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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________
Commission file number 1-11568
DYNTEK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4228470
-------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
18881 Von Karman Avenue, #250
Irvine, CA 92612
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (949) 955-0078
--------------
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filings requirements for
the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's Class A Common Stock,
$.0001 par value, as of November 8, 2002 was 35,426,818.
DYNTEK, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Number
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2002 3
and June 30, 2002
Consolidated Statements of Operations and Comprehensive
Loss - For the Three Months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - For the 5
Three Months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial 11 - 14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION 15 - 16
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE 17
CERTIFICATIONS 18
2
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, June 30,
ASSETS 2002 2002
------ ---- ----
CURRENT ASSETS: Unaudited
Cash (includes restricted cash of $846 and $986) $ 950 $ 1,012
Accounts receivable, net of allowance for doubtful accounts of $464 and $609 12,320 15,023
Tax refund receivable - 245
Inventories 265 1,008
Costs and estimated earnings in excess of billings on uncompleted contracts 171 3,015
Prepaid expenses and other assets 67 128
Note receivable - current portion 281 375
Other receivables 279 779
------------ ------------
TOTAL CURRENT ASSETS 14,333 21,585
RESTRICTED CASH 985 995
INVESTMENTS - Marketable Securities 400 366
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,047 and $2,844 1,317 1,514
GOODWILL 43,538 43,538
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $432 and $378 645 698
ACQUIRED CUSTOMER LIST, net of accumulated amortization of $3,620 and $3,110 9,470 9,979
PURCHASED SOFTWARE, net of accumulated amortization of $368 and $325 322 365
NOTES RECEIVABLE, long term, including receivable from officer $100 1,017 1,017
DEPOSITS AND OTHER ASSETS 334 462
------------ ------------
$ 72,361 $ 80,519
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,625 $ 16,963
Line of credit 5,708 6,347
Accrued expenses 4,123 4,437
Deferred revenue 3,435 4,658
Audit assessment 1,878 1,861
Notes payable 231 1,250
Capital leases, net of long term portion 144 144
------------ ------------
TOTAL CURRENT LIABILITIES 29,144 35,660
DEFERRED REVENUE - long term 985 995
LONG TERM PORTION CAPITAL LEASE 53 84
NOTE PAYABLE to STOCKHOLDER 5,000 -
------------ ------------
TOTAL LIABILITIES 35,182 36,739
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 10,000,000 shares authorized;
1,616,397 and 1,616,397 shares issued and outstanding as of September
30, 2002 and June 30,
2002, respectively 1 1
Class A Common stock, $.0001 par value, 70,000,000 shares authorized;
35,421,733 shares and 23,533,692 shares issued and outstanding after deducting
300,000 and 0 shares in treasury as of September 30, 2002 and June 30, 2002,
respectively 4 2
Class B Common stock, $.0001 par value, 20,000,000 shares authorized; 0 shares
and 18,336,663 shares issued and outstanding as of September 30, 2002 and June
30, 2002, respectively - 2
Additional paid-in-capital 80,773 86,193
Unrealized loss on securities (126) (131)
Deficit (43,473) (42,287)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 37,179 43,780
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,361 $ 80,519
============ ============
See notes to consolidated financial statements
3
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
For the Three Months Ended
September 30, September 30,
---------------- -- ---------------
2002 2001
---------------- ---------------
REVENUES:
Product Revenue $ 6,162 $ 6,497
Service Revenue 19,093 5,088
---------------- ---------------
Total revenues 25,255 11,585
---------------- ---------------
COST OF REVENUES:
Cost of products 5,267 5,296
Cost of services 16,653 3,853
---------------- ---------------
Total cost of revenues 21,920 9,149
---------------- ---------------
GROSS PROFIT 3,335 2,436
---------------- ---------------
OPERATING EXPENSES:
Selling expenses 2,184 1,964
General and administrative expenses 1,334 918
Application development - 340
Depreciation and amortization 809 543
---------------- ---------------
Total operating expenses 4,327 3,765
---------------- ---------------
LOSS FROM OPERATIONS (992) (1,329)
---------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (174) (186)
Interest income 8 12
Equity interest in loss of investee (28) (107)
---------------- ---------------
Total other expense (194) (281)
---------------- ---------------
LOSS BEFORE INCOME TAX (1,186) (1,610)
---------------- ---------------
INCOME TAX - 43
