the underwriters, shareholders who would otherwise be able to avail themselves
of this provision to resell their shares have agreed to enter into the lock-up
agreements described above for a period of 180 days from the consummation of
this offering.
REGISTRATION RIGHTS AGREEMENT
All of the stockholders of Dynacs prior to this initial public offering,
together with the former holders of Cerulean Colorization, L.L.C. holding shares
of common stock of Cerulean FXs, Inc., are party to a registration rights
agreement. This agreement provides that if Dynacs proposes to register any of
its securities under the Securities Act, either for its own account or for the
account of another security holder, the parties to this agreement are entitled
to receive notice of the registration and to register their shares as part of
the registration. The agreement also provides, however, that the underwriters of
a public offering of Dynacs' common stock have the right to limit the number of
shares registered by these stockholders. The registration rights of these
stockholders terminate as to each stockholder at the time when Rule 144(k)
promulgated under the Securities Act would permit the stockholder to sell all of
its shares.
Also, in connection with the Mezzanine Financings, we granted "piggyback"
and demand registration rights to the holders of the Mezzanine Notes and
Mezzanine Warrants with respect to the registration of the shares of common
stock issued or issuable upon the conversion of the Mezzanine Notes and exercise
of the Mezzanine Warrants. If during the five-year period commencing from the
effective date of this offering, we propose to prepare and file a registration
statement on a suitable form with the Securities and Exchange Commission, we are
obligated to give at least 30 days notice to the holders of the Mezzanine Notes
and Mezzanine Warrants and eligible underlying common stock and give them the
opportunity to register their common stock in our registration statement,
subject to customary reductions by the underwriter, if any. We are also
obligated to prepare and file a registration statement with the Securities and
Exchange Commission on one occasion in the event that the holders of a majority
of the eligible shares of common stock issued or issuable upon the conversion of
the Mezzanine Notes and exercise of the Mezzanine Warrants provide us with a
written request to register their common stock. We would also be obligated to
contact the other holders of the eligible shares and notify them of the
registration request, and to include their shares, if requested.
STOCK OPTIONS
We intend to file a registration statement under the Securities Act
covering 1,124,113 shares of common stock reserved for issuance under our 1999
Long-Term Incentive Plan. We expect to file this registration statement 120 days
after the effective date of this offering, and we anticipate that it will become
effective upon filing. Accordingly, shares registered under this registration
statement should
77
<PAGE> 80
be available for sale in the open market 120 days after the effective date of
this offering, subject to vesting provisions of the plan, Rule 144 volume
limitations that apply to our affiliates, and applicable lock-up agreements.
Options to purchase an aggregate of 255,480 shares of common stock have
been reserved under the plan to holders of the Cerulean FXs shares in connection
with the acquisition of Cerulean Colorization, L.L.C. Options to purchase
204,385 of the 255,480 shares of common stock were reserved for Mr. Burns under
the plan. Also, Mr. Burns has the right to receive options to purchase 51,097
shares of common stock under the plan upon the Company obtaining contracts for
colorization services in an aggregate amount of $10.0 million no later than
August 12, 2002. See "Management -- Executive Compensation."
78
<PAGE> 81
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, Dynacs has agreed to sell to each of the underwriters named below,
and each of the underwriters, for which H.C. Wainwright & Co., Inc. and Roth
Capital Partners, Inc. are acting as representatives, has severally, and not
jointly, agreed to purchase the number of shares offered in this offering set
forth opposite their respective names below.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
H.C. Wainwright & Co., Inc. ................................
Roth Capital Partners, Inc. ................................
---------
Total............................................. 3,000,000
=========
</TABLE>
A copy of the underwriting agreement has been filed as an exhibit to this
registration statement. The underwriters shall be obligated to purchase all of
the shares (other than those covered by the underwriters' over-allotment option
described below), if any are purchased.
The representatives have advised us that the underwriters propose to offer
the shares to the public at the initial public offering price on the cover page
of this prospectus and that they may allow some dealers who are members of the
NASD, and some foreign dealers, concessions not in excess of $ per share, of
which amount a sum not in excess of $ per share may in turn be re-allowed by
these dealers to other dealers who are members of the NASD and to some foreign
dealers. After the commencement of this offering, the offering price, the
concession to selected dealers, and the re-allowance to other dealers may be
changed by the representatives. The representatives have informed us that they
do not expect discretionary sales by the underwriters to exceed five percent of
the shares offered by this prospectus.
At the request of Dynacs, the underwriters have reserved at the initial
public offering up to 300,000 shares of common stock for sale to employees,
customers and other business associates of Dynacs.
We have agreed to pay to the representatives an expense allowance on a
non-accountable basis, equal to 1.0% of the gross proceeds derived from the sale
of 3,000,000 shares offered in this offering, or 3,450,000 shares if the
underwriters' over-allotment option is exercised in full. We paid an advance on
this allowance in the amount of $25,000.
OVER-ALLOTMENT OPTION. Eight selling stockholders, Ramendra P. Singh, Ravi
Venugopal, Harry W. Schubele III, Jayant Ramakrishnan, Javier E. Benavente,
Peter Likins, Robert E. Skelton and Ramesh Venugopal have granted to the
underwriters an option, exercisable during the 45-day period after the date this
offering is consummated, to purchase up to an aggregate of 250,000 outstanding
shares of common stock, and we have granted to the underwriters an option to
purchase up to 200,000 to cover over-allotments, if any, at the same price per
share as we will receive for the 3,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of these additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 3,000,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 3,000,000 shares are being sold. The selling stockholders will be
obligated, under this option, to sell shares to the extent the option is
exercised. In the event the over-allotment option is not exercised in full, the
underwriters will exercise the option from the selling stockholders before
exercising the option from us. The underwriters may exercise the option only to
79
<PAGE> 82
cover over-allotments made in connection with the sale of the 3,000,000 shares
of our common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Assumed public offering price.................. $ $ $
Underwriting discounts and commissions.......
Proceeds before expenses, to us..............
Proceeds before expenses to selling
stockholders..............................
</TABLE>
We have also agreed to sell to H.C. Wainwright & Co., Inc., as a
representative of the underwriters, for nominal consideration, the
representative's warrants to purchase up to 300,000 shares of common stock. The
representative's warrants are exercisable for a period of four years commencing
one year after the effective date of this prospectus at an exercise price per
share equal to $12.00 (120.0% of the public offering price). The
representative's warrants may not be sold, transferred, assigned, pledged, or
hypothecated for a period of 12 months from the date of this prospectus, except
to officers or partners of the representatives or members of the selling group.
Dynacs has granted to H.C. Wainwright & Co., Inc. one demand registration right
at Dynacs expense and one demand registration right at the holders' expense for
a period of five years from the effective date of this offering and piggyback
registration rights for a period of six years from the effective date of this
offering with respect to registration under the Securities Act of the securities
directly or indirectly issuable upon exercise of the representative's warrants.
The representative's warrants contain anti-dilution provisions providing for
adjustments of the exercise price and number of shares issuable on exercise of
the representative's warrants, upon the occurrence of some events, including
stock dividends, stock splits, and recapitalizations. The holders of the
representative's warrants have no voting, dividend, or other rights as a
stockholder with respect to shares of common stock underlying the
representative's warrants, unless the representative's warrants shall have been
exercised.
In connection with this offering, we have granted H.C. Wainwright & Co.,
Inc. the right, for the five-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of our board of
directors. This designee has the right to notice of all meetings of the board of
directors and to receive reimbursement for all out-of-pocket expenses incurred
to attend these meetings. In addition, the designee will be entitled to
indemnification to the same extent as our directors.
Each of our officers, directors, and stockholders, have entered into
lock-up agreements under which we and they have agreed not to offer, assign,
issue, sell, hypothecate, or otherwise dispose of any shares of common stock,
securities of Dynacs convertible into, or exercisable or exchangeable for,
shares of common stock, or shares of common stock received upon conversion,
exercise, or exchange of these securities, to the public without the prior
written consent of H.C. Wainwright & Co., Inc. for a period of at least 180 days
after the date of this prospectus. H.C. Wainwright & Co., Inc. may, at any time
and without notice, waive the terms of those lock-up agreements.
Before this offering, there has been no public market for the common stock
of Dynacs. The initial public offering price, negotiated between Dynacs and the
representatives, is based upon Dynacs' financial and operating history and
condition, its prospects, the prospects for the industry we are in and
prevailing market conditions.
80
<PAGE> 83
H.C. Wainwright & Co., Inc. received an aggregate of $240,000 in cash
commissions and warrants to purchase 62,834 shares of common stock of Dynacs as
placement agent in connection with the Mezzanine Financings. H.C. Wainwright &
Co., Inc. was also reimbursed $9,000 for expenses related to the Mezzanine
Financings. The warrants issued to H.C. Wainwright & Co., Inc. in connection
with the Mezzanine Financings will be cancelled prior to this offering.
On May 1, 2000, Dynacs entered into an agreement with H.C. Wainwright &
Co., Inc. pursuant to which H.C. Wainwright & Co., Inc. is to act as Dynacs'
exclusive financial advisor in connection with the evaluation of strategic and
financial alternatives for Dynacs, including a merger, partnership, alliance,
acquisition or other strategic transactions. Pursuant to the agreement, H.C.
Wainwright & Co., Inc. shall receive in connection with the consummation of any
transaction described above, a fee equal to 4.0% of the aggregate consideration
paid by Dynacs with respect to the transaction up to $10.0 million, plus 3.0% of
aggregate consideration with respect to the transaction between $10.0 million
and $15.0 million, and 1.0% of aggregate consideration with respect to the
transaction in excess of $15.0 million; provided, however, that H.C. Wainwright
& Co., Inc. shall be entitled to a minimum fee of $350,000 in connection with
the consummation of any transaction described above. In accordance with the
terms of the agreement, Dynacs is obligated to pay H.C. Wainwright & Co., Inc. a
fee of $350,000 in connection with the consummation of the acquisition of the
shares of common stock of Sherman Grinberg Film Libraries, Inc., 25.0% of which
may be paid in Dynacs common stock at the initial public offering price, upon
the election of Dynacs. The agreement also provides that H.C. Wainwright & Co.,
Inc. is entitled to receive an advisory fee in connection with assisting Dynacs
in negotiating a credit facility and/or acquisition facility, such fee equal to
1.75% of such credit or acquisition facility.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
- STABILIZING TRANSACTIONS. The underwriters may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
- OVER-ALLOTMENTS AND SYNDICATE COVERAGE TRANSACTIONS. The underwriters
may create a short position in the shares by selling more shares than are
set forth on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
- PENALTY BIDS. If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate coverage transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market, in the
over-the-counter market or on any trading market. If such transactions are
commenced, they may be discontinued without notice at any time.
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in this respect.
81
<PAGE> 84
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed
upon for Dynacs by Frankfurt, Garbus, Kurnit, Klein & Selz, P.C., New York, NY.
Orrick, Herrington & Sutcliffe LLP, New York, NY is acting as counsel for the
underwriters.
EXPERTS
On August 27, 1999, pursuant to the approval of the Board of Directors,
Dynacs dismissed their prior independent accountants, Hoyman, Dobson & Company,
P.A., upon completion of the audit of the financial statements as of and for the
year ended December 31, 1997. The dismissal of Hoyman by the Company was not
based on a disagreement nor did any of Hoyman's reports on the financial
statements as of and for the year ended December 31, 1997 contain any adverse
opinion or disclaimer of opinion nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. A copy of Hoyman's letter
addressed to the SEC concurring with Dynacs' foregoing disclosure is filed as an
exhibit to the registration statement of which this prospectus is a part. On
August 27, 1999, Dynacs engaged Arthur Andersen LLP as their new independent
certified public accountants.
The consolidated financial statements included in this registration
statement to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent certified public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
The consolidated financial statements included in this registration
statement to the extent and for the periods indicated in their report, have been
audited by Hoyman Dobson and Co., independent certified public accountants, and
are included herein in reliance upon the authority of said firm as experts in
giving said report.
The financial statements of Sherman Grinberg Film Libraries, Inc. included
in this registration statement, of which this prospectus is a part, to the
extent and for the period indicated in their report, have been audited by
Yohalem, Gillman & Company, LLP, independent certified public accountants, and
are included herein in reliance upon the authority of said firm as experts in
giving said report.
AVAILABLE INFORMATION
Dynacs has filed with the Securities and Exchange Commission, a
registration statement on Form S-1 (including the exhibits and schedules to the
registration statement) under the Securities Act with respect to the shares to
be sold in this offering. This prospectus does not contain all the information
set forth in the registration statement. For further information with respect to
Dynacs and the shares to be sold in this offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance reference is made to the copy of each
contract, agreement or other document filed as an exhibit to the registration
statement. Any reference to our web sites, www.dynacs.com and
www.MarketYourMedia.com, in the registration statement, of which this prospectus
constitutes a part, does not constitute incorporation by reference of the
information contained therein.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information Dynacs files at the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Dynacs' Commission filings, including
the registration statement will also be available to you on the Commission's
Internet site (http://www.sec.gov).
82
<PAGE> 85
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF DYNACS INC. AND
SUBSIDIARIES:
Report of Independent Certified Public
Accountants -- Arthur Andersen LLP..................... F-2
Report of Independent Certified Public
Accountants -- Hoyman, Dobson & Company, P.A........... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income................................... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-9
FINANCIAL STATEMENTS OF CERULEAN COLORIZATION, LLC
Report of Independent Certified Public Accountants........ F-25
Balance Sheets............................................ F-26
Statement of Income and Members' Interest................. F-27
Statements of Cash Flows.................................. F-28
Notes to Financial Statements............................. F-29
FINANCIAL STATEMENTS OF SHERMAN GRINBERG FILM LIBRARIES,
INC.
Reports of Independent Certified Public
Accountants -- Yohalem, Gillman & Company, LLP......... F-33
Balance Sheets............................................ F-34
Statements of Operations.................................. F-35
Statements of Changes in Stockholder's Equity............. F-36
Statements of Cash Flows.................................. F-37
Notes to Financial Statements............................. F-38
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Pro Forma Consolidated Financial Statements............... F-44
Pro Forma Consolidated Balance Sheet...................... F-45
Pro Forma Consolidated Statements of Operations........... F-46
Notes to Pro Forma Consolidated Financial Statements...... F-48
</TABLE>
F-1
<PAGE> 86
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Dynacs Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Dynacs Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1998, and September
30, 1999, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income and cash flows for the year ended
December 31, 1998, and for the nine-month period ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated statements of operations, changes in stockholders'
equity and comprehensive income and cash flows of Dynacs Inc. and subsidiaries
for the year ended December 31, 1997, were audited by other auditors whose
report dated August 28, 1998, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Dynacs Inc. and subsidiaries
as of December 31, 1998, and September 30, 1999, and the results of their
operations and their cash flows for the year ended December 31, 1998, and the
nine-month period ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Tampa, Florida,
January 21, 2000 (except with respect to
the matters discussed in Note 15,
as to which the date is May 16, 2000
and Notes 6 and 16, as to which the date
is July 14, 2000)
F-2
<PAGE> 87
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Dynacs Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Dynacs Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dynacs Inc. and subsidiaries
as of December 31, 1997 and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ HOYMAN, DOBSON & COMPANY, P.A.
