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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended September 30, 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 Avenue, #250
Irvine, CA 92612
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (949) 955-0078
--------------
Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of the issuer's Class A Common Stock,
$.0001 par value, as of November 10, 2003 was 42,992,785.
DYNTEK, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Number
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - September 30, 2003 (unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) - For 4
the Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (unaudited) - For the 5 - 6
Three Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 14
Item 2. Management's Discussion and Analysis of Financial 15 - 17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19 - 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20 - 22
SIGNATURE 23
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS September 30, June 30,
2003 2003
--------------- ---------------
(unaudited)
CURRENT ASSETS:
Cash - Restricted 832 920
Accounts receivable, net of allowance for doubtful accounts of $140 and $463 6,808 9,370
Inventories 492 351
Prepaid expenses and other assets 139 151
Other receivables 101 122
--------------- ---------------
TOTAL CURRENT ASSETS 8,372 10,914
RESTRICTED CASH - over one year 210 317
INVESTMENTS - Marketable Securities 178 282
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,960 and $2,904 649 624
GOODWILL 31,214 31,214
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $648 and $594 429 483
ACQUIRED CUSTOMER LIST, net of accumulated amortization of $5,481 and $4,955 7,076 7,602
PURCHASED SOFTWARE, net of accumulated amortization of $541 and $498 149 192
NOTES RECEIVABLE, long term, including receivable from officer of $100, net of
allowance for doubtful accounts of $200 1,640 1,204
DEPOSITS AND OTHER ASSETS 263 295
--------------- ---------------
$ 50,180 $ 53,127
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,752 $ 11,714
Line of credit 2,128 708
Accrued expenses 1,321 2,271
Deferred revenue 990 981
Notes payable-accrued interest -- 625
Current liabilities of discontinued operations 5,319 5,888
--------------- ---------------
TOTAL CURRENT LIABILITIES 18,510 22,187
DEFERRED REVENUE - long term 210 317
LONG TERM NOTE PAYABLE -- 5,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 10,000,000 shares authorized; 1,458,023
and 1,490,437 shares issued and outstanding as of September 30, 2003 and 1 1
June 30, 2003, respectively
Class A Common stock, $.0001 par value, 70,000,000 shares authorized;
42,661,739 shares and 38,382,705 shares issued and outstanding as of
September 30, 2003 and June 30, 2003 respectively 4 4
Additional paid-in capital 89,378 81,918
Accumulated other comprehensive loss (170) (244)
Accumulated deficit (57,753) (56,056)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 31,460 25,623
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,180 $ 53,127
=============== ===============
See notes to condensed consolidated financial statements.
3
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
September 30,
-----------------------------------
2003 2002
--------------- ---------------
REVENUES:
Product Revenues $ 5,593 $ 6,162
Service Revenues 7,332 7,986
--------------- ---------------
Total revenues 12,925 14,148
--------------- ---------------
COST OF REVENUES:
Cost of products 4,961 5,267
Cost of services 5,680 6,045
--------------- ---------------
Total cost of revenues 10,641 11,312
--------------- ---------------
GROSS PROFIT 2,284 2,836
--------------- ---------------
OPERATING EXPENSES:
Selling 1,822 2,170
General and administrative 848 1,040
Depreciation and amortization 679 708
--------------- ---------------
Total operating expenses 3,349 3,918
--------------- ---------------
LOSS FROM OPERATIONS (1,065) (1,082)
--------------- ---------------
OTHER INCOME (EXPENSE):
Loss on sale of marketable securities (107) --
Interest expense (355) (169)
Interest income 5 9
Equity interest in loss of investee -- (28)
--------------- ---------------
Total other income (expense) (457) (188)
--------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS $ (1,522) $ (1,270)
DISCONTINUED OPERATIONS
(LOSS) GAIN FROM DISCONTINUED OPERATIONS (175) 84
--------------- ---------------
NET LOSS $ (1,697) $ (1,186)
=============== ===============
NET LOSS PER SHARE: Basic and Diluted
Continuing (.04) (.03)
Discontinued -- --
--------------- ---------------
NET LOSS PER SHARE BASIC and DILUTED $ (.04) $ (.03)
=============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION -
Basic and Diluted 40,522,222 38,646,044
NET LOSS $ (1,697) $ (1,186)
COMPREHENSIVE LOSS, NET OF TAX
Change in unrealized gain on available-for-sale- 74 5
securities
--------------- ---------------
COMPREHENSIVE LOSS $ (1,623) $ (1,181)
