Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
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 Ave., Suite 250
Irvine, CA 92612
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 955-0078
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Series A Preferred Stock, $.0001 par value
(Title of Class)
Indicate by check mark 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes __ No X
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer as of October 1, 2003 was approximately
$46,000,000.
The number of shares outstanding of the issuer's Common Stock, $.0001 par value,
as of October 1, 2003 was 42,629,832.
Documents incorporated by reference: None
PART I
ITEM 1. BUSINESS
GENERAL
DynTek, Inc. is a professional services firm specializing in
information technology solutions and business process outsource services for
state and local government agencies. We operate our business through our sole
active subsidiary, DynTek Services, Inc. Depending upon the context, the term
DynTek, or "we", refers to either DynTek alone, or DynTek and its subsidiary.
We provide information technology support services and enabling
technologies, as well as related products, to state and local government
customers which are used to increase efficiency in operations and improve access
to government functions. Our comprehensive information technology services
include consulting, infrastructure planning and deployment, information
technology application development, legacy systems integration, information
technology system support, and business process outsourcing services for state
government agencies.
The following wholly owned subsidiaries of DynTek are inactive:
Physicians Support Services, Inc., a California corporation; Clinishare Diabetes
Centers, Inc. d/b/a SugarFree Centers, Inc., a California corporation;
USC-Michigan, Inc., a Michigan corporation; PCS, Inc.-West, a Michigan
Corporation; TekInsight e-Government Services, Inc., a Delaware corporation;
TekInsight Research, Inc., a New York corporation; and BugSolver.com, Inc., a
Delaware corporation.
INDUSTRY OVERVIEW
Government agencies are under continuing pressure to upgrade how they
manage their data and serve their citizenry. This requirement is driven by the
broadening impact of the Internet, the increasing need for real-time
information, regulatory changes, the speed and complexity of technology and
operating system advancements. State and local government agencies are
undergoing the most rapid changes, since this is where individuals have most of
their interaction with the public sector. According to the Gartner Group, Inc.
"Trends in U.S. State and Local Governments Market Trends" report, published in
March 2002, state and local government information technology, or IT, spending
is forecast to increase over the next four years at a rate of 8 percent
annually, from approximately $44 billion in 2000, to reach over $56 billion by
2005.
Fiscal and service delivery pressures have led state and local
governments increasingly to seek outside, non-governmental business partners who
can assume and ensure the delivery of high quality services at less cost and
greater quality than traditional government service offerings. State and local
government agencies are also finding that certain business processes can be
better operated and managed by private sector companies.
Government organizations often rely on outside contractors to provide
skilled resources to accomplish technology and business process outsourcing
programs. We believe that this reliance will continue to intensify in many
government agencies due to the difficulties faced in recruiting and retaining
highly skilled professionals in a labor market that, despite current high
national unemployment rates, is competitive for persons with specialized
expertise. We believe that government agencies will increasingly outsource
programs as a means of simplifying the implementation and management of
government services.
We believe that the markets we serve now demand a comprehensive
business solution from service providers, grounded in specific and relevant
business knowledge and proven experience, rather than simply the provision of
limited or generic services or offering only technology-specific solutions. We
offer comprehensive solutions to address the needs of our markets. We engage in
large-scale systems development projects involving full-service solutions that
combine hardware, legacy systems integration, systems engineering and systems
support operations. We integrate data with services to provide efficient and
low-cost business processes.
2
CURRENT OPERATIONS
We provide segment reporting for the results of our operations in two
segments, Information Technology Services and Business Process Outsourcing
Services (see Item 8 Financial Statements, footnote 21).
Information Technology Services
We provide a range of specialized information technology, or IT,
infrastructure services: system architectural design, network security services,
legacy systems integration, network engineering, applications development, help
desk support and operational support. In conjunction with these service
offerings, we also sell hardware and software to our customers. Dyntek had
approximately $ 21,882,000 in product sales and $ 22,272,000 in service sales
which account for 42% and 42% of total revenue respectively. Operations are
distributed primarily among nine states; California, Florida, Louisiana,
Massachusetts, Michigan, Texas, New Mexico, Virginia and New York, with
employees situated in locations that are convenient to client sites.
Services and related product sales are contracted primarily through
Indefinite Delivery-Indefinite Quantity-type, or IDIQ, contracts that may be
awarded by a state or local government agency to more than a single vendor.
After the government sponsor awards the contract to multiple vendors, DynTek may
then compete with other companies identified in the multiple IDIQ contracts for
individual orders issued under the contract from time to time by the government
customer. Government contracts for IT infrastructure services awarded
specifically to us alone are generally short-term task orders granted under
multi-project contract vehicles. The scope of services and product sales
provided to any given customer can vary, according to project size and the
internal client IT resources available. While the majority of our IT
infrastructure services revenues and related product sales are derived from
specific projects, as contracted, we also derive revenues from ongoing customer
relationships which generate a considerable number of recurring engagements.
Hardware and software maintenance agreements provide a significant portion of
the service revenues. Such services are provided through a combination of
in-house technicians, as well as subcontractor third-party suppliers of the
services. Dyntek currently has 43 in-house technicians and approximately 25
subcontractor third-party suppliers who have approximately 90 cumulative
technicians supplying services.
Business Process Outsourcing
DynTek provides child support enforcement services under four contracts
with state or county agencies including State of Kansas Department of Social and
Rehabilitation Services, State of Nebraska Department of Health and Human
Services, New Hanover County Department of Social Services in North Carolina,
Beaufort County Department of Social Services in North Carolina, pursuant to
which DynTek assumes responsibility for the determination and location of
legally established paternity and support obligations, enforcement of court or
administrative orders for such obligations, location of absent responsible
parents or other persons obligated for such payments and location of relevant
assets which may be used for satisfaction of such obligations. Typically these
contracts are for multi-year periods of performance, with options to renew for
additional periods. Such contracts are generally awarded through competitive
procurements. Payment is based on either fixed-price, fixed-unit- price based on
contractual allocations, revenue sharing, or a combination of the above. In
addition to direct business process outsourcing, DynTek also provides consulting
expertise to state and local governments interested in designing and evaluating
outsourced operations. DynTek had approximately $ 8,493,000 in service sales
which accounted for approximately 16% of total sales. Such services are provided
through in-house customer service representatives and attorneys and third party
attorneys. DynTek currently has 100 in house support staff and approximately 5
third party support contractors.
3
DynTek formerly provided non-emergency medical transportation brokerage
services as a part of its business process outsourcing services. Such services
were discontinued between December 2002 and March 2003 in connection with the
termination of our non-emergency medical transportation brokerage contract with
the Commonwealth of Virginia and the sales of our interests in all remaining
transportation brokerage outsourcing contracts to First Transit Inc. Our
provision of all such services is reflected as discontinued operations.
CUSTOMERS
Our customers are primarily agencies of state governments and
municipalities with large-volume information and technology needs, or the
primary vendors to those governments and agencies. Among the information
technology customers, the State of New York and its agencies comprised
approximately 25% of our total revenues and 30% of our Information Technology
Services revenue for the fiscal year ended June 30, 2003, approximately 21% of
our total revenues and 31% of our Information Technology Services revenue for
the fiscal year ended June 30, 2002 and approximately 33% of our total revenues
for the fiscal year ended June 30, 2001. We sell products and services to the
State of New York and its agencies as an authorized vendor to provide system
peripheral equipment and services to New York state agencies. As part of our
sales efforts to the State of New York, we are also an authorized reseller of
Novell, Nortel Systems and Cisco products and software. Approximately 63% of
revenues generated from New York State Agencies were from product sales and 37%
were from services.
No single customer or state (including all agencies of such state)
other than New York State accounted for more than 10% of our total revenue
during fiscal 2003. The State of Kansas Department of Social and Rehabilitation
accounted for 29% of the Business Process Outsourcing revenue for the fiscal
year ended June 30, 2003 and 25% for fiscal year ended June 30, 2002. Generally,
our products and services are purchased by individual state agencies issuing
their own purchase orders under master contract agreements between us and the
related state government through which the agency gets the authority to issue a
valid purchase order.
SALES AND MARKETING
Our sales and marketing objective in both our Information Technology
and Outsourcing sectors is to develop relationships with clients that result in
both repeat and long-term engagements. We use an internal sales force in
conjunction with partnership alliances with our vendors. Our sales team derives
leads through industry networking, referrals from existing clients, government
agencies' requests for proposals, or RFP's, open competitions conducted by
states and municipalities, strategic partnerships with third party vendors under
which we jointly bid and perform certain engagements, and sales and marketing
activities directed to specific customers.
We receive and review numerous RFPs, and evaluate competitive bidding
opportunities, from governmental entities for the provision of services and
identify those that are suitable for our responsive bid. In government contract
award procedures, following proposal submission, contracts are often awarded
based on subsequent negotiations with the bidder offering the most attractive
proposal, price and other contracting factors. In certain cases low price may be
the determining factor, while in others price may be secondary when compared
with the quality of technical skills or management approach.
We employ a team selling approach for marketing our offerings. Our
subject matter experts collaborate with our service delivery professionals to
identify a comprehensive service and product offering mix that meets customer
needs. As a result of our particular mix of service offerings, we believe that
we have the ability to penetrate markets quickly with sales of an array of
different products and services.
BACKLOG
Our backlog represents an estimate of the remaining future revenues
from existing firm contracts, which are principally for the provision of
services and related products. Our backlog estimate includes revenues expected
under the current terms of executed contracts and does not assume any contract
renewals or extensions. However, our backlog estimate may vary from the revenues
actually realized because services and related products provided under each
included contract fluctuates from period to period based on usage criteria set
forth in each contract.
4
Our information technology contracts typically are funded incrementally
and are specific-task driven, with the exception of our annual maintenance and
help desk support contracts. Therefore, in our estimation, our firm backlog at
any point in time does not represent the aggregate projected value of our
related contracts. Our backlog under information technology services contracts
only becomes firm as work progresses throughout the term of a contract, as
specific orders under the contract are placed for services and related products.
Our backlog is typically subject to large variations from quarter to quarter. As
a result, we do not consider our order backlog from information technology
services contracts to be a significant indicator of our future information
technology services revenue.
Our outsource services contracts firm backlog is approximately $27
million as of June 30, 2003, realizable primarily over the next 36 months.
VENDORS
In connection with sales of our information technology services and
products, we purchase microcomputers and related products directly from
manufacturers and indirectly through distributors such as Tech Data and Ingram
Micro Corporation. In general, we are authorized by a manufacturer to sell their
products, whether the products are purchased from distributors or directly from
manufacturers. We are an authorized reseller for microcomputers, workstations,
and related products of over 50 manufacturers. Our sales of products
manufactured by Compaq, Cisco and Novell accounted for approximately 51% of our
product revenues in the information technologies segment during the last fiscal
year (or 21% of our total revenue during the last fiscal year). Typically,
vendor agreements provide that we have been appointed, on a non-exclusive basis,
as an authorized reseller of specified products at specified locations. The
agreements generally are terminable on 30 to 90 days' notice or immediately upon
the occurrence of certain events, and are subject to periodic renewal. The loss
of a major manufacturer or the deterioration of our relationship with a major
manufacturer could have a material adverse effect on our business as certain
product offerings that are requested by customers would not be available to us.
COMPETITION
The information technology and business process outsourcing markets are
highly competitive and are served by numerous national and local firms. Market
participants include systems consulting and integration firms, including
national accounting firms and related entities, the internal information systems
and service groups of our prospective clients, professional services companies,
hardware and application software vendors, and divisions of both integrated
technology companies and outsourcing companies.
We believe that the principal competitive factors in our industry
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise, competitive pricing and the
ability to deliver results on a fixed price or transaction basis, as well as on
a time and materials basis. We believe that we can meet our competition with
respect to these factors. We believe that our ability to compete also depends in
part on a number of competitive factors outside our control, including the
ability of our clients or competitors to hire, retain and motivate project
managers and other senior technical staff, the ownership by competitors of the
software and other intellectual property to be used by potential clients, the
price at which competitors offer comparable services, the ability of our clients
to perform the services themselves, and the extent of our competitors'
responsiveness to client needs. We anticipate that our experience, reputation,
industry focus and broad range of services provide significant competitive
advantages which we expect will enable us to compete effectively in our markets.
FUTURE STRATEGY
Our strategy is to continue to grow our revenue base by capitalizing on
our core competencies in the information technologies and outsourced services
markets. Our strategies for obtaining this objective include:
Increased Market Penetration. We intend to capitalize on our long-term
relationships with government clients and our reputation within the government
market to cross-sell our full range of services to our existing client base and
to expand into organizations for which we have not already performed services.
We intend to pursue these opportunities through a continued active sales and
marketing effort and by continuing to promote the success stories stemming from
our aggressive application of successful solutions. We also intend to leverage
our relationships with our technology providers and their sales resources to
obtain new government clients.
5
Continue to Develop Complementary Services. We intend to continue
broadening our range of services in order to respond to the evolving needs of
our clients and to provide additional cross-selling opportunities. We intend to
continue to internally develop consulting practices, technologies, and
methodologies that we believe are required by government entities in order to
effectively deliver public services.
Recruit Highly Skilled Professionals. We intend to hire and retain
outstanding professionals, provide incentives to achieve corporate goals and
maintain a culture that fosters innovation. We will continue to emphasize
professional development and training of our employees. We will maintain our
active internal communications program to promote a team culture and foster high
employee morale. We will also continue to emphasize our corporate technology
infrastructure to facilitate the sharing of knowledge among our employees.
Pursue Strategic Acquisitions. We plan to broaden our capabilities and
client base and extend our geographic presence in state and local government
markets by acquiring select businesses in the future. Acquired businesses either
will be expected to perform similar technical work to that already provided by
us to organizations outside our current client base or to support solution sets
for our existing client base that are consistent with and that extend our
web-enabling strategy, or will be located in geographic areas strategic to
significant state and local governments and programs that we target as potential
new clients.
INTELLECTUAL PROPERTY RIGHTS
Our success is dependent, in part, upon our proprietary processes,
components and other intellectual property rights. We do not have any patents or
patent applications pending. We rely on a combination of trade secret,
nondisclosure and other contractual agreements, and copyright and trademark
laws, to protect our proprietary rights. Existing trade secret and copyright
laws afford us only limited protection. We enter into confidentiality agreements
with our employees and our contractors and limit access to and distribution of
our proprietary information. There can be no assurance that the steps we have
taken in this regard will be adequate to deter misappropriation of our
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights.
A portion of our business involves the development of software
applications for specific client engagements. Although ownership of
client-specific software is generally retained by the client, we retain some
rights to the applications, processes and intellectual property developed in
connection with client engagements.
HUMAN RESOURCES
As of June 30, 2003, DynTek and its subsidiaries had 230 employees. We
also sub-contract approximately 95 contract consultants for technical support.
We believe that our relationships with our employees are good.
INSURANCE COVERAGE
We maintain general liability insurance, which includes directors and
officers liability coverage, and workers compensation and professional liability
insurance in amounts deemed adequate by the Board of Directors.
6
ITEM 2. PROPERTIES
DynTek's corporate headquarters is located in Irvine, California, in a
leased facility consisting of approximately 6,500 square feet of office space
rented under a lease expiring in October 2005. There is an administrative office
located in Farmington Hills, Michigan, in a leased facility consisting of
approximately 7,000 square feet of office space. This lease expired on November
2002 and is currently operating on a month to month agreement. A technical
facility is also located in Farmington Hills, Michigan with approximately 7,000
square feet rented under a lease that expired in March 2003 and is operating on
a month to month agreement. We are currently looking to consolidate and reduce
facilities and believe that we will be able to find new suitable replacement
space within the next six months on commercially reasonable terms.
We also lease 7 separate direct sales offices and 9 other commercial
facilities containing an aggregate of approximately 52,000 square feet under
leases with terms ranging from month-to-month to five years. Such facilities are
used in connection with the provision of various services to our customers. None
of these properties is unique, all are expected to continue to be utilized in
the operation of our business and they are believed to be adequate for the
present needs of the business.
ITEM 3. LEGAL PROCEEDINGS
MILETICH DERIVATIVE ACTION
On August 20, 2002, a final settlement and dismissal order was approved
and filed in the New York County Clerk's Office from a stockholder's derivative
action by Paul Miletich. The action was originally filed on July 10, 2000,
naming us as a nominal defendant. As a part of the settlement, we received
300,000 shares of our common stock and 125,000 shares of MedEmerg common stock,
as full settlement of a guarantee provided to us. Additionally, our insurance
underwriters paid us $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 retired and the remaining shares of MedEmerg common stock are held as
marketable securities. No gain or loss was recorded in connection with the
settlement.
COMPUTER ASSOCIATES
On July 7, 2003, a Settlement Agreement was reached in a matter brought
by Computer Associates International, Inc. ("CA") against the City of Boston
("COB"), in United States District Court, District of Massachusetts (Case Number
01-10566-EFH), in which we were named as a third-party defendant. Under the
Agreement, the parties mutually released each other from any further claims on
this matter.