Melbourne, Florida
August 28, 1998
F-3
<PAGE> 88
DYNACS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, MARCH 31,
1998 1999 2000
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 172,557 $ 1,094,790 $ --
Accounts receivable....................................... 6,022,961 5,765,434 5,745,964
Unbilled revenue.......................................... 2,054,154 749,195 1,314,138
Prepaid expenses.......................................... 208,698 91,531 365,975
Deferred tax assets....................................... 376,000 524,000 787,000
----------- ----------- -----------
Total current assets............................... 8,834,370 8,224,950 8,213,077
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$982,218, $2,040,517 and $2,606,927 as of December 31,
1998, September 30, 1999, and March 31, 2000,
respectively.............................................. 1,843,366 3,329,691 2,988,324
FILM LIBRARY AND PRODUCTION COSTS, less accumulated
amortization of $122,581, $235,297 and $298,557 as of
December 31, 1998, September 30, 1999, and March 31, 2000,
respectively.............................................. 448,333 641,546 1,045,905
NOTES RECEIVABLE............................................ -- 905,000 765,558
DEFERRED TAX ASSET.......................................... -- 713,000 636,000
OTHER ASSETS................................................ 174,988 457,318 801,289
----------- ----------- -----------
Total assets....................................... $11,301,057 $14,271,505 $14,450,153
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,320,776 $ 2,555,127 $ 2,151,579
Accrued expenses.......................................... 2,804,401 3,646,226 4,149,865
Line of credit borrowings................................. 2,473,564 3,226,135 2,026,693
Current portion of long-term debt......................... 957,766 2,676,733 3,754,174
----------- ----------- -----------
Total current liabilities.......................... 9,556,507 12,104,221 12,082,311
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current portion...................... 664,070 473,012 111,940
Deferred tax liabilities.................................. 32,000 -- --
----------- ----------- -----------
MINORITY INTEREST........................................... -- 393,452 393,452
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding at December
31, 1998, September 30, 1999, or March 31, 2000......... -- -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 6,387,005 shares issued and outstanding at
December 31, 1998, and 6,961,837 shares issued and
outstanding at September 30, 1999, and March 31, 2000... 63,870 69,618 69,618
Additional paid-in capital................................ (18,630) 2,959,136 3,858,136
Note receivable for common stock from a related party..... -- (1,125,700) (1,125,700)
Accumulated other comprehensive (loss) income............. (6,996) (6,059) (119)
Retained earnings (deficit)............................... 1,010,236 (596,175) (939,485)
----------- ----------- -----------
Total stockholders' equity......................... 1,048,480 1,300,820 1,862,450
----------- ----------- -----------
Total liabilities and stockholders' equity......... $11,301,057 $14,271,505 $14,450,153
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 89
DYNACS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE-MONTH SIX-MONTH PERIOD ENDED
DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------- SEPTEMBER 30, -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Information and applied
technology..................... $26,068,005 $59,615,270 $53,896,828 $34,489,144 $35,708,540
Media and entertainment........... 892,834 1,331,416 1,398,257 1,439,743 902,902
----------- ----------- ----------- ----------- -----------
Total revenues............ 26,960,839 60,946,686 55,295,085 35,928,887 36,611,442
----------- ----------- ----------- ----------- -----------
COST OF REVENUES:
Information and applied
technology..................... 22,980,525 56,211,548 51,233,756 32,803,430 31,798,637
Media and entertainment........... 1,007,667 1,817,647 3,063,995 1,677,765 1,722,728
----------- ----------- ----------- ----------- -----------
Total cost of revenues.... 23,988,192 58,029,195 54,297,751 34,481,195 33,521,365
----------- ----------- ----------- ----------- -----------
GROSS PROFIT........................ 2,972,647 2,917,491 997,334 1,447,692 3,090,077
GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 2,480,825 2,639,986 3,444,599 1,950,302 3,052,803
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)............. 491,822 277,505 (2,447,265) (502,610) 37,274
INTEREST EXPENSE, net............... 46,522 204,450 491,279 223,704 543,361
LOSS ON EQUITY METHOD INVESTMENT.... 3,196 67,039 27,867 26,049 23,223
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES... 442,104 6,016 (2,966,411) (752,363) (529,310)
INCOME TAX (PROVISION) BENEFIT...... (178,571) 35,000 1,360,000 374,699 186,000
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................... $ 263,533 $ 41,016 $(1,606,411) $ (377,664) $ (343,310)
=========== =========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE....... $ .03 $ .00 $ (.23) $ (.06) $ (.05)
=========== =========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES.......... 10,219,209 10,219,209 6,859,644 6,804,290 6,961,837
=========== =========== =========== =========== ===========
BASIC NET INCOME (LOSS) PER COMMON
SHARE............................. $ .04 $ .01 $ (.23) $ (.06) $ (.05)
=========== =========== =========== =========== ===========
BASIC WEIGHTED AVERAGE COMMON
SHARES............................ 6,387,005 6,387,005 6,859,644 6,804,290 6,961,837
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 90
DYNACS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998,
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999, AND
THE SIX-MONTH PERIOD ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED FOR COMPREHENSIVE OTHER
------------------- PAID-IN EARNINGS COMMON (LOSS) COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) STOCK INCOME LOSS
--------- ------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1997...................... 6,387,005 $63,870 $ (18,630) $ 969,220 $ -- $ -- $ --
Foreign currency
translation
adjustment.............. -- -- -- -- -- (6,996) (6,996)
Net income................ -- -- -- 41,016 -- 41,016 --
--------- ------- ---------- ----------- ----------- ----------- -------
COMPREHENSIVE NET INCOME.... $ 34,020
===========
BALANCE, December 31,
1998...................... 6,387,005 63,870 (18,630) 1,010,236 -- (6,996)
Issuance of common stock
to a related party...... 459,866 4,599 1,123,101 -- (1,125,700) --
Issuance of common stock
in Cerulean
acquisition............. -- -- 1,573,810 -- -- --
Issuance of common stock
for consulting
services................ 114,966 1,149 280,855 -- -- --
Net loss.................. -- -- -- (1,606,411) -- $(1,606,411) --
Foreign currency
translation
adjustment.............. -- -- -- -- -- 937 937
--------- ------- ---------- ----------- ----------- ----------- -------
COMPREHENSIVE NET LOSS...... $(1,605,474)
===========
BALANCE, September 30,
1999...................... 6,961,837 69,618 2,959,136 (596,175) (1,125,700) (6,059)
Issuance of warrants
(unaudited)............. -- -- 899,000 -- -- --
Net loss (unaudited)...... -- -- -- (343,310) -- $ (343,310) --
Foreign currency
translation adjustment
(unaudited)............. -- -- -- -- -- 5,940 5,940
--------- ------- ---------- ----------- ----------- ----------- -------
COMPREHENSIVE NET LOSS
(UNAUDITED)............... $ (337,370)
===========
BALANCE, March 31, 2000
(unaudited)............... 6,961,837 $69,618 $3,858,136 $ (939,485) $(1,125,700) $ (119)
========= ======= ========== =========== =========== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, December 31,
1997...................... $1,014,460
Foreign currency
translation
adjustment.............. (6,996)
Net income................ 41,016
----------
COMPREHENSIVE NET INCOME....
BALANCE, December 31,
1998...................... 1,048,480
Issuance of common stock
to a related party...... 2,000
Issuance of common stock
in Cerulean
acquisition............. 1,573,810
Issuance of common stock
for consulting
services................ 282,004
Net loss.................. (1,606,411)
Foreign currency
translation
adjustment.............. 937
----------
COMPREHENSIVE NET LOSS......
BALANCE, September 30,
1999...................... 1,300,820
Issuance of warrants
(unaudited)............. 899,000
Net loss (unaudited)...... (343,310)
Foreign currency
translation adjustment
(unaudited)............. 5,940
----------
COMPREHENSIVE NET LOSS
(UNAUDITED)...............
BALANCE, March 31, 2000
(unaudited)............... $1,862,450
==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 91
DYNACS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE SIX-MONTH
YEAR ENDED NINE-MONTH PERIOD ENDED
DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------- SEPTEMBER 30, -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............................... $ 263,533 $ 41,016 $(1,606,411) $ (377,664) $ (343,310)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Consulting services paid by issuance of common
stock....................................... -- -- 282,004 -- --
Depreciation and amortization................. 210,650 729,678 1,178,192 554,762 679,375
Loss on equity method investment.............. 3,196 67,039 27,867 26,049 23,223
Deferred tax benefit.......................... 44,000 (388,000) (893,000) (496,399) (186,000)
Changes in operating assets and liabilities-
Accounts receivable......................... (1,533,315) (3,096,787) 307,694 (639,248) 19,470
Prepaid expenses............................ (111,752) (91,133) 126,507 113,218 (274,444)
Unbilled revenue............................ (307,308) (1,402,191) 1,304,959 (404,789) (564,943)
Other assets................................ 32,724 60,936 (192,645) (12,498) (351,900)
Accounts payable............................ 641,376 2,226,933 (1,045,895) (2,544,994) (403,548)
Accrued expenses............................ 769,419 1,019,915 841,825 134,732 503,639
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 12,523 (832,594) 331,097 (3,646,831) (898,438)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable................................ -- -- (300,000) -- 139,442
Proceeds from sale of marketable securities..... 14,704 -- -- -- --
Loans to related parties........................ (89,592) -- -- -- --
Contributions to Dynacs Properties.............. -- (230,792) (106,172) (175,776) (65,000)
Film production costs........................... -- (570,916) (93,964) (570,916) (467,619)
Purchases of property and equipment............. (858,975) (1,337,950) (1,250,827) (687,008) (225,042)
Cash acquired in connection with Cerulean
acquisition................................... -- -- 194,059 -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.... (933,863) (2,139,658) (1,556,904) (1,433,700) (618,219)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit..... 562,835 1,423,729 752,571 2,008,361 (1,199,442)
Proceeds from issuance of long-term debt........ 350,000 1,400,000 1,887,395 1,251,071 2,218,077
Issuance of common stock........................ -- -- 2,000 2,000 --
Issuance of stock warrants...................... -- -- -- -- 899,000
Payment on long-term debt....................... (25,177) (217,839) (494,863) (1,357,156) (1,501,708)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. 887,658 2,605,890 2,147,103 1,904,276 415,927
----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (33,682) (366,362) 921,296 (3,176,255) (1,100,730)
EFFECT OF EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS..................................... -- (6,996) 937 (6,995) 5,940
</TABLE>
F-7
<PAGE> 92
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE SIX-MONTH
YEAR ENDED NINE-MONTH PERIOD ENDED
DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------- SEPTEMBER 30, -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS, beginning of period.... 579,597 545,915 172,557 3,298,450 1,094,790
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.......... $ 545,915 $ 172,557 $ 1,094,790 $ 115,200 $ --
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest...................................... $ 48,543 $ 214,432 $ 492,584 $ 223,704 $ 397,403
Income taxes.................................. $ 59,738 $ 296,979 $ 88,000 $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
ACTIVITIES:
Acquisition of Cerulean for issuance of common
stock as follows-
Cash.......................................... $ -- $ -- $ 194,059 $ -- $ --
Accounts receivable........................... -- -- 50,167 -- --
Prepaids...................................... -- -- 9,340 -- --
Notes receivable.............................. -- -- 605,000 -- --
Other assets.................................. -- -- 11,380 -- --
Plant, property and equipment................. -- -- 1,300,974 -- --
Film library.................................. -- -- 211,965 -- --
Accounts payable.............................. -- -- (280,246) -- --
Notes payable................................. -- -- (135,377) -- --
Minority interest............................. -- -- (393,452) -- --
----------- ----------- ----------- ----------- -----------
$ -- $ -- $ 1,573,810 $ -- $ --
=========== =========== =========== =========== ===========
Common stock issued to a related party in
exchange for notes receivable................. $ -- $ -- $ 1,125,700 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 93
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998, AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Dynacs Inc. (Dynacs) and its wholly-owned subsidiaries (collectively, the
Company) are engaged in engineering and research services for both commercial
and governmental entities, primarily in the aerospace industry. Beginning in
1996, the Company also became engaged in the colorization of motion picture
films. The Company is headquartered in Florida with locations in India,
Indonesia and throughout the United States. The Company's revenues are primarily
from engineering contracts and sales from colorization of film footage and other
media throughout the United States.
As a government contractor, the Company is subject to compliance with
Federal Acquisition Regulations (FAR). The FAR requires, among other things,
various audits be performed by the Defense Contract Audit Agency, including
annual audits of the Company's financial records via indirect cost submissions.
The Company has been found to be in compliance for all fiscal years in which an
audit has been completed. The Company believes it is in compliance with FAR
requirements for all subsequent years.
LIQUIDITY
The Company's financial statements have been prepared on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
experienced a significant operating loss during the nine-month period ended
September 30, 1999, largely attributable to its continuing start-up costs and
investments in the colorization segment (see Note 14). The Company has funded
these costs and investments primarily through additional borrowings, and,
subsequent to September 30, 1999, the Company has continued to obtain additional
financing to cover its working capital needs (see Note 16). The Company believes
that this financing and anticipated funds from future operations will be
sufficient to satisfy the Company's projected working capital and capital
expenditure needs through at least September 30, 2000.
CHANGE IN FISCAL YEAR-END
Effective September 30, 1999, the Company changed its year-end from
December 31 to September 30. The accompanying consolidated statements of
operations, changes in stockholders' equity and cash flows are presented for the
years ended December 31, 1997 and 1998, and the nine-month period ended
September 30, 1999. For comparative purposes only, the following table presents
the condensed results of operations (unaudited) for the nine-month period ended
September 30, 1998. In the opinion of management, all adjustments necessary to
fairly present these results of operations have been properly recorded:
<TABLE>
<CAPTION>
AMOUNT
-----------
(UNAUDITED)
<S> <C>
Total revenues.......................................... $42,791,452
Costs and expenses...................................... 42,205,345
Income before income taxes.............................. 586,107
Provision for income taxes.............................. (244,000)
Net income.............................................. 342,107
Basic net earnings per share............................ .05
Diluted net earnings per share.......................... .03
</TABLE>
F-9
<PAGE> 94
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION
During 1999, the Company established Cerulean FXs, Inc., a wholly-owned
subsidiary (Cerulean). On August 13, 1999, Cerulean FXs, Inc. acquired all of
the membership interests in Cerulean Colorization LLC and issued to its members
(the Cerulean Members) 20 percent of the shares of Cerulean. The shares issued
in the exchange were valued at $1,967,262 and are exchangeable at the option of
the Cerulean Members into 912,064 shares of Dynacs common stock, upon certain
events or automatically convert upon the Company's registration statement being
declared effective by the Securities and Exchange Commission (SEC).