---------------- ---------------
NET LOSS (1,186) (1,653)
================ ===============
NET LOSS PER SHARE: $ (0.03) $ (0.08)
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION 38,646,044 20,924,214
================ ===============
NET LOSS $ (1,186) $ (1,653)
OTHER COMPREHENSIVE LOSS, NET OF TAX
Reversal of unrealized gain (loss) on
available-for-sale- securities 5 (56)
---------------- ---------------
COMPREHENSIVE LOSS $ (1,181) $ (1,709)
================ ===============
See notes to consolidated financial statements
4
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months ended
------------------
September 30, September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,186) $ (1,653)
------------ ---------
Adjustments to reconcile net loss to net cash provided by( used in)
operating activities:
Depreciation and amortization 756 489
Amortization of capitalized software costs 53 54
Equity interest in investee 28 107
Changes in operating assets and liabilities:
Accounts receivable 2,703 (461)
Inventory 743 894
Costs and estimated earnings in excess of billings on uncompleted
contracts 2,844 -
Prepaid expenses and other current assets 342 (66)
Note receivable 94
Deposits and other assets 100 23
Accounts payable (3,338) (521)
Deferred revenue (1,225) 274
Notes payable (1,019) -
State audit reserve 17 17
Accrued expenses (310) (372)
------------ ---------
Total adjustments 1,788 438
------------ ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 602 (1,215)
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash proceeds from sale of securities 13 -
Capital expenditures (7) (30)
------------ ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6 (30)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds under bank line of credit (639) 731
Capital lease repayments (31) -
Issuance of short term convertible securities - 307
------------ ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (670) 1,038
------------ ---------
NET DECREASE IN CASH (62) (207)
CASH AT BEGINNING OF YEAR 1,012 1,309
------------ ---------
CASH AT END OF PERIOD $ 950 $ 1,102
============ =========
See notes to consolidated financial statements
5
DYNTEK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Dyntek, Inc. and
Subsidiaries ("DynTek") or ("the Company")have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Article 10 of Regulations S-X.
Accordingly, they do not include all of the information and disclosures required
for annual financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related footnotes for
the year ended June 30, 2002 included in the Form 10-K for the year then ended
and Form 10-K/A filed on October 13, 2002.
The accompanying financial statements reflect all adjustments, which, in the
opinion of management, are necessary for a fair presentation of financial
position, and the results of operations for the interim periods presented.
Except as otherwise disclosed, all such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a full fiscal year.
2. Restricted Cash
At September 30, 2002, cash of $ 1,831,000 was received in connection with
maintenance agreements. Such cash is restricted and will become available to the
Company as revenue is recognized according to the terms of the respective
agreements. Of this amount, approximately, $846,000 will be released during the
next year. The non-current portion, $985,000, has been classified as a
non-current asset.
3. Credit Facility
The credit agreement with Foothill Capital (the "Foothill Agreement") provides
for a revolving line of credit not to exceed $15,000,000. The available line of
credit at September 30, 2002, according to the collateral formula, was
approximately $8,706,000 of which $5,708,000 was outstanding. Borrowing limits
are determined based on a collateral formula, which includes 85% of qualified
trade receivables. Also, borrowings bear interest at 1% over Norwest Bank prime
(4.75% at September 30, 2002) with a minimum rate of 7%. The term of the
agreement has been extended through March 31, 2004 under terms similar to the
current agreement.
In connection with the Foothill Agreement extension amendment, DynTek Services
is required to maintain certain financial covenants, based upon defined EBITDA,
tangible net worth and interest coverage ratio of the subsidiary. DynTek
Services is in compliance with the covenants as of September 30, 2002. In
connection with Foothill's consent for the merger with DynCorp Management
Services, Inc. ("DMR"), the Company agreed to raise an additional $3 million of
capital investment within 30 days of the consummation of the merger. This
period has been extended per an amendment to the Foothill Agreement until
November 20, 2002. The company has raised $2.1 million of such amount as of
September 30, 2002. It is not certain that DynTek will be able to raise the
additional equity by that date, and a waiver will be requested if DynTek is not
successful.