COMMONWEALTH OF VIRGINIA
Effective December 15, 2002, we entered into a mutual Settlement
Agreement to cancel a contract to provide non-emergency transportation brokerage
services in certain regions of the Commonwealth of Virginia. The terms of the
Settlement Agreement provided that we issue certain payments due to
transportation provider vendors according to an agreed-upon schedule, which
extended through June 2003. In connection with initially entering the contract,
a bond was posted by a third party for our payment performance to the
transportation providers. A number of such providers caused the bond to be
called, initiating a process of disbursing approximately $2.4 million (the
"Bonded Amount") of payments to providers with verified claims due. We have
arranged for a limited release of indemnification by DynCorp of our obligation
to pay to the bonding company and to reimburse the third party for its
obligation to fund the bonding company, respectively, in an amount not to exceed
the Bonded Amount to the extent that we otherwise would have an obligation to
fund or reimburse such parties with respect to the bond. The bonding company
filed an interpleader action to distribute the penal sum of the bond on July 22,
2003. As a result of our being released from our obligations with respect to
indemnification under and reimbursement with respect to the bond in an amount up
to the Bonded Amount, our liability to such third party providers will in effect
have been extinguished to the extent the funds disbursed. When the individual
claims are determined for each provider, in accordance with court procedures,
the interpled funds shall be disbursed. Should valid claims remain outstanding
after the disbursement of the interpled funds, certain third party providers may
continue to pursue their claims after the interpleader proceedings are
concluded. While the interpleader is in process, we have offered to make
payments in the aggregate amount of approximately $100,000 per month to
providers with valid claims, commencing in September 2003, until whatever
shortfall amount as we determine to exist in excess of the Bonded Amount is
paid.
7
A number of the vendors that provided transportation services in the
Commonwealth of Virginia have initiated separate legal demands for payment. Some
of the demands, either in whole or in part, have been disputed by us as being
without merit or have been settled. As of August 2003, actions for collection
are pending in 5 separate proceedings. Ali Medical,et.al, a joint case of 27
providers for approximately $1,042,000, is the largest of the claims. The Ali
Medical joint case was consolidated with the above-referenced interpleader
action for all purposes. The remaining four proceedings are for an aggregate
amount of approximately $625,000, a portion of which has been disputed based on
billings for services that were not provided under the agreements or on billings
which were outside the terms of the subcontracts. We believe that these claims
will be fully resolved following evaluation of the claims against those services
authorized by us and those rates permitted in subcontracts. Provisions in our
financial statements for the estimated settlement amounts for these and other
potential similar claims are considered adequate; however, we are unable to
predict the outcome of these claims.
OTHER MATTERS
In July 2003, we reached a mutual agreement with Merisel Americas
regarding our failure to make payments within the terms of the reseller
agreement. We shall remit $567,402 in 23 installments over a 12-month period.
Merisel has dismissed its complaint filed on October 11, 2002 in Superior Court
of California.
Due to the expiration of the statute of limitations to obtain a
judgment against us, a liability carried on our books since 1995 has been
written off during the fiscal year ended June 30, 2003, along with the accrued
interest on the debt. In connection with the write-off, we recorded other income
of $1,862,000, and offset interest expense in the amount of $52,000. The
liability was originally recorded as a result of audit findings relating to a
prior business of ours that was 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, which was conducted on behalf of the California Department of Health
Services. On January 26, 2000, the California Court of Appeals upheld the audit
findings, but the California Department of Health Services never filed an action
to collect the amount in question.
During the fiscal year ended June 30, 2003, the Company satisfied its
obligation on a judgment that was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina on July
28, 2000. The plaintiff was awarded a judgment of $572,000 plus reasonable
attorney fees and interest totaling $ 778,000. The debt was paid in full during
the fiscal year ended June 30, 2003.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Stockholders on June 27, 2003 to consider
the election of directors and the ratification of the appointment by the Board
of Directors of Marcum & Kliegman LLP as independent accountants for the year
ended June 30, 2003.
The following five individuals were elected by the stockholders to
serve as directors for terms expiring at our 2003 Annual Meeting or until their
successors are elected and qualified:
Votes Cast For Against or Withheld Abstentions
-------------- --------------------- -----------
Name Class A Class A Class A
- ---- Common Series A Common Series A Common Series A
Stock Preferred Stock Preferred Stock Preferred
----- --------- ----- --------- ----- ---------
Steven J. Ross 16,434,085 1,430,987 14,412 4,336 0 0
James Linesch 16,434,085 1,430,988 14,412 4,335 0 0
Brian D. Bookmeier 16,434,085 1,430,988 14,412 4,335 0 0
Michael W. Grieves 16,434,085 1,430,846 14,412 4,477 77,564 1,077
Marshall Toplansky 16,434,085 1,430,987 14,412 4,336 22,850 1,943
There were no broker nonvotes in any category. At the Annual Meeting,
the stockholders also ratified the appointment of Marcum & Kliegman LLP as
independent accountants for the year ended June 30, 2003 by the following vote:
16,366,033 shares of Common Stock, and 1,424,411 shares of Series A Preferred
Stock were voted in favor, 4,900 shares of Common Stock, and 9,835 shares of
Series A Preferred Stock were voted against, and 77,564 shares of Common Stock,
and 1,077 shares of Preferred Stock were held in abstention.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for trading our Common Stock and Class A Warrants
is the Nasdaq Small Cap Market ("Nasdaq"), although our Common Stock and Class A
Warrants are also traded on the Boston Stock Exchange.
PRICE RANGE OF OUTSTANDING COMMON STOCK
On December 18, 1992, our Common Stock began trading on Nasdaq and has
been quoted on Nasdaq at all times since that date.
The following table sets forth the high and low bid prices for each
fiscal quarter during the fiscal years ended June 30, 2003 and 2002, as reported
by Nasdaq. Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and do not necessarily represent actual transactions.
9
FISCAL YEAR ENDED JUNE 30, 2002 HIGH LOW
----- ---
First quarter ended September 30, 2001 $2.55 $1.53
Second quarter ended December 31, 2001 2.64 1.63
Third quarter ended March 31, 2002 2.44 1.86
Fourth quarter ended June 30, 2002 2.11 1.56
FISCAL YEAR ENDED JUNE 30, 2003 HIGH LOW
----- ---
First quarter ended September 30, 2002 $1.90 $0.80
Second quarter ended December 31, 2002 1.49 0.68
Third quarter ended March 31, 2003 1.04 0.55
Fourth quarter ended June 30, 2003 1.05 0.61
On September 15, 2003, the last trade price for a share of Common Stock
was $1.01, as reported on Nasdaq. We estimate that we have in excess of 300
beneficial holders of our Common Stock.
DIVIDEND POLICY
We have never paid cash dividends on our Common Stock and do not
anticipate paying cash dividends in the foreseeable future, but rather intend to
retain future earnings, if any, for reinvestment in our future business. Any
future determination to pay cash dividends will be in compliance with our
contractual obligations (including our credit agreement with Systran Financial
Services Corporation), and otherwise at the discretion of the Board of Directors
and based upon our financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
10
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders................. 3,122,273 $1.81 1,242,479
Equity compensation plans not
approved by security
holders................. - - -
Total........ 3,122,273 $1.81 1,242,479
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2003, we issued the following
securities in private offerings exempt from the Securities Act of 1933, as
amended (the "Securities Act"). Unless otherwise noted, we relied on the
exemption provided under Rule 506 of Regulation D promulgated under Section 4(2)
of the Securities Act:
o In June 2003, we sold 2,221,932 shares of its Common Stock for $0.50
per share. Warrants were issued in connection with this Offering at
a rate of one warrant for each $1 invested exercisable for a period
of five years. In connection with the offering, we paid a placement
agent a fee in DynTek Common Stock in an amount that is equal to 30%
of the aggregate shares issued in the Offering of 666,579 shares.
11
ITEM 6. SELECTED FINANCIAL DATA
On August 14, 2000, we acquired the assets of Data Systems Network
Corporation, causing an increase in our revenues and costs for the fiscal year
ended June 30, 2001.
DynTek, Inc.
Selected Financial Data
Years ended June 30,
in (000's)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating revenues $52,647 $ 60,077 $ 44,910 $ 1,962 $ 1,515
Loss from continuing operations (4,203) (12,379) (10,822) (3,947) (479)
Loss from continuing operations - per share (.11) (.43) (.63) (.25) (.03)
Loss from discontinued operations - per share (.26) (.24) - - -
Total assets 53,127 80,519 33,997 12,525 16,488
Long term debt 5,000 - - - 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-K and in our future filings with the
Securities and Exchange Commission, the words or phrases "will likely result",
"we expect," "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. We wish 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
our business emphasis, the ability to finance and sustain operations, including
the ability either to maintain and extend the Textron Financial Corporation
credit agreement when it becomes due or to replace it with alternative
financing, the ability to raise equity capital in the future despite historical
losses from operations, our ability to arrange successfully for extended payment
terms for certain overdue obligations and judgments or to successfully refinance
obligations in the event that the holders of such overdue or otherwise defaulted
obligations declare us in default thereunder, the ability to fulfill our
obligations to third parties, 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 our ability to obtain extensions of the
remaining profitable DMR contracts at their maturity, the performance of
governmental services, the ability to develop and upgrade our technology, and
the continuation of general economic and business conditions that are conducive
to governmental outsourcing of service performance. We have 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.
12
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales.
Year Ended June 30,
-------------------
2003 2002 2001
---- ---- ----
Product Revenue 42% 52% 56%
Service Revenue-Information Technology 42% 40% 44%
Service Revenue-Business Process Outsourcing 16% 8% 0%
Cost of Product 85% 85% 83%
Cost of Service-Information Technology 80% 76% 75%
Cost of Service-Business Process Outsourcing 77% 79% 0%
Gross profit 18% 19% 21%
SG & A 21% 26% 28%
Loss from operations (6)% (20)% (24)%
Interest income - - -
Total income (loss) from discontinued operations (18)% (12)% (0)%
Net income/(loss) (24)% (32)% (24)%
=== === ===
Fiscal years ended June 30, 2003 and June 30, 2002 - Continuing Operations
Revenues for the fiscal year ended June 30, 2003 decreased to
approximately $52,647,000 from approximately $60,077,000 during the prior year,
or a 12% decrease from the fiscal year ended June 30, 2002. This decrease was
primarily a result of decreased orders from ongoing customers, resulting
primarily from reduced or delayed information technology spending budgets during
the period. The revenue mix from ongoing services and the related product sales
was 58% and 42%, respectively, for the 2003 fiscal year, as compared to 48% and
52%, respectively, for the 2002 fiscal year. This change in revenue mix is
primarily due to the decrease in product revenues associated with reduced or
delayed information technology spending budgets during the period.
Cost of revenues for the fiscal year ended June 30, 2003 decreased to
approximately $43,088,000 from approximately $48,589,000 during the fiscal year
ended June 30, 2002. The decrease is generally consistent with the reduction in
revenues. The overall cost of revenue percentage increased to 82% for the 2003
fiscal year from 81% during the 2002 fiscal year, causing slightly lower gross
margins on sales. The decrease in overall gross margins on sales is primarily
due to under-utilized technical personnel in certain geographic areas and to the
completion of certain non recurring projects. Costs of product revenues remained
constant, as a percentage of sales, at approximately 85% of revenues during the
fiscal years ended June 30, 2003 and 2002.
Selling, general and administrative expenses decreased to approximately
$11,202,000 for the fiscal year ended June 30, 2003, from approximately
$15,786,000 for the 2002 fiscal year period. As a percentage of total revenues,
the aggregate selling, general and administrative expenses were 21% during
fiscal 2003, from approximately 26% in the prior fiscal year. This decrease in
selling, general and administrative costs was primarily due to consolidation of
overhead costs. Application development costs decreased to zero during fiscal
2003, from $492,000 during the prior fiscal year. We are not developing new
applications at this time. We are enhancing current applications on a task-order
basis only, with such costs charged to cost of sales.
Options were issued for services rendered with a value of $17,000
during the fiscal year ended June 30, 2003, as compared to $325,000 during the
prior fiscal year.
13
Depreciation and amortization expense increased to approximately
$2,729,000 for the fiscal year ended June 30, 2003, from approximately
$2,720,000 for the 2002 fiscal year.
Interest expense for the fiscal year ended June 30, 2003 was
$1,175,000, as compared to $2,582,000 for the fiscal year ended June 30, 2002.
The decrease in expense is primarily a result of interest and finance costs on
short-term convertible notes payable incurred during the fiscal year 2002 of
$1,156,000, which did not recur in fiscal 2003. The decrease in interest income
from June 30, 2003 to $69,000 from $294,000 during the fiscal year June 30, 2002
is due primarily to non-recurring note receivable interest.
The loss on sale of marketable securities of $1,241,000 in fiscal 2002
did not recur in fiscal 2003.
The net loss of $13,769,000 for the fiscal year ended June 30, 2003
includes losses from discontinued operations of the non-emergency transportation
business of $9,566,000. The losses from continuing operations are primarily a
result of decreased orders from ongoing customers, resulting primarily from
reduced or delayed information technology spending budgets during the period.
Fiscal years ended June 30, 2002 and June 30, 2001 - Continuing Operations
Revenues for the fiscal year ended June 30, 2002 increased to
approximately $60,077,000 from approximately $44,910,000 during the prior year,
or a 34% increase from the fiscal year ended June 30, 2001. These increases were
primarily due to the December 31, 2001 acquisition by merger of DynCorp
Management Resources (DMR). The revenue mix of services and related product was
52% and 48%, respectively, for the 2002 fiscal year.
Cost of revenues for the fiscal year ended June 30, 2002 increased to
approximately $48,589,000 from approximately $35,492,000 during the fiscal year
ended June 30, 2001. The cost of revenue percentage increased to 81% for the
2002 fiscal year from 79% during the 2001 fiscal year. The average cost of
revenue percentage is impacted by the mix of revenues derived from services and
from the related product sales. The revenues generated from product sales
normally produce a lower gross margin percentage when compared to those of
service revenues. During the prior fiscal year, revenues were predominately from
consulting services rendered by our development group. For the fiscal year ended
June 30, 2002, the product cost of revenue was 85% of such sales and the service
costs of revenue were 76% of such sales.
Selling, general and administrative expenses increased to approximately
$15,786,000 for the fiscal year ended June 30, 2002, from approximately
$12,668,000 for the 2001 fiscal year period. The increase in costs were
primarily from the December 31, 2001 merger of DMR. Stock options issued for
services comprised $325,000 of costs for the fiscal year ended June 30, 2002 and
$721,000 of the costs for the fiscal year ended June 30, 2001.
Application development expense for the fiscal year ended June 30, 2002
decreased to approximately $492,000 from approximately $2,945,000 for the prior
fiscal year. The decrease is due to the costs associated with the development of
our ProductivIT product and the development costs for our eGovernment modules in
fiscal year 2001.
Depreciation and amortization expense decreased to approximately
$2,720,000 for the fiscal year ended June 30, 2002, from approximately
$2,747,000 for the 2001 fiscal year.
Interest income increased to approximately $294,000 for the fiscal year
ended June 30, 2002, from approximately $112,000 for the 2001 fiscal year. This
increase is attributable to interest earned on the PLC note receivable. Interest
expense for the fiscal year ended June 30, 2002 increased to approximately
$2,582,000 from $592,000 in the prior fiscal year. This expense is a result of
the credit line facility acquired in the August 14, 2000 Data Systems merger and
the finance costs on short-term convertible notes payable incurred during the
fiscal year 2002, of $1,156,000.
14
Although total other expense did not change significantly for the
fiscal year ended June 30, 2002, from the prior fiscal year, the composition of
such costs changed from year to year. The loss on marketable securities
increased to $1,241,000 from $480,000 in the prior year.
The net loss of $19,413,000 for the fiscal year ended June 30, 2002 includes
discontinued operations losses of $ 7,034,000 from the December 31, 2001 merger
with DMR.
Discontinued Operations
Effective March 1, 2003, the Company entered into an Asset Purchase Agreement
with First Transit, Inc., pursuant to which the Company sold to First Transit,
Inc. certain specific assets relating to the non-emergency transportation
brokerage services business previously provided by the Company. The assets sold
consisted of the Company's interests in three contracts to provide non-emergency
transportation related services and related assets used in connection with
performance of such contracts by the Company as well as the assumption of all
vendor and services sub-contract agreements relating to the contracts. The
Purchase Price consisted of $6,450,000 cash payments and up to $1,750,000 to be
paid in the event that First Transit, Inc. is able to obtain extension of the
Illinois Department of Public Aid contract for a period of up to three years
beyond May 31, 2004 under certain specified conditions. As part of the
Agreement, DynTek Services also agreed to not compete with First Transit in the
business which was sold.
As a result of the First Transit Inc. Agreement and the mutual Settlement
Agreement the Company entered into on December 15, 2002 to cancel a contract to
provide non-emergency transportation brokerage services with the Commonwealth of
Virginia, the Company has discontinued all non-emergency transportation services
which was a component and separate reporting unit of the Company's business
outsourcing segment. The Discontinued Operations losses for fiscal year end June
30, 2003 were $ 9,566,000, which consisted of losses of $6,309,000 on disposal
of assets and losses of $ 3,257,000 on discontinued operations, compared to
discontinued operations losses of $7,304,000 in fiscal year end June 30, 2002.