=============== ===============
See notes to condensed consolidated financial statements
4
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
September 30,
-----------------------------------
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss - Continuing Operations $ (1,522) $ (1,270)
--------------- ---------------
Adjustments to reconcile net loss, excluding discontinued operations, to
net cash provided by (used in) operating activities:
Depreciation and amortization 625 655
Amortization of capitalized software costs 54 53
Equity interest in investee -- 28
Loss on sale of marketable securities 107 --
State audit assessment -- 17
Changes in operating assets and liabilities:
Accounts receivable 2,126 2,384
Inventories (141) 743
Prepaid expenses and other current assets 33 306
Deposits and other assets 32 136
Accounts payable (2,962) (3,775)
Deferred revenue (98) (696)
Restricted cash 195 72
Accrued expenses (950) (435)
--------------- ---------------
Total adjustments (979) (512)
NET CASH (USED IN) CONTINUING OPERATIONS (2,501) (1,782)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (744) 2,321
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATIONS (3,245) 539
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes Receivable -- 94
Cash proceeds from sale of marketable securities 71 --
Capital expenditures (81) (7)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10) 87
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under bank line of credit 1,420 (639)
Cash proceeds from the issuance of common stock 1,835 13
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,255 (626)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH -- --
CASH AT BEGINNING OF YEAR -- --
--------------- ---------------
CASH AT END OF PERIOD $ -- $ --
=============== ===============
See notes to condensed consolidated financial statements
5
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands, except share data)
For the three
months ended
September 30,
-----------------------------------
2003 2002
--------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 355 $ 169
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Forgiveness by shareholders of note payable and accrued interest $ 5,625 $ --
Buyback of common stock in conjunction with note payable $ -- $ 5,000
Exchange of note receivable for 300,000 shares of common stock $ -- $ 430
See notes to condensed consolidated financial statements
6
DYNTEK, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(UNAUDITED)
1. Basis of Presentation and Management's Liquidity Plans
The accompanying unaudited condensed consolidated financial statements of
DynTek, Inc. and Subsidiaries ("DynTek", "the Company", or "we") have been
prepared in accordance with accounting principles generally accepted in the
United State of America, for interim financial statements and with the
instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they
do not include all of the information and disclosures required for annual
financial statements. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
footnotes for the year ended June 30, 2003 included in the Form 10-K for the
year then ended.
The accompanying condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management consist of normal recurring
items, are necessary for a fair presentation in conformity with accounting
principles generally accepted in the United States of America. These adjustments
include certain reclassifications to reflect the disposal of certain
non-emergency transportation services which was a component of our business
outsourcing segment. Preparing condensed consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. The results of operations
for any interim period are not necessarily indicative of the results attainable
for a full fiscal year.
As of September 30, 2003, we had a working capital deficiency of approximately
$10 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 former vendors.
The Company plans to continue to improve its cash flows during fiscal 2004 by
continuing to implement reductions of administrative overhead expenses as well
as pursing customer relationships and expansion of services offered to
customers. The Company is negotiating extended payment terms with vendors. 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 September 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.
2. Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements as filed in its Form 10-K for the
year ended June 30, 2003.
During the current quarter the Company adopted, the Statement of Financial
Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: (1) mandatorily
redeemable financial instruments, (2) obligations to repurchase the issuer's
equity shares by transferring assets, and (3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. There was
no effect on the condensed consolidated financial statements from the adoption
of this pronouncement.