6
4. Marketable Securities
Marketable securities have been classified as available for sale securities at
September 30, 2002 and, accordingly, the unrealized loss resulting from valuing
such securities at market value is reflected as a component of stockholders'
equity. At September 30, 2002, the unrealized loss on securities was
$126,000.
5. Commitments, Contingencies, and Other Agreements
On July 10, 2000, the Company was named as a nominal defendant in a
stockholder's derivative action brought in the Supreme Court of New York, New
York County, on behalf of DynTek by Paul Miletich. On August 20, 2002, a final
order approving settlement and dismissing action by Paul Miletich was filed in
the New York County Clerk's Office. The settlement approved a stipulation that
The Rubin Family Trust transfer to DynTek 300,000 shares of DynTek common stock
and 125,000 shares of MedEmerg common stock, as full settlement of a guarantee
provided by Mr. Rubin pertaining to a transaction with StyleSite Marketing.
Additionally, the insurance underwriters for DynTek paid the Company $300,000 on
behalf of the director defendants. DynTek reimbursed plaintiff's counsel for
fees and expenses of $330,000, of which 20% was paid in MedEmerg stock (80,488
shares). The shares of DynTek common stock were received and will be retired and
the remaining shares of MedEmerg common stock are being held as marketable
securities. No gain or loss was recorded in connection with the settlement.
On July 28, 2000, a judgment was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina. The
plaintiff was awarded a judgment of $572,000 plus reasonable attorney fees and
interest, and the award was affirmed on appeal. An accrual has been established
in an aggregate amount of approximately $700,000. The Company is in negotiations
with the plaintiff regarding settlement terms.
On September 16, 2002 a Notice and Motion for Judgment was filed in the Circuit
Court of Pulaski County, Virginia the transportation provider alleging
non-payment for transportation services alleged to have been provided in support
of the Virginia Non-Emergency Transportation contract and alleged to have been
valued in excess of $516,000. DynTek has had this matter removed to the United
States District Court, Western District of Virginia, Roanoke Division. The
Company believes that this claim is without merit because the services were
provided outside the Company's transportation brokerage agreement with the
Commonwealth of Virginia.
In February 2002, the Company purchased the assets of Exodus Communications,
Inc. ("Exodus") for $175,000, including an assignment to the Company of the
Exodus subsidiary's contracts with its existing customers. Under the
purchase agreement and the service agreements, the Company is obligated to pay a
net amount of approximately $272,000 as of September 30, 2002. The Company is
currently in discussions with the Exodus bankruptcy trustees about payment
terms.
On January 29, 2002, the Company was named as a third-party defendant in a
matter initially between Computer Associates International, Inc. (CA) and the
City of Boston (COB), in United States District Court, District of Massachusetts
(Case Number 01-10566-EFH). CA had filed suit against COB alleging that COB
breached a contract with CA, infringed on copyrights of CA, and engaged in
tortuous behavior in its dealings with CA. The Company was subsequently joined
as a defendant because it was the authorized reseller for CA and supplied
various CA software programs and services to COB on behalf of CA. To the extent
that CA may have sustained damages, a demand for indemnification from the
Company has been made by COB. The complaint demands relief from judgment in the
amount of $600,000 plus other costs, which is the initial contract amount. CA
has additionally commenced a claim against COB for breach of copyright and the
balance due under a multi-phase purchase agreement. While a specific claim for
damages has not been asserted, the total multi-phase contract was in an amount
of approximately $2 million. Settlement discussions are currently undertaken by
7
CA and COB. Company management believes that COB will not prevail with an
indemnification claim against the Company and that the matter will be resolved
between CA and COB through a mutual settlement. However, there is no assurance
that the settlement will be reached or that indemnification claims will not be
asserted against the Company.