Liquidity and Capital Resources
As of June 30, 2003, we had a working capital deficiency of approximately $11
million. During July 2003, the Company received proceeds from the sale of our
common stock of $1.8 million and received forgiveness of $625,000 of accrued
interest on a note payable. In addition, we received a release of our obligation
to indemnify DynCorp for approximately $2.4 million of payments due to certain
of our former vendors, which are currently reflected in accounts payable.
In July 2003, we sold 4,198,000 shares of our Common Stock at $0.50 per share,
for aggregate proceeds, net of costs, of approximately $1,834,000. On July 3,
2003, an investor group cancelled a note payable by us of $5 million plus
accrued interest of $625,000. The investor group also cancelled a warrant to
acquire 7,500,000 shares of Company Common Stock that they acquired in the same
transaction. The note was acquired by the group in connection with their private
purchase of 10 million shares of our Common Stock from DynCorp. In exchange for
the note cancellation and warrant cancellation, we provided additional
registration rights to the investor group covering the Common Stock that was
transferred.
15
We obtained a limited release of indemnification by DynCorp of our
obligation to pay to a bonding company and to reimburse DynCorp for its
obligation to fund, respectively, an amount not to exceed approximately $2.4
million under a performance bond related to our discontinued transportation
services business to the extent that we otherwise would have an obligation to
fund or reimburse such parties with respect to the bond. As a result of our
being released from our obligations with respect to indemnification under and
reimbursement with respect to the bond in an amount up to approximately $2.4
million, our liability to former providers whose service payments are covered by
the bond has in effect been reduced by approximately $2.4 million. Such
liability to the vendors is currently reflected in accounts payable, and will be
eliminated from accounts payable as and to the extent that the proceeds from the
bond satisfy those obligations to such vendors. When the individual claims are
determined for each provider, in accordance with court procedures, the
approximately $2.4 million subject to the bond will be disbursed. Should valid
vendor claims remain outstanding after disbursement of the approximately $2.4
million covered by the bond, certain providers may continue to pursue their
claims against us. While vendor actions with respect to the bond are in process,
we have offered to make payments to providers with valid claims of approximately
$100,000 per month, commencing in September 2003, until whatever shortfall
amount as we determine to exist in excess of the aggregate approximately $2.4
million is paid. We believe that aggregate accruals recorded in our accounts
payable exceed the aggregate amount due under our remaining obligations to
transportation providers; however, we are unable to predict the outcome of these
claims.
On June 30, 2003, we entered into a twelve (12) month renewable credit
facility agreement with an agency of Textron Financial Corporation ("Textron").
Textron provides a full notification factoring facility for up to $7 million of
working capital. Eligible accounts receivable expected to be collected within 90
days are purchased with recourse, with a holdback amount of 20%. Interest is
charged on the outstanding balance at the Prime rate plus 2.5% (6.25% at June
30, 2003). Additionally, a 0.25% discount fee is charged at the time of
purchase. The credit facility with Textron replaced the former agreement with
Foothill Capital. As of June 30, 2003, $708,000 was outstanding under the former
Foothill Capital agreement.
On March 1, 2003, we entered into an Asset Purchase Agreement with
First Transit, Inc., pursuant to which we sold to First Transit, Inc. certain
specific assets relating to our discontinued transportation management business
originally acquired in December 2002. The assets sold consisted of our interests
in three contracts to provide non-emergency transportation related services and
related assets used in connection with our performance of such contracts, as
well as the assumption of all vendor and services sub-contract agreements
relating to the acquired contracts. The purchase price consisted of cash
payments of $6,450,000 and an obligation to pay up to $1,750,000 in the event
that First Transit, Inc. is able to obtain extension of our former Illinois
Department of Public Aid transportation services contract for a period of up to
three years beyond May 31, 2004 under certain specified conditions. We believe
that such payment may become due to the Company during the first calendar
quarter of 2004.
During September 2003, we commenced negotiations for a financing
commitment from investors for an amount up to $ 2 million. If such negotiations
are successfully concluded, the terms of the investment are anticipated to be a
long-term note payable with an equity conversion feature. There is no assurance,
however, that this financing will occur.
We may expand the scope of our product and services offerings by
pursuing acquisition candidates with complementary technologies, services or
products. Should we commence such acquisitions, we believe that we would finance
the transactions with a combination of our 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.
Based on current business plans, we believe that the current operations
of the Company will produce positive cash flows during the fiscal year ended
June 30, 2004. We are receiving indications that that some of the adverse fiscal
pressures of our ongoing customers are easing, which are anticipated to result
in increased revenues from our recurring customer relationships. At the same
time, we are adding to and adjusting our service offerings to emphasize the
primary needs of our customers, such as network security services. We believe
that our unique service offering mix, along with the increased spending budgets
of our customers, will continue to drive increased revenues throughout the
fiscal year 2004.
Our capital structure improved dramatically during July 2003, through
the retirement of the $5 million note and accrued interest, the $1.8 million
capital raise and the $7 million credit facility, as mentioned above.
Additionally, we will realize further reductions in our outstanding accounts
payable as the $2.4 million performance bond is disbursed in fulfillment of our
obligations to transportation provider vendors. We are negotiating payment terms
with other vendors that will defer certain payments due. We also anticipate the
ability to negotiate improvements in the terms of our working capital line of
credit, as our results of operations improve. Based on current business plans,
we believe that our current working capital is sufficient to support our
business operations during the fiscal year 2004. Should we require additional
working capital, we would consider divesting of certain contracts or other
assets that may not be critical to the future success of the Company.
16
Recent Accounting Standards
The following pronouncements have been issued by the FASB.
In January 2003, the FASB issued Fin 46, "Consolidation of Variable Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or, (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidated requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
Certain of the disclosure requirements apply in all financial statement s issued
after January 31, 2002, regardless of when the variable interest entity was
established.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provision relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of financial instrument that
is within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and, otherwise, is effective at the beginning of the first interim
period beginning after June 15, 2003.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's financial statements.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes are prepared in accordance with
U.S. GAAP. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Critical accounting policies
for us include revenue recognition, impairment of investment securities,
impairment of goodwill, accounting for contingencies and accounting for
discontinued operations.
Basis of Presentation. During the fiscal year ended June 30, 2003 we adopted a
plan to sell our transportation brokerage operations. The operations are
accounted for as a discontinued operation, and, accordingly, amounts in the
consolidated financial statements and related notes for all periods presented
reflect discontinued operation accounting.
17
Revenue recognition. Our policy follows the guidance from SEC Staff Accounting
Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. We recognize revenues when persuasive evidence of an
arrangement exists, the product has been shipped or the services have been
provided to the client, the sales price is fixed or determinable, and
collectability is reasonably assured.
Generally, information technology processing revenues are recognized as services
are provided to the client. Revenues from annual maintenance contracts services
provided by the Company are deferred and recognized ratably over the maintenance
period. Revenues from hardware sales are recognized upon delivery to the client
and when uncertainties regarding customer acceptance have expired. Revenues for
business process outsourcing services are recognized as services are rendered,
normally invoiced on a monthly basis. Revenues on unit-price contracts are
recognized at the contractual selling prices of work completed and accepted by
the client. Revenues on time and material contracts are recognized at the
contractual rates as the labor hours and direct expenses are incurred.
Collectability of Receivables. A considerable amount of judgment is required to
assess the ultimate realization of receivables, including assessing the
probability of collection and the current credit worthiness of our clients.
Probability of collection is based upon the assessment of the client's financial
condition through the review of its current financial statements or credit
reports.
SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested
for impairment at the reporting unit level (operating segment or one level below
an operating segment) on an annual basis (June 30th for DynTek) and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment for each
reporting unit.
Factors That May Affect Future Results
The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements in this
Form 10-K.
Inability to Obtain Additional Financing, if Needed. We have had
recurring losses from continuing operations and negative cash flows from
operations. Such losses have been funded primarily from cash received from the
sales of our stock and from debt financings, as well as cash received from the
sale of discontinued operations. We have implemented and will continue to
implement cost reductions designed to minimize such losses. However, if our
existing cash balances are not sufficient to meet our liquidity needs, support
our future expansion needs and achieve our strategic goals, we may require
additional funds. If adequate funds are not available on acceptable terms, we
may be required to divest certain contracts or other assets that are not central
to our business strategy. We will continue to pursue a number of initiatives
intended to minimize our losses in the event that gross margins from sales do
not occur as planned, however, we cannot assure you that we will not require
additional working capital for our operations.
Dependence on Contracts with Government Agencies. The majority of our
revenues are derived from sales to government agencies. Such government agencies
may be subject to budget cuts or budgetary constraints or a reduction or
discontinuation of funding. A significant reduction in funds available for
government agencies to purchase professional services and related products would
have a material adverse effect on our business, financial condition and results
of operations.
Inability to Attract and Retain Professional Staff Necessary for
Existing and Future Projects. Our success depends in large part upon our ability
to attract, retain, train, manage and motivate skilled employees, particularly
project managers and other senior technical personnel. Despite current high
unemployment rates, there is significant competition for employees with the
skills required to perform the services we offer. In particular, qualified
project managers and senior technical and professional staff are in great demand
and competition for such persons is likely to increase. If we are unable to
attract, retain and train skilled employees, it could impair our ability to
adequately manage and staff our existing projects and to bid for or obtain new
projects, which would have a material adverse effect on our business, financial
condition and results of operations. In addition, the failure of our employees
to achieve expected levels of performance could adversely affect our business.
There can be no assurance that a sufficient number of skilled employees will
continue to be available, or that we will be successful in training, retaining
and motivating current or future employees.
18
Substantial Competition in the Information Technology and Consulting
Services Markets. The information technology products and related services
markets are highly competitive and are served by numerous international,
national and local firms. There can be no assurance that we will be able to
compete effectively in these markets. Market participants include systems
consulting and integration firms, including national accounting firms and
related entities, the internal information systems groups of our prospective
clients, professional services companies, hardware and application software
vendors, and divisions of both large integrated technology companies and
outsourcing companies. Many of these competitors have significantly greater
financial, technical and marketing resources, generate greater revenues and have
greater name recognition than we do. In addition, there are relatively low
barriers to entry into the IT products and related services markets, and we have
faced, and expect to continue to face, additional competition from new entrants
into the IT products and related services markets.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. A
component of our business strategy is to expand our presence in new or existing
markets by acquiring additional businesses. There can be no assurance that we
will be able to identify, acquire or profitably manage additional businesses or
integrate successfully any acquired businesses without substantial expense,
delay or other operational or financial problems. Acquisitions involve a number
of special risks, including the diversion of management's attention, failure to
retain key personnel, increased general and administrative expenses, client
dissatisfaction or performance problems with an acquired firm, assumption of
unknown liabilities, and other unanticipated events or circumstances. Any of
these risks could have a material adverse effect on our business, financial
condition and results of operations.
Dependence on Significant Personnel. Our success depends in large part
upon the continued services of a number of significant employees. Although we
have entered into employment agreements with certain significant employees,
these employees and other significant employees who have not entered into
employment agreements may terminate their employment at any time. The loss of
the services of any significant employee could have a material adverse effect on
our business. In addition, if one or more of our significant employees resigns
to join a competitor or to form a competing company, the loss of such personnel
and any resulting loss of existing or potential clients to any such competitor
could have a material adverse effect on our business, financial condition and
results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not Applicable.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DYNTEK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
Page Number
-----------
INDEPENDENT AUDITORS' REPORTS 21 - 22
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2003 AND 2002 23
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) FOR THE YEARS
ENDED JUNE 30, 2003, 2002 AND 2001 24
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
JUNE 30, 2003, 2002 AND 2001 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 26 - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 - 46
20
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
DynTek, Inc.
We have audited the accompanying consolidated balance sheet of DynTek, Inc. and
Subsidiaries as of June 30, 2003, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity 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 of America. 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 consolidated financial position of DynTek, Inc. and
Subsidiaries as of June 30, 2003 and the consolidated results of their
operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
Marcum & Kliegman LLP
Certified Public Accountants
September 26, 2003
New York, New York
21
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
DynTek, Inc.
We have audited the accompanying consolidated balance sheet of DynTek, Inc. and
Subsidiaries as of June 30, 2002, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity and
cash flows for each of the two years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial position of DynTek, Inc. and
Subsidiaries as of June 30, 2002 and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
June 30, 2002, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has had recurring
losses from continuing operations, negative cash flows from operations, and has
a working capital deficiency of approximately $14,000,000 at June 30, 2002, that
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Grassi & Co., P.C.
Certified Public Accountants
October 11, 2002
New York, New York
22
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
----------------------------------
June 30, 2003 June 30, 2002
-------------- ----------------
ASSETS
CURRENT ASSETS:
Cash $ - $ 26
Cash - Restricted 920 986
Accounts receivable, net of allowance for doubtful accounts of $463 and $609 9,370 10,012
Tax refund receivable - 245
Inventories 351 1,008
Prepaid expenses and other assets 151 128
Note receivable - current portion - 375
Other receivables 122 779
Current assets of discontinued operations - 8,026
------------- ---------------
TOTAL CURRENT ASSETS 10,914 21,585
RESTRICTED CASH - over one year 317 995
INVESTMENTS - Marketable Securities 282 366
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,904 and $2,382 624 1,037
GOODWILL 31,214 31,588
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $594 and $378 483 698
ACQUIRED CUSTOMER LIST, net of accumulated amortization of $4,955 and $2,920 7,602 9,419
PURCHASED SOFTWARE, net of accumulated amortization of $498 and $325 192 365
NOTES RECEIVABLE, long term, including receivable from officer of $100 1,204 1,017
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS - 12,987
DEPOSITS AND OTHER ASSETS 295 462
------------- ---------------
$ 53,127 $ 80,519
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,714 $ 12,260
Line of credit 708 6,347
Accrued expenses 2,271 4,437
Deferred revenue 981 1,610
Audit assessment - 1,861
Notes payable-accrued interest 625 -
Current liabilities of discontinued operations 5,888 9,145
------------- ---------------
TOTAL CURRENT LIABILITIES 22,187 35,660
------------- ---------------
DEFERRED REVENUE - long term 317 995
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS - 84
LONG TERM NOTE PAYABLE 5,000 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 10,000,000 shares authorized;
1,490,437 and 1,616,397 shares issued and outstanding as of June 30, 2003 and 1 1
June 30, 2002, respectively
Class A Common stock, $.0001 par value, 70,000,000 shares authorized;
38,382,705 shares and 23,533,692 shares issued and outstanding as of
June 30, 2003 and June 30, 2002, respectively 4 2
Class B Common stock, $.0001 par value, 20,000,000 shares authorized;
18,336,663 shares issued and outstanding as of June 30, 2002 - 2
Additional paid-in capital 81,918 86,193
Accumulated other comprehensive loss (244) (131)
Accumulated deficit (56,056) (42,287)
------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 25,623 43,780
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,127 $ 80,519
============= ===============
See notes to consolidated financial statements.
23
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
Years Ended June 30,
---------------------------------------------
2003 2002 2001
------------ ----------- ------------
REVENUES
Product Revenues $ 21,882 $ 31,055 $ 24,650
Service Revenues 30,765 29,022 20,260
------------ ----------- ------------
TOTAL REVENUES 52,647 60,077 44,910
------------ ----------- ------------
COST OF REVENUES
Cost of Products 18,540 26,392 20,371
Cost of Services (net of $5 million reimbursement in 2002) 24,548 22,197 15,121
------------ ----------- ------------
TOTAL COST OF REVENUES 43,088 48,589 35,492
------------ ----------- ------------
GROSS PROFIT 9,559 11,488 9,418
------------ ----------- ------------
OPERATING EXPENSES:
Selling costs 7,443 10,507 8,614
General and administrative expenses 3,759 5,279 4,054
Non Cash Charge Options and Warrants-General and
administrative - 325 721
Application development - 492 2,945
Depreciation and amortization 2,729 2,720 2,747
Impairment of goodwill -
Impairment of goodwill 600 1,135 -
------------ ----------- ------------
LOSS FROM OPERATIONS (4,972) (8,970) (9,663)
OTHER INCOME (EXPENSE)
Loss on marketable securities - (1,241) (480)
Equity interest in loss of investee (72) (220) (100)
Interest expense (1,175) (2,582) (592)
Interest income 69 294 112
Other income (expense), net 1,947 142 (175)
------------ ----------- ------------
TOTAL OTHER INCOME (EXPENSE) 769 (3,607) (1,235)
------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (4,203) (12,577) (10,898)
INCOME TAX (BENEFIT) - (198) (76)
------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS (4,203) (12,379) (10,822)
------------ ----------- ------------
DISCONTINUED OPERATIONS
Loss on disposal of discontinued operations (6,309) - -
Loss on discontinued operations (3,257) (7,034) 59
------------ ----------- ------------
TOTAL (LOSS) INCOME FROM DISCONTINUED OPERATIONS (9,566) (7,034) 59
------------ ----------- ------------
NET LOSS $ (13,769) $ (19,413) $ (10,763)
------------ ----------- ------------
NET LOSS PER SHARE:
Continued $ (0.11) $ (0.43) $ (0.63)
Discontinued (0.26) (0.24) (0.00)
------------ ----------- ------------
NET LOSS PER SHARE - basic and diluted $ (0.37) $ (0.67) $ (0.63)
============ =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES USED IN
COMPUTATION-BASIC AND DILUTED 36,639,261 29,103,092 17,168,883
============ =========== ============
NET LOSS $ (13,769) $ (19,413) $ (10,763)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain (loss) on available-for-sale securities (113) 823 (1,918)
------------ ----------- ------------
COMPREHENSIVE LOSS $ (13,882) $ (18,590) $ (12,681)
============ =========== ============
See notes to consolidated financial statements.