7
3. Marketable Securities
Marketable securities have been classified as available for sale securities at
September 30, 2003 and, accordingly, the unrealized loss resulting from valuing
such securities at market value is reflected as a component of stockholders'
equity. During the quarter the Company sold 194,512 shares of MedEmerge common
stock for $71,000 and realized a loss of $107,000 on the sale. At September 30,
2003, the unrealized loss on such securities was $170,000.
4. Goodwill and Other Intangibles
The Company evaluates the recoverability of it's goodwill and other intangibles
in accordance with the Statement of Financial Accounting Standards Board
("SFAS") No. 142, Goodwill and Other Intangible Assets. As of September 30,
2003, the Company has determined there have been no events to indicate that any
impairment has occurred which would require an adjustment to reduce the carrying
value of goodwill. The Company will be conducting its annual test of existing
goodwill at June 30, 2004. The results of this annual testing of goodwill will
determine if further adjustments to reduce the carrying value are required.
5. Credit Facility
On June 30, 2003, the Company entered into a 12 month credit facility agreement
with annual automatic renewals (the "Textron Factoring Facility") with an agency
of Textron Financial Corporation ("Textron"). The Textron Factoring Facility
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 Prime rate plus 2.5% (6.5% at September
30, 2003). Additionally, a 0.25% discount fee is charged at the time of
purchase. The Textron Factoring Facility replaced the former agreement with
Foothill Capital. As of September 30, 2003, $2,128,000 was outstanding under the
agreement.
6. Commitments, Contingencies, and Other Agreements
On July 7, 2003, a Settlement Agreement was reached in a matter brought by
Computer Associates International, Inc. against the City of Boston, 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.
8
COMMONWEALTH OF VIRGINIA
Effective December 15, 2002, the Company cancelled a contract to provide
non-emergency transportation brokerage services in certain regions of the
Commonwealth of Virginia, by entering into a mutual Settlement Agreement with
the Commonwealth. The terms of the Settlement Agreement provided that the
Company make payments due to transportation provider vendors for services
rendered under the contract. Under an interim letter understanding; beginning in
September 2003 the Company has made payments in the aggregate amount of
approximately $100,000 per month to various providers. As of September 30, 2003,
the Company paid $168,000 to providers as a result of this offer.
In connection with initially entering the contract, a performance bond was
posted by a third party to guarantee payment to the transportation provider
vendors up to the bond amount of $2.4 million. A number of such vendors caused
the bond to be called, requiring the bond amount to be deposited in an escrow
account and initiating a process of disbursing the $2.4 million to vendors with
valid claims. The bonding company filed an inter-pleader action on July 22,
2003.
In a separate transaction, the Company has entered into a limited release of
indemnification to reimburse the guarantor (former Shareholder) for funding the
bond. As a result, the Company's liability to such vendors will in effect have
been extinguished to the extent of the funds disbursed. The amount of $2.4
million deposited in escrow for the payment to the Company's vendors has not yet
been recorded as an offset to the Company's accounts payable. Such liability to
the vendors is currently reflected in current liabilities from discontinued
operations, and will be eliminated from current liabilities from discontinued
operations as and to the extent that the bond proceeds are used to satisfy those
obligations to such vendors.
The courts are currently in the process of assembling the amounts of the
individual claims due from these vendors. When the individual claims are
determined for each vendor, in accordance with court procedures, the Company
will evaluate its overall accrual for such payables and adjust its liability
accordingly. Once the courts determine the valid claim amounts, the inter-plead
funds shall be disbursed. Should valid claims remain outstanding after the
disbursement of the inter-plead funds, certain vendors may continue to pursue
their claims after the inter-pleader proceedings are concluded, however, such
claims may not exceed the amounts determined by the courts to be due. The
Company believes that the aggregate inter-pleader claims ultimately due, as
determined by the courts, will be less than the combined total of the bond
amount and the Company payables currently recorded as due to such vendors, and
that a substantial amount of these claims are without merit based on billings
for services that were not provided under the agreements or on billings which
were outside the terms of the subcontracts.