On March 20, 2002, two actions were commenced against the Company by Stride &
Associates (Stride) in Civil Court of New York, regarding the alleged breach of
two contracts in the aggregate amount of $40,000, for amounts due this placement
firm from the alleged hiring of two consultants by the Company. Additionally,
the two consultants have commenced separate actions in the Civil Court of New
York for compensation due in the aggregate amount of $53,000. We believe that
neither of these consultants was hired by the Company, and that the actions by
Stride are without merit. Additionally, the work performed by the consultants
pertained to a project undertaken by the Company's former Chief Technology
Officer, which was separate from any projects undertaken by the Company. The
Company believes that, to the extent that any damages may be awarded, the costs
shall be indemnified by the former Chief Technology Officer.
In a matter relating to a prior business of the Company, divested in 1998, one
of the Company's discontinued wholly-owned subsidiaries was issued a Letter of
Demand for $1.3 million, as a result of an audit by the California State
Controller's Office, Division of Audits. Additionally, accrued interest on the
amount demanded was also sought. On January 20, 1999, the California Superior
Court recommended that the Demand be upheld. On January 26, 2000, the California
Court of Appeals upheld the demand. The Company has provided a reserve for the
principal amount of $1,340,000 plus $538,000 in accrued interest, or $1,878,000
in total as of September 30, 2002. The Company has decided not to appeal the
decisions. The California State Controller's Office has not taken legal action
to obtain a judgment against the Company in order to collect this obligation.
On October 11, 2002, Merisel Americas, Inc. filed a breach of contract complaint
in Superior Court of California, Southwest District. The complaint arose from
the Company's failure to make payments within the terms of the reseller
agreement. The Company does not dispute the claim of $483,000 and is negotiating
payment terms. This amount is included in the Company's accounts payable.
6. Stockholders' Equity
On August 14, 2001, the Company's preferred stock became convertible into the
Company's Class A common stock, at a rate of 2.5 common shares for each
preferred share tendered. As of September 30, 2002, 573,403 of such shares were
converted into 1,432,459 shares of Class A common stock, with a remainder of
1,616,397 shares not yet converted.
In June 2002, the Company sold 1,389,293 shares of Common Stock for $1.50 per
share to accredited investors, and converted short-term notes payable into
1,042,039 shares of Class A Common Stock for $1.50 per share to accredited
investors. Part of the share issuances were completed in June 2002, and the
remaining shares were issued during July 2002. During the quarter ended
September 30, 2002, 1,501,844 shares of Class A Common Stock were issued in
connection with this placement and conversion of short-term notes.
In July 2002, 24,534 shares of Class A Common Stock were issued to an accredited
investor as an extinguishment of an account payable. Stock options were
exercised during the quarter ended September 30, 2002 for 25,000 shares of Class
A Common Stock.
During August 2002, the Company repurchased and retired 8,000,000 shares of its
Class B Common Stock (see note 7), and converted the remaining 10,336,663 shares
of Class B Common Stock into the same number of Class A Common Stock shares.
8
In connection with the settlement of the Miletich Derivative Action, the Company
received 300,000 shares of its Class A Common Stock. Such shares were held as
treasury stock at September 30, 2002, and the Company plans to retire the shares
shortly. The treasury shares have been recorded by the constructive retirement
method of accounting.
7. Dyncorp Settlement Agreement
On August 20, 2002, DynTek entered into the Settlement Agreement with DynCorp
its principal stockholder, pursuant to which each of DynTek and DynCorp agreed
to settle all disputes between them, including those resulting from DynTek's
acquisition by merger of DynCorp's former wholly-owned subsidiary, DMR in
December 2001. As part of the Settlement Agreement, DynCorp sold to DynTek
8,000,000 shares of DynTek Class B common stock at a price of $.625 per share,
converted its remaining 10,336,663 shares of Class B common stock (constituting
the balance of all outstanding Class B common stock) to DynTek Class A common
stock, paid to DynTek $5 million to defray losses incurred by DynTek from its
operations under the terms of a contract with the Commonwealth of Virginia
acquired by DynTek in connection with the DMR merger, and provided a general
release to DynTek and its affiliates from any and all claims that it might have
against such persons. Such reimbursement of $5 million has been treated as an
offset to costs incurred under the Virginia contract. Under the Settlement
Agreement, DynTek agreed to pay for the Class B common stock shares acquired
from DynCorp with a $5 million principal unsecured, subordinated note maturing
on January 2, 2007, bearing interest at 15%. DynTek also agreed to issue to
DynCorp warrants to acquire 7,500,000 shares of Class A common stock exercisable
for three years at $4.00 per share (the "Warrants"), grant demand registration
rights with respect to the Warrants and DynCorp's Class A common stock shares
(including those to be acquired upon Warrant exercise), and provide a general
release to DynCorp and its affiliates from any and all claims that it might have
against such persons.