24
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Class B Common
Preferred Stock Class A Common Stock Stock
----------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ -------- -------- -------- ------ ------
Balance - June 30, 2000 16,294 2
Shares issued in connection
with the acquisition of
Data Systems Network
Corporation 2,190 1 130
Shares issued in connection
with the exercise of
employee stock options 250
Shares issued in connection
with the acquisition of Big
Technologies, Inc. 78
Options issued in
connection with consulting
agreements
Shares issued in connection 2,718
with private offering
Shares issued in connection
with BugSolver, Inc.
private offering
Minority interest in
BugSolver, Inc. subsidiary
Changes in unrealized gain
(loss) on securities
available-for-sale
Net Loss
-------- -------- -------- -------- -------- --------
Balance - June 30, 2001 2,190 1 19,470 2
Shares issued in connection
with the acquisition of DMR 18,337 2
Shares issued in connection
with the exercise of
employee stock options 184
Conversion of short-term
notes to subscriptions due 316
Shares issued in connection
with private offering 625
Subscriptions due in
connection with private
offering
Shares due for services
rendered
Discount on short-term
notes payable
Deferred finance costs
Beneficial conversion
feature
Convert preferred stock to (574) 1,433
common
Convert shares issued in
connection with BugSolver,
Inc. private offering 1,500
Shares issued in connection
with the acquisition of Big
Technologies 78
Options issued for services
Retirement of shares (72)
Changes in unrealized gain
(loss) on securities
available for sale
Net loss
--------- -------- -------- -------- -------- --------
Balance - June 30, 2002 1,616 $ 1 23,534 $ 2 18,337 $ 2
Conversion of short-term 776
notes to private offering 1
Shares issued in connection
with private offering 726
Shares issued for services 25
rendered
Convert preferred stock to (126) 314
common
Buyback of Class B shares (8,000) (1)
Convert Class B shares to
Class A 10,337 1 (10,337) (1)
Shares issued in connection
with private offering 2,889
Options issued for services -
Stock option exercise 10
Retirement of shares (300)
Reverse Retirement of shares 72
Stock Fees
Changes in unrealized gain
(loss) on securities
available for sale
Net loss
--------- -------- -------- -------- -------- --------
Balance - June 30, 2003 1,490 $ 1 38,383 $ 4 - $ -
========= ======== ======== ======== ======== ========
Un-
realized Total
Additional Gain Accum- Stock-
Paid-In (Loss) on ulated holders'
Capital Securities Deficit Equity
------- ---------- -------- --------
Balance - June 30, 2000 20,764 964 (12,111) 9,619
Shares issued in connection
with the acquisition of
Data Systems Network
Corporation 12,800 12,801
Shares issued in connection
with the exercise of
employee stock options 337 337
Shares issued in connection
with the acquisition of Big
Technologies, Inc. 217 217
Options issued in
connection with consulting
agreements 779 779
Shares issued in connection 2,535 2,535
with private offering
Shares issued in connection
with BugSolver, Inc.
private offering 2,850 2,850
Minority interest in (222) (222)
BugSolver, Inc. subsidiary
Changes in unrealized gain
(loss) on securities
available-for-sale (1,918) (1,918)
Net Loss (10,763) (10,763)
--------- -------- -------- --------
Balance - June 30, 2001 40,060 (954) (22,874) 16,235
Shares issued in connection
with the acquisition of DMR 40,339 40,341
Shares issued in connection
with the exercise of
employee stock options 131 131
Conversion of short-term
notes to subscriptions due 473 473
Shares issued in connection
with private offering 938 938
Subscriptions due in
connection with private
offering 1,962 1,962
Shares due for services
rendered 58 58
Discount on short-term 591
notes payable 591
Deferred finance costs 115 115
Beneficial conversion 763
feature 763
Convert preferred stock to - -
common
Convert shares issued in
connection with BugSolver,
Inc. private offering 222 222
Shares issued in connection
with the acquisition of Big
Technologies 216 216
Options issued for services 325 325
Retirement of shares - -
Changes in unrealized gain
(loss) on securities
available for sale 823 823
Net loss (19,413) (19,413)
--------- -------- -------- --------
Balance - June 30, 2002 $ 86,193 $ (131) $(42,287) $ 43,780
Conversion of short-term -
notes to private offering
Shares issued in connection
with private offering 12 12
Shares issued for services
rendered 50 50
Convert preferred stock to - -
common
Buyback of Class B shares (4,999) (5,000)
Convert Class B shares to
Class A - 1
Shares issued in connection
with private offering 1,111 1,111
Options issued for services 16 16
Stock option exercise 10 10
Retirement of shares (435) (435)
Reverse Retirement of shares (7) (7)
Stock Fees (33) (33)
Changes in unrealized gain
(loss) on securities
available for sale (113) (113)
Net loss (13,769) (13,769)
--------- -------- -------- --------
Balance - June 30, 2003 $ 81,918 $ (244) $(56,056) $ 25,623
========= ======== ======== ========
See notes to consolidated financial statements.
25
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30,
----------------------------------------
2003 2002 2001
----------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss-Continuing operations $ (4,203) $ (12,379) (10,822)
----------- --------- ----------
Adjustments to reconcile net loss, excluding discontinued operations, to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,729 2,720 2,037
Amortization of debt discount on short-term notes - 591 -
Amortization of capitalized software costs 215 216 473
Write-down of capitalized software costs - - 237
Equity interest in loss of investee 72 220 100
Beneficial conversion feature of short-term notes - 763 -
Reserve for valuation of note receivable - - 300
Loss (gain) on marketable securities - 1,241 480
Options and shares issued for services 16 370 721
Impairment of goodwill 600 1,135 -
Forgiveness of loan receivable from officer - 70 -
Settlement of royalties, net (425) - -
State audit assessment (1,861) 69 70
Changes in operating assets and liabilities:
Accounts receivable 642 4,431 (1,551)
Refund receivable 245 (245) -
Inventory 657 609 -
Accrued interest income on note - (392) -
Capitalized software costs - - (287)
Prepaid expenses (23) 331 (606)
Deposits and other assets 95 (132) 109
Accounts payable (546) (2,284) 2,836
Deferred revenue (1,307) 76 67
Accrued expenses (2,152) 749 (1,930)
Note Payable-accrued interest 625 - -
Restricted cash 744 (1,177) (804)
---------- --------- --------
Total adjustments 326 9,361 2,252
---------- --------- --------
NET CASH PROVIDED BY (USED) IN CONTINUING OPERATIONS (3,877) (3,018) (8,570)
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS
1,655 (5,289) 59
---------- --------- ---------
NET CASH PROVIDED BY (USED) IN OPERATIONS (2,222) (8,307) (8,511)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash proceeds from sale of discontinued operations 6,450 - -
Cash received from purchase of subsidiary - 13 1,313
Cash disbursements for the purchase of securities - - (90)
Other notes receivable 195 109 -
Capital expenditures (109) (131) (551)
Net cash paid for acquisition - - (456)
Collection on note receivable 188 600 -
---------- --------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 6,724 591 216
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of related party loans - - (220)
Proceeds from debt financing - 1,508 -
Net proceeds (repayments) under bank line of credit (5,639) 3,844 (664)
Issuance of subsidiary securities, net of expenses - 62 2,851
Issuance of Common Stock, net of expenses 1,111 1,823 2,872
---------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,528) 7,237 4,839
---------- --------- ---------
NET DECREASE IN CASH (26) (479) (3,456)
CASH AT BEGINNING OF YEAR 26 505 3,961
---------- ---------- ---------
CASH AT END OF YEAR $ - $ 26 $ 505
========== ========== =========
See notes to consolidated financial statements.
26
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
Years Ended June 30,
-----------------------------------
2003 2002 2001
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $1,175 $ 690 $ 592
Cash paid for income taxes $ - $ 47 -
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Convertible notes converted to common stock - $ 1,563 -
Redeemable preferred stock converted to common stock - - $ 505
Issuance of common stock in conjunction with acquisition of company - $40,341 $ 517
Exchange of preferred stock in conjunction with acquisition of company - - $ 12,500
Payment of acquisition costs with common stock - - $ 300
Buyback of common stock in conjunction with note payable $5,000 - -
Issuance of common stock for services rendered $ 50 - -
See notes to consolidated financial statements.
27
DYNTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Organization Summary - DynTek, Inc. ("DynTek") was initially
incorporated in Delaware on May 27, 1989 as Universal Self Care,
Inc. In January 1998 the Company changed its name to Tadeo Holdings,
Inc. In November 1999 the Company changed its name to TekInsight,
and in December 2001 the Company changed its name to DynTek, Inc.
DynTek is a professional services firm specializing in information
technology solutions and business process outsourcing for state and
local government organizations. Depending upon the context, the term
DynTek refers to either DynTek alone, or DynTek and its active
subsidiary, DynTek Services.
DynTek is the parent corporation for the following wholly owned
inactive subsidiaries: Physicians Support Services, Inc., a
California corporation; Clinishare Diabetes Centers, Inc. d/b/a
SugarFree Centers, Inc., a California corporation; USC-Michigan,
Inc., a Michigan corporation; PCS, Inc.-West, a Michigan
Corporation; TekInsight e-Government Services, Inc., a Delaware
corporation; TekInsight Research, Inc., a New York corporation; and
BugSolver.com, Inc., a Delaware corporation.
Effective March 1, 2003, the Company entered into an Asset Purchase
Agreement with First Transit, Inc., pursuant to which the Company
sold to First Transit, Inc. certain specific assets relating to the
non-emergency transportation brokerage services previously provided
by the Company. The operations of this segment have been reflected
as discontinued operations for all periods presented. (See Note 20).
See Note 27 with respect to managements' liquidity plans.
B. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions have been
eliminated.
C. Revenue Recognition - The Company licenses software to end users
under license agreements. The Company recognizes revenues in
accordance with Statement of Position 97-2 ("SOP 97-2") as amended
by Statement of Position 98-9 ("SOP 98-9"), issued by the American
Institute of Certified Accountants. Under SOP 97-2, revenue from
software licensing is recognized upon shipment of the software
provided that the fee is fixed or determinable and that
collectability of the revenue is probable. If an acceptance period
is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period unless some
additional performance target is mandated. In the latter case,
revenue is recognized upon satisfaction of that target, as defined
in the applicable software license agreement. SOP 98-9 amends
certain aspects of 97-2 to require recognition of revenue using the
"residual method" under certain circumstances.
Revenues derived from business processing outsourcing service
engagements are recorded on the accrual basis as services are
performed. The length of the Company's contracts varies but
typically ranges from one to two years.
Contract costs include all direct materials, direct labor and other
indirect costs such as, supplies and site office expenses. General
and administrative costs are charged to expense as incurred.
D. Property and Equipment - Property and equipment is stated at cost
and is depreciated on a straight-line basis over the estimated
useful lives of the assets. Leasehold improvements are amortized
over the term of their respective leases or service lives of the
improvements, whichever is shorter.
28
E. Income (loss) per Common Share - Basic earnings per share has been
calculated based upon the weighted average number of common shares
outstanding. Convertible preferred stock, options and warrants have
been excluded as common stock equivalents in the diluted earnings
per share because they are either antidilutive, or their effect is
not material.
F. Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States
of America 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.
G. Cash and Cash Equivalents - The Company considers all highly liquid
temporary cash investments with an original maturity of three months
or less when purchased, to be cash equivalents.
H. Stock Based Compensation - The Company accounts for employee stock
transactions in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has adopted the proforma
disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting For Stock-Based Compensation."
The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB
Statement No. 123" that provides alternatives methods of transition
for a voluntary change to the fair value based method accounting for
stock-based employee compensation. The provisions of this Statement
are effective for fiscal years beginning after December 15, 2002.
During the year ended June 30, 2003, the Company adopted Statement
of financial Accounting Standard No. 148, "Accounting for
Stock-based Compensation-Transition and Disclosure." This statement
amended Statement No. 123, "Accounting for Stock-based
Compensation." As permitted under Statement No. 123, the Company
continues to apply the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As required under
Statement No. 148, the following table present pro- forma net income
and basic and diluted earnings (loss) per share as if the fair
value-based method had been applied to all awards.
29
(in thousands except per
share data) Year Ended June 30,
-----------------------------------
2003 2002 2001
--------- --------- --------
Net Income (Loss) $ (13,769) $ (19,413) $ (10,763)
Stock-based employee
compensation cost, net of tax
effect, under fair value
accounting (399) (433) (1,809)
--------- ---------- ---------
Pro-forma net loss under Fair
Value Method $ (14,168) $ (19,846) $ (12,572)
--------- ---------- ---------
Income (Loss) per share
Basic $ (0.37) $ (0.67) $ (0.63)
========= ========== =========
Diluted $ (0.37) $ (0.67) $ (0.63)
========= ========== =========
Per share stock-based
employee compensation cost,
net of tax effect, under fair
value accounting:
Pro-forma loss share basic $ (0.38) $ (0.68) $ (0.73)
========= ========== =========
Pro-forma loss share diluted $ (0.38) (0.68) (0.73)
========= ========== =========
The fair value of each option grant was estimated at the date of
grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Because the Company's stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value estimate of its stock
options. The weighted average fair value per share of options
granted during years ended 2003, 2002, 2001 were $0.72, $0.45 and
$0.89 respectively. In calculating the fair values of the stock
options, the following assumptions were used:
Year Ended June 30,
---------------------------------
2003 2002 2001
---- ---- ----
Dividend yield - - -
Weighted average expected life 4.9 years 5.6 years 3 years
Weighted average risk-free
interest rate 2.8% 3.7% 5.3%
Expected volatility 86% 53% 208%
I. Fair Value of Financial Instruments - The carrying amounts reported
in the balance sheet for cash, trade receivables, accounts payable
and accrued expenses approximate fair value based on the short-term
maturity of these instruments.
J. The Company evaluates the recoverability of it's Goodwill and Other
intangibles in accordance with the Statement of Financial Accounting
Standards Board "SFASB" No. 142, Goodwill and Other Intangible
Assets. Based on the annual testing performed at June 30, 2003, the
Company recorded an impairment charge of $600,000 in fiscal 2003 and
$1,135,000 in fiscal 2002.
30
K. Comprehensive Income - Comprehensive income is comprised of net
income (loss) and all changes to the statements of stockholders'
equity, except those due to investments by stockholders, changes in
paid-in capital and distributions.
L. Inventories - Inventories consist primarily of finished goods in
transit, which are recorded at the lower of cost or market.
M. Advertising Costs - Costs related to advertising and promotions of
services are charged to operating expense as incurred. Advertising
expense was $93,000, $206,000 and $524,000 for the years ended June
30, 2003, 2002 and 2001, respectively.
N. Application Development - Application development costs are direct
costs associated with developing software features or programs for
sale to the Company's customers. Such costs are charged to expense
as incurred.
O. Shipping and Handling Costs - The Company accounts for shipping and
handling costs as a component of "Cost of Product Revenues." These
costs are primarily the direct freight costs related to the "drop
shipment" of products to the Company's customers. Total cost was
$112,000 in fiscal 2003, $258,000 in fiscal 2002 and $136,000 in
fiscal 2001.
P. New Accounting Pronouncements - In January 2003, the FASB issued
Interpretation 46, Consolidation of Variable Interest Entities. In
general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b)
has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Interpretation
46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FASB Interpretation
46 is not expected to have an impact on the Company's financial
statements.
In April 2003, Financial Accounting Standards Board, "FASB" issued
Statement of Financial Accounting Standard, SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities."
The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133.
This Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The provisions of this Statement that relate
to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates.
In addition, certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The adoption of SFAS No.
149 is not expected to have an impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS No. 150 establishes standards for classification and
measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and
equity. It requires classification of financial instrument that is
within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS No 150 is not expected to have a material
impact on the Company's financial statements.