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 September 30, 2003, actions for
collection are pending in 12 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
inter-pleader action for all purposes. The Ali Medical claimants are considered
cross-claimants in the inter-pleader action. In addition to the Ali Medical
claimants, an additional six defendants in the inter-pleader action have filed
cross-claims for an aggregate amount of approximately $449,000. The remaining
eleven proceedings which claim an aggregate amount of approximately $669,000
have been temporarily stayed by an order of the court overseeing the
inter-pleader action. In both the outside lawsuits and the cross-claims, all or
a portion of the amounts claimed have been disputed.
9
Provisions in the Company's condensed consolidated 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.
7. Other Settlements
On October 11, 2002, Merisel Americas, Inc. ("Merisel") 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 12 months in an aggregate amount of
$567,000 which is included in accounts payable. As of September 30, 2003
$467,000 was outstanding.
On December 31, 2002, the Company settled all amounts due of approximately
$713,000, net of a related receivable of $187 under the previous agreement to
purchase the assets of Exodus Communications, Inc. ("Exodus") for a total amount
of $100,000. As of September 30, 2003, $50,000 remains due and payable under
this agreement. The Company continues to make progress payments.
8. First Transit Agreement
On March 1, 2003, the Company entered into an Asset Purchase Agreement (the
"First Transit Agreement") with First Transit, Inc. ("First Transit"), pursuant
to which it sold to First Transit 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 for First Transit to pay up to $1,750,000 in the event that First
Transit 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.
9. Stock Based Compensation
During the year ended June 30, 2003, the Company adopted SFAS 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 (APB) No. 25, "Accounting for Stock Issued
to Employees." As required under Statement No. 148, the following table present
pro- forma net loss and basic and diluted loss per share as if the fair
value-based method had been applied to all awards.
(in thousands) Three Months
Periods Ended September 30, 2003 2002
--------------------------- --------------- ---------------
Net Loss $ (1,697) $ (1,186)
Stock-based employee compensation
cost, net of tax effect, under fair
value accounting (22) (100)
--------------- ---------------
Pro-forma net loss under Fair Value $ (1,719) $ (1,286)
Method
=============== ===============
Loss per share
Basic and Diluted $ (0.04) $ (0.03)
Per share stock-based employee
compensation cost, net of tax
effect, under fair value accounting $ -- $ --
--------------- ---------------
Pro-forma loss share basic & diluted $ (0.04) $ (0.03)
=============== ===============
10
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. In calculating the fair values of the stock options, the
following assumptions were used:
Fiscal year Fiscal year
2004 grants 2003 grants
--------------- ---------------
Dividend yield -- --
Weighted average expected life: 3 years 3.6 years
Weighted average risk-free interest rate 1.79% 2.5%
Expected volatility 89% 136%
10. Stockholders' Equity
On July 3, 2003, an investor group cancelled a note payable by the Company of $5
million plus accrued interest of $625,000 which was recorded as an increase to
additional paid-in-capital. The note was acquired by the group in connection
with their private purchase of 10,336,663 shares of the Company's 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 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.
11. Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the "treasury stock method". Common
stock equivalents consisting of options, warrants, and convertible preferred
stock totaling 55,600,458 were not included in the calculation of diluted
earnings per share as the results would be anti-dilutive.
11
Total outstanding stock, options, convertible preferred stock and warrants are
as follows:
As of September 30,
2003 2002
--------------- ---------------
Common stock 42,661,739 35,421,733
Options and warrants 9,293,661 15,198,996
Convertible preferred stock 3,645,058 4,040,993
--------------- ---------------
55,600,458 54,661,722
=============== ===============
12. Discontinued Operations
During 2003, the Company disposed of its non-emergency transportation business.