The accompanying consolidated financial statements reflect the acquisition
under the purchase method of accounting and include the results of operations
from August 13, 1999. The purchase price was allocated to the assets acquired
and liabilities assumed based on their fair values as of the date of acquisition
and are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Cash and cash equivalents................................ $ 194,059
Accounts receivable...................................... 50,167
Prepaid expenses......................................... 9,340
Notes receivable......................................... 605,000
Other assets............................................. 11,380
Property, plant and equipment............................ 1,300,974
Film library and production costs........................ 211,965
Accounts payable......................................... (280,246)
Notes payable............................................ (135,377)
----------
1,967,262
Less- Minority interest.................................. (393,452)
----------
$1,573,810
==========
</TABLE>
F-10
<PAGE> 95
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information is presented assuming the
acquisition of Cerulean had occurred as of the beginning of the periods
presented:
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER
1998 30, 1999
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue........................................... $63,127,398 $56,846,657
Operating Income (Loss)........................... 339,401 (1,410,721)
Net Income (Loss)................................. 131,705 (568,492)
Diluted EPS....................................... .01 (.07)
</TABLE>
In addition, in conjunction with the acquisition, the Company reserved
306,577 stock options as contingent consideration, of which an aggregate of
255,480 will be granted to Cerulean Members upon the first stock option grant
under the 1999 Long Term Incentive Plan (see Note 12), and 51,097 will be
granted to one of the Cerulean Members, if, within three years from the date of
the agreement, certain performance goals, as defined, are met.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Cerulean, Dynacs Engineering Company (India),
Ltd., Dynacs Digital Studios (India) PVT. Ltd. and PT Dynacs Digital Studios
(Indonesia). All significant intercompany transactions and balances have been
eliminated in consolidation.
The Company's investment in Dynacs Properties, Inc. (DPI), a
nonmajority-owned company, is accounted for using the equity method. The Company
owns a 50 percent interest in DPI. The investment is included in other assets in
the accompanying consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due on demand from
contracts and subcontracts with various United States Government agencies and
its contractors. Therefore, the Company considers these accounts receivable to
be fully collectible and, accordingly, no allowance has been provided.
The Company periodically assesses the collectibility of commercial accounts
receivable. As of December 31, 1998, and September 30, 1999, the Company
believes the commercial accounts receivable are fully collectible and,
accordingly, no allowance has been provided.
F-11
<PAGE> 96
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Repair and maintenance costs which do not extend the
useful lives of the assets are expensed as incurred.
The Company is required to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Based upon its most recent analysis, the
Company believes that no material impairment of its long-lived assets exists at
December 31, 1998 or September 30, 1999.
FILM LIBRARY AND PRODUCTION COSTS
Film library and production costs consist primarily of film libraries
acquired and direct labor and overhead costs specifically associated with the
colorization of motion picture films. Amortization is computed based on the
individual-film-forecast computation method, which measures the ratio of
current-year revenues to estimated total revenues. Amortization expense for the
year ended December 31, 1998, and the nine-month period ended September 30,
1999, was approximately $123,000 and $112,000, respectively. There was no
amortization expense for the year ended December 31, 1997.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred tax assets and liabilities are
measured by applying enacted statutory tax rates applicable to the future years
in which the related deferred tax assets or liabilities are expected to be
settled or realized. Income tax provision consists of the taxes payable for the
current period and the change during the period in deferred tax assets and
liabilities.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Foreign currency translation adjustments arise primarily from activities of
the Company's international operations. Results of operations are translated
using the average exchange rates during the period, while assets and liabilities
are translated into U.S. dollars using current rates. Resulting foreign currency
translation adjustments are recorded in stockholders' equity.
REVENUE RECOGNITION
The Company has entered into long-term cost-reimbursable and time and
materials government contracts. The cost-reimbursable contracts provide for the
Company to be reimbursed for allowable incurred costs plus a fee based on
performance measures of quality, timeliness, ingenuity and cost-effectiveness.
Revenues from the reimbursement of incurred costs and the performance award fee
are recognized under the percentage of completion method. The Company assesses
the status of the performance fee on a periodic basis and any necessary
revisions are made prospectively. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs. Under time and
materials contracts, the Company is paid a fixed hourly rate for direct labor
hours expended and reimbursed for direct expenses
F-12
<PAGE> 97
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus applied indirect, general and administrative expenses. Revenues are
recognized as the direct labor hours and direct expenses are incurred.
Revenues from media and entertainment are derived from two contract types,
work for hire and royalties. Work for hire consists of long-term contracts in
which the Company receives a fee based on the number of minutes of film to be
colorized. Revenues from work for hire contracts are recognized under the
percentage of completion method. Contract costs include direct labor and
overhead costs specifically related to the production activities. Royalties
contracts include the sales of exhibition rights for films included in the
Company's film library. Revenue is recognized on these contracts when all of the
following conditions have been met: 1) the royalty fee for each film is known;
2) the cost of each film is known or reasonably determinable; 3) collectibility
of the full royalty fee is reasonably assured; 4) the film has been accepted by
the licensee in accordance with the conditions of the contract; and 5) the film
is available for its first showing or telecast. Once all of these conditions are
met, the Company recognizes revenue at the time the licensee is able to exercise
the rights under the contract.
Professional services performed and reimbursable costs incurred on
contracts, which have been authorized but not billed, are classified as unbilled
revenue.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates made by the Company include: revenue for performance
awards, percentage of completion of long-term contracts, amortization of film
library and production costs based on total expected revenues and impact of
audits of federal government contracts.
NET INCOME PER COMMON SHARE
Basic net income (loss) per common share was determined by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted net income (loss) per common and common equivalent
share was determined by dividing net income by the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares from
stock options and stock warrants, using the treasury stock method.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of accounts receivable. During the year ended
December 31, 1998, and nine-month period ended September 30, 1999, the Company
generated 97 percent and 88 percent, respectively, of its revenues from three
major customers, for services provided as a prime contractor or subcontractor to
agencies of the federal government. Funding for these projects results from
budget appropriations by the United States Congress.
F-13
<PAGE> 98
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments as of December
31, 1998, and September 30, 1999, approximate fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1997 and 1998,
financial statements to conform with the September 30, 1999, presentation.
INTERIM FINANCIAL INFORMATION
As is normal and customary, the interim financial statements as of March
31, 2000, and for the six-month periods ended March 31, 1999 and 2000, are
unaudited, and certain information normally included in financial statements
prepared in accordance with generally accepted accounting principles has not
been included herein. In the opinion of management, all adjustments necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim financial statements have been properly included. Due to
seasonality and other factors, the results of operations for the interim period
are not necessarily indicative of the results that will be realized for the
entire fiscal year.
2. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of December 31, 1998, and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
U.S. Government agencies and prime contractors,
including retainage of $50,000.................. $5,477,670 $5,281,507
Commercial customers.............................. 27,169 281,927
Medical insurance reimbursement................... 518,122 --
Income tax refund receivable...................... -- 202,000
---------- ----------
$6,022,961 $5,765,434
========== ==========
</TABLE>
Pursuant to one governmental subcontract agreement, retainage of 5 percent
of billings, not to exceed $50,000, is to be withheld until execution and
delivery of a release by the governmental agency.
F-14
<PAGE> 99
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES RECEIVABLE:
Notes receivable consisted of the following at September 30, 1999:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Note receivable from nominated director (a related party),
bears interest at 5.7%, principal and accrued interest
are due August 2004, secured by the nominated director's
interest in common stock of Cerulean..................... $300,000
Note receivable, bears interest at 8.5%, due as the Company
generates revenue from the sale of the motion picture
film rights.............................................. 605,000
--------
$905,000
========
</TABLE>
As part of the acquisition of Cerulean, Dynacs agreed to lend Mr. Burns an
aggregate of $600,000. Of this amount, Dynacs loaned him $300,000 in August 1999
and is obligated to lend him $150,000 in January 2000 and another $150,000 in
January 2001. Mr. Burns has agreed to allow the Company to defer its loan
obligation to him for January 2000 until the consummation of the Company's
initial public offering.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31, 1998,
and September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Computer equipment and software............. 5 $2,058,526 $3,544,158
Furniture, fixtures and equipment........... 5-7 767,058 1,826,050
---------- ----------
2,825,584 5,370,208
Less-Accumulated depreciation............... (982,218) (2,040,517)
---------- ----------
$1,843,366 $3,329,691
========== ==========
</TABLE>
Depreciation expense for the year ended December 31, 1998, and the
nine-month period ended September 30, 1999, was approximately $492,000 and
$1,065,000, respectively.
5. ACCRUED EXPENSES:
Accrued expenses consisted of the following as of December 31, 1998, and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Accrued salaries and related taxes................ $1,304,920 $1,297,238
Accrued vacation.................................. 1,022,111 1,705,475
Other accrued expenses............................ 477,370 643,513
---------- ----------
$2,804,401 $3,646,226
========== ==========
</TABLE>
F-15
<PAGE> 100
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LINE OF CREDIT:
The Company has a line of credit (the Line) with a financial institution.
The Line provided for maximum borrowings of $3,000,000 at December 31, 1998, and
increased to $4,000,000 in January 1999. The Line bears interest at the greater
of the bank's prime rate plus 2 percent (10.25 percent as of September 30, 1999)
or 9.75 percent. Interest is payable monthly and the principal balance is
payable upon demand. As of December 31, 1998, and September 30, 1999, amounts
available under the Line were $526,436 and $773,865, respectively. The Line is
collateralized by all furniture, fixtures and equipment and accounts receivable.
The Line is also personally guaranteed by the principal stockholder.
The Company is subject to a borrowing base, which limits Line advances to
90 percent of accounts receivable derived from engineering services. The Line
contains certain non-financial covenants, including restrictions on the use of
funds. As of September 30, 1999, the Company is in compliance with, or had
obtained waivers for non-compliance with, all covenants.
On July 7, 2000, the Company entered into a new $4,000,000 demand revolving
credit loan facility with First National Bank of Florida (the Facility). The
Facility allows the Company to borrow up to 80 percent of their receivables from
engineering sources, excluding commercial film colorization receivables at the
Bank's prime rate plus 2 percent per year. The Facility is personally guaranteed
by the President of the Company.
7. LONG-TERM DEBT:
Long-term debt consisted of the following as of December 31, 1998, and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Notes payable to related parties, bearing interest
at rates ranging from 10 percent to 12 percent,
principal and interest payable monthly, $822,213
secured by revenues from colorization contracts
with the remainder unsecured, maturities
throughout 2000................................. $1,237,167 $2,117,650
Note payable to a financial institution, bearing
interest at 8.75 percent, principal and interest
payable monthly beginning December 25, 1998,
collateralized by furniture, fixtures and
equipment, personally guaranteed by principal
stockholder, matures November 2000.............. 384,669 241,831
Notes payable, bearing interest at rates ranging
from 12 percent to 14.5 percent, interest
payable monthly starting October 1999,
unsecured, maturities throughout 2000........... -- 700,000
</TABLE>
F-16
<PAGE> 101
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Obligations under capital lease................... -- 90,264
---------- ----------
1,621,836 3,149,745
---------- ----------
Less-Current maturities of long-term debt......... (957,766) (2,676,733)
---------- ----------
$ 664,070 $ 473,012
========== ==========
</TABLE>
The remaining balance of long term debt matures during 2001.
8. INCOME TAXES:
Significant components of income tax provision (benefit) are summarized as
follows as of December 31, 1997 and 1998, and September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal................................... $119,775 $ 314,170 $ (415,630)
State..................................... 14,796 38,830 (51,370)
-------- --------- -----------
134,571 353,000 (467,000)
-------- --------- -----------
Deferred:
Federal................................... 39,160 (345,320) (794,770)
State..................................... 4,840 (42,680) (98,230)
-------- --------- -----------
44,000 (388,000) (893,000)
-------- --------- -----------
$178,571 $ (35,000) $(1,360,000)
======== ========= ===========
</TABLE>
Income tax expense differs from the amount computed by applying the U.S.
federal corporate tax rate of 34 percent to income before income tax expense as
follows, as of December 31, 1997 and 1998, and September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Statutory U.S. federal income tax provision
(benefit)................................. $150,315 $ 2,045 $(1,008,580)
Foreign income tax credit................... -- (62,000) (237,948)
Meals and entertainment..................... 9,688 21,346 35,795
State taxes, net of federal benefit......... 18,568 2,795 (149,561)
Other....................................... -- 814 294
-------- -------- -----------
Effective income tax provision
(benefit).............................. $178,571 $(35,000) $(1,360,000)
======== ======== ===========
</TABLE>
F-17
<PAGE> 102
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of the Company's deferred tax assets (liabilities) as of
December 31, 1998, and September 30, 1999, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Net operating loss (NOL) carryforward..................... $ -- $ 751,000
Accrued vacation.......................................... 310,000 513,000
Other accrued expenses.................................... 40,000 --
Investment in equity method............................... 26,000 11,000
Depreciation.............................................. (32,000) (38,000)
-------- ----------
Net deferred tax assets................................. $344,000 $1,237,000
======== ==========
</TABLE>
The Company has federal and state NOL carryforwards which expire in 2014.
In addition, the Company operates in certain countries that have granted tax
holidays as an incentive for providing employment and capital investment. The
tax holidays for these operations will expire at the year end March 31, 2002.
The income tax benefits related to the tax status of these operations were
$62,000 ($0.01 per fully diluted share) and $237,948 ($0.03 per fully diluted
share) for the year ended December 31, 1998 and the period from January 1, 1999
to September 30, 1999, respectively. There were no operations in these countries
during the year ended December 31, 1997.
9. PROFIT SHARING PLAN:
The Company maintains a qualified deferred compensation plan (the Plan)
under Section 401(k) of the Internal Revenue Code (IRC), covering substantially
all employees. Under the Plan, employees may elect to defer up to 15 percent of
their salary, subject to IRC limitations. The Company makes matching
contributions of 50 percent of employee deferrals up to 2 1/2 percent of the
employee's wages. For the years ended December 31, 1997 and 1998, and the
nine-month period ended September 30, 1999, the Company's matching contributions
totaled $294,624, $634,019 and $422,984, respectively. The Plan also allows
discretionary employer profit sharing contributions. As of December 31, 1998,
and September 30, 1999, the Company has accrued $75,000 and $58,000 in
discretionary profit sharing contributions, respectively.
10. SELF-INSURANCE:
The Company has an agreement whereby it is self-insuring the health care of
its employees and covered dependents up to $35,000 per year per employee and
covered dependents. Health care expenses of covered individuals in excess of
$35,000 per year are paid out of insurance purchased by the Company.
Administration of the self-insurance is handled by a third-party administrator.
Provisions for expected future payments are accrued based on the Company's
estimate of its aggregate liability for all open and unreported claims.
Management believes the amount currently accrued is adequate to cover all known
and unreported claims at September 30, 1999. For the years ended December 31,
1997 and 1998, and the nine-month period ended September 30, 1999, the annual
aggregate liability calculated by the insurance company was $1,645,842. The
total amount of claims and premiums paid by the Company under this policy for
years ended December 31, 1997 and 1998, and the nine-month period ended
September 30, 1999, were approximately $79,736, $2,164,000 and $1,458,000,
respectively. The Company had a receivable
F-18
<PAGE> 103
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $518,122 at December 31, 1998, due to advancing more money for claims than
the aggregate liability limit. This amount was collected during 1999.
11. COMMON STOCK:
On January 25, 1999, the Company issued 459,866 shares (adjusted for the
stock splits) of the Company's common stock, at fair value on the date of grant
of approximately $2.45 (adjusted for stock splits) per share, to one of its
senior vice presidents, who is also the Company's corporate secretary.
Concurrent with this issuance, the Company entered into an agreement whereby the
Company loaned $1,125,700 to the corporate secretary for the purchase of this
stock. The loan bears interest at the prime rate (8.25 percent at September 30,
1999) and is payable in full on January 25, 2002. The loan is collateralized by
the shares of common stock purchased by the corporate secretary. The loan has
been classified as a reduction of additional paid-in capital in the accompanying
consolidated financial statements.