31
2. RESTRICTED CASH
At June 30, 2003, cash of $1,237,000 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 $920,000 will be released during the
fiscal year ended June 30, 2004. The non-current portion, $317,000, has been
classified as a non-current asset.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
(thousands of dollars)
Additions:
-----------------------------
Balance at Charged to Charged to Balance
beginning cost and Other at end
Accounts Receivable Reserves: of year expenses Accounts Deductions of year
----------------------------- ------- -------- -------- ---------- -------
Year ended June 30, 2003 $609 $ $ $146 $463
Year ended June 30, 2002 $205 $ 366 $ 38 $ $609
Year ended June 30, 2001 $124 $ - $170 $ 89 $205
4. PREPAID EXPENSES AND OTHER ASSETS
(thousands of dollars):
2003 2002
---- ----
Prepaid insurance $ 39 $ 45
Prepaid maintenance 17 36
Prepaid bank charges 69 9
Other prepaid costs 26 38
-------- -------
$ 151 $ 128
======== ===-===
5. CREDIT FACILITY
On June 30, 2003, the Company entered into a twelve (12) month credit
facility agreement with annual automatic renewals with an agency of Textron
Financial Corporation ("Textron"). Textron provides a full notification
factoring facility for up to $7 million of working capital collateralized by
accounts receivable, inventory, general intangibles and other assets. Eligible
accounts receivable expected to be collected within 90 days are purchased with
recourse, with a holdback amount of 20%. Interest is charged on the outstanding
balance at the Prime rate plus 2.5% (6.5% at June 30, 2003). Additionally, a
0.25% discount fee is charged at the time of purchase. The credit facility with
Textron replaced the former agreement with Foothill Capital. As of June 30,
2003, $708,000 was outstanding under the former Foothill Capital agreement.
6. MARKETABLE SECURITIES
Marketable securities have been classified as available for sale
securities at June 30, 2003 and, accordingly, the unrealized gain or loss
resulting from valuing such securities at market value is reflected as a
component of stockholders' equity. At June 30, 2003, the unrealized loss on
securities was $244,000.
32
7. NOTE RECEIVABLE
At June 30, 2003, DynTek held a note receivable from Private Label
Cosmetics, Inc. (PLC), a private cosmetics manufacturer, under which PLC owes
the amount of $1,104,000, payable in 48 monthly installments and bearing
interest at 7.5% per annum. The note was secured by 342 shares of the common
stock of PLC. On September 23, 2003, the Commony agreed to convert the note
receivable into the preferred stock of PLC to be held as an investment. Such
preferred shares contain liquidation rights if the company is sold as well as
conversion rights, and are secured by additional shares of the maker's common
stock.
On January 2, 2001, the Company advanced $170,000 to its Chief
Executive Officer, Mr. Ross, for a promissory note bearing interest at 8% per
annum. On December 10, 2001, the Company extended the term of the note to the
end of Mr. Ross's period of employment. On December 10, 2001, Companys forgave
$70,000 of such note as a bonus to Mr. Ross. At June 30, 2003, $100,000 remained
outstanding under the note receivable.
8. PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment follows (in thousands of dollars):
June 30,
------------------------
2003 2002
---- ----
Furniture and Fixtures $ 799 $ 916
Computer software 9 9
Computer equipment 2,687 2,452
Machinery and equipment 3 3
Leasehold improvements 30 39
----------- ---------
3,528 3,419
Less: accumulated depreciation (2,904) (2,382)
---------- ---------
$ 624 $ 1,037
========== =========
Depreciation expense for fiscal years ended 2003, 2002 and 2001 were
$522,000, $ 611,000 and $ 861,000 respectively.
9. OTHER RECEIVABLES
The total other receivables at June 30, 2003 were an aggregate amount
of $ 122,000 of which $72,000 consisted of loans to officers and employees with
various payment terms. The Company has also recorded a note receivable in the
amount of $100,000 of which $50,000 plus interest was paid in January 2003. The
remaining $50,000 will be paid in connection with a Plan of Reorganization of
the maker, which stipulates that it shall be paid in May 2004. Total other
receivables at June 30, 2002 were $ 779,000 of which $500,000 was due from a
transaction related to the Miletich Derivative Action.
33
10. GOODWILL AND INTANGIBLE ASSETS
The Company acquired goodwill in the amount of $ 38,707,000 as part of
the purchase of Dyncorp Management Resources (DMR), a state and local government
outsourced management company in December, 2001. Prior to the implementation of
FASB 142, goodwill was amortized over a fifteen-year period. Accumulated
amortization of goodwill as of June 30, 2001 was $ 412,000 and at the adoption
date of FASB 142 the carrying amount of goodwill was $ 8,466,000.
The following reconciles reported net loss to net loss adjusted to
exclude amortization expense relating to goodwill:
2003 2002 2001
-------------- ------------ -------------
Reported net loss $(13,769,000) $(19,413,000) $ (10,763,000)
Add back goodwill amortization - - 400,000
------------- ------------ -------------
Adjusted net loss $ (13,769,000) $(19,413,000) $ (10,363,000)
============= ============ =============
At June 30, 2003 and 2002, the Company had the following intangible
assets:
Amortized intangible assets: 2003 2002
---------------------------- ------ -----
Purchased customer accounts $ 12,557,000 12,339,000
Less: accumulated amortization 4,955,000 2,920,000
-------------- --------------
Purchased customer accounts, net $ 7,602,000 $ 9,419,000
============== ==============
Unamortized intangible assets:
Goodwill $ 31,214,000 $ 31,588,000
============== ==============
Amortization is computed on a straight-line basis over a period of 3 to
7 years. Amortization expense for each of the years ended June 30, 2003, 2002,
and 2001 was $ 2,035,000, $ 1,759,000 and $1,351,000 respectively.
The amortization expense for the next five years, in the aggregate, is:
Year Ending
-----------
June 30, 2004 $ 2,105,000
June 30, 2005 2,105,000
June 30, 2006 1,661,000
June 30, 2007 1,544,000
June 30, 2008 187,000
June 30, 2009 and thereafter -
------------
Total $ 7,602,000
------------
11. NOTES PAYABLE
The total notes payable and accrued interest were an aggregate of
$5,625,000 at June 30, 2003. The company entered into a settlement agreement
with DynCorp for Class B common stock shares with a $5 million principal
unsecured, subordinated note maturing on January 2, 2007. There was $625,000 of
accrued interest on this note as of June 30, 2003. This note and interest were
cancelled in July, 2003. (See notes 19 and 25).
In June 2002, the Company negotiated a settlement with a discontinued operations
subcontractor for outstanding payments due. As payment in full for outstanding
accounts payable from the discontinued services rendered, the Company provided a
note payable of $250,000. The promissory note to the subcontractor for $250,000
bears interest at 8% per annum and is payable over three years in twelve (12)
equal quarterly installments of $23,640. The Company is currently not in
compliance with the agreement and is in discussions with the holder of the note
regarding revising the payment terms. This note is recorded within current
liabilities of discontinued operations.
34
12. BUSINESS ACQUISITIONS
On December 27, 2001, the Company acquired all of the outstanding
capital stock of DynCorp Management Resources ("DMR"), from DynCorp, Inc.
(DynCorp). DMR provided professional services to state and local government
markets with primary focus on Information Technology and Business Process
Outsourcing services. Initial merger consideration consisted of 18,336,663
shares of new Class B Common Stock. As of June 30, 2002 DynCorp owned
approximately 40% of the outstanding shares of the Company's Common Stock. On
August 20, 2002, DynTek entered into a Settlement Agreement with DynCorp
regarding the merger (see note 19).
In connection with this acquisition, the Company assumed numerous
ongoing customer relationships, representing the majority of its revenues. In
the acquisition, the Company recorded $40,827,000 in total goodwill and
intangible assets allocated as follows: $38,727,000 in goodwill, which will be
tested for impairment of value on a periodic basis, and $2,100,000 in
capitalized customer contracts amortized over 5 years. Property and equipment
were evaluated for adjustments to fair value, and generally were recorded at its
carrying value as acquired, which were considered to approximate fair value.
A summary of the business assets acquired is as follows:
(Amounts in thousands)
Consideration paid:
Stock issued $ 40,341
Acquisition costs 1,110
Liabilities assumed 8,066
---------
Total consideration $ 49,517
=========
Assets acquired:
Cash $ 13
Accounts receivable, net 7,317
Prepaid expenses, deposits and other assets 29
Deferred costs 58
Property and equipment 1,273
Customer list 2,100
Goodwill 38,727
---------
Fair value of assets acquired $ 49,517
=========
In March 2003, the company sold the non-emergency transportation
component of DMR which is included in discontinued operations in the
accompanying financial statements.
13. CONCENTRATION OF RISK
A The Company maintains cash balances at financial institutions which are
insured by Federal Deposit Insurance Corporation up to $100,000. The
Company's cash balances exceeded such insured limits at certain times
during the fiscal year.
B The concentration of credit risk in the Company's accounts receivable,
with respect to state and local government customers, is mitigated by
the Company's credit evaluation process, credit limits, monitoring
procedures and reasonably short collection terms. Credit losses have
been within management's expectations and the Company does not require
collateral to support accounts receivable.
35
C Customers are primarily agencies of state governments and
municipalities with large-volume information and technology needs, or
the primary vendors to those governments and agencies. The State of New
York and its agencies comprised approximately 25% of the Company's
revenues for the fiscal year ended June 30, 2003 and approximately 21%
of revenues for the fiscal year ended June 30, 2002. The Company sells
products and services to the State of New York and its agencies as an
authorized vendor to provide system peripheral equipment to New York
state agencies. The Company is also an authorized reseller of Novell,
Nortel Systems and Cisco products and software to the State of New
York.
No other single customer or state accounted for more than 10% of
revenue from continuing operations during fiscal 2003. Generally,
products and services are purchased by individual state agencies
issuing their own purchase orders under master contract agreements
between the Company and the State through which the agency gets the
authority to issue a valid purchase order.
D. Company sales of products manufactured by three hardware manufacturers
accounted for approximately 51% of the product and 21% of the total
revenues during fiscal 2003, 49% of such product and 25% of total
revenues during fiscal 2002 and 70% of the product and 38% of the total
revenues in 2001. Typically, vendor agreements provide that the Company
have been appointed, on a non-exclusive basis, as an authorized
reseller of specified products at specified locations. The agreements
generally are terminable on 30 to 90 days' notice or immediately upon
the occurrence of certain events, and are subject to periodic renewal.
14. OTHER INCOME
Due to the expiration of the statute of limitations to obtain a
judgment against the Company; a liability carried on its books since 1995 has
been written off during the fiscal year ended June 30, 2003, along with the
accrued interest on the debt. In connection with the write-off, the Company
recorded other income of $1,862,000, and offset interest expense in the amount
of $52,000. The liability was originally recorded as a result of audit findings
relating to a prior business of the Company that was divested in 1998 following
one of the Company's discontinued wholly-owned subsidiaries being issued a
Letter of Demand for $1.3 million as a result of such audit conducted on behalf
of the California Department of Health Services.
15. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS
No. 109 requires the recognition of deferred tax assets and liabilities for both
the expected impact of differences between the financial statements and tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carry forwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.
36
Deferred tax assets and liabilities consist of the following:
(amounts in thousands)
June 30,
---------------------
2003 2002
---- ----
Deferred tax assets:
Net operating loss carry forwards $ 16,800 $16,660
Allowance for doubtful accounts 160 207
Unrealized loss on investments 80 45
Depreciation 200 200
Accrued vacation 220 215
--------- -------
17,460 17,327
Deferred tax liabilities
Amortization (180) (244)
Less valuation allowance (17,280) (17,083)
--------- --------
$ - $ -
--------- --------
The benefit for income taxes from Year continuing operations differs
from the ended amount computed applying the statutory June federal income tax
rate to loss before 30, income taxes as follows:
In 000's Year ended June 30,
-------------------------------
2003 2002 2001
--------- --------- --------
Income tax benefit computed at statutory rate $ 1,429 $ 4,300 $ 3,660
Income tax benefit not recognized $ (1,429) $ (4,102) $ (3,584)
--------- -------- --------
Income tax benefit $ - $ 198 $ 76
========= ======== ========
The Company has net operating losses of approximately $ 50,000,000, of which
approximately $30,000,000 is subject to limitations under Section 382 of the
Internal Revenue Code. The net operating loss carryforwards expire in 2009-2023.
16. STOCKHOLDERS' EQUITY
A. Preferred Stock - The Certificate of Incorporation of the Company
authorizes the issuance of a maximum of 10,000,000 shares of
preferred stock. The Company's Board of Directors is vested with the
authority to divide the class of preferred shares into series and to
fix and determine the relative rights and preferences of shares of
any such series to the extent permitted by the laws of the State of
Delaware and the Articles of Incorporation.
B. In connection with its December 1992 public offering, the Company
has 1,707,875 Class A warrants outstanding to purchase Common Stock
at $3.30 per share, which originally expired on December 17, 2000.
On December 6, 2000, such warrants were extended, at a price of
$2.00 per share, until December 11, 2005.
C. In March 2001, the Company sold 2,718,550 shares of its common stock
for $1.00 per share. In connection with these placements, the
Company paid to a related party a fee of 7% in cash, and issued
options to purchase 271,855 shares of its common stock, under the
1992 Stock Option Plan.
37
D. During the fiscal year ended June 30, 2001, the Company issued
121,500 options to accredited investors for services rendered, at
exercise prices between $0.59 and $2.22.
E. 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 June 30, 2003,
699,363 of such shares were converted into 1,748,408 shares of Class
A common stock, with a remainder of 1,490,437 shares not yet
converted.
F. On November 1, 2001, the Company issued an aggregate of $1,057,000
in principal of short-term notes payable, bearing interest at 12%
per annum. In connection with the these notes, the investors
received a warrant to acquire one-third of a share of Class A common
stock for each dollar of note principal, bearing exercise prices of
$1.50 and $1.70 per share and are exercisable for three years. The
notes were partially repaid ($300,000), and the balance converted
into 1,042,039 shares of the Company's Class A common stock, as a
part of the June 2002 offering described below.
G. In June 2002, the Company sold 1,389,293 shares of Common Stock for
$1.50 per share and converted short-term notes payable to 1,091,393
shares of Common Stock for $1.50 per share, for an aggregate
placement of 2,442,999 shares of Common Stock to accredited
investors, and issued warrants to purchase 1,215,666 shares of
Common Stock for $1.50 per share. At June 30, 2002, 941,155 of the
share certificates and 487,244 of the warrants had been issued and
during July 2002 the remaining 1,501,844 share certificates and
728,422 of the warrants were issued. In connection with these sales,
the Company paid to a related party a fee of $262,000.
H. During the fiscal year ended June 30, 2002, the Company issued
229,000 options to accredited investors for services rendered, at
exercise prices between $2.00 and $2.28.
I. During September 2002, in connection with the settlement of the
Miletich Derivative Action, the Company received 300,000 shares of
its Class A Common Stock with a value of $435,000, and retired the
shares during the fiscal year June 30, 2003.
J. In July 2002, 24,534 shares of Class A Common Stock with a value of
$ 12,000 were issued to an accredited investor as an extinguishment
of an account payable.
K. During August 2002, the Company repurchased and retired 8,000,000
shares of its Class B Common Stock and converted the remaining
10,336,663 shares of Class B Common Stock into the same number of
Class A Common Stock shares.
L. In June 2003, the Company sold 2,221,932 shares of its Common Stock
for $0.50 per share for net proceeds of $ 1,111,000. Warrants of
1,111,000 shares were issued in connection with this Offering at a
rate of one warrant for each $1 invested exercisable for a period of
five years. In connection with the offering, the Company paid a
placement agent, the principal of which is a shareholder of the
company, a fee in DynTek Common Stock of 666,579 shares that is
equal to 30% of the aggregate shares issued in the Offering.
M. In July 2003, the Company sold 4,198,000 shares of its Common Stock
at $0.50 per share, for aggregate proceeds, net of costs, of
approximately $1,834,000. In addition to fees paid, the Company
granted options to the aforementioned placement agent to purchase
419,800 shares of Common Stock at the then current market price of
$1.00 during five years.
N. During the year ended June 30, 2003, 126,000 shares of Preferred
Stock were converted into 314,000 Class A Common shares. An
additional 72,000 previously retired shares were reissued.
38
17. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
A. The 1992 Employee Stock Option Plan was adopted by the Board of
Directors in 1992 and 500,000 shares of common stock were initially
reserved for issuance upon the exercise of options granted pursuant
to the plan. Options granted under the 1992 plan may be either
incentive options within the meaning of Section 422 of the Internal
Revenue Service Code of 1986, non-qualified options, or options not
intended to be incentive options.
The 1992 plan provides for the grant of options that are intended to
qualify as incentive stock options, or ISOs, under Section 422 of
the Internal Revenue Code to employees of the Company, as well as
the grant of non-qualifying options, or NSOs, to officers, directors
or key employees of DynTek or other individuals whose participation
in the 1992 plan is determined to be in the best interest of DynTek
by the compensation committee. In August 2000, Directors and
Shareholders approved an increase in the number of shares authorized
for issuance upon exercise of options granted pursuant to the Plan
from 500,000 to 2,000,000. As of June 30, 2003, 1,899,521 shares
were subject to options granted under the plan, net of forfeitures,
at an average price of $1.41 per share.
B. In November 1997, the Company established the 1997 Stock Option Plan
for Non-employee Directors, which authorizes the issuance of options
to purchase up to 300,000 shares of Common Stock at an exercise
price of 100% of the Common Stock's market price. Options to
purchase 200,000 shares of Common Stock were outstanding at June 30,
2003, net of forfeitures, at an average price of $2.32 per share.