As of September 30, 2003, total remaining liabilities of discontinued operations
were $5,319,000. A significant portion of such payables are owed to third party
vendors and are subject to an inter-pleader action (see note 6 Commitments,
Contingencies and Other Agreements - COMMONWEALTH OF VIRGINIA).
13. Business Segments
DynTek's operations are organized along its product lines and include two
segments - Information Technology Services and Business Process Outsource
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.
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):
12
Reportable Business Segments:
Business Information
Process Technology
Outsourcing Services Total
--------------- --------------- ---------------
Three months ended September 30, 2003
Sales to external customers $ 1,873 $ 11,052 $ 12,925
Depreciation and amortization expense 111 568 679
Operating income (loss) 57 (1,579) (1,522)
Net interest expense (income) -- (350) (350)
Total assets 25,892 24,288 50,180
Capital expenditures 1 80 81
Three months ended September 30, 2002
Sales to external customers $ 2,463 $ 11,685 $ 14,148
Depreciation and amortization expense 121 587 708
Operating income (loss) 81 (1,351) (1,270)
Net interest expense (income) -- (160) (160)
Total assets 25,438 27,689 53,127
Capital expenditures -- 7 7
14. 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. 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 the LaborSoft investment, which is
recorded in deposits and other assets, to $64,000 at September 30, 2003.
On September 30, 2003, the Company received additional security collateral for
its receivable from LaborSoft by obtaining a Promissory Note and Security
Agreement for the amount of $636 owed by LaborSoft for the value of previously
delivered services for which the Company has not been compensated. Under the
Promissory Note, LaborSoft shall pay interest on the amount, at the prime rate
(4.0% as of September 30, 2003), with the principal amount due on December 21,
2006. Under the Security Agreement LaborSoft granted the Company a security
interest in the assets of LaborSoft including receivables, equipment, software,
and other intellectual property, inventory and other intangible assets of
LaborSoft. The Company recognized $136,000 in service revenues during the
quarter ended September 30, 2003 for support services rendered. The Company
maintains a reserve against this Promissory Note of $200,000.
15. Subsequent Events
On October 3, 2003, the Company received 1,000 shares of Non-Voting Convertible
Preferred Stock from Private Label Cosmetic, Inc. ("PLC") in exchange for their
surrender to PLC of a note receivable in the amount of $1,104,000. The shares of
preferred stock are convertible at the Company's option into 306 shares of
common stock of PLC. Such shares have been placed in escrow in connection with
the Stock Pledge Agreement and shall remain there for such conversion.
Commencing the quarter ended March 31, 2005, these shares of preferred stock
become entitled to receive a dividend of $10,000 per quarter, payable at the end
of the quarter.
13
Effective October 8, 2003, the Company and James Linesch, its Chief Financial
Officer, entered into an Amendment to Employment Agreement, with respect to his
Employment Agreement dated August 14, 2000 as previously amended on August 15,
2001. Under the revised terms, the Company reduced Mr. Linesch's salary from an
annual rate of $200,000 to $150,000 effective November 1, 2003. On November 1,
2004, his salary shall be further reduced to an annual rate of $100,000 for one
year, and the Employment Agreement shall terminate on October 31, 2005 without
further obligation by the Company.
On October 16, 2003, the board of directors approved an increase in the base
salary of Steven J. Ross, its Chief Executive Officer, from $400,000 to $440,000
effective October 1, 2003.