On May 10, 1999, the Company issued 114,966 shares (adjusted for the stock
splits) of common stock to a brother of the corporate secretary for consulting
services rendered. The Company recognized consulting expense of approximately
$282,000 for the difference between the issue price and the fair market value of
the common stock at May 10, 1999.
All stockholders of Dynacs, together with the former holders of Cerulean
Colorization, L.L.C., holding shares of common stock of Cerulean, are party to a
registration rights agreement, which provides that if Dynacs proposes to
register any of its securities under the Securities Act, either for its own
account or the account of any of its security holders, the parties to this
agreement are entitled to include their registrable shares in such registration.
However, in the event of a registration pursuant to an underwritten public
offering of common stock, the underwriters have the right to limit the number of
shares included in any registration. These rights terminate for a holder once
the holder at such times as the holder is authorized to sell all of its shares
under Rule 144(k) under the Securities Act.
12. STOCK OPTION PLANS:
As of December 31, 1998, the Company had 3,832,204 outstanding options
granted in 1993 to its President to purchase one share each of the Company's
common stock at $0.02 per share, the fair value at date of grant. During 1999,
the President voluntarily surrendered 3,576,724 outstanding options. At
September 30, 1999, 255,480 (adjusted for the stock splits) options remained
outstanding. The stock options are fully vested and have no expiration date.
On November 12, 1999, the Company implemented a stock incentive program,
the 1999 Long Term Incentive Plan (the Incentive Plan), providing for the
issuance of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, deferred stock, stock purchase rights and
other stock-based awards. The Incentive Plan provides for the issuance of
1,124,113 Shares of the Company's common stock. The terms for any awards under
the Incentive Plan will be set at the time of the award. As of September 30,
1999, no incentive awards have been issued under the Incentive Plan.
F-19
<PAGE> 104
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock options for the year ended December 31,
1998, and the nine-month period ended September 30, 1999, is presented in the
following table:
<TABLE>
<CAPTION>
1998 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding options beginning of year... 3,832,204 $0.02 3,832,204 $0.02
Granted................................. -- -- -- --
Exercised............................... -- -- -- --
Forfeited............................... -- -- 3,576,724 $0.02
Expired................................. -- -- -- --
EOY..................................... 3,832,204 $0.02 255,480 $0.02
</TABLE>
13. NET INCOME PER SHARE:
The following is a reconciliation of the denominator of basic earnings per
share (EPS) to diluted EPS, as shown on the face of the accompanying
consolidated statements of operations for the years ended December 31, 1997 and
1998, and the nine-month period ended September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Basic weighted average common shares............ 6,387,005 6,387,005 6,859,644
Dilutive effect of options outstanding.......... 3,832,204 3,832,204 --
---------- ---------- ---------
Diluted weighted average common and common
equivalent shares............................. 10,219,209 10,219,209 6,859,644
========== ========== =========
</TABLE>
For the nine-month period ended September 30, 1999, the dilutive effect of
options outstanding was 274,685. These shares are not included in the diluted
weighted average common and common equivalent shares shown above as the effect
of these options is anti-dilutive.
14. SEGMENT REPORTING:
The Company operates through two business segments which offer distinct
services. The Company's Information and Applied Technology (IAT) segment
includes engineering and research services provided to government and commercial
entities, primarily in the aerospace industry. The Company's Media and
Entertainment segment, which began in 1996, is engaged in the colorization of
film footage and other media.
F-20
<PAGE> 105
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reportable business segment information is as follows:
<TABLE>
<CAPTION>
INFORMATION AND MEDIA AND
APPLIED TECHNOLOGY ENTERTAINMENT CONSOLIDATED
------------------ ------------- ------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Revenue................................ $26,068,005 $ 892,834 $26,960,839
Depreciation and amortization.......... 83,163 134,452 217,615
Net operating income (loss)............ 774,400 (282,578) 491,822
Purchases of property and equipment.... 177,411 681,564 858,975
Total assets........................... 4,399,665 911,634 5,311,299
DECEMBER 31, 1998
Revenue................................ 59,615,270 1,331,416 60,946,686
Depreciation and amortization.......... 316,386 413,292 729,678
Net operating income (loss)............ 944,841 (667,336) 277,505
Purchases of property and equipment.... 596,474 741,476 1,337,950
Total assets........................... 8,355,656 2,945,401 11,301,057
SEPTEMBER 30, 1999
Revenue................................ 53,896,828 1,398,257 55,295,085
Depreciation and amortization.......... 654,292 411,184 1,065,476
Net operating income (loss)............ 957,772 (3,405,037) (2,447,265)
Purchases of property and equipment.... 400,337 2,151,464 2,551,801
Total assets........................... 9,708,061 4,563,444 14,271,505
</TABLE>
The Company operates in two geographical areas, domestic and international.
As of December 31, 1998, and September 30, 1999, the domestic offices had
long-lived assets of $1,556,510 and $2,895,117, respectively, located throughout
the United States and the international offices had long-lived assets of
$735,189 and of $1,076,120, respectively, located in India and Indonesia. For
the years ended December 31, 1997 and 1998, and the nine-month period ended
September 30, 1999, all sales were to domestic customers.
F-21
<PAGE> 106
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases various office space under non-cancelable operating
leases expiring in 2000 through 2004. Minimum future rental payments under
operating leases as of September 30, 1999, for each of the next five years and
in the aggregate are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
YEAR ENDING SEPTEMBER 30,
2000..................................................... $1,117,284
2001..................................................... 1,129,097
2002..................................................... 1,110,393
2003..................................................... 1,045,212
2004..................................................... 71,993
Thereafter............................................... 3,618
----------
$4,477,597
==========
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998, and the
nine-month period ended September 30, 1999, was $231,000, $1,322,661 and
$1,195,408, respectively, of which approximately $18,807, $69,000 and $72,000,
respectively, relates to rent paid to the Company's nonmajority-owned
investment.
CONTINGENCIES
The Company was in litigation involving the wrongful termination of a
contract for colorization of a full-length feature film. The case was referred
to arbitration. The final arbitration hearing was scheduled for February 2000,
and a final determination was not expected before April 2000. The outcome of
this arbitration was unknown as of September 30, 1999. The amount of the
potential loss for the Company was estimated at $950,000. The amount of
potential gain was estimated at $2,825,000 less any successful claims brought by
the licensor of the colorization software. At that stage in the proceedings,
management believed it was not possible to determine the probable outcome of
this matter and no amounts were recorded in the Company's financial statements
as of December 31, 1998, or September 30, 1999.
In April 2000, a final determination was made requiring payment by the
Company of $370,352. This amount was recorded in general and administrative
expenses during the quarter ended March 31, 2000.
The Company is also involved in various legal actions arising in the normal
course of business. While it is not possible to determine with certainty the
outcome of these matters, in the opinion of management, the eventual resolution
of these claims and actions outstanding will not have a material adverse effect
on the Company's financial position or results of operations.
F-22
<PAGE> 107
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS:
NOTES PAYABLE
In November 1999, the Company issued $500,000 of convertible debt with
109,492 (adjusted for the stock splits) detachable warrants. During January
through March, the Company issued an additional $2,400,000 of convertible debt
with 525,558 (adjusted for the stock splits) detachable warrants. The notes bear
interest at 8 percent for the first 120 days after issuance, then increase to 15
percent. The notes are convertible 120 days after issuance into common stock at
60 percent of the price per share at the date of a liquidity event. A liquidity
event is defined as the Company's registration statement being declared
effective by the Securities and Exchange Commission or the sale of all or
substantially all of the Company's assets. The notes are personally guaranteed
by the Company's principal stockholder and mature 12 months after issuance. The
warrants are exercisable one year after issuance at 70 percent of the price per
share at the date of a liquidity event, as defined. One year after issuance but
prior to a liquidity event, the warrants are exercisable at the fair market
value of common stock, as determined by the Company's Board of Directors (the
Board). The warrants expire five years from the date of issuance or four years
from the date of a liquidity event.
The Company allocated the proceeds from the issuance of the notes payable
between long-term debt and warrants based on the relative fair values of the
debt without the warrants and the warrants themselves at the time of issuance.
The estimated fair value of the warrants was computed based on the application
of the Black-Scholes option pricing model which incorporates current stock
prices, expected stock price volatility, expected interest rates and the
expected holding period of the stock. At the date of issuances, $2,001,000 and
$899,000 were allocated to the long-term debt and warrants, respectively. The
difference between the face amount of the notes payable and the amount allocated
to them has been recorded as a discount on the notes payable. This discount is
being amortized to interest expense over the 12-month term of the debt using the
effective interest method. Interest expense of approximately $152,000 was
recorded during the six-month period ended March 31, 2000.
In addition, the Company has calculated an intrinsic value for the
Beneficial Conversion Feature (BCF) related to these convertible notes payable
of $1,933,333. The BCF was calculated based on the number of shares the notes
payable are convertible into multiplied by the expected discount from fair
market value on the date of conversion. The BCF has not been recognized as of
December 31, 1999, as it is contingent on the occurrence of a liquidity event.
STOCK OPTIONS
In February 2000, the Company committed to grant options to purchase common
stock of the Company to certain nominated directors upon the effective date of
an Initial Public Offering. The nominated directors and consultants will receive
82,727 options at an exercise price equal to the opening price per share upon
the Company's registration statement being declared effective by the SEC. The
options vest ratably over a one to two-year period.
CHANGE IN CORPORATE STRUCTURE
In February 2000, the Board approved a merger of Dynacs Engineering
Company, Inc. into Dynacs Inc., a Delaware Corporation. Dynacs Inc. of Delaware
became the surviving corporation. In conjunction with the merger, the par value
of the Company's preferred and common stock was changed from $.001 to $.01. In
addition, in July 2000 the Company authorized an additional 10 million shares of
common stock
F-23
<PAGE> 108
DYNACS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for a total authorized amount of 25 million shares. The changes in the Company's
name, par values and authorized common stock have been reflected retroactively
in these financial statements.
STOCK SPLITS
On August 11, 1999, March 28, 2000, and July 14, 2000, the Company approved
stock splits, whereby each outstanding share of the Company's common stock was
converted into 1,750, 1.12299 and 1.3 shares of common stock, respectively. The
accompanying consolidated financial statements have been retroactively adjusted
as a result of the stock splits.
GRINBERG ACQUISITION
In May 2000, the Company entered into a non-binding letter of intent to
acquire all of the outstanding common stock of Sherman Grinberg Film Libraries,
Inc. (Grinberg) in exchange for a maximum of 1,085,000 shares of Company common
stock. Under the terms of the letter of intent, the Company and Grinberg will
enter into a definitive stock purchase agreement upon the effective date of the
Company's initial public offering (IPO). In addition, the Company has agreed to
issue 15,000 shares to Film Archive Finance Company, Inc. (Grinberg's parent)
and an executive officer of Film Archive Finance Company, Inc. in exchange for a
covenant not to compete for a period of three years after the closing. The
Company will issue to Grinberg shareholders up to 1,085,000 shares if the
Company's IPO price is $10 or less. Should the Company's stock be priced greater
than $10 at the IPO, the number of shares to be issued to Grinberg will be
reduced on a proportionate basis such that the maximum number of shares issued
to acquire the Grinberg common stock and the non-compete covenant shall not have
a market value in excess of $11,000,000.
The 1,085,000 shares shall be issued to Grinberg upon the occurrence of
certain events. At closing, the Company will issue a maximum of 335,000 shares,
which will be reduced should Grinberg's current liabilities exceed their current
assets by more than $607,000. The Company will issue additional shares, up to a
maximum of 300,000 based on the amount of commercially usable footage in the
film library. The Company has 24 months from closing to complete its evaluation
of the footage. An additional 50,000 shares will be issued for each calendar
year 2001, 2002, 2003 if the Company's gross receipts from the sale of footage
less the Company's colorization costs exceed $400,000, $750,000 and $1,000,000,
respectively. If the Company's gross receipts from the sale of footage
colorized, re-edited and compiled by the Company exceeds $2.0 million in 2001,
$4.0 million in 2002 and $5.0 million in 2003 and 2004, the Company will issue
an additional 75,000 shares each year.
The Grinberg shareholders have agreed to indemnify the Company up to the
value of 767,500 shares issued in the transaction. The initial 335,000 shares
and the 15,000 shares issued for the covenant not to compete are subject to a
twelve-month lock-up agreement. All other shares are subject to a six-month
lock-up agreement.