C. In connection with a merger, on August 14, 2000, the Company assumed
the existing Data Systems Network Corp Stock Option Plan. Options
granted under the Plan were either incentive options within the
meaning of Section 422 of the Internal Revenue Service Code of 1986,
non-qualified options, or options not intended to be incentive
options. Following the assumption of the Plan, no further options
have been granted under the Plan. As of June 30, 2003, 145,901
Series A Preferred shares were subject to options granted under the
plan, net of forfeitures, at an average price of $8.00 per share.
Upon conversion, such options may be converted into the Company's
Common Stock at a ratio of 2.5 shares of Common per share of
Preferred.
D. The 2001 Employee Stock Option Plan was adopted by the Board of
Directors in 2001 and 2,000,000 shares of common stock were
initially reserved for issuance upon the exercise of options granted
pursuant to the plan. Options granted under the 2001 plan may be
either incentive options within the meaning of Section 422 of the
Internal Revenue Service Code of 1986, non-qualified options, or
options not intended to be incentive options.
The 2001 plan provides for the grant of options that are intended to
qualify as incentive stock options, or ISOs, under Section 422 of
the Internal Revenue Code to employees of the Company, as well as
the grant of non-qualifying options, or NSOs, to officers, directors
or key employees of DynTek or other individuals whose participation
in the 2001 plan is determined to be in the best interest of DynTek
by the compensation committee. As of June 30, 2003, 588,000 shares
were subject to options granted under the plan, net of forfeitures,
at an average price of $1.95 per share.
E. DynTek maintains a defined contribution 401(k) plan that covers
substantially all employees. Contributions to the Plan may be made
by DynTek (which are discretionary) or by plan participants through
elective salary reductions. During the fiscal year ended June 30,
2003 and 2002, contribution expense was $125,000 and $60,000
respectively. No contributions were made to the plan by DynTek
during the fiscal year ended June 30, 2001.
18. ACCOUNTING FOR STOCK OPTIONS AND WARRANTS
During the fiscal year ended June 30, 2003, 50,000 warrants were issued
in connection with services rendered to the Company, all of which were vested.
The Company recorded expense for the value of these warrants in the total amount
of $16,000. The Company also recognized expenses during the fiscal years ended
June 30, 2002 and June 30, 2001, resulting from warrants granted for services,
in the amount of $325,000 and $721,000 respectively. Also, 1,839,000 warrants
were issued during the fiscal year ended June 30, 2003 in connection with
private placements of securities, at an average exercise price of $1.50 per
share and 7,500,000 warrants were issued at $4.00 per share to DynCorp (see note
19).
39
The following table summarizes the changes in options and warrants
outstanding and the related exercise prices for the shares of the Company's
Common Stock:
Stock options under Plans Other Options and Warrants
-------------------------------------------------- ---------------------------------------------
Weighted Weighted
Weighted Average Average
Average Remaining Remaining
Exercise Contractual Contractual
Shares Price Life (years) Exerciseable Shares Price Life (years) Exerciseable
--------- -------- ------------ ------------ ----------- ----- ------------ ------------
Outstanding at June 30, 2000 199,500 1.94 3.2 197,000 4,792,042 2.19 4.0 4,792,042
=== ======== ==== =========
Granted 2,023,521 1.39 144,000 1.12
Canceled (56,500) 1.25 (754,167) 2.58
Exercised - - (250,000) 1.35
Assumed Data Systems Plan 468,730 2.78
----------- ------------
Outstanding at June 30, 2001 2,635,251 1.60 7.7 1,510,522 3,931,875 2.12 3.9 3,909,375
=== ========= ==== =========
Granted 963,000 2.06 1,259,255 1.61
Canceled (67,116) 1.77 (839,389) 2.27
Exercised (109,139) 0.97 (74,711) 0.94
----------- ------------
Outstanding at June 30, 2002 3,421,996 1.81 5.6 2,221,377 4,277,000 1.96 3.5 4,072,000
=== ========= === =========
Granted 160,000 1.81 9,389,388 3.49
Canceled (459,723) 1.92 (35,000) 2.06
Exercised 0 - (10,000) 1.21
------------
Outstanding at June 30, 2003 3,122,273 1.77 4.9 2,766,937 13,621,388 3.02 3.2 13,621,388
========= === ========= ========== === ==========
19. 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
recorded 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. 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"), and
provide a general release to DynCorp and its affiliates from any and all
claims that it might have against such persons. On July 3, 2003, the
DynCorp Note was sold and then retired and the warrants were cancelled
(see note 25).
20. DISCONTINUED OPERATIONS
Effective March 1, 2003, the Company entered into an Asset Purchase
Agreement with First Transit, Inc., pursuant to which the Company sold to
First Transit, Inc. certain specific assets relating to the non-emergency
transportation brokerage services previously provided by the Company. The
assets sold consisted of the Company's interests in three contracts to
provide non-emergency transportation related services and related assets
used in connection with performance of such contracts by the Company as
well as the assumption of all vendor and services sub-contract agreements
relating to the contracts. The Purchase Price consisted of $6,450,000 cash
payments and up to $1,750,000 to be paid in the event that First Transit,
Inc. is able to obtain extension of the Illinois Department of Public Aid
contract for a period of up to three years beyond May 31, 2004 under
certain specified conditions. As part of the Agreement, DynTek Services
also agreed to not compete with First Transit in the business which was
sold.
40
As a result of the First Transit Inc. Agreement and the mutual Settlement
Agreement the Company entered into on December 15, 2002 to cancel a contract to
provide non-emergency transportation brokerage services with the Commonwealth of
Virginia, the Company has discontinued all non-emergency transportation services
which was a component and separate reporting unit of the Company's business
outsourcing segment.
Major assets disposed (in thousands):
2003
Purchase Price $ 6,450
Goodwill (11,950)
Acquired customer list (560)
Property, Plant & Equipment , net (249)
-----------
Net Loss on Disposal of Discontinued Operations $ (6,309)
===========
The results of the discontinued operations are (in thousands):
2003 2002 2001
---- ---- ----
Twelve months ended June 30,
Sales to external customers $22,983 $22,965 -
-
Loss from Disposal of Discontinued Operations (6,309) -
Gain (Loss) from Discontinued Operations, net (3,257) (7,034) 59
------- ------- -----
Total Gain (Loss) from Discontinued Operations (9,566) (7,034) 59
======= ======= =====
As of June 30, 2003, total current liabilities of discontinued
operations were $5,888,000, which is comprised of accounts payable and a note
payable. A significant portion of such payables are owed to third party vendors
and are subject to an interpleader action (see note 24 COMMONWEALTH OF
VIRGINIA).
21. BUSINESS SEGMENTS
DynTek's operations for the fiscal year 2003 are organized along its
product lines and include two segments - Business Process Outsource Services and
Information Technology Services segments. The Information Technology Services
segment provides a range of specialized IT infrastructure services: system
architectural design, legacy systems integration, network engineering,
applications development, network security services, help desk support and
operational support, primarily to state and local government entities. In
conjunction with these service offerings, it also sells hardware and software to
its customers. Operations are distributed primarily among nine states (including
the principal executive office), California, Florida, Louisiana, Massachusetts,
Michigan, Texas, New Mexico, Virginia and New York, with employees situated in
locations that are convenient to client sites.
The Business Process Outsourcing segment contracts outsourced program
operations for state government agencies in several areas including the
privatization of child support enforcement services. Our business process
outsourcing customers have included various governmental departments in the
states of Virginia, North Carolina, Kansas and Nebraska. Typically these
contracts are for multi-year periods of performance, with options to renew for
additional periods. Such contracts are generally awarded through competitive
procurements. Payment is based on either fixed-price, fixed-unit- price based on
contractual allocations, revenue sharing, or a combination of the above.
41
Our reportable segments are business units that offer different
services and contract types and are managed separately due to the expertise and
different managed key factors in each area. Since the separate business segment
was acquired as a unit, management has retained separate reporting and review
criteria for that unit. The following table provides actual selected financial
data for our business segments (in thousands):
Reportable Business Segments
------------------------------------------
Business Information
Process Technology
Outsourcing Services Total
----------- -------- -----
Fiscal year ended June 30, 2003
Sales to external customers $ 8,493 $ 44,154 $ 52,647
Depreciation and amortization expense 481 2,248 2,729
Net loss from Operations (69) (4,134) (4,203)
Net Interest expense 177 929 1,106
Total assets 28,172 24,955 53,127
Capital Expenditures 30 79 109
Fiscal year ended June 30, 2002
Sales to external customers 4,950 55,126 60,076
Depreciation and amortization expense 174 2,546 2,720
Net loss from operations (568) (11,811) (12,379)
Net interest expense (income) 7 2,281 2,288
Total assets 47,738 32,781 80,519
Capital expenditures 56 75 131
During fiscal 2001, the Company did not have segment reporting, since
the only business segment was Information Technology Services.
22. COMMITMENTS, CONTINGENCIES, AND OTHER AGREEMENTS
The Company is obligated under five non-cancelable leases for aggregate base
annual rent of approximately $191,000 (California), $164,000 (Louisiana) through
August 2005 and May 2006, respectively. The Company also leases 5 separate
direct sales offices and 11 other commercial facilities containing an aggregate
of approximately 82,000 square feet under leases with terms ranging from
month-to-month to five years. Total rent expense for the fiscal years ended June
30, 2003, 2002 and 2001 was $ 1,358,000 $1,534,000, and $705,000 respectively.
At June 30, 2003, minimum rental commitments under noncancellable operating
leases are as follows:
Fiscal Year Amount
----------- ------
2004 $ 958
2005 707
2006 267
-------
$ 1,932
=======
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. In July 2003, the Company entered into an agreement with
Merisel to repay the liability and accrued interest and expenses, with an
obligation to make payments over the next twelve (12) months in an aggregate
amount of $567,402 which is included in accounts payable.
On December 31, 2002, the Company settled all amounts due of
approximately $713,000, net of a related receivable of $187,000, under the
previous agreement to purchase the assets of Exodus Communications, Inc.
("Exodus") for a total amount of $100,000. As of June 30, 2003, $75,000 remains
due and payable under this agreement.
42
23. 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 basis which is common in the industry and can terminate services
upon 30 day notification. These monthly charges are approximately $20,000/month.
As of June 30, 2003, the Company had outstanding receivables (included in
accounts receivable) for such services in the total amount of $502,000,
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 $392,000. Such
losses have reduced the carrying value of its investment to $64,000 at June 30,
2003.
24. LEGAL MATTERS
MILETICH DERIVATIVE ACTION
On August 20, 2002, a final settlement and dismissal order was approved
and filed in the New York County Clerk's Office from a stockholder's derivative
action by Paul Miletich. The action was originally filed on July 10, 2000,
naming the Company as a nominal defendant. As a part of the settlement, the
Company received 300,000 shares of DynTek common stock and 125,000 shares of
MedEmerg common stock, as full settlement of a guarantee provided to the
Company. 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 retired and the
remaining shares of MedEmerg common stock are held as marketable securities. No
gain or loss was recorded in connection with the settlement.
COMPUTER ASSOCIATES
On July 7, 2003, a Settlement Agreement was reached in a matter brought
by Computer Associates International, Inc. ("CA") against the City of Boston
("COB"), in United States District Court, District of Massachusetts (Case Number
01-10566-EFH), in which the Company was named as a third-party defendant. Under
the Agreement, the parties mutually released each other from any further claims
on this matter.
COMMONWEALTH OF VIRGINIA
Effective December 15, 2002, the Company entered into a mutual
Settlement Agreement to cancel a contract to provide non-emergency
transportation brokerage services in certain regions of the Commonwealth of
Virginia. The terms of the Settlement Agreement provided that the Company issue
certain payments due to transportation provider vendors according to an
agreed-upon schedule, which extended through June 2003. In connection with
initially entering the contract, a bond was posted by a DynCorp, Inc. for the
Company's payment performance to the transportation providers. A number of such
providers caused the bond to be called, initiating a process of disbursing
approximately $2.4 million (the "Bonded Amount") of payments to providers with
verified claims due. The Company has arranged for a limited release of
indemnification by DynCorp, Inc. of the Company's obligation to pay to the
bonding company and to reimburse the third party for its obligation to fund,
respectively, in an amount not to exceed the Bonded Amount to the extent that
the Company otherwise would have an obligation to fund or reimburse such parties
with respect to the bond. The bonding company filed an interpleader action to
distribute the penal sum of the bond on July 22, 2003. As a result of the
Company being released from its obligations with respect to indemnification
under and reimbursement with respect to the bond in an amount up to the Bonded
Amount, its liability to such providers has in effect been reduced by the Bonded
Amount. When the individual claims are determined for each provider, in
accordance with court procedures, the interpled funds shall be disbursed. Should
valid claims remain outstanding after the disbursement of the interpled funds,
certain providers may continue to pursue their claims after the interpleader
proceedings are concluded. While the interpleader is in process, the Company has
offered to make payments to providers with valid claims of approximately
$100,000 per month, commencing in September 2003, until whatever shortfall
amount as the Company determines to exist in excess of the Bonded Amount is
paid.
43
A number of the vendors that provided transportation services in the
Commonwealth of Virginia have initiated separate legal demands for payment. Some
of the demands, either in whole or in part, have been disputed by the Company as
being without merit or have been settled. As of August 2003, actions for
collection are pending in 5 separate proceedings. Ali Medical,et.al, a joint
case of 27 providers for approximately $1,042,000, is the largest of the claims.
The Ali Medical joint case was consolidated with the above-referenced
interpleader action for all purposes. The remaining four proceedings are for an
aggregate amount of approximately $625,000, a portion of which has been disputed
based on billings for services that were not provided under the agreements or on
billings which were outside the terms of the subcontracts. The Company believes
that these claims will be fully resolved following evaluation of the claims
against those services authorized by them and those rates permitted in
subcontracts. Accruals in the financial statements for the estimated settlement
amounts for these and other potential similar claims are considered adequate;
however, the Company is unable to predict the outcome of these claims.
STRIDE & ASSOCIATES
In February 2003, four actions were dismissed in Civil Court of New
York, two between the Company and Stride & Associates in the aggregate amount of
$40,000, and two between the Company and consultants in the aggregate amount of
$53,000.
OTHER MATTERS
During the fiscal year ended June 30, 2003, the Company satisfied its
obligation on a judgment that was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina on July
28, 2000. The plaintiff was awarded a judgment of $572,000 plus reasonable
attorney fees and interest totaling $ 778,000. The debt has been paid in full.
25. SUBSEQUENT EVENTS
On July 3, 2003, an investor group cancelled a note payable by the
Company of $5 million plus accrued interest of $625,000. The note was acquired
by the group in connection with their private purchase of 10 million shares of
Company Common Stock from DynCorp, Inc. The investor group also cancelled a
warrant to acquire 7,500,000 shares of Company Common Stock that they acquired
in the same transaction. In exchange for the note cancellation, the Company
provided certain registration rights to the investor group covering the Common
Stock that was transferred. The Company was released from an obligation to
provide indemnity for up to approximately $2.4 million of claims under a
performance bond. Such bond has subsequently been funded for the benefit of the
Company's vendors as part of an interpleader action, which will reduce the
aggregate payables to those providers by the funded amount (see note 24
COMMONWEALTH OF VIRGINIA ).
44
26. UNAUDITED QUARTERLY DATA
The numbers below have been restated for prior periods for discontinued
operations.
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30
2001 2001 2002 2002 2002 2002 2003 2003
---- ---- ---- ---- ---- ---- ---- ----
Revenue $ 11,586 $ 12,229 $ 16,586 $ 19,676 $ 14,148 $ 11,840 $12,012 $14,647
Gross Profit $ 2,437 $ 2,708 $ 3,246 $ 3,097 $ 2,818 $ 1,989 $ 2,507 $ 2,245
Net Income
(loss)
Continuing
Operations $ (1,653) $ (4,081) $ (2,782) $ (3,863) $(1,185) $ (1,208) $ 848 $ 2,658)
Net Income
(loss)
Discontinued
operations $ - $ - $ (2,808) $ (4,226) $ 84 $ 178 $ ( 342) $(9,486)
Basic and
diluted income
(loss) per
share-Continuing
Operations $ (0.08) $ (0.18) $ (.09) $ (0.13) $ (.03) $ (.03) $ .03 $ (.08)
Basic and
diluted income
(loss) per
share-Discontinued
Operations $ - $ - $ (.09) $ (0.15) $ - $ .01 $ (.01) $ (.26)
27. MANAGEMENT'S LIQUIDITY PLANS
As of June 30, 2003, we had a working capital deficiency of
approximately $11 million. During July 2003, this Company received proceeds from
the sale of its Common Stock of $1.8 million and received forgiveness of
$625,000 of accrued interest on a note payable. In addition, the Company
received a release of its obligation to indemnify DynCorp for approximately $2.4
million of payments to certain of its former vendors.
In July 2003, the Company sold 4,198,000 shares of its Common Stock at $0.50 per
share, for aggregate proceeds, net of costs, of approximately $1.8 million. On
July 3, 2003, an investor group cancelled a note payable by the Company of $5
million plus accrued interest of $625,000. The note was acquired by the group in
connection with their private purchase of 10 million shares of the Company's
Common Stock from DynCorp.