16. Recent Accounting Pronouncements
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have a
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative instruments and Hedging Activities." This Statement amends and
clarifies SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of the SFAS
No.133. SFAS No.149 also amends certain other existing pronouncements, which
will result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. SFAS No. 149 is effective (1) for contracts entered into or modified
after September 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after September 30, 2003. The guidance is to be applied
prospectively.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's condensed consolidated financial
statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
When used in the Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result"
and "the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Such risks and
uncertainties include, among others, success in reaching target markets for
services and products in a highly competitive market and the ability to attract
future customers, the size and timing of additional significant orders and their
fulfillment, the success of the Company's business emphasis, the ability to
finance and sustain operations, including the ability either to maintain and
extend the Textron Factoring Facility 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, the ability to fulfill the Company's
obligations to third parties, and ability to defend successfully certain ongoing
litigation over contract performance, the size and timing of additional
significant orders and their fulfillment, the ability to turn contract backlog
into revenue and net income, the continuing desire of state and local
governments to outsource to private contractors and the ability of the Company
to obtain extensions of the 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
and the acquisition of other services and products. The Company has no
obligation to publicly release the results of any revisions, which may be made
to any forward-looking statements to reflect anticipated or unanticipated events
or circumstances occurring after the date of such statements.
RESULTS OF CONTINUING OPERATIONS
The three months ended September 30, 2003 (the "2003 Three Month Period") as
compared to the three months ended September 30, 2002 (the "2002 Three Month
Period").
Revenues for the 2003 Three Month Period decreased to $12,925,000 from
$14,148,000 for the 2002 Three Month Period. This decrease was associated with
decreased orders from customers, resulting primarily from reduced or delayed
information technology spending budgets during the period. The revenue mix of
product and services was 43% and 57%, respectively, for the 2003 Three Month
Period, as compared to 44% and 56%, respectively, for the 2002 Three Month
Period.
Cost of revenues for the 2003 Three Month Period decreased to $10,641,000 from
$11,312,000 for the 2002 Three Month Period, due to the decrease in revenue. The
overall gross margin percentage decreased to18% for the 2003 Three Month Period
from 20% for the 2002 Three Month Period. This decrease in margin primarily
results from a decrease in margins related to software product sales.
Selling, general and administrative expenses for the 2003 Three Month Period
decreased to $2,670,000 from $3,210,000 for the 2002 Three Month Period. The
Company has realized cost savings from consolidating administration centers,
personnel and management. As a percentage of total revenues, such costs
decreased to 21% during the 2003 Three Month Period, from 23% in the prior 2002
Three Month Period.
Depreciation and amortization expense for the 2003 Three Month Period decreased
to $679,000 from $708,000 for the 2002 Three Month Period.
Interest expense for the 2003 Three Month Period was $355,000, as compared to
$169,000 during the 2002 Three Month Period. Interest from the credit facility
borrowings increased $186,000 during the 2003 Three Month Period due to start up
loan fees and higher interest rates on the new Textron Factoring Facility
entered into on June 30, 2003.
Net loss was $1,522,000 for the 2003 Three Month Period, as compared to a net
loss of $1,270,000 for the 2002 Three Month Period. The increase in loss
attributed primarily factors identified above.
RESULTS OF DISCONTINUED OPERATIONS
Net loss from discontinued operations was $175,000 for the 2003 Three Month
Period as compared to a net gain of $84,000 for the 2002 Three Month Period. The
increase in loss was due to ongoing legal and facility costs and other
transitional expenses associated with the discontinued operations of the
Company's non-emergency transportation business.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had a working capital deficiency of
approximately $10 million. The Company anticipates a reduction in this
deficiency as its accounts payable are reduced due to disbursement of proceeds
from a third party's performance bond to certain former vendors to the Company.