8. Business Segments
The following table provides actual selected financial data for our business
segments (in thousands):
Reportable Business Segments
---------------- ---------------- -----------------
Business
Process Network
Outsourcing Services Total
Three months ended September 30, 2002 ------------ --------- --------
-------------------------------------
Sales to external customers $13,570 $11,685 $25,255
Depreciation and amortization expense 222 587 809
Operating income (loss) (355) (637) (992)
Net interest expense (income) 89 77 166
Total assets 41,356 31,005 72,361
Capital expenditures 6 1 7
During the three months ended September 30, 2001 the Company did not have
segment reporting, since the only business segment was Network Services.
9. Related-Party Transactions
In March 2001, the Company purchased 25% of the equity in LaborSoft Corporation
("LaborSoft"), a company providing labor relations software to labor unions and
commercial customers to supplement other market segment services. As a result of
its investment, the Company assigned one of its directors to become the chairman
of the board of directors of LaborSoft. The Company has a service agreement to
provide infrastructure services to LaborSoft, on a cost plus fee-for-service
9
basis which is common in the industry and can terminate services upon 30 day
notification. These monthly charges are approximately $20,000 per month. As of
September 30, 2002, the Company had outstanding receivables for such services in
the total amount of $500,000, representing unpaid charges since April 2001 and
an allowance reserve of $200,000. The Company accounts for its investment under
the equity method of accounting, and has therefore recognized its pro-rata
portion of the losses incurred by this affiliate, since March 2001, in the
amount of $320,000. Such losses have reduced the carrying value of its
investment to $107,000 at September 30, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in the Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, the words or phrases "will likely
result" and "the Company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, each of
which speaks only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Such
risks and uncertainties include, among others, success in reaching target
markets for services and products in a highly competitive market and the ability
to attract future customers, the size and timing of additional significant
orders and their fulfillment, the success of the Company's business emphasis,
the ability to finance and sustain operations, including the ability to maintain
and extend the Foothill Agreement when it becomes due and the ability to raise
equity capital in the future, despite continuing losses from operations and a
"going concern" opinion from our auditors, the Company's ability to arrange
successfully for extended payment terms for certain overdue obligations and
judgments against the Company, the ability to fulfill the Company's obligations
to third parties, including the ability to obtain performance bonds to support
certain such contractual obligations, the size and timing of additional
significant orders and their fulfillment, the ability to turn contract backlog
into revenue and net income, the continuing desire of state and local
governments to outsource to private contractors and the ability of the Company
to obtain extensions of the profitable DMR contracts at their maturity, the
performance of governmental services, the ability to develop and upgrade our
technology, the ability to successfully integrate the operations of DMR with
DynTek, and the continuation of general economic and business conditions that
are conducive to governmental outsourcing of service performance. The Company
has no obligation to publicly release the results of any revisions, which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
RESULTS OF OPERATIONS
The three months ended September 30, 2002 (the "2002 Three Month Period") as
compared to the three months ended September 30, 2001 (the "2001 Three Month
Period").
Revenues for the 2002 Three Month Period increased to approximately $25,255,000
from approximately $11,585,000 for the 2001 Three Month Period, primarily due to
the December 27, 2001 merger with DynCorp Management Resources (DMR). The
revenue mix of product and services was 25% and 75%, respectively, for the 2002
Three Month Period, as compared to 56% and 44%, respectively, for the 2001 Three
Month Period. This change in revenue mix is primarily due to the increased
service revenues from business process outsourcing contracts assumed in the
merger with DMR.