Additionally, the Company obtained a limited release of indemnification by
DynCorp of its obligation to pay to a bonding company and to reimburse DynCorp
for its obligation to fund, respectively, an amount of approximately $2.4
million under a performance bond related to its discontinued transportation
services business. As a result of being released from its obligations with
respect to indemnification under and reimbursement with respect to the bond in
an amount up to approximately $2.4 million, the Company's liability to former
providers whose service payments are covered by the bond has in effect been
reduced by approximately $2.4 million. Such liability to the vendors is
currently reflected in accounts payable, and will be eliminated from accounts
payable as and to the extent that the bond proceeds will satisfy those
obligations to such vendors. When the individual claims are determined for each
provider, in accordance with court procedures, the approximately $2.4 Million
subject to the bond will be disbursed. Should valid vendor claims remain
outstanding after disbursement of the approximately $2.4 million covered by the
bond, certain providers may continue to pursue their claims against the Company.
While vendor actions with respect to the bond are in process, the Company has
offered to make payments in the aggregate of approximately $100,000 per month,
commencing in September 2003, to providers with valid claims, until whatever
shortfall amount as the Company determines to exist in excess of the aggregate
approximately $2.4 million is paid.
45
On June 30, 2003, the Company entered into a twelve (12) month renewable credit
facility agreement with an agency of Textron Financial Corporation ("Textron").
Textron provides a full notification factoring facility for up to $7 million of
working capital. Eligible accounts receivable expected to be collected within 90
days from invoice date are purchased with recourse, with a holdback amount of
20%. Interest is charged on the outstanding balance at the Prime rate plus 2.5%
(6.25% at June 30, 2003). Additionally, a 0.25% discount fee is charged at the
time of purchase. The credit facility with Textron replaced the former agreement
with Foothill Capital. As of June 30, 2003, $708,000 was outstanding under the
former Foothill Capital agreement.
On March 1, 2003, the Company entered into an Asset Purchase Agreement with
First Transit, Inc., pursuant to which it sold to First Transit, Inc. certain
specific assets relating to its discontinued transportation management business
originally acquired in December 2002. The assets sold consisted of interests in
three contracts to provide non-emergency transportation related services and
related assets used in connection with the performance of such contracts, as
well as the assumption of all vendor and services sub-contract agreements
relating to the acquired contracts. The purchase price consisted of cash
payments of $6,450,000 and an obligation to pay up to $1,750,000 in the event
that First Transit, Inc. is able to obtain extension of the Company's former
Illinois Department of Public Aid transportation services contract for a period
of up to three years beyond May 31, 2004 under certain specified conditions. The
Company believes that such payment may become due to the Company during the
first calendar quarter of 2004.
During September 2003, the Company commenced negotiations for a financing
commitment from investors for an amount of approximately $2 million. If such
negotiations are successfully concluded, the terms of the investment are
anticipated to be a long-term note payable with an equity conversion feature.
The Company plans to continue to improve its cash flows during fiscal 2004 by
continuing to implement reductions of administrative overhead expenses where
necessary and feasible as well as aggressively pursue new customer relationships
and expansion of services offered to existing customers. The Company is
negotiating payment terms with vendors that will defer certain payments due.
Based on current business plans, the Company believes that the current
operations of the Company will produce positive cash flow during the fiscal year
ended June 30, 2004. Until such time, the Company believes that its present cash
on hand as well as obtaining additional debt and/or equity financing should
provide adequate funding through at least June 30, 2004. However, there can be
no assurances that the Company will have sufficient funds to implement its
current plan. In such an event, the Company could be forced to significantly
alter its plan and reduce its operating expenses or would consider divesting of
certain contracts or other assets that may not be critical to the future success
of the Company.
46
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation as of June 30, 2003, our Chief Executive
Officer and Chief Financial Officer have concluded that Dyntek's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that Dyntek files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported as specified in the Securities and Exchange Commission's rules and
forms. There have been no significant changes in DynTek's internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors as of September 30, 2003 are as
follows:
Principal Occupation, Business
Name Age Experience and Directorships
- ---- --- ----------------------------
Steven J. Ross 45 Since February 2000, Mr. Ross has been
DynTek's President, Chief Executive Officer
and Chairman of the Board. Mr. Ross has an
extensive industry background, most recently
serving as General Manager of Toshiba's
Computer System Division, responsible for
sales, marketing, and operations in North
and South America from 1998 to 1999. Prior
to that, Mr. Ross was President and General
Manager of the Reseller Division and
President of Corporate Marketing at Inacom
Corporation from 1996 to 1998. Mr. Ross'
other positions have included responsibility
for sales and marketing, operations,
strategic planning, and other senior
executive activities.
James Linesch 49 Since August 14, 2000, Mr. Linesch has
served as the Chief Financial and Chief
Accounting Officer, Executive Vice President
and Secretary, and since February 1997
Director, of DynTek. Previously, Mr. Linesch
was the President, Chief Executive Officer
and Chief Financial Officer of CompuMed, a
public computer company involved with
computer assisted diagnosis of medical
conditions, which he joined in April 1996 as
Vice President and Chief Financial Officer.
Mr. Linesch served as a Vice President and
Chief Financial Officer of DynTek from
August 1991 to April 1996. From May 1998 to
August 1991, Mr. Linesch served as the Chief
Financial Officer of Science Dynamics Corp.,
a corporation involved in the development of
computer software. Mr. Linesch holds a CPA
certification in the State of California,
where he practiced with Price Waterhouse
from 1981 to 1984.
47
Principal Occupation, Business
Name Age Experience and Directorships
- ---- --- ----------------------------
Brian D. Bookmeier 44 Mr. Bookmeier is an investor and Vice
President of Seven Sons, Inc., d/b/a Las
Vegas Golf & Tennis. Seven Sons, Inc. is in
the business of franchised retailing of golf
and tennis products. Mr. Bookmeier has held
this position since 1997. Mr. Bookmeier has
served as a Director of DynTek since July
1995, and was President and Chief Executive
of DynTek from July 1995 to February 2000.
From September 1989 until its merger into
DynTek, Mr. Bookmeier served as Executive
Vice President and a Director of Patient
Care Services, a home medical equipment
supply company that specialized in diabetes
management, and the sale of related
equipment and supplies. He was on the Board
of Directors of Azurel, Ltd., a public
company that filed for protection under
Chapter 11 of the Federal Bankruptcy Code in
2001. He continues to serve as Chairperson
of the Audit and Compensation Committees of
the Reorganized Board of Azural, Ltd. In May
2003, be became COO of ModeEleven, Inc., a
privately held software development and
media broadcast company.
Dr. Michael W. Grieves 53 Dr. Grieves has been a director since August
14, 2000. Previously, Dr. Grieves had served
as Data Systems Corporation's President,
Chief Executive Officer and Chairman of the
Board since its inception in 1986. Prior to
1986, Dr. Grieves served in executive,
managerial and technical capacities with
Computer Alliance Corporation, a turnkey
system house; Quanex Management Sciences, a
computer services bureau; and Lear Siegler
Corporation. He has more than 25 years of
experience in the computer industry.
Marshall Toplansky 52 Mr. Toplansky has been a director since
October 2002. Mr. Toplansky founded the
consulting firm Core Strategies in 1996, of
which he remains CEO. The firm specializes
in evaluating marketing strategies and
identifying growth opportunities for
technology-based companies. From 1994 to
1996, he served as Senior Vice President of
Sales and Marketing for enterprise software
publisher Open Environment. He was Vice
President of Marketing for modem
manufacturer U.S. Robotics from 1989 to
1994. Mr. Toplansky's other positions have
involved advertising and data base direct
marketing management, primarily with Ogilvy
& Mather. Mr. Toplansky currently serves on
the board of directors of CompTIA, the
country's largest technology trade
association, and the Harvard Business School
Association of Orange County.
Section 16(a) Beneficial Ownership Compensation
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the rules promulgated thereunder require our officers and directors and persons
who own more than ten percent of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish to us copies of all such filings. We have
determined, based solely upon a review of those reports and amendments thereto
furnished to us during and with respect to the year ended June 30, 2003 and any
written representations from reporting persons, that all filing requirements
were timely satisfied by our officers and directors except for two late filings
of Form 4s covering shares sold by Mr. Bookmeier in two transactions on April
22, 2003 and June 12, 2003. The Form 5 filing for Mr. Bookmeier to report the
transaction is in the process of being completed.
48
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the three
years ended June 30, 2003 to our chief executive officer and our other most
highly paid executive officers whose annual salary and bonus, exceeded $100,000
for all services rendered to us during each such annual period.
Annual Compensation Long Term Compensation
------------------- ----------------------
Other Restricted All
Fiscal Annual Stock Options/ LTIP Other
Name and Position Year Salary($) Bonus($) Compensation Awards SARs (#) Payouts Compensation
----------------- ---- --------- -------- ------------ ------ -------- ------- ------
Steven J. Ross 2003 $400,000 $100,000 $ 25,000 -- -- -- --
President, Chief 2002 $376,000 $205,000 $ 70,000 -- 75,000 -- $40,431
Executive Officer and 2001 $175,000 -- $ 25,000 -- 810,000 -- --
Chairman of the Board
James Linesch 2003 $200,000 $ 25,000 $ 25,000 -- -- -- $ 6,000
Chief Financial Officer, 2002 $179,000 $ 75,000 $ 25,000 -- 45,000 -- $ 6,321
Executive Vice President 2001 $138,000 $ 10,000 $ 25,000 -- 335,000 -- --
and Director
Wade Stevenson 2003 $140,000 $ 10,000 -- --
Vice President 2002 $129,000 $ 20,000 -- -- 20,000 -- --
Finance 2001 $ 98,990 $ 26,000 -- -- -- -- --
Arion Kalpaxis 2003 $175,000 -- -- -- -- -- --
Chief Technology Officer 2002 $176,000 -- -- -- -- -- --
2001 $153,798 -- -- -- 15,000 -- --
Option Grants
The following table sets forth certain information, as of June 30,
2003, concerning individual grants of stock options made during the fiscal year
ended June 30, 2003 to each of the persons named in the Summary Compensation
Table above.
OPTION/SAR GRANTS IN FISCAL YEAR ENDED JUNE 30, 2003
Number of Potential Realizable Value at
Securities Percent of Total Assumed Annual Rates of Stock
Underlying Options/SARs Exercise or Base Price Appreciation
Name Options/SARs Granted Granted in Fiscal Year Price ($/Sh) for Option Term
---- -------------------- ---------------------- ------------ ---------------
(a) (b) (c) (d) 5% 10%
Steven J. Ross 10,000 6% $1.75 $875 $1,750
James Linesch 10,000 6% $1.75 $875 $1,750
Wade Stevenson - - - - $4,000
Arion Kalpaxis - - - $2,000 $3,000
The following table sets forth information concerning exercises of
stock options by each of the executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 2003 and the fiscal
year-end value of options held by such named individuals.
49
AGGREGATED OPTION/SAR EXERCISED IN FISCAL YEAR ENDED
JUNE 30, 2003 AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised In-The-Money
Shares Unexercised Options/SARs At Fiscal Options/SARs At Fiscal Year-end
Acquired on Value Year-End (#) ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
(a) (b) (c) (d) (e)
Steven J. Ross -- 0 921,500/32,500 $8,330/$0
James Linesch -- 0 402,500/17,500 $0/$0
Wade Stevenson -- 0 42,250/20,000 $0/$0
Arion Kalpaxis -- 0 7,500/7,500 $0/$0
Employment Agreements
On December 10, 2001, we entered into an employment agreement with
Steven J. Ross, our President, Chief Executive Officer, and Chairman of the
Board, which replaced the prior employment agreement dated January 2, 2001. The
agreement is for a three-year term, commencing December 10, 2001, which term may
be extended upon the consent of all parties to the agreement. During the term of
the agreement, Mr. Ross shall serve on our Board of Directors and on the board
of each of our wholly-owned subsidiaries. Mr. Ross's current annual base salary
under the agreement is $400,000 per year, which may be increased by the Board of
Directors in its discretion. Based upon meeting criteria established by mutual
consent of Mr. Ross and our Board of Directors, and then upon further approval
by the Board of Directors (which actions by the Board of Directors are taken by
its Compensation Committee), Mr. Ross is entitled to receive an annual bonus,
payable quarterly, the aggregate amount of which is equal to at least 50% of his
annual base salary. For the fiscal year ended June 30, 2003, Mr. Ross received $
100,000 in quarterly bonus payments. In addition to participation in all
employee benefit programs generally made available to members of our executive
management, Mr. Ross also receives a supplemental executive benefits plan that
includes premium payments for a $1 million life insurance policy, long-term
disability and supplemental medical insurance coverage. The maturity date of Mr.
Ross's note payable to us, dated January 2, 2001, of $170,000 principal (the
"Note") was extended to December 10, 2004 under the agreement. In addition, the
agreement provided that should the average closing price for a share of our
common stock as reported by Nasdaq (the "Stock Price") for the ten trading days
prior to June 30, 2002 meet or exceed 110% of the Stock Price for the ten
trading days prior to the December 27, 2001 closing date of our merger with DMR,
then Mr. Ross's obligation to repay $100,000 principal of the Note would be
forgiven. The criterion for such forgiveness was not met.
In the event Mr. Ross is terminated without cause, all options granted
to Mr. Ross during his employment term that are exercisable to acquire common
stock will become fully vested, his medical and other insurance coverage
benefits will be extended for a period of 18 months from the date of employment
termination and he shall receive additional expense reimbursements for certain
health insurance coverages. He shall also be entitled to receive a Severance
Payment equal to the lesser of (1) the aggregate of the remaining base salary
payments due under the agreement or (2) the aggregate of 24 payments each being
equal to his monthly base salary amount plus one-twelfth of the bonus amount
that could be earned under the contract as of the date of termination. The
severance payment shall be payable one half in a lump sum at termination and one
half in equal monthly installments over the succeeding 24 months. In addition,
Mr. Ross is entitled to the same compensation and stock option benefits afforded
non-employee directors.
50
On August 14, 2000, we entered into an employment agreement with James
Linesch, our Chief Financial Officer and Executive Vice President, which
agreement was subsequently amended on August 15, 2001. The agreement is for a
one year period commencing August 14, 2000, which term automatically renews for
subsequent one-year periods unless we provide written notice of our intention
not to renew at least six months prior to the next anniversary of the
commencement date. During the term of the agreement, Mr. Linesch shall serve as
a member of our Board of Directors. Mr. Linesch's current base salary under the
agreement is $200,000 per year, which may be increased by the Board of Directors
in its discretion. In addition to participation in all employee benefit programs
generally made available to members of our executive management, Mr. Linesch
also receives a supplemental executive benefits plan that includes premium
payments for a $1 million life insurance policy, long-term disability and
supplemental medical insurance coverage. During the first year of the agreement,
Mr. Linesch earned a bonus in the amount of $25,000. Commencing on August 15,
2001, Mr. Linesch became eligible for quarterly bonuses in the annual cumulative
amount of 50% of his then current base salary, with the criteria for achievement
of quarterly bonuses being equivalent to such criteria described in the
preceding paragraph of this section established for Mr. Ross under his
employment agreement. For the fiscal year ended June 30, 2003, Mr. Linesch
received $ 25,000 in quarterly bonus payments.
In the event Mr. Linesch is terminated without cause, all options
granted to Mr. Linesch during his employment term that are exercisable to
acquire common stock will become fully vested, his medical and other insurance
coverage benefits will be extended for a period of 12 months from the date of
employment termination, and he shall be entitled to receive a Severance Payment
equal to the greater of (1) the aggregate of the remaining base salary and bonus
in effect under the agreement at the time of termination or (2) a lump sum
severance payment equal to 18 times the aggregate of the monthly base salary
payment plus one-twelfth of the bonus in effect under the agreement at the time
of termination. In addition, Mr. Linesch is entitled to the same compensation
and stock option benefits afforded non-employee directors.
Compensation of Directors
Directors are paid an annual Board Membership fee of $25,000 and are
reimbursed for certain reasonable expenses incurred in attending Board or
Committee meetings. The Chairman of the Audit Committee and the Chairman of the
Compensation Committee are each paid an additional fee of $25,000 for service in
those positions, effective April 2003 Currently, Dr. Grieves is Chairman of both
the Audit Committee and the Compensation Committee. Directors are eligible for
awards under DynTek's 1997 Non-employee Directors' Stock Option Plan. The
Non-employee Directors' Plan provides for option grants with respect to 10,000
shares of Common Stock to be made to each eligible director upon each July 1st
on which such director is a member of DynTek's Board of Directors. Options are
exercisable for 5 years after the date of grant. The exercise price for any
option under the plan shall be equal to the fair market value of the Common
Stock at the time such option is granted. The plan provides that grants
thereunder vest immediately. During the year ended June 30, 2003, each of
Messrs. Bookmeier and Grieves received grants in accordance with the
Non-employee Directors' Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
As of June 30, 2003, DynTek's Compensation Committee consisted of
Messrs. Ross, Grieves and Toplansky, with only Mr. Ross being an employee of
DynTek. For information concerning Mr. Ross' Employment Agreement, see
"Employment Agreements and Consulting Agreements", above.
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. As a result of its investment, the Company
assigned Dr. Grieves to become the Chairman of the Board of Directors of
LaborSoft. The Company provides infrastructure services to LaborSoft, on a
fee-for-service basis, with monthly charges of approximately $17,000.