The Company obtained a limited release of indemnification from DynCorp of its
obligation to reimburse them for their obligation to fund an amount of
approximately $2.4 million under a performance bond related to the Company's
discontinued transportation services business. As a result, the Company's
liability to such vendors will in effect have been extinguished to the extent of
the funds disbursed. The amount of $2.4 million deposited in escrow for the
payment to the Company's vendors has not yet been recorded as an offset to the
Company's accounts payable. Such liability to the vendors is currently reflected
in current liabilities from discontinued operations, and will be eliminated from
current liabilities from discontinued operations as and to the extent that the
bond proceeds are used to satisfy those obligations to such vendors. The courts
are currently in the process of assembling the amounts of the individual claims
due from these vendors. When the individual claims are determined for each
vendor, in accordance with court procedures, the Company will evaluate its
overall accrual for such payables and adjust its liability accordingly. Once the
courts determine the valid claim amounts, the inter-plead funds shall be
disbursed and the payable shall be adjusted accordingly. Should valid claims
remain outstanding after the disbursement of the inter-plead funds, certain
vendors may continue to pursue their claims after the inter-pleader proceedings
are concluded, however, such claims may not exceed the amounts determined by the
courts to be due. The Company believes that the aggregate inter-pleader claims
ultimately due, as determined by the courts, will be less than the combined
total of the bond amount and the Company payables currently recorded as due to
such vendors, and that a substantial amount of these claims are without merit
based on billings for services that were not provided under the agreements or on
billings which were outside the terms of the subcontracts. Through September 30,
2003, the Company has itself paid $168,000 to such providers.
16
On March 1, 2003, the Company entered into the First Transit Agreement with
First Transit, pursuant to which it sold to First Transit 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 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 if such
extension is obtained.
On June 30, 2003, the Company entered into a 12 month renewable Textron Credit
Facility with an agency of Textron. The Textron Credit Facility 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% (6.5%
at September 30, 2003). Additionally, a 0.25% discount fee is charged at the
time of purchase. The Textron Factoring Facility replaced the former agreement
with Foothill Capital. As of September 30, 2003, $2,128,000 was outstanding
under this agreement.
During October 2003, the Company continued 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 anticipates continued improvement in its cash flows during fiscal
2004 by implementing reductions of administrative overhead expenses as well as
aggressively pursuing new customer relationships and expanding the services
offered to existing customers. The Company is also negotiating with vendors for
improved payment terms. 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 the additional debt and/or
equity financing for which it is currently negotiating should provide adequate
funding through at least September 30, 2004. However, there can be no assurances
that the Company will have sufficient funds to implement its current business
plan. If sufficient funds are not available, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States.
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.
17
Basis of Presentation. During the fiscal year ended June 30, 2003, the Company
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.
Revenue Recognition. The Company's 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. The Company recognizes 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 collectibility 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.
Collectibility 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.
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, an Interpretation of ARB No. 51." FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional financial support from other
parties. FIN 46 is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after December 15, 2003.
18
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of the SFAS
133. SFAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant separate accounting.
SFAS 149 is effective (1) for contracts entered into or modified after September
30, 2003, with certain exceptions, and (2) for hedging relationships designated
after September 30, 2003. The guidance is to be applied prospectively.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's condensed consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Textron Factoring Facility exposes the Company to the risk of earnings or
cash flow loss due to changes in market interest rates. The Textron Factoring
Facility requires interest to be paid at 2.5% over the prime rate. The table
below provides information on the Textron Factoring Facility as of September 30,
2003.
- ---------------------------------------- ------------------------------ ----------------------------------------------
Weighted Average
- ---------------------------------------- ------------------------------ ----------------------------------------------
Principal Balance Interest Rate (Prime plus 2.5%)
at September 30, 2003
- ---------------------------------------- ------------------------------ ----------------------------------------------
Factoring credit facility $ 2,128,000 6.5%
- ---------------------------------------- ------------------------------ ----------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including its Chief Executive Officer, or CEO and
Chief Financial Officer, or CFO, of the effectiveness of the Company's
disclosure controls and procedures as of September 30, 2003. Based on that
evaluation, the Company's management, including its CEO and CFO, have concluded
that the Company's disclosure controls and procedures are effective to ensure
that the information required to be disclosed in the Company files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the times periods specified in the Securities and Exchange
Commission's rules and forms. There have been no changes in the Company's
internal controls over financial reporting or in other factors identified in
this evaluation that occurred during the three months ended September 30, 2003
that have materially affected, or are reasonably materially likely to affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMMONWEALTH OF VIRGINIA
Effective December 15, 2002, the Company cancelled a contract to provide
non-emergency transportation brokerage services in certain regions of the
Commonwealth of Virginia, by entering into a mutual Settlement Agreement with
the Commonwealth. The terms of the Settlement Agreement provided that the
Company make payments due to transportation provider vendors for services
rendered under the contract. Under an interim letter understanding; beginning in
September 2003 the Company has made payments in the aggregate amount of
approximately $100,000 per month to various providers. As of September 30, 2003,
the Company paid $168,000 to providers as a result of this offer.