F-24
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Cerulean Colorization, LLC:
We have audited the accompanying balance sheets of Cerulean Colorization,
LLC (the Company) as of December 31, 1998 and 1997, and the related statements
of income and members' interest and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in
all material respects, the financial position of Cerulean Colorization, LLC as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 30, 1999
F-25
<PAGE> 110
CERULEAN COLORIZATION, LLC
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 436 $ 8,128
Accounts receivable, net of allowance for doubtful
accounts of $96,200 and $45,950, respectively.......... 25,124 38,310
Unbilled revenue.......................................... 140,250 --
Prepaid contracts......................................... 687,790 372,872
Prepaid expenses.......................................... 9,340 --
---------- ----------
Total current assets.............................. 862,940 419,310
---------- ----------
PROPERTY AND EQUIPMENT, net................................. 328,156 615,522
---------- ----------
OTHER ASSETS:
Film library.............................................. 500,000 37,500
Note receivable........................................... 605,000 --
Goodwill, net............................................. 34,670 69,375
Deposits.................................................. 11,000 11,000
---------- ----------
1,150,670 117,875
---------- ----------
$2,341,766 $1,152,707
========== ==========
LIABILITIES AND MEMBERS' INTEREST
CURRENT LIABILITIES:
Short-term borrowings..................................... $ -- $ 125,000
Advance from member....................................... 4,000 130,000
Bank overdraft............................................ 1,091 --
Accounts payable.......................................... 211,346 104,916
Payable to subcontractor.................................. 1,054,283 --
Other payable............................................. 178,500 --
Accrued expenses.......................................... 35,806 29,942
Billings in excess of revenue earned...................... 665,624 718,000
Current portion of capital lease liability................ 8,602 11,764
---------- ----------
Total current liabilities......................... 2,159,252 1,119,622
---------- ----------
CAPITAL LEASE LIABILITY, net of current portion............. -- 8,602
OTHER LIABILITIES........................................... 79,289 68,004
COMMITMENTS AND CONTINGENCIES
MEMBERS' INTEREST........................................... 103,225 (43,521)
---------- ----------
$2,341,766 $1,152,707
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 111
CERULEAN COLORIZATION, LLC
STATEMENTS OF INCOME AND MEMBERS' INTEREST
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUE..................................................... $3,152,752 $ 873,578
COST OF REVENUES............................................ 2,095,089 616,307
---------- ----------
GROSS PROFIT................................................ 1,057,663 257,271
---------- ----------
SELLING, GENERAL AND ADMINISTRATIVE......................... 995,767 1,228,357
---------- ----------
INCOME (LOSS) FROM OPERATIONS............................... 61,896 (971,086)
OTHER INCOME (EXPENSES), net................................ 84,850 (2,435)
---------- ----------
NET INCOME (LOSS)........................................... 146,746 (973,521)
MEMBERS' INTEREST, beginning of period...................... (43,521) 930,000
---------- ----------
MEMBERS' INTEREST, end of period............................ $ 103,225 $ (43,521)
========== ==========
</TABLE>
CERULEAN COLORIZATION, LLC
STATEMENTS OF INCOME AND MEMBERS' INTEREST
FOR THE PERIOD JANUARY 1, 1999 TO AUGUST 13, 1999
<TABLE>
<S> <C>
REVENUE..................................................... $2,810,086
COST OF REVENUE............................................. 1,258,514
----------
GROSS PROFIT................................................ 1,551,572
SELLING, GENERAL AND ADMINISTRATIVE......................... 515,028
----------
INCOME (LOSS) FROM OPERATIONS............................... 1,036,544
OTHER INCOME (EXPENSES), net................................ 1,375
----------
NET INCOME (LOSS)........................................... 1,037,919
MEMBERS' INTEREST, beginning of period...................... 103,225
----------
MEMBERS' INTEREST, end of period............................ $1,141,144
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 112
CERULEAN COLORIZATION, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 146,746 $(973,521)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 323,423 316,394
Loss on sale of property and equipment.................. -- 5,285
Changes in assets and liabilities:
Accounts receivable, net............................. 13,186 (38,310)
Unbilled revenue..................................... (140,250) --
Prepaid contracts.................................... (314,918) (372,872)
Prepaid expenses..................................... (9,340) --
Deposits............................................. -- (11,000)
Bank overdraft....................................... 1,091 --
Accounts payable..................................... 106,430 104,916
Payable to subcontractor............................. 1,054,283 --
Accrued expenses..................................... 5,864 29,942
Billings in excess of revenue earned................. (52,376) 718,000
Other liabilities.................................... 11,285 68,004
---------- ---------
Net cash provided by (used in) operating activities..... 1,145,424 (153,162)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,352) (57,076)
Proceeds from sale of property and equipment.............. -- 4,625
Purchase of film library.................................. (284,000) (37,500)
Cash paid for note receivable............................. (605,000) --
---------- ---------
Net cash used in investing activities................... (890,352) (89,951)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... -- 125,000
Repayments of short-term borrowings....................... (125,000) --
Proceeds from advance from member......................... 138,200 130,000
Repayments of advance from member......................... (264,200) --
Payments of capital lease obligation...................... (11,764) (8,759)
---------- ---------
Net cash (used in) provided by financing activities..... (262,764) 246,241
---------- ---------
Net (decrease) increase in cash......................... (7,692) 3,128
CASH, beginning of period................................... 8,128 5,000
---------- ---------
CASH, end of period......................................... $ 436 $ 8,128
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 5,957 $ 3,759
Cash paid for income taxes................................ $ -- $ --
========== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Acquisition of equipment under a capital lease............ $ -- $ 29,125
Acquisition of film library in exchange for other
payable................................................. $ 178,500 $ --
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 113
CERULEAN COLORIZATION, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
Cerulean Colorization, LLC, (the Company) is a limited liability company
established in December 1996. The Company is engaged in colorization of motion
picture films, television series, commercials, and other films. Many of the
Company's customers are in the entertainment industry and are located primarily
in Southern California.
As discussed in Note 7, in August 1999, Dynacs Engineering Company, Inc.
(Dynacs) of Palm Harbor, Florida acquired all of the membership interests in the
Company through Dynacs' wholly-owned subsidiary, Cerulean FXs, Inc. Prior to the
acquisition, the Company subcontracted colorization projects to Dynacs. After
the acquisition, the Company's operations were absorbed into Dynacs as a part of
Dynacs' colorization line of business and the Company ceased operations as a
separate entity.
The Company incurred a substantial loss in the year ended December 31, 1997
and has a negative working capital of $1,296,312 as of December 31, 1998. Dynacs
and the Company believe that anticipated funds from future operations will be
sufficient to satisfy the Company's projected working capital and capital
expenditure needs. The accompanying financial statements have been presented on
the basis that it is a going concern, which contemplates realization of assets
and satisfaction of debt in the normal course of business. Through the date of
acquisition in August 1999, the Company funded operations primarily with cash
provided by operating activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is an analysis of the activities in the allowance for
doubtful accounts for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Beginning of period...................................... $45,950 $ --
Provision................................................ 50,250 45,950
Write-off's.............................................. -- --
------- -------
End of period............................................ $96,200 $45,950
======= =======
</TABLE>
F-29
<PAGE> 114
CERULEAN COLORIZATION, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated lives of the assets. Property and
equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997 USEFUL LIVES
-------- -------- ------------
<S> <C> <C> <C>
Machinery and equipment............................ $610,235 $608,883 3 to 5 years
Furniture and fixtures............................. 42,568 42,568 3 years
Software........................................... 245,760 245,760 3 years
-------- --------
898,563 897,211
Less -- Accumulated depreciation and
amortization..................................... (570,407) (281,689)
-------- --------
Property and equipment, net........................ $328,156 $615,522
======== ========
</TABLE>
FILM LIBRARY
In May 1997, the Company entered into an agreement with a producer of a
television series and a distributor under which the distributor purchased
exclusive rights throughout the world to exploit the television series,
consisting of 65 episodes, in exchange for a right to the future revenue from
the series. The Company purchased from the producer a right to 50 percent of
such future revenue for $500,000. The Company paid $321,500 of this amount in
cash in the years ended December 31, 1998 and 1997, and the remaining $178,500
was outstanding as of December 31, 1998. This amount bears no interest and is
due on demand. The cost of the film library is to be amortized over the
estimated period of exploitation based on the percentage of revenue received
from the series to total estimated revenue. In the years ended December 31, 1998
and 1997, no revenue was received from the series, and accordingly no
amortization of film library was recorded. Based on the estimated total revenue
from the series, the Company believes that the cost of film library as of
December 31, 1998 is fully realizable.
In connection with the purchase of film library, the Company also loaned
the producer $605,000 in exchange for a note for the purpose of clearing a lien
that was on the series. The note bears interest at 8.50 percent and is payable
to the Company out of the first $605,000 of the producer's 50 percent share of
the future revenue from the series. The note is without recourse. Based on the
estimated total revenue from the series, the Company believes that the balance
of the note as of December 31, 1998 is fully realizable.
The revenue to be received by the Company and the producer is gross
receipts from the series less certain costs as specified in the agreement
including costs of colorization and distribution. The agreement also states that
such colorization of the series is to be performed by the Company for $40,000
per episode. In the year ended December 31, 1998, the Company earned $2,080,000
of the $2,600,000 to be earned in total from such colorization projects.
GOODWILL
In December 1996, the Company acquired certain assets of CST Entertainment,
Inc., CST Featurizations, Inc., and CST Computoons, Inc. (collectively CST) in
exchange for a cash payment of $925,000. The acquisition was accounted for as a
purchase. Accordingly, the purchase price was allocated to the assets acquired
based on their estimated fair market values at the closing date. The excess of
purchase price over the estimated fair value of the assets acquired was recorded
as goodwill, and is being amortized using the straight-line method over a period
of three years. The Company recorded amortization
F-30
<PAGE> 115
CERULEAN COLORIZATION, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of goodwill of $34,705 in the years ended December 31, 1998 and 1997. The
results of operations of the acquired business are included in the accompanying
financial statements since the date of the acquisition.
REVENUE RECOGNITION
The Company generates revenue from colorization of motion picture films,
television series, commercials, and other films. Revenue from long-term
colorization contracts is recognized based on the percentage-of-completion
method measured by the percentage of costs incurred to date to total estimated
costs for each contract. Costs of contracts primarily represent subcontracting
expense to Dynacs. For short-term projects, revenue is recognized upon
completion of the project.
Unbilled revenue and billings in excess of revenue earned result from the
difference between the amounts billed to the customer and the revenue recognized
based on the percentage of completion of the contract, and are analyzed on a
contract-by-contract basis.
Prepaid contracts represent amounts paid or payable to Dynacs in excess of
costs incurred by Dynacs.
SIGNIFICANT CUSTOMER
In the year ended December 31, 1998, one customer accounted for 83 percent
of total revenue.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and
unbilled revenue. As of December 31, 1998 and 1997, approximately 81 percent and
85 percent of accounts receivable were concentrated with one and two customers,
respectively. As of December 31, 1998, all of unbilled revenue was concentrated
with one customer.
INCOME TAXES
The Company is a limited liability company and is treated as a partnership
for Federal and state income tax purposes. Accordingly, the Company's taxable
income or losses are included in the income tax returns of the Company's
members.
3. SHORT-TERM BORROWINGS
In 1997 the Company had a line of credit agreement (the Agreement) with a
bank, which expired in June 1998. Under the Agreement the Company could borrow
up to $125,000. Interest was payable monthly at the rate of 1.75 percent per
annum over the prime rate (8.50 percent at December 31, 1997). The balance
outstanding under the Agreement at December 31, 1997 was $125,000, which was
repaid in full in the year ended December 31, 1998. Borrowings under the
Agreement were collateralized by substantially all of the Company's assets.
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and a phone system under non-cancelable
operating leases, which expire in various years through 2002. Rental expense was
approximately $84,000 and $100,000 for the
F-31
<PAGE> 116
CERULEAN COLORIZATION, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
years ended December 31, 1998 and 1997, respectively. As of December 31, 1998,
future minimum rental payments under the non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999....................................................... $145,000
2000....................................................... 138,000
2001....................................................... 138,000
2002....................................................... 16,000
--------
$437,000
========
</TABLE>
LITIGATION
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the information presently available, management believes
that the ultimate resolution of any such proceedings will not have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
5. MEMBERS' INTEREST
Pursuant to terms of the Company's operating agreement, no member is liable
to creditors of the Company, or shall be required to make additional capital
contributions to the Company or to restore all or any portion of a deficit
balance in such member's capital account with the Company. The operating term of
the Company expires in December 2025.
6. RELATED PARTY TRANSACTIONS
The Company had an advance from member of $4,000 and $130,000 as of
December 31, 1998 and 1997, respectively.
The Company subleases office space to another company owned by a member and
charges rent, utilities and phone expenses to the subleasee. Such expenses
charged to the subleasee were $94,000 and $16,000 for the years ended December
31, 1998 and 1997, respectively, and were offset against the Company's expenses.
7. SUBSEQUENT EVENT
In August 1999, the Company entered into an agreement with Cerulean FXs,
Inc. pursuant to which Cerulean FXs, Inc. acquired all of the membership
interests of the Company and issued to the Cerulean members (Cerulean Members)
20 percent of the shares of Cerulean FXs, Inc. The shares issued are
exchangeable at the option of the Cerulean members into 912,064 shares of Dynacs
common stock upon the occurrence of certain events or they will automatically
convert upon an effective registration statement filing with the Securities and
Exchange Commission by Dynacs. In addition, the Cerulean Members of the Company
will receive stock options to purchase 255,480 of Dynacs' common stock when the
first stock option is granted under Dynacs' 1999 Long-Term Incentive Plan, and
will also receive stock options to purchase additional 51,097 shares if, within
three years of the date of the agreement, certain performance goals, as defined
in the agreement, are met. After the acquisition, the Company's operations were
absorbed into Dynacs as a part of Dynacs' colorization line of business and the
Company ceased operations as a separate entity.
F-32
<PAGE> 117
INDEPENDENT AUDITOR'S REPORT
Shareholder
Sherman Grinberg Film Libraries, Inc.
We have audited the accompanying balance sheets of Sherman Grinberg Film
Libraries, Inc. as of June 30, 1997, 1998 and 1999 and the related statements of
operations, changes in stockholder's equity and cash flows for each of the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sherman Grinberg Film
Libraries, Inc. as of June 30, 1997, 1998 and 1999 and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has negative working capital and has sustained
significant operating losses in recent years that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
YOHALEM, GILLMAN & COMPANY, LLP
New York, New York
March 30, 2000
F-33
<PAGE> 118
SHERMAN GRINBERG FILM LIBRARIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------- MARCH 31,
1997 1998 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................ $ 36,706 $ 25,130 $ 41,994 $ 7,992
Accounts receivable -- net.......... 94,366 149,604 101,161 41,973
Prepaid expenses and other current
assets........................... 40,361 36,193 42,815 39,099
----------- ----------- ----------- -----------
Total current assets........ 171,433 210,927 185,970 89,064
FILM LIBRARY, NET..................... 6,613,077 6,218,329 5,823,581 5,527,520
GOODWILL, NET......................... 1,247,942 1,172,185 1,096,428 1,039,611
OTHER ASSETS
Property, equipment and
improvements, net................ 152,538 103,746 64,504 50,524
Restricted cash -- escrow........... 200,000 200,000 200,000 200,000
----------- ----------- ----------- -----------
352,538 303,746 264,504 250,524
----------- ----------- ----------- -----------
$ 8,384,990 $ 7,905,187 $ 7,370,483 $ 6,906,719
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.................... $ 223,384 $ 212,508 $ 202,546 $ 241,721
Royalties payable................... 628,834 606,676 606,676 606,676
Due to Parent....................... 754,943 754,943 -- --
----------- ----------- ----------- -----------
Total current liabilities... 1,607,161 1,574,127 809,222 848,397
----------- ----------- ----------- -----------
DEFERRED INCOME TAXES................. 1,716,736 1,479,421 1,174,868 904,995
STOCKHOLDER'S EQUITY
Common stock, $100 par value, 2,000
shares authorized; 53.59 shares
issued and outstanding........... 5,359 5,359 5,359 5,359
Additional paid-in capital.......... 6,713,200 6,891,019 7,901,309 8,081,309
Accumulated deficit................. (1,657,466) (2,044,739) (2,520,275) (2,933,341)
----------- ----------- ----------- -----------
Total stockholder's
equity................... 5,061,093 4,851,639 5,386,393 5,153,327
----------- ----------- ----------- -----------
$ 8,384,990 $ 7,905,187 $ 7,370,483 $ 6,906,719
=========== =========== =========== ===========
</TABLE>
See accompanying notes and independent auditor's report.
F-34
<PAGE> 119
SHERMAN GRINBERG FILM LIBRARIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JUNE 30, ENDED
--------------------------------------- MARCH 31,
1997 1998 1999 2000
----------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................ $ 999,259 $ 861,195 $ 337,983 $ 318,937
DIRECT COSTS............................ 256,562 156,270 75,960 40,870
OTHER OPERATING EXPENSES................ 1,173,151 810,216 522,015 579,148
----------- ---------- ---------- ----------
1,429,713 966,486 597,975 620,018
LOSS BEFORE ITEMS SHOWN BELOW........... (430,454) (105,291) (259,992) (301,081)
AMORTIZATION AND DEPRECIATION........... 525,553 519,297 520,097 381,858
----------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES................ (956,007) (624,588) (780,089) (682,939)
INCOME TAX BENEFIT...................... 380,620 237,315 304,553 269,873
----------- ---------- ---------- ----------
NET LOSS................................ $ (575,387) $ (387,273) $ (475,536) $ (413,066)
=========== ========== ========== ==========
Basic and diluted loss per common
share................................. $(10,736.84) $(7,226.59) $(8,873.60) $(7,707.89)
=========== ========== ========== ==========
Basic and diluted weighted average
common shares......................... 53.59 53.59 53.59 53.59
=========== ========== ========== ==========
</TABLE>
See accompanying notes and independent auditor's report.