Cost of revenues for the 2002 Three Month Period increased to
approximately $21,920,000 from approximately $9,149,000 for the 2001 Three Month
Period, due to the December 27, 2001 merger of DMR.
Selling, general and administrative expenses for the 2002 Three Month
Period increased to approximately $3,518,000 from approximately $2,882,000 for
the 2001 Three Month Period. The increase is primarily due to the December 27,
2001 merger with DMR and to the expansion of information technology services
11
offered into new geographic markets. As a percentage of total revenues, such
costs decreased to 14% during the 2002 Three Month Period, from 25% in the prior
2001 Three Month Period.
Application development expense for the 2002 Three Month Period was zero
compared to approximately $340,000 for the 2001 Three Month Period. The
elimination of such costs was primarily due to a restructuring of the Company to
reduce software development activities related to new products, notwithstanding
the continuation of normal software development services provided to customers
under ongoing service agreements. Depreciation and amortization expense for the
2002 Three Month Period increased to approximately $809,000 from approximately
$543,000 for the 2001 Three Month Period. This increase is primarily
attributable to the addition of amortizable intangible assets recorded in the
December 27, 2001 merger of DMR.
Interest income for the 2002 Three Month Period decreased to approximately
$8,000 from approximately $12,000 for the 2001 Three Month Period. Interest
expense for the 2002 Three Month Period was approximately $174,000, as compared
to $186,000 during the 2001 Three Month Period. This decreased expense is a
result of interest on the short-term convertible notes payable incurred during
the 2001 Three Month Period that did not recur during the 2002 Three Month
Period.
We recognized our pro-rata portion of the losses incurred by an affiliate,
LaborSoft, in the amount of $28,000 during the 2002 Three Month Period compared
to $107,000 during the 2001 Three Month Period. Such losses have reduced the
carrying, value of our investment in LaborSoft to $107,000 at September 30,
2002.
The decrease in net loss to $1,186,000 for the 2002 Three Month Period, as
compared to a loss of $1,653,000 for the 2001 Three Month Period, is primarily
due to an increased contribution to our gross profit from the operations assumed
in the December 27,2001 merger of DMR, which offsets a portion of the selling,
general and administrative costs.
Liquidity and Capital Resources
As of September 30, 2002 the Company had a working capital deficiency of
approximately $14,811,000 compared to a working capital deficiency of
$14,075,000 at June 30, 2002. This decrease in working capital is primarily due
to losses from operations.
The Foothill Agreement provides for a revolving line of credit not to exceed
$15,000,000. The available line of credit at September 30, 2002, according to
the collateral formula, was approximately $8,706,000 of which $5,708,000 was
outstanding. Borrowing limits are determined based on a collateral formula,
which includes 85% of qualified trade receivables. Also, borrowings bear
interest at 1% over Norwest Bank prime (4.75% at September 30, 2002) and have a
term extending to March 31, 2004. We received a waiver, through November 20,
2002, to raise the last $903,560 of the $3,000,000 of additional equity that we
agreed to raise under the terms of the Foothill Agreement
On July 28, 2000, a judgment was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina. The
plaintiff was awarded a judgment of $572,000 plus reasonable attorney fees and
interest. While we have appealed this decision, accruals for this contingency
have been established in an aggregate amount of approximately $700,000. We are
in negotiations with the plaintiff regarding settlement terms.