19
In connection with initially entering the contract, a performance bond was
posted by a third party to guarantee payment to the transportation provider
vendors up to the bond amount of $2.4 million. A number of such vendors caused
the bond to be called, requiring the bond amount to be deposited in an escrow
account and initiating a process of disbursing the $2.4 million to vendors with
valid claims. The bonding company filed an inter-pleader action on July 22,
2003.
In a separate transaction, the Company has entered into a limited release of
indemnification to reimburse the guarantor for funding the bond. As a result,
the Company's liability to such vendors will in effect have been extinguished to
the extent of the funds disbursed. The amount of $2.4 million deposited in
escrow for the payment to the Company's vendors has not yet been recorded as an
offset to the Company's accounts payable. Such liability to the vendors is
currently reflected in current liabilities from discontinued operations, and
will be eliminated from current liabilities from discontinued operations as and
to the extent that the bond proceeds are used to satisfy those obligations to
such vendors.
The courts are currently in the process of assembling the amounts of the
individual claims due from these vendors. When the individual claims are
determined for each vendor, in accordance with court procedures, the Company
will evaluate its overall accrual for such payables and adjust its liability
accordingly. Once the courts determine the valid claim amounts, the inter-plead
funds shall be disbursed and the payable shall be adjusted accordingly. Should
valid claims remain outstanding after the disbursement of the inter-plead funds,
certain vendors may continue to pursue their claims after the inter-pleader
proceedings are concluded, however, such claims may not exceed the amounts
determined by the courts to be due. The Company believes that the aggregate
inter-pleader claims ultimately due, as determined by the courts, will be less
than the combined total of the bond amount and the Company payables currently
recorded as due to such vendors, and that a substantial amount of these claims
are without merit based on billings for services that were not provided under
the agreements or on billings which were outside the terms of the subcontracts.
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 September 30, 2003, actions for
collection are pending in 12 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
inter-pleader action for all purposes. The Ali Medical claimants are considered
cross-claimants in the inter-pleader action. In addition to the Ali Medical
claimants, an additional six defendants in the inter-pleader action have filed
cross-claims for an aggregate amount of approximately $449,000. The remaining
eleven proceedings which claim an aggregate amount of approximately $669,000
have been temporarily stayed by an order of the court overseeing the
inter-pleader action. In both the outside lawsuits and the cross-claims, all or
a portion of the amounts claimed have been disputed.
20
Provisions in the Company's condensed consolidated 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.
On October 11, 2002, Merisel Americas, Inc. filed a breach of contract complaint
in Superior Court of California, Southwest District. The complaint arose from
our 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 12 months in an aggregate amount of $567,000 which is included in accounts
payable. As of September 30, 2003 $467,000 was outstanding and 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 September 30, 2003, $50,000 remains due and payable
under this agreement. The Company is currently making progress payments on this
amount.
ITEM 5. OTHER INFORMATION
Effective October 8, 2003, the Company and James Linesch, its Chief Financial
Officer, entered into an Amendment to Employment Agreement, with respect to his
Employment Agreement dated August 14, 2000 as previously amended on August 15,
2001. Under the revised terms, the Company reduced Mr. Linesch's salary from an
annual rate of $200,000 to $150,000, effective