F-35
<PAGE> 120
SHERMAN GRINBERG FILM LIBRARIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996............. 53.59 $5,359 $6,226,976 $(1,082,079) $5,150,256
Capital contributions........... 486,224 486,224
Net loss........................ (575,387) (575,387)
----- ------ ---------- ----------- ----------
BALANCE, JUNE 30, 1997............ 53.59 5,359 6,713,200 (1,657,466) 5,061,093
Capital contributions........... 177,819 177,819
Net loss........................ (387,273) (387,273)
----- ------ ---------- ----------- ----------
BALANCE, JUNE 30, 1998............ 53.59 5,359 6,891,019 (2,044,739) 4,851,639
Capital contributions........... 255,347 255,347
Conversion of stockholder debt
to equity.................... 754,943 754,943
Net loss........................ (475,536) (475,536)
----- ------ ---------- ----------- ----------
BALANCE, JUNE 30, 1999............ 53.59 5,359 7,901,309 (2,520,275) 5,386,393
Capital contributions
(unaudited).................. 30,000 30,000
Expenses paid by Parent on
behalf of the Company
(unaudited).................. 150,000 150,000
Net loss (unaudited)............ (413,066) (413,066)
----- ------ ---------- ----------- ----------
BALANCE, MARCH 31, 2000
(UNAUDITED)..................... 53.59 $5,359 $8,081,309 $(2,933,341) $5,153,327
===== ====== ========== =========== ==========
</TABLE>
See accompanying notes and independent auditor's report.
F-36
<PAGE> 121
SHERMAN GRINBERG FILM LIBRARIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JUNE 30, ENDED
----------------------------------- MARCH 31,
1997 1998 1999 2000
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss................................. $(575,387) $(387,273) $(475,536) $(413,066)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization and depreciation......... 525,553 519,297 520,097 381,858
Expenses paid by Parent on behalf of
the Company......................... -- -- -- 150,000
Income tax benefit.................... (380,620) (237,315) (304,553) (269,873)
Provision for doubtful accounts....... 71,495 (24,000) 62,000 94,000
Deferred income....................... (119,249) -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................. 226,387 (31,238) (13,557) (34,812)
Prepaid expenses and other current
assets........................... (24,979) 4,168 (6,622) 3,716
Accounts payable.................... (278,838) (10,875) (9,962) 39,175
Royalties payable................... 69,843 (22,159) -- --
--------- --------- --------- ---------
Net cash used in operating
activities.................... (485,795) (189,395) (228,133) (49,002)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................... (5,500) -- (10,350) (15,000)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions.................... 486,224 177,819 255,347 30,000
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............ (5,071) (11,576) 16,864 (34,002)
Cash -- beginning of year.................. 41,777 36,706 25,130 41,994
--------- --------- --------- ---------
CASH -- END OF YEAR........................ $ 36,706 $ 25,130 $ 41,994 $ 7,992
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Income taxes.......................... $ 16,429 $ 9,868 $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans from Parent converted to capital... -- -- 754,943 --
</TABLE>
See accompanying notes and independent auditor's report.
F-37
<PAGE> 122
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND 1999
1. OPERATION, ORGANIZATION AND BASIS OF PRESENTATION
Sherman Grinberg Film Libraries, Inc. ("SGFL" or the "Company"), a
wholly-owned subsidiary of Film Archive Finance Company, Inc. ("FAFC"), licenses
the news and stock footage from its film library, primarily the Pathe and
Paramount news libraries, to television networks, independent producers and
other customers throughout the United States, Europe and Canada. The Company
also licenses stock footage from other film libraries it represents.
On April 15, 1994, the Company was acquired by Sequent Communications, Inc.
("Sequent"), which subsequently changed its name to Timespan Communications,
Inc. ("Timespan"). That change in ownership resulted in a new basis of
accounting for the purchased assets and liabilities (see Note 3). The
collateralized loan that was obtained by Sequent for the acquisition was
extinguished in 1999 upon transfer of ownership of the Company to FAFC, a
corporation which was formed and funded by substantially all the shareholders of
Timespan. (Sequent, Timespan and FAFC are also referred to herein as the
"Parent".) The aforementioned debt and its extinguishment have not been
"pushed-down" to the Company's financial statements.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. In 1996, the Company lost a major film
library it represented, and from that point through June 30, 1999, the Company
sustained significant operating losses resulting in negative working capital
that raise substantial doubt about its ability to continue as a going concern.
Management has taken measures to reduce operating costs and plans to sell the
Company to an enterprise which intends to raise capital for the purpose of
preserving, modernizing and marketing the film library. Furthermore, until such
sale is consummated, FAFC (the current Parent) has committed to financially
support the Company at least through June 30, 2000. The continued operation of
the Company is dependent upon its ability to raise capital as described above
and operate profitably in the future. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FILM LIBRARY AND GOODWILL
The film library and goodwill are stated at the amounts assigned to them in
1994 (see Note 3) plus subsequent additions at cost, and are being amortized
over 20 years on a straight-line basis.
REVENUE RECOGNITION
Library revenue is recognized when the film footage is delivered to the
customer.
INCOME TAXES
The Company files consolidated tax returns with its Parent. Current and
deferred income taxes in these financial statements are recorded as though the
Company were a separate taxpayer.
Deferred income taxes are computed under Statement of Financial Accounting
Standards No. 109, (SFAS 109) "Accounting for Income Taxes". SFAS 109 requires
use of the liability method for computing deferred income taxes. Under this
method, deferred tax liabilities are recognized for taxable temporary
differences and deferred tax assets are recognized for deductible temporary
differences and net operating loss carryforwards. A valuation allowance reduces
deferred tax assets if it is more likely than not that all, or some portion,
will not be realized.
F-38
<PAGE> 123
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Because the Company will be included in a consolidated tax return, the
amounts of any deferred taxes represent amounts due to the Parent.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. When assets are sold or
retired, the cost and related accumulated depreciation are eliminated from the
accounts, and any resulting gain or loss is reflected in income for the year.
The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and replacements which substantially extend the lives of
the assets are capitalized.
Depreciation is computed on both the straight-line and accelerated methods
over the following useful lives:
<TABLE>
<CAPTION>
DESCRIPTION DEPRECIABLE LIFE
----------- ----------------
<S> <C>
Leasehold and improvements.................................. Life of Lease
Machinery and equipment..................................... 3 - 7 years
Computer equipment.......................................... 3 years
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. FILM LIBRARY AND GOODWILL
On April 15, 1994, Sequent purchased the Company for $5,812,000 in a
business combination accounted for under the purchase method. Accordingly under
"push-down" accounting, the assets and liabilities of SGFL were restated and
recorded at their estimated fair values at the date of acquisition, including
$7,735,000, which was assigned as the fair value of the film library and
$3,400,000 which was assigned to the deferred income taxes payable on the
difference between the fair value of the film library and its tax basis to the
Company. The total consideration paid exceeded the fair values of net assets
acquired by approximately $1,500,000, which was allocated to goodwill.
The Pathe Film Library was included in the acquisition. The Company owns a
one-half interest and has the sole exclusive license, in perpetuity, to operate
the Pathe News Library for $1,250 per month.
F-39
<PAGE> 124
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of the film library and goodwill at June 30, 1997,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Film library................................... $7,894,903 $7,894,903 $7,894,903
Accumulated amortization....................... 1,281,826 1,676,574 2,071,322
---------- ---------- ----------
$6,613,077 $6,218,329 $5,823,581
========== ========== ==========
Goodwill....................................... $1,498,197 $1,498,197 $1,498,197
Accumulated amortization....................... 250,255 326,012 401,769
---------- ---------- ----------
$1,247,942 $1,172,185 $1,096,428
========== ========== ==========
</TABLE>
Amortization of the film library and goodwill for the years ended June 30,
1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Film library........................................ $394,748 $394,748 $394,748
Goodwill............................................ 75,757 75,757 75,757
-------- -------- --------
$470,505 $470,505 $470,505
======== ======== ========
</TABLE>
Substantially all of the Company's film library consists of nitrate-based
film which is extremely flammable and subject to chemical deterioration as it
ages. Physical changes are not always apparent and are usually identified when
footage is viewed. It is therefore reasonably possible that the Company's
estimate of the useful life of the library (see Note 2) could change
significantly within the ensuing year. Management estimates that the capital and
maintenance costs to be incurred to preserve the library in its current
condition are approximately $3 million.
The consideration for the 1999 transfer of ownership of the Company to FAFC
(see Note 1) was approximately $5.1 million. Management believes that such
valuation does not reflect any impairment of the carrying amount of the film
library and related goodwill.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property and equipment at June 30, 1997, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Furniture and fixtures............................ $ 94,039 $ 94,039 $ 94,039
Library equipment................................. 199,638 199,638 209,988
Office and computer equipment..................... 378,026 378,026 378,026
Leasehold improvements............................ 319,353 319,353 319,353
-------- -------- ----------
991,056 991,056 1,001,406
Less accumulated depreciation and amortization.... 838,518 887,310 936,902
-------- -------- ----------
$152,538 $103,746 $ 64,504
======== ======== ==========
</TABLE>
F-40
<PAGE> 125
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of property, equipment and improvements
amounted to $55,048, $48,792 and $49,452 for the years ended June 30, 1997, 1998
and 1999, respectively.
5. INCOME TAXES
The Company's income tax benefit for the years ended June 30, 1997, 1998
and 1999 consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current -- federal.................................. $ -- $ -- $ --
-- state and local......................... -- -- --
Deferred -- federal................................. 257,385 160,479 205,946
-- state and local........................ 123,235 76,836 98,607
-------- -------- --------
$380,620 $237,315 $304,553
======== ======== ========
</TABLE>
The Company's effective income tax rate differs from the federal statutory
rate as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
--------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Pretax loss......................... $ 956,007 100 $ 624,588 100 $ 780,089 100
Tax (benefit) at federal statutory
rate.............................. (325,042) (34) (212,360) (34) (265,230) (34)
State and local income tax, net of
federal tax benefit............... (88,335) (9) (57,712) (9) (72,080) (9)
Goodwill............................ 32,757 3 32,757 5 32,757 4
--------- --- --------- --- --------- ---
$(380,620) (40) $(237,315) (38) $(304,553) (39)
========= === ========= === ========= ===
</TABLE>
Deferred taxes reflect temporary timing differences in the recognition of
certain assets and liabilities for financial accounting and income tax purposes.
At June 30, 1997, 1998 and 1999, the components of net deferred tax liability
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liability relating to the Film library.... $3,108,412 $2,922,767 $2,737,122
Deferred tax asset relating to:
Net operating loss carryforwards..................... 1,122,289 1,198,519 1,306,827
State taxes.......................................... 188,984 162,860 129,333
Accounts receivable, net............................. 71,040 59,520 89,280
Property, equipment and improvements................. 9,363 22,447 36,814
---------- ---------- ----------
1,391,676 1,443,346 1,562,254
---------- ---------- ----------
Net deferred tax liability............................. $1,716,736 $1,479,421 $1,174,868
========== ========== ==========
</TABLE>
The Company has net operating loss carryforwards at June 30, 1999, totaling
approximately $2,700,000, expiring through the year 2019.
F-41
<PAGE> 126
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The parent has not filed consolidated tax returns for the years ended June
30, 1998 and 1999.
6. ROYALTIES PAYABLE
Prior to July 1, 1997, the Company recorded royalties payable of
approximately $629,000 in connection with certain film libraries it represented.
Such royalties remain unpaid for several years.
7. MULTIEMPLOYER PENSION PLANS
The Company participated in two multiemployer pension plans under
collective bargaining agreements with the National Association of Broadcast
Employees & Technicians and Communications Workers of America (NABET) and the
International Alliance of Theatrical Stage Employees, Moving Picture
Technicians, Artists and Allied Crafts of the United States and Canada
(I.A.T.S.E.). Under the NABET agreement, which expired on January 18, 1998, and
the I.A.T.S.E. agreement, which was terminated effective July 1, 1997, the
Company was required to contribute based on hours worked by eligible employees.
Pension and welfare contributions charged to operations under these plans
approximated $16,000 and $10,000 for the years ended June 30, 1997 and 1998,
respectively.
8. RELATED PARTY TRANSACTIONS
DUE TO PARENT
Due to Parent represents amounts advanced to the Company by Timespan for
working capital purposes in prior years. In 1999, these loans were converted to
capital (see Note 9).
MANAGEMENT SERVICES PROVIDED BY PARENT
Management of the Company during 1997 and 1998 was directed by certain
officers and key employees of Timespan/Sequent. The compensation and benefits
for such services were absorbed by the parent and not charged to the Company,
and, accordingly, no amounts therefor are included in these financial
statements.
9. ADDITIONAL PAID-IN CAPITAL
During the years ended June 30, 1997, 1998 and 1999, Timespan and FAFC made
advances to the Company amounting to $486,224, $177,819 and $255,347,
respectively. Such advances were recorded as additional paid-in capital. In
addition, during 1999, the Company converted loans from Timespan totaling
$754,943 to additional paid-in capital.
10. COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
Restricted cash consists of cash held in escrow to satisfy certain
contingent obligations in connection with the purchase of the Company by
Sequent.
LEASES
The Company conducts its operations in New York and Los Angeles under
noncancellable leases which expire in May and July 2000, respectively. The
Company agreed to sublet a portion of the New York premises from May 1998
through May 2000 at $3,600 for the first year and $37,200 per year thereafter.
Rental commitments (excluding subrentals) in the year 2000, the remaining terms
of these
F-42
<PAGE> 127
SHERMAN GRINBERG FILM LIBRARIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
leases, amount to $98,767. Rent expense charged to operations for the years
ended June 30, 1997, 1998 and 1999 amounted to $144,396, $100,524 and $102,132,
respectively. Subrental income in 1998 and 1999 amounted to $6,000 and $36,000,
respectively.
11. OTHER FINANCIAL INFORMATION
During 1998 and 1999, 28% and 31%, respectively, of the Company's revenues
were derived from one customer.
The Company's allowance for doubtful accounts at June 30, 1997, 1998 and
1999 amounted to $148,000, $124,000 and $186,000, respectively.
12. INTERIM FINANCIAL INFORMATION
As is normal and customary, the interim financial statements as of March
31, 2000 and the nine months then ended, are unaudited and certain information
normally included in the financial statements prepared in accordance with
generally accepted accounting principles has not been included herein. In the
opinion of management, all adjustments necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements have been property included. The results of operations for
the interim period are not necessarily indicative of the results that will be
realized for the entire fiscal year.
F-43
<PAGE> 128
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Consolidated Financial Statements") are based on the historical
financial statements of Dynacs Inc. as of and for the nine month period ended
September 30, 1999, and as of and for the six month period ended March 31, 2000,
adjusted to give effect to the transactions described below. The Pro Forma
Consolidated Statement of Operations give effect to the following transactions
as if they had occurred on January 1, 1999: (i) the acquisition of Cerulean
Colorization LLC,(ii) the acquisition of Sherman Grinberg Film Libraries, Inc.,
(iii) the issuance of the "Mezzanine Notes", (iv) conversion of the Mezzanine
Notes, (v) the exercise of warrants issued in connection with the Mezzanine
Notes, and (vi) the use of certain proceeds from the Offering. The Pro Forma
Consolidated Balance Sheet gives effect to the following transactions as if they
had occurred on March 31, 2000: (i) the acquisition of Sherman Grinberg Film
Libraries, Inc., (ii) the receipt of the proceeds of the offering, (iii) the use
of certain proceeds from the Offering, (iv) the conversion of the Mezzanine
Notes, (v) the exercise of warrants issued in connection with the Mezzanine
Notes, and (vi) the exercise of options by the Company's President.