In connection with the merger with DMR, we assumed a contract with the
Commonwealth of Virginia for non-emergency medical transportation services. The
contract extends until June 30, 2003, with aggregate revenues of approximately
$41 million remaining following the December 27, 2001 merger. The contract is a
fixed-fee agreement, with us providing complete transportation services, as
stipulated, including the hiring of transportation providers. Our estimated
12
losses from the contract, determined following the merger date, were
approximately $7,383,000. In August 2002, we completed a negotiated settlement
with DynCorp regarding this contract, whereby DynCorp reimbursed us for $5
million of the unanticipated operating expenses incurred to perform under the
contract. Such reimbursement has been applied to the estimate to complete the
contract. The balance of the estimated losses to complete the contract, in the
amount of $2,383,000, was recognized as a loss during the fiscal quarter ended
March 31, 2002 . Such losses have been accrued in the loss estimate, net of the
reimbursement from DynCorp. During the fiscal quarter ended September 30, 2002,
we applied losses of $1,846,000 to the previously accrued liability established
for this contract, and estimate that losses of $124,000 will be offset against
the accrual during the remainder of the contract term. The Commonwealth of
Virginia has notified us of its intention to solicit bids for the renewal of the
services award following June 30, 2002. We will submit a competitive bid;
however, there is no assurance that such bid will be accepted and that we will
continue as the provider of services in the future after June 30, 2003.
In February 2002, we purchased the assets of Exodus for $175,000, including an
assignment to us of the Exodus subsidiary's contracts with its existing
customers. Under the purchase agreement and the service agreements, we are
obligated to pay a net amount of approximately $272,000 as of September 30,
2002. We are currently discussing a payment schedule with respect to such amount
with Exodus's trustee in bankruptcy.
In a matter relating to a prior business of ours, divested in 1998, one of our
discontinued wholly-owned subsidiaries was issued a Letter of Demand for $1.3
million, as a result of an audit by the California State Controller's Office,
Division of Audits. Additionally, accrued interest on the amount demanded was
also sought. On January 20, 1999, the California Superior Court recommended that
the Demand be upheld. On January 26, 2000, the California Court of Appeals
upheld the Demand. We have provided a reserve for the principal amount of
$1,340,000 plus $538,000 in accrued interest, or $1,878,000 in total as of
September 30, 2002. We have decided not to appeal the decisions. The California
State Controller's Office has not taken legal action to obtain a judgment
against us in order to collect this obligation.
We may expand the scope of our product offerings by pursuing acquisition
candidates with complementary technologies, services or products. Should we
commence such acquisitions, we anticipate that we would finance the transactions
with a combination of working capital and the issuance of additional equity
securities. We would attempt to secure additional funding, including equity
financing where appropriate, for acquisitions. There can be no assurance,
however, that we will be successful in identifying appropriate acquisition
candidates or that, if appropriate candidates are identified, that we will be
successful in obtaining the necessary financing to complete the acquisitions.
We have had recurring losses from continuing operations and negative cash flows
from operations. Such losses have been funded primarily from cash received from
sales of stock, cash received in 1999 from the sale of discontinued operations
and cash received from DynCorp in settlement of issues resulting from the DMR
merger. As additional funds are necessary, we would consider reducing the scope
of our operations, divesting of long-term contracts or business segments, or
seeking other forms of financing. We received an explanatory paragraph about
our ability to continue as a going concern from our auditors in connection with
the audit of our financial statements for the 2002 fiscal year end and since the
end of the 2002 fiscal year we have continued to generate losses from our
continuing operations and negative cash flows from our operations. Such losses
have been funded primarily from cash received from the sales of stock in prior
periods and cash received from DynCorp in settlement of issues resulting from
the DMR merger.
During the quarter ended September 30, 2002, we have reduced our operating costs
by enacting staff reductions and have been successful in reducing the negative
cash flow derived from the Virginia transportation contract. During future
quarters, we believe that losses and negative cash flows from operations will be
13
significantly reduced or eliminated through continuing cost savings measures and
increasing margin contributions. During the next 12 months, however, we will be
required to make payments that may exceed the positive cash flows that may be
generated from operations. We are planning to negotiate extended payment terms
wherever possible, including with respect to the Moore judgment, the Exodus
purchase amount due, and the liability to the California State Controller's
Office; however, there is no assurance that extended payment terms offered will
be acceptable. The vendor payment to Merisel America will likely require payment
in full, in the amount of approximately $450,000. In addition, we have a
requirement from our lending institution to raise an additional $904,000 in
equity funding by November 20, 2002 that may not be possible by that date.