51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of outstanding Class A Common as of September 18, 2003 by (i) each of
our directors and executive officers, (ii) all directors and executive officers
as a group, and (iii) each owner of more than 5% of our Common Stock, referred
to as the 5% owners. For purposes of the following table, the number of shares
of Class A Common Stock assumes the conversion to Class A Common Stock of all
outstanding shares of Preferred Stock. No person holds 5% or more of the
outstanding Preferred Stock
Number of Shares Percentage
Name and Address of of Common Stock Outstanding of
Beneficial Owner (2) Beneficially Owned (1) Common Stock Owned
H. T. Ardinger(4) 4,083,160 8.6%
9040 Governors Row
P.O. Box 569360
Dallas, TX 75356
Estate of Fred Kassner(3) 3,045,650 6.6%
59 Spring Street
Ramsey, NJ 07446
Steven J. Ross (5) 973,845 2.1%
Michael W. Grieves (6) 707,729 1.5%
34705 West 12 Mile Road, Suite 300
Farmington Hills, MI 48009
James Linesch (7) 565,573 1.2%
Brian D. Bookmeier (8) 70,000 *
19327 Agusta Dr.
Livonia, MI 48152
Arion Kalpaxis (9) 302,500 *
Marshall Toplansky (10) 10,000 *
Wade Stevenson (11) 62,250 *
ALL OFFICERS AND DIRECTORS 2,691,897 5.6%
as a group (7 persons) (6)(7)(8)(9)
* Less than 1%
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as
consisting of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
or direct the disposition of) with respect to the security through any contract,
arrangement, understanding, relationship or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment rights.
(2) Except as set forth in the footnotes to this table, the business address of
each director and executive officer listed is c/o DynTek, Inc., 18881 Von Karman
Avenue, Irvine, California 92612.
52
(3) For the Estate of Mr. Kassner, includes 40 shares of Common Stock underlying
the our publicly-traded Class A Warrants and 100,000 shares of Common Stock
underlying Warrants granted in connection with certain financial accommodations
granted by Mr. Kassner related to the release of security interests in our
assets.
(4) Includes 1,140,310 shares that Mr. Ardinger has the right to acquire under
an agreement with ViewCast, Inc. and 1,234,550 shares under publicly-traded
Class A warrants.
(5) Includes options to purchase 905,000 shares of Common Stock exercisable at
prices ranging from $0.80 to $2.25 per share granted to Mr. Ross under the
DynTek 1992 and 2001 Employee Stock Option Plans and the DynTek 1997
Non-Employee Director's Stock Option Plan, 19,845 shares of Common Stock which
are issuable upon conversion of 7,938 shares of Series A Preferred Stock, and
49,000 shares of Common Stock underlying options to purchase 19,600 shares of
DynTek Series A Preferred Stock with strike prices of $1.69 per share.
(6) Includes 89,883 shares of Common Stock which are issuable to Dr. Grieves
upon conversion of 35,935 shares of Preferred Stock held by him. Also includes
beneficial ownership of options to purchase 90,846 shares of Common Stock at
prices between $0.957 to $13.52 per share, upon exercise of options to purchase
36,642 shares of Preferred Stock. Also includes 30,000 options exercisable for
Common Stock granted to Dr. Grieves under the DynTek 1997 Non-Employee
Director's Stock Option Plan at prices between $0.80 and $2.25.
(7) Includes 420,000 options granted to Mr. Linesch under the DynTek 1997
Non-Employee Director's Stock Option Plan, the DynTek 1992 Plan and the 2001
Employee Stock Option Plan at prices ranging from $0.80 to $3.78 and includes
8,750 shares of Common Stock which are issuable to Mr. Linesch upon conversion
and 3,500 shares of Preferred Stock held by him.
(8) Includes options to purchase 70,000 shares of Common Stock granted under the
DynTek's 1997 Non-Employee Directors' Stock Option Plan at prices between $0.80
and $3.78.
(9) Includes 15,000 options to purchase 15,000 shares of Common Stock granted to
Mr. Kalpaxis at $2.04 per share under the DynTek 2001 Employee Stock Option
Plan.
(10) Includes 100,000 options to purchase shares of Common Stock at $3.00 per
share issued to Mr. Toplansky for services rendered and 10,000 options to
purchase shares of Common Stock granted at $1.00 per share under the DynTek 2001
Employee Stock Option Plan and 10,000 options to purchase shares of Common Stock
granted at $0.80 per share under the DynTek 1997 Non-Employee Director's Stock
Option Plan.
(11) Includes options to purchase 62,250 shares of DynTek Common Stock with
strike prices between $0.96 and $2.04 per share under the DynTek 1992 and 2001
Employee Stock Option Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2001, we purchased 25% of the equity in LaborSoft Corporation
("LaborSoft"), a company providing labor relations software to labor unions and
commercial customers. As a result of its investment, we assigned Dr. Grieves to
become the Chairman of the Board of Directors of LaborSoft. We provide
infrastructure services to LaborSoft, on a fee-for-service basis, with monthly
charges of approximately $17,000.
On April 25, 2001, we entered into an Agreement and Plan of Merger, and
an Agreement and Plan of Reorganization (the "Reorganization Agreement") each
with DMR, Newport Acquisition Corp. and DynCorp. The Reorganization Agreement
was subsequently amended four times. On December 27, 2001, we entered into a
Fourth Amendment to the Agreement and Plan of Merger with DynTek, Newport
Acquisition Corp., DynTek Services, Inc., DynCorp and DMR. Pursuant to the
Reorganization Agreement, as amended, DMR was merged with and into DynTek
Services, Inc. and renamed DynTek Services, Inc. The initial merger
consideration delivered to DynCorp consisted of 18,336,663 shares of DynTek
Class B common stock, subject to additional shares of Class B common stock being
issued to DynCorp as additional merger consideration under the terms of the
Reorganization Agreement.
53
On August 20, 2002, we entered into a Stock Purchase and Settlement
Agreement (the "Settlement Agreement") with DynCorp, pursuant to which disputes,
including those resulting from the December 2001 merger with DMR were settled.
As a part of the Settlement Agreement, we repurchased a portion of the DynTek
Class B common stock from DynCorp and the remaining Class B common stock held by
DynCorp (constituting the balance of all outstanding Class B common stock, were
converted by DynCorp to DynTek Class A common stock. As part of the Settlement
Agreements DynCorp also was granted 3-year warrants to acquire 7,500,000 shares
of Class A Common Stock exercisable at $4.00 per share.
On January 31, 2001, we forgave $70,000 of a note receivable from Mr.
Ross, our Chief Executive Officer, as a bonus.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) A list of Financial Statements filed as part of this Report is
identified in Part II, Item 8. [There are no Financial Statement Schedules filed
as part of this Report.]
(b) The following reports on Form 8-K were filed by the Registrant
during the quarter ended June 30, 2003:
(1) On May 6, 2003, we filed a Current Report on Form 8-K
regarding the dismissal of Grassi & Co. CPAs, P.C. and the
appointment of Marcum & Kliegman LLP as our certifying
accountants for the fiscal year ending June 30, 2003.
(2) On May 27, 2003, we filed an amendment to the Current Report
on Form 8-K filed on May 6, 2003, which included as an exhibit
a letter from Grassi & Co., CPAs, P.C. to the Securities and
Exchange Commission.
(c) EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Merger, as amended, dated February 18,
2000 between DynTek, DynTek Services, Inc. and Data Systems
Network Corporation. (6)
2.2 Second Amendment to the Agreement and Plan of Merger dated as
of June 28, 2000 between DynTek, Inc. DynTek Services, Inc.
and Data Systems Network Corporation. (10)
2.3 Agreement and Plan of Reorganization, dated as of April 25,
2001, among DynCorp Management Resources, Inc., Newport
Acquisition Corp., DynCorp and DynTek, Inc. (17)
2.4 Agreement and Plan of Merger, dated as of April 25, 2001,
among DynCorp Management Resources, Inc., Newport Acquisition
Corp., DynCorp and DynTek, Inc. (17)
54
NUMBER DESCRIPTION OF EXHIBIT
2.5 Stock Option Agreement, dated as of April 25, 2001 between
DynTek, Inc. and DynCorp. (17)
2.6 First Amendment to Agreement and Plan of Reorganization, dated
as of July 9, 2001, among DynCorp Management Resources, Inc.,
Newport Acquisition Corp., DynCorp and DynTek, Inc. (17)
3.1(b) Amended and Restated Charter of the Company. (2)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1(a) Specimen Certificate of the Company's Common Stock. (1)
4.1(b) Specimen of Redeemable Common Stock Purchase Warrant. (3)
4.2 Form of Warrant Agent Agreement between the Company and
American Stock Transfer and Trust Company. (1)
4.3 Amended Warrant Agreement between the Company and American
Stock Transfer and Trust Company, dated November 30, 1999. (6)
4.3 Form of Underwriter's Warrant Agreement. (4)
4.4 1992 Employee Incentive Stock Option Plan, including form of
Incentive Stock Option Agreement. (1)
4.5 1998 Non-Employee Director Stock Option Plan. (5)
4.6 Form of Amendment to 1992 Employee Incentive Stock Option
Plan. (9)
4.7 Second Amended Warrant Agreement, dated as of November 30,
2000, between DynTek, Inc. and American Stock Transfer & Trust
Company. (15)
4.8 Third Amended Warrant Agreement, dated as of April 10, 2001,
between DynTek, Inc. and American Stock Transfer & Trust
Company. (16)
4.9 Form of Series A convertible preferred stock certificate of
DynTek, Inc. (10)
4.10 2001 Employee Incentive Stock Option Plan (21)
10.1 Letter Agreement between Core Strategies, LLC and DynTek,
Inc., dated May 24, 2000. (10)
10.2 Form of Consulting Agreement between The Exigo Group and
DynTek, Inc., dated June 1, 2000. (10)
10.3 Agreement and Plan of Merger, dated May 17, 2000, between
DynTek, Inc., Big Tech Acquisition Corp. and Big Technologies,
Inc. (8)
10.4 Form of Non-Competitive, Confidentiality and Inventions
Agreement between Big Technologies, Inc. and Employees. (8)
10.5 Guaranty, dated as of August 11, 2000, made by DynTek, Inc. in
favor of Foothill Capital Corporation. (11)
10.6 Amendment No. 6 and Waiver to Loan and Security agreement,
dated as of August 11, 2000, among Foothill Capital
Corporation, DynTek Services, Inc. and Data Systems Network
Corporation. (11)
10.7 Loan and Security Agreement, dated as of September 30, 1998,
between DynTek Services, Inc. (as successor to Data Systems
Network Corporation) and Foothill Capital Corporation. (12)
55
NUMBER DESCRIPTION OF EXHIBIT
10.8 Employment Agreement, dated as of August 14, 2000, between
DynTek, Inc. and James Linesch. (13)
10.9 Letter Agreement, dated as of July 28, 2001, between DynTek
Services, Inc. (as successor to Data Systems Network
Corporation) and Interactive Frontiers, Inc. (13)
10.10 Amendment No. 1, dated December 12, 2000, to Amendment No. 6
and Waiver, among Foothill Capital Corporation, DynTek
Services, Inc. and Data Systems Network Corporation. (14)
10.11 Amendment No. 2, dated as of December 29, 2000, to Amendment
No. 8 and Waiver, among Foothill Capital Corporation, DynTek
Services, Inc. and Data Systems Network Corporation. (14)
10.12 Amendment No. 3, dated as of January 12, 2001, to Amendment
No. 8 and Waiver, among Foothill Capital Corporation, DynTek
Services, Inc. and Data Systems Network Corporation. (14)
10.13 Amendment No. 4, dated as of January 26, 2001, to Amendment
No. 8 and Waiver, among Foothill Capital Corporation, DynTek
Services, Inc. and Data Systems Network Corporation. (14)
10.14 Letter Agreement, dated November 3, 2000, between DynTek, Inc.
and LaborSoft Corporation. (14)
10.15 Amendment No. 9 to Loan and Security Agreement, dated as of
March 30, 2001, among Foothill Capital Corporation, and DynTek
Services, Inc. (18)
10.16 Employment Agreement, dated as of January 2, 2001, between
DynTek, Inc. and Steven J. Ross. (18)
10.17 Amendment No. 10 to Loan and Security Agreement, dated as of
June 30, 2001 among Foothill Capital Corporation, and DynTek
Services, Inc. (19)
10.18 Stock Purchase and Settlement Agreement, dated August 20,
2002, between DynCorp and DynTek, Inc. (20)
10.19 Promissory Note, dated August 20, 2002, made by DynTek, Inc.
in favor of DynCorp, for $5,000,000 in principal amount. (20)
10.20 Warrant, dated August 20, 2002, made in favor of DynCorp for
7,500,000 shares of Class A Common Stock. (20)
10.21 General Release, dated August 20, 2002, of DynTek, Inc. by
DynCorp. (20)
10.22 General Release, dated August 20, 2002, of DynCorp by DynTek,
Inc. (20)
10.23 Amendment No. 14 and Waiver to Loan and Security Agreement,
dated August 20, 2002, among DynTek Services, Inc., DynTek,
Inc. and Foothill Capital Corporation. (20)
10.24 Settlement Agreement, dated December 10, 2002, between the
Commonwealth of Virginia and DynTek Services, Inc.
10.25 Asset Purchase Agreement, effective March 1, 2003, by and
among DynTek Services, Inc. and First Transit, Inc. (22)
10.26 Factoring Agreement, dated July 1, 2003, between Systran
Financial Services Corporation, the Company and DynTek
Services, Inc. (23)
10.27 Limited Release and Agreement to Indemnify, executed by
DynCorp in favor of the Company, dated July 3, 2003
10.28 James Linesch employment agreement changes letter dated August
14, 2001.
56
NUMBER DESCRIPTION OF EXHIBIT
21 DynTek subsidiaries. (10)
31.1 Certification Pursuant to 17 CFR 240, 13a-14(a) or 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to 17 CFR 240, 13a-14(a) or 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------------
1. Incorporated by reference, filed as an exhibit to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1
filed on October 13, 1992.
2. Incorporated by reference, filed as an exhibit to Amendment
No. 2 to the Registrant's Registration Statement on Form S-1
filed on November 10, 1992.
3. Incorporated by reference, filed as an exhibit to Amendment
No. 4 to the Registrant's Registration Statement on Form S-1
filed on December 4, 1992.
4. Incorporated by reference, filed as an exhibit to Amendment
No. 5 to the Registrant's Registration Statement on Form S-1
filed on December 8, 1992.
5. Incorporated by reference, filed as an exhibit to the
Company's Report on Form 10-Q, filed on December 24, 1998.
6. Incorporated by reference, filed as an Exhibit to the Company
Current Report on Form 8-K, filed on December 6, 1999.
7. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed on February 29,
2000.
8. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed on May 19, 2000.
9. Incorporated by reference, filed as an Exhibit to the
Company's Registration Statement on Form S-4, filed on May 1,
2000 (File No. 333-36044).
10. Incorporated by reference, filed as an Exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-4, filed on July 13, 2000 (File No. 333-36044).
11. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed on August 24,
2000.
12. Incorporated by reference, filed as an Exhibit to the
Quarterly Report on Form 10-Q of Data Systems Network
Corporation for the quarter ended September 30, 1998.
13. Incorporated by reference, filed as an Exhibit to the
Company's Annual Report on Form 10-K/A, filed on October 27,
2000.
14. Incorporated by reference, filed as an Exhibit to the
Company's Quarterly Report of Form 10-Q, filed on December 31,
2000.
57
15. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed on January 11,
2001.
16. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed on April 17, 2001.
17. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed May 2, 2001.
18. Incorporated by reference, filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q, filed May 15, 2001.
19. Incorporated by reference, filed as an exhibit to the
Company's Annual Report on Form 10-K, filed on September 26,
2001.
20. Incorporated by reference, filed as an Exhibit to the
Company's Current Report on Form 8-K, filed August 20, 2002.
21. Incorporation by reference, filed as Annex D to the Company's
definitive Proxy Statement for Special Meeting of Stockholders
on November 20, 2001, filed November 5, 2001.
22. Incorporated by reference, filed as an Exhibit to the
Company's Current report on Form 8-K, filed March 18, 2003.
23. Incorporated by reference, filed as an Exhibit to the
Company's Current report on Form 8-K, filed July 9, 2003.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED: OCTOBER 7, 2003
DYNTEK, INC.
BY: /s/ Steven J. Ross
--------------------------
Steven J. Ross, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Steven J. Ross
- --------------------------- President, Chief Executive Officer October 7, 2003
Steven J. Ross and Chairman
/s/ James Linesch
- --------------------------- Chief Financial Officer, Chief October 7, 2003
James Linesch Accounting Officer, Executive Vice
President, Director and Secretary
/s/ Brian D. Bookmeier
- --------------------------- Director October 7, 2003
Brian D. Bookmeier
/s/ Michael Grieves
- --------------------------- Director October 7, 2003
Michael Grieves
/s/ Marshall Toplansky
- --------------------------- Director October 7, 2003
Marshall Toplansky
59