The Pro Forma Consolidated Financial Statements do not purport to represent
what Dynacs' results of operations or financial condition would have been had
the events actually occurred on the dates indicated or to predict Dynacs'
results of operations or financial condition in the future. These statements are
qualified in their entirety by, and should be read in conjunction with, the
historical financial statements of Dynacs and the notes thereto included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Pro Forma Consolidated Financial Statements give effect only to the
adjustments set forth in the accompanying notes and do not reflect any other
benefits anticipated by management as a result of the Cerulean Colorization LLC
acquisition, the Sherman Grinberg Film Libraries, Inc. acquisition and the
implementation of its business strategy.
F-44
<PAGE> 129
DYNACS INC.
PRO FORMA CONSOLIDATED BALANCE SHEET -- MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
DYNACS GRINBERG PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- -----------
(a)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash Equivalents................. $ -- $ 7,992 $25,355,110(c)(d)(h) $25,363,102
Accounts receivable....................... 5,745,964 41,973 -- 5,787,937
Unbilled revenue.......................... 1,314,138 -- -- 1,314,138
Prepaid expenses.......................... 365,975 39,099 -- 405,074
Deferred tax assets....................... 787,000 -- -- 787,000
----------- ----------- ----------- -----------
Total current assets............... 8,213,077 89,064 25,355,110 33,657,251
PROPERTY AND EQUIPMENT, net................. 2,988,324 50,524 -- 3,038,848
FILM LIBRARY AND PRODUCTION COSTS, net...... 1,045,905 5,527,520 2,272,480(a) 8,845,905
NOTES RECEIVABLE............................ 765,558 -- -- 765,558
DEFERRED TAX ASSET.......................... 636,000 -- -- 636,000
GOODWILL.................................... 1,039,611 2,519,198(a) 3,558,809
OTHER ASSETS................................ 801,289 200,000 150,000(a) 1,151,289
----------- ----------- ----------- -----------
Total assets....................... $14,450,153 $ 6,906,719 $30,296,788 $51,653,660
=========== =========== =========== ===========
CURRENT LIABILITIES
Accounts payable.......................... $ 2,151,579 $ 241,721 $ -- 2,393,300
Accrued expenses.......................... 4,149,865 606,676 -- 4,756,541
Line of credit borrowings................. 2,026,693 -- -- 2,026,693
Current portion of long-term debt......... 3,754,174 -- (3,389,060)(b)(d) 365,114
----------- ----------- ----------- -----------
Total current liabilities.......... 12,082,311 848,397 (3,389,060) 9,541,648
Long-term debt, net of current maturities... 111,940 -- (111,940)(b)(d) --
MINORITY INTEREST........................... 393,452 -- (393,452)(e) --
Deferred tax liability...................... -- 904,995 (904,995)(a) --
STOCKHOLDERS' EQUITY
Common stock.............................. 69,618 5,359 58,501(a)(c)(e) 133,478
(f)(g)(h)
Additional paid-in capital................ 3,858,136 8,081,309 32,104,393(a)(b)(c)(e) 44,043,838
(f)(g)(h)
Note receivable for common stock.......... (1,125,700) -- (1,125,700)
Accumulated other comprehensive loss...... (119) -- -- (119)
Retained earnings......................... (939,485) (2,933,341) 2,933,341(a) (939,485)
----------- ----------- ----------- -----------
Total stockholders' equity......... 1,862,450 5,153,327 35,096,235 42,112,012
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity........................... $14,450,153 $ 6,906,719 $30,296,788 $51,653,660
=========== =========== =========== ===========
</TABLE>
F-45
<PAGE> 130
DYNACS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DYNACS GRINBERG CERULEAN PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
(b) (a)
<S> <C> <C> <C> <C> <C>
REVENUES:
Information and applied
technology................. $53,896,828 $ -- $ -- $ -- $53,896,828
Media and entertainment....... 1,398,257 311,170 2,810,086 (1,258,514)(a) 3,260,999
----------- --------- ---------- ----------- -----------
Total revenues........ 55,295,085 311,170 2,810,086 (1,258,514) 57,157,827
COST OF REVENUES:
Information and applied
technology................. 51,233,756 -- -- -- 51,233,756
Media and entertainment....... 3,063,995 60,301 1,258,514 (1,258,514)(a) 3,124,296
----------- --------- ---------- ----------- -----------
Total cost of
revenues........... 54,297,751 60,301 1,258,514 (1,258,514) 54,358,052
GROSS PROFIT.................... 997,334 250,869 1,551,572 -- 2,799,775
GENERAL AND ADMINISTRATIVE
EXPENSES...................... 3,444,599 766,554 515,028 (184,547)(b) 4,541,634
----------- --------- ---------- ----------- -----------
OPERATING INCOME (LOSS)......... (2,447,265) (515,685) 1,036,544 184,547 (1,741,859)
INTEREST EXPENSE (INCOME),
net........................... 491,279 -- (1,375) 3,142,550(c)(d) 3,632,454
LOSS ON EQUITY METHOD
INVESTMENT.................... 27,867 -- -- -- 27,867
----------- --------- ---------- ----------- -----------
LOSS BEFORE INCOME TAX.......... (2,966,411) (515,685) 1,037,919 (2,958,003) (5,402,180)
INCOME TAX BENEFIT.............. 1,360,000 242,234 -- 882,769(e) 2,485,003
----------- --------- ---------- ----------- -----------
NET (LOSS)...................... $(1,606,411) $(273,451) $1,037,919 $(2,075,234) $(2,917,177)
=========== ========= ========== =========== ===========
PRO FORMA NET LOSS, PER COMMON
SHARE -- BASIC................ $ (0.29)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN
COMPUTING PRO FORMA NET LOSS
PER SHARE -- BASIC............ 10,238,231
===========
</TABLE>
F-46
<PAGE> 131
DYNACS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
TOTAL
DYNACS GRINBERG PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
(a)
<S> <C> <C> <C> <C>
REVENUES:
Information and applied
technology............... $35,708,540 $ -- $ -- $35,708,540
Media and entertainment..... 902,902 204,212 -- 1,107,114
----------- --------- --------- -----------
Total revenues...... 36,611,442 204,212 -- 36,815,654
COST OF REVENUES:
Information and applied
technology............... 31,798,637 -- -- 31,798,637
Media and entertainment..... 1,722,728 25,991 -- 1,748,719
----------- --------- --------- -----------
Total cost of
revenues......... 33,521,365 25,991 -- 33,547,356
GROSS PROFIT.................. 3,090,077 178,221 -- 3,268,298
GENERAL AND ADMINISTRATIVE
EXPENSES.................... 3,052,803 707,491 (119,489)(a) 3,640,805
----------- --------- --------- -----------
OPERATING INCOME (LOSS)....... 37,274 (529,270) 119,489 (372,507)
INTEREST EXPENSE, net......... 543,361 -- 82,500(b) 625,861
LOSS ON EQUITY METHOD
INVESTMENT.................. 23,223 -- -- 23,223
----------- --------- --------- -----------
LOSS BEFORE INCOME TAX........ (529,310) (529,270) 36,989 (1,021,591)
INCOME TAX BENEFIT............ 186,000 179,915 (14,056)(c) 351,859
----------- --------- --------- -----------
NET LOSS...................... $ (343,310) (349,355) $ 22,933 $ (669,732)
=========== ========= ========= ===========
PRO FORMA NET LOSS, PER COMMON
SHARE BASIC................. $ (0.06)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN
COMPUTING PRO FORMA NET LOSS
PER SHARE -- BASIC.......... 10,497,765
===========
</TABLE>
F-47
<PAGE> 132
DYNACS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The accompanying pro forma information presents the pro forma financial
position of Dynacs Inc. and subsidiaries (the Company) as of March 31, 2000, and
the pro forma results of operations for the nine-month period ended September
30, 1999, and the six-month period ended March 31, 2000.
The historical financial statements of the Company were derived from the
consolidated balance sheet as of March 31, 2000 and the consolidated statements
of income for the nine-, and six-month periods ended September 30, and March 31,
2000. See the Consolidated Financial Statements and notes thereto for the
Company included elsewhere in the Prospectus.
2. ACQUISITION OF CERULEAN COLORIZATION LLC:
During 1999, the Company established Cerulean FXs, Inc., a wholly-owned
subsidiary. On August 13, 1999, Cerulean FXs, Inc. acquired all of the
membership interests in Cerulean Colorization LLC and issued to its members 20
percent of the shares of Cerulean FXs, Inc. (the Cerulean Members). The shares
issued in the exchange were valued at $1,967,262 and are exchangeable at the
option of the Cerulean Members into 912,064 shares of Dynacs common stock, upon
certain events or automatically convert upon the Company's registration
statement being declared effective by the Securities and Exchange Commission
(SEC). The acquisition has been accounted for under the purchased method of
accounting.
3. PROPOSED ACQUISITION OF SHERMAN GRINBERG FILM LIBRARIES, INC.
During May 2000, the company entered into a non-binding letter of intent to
acquire Sherman Grinberg Film Libraries, Inc. (Grinberg) in exchange for a
maximum of 1,100,000 shares of Company stock. Under the terms of the letter of
intent, the Company and Grinberg will enter into a definitive stock purchase
agreement upon the effective date of the Company's initial public offering. The
acquisition has been accounted for under the purchased method of accounting.
4. ADJUSTMENTS TO THE PRO FORMA CONSOLIDATED BALANCE SHEET:
(a) Reflects the proposed acquisition of Grinberg and assumes the issuance
of the maximum number of shares under the letter of intent. Under the proposed
acquisition assets and liabilities were adjusted to their fair market value as
follows:
<TABLE>
<S> <C>
Film library...................................... $2,272,480
Other assets...................................... $ 150,000
Goodwill.......................................... $2,519,198
Deferred tax liabilities.......................... $ (904,955)
</TABLE>
In addition, Grinberg's existing common stock of $5,359, additional paid-in
capital of $8,081,309 and accumulated deficit of ($2,933,341) were eliminated.
The 1,100,000 shares issued by the Company to the sellers were valued at
$11,000,000 and resulted in common stock of $11,000 and additional paid in
capital of $10,989,000 being recorded.
(b) Reflects the revaluation of the discount on the Mezzanine loans related
to the detachable warrants (348,000) and the beneficial conversion feature
($1,653,000) which have been included as an increase in additional paid in
capital.
(c) Reflects the issuance of 3,000,000 shares of common stock related to
the proposed offering based on an offering price of $10 per common share less
offering costs of $3,150,000. The issuance
F-48
<PAGE> 133
DYNACS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
results in an increase of $30,000 and $26,820,000 in common stock and additional
paid-in capital, respectively.
(d) Reflects the use of $1,500,000 proceeds of the proposed offering to
repay certain long-term debt outstanding as of March 31, 2000.
(e) Reflects the issuance of 912,064 shares of common stock to sellers of
the equity interest in Cerulean Colorization, LLC upon closing of this offering
and a reclassification of the $393,452 minority interest into $9,121 of common
stock and $384,331 of additional paid in capital.
(f) Reflects the conversion of the Mezzanine Notes into 483,334 shares of
common stock resulting in an increase in common stock of $4,833 and a decrease
in additional paid-in-capital of $4,833.
(g) Reflects the exercise of warrants issued in connection with the
Mezzanine Notes into 635,050 shares of common stock resulting in an increase in
common stock of $6,351 and a decrease in additional paid-in-capital of $6,351.
(h) Reflects the exercise of options to purchase 255,480 shares of common
stock by the Company's President at $.02 per share. Results in an increase in
cash of $5,110, an increase in common stock of $2,555 and an increase in
additional paid in capital of $2,555.
5. ADJUSTMENTS TO THE PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE-MONTHS ENDED SEPTEMBER 30, 1999:
(a) Reflects the inclusion of the operations of Cerulean FX, Inc. from
January 1, 1999 to August 13, 1999, the date of acquisition. During the period
from January 1, 1999 to August 13, 1999, Cerulean FX, Inc. outsourced all
colorization work to the Company. The pro forma adjustments eliminate $1,258,514
of revenue and the associated cost of colorization revenue incurred by the
Company for Cerulean FX, Inc.
(b) Reflects the inclusion of the operations of Grinberg under the proposed
acquisition from January 1, 1999 to September 30, 1999. The pro forma
adjustments include the elimination of $348,009 of depreciation and amortization
and the amortization of purchase goodwill of $125,962 and the non-compete
agreement of $37,500.
(c) Reflects the increase in interest expense related to the issuance of
the Mezzanine Notes as of January 1, 1999 to the date of assumed conversion on
April 30, 1999, 120 days after issuance. Interest expense includes interest of
$76,300, amortization of discount of $1,247,000, amortization of beneficial
conversion feature of $1,653,000 and amortization of debt issuance of cost
$290,000.
(d) Reflects a reduction in interest expense of $123,750 resulting from the
use of certain proceeds of the offering to reduce long-term debt.
(e) For the nine months ended September 30, 1999, reflects the provision
for income taxes as if the Company's subsidiaries were C Corporations during the
period presented.
6. ADJUSTMENTS TO THE PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
SIX-MONTHS ENDED MARCH 31, 2000:
(a) Reflects the inclusion of the operations of Grinberg under the proposed
acquisition from October 1, 1999, to March 31, 2000. The pro forma adjustments
include the elimination of $228,464
F-49
<PAGE> 134
DYNACS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of depreciation and amortization and the amortization of purchase goodwill of
$83,975 and the non-compete agreement of $25,000.
(b) Reflects a reduction in interest expense of $82,500 resulting from the
use of certain proceeds of the offering to reduce long-term debt.
(c) For the six months ended March 31, 2000, reflects the provision for
income taxes as if the Company's subsidiaries were C Corporations during the
period presented.
7. PRO FORMA SHARES:
The weighted average shares used in computing pro forma net income per
share are as follows:
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, MARCH 31,
1999 2000
------------- ----------
<S> <C> <C>
Weighted average outstanding shares of common stock.... 6,859,644 6,961,837
Shares of common stock issued to purchase Cerulean..... 912,064 912,064
Conversion of mezzanine notes into shares of common
stock................................................ 325,993 483,334
Exercise of warrants issued in connection with
mezzanine notes...................................... 635,050 635,050
Shares of common stock issued to purchase Grinberg..... 1,100,000 1,100,000
Certain common stock issued in the offering............ 150,000 150,000
Options exercised by the Company's President........... 255,480 255,480
---------- ----------
Pro forma, as adjusted shared........................ 10,238,231 10,497,765
========== ==========
</TABLE>
F-50
<PAGE> 135
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO SELL ONLY THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES
AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
------------------------
3,000,000 SHARES
DYNACS INC.
COMMON STOCK
------------------------
H. C. WAINWRIGHT & CO., INC.
ROTH CAPITAL PARTNERS, INC.
------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions and
the underwriters' non-accountable expense allowance) payable in connection with
the sale of the Common Stock offered hereby are as follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,065
NASD filing fee............................................. 5,126
Nasdaq National Market listing fee.......................... 78,875
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 250,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 5,000
Miscellaneous............................................... 14,934
TOTAL............................................. 750,000
========
</TABLE>
Dynacs will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and Dynacs' charter and by-laws
provide for indemnification of Dynacs' directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of Dynacs
and, with respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful. Reference is made
to Dynacs' charter and by-laws filed as Exhibits 3.1 and 3.2 hereto,
respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under some circumstances, to indemnify directors, officers and controlling
persons of Dynacs against some liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three fiscal years preceding the filing of this registration
statement, Dynacs has issued the following securities that were not registered
under the Securities Act of 1933, as amended (the "Act"):
- On January 25, 1999, Dynacs issued options for the purchase of 459,866
shares of common stock to Ravi Venugopal which Mr. Venugopal immediately
exercised for the aggregate consideration of $1,127,700. Of this amount,
Mr. Venugopal paid $2,000 in cash and the balance of $1,125,700 by
issuing to Dynacs a promissory note which is also secured by a pledge of
these shares. This note bears interest at the prime rate per annum and
matures on January 1, 2001. The options and shares were issued pursuant
to Rule 701 under the
II-1
<PAGE> 137
Securities Act because Dynacs was not a reporting company under the Securities
Exchange Act of 1934 at the time of the grant, and the grant was to an employee
pursuant to a compensatory plan.
- In August 1999, Dynacs issued to Ramesh Venugopal, a brother of Ravi
Venugopal, who is a senior Vice President and the Secretary of Dynacs, an
aggregate of 114,966 shares of Dynacs' common stock as compensation for
Mr. Venugopal's services in setting up the new Dynacs Digital Media
Products facility in Batam, Indonesia and for the management of such
facility through December 31, 1999. Those shares were issued pursuant to
Section 4(2) of the Securities Act in that the issuance did not involve a
public offering.
- In August 1999, in connection with our acquisition of Cerulean FXs, Inc.,
we agreed to issue, upon the consummation of this offering, an aggregate
of 912,064 shares of our common stock to Michael Burns, a
director-nominee, William Dallas, John Feltheimer and Offense Group
Associates, L.P. upon the automatic conversion of their equity interest
in our subsidiary, Cerulean FXs, Inc. and options to purchase an
aggregate of 255,480 shares of our common stock under our 1999 Long-Term
Incentive Plan to Michael Burns, a director-nominee, Stephen Strick and
Tracy Pearce. In addition, Michael Burns, a director-nominee, has the
right to receive options to purchase 51,097 shares of common stock under
the plan in the event we obtain contracts for colorization services in an
aggregate amount of $10.0 million no later than August 12, 2002. These
options and shares were issued pursuant to Section 4(2) of the Securities
Act in that the issuance did not involve a public offering.
- During the period November 1999 through March 2000, the Company issued to
a group of accredited investors an aggregate of $2,900,000 in principal
amount of Mezzanine Notes. Each investor received five year warrants to
purchase 21,899 shares of our common stock for each $100,000 principal
amount of Mezzanine Notes purchased. $1,000,000 principal amount of
Mezzanine Notes were sold in "Mezzanine I" during November 1999 and
January 2000, and warrants to purchase 218,985 shares of common stock
were issued. $1,900,000 aggregate principal amount of Mezzanine Notes
were sold in "Mezzanine II" during February and March 2000 and warrants
to purchase 416,065 shares of common stock were issued in connection with
Mezzanine II (collectively, the "Mezzanine Warrants"). In addition, in
connection with the Mezzanine Financings, warrants to purchase an
aggregate of 62,834 shares of common stock were issued to H.C. Wainwright
& Co., Inc. in consideration for services rendered as placement agent.
The Mezzanine Notes, the Mezzanine Warrants and the warrants issued to
Wainwright were issued pursuant to Section 4(2) of the Act in that the
issuance did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation.*
3.4 By-laws.*
4.1 Form of Registrant's common stock certificate.*
4.2 Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.1).*
</TABLE>
II-2
<PAGE> 138
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
4.3 Form of Representatives' Warrants, including form of warrant
certificate.*
5.1 Form of opinion of Frankfurt, Garbus, Kurnit, Klein & Selz,
P.C., counsel to the Registrant.
10.1 1999 Long-Term Incentive Plan of the Registrant.*
10.2 Contract with The Boeing Company under Purchase Order No.
HX3259 effective as of September 22, 1994, as amended.*
10.3 Contract with NASA under Contract No. NAS10-98001 effective
as of October 1, 1997, as amended.+
10.4 Contract with NASA under Contract No. NAS3-98008 effective
as of June 1, 1998, as amended.+
10.5 Form of Employment Agreement between the Registrant and
Ramendra Singh.
10.6 Form of Employment Agreement between the Registrant and Ravi
Venugopal.
10.7 Form of Employment Agreement between the Registrant and
Harry W. Schubele III.
10.8 Form of Employment Agreement between the Registrant and
Jayant Ramakrishnan.
10.9 Form of Employment Agreement between the Registrant and
Javier E. Benavente.
10.10 Form of Employment Agreement between the Registrant and
Robert Rodriguez.
10.11 Warrant and Senior Subordinated Convertible Note Purchase
Agreement dated as of November 4, 1999 among the Registrant
and the Investors identified therein (including form of Note
and Warrant).*
10.12 Second Warrant and Senior Subordinated Convertible Note
Purchase Agreement dated as of March 15, 2000 among the
Registrant and the Investors identified therein (including
form of Note and Warrant).*
10.13 Shareholder Agreement dated as of August 13, 1999 among the
Registrant, current shareholders of Registrant and former
owners of Cerulean Colorization, L.L.C.*
10.14 Registration Rights Agreement dated August 13, 1999 among
the Registrant, current shareholders of Registrant and
former owners of Cerulean Colorization, L.L.C.*
10.15 Exchange Agreement dated August 13, 1999 among former owners
of Cerulean and Registrant.*
10.16 Contribution and Exchange Agreement dated as of August 12,
1999 among Registrant, Cerulean FXs, Inc., and former owners
of Cerulean FXs, Inc.*
10.17 Demand Promissory Note and Loan Agreement dated February 20,
1999 between First National Bank of Florida and the
Registrant for $4,000,000.*
10.18 Lease Agreement dated as of October 23, 1998 between
TechPark Limited Partnership and the Registrant.*
10.19 Lease Agreement dated as of January 1, 1999 between the
Registrant and Dynacs Properties, Inc.*
10.20 Factory Lease Agreement between PT Batamindo Investment
Corporation and Dynacs Digital Studios PTE Ltd. dated
November 3, 1998.*
10.21 Promissory note, dated October 6, 1997, payable by the
Registrant to Venugopal Srnivasan and Ranjini Srinivasan for
the principal amount of $200,000.*
10.22 Promissory note, dated February 15, 1999, payable by the
Registrant to Venugopal Srinivasan for the principal amount
of $110,000.*
</TABLE>
II-3
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.23 Promissory note, dated March 30, 1999, payable by the
Registrant to Ramendra P. Singh for the principal amount of
$160,000.*
10.24 Promissory note, dated June 10, 1999, payable by the
Registrant to Peter Likins for the principal amount of
$400,000.*
10.25 Promissory note, dated June 10, 1999, payable by the
Registrant to Robert Skelton for the principal amount of
$200,000 and extension thereof.*
10.26 Promissory note, dated February 23, 1999, payable by the
Registrant to Ravi Venugopal for the principal amount of
$248,000.*
10.27 Promissory note, dated August 23, 1999, payable by the
Registrant to April Singh for the principal amount of
$89,301.*
10.28 Form of Lock-up Agreement.*
10.29 Business Loan Agreement, dated July 7, 2000, between the
Registrant and First National Bank of Florida.
10.30 Demand Promissory Note, dated July 7, 2000, payable by the
Registrant to First National Bank of Florida in the amount
of $4,000,000.
10.31 Commercial Security Agreement, dated July 7, 2000, between
the Registrant and First National Bank of Florida.
10.32 Commercial Guaranty, dated July 7, 2000, from Ramendra P.
Singh to First National Bank of Florida.
16.1 Letter on change in certifying accountant.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen LLP (Dynacs).
23.2 Consent of Hoyman, Dobson & Company P.A.
23.3 Consent of Frankfurt, Garbus, Kurnit, Klein & Selz, P.C.
(included in Exhibit 5.1).
23.4 Consent of Yohalem Gillman & Company LLP.*
23.5 Consent of Arthur Andersen LLP (Cerulean).
24.1 Power of Attorney (included in the signature page to the
registration statement).*
27.1 Financial Data Schedule. (Dynacs Inc.)*
27.2 Financial Data Schedule. (Cerulean Colorization, L.L.C.)*
27.3 Financial Data Schedule (Sherman Grinberg Film Libraries,
Inc.)*
99.1 Consent of Michael G. Bolton, as Director-Nominee.*
99.2 Consent of Michael R. Burns, as Director-Nominee.*
99.3 Consent of Peter Likins, as Director-Nominee.*
99.4 Consent of Robert E. Skelton, as Director-Nominee.*
99.5 Waiver, dated August 20, 1999, from Small Business
Administration.*
</TABLE>
-------------------------
* Previously filed.
+ Confidential information omitted and filed separately with the Commission.
II-4
<PAGE> 140
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are being
made, a post-effective amendment to this registration statement to:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counselor the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such
II-5
<PAGE> 141
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Palm Harbor, Florida,
on July 17, 2000.
DYNACS INC.
By: *
------------------------------------
Ramendra P. Singh
Chief Executive Officer,
President and Director
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
* Chief Executive Officer, July 17, 2000
--------------------------------------------------- President and Director
Ramendra P. Singh (Principal Executive Officer)
/s/ ROBERT RODRIGUEZ Chief Financial Officer July 17, 2000
--------------------------------------------------- (Principal Financial and
Robert Rodriguez Accounting Officer)
*By: /s/ ROBERT RODRIGUEZ
---------------------------------------------
Robert Rodriguez,
Attorney-in-fact
</TABLE>
II-7
<PAGE> 143
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation.*
3.4 By-laws.*
4.1 Form of Registrant's common stock certificate.*
4.2 Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.1).*
4.3 Form of Representatives' Warrants, including form of warrant
certificate.*
5.1 Form of opinion of Frankfurt, Garbus, Kurnit, Klein & Selz,
P.C., counsel to the Registrant.
10.1 1999 Long-Term Incentive Plan of the Registrant.*
10.2 Contract with The Boeing Company under Purchase Order No.
HX3259 effective as of September 22, 1994, as amended.*
10.3 Contract with NASA under Contract No. NAS10-98001 effective
as of October 1, 1997, as amended.+
10.4 Contract with NASA under Contract No. NAS3-98008 effective
as of June 1, 1998, as amended.+
10.5 Form of Employment Agreement between the Registrant and
Ramendra Singh.
10.6 Form of Employment Agreement between the Registrant and Ravi
Venugopal.
10.7 Form of Employment Agreement between the Registrant and
Harry W. Schubele III.
10.8 Form of Employment Agreement between the Registrant and
Jayant Ramakrishnan.
10.9 Form of Employment Agreement between the Registrant and
Javier E. Benavente.
10.10 Form of Employment Agreement between the Registrant and
Robert Rodriguez.
10.11 Warrant and Senior Subordinated Convertible Note Purchase
Agreement dated as of November 4, 1999 among the Registrant
and the Investors identified therein (including form of Note
and Warrant).*
10.12 Second Warrant and Senior Subordinated Convertible Note
Purchase Agreement dated as of March 15, 2000 among the
Registrant and the Investors identified therein (including
form of Note and Warrant).*
10.13 Shareholder Agreement dated as of August 13, 1999 among the
Registrant, current shareholders of Registrant and former
owners of Cerulean Colorization, L.L.C.*
10.14 Registration Rights Agreement dated August 13, 1999 among
the Registrant, current shareholders of Registrant and
former owners of Cerulean Colorization, L.L.C.*
10.15 Exchange Agreement dated August 13, 1999 among former owners
of Cerulean and Registrant.*
10.16 Contribution and Exchange Agreement dated as of August 12,
1999 among Registrant, Cerulean FXs, Inc., and former owners
of Cerulean FXs, Inc.*
10.17 Demand Promissory Note and Loan Agreement dated February 20,
1999 between First National Bank of Florida and Registrant
for $4,000,000.*
10.18 Lease Agreement dated as of October 23, 1998 between
TechPark Limited Partnership and the Registrant.*
10.19 Lease Agreement dated as of January 1, 1999 between the
Registrant and Dynacs Properties, Inc.*
10.20 Factory Lease Agreement between PT Batamindo Investment
Corporation and Dynacs Digital Studios PTE Ltd. dated
November 3, 1998.*
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.21 Promissory note, dated October 6, 1997, payable by the
Registrant to Venugopal Srinivasan and Ranjini Srinivasan
for the principal amount of $200,000.*
10.22 Promissory note, dated February 15, 1999, payable by the
Registrant to Venugopal Srinivasan for the principal amount
of $110,000, and extension thereof.*
10.23 Promissory note, dated March 30, 1999, payable by the
Registrant to Ramendra P. Singh for the principal amount of
$160,000, and extension thereof.*
10.24 Promissory note, dated June 10, 1999, payable by the
Registrant to Peter Likins for the principal amount of
$400,000, and extension thereof.*
10.25 Promissory note, dated June 10, 1999, payable by the
Registrant to Robert Skelton for the principal amount of
$200,000, and extension thereof.*
10.26 Promissory note, dated February 23, 1999, payable by the
Registrant to Ravi Venugopal for the principal amount of
$248,000.*
10.27 Promissory note, dated August 23, 1999, payable by the
Registrant to Anil Singh for the principal amount of $89,301
and extension thereof.*
10.28 Form of Lock-up Agreement.*
10.29 Business Loan Agreement, dated July 7, 2000, between the
Registrant and First National Bank of Florida.
10.30 Demand Promissory Note, dated July 7, 2000, payable by the
Registrant to First National Bank of Florida in the amount
of $4,000,000.
10.31 Commercial Security Agreement, dated July 7, 2000, between
the Registrant and First National Bank of Florida.
10.32 Commercial Guaranty, dated July 7, 2000, from Ramendra P.
Singh to First National Bank of Florida.
16.1 Letter on change in certifying accountant.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen LLP (Dynacs).
23.2 Consent of Hoyman, Dobson & Company P.A.
23.3 Consent of Frankfurt, Garbus, Kurnit, Klein & Selz, P.C.
(included in Exhibit 5.1).
23.4 Consent of Yohalem Gillman & Company LLP.*
23.5 Consent of Arthur Andersen LLP (Cerulean).
24.1 Power of Attorney (included in the signature page to the
registration statement).*
27.1 Financial Data Schedule. (Dynacs Inc.)*
27.2 Financial Data Schedule. (Cerulean Colorization, L.L.C.)*
27.3 Financial Data Schedule (Sherman Grinberg Film Libraries,
Inc.)*
99.1 Consent of Michael G. Bolton, as Director-Nominee.*
99.2 Consent of Michael R. Burns, as Director-Nominee.*
99.3 Consent of Peter Likins, as Director-Nominee.*
99.4 Consent of Robert E. Skelton, as Director-Nominee*
99.5 Waiver, dated August 20, 1999, from U.S. Small Business
Administration.*
</TABLE>
-------------------------
* Previously filed.
+ Confidential information omitted and filed separately with the Commission.