Although we anticipate that the funding requirement will be extended, however,
such an extension has not yet been granted. As additional funds are necessary,
we would consider divesting of long-term contracts or business segments that are
not core to our business expansion plans, reducing the scope of our operations
and business development efforts requiring investment, or seeking other forms of
financing. Should we not generate sufficient cash flow from operations to
support our ongoing obligations, or if we are unable to arrange successfully for
extended payment terms for those obligations or obtain financing from some other
source or arrange other waivers of obligations as necessary, our continuing
operation will be severely compromised.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Foothill Agreement exposes the Company to the risk of earnings or cash flow
loss due to changes in market interest rates. The Foothill Agreement accrues
interest at 1% over Norwest Bank prime (4.75% at September 30, 2002) with a
minimum rate of 7%.
The table below provides information on the Foothill Agreement as of September
30, 2002.
Weighted Average
- ---------------------------------------- ------------------------------ ----------------------------------------------
Principal Balance Interest Rate at September 30, 2002
----------------- -----------------------------------
- ---------------------------------------- ------------------------------ ----------------------------------------------
Revolving credit facility $ 5,708,000 7%
- ---------------------------------------- ------------------------------ ----------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded
that the our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 10, 2000, we were named as a nominal defendant in a stockholder's
derivative action brought in the Supreme Court of New York, New York County, on
behalf of DynTek by Paul Miletich. On August 20, 2002, a final order approving
settlement and dismissing action by Paul Miletich was filed in the New York
County Clerk's Office. The settlement approved a stipulation that The Rubin
Family Trust transfer to DynTek 300,000 shares of DynTek common stock and
125,000 shares of MedEmerg common stock, as full settlement of a guarantee
provided by Mr. Rubin pertaining to a transaction with StyleSite Marketing.
Additionally, the insurance underwriters for DynTek paid the Company $300,000 on
behalf of the director defendants. DynTek reimbursed plaintiff's counsel for
fees and expenses of $330,000, of which 20% was paid in MedEmerg stock (80,488
shares). The shares of DynTek common stock was received and will be retired and
the remaining shares of MedEmerg common stock are being held as marketable
securities. No gain or loss was recorded in connection with the settlement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this item is incorporated by reference to the
information contained in the our Annual Report on Form 10-K filed on October 15,
2002.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
10.1 Amendment No. 15 and Waiver to Loan and Security Agreement,
dated October 15, 2002, by and between DynTek Services, Inc.
and Foothill Capital Corporation
23.1 Consent of Grassi & Co., P.C.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
- Steven J. Ross
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
- James Linesch
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed August 20,
2002, in connection with Stock Purchase and
Settlement Agreement.
(2) Current Report on Form 8-K/A filed August 30,
2002, in connection with financial statements omitted
from the Form 8-K filed August 20, 2002.
16
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNTEK, INC.
By:/s/James Linesch
--------------------
James Linesch
Chief Financial Officer
Date: November 19, 2002
17
CERTIFICATIONS
I, Steven J. Ross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DynTek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 19, 2002
By: /s/ Steven J. Ross
-----------------------
Steven J. Ross
Chief Executive Officer
18
I, James Linesch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DynTek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 19, 2002
By: /s/ James Linesch
-----------------------
James Linesch
Chief Financial Officer
19
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
In connection with the Quarterly Report of DynTek, Inc., a Delaware corporation
(the "Company"), on Form 10-Q for the quarter ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, the Chief Executive Officer, hereby certifies pursuant to 18
U.S.C. ss.1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 that:
(1) the Report of the Company filed today pursuant to Section 13(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), fully
complies with the requirements of Section 13(a) of the Exchange Act; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Steven J. Ross
---------------------
Steven J. Ross
Chief Executive Officer
November 19, 2002
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
In connection with the Quarterly Report of DynTek, Inc., a Delaware corporation
(the "Company"), on Form 10-Q for the quarter ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, the Chief Financial Officer, hereby certifies pursuant to 18
U.S.C. ss.1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 that:
(1) the Report of the Company filed today pursuant to Section 13(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), fully
complies with the requirements of Section 13(a) of the Exchange Act; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ James Linesch
----------------------
James Linesch
Chief Financial Officer
November 19, 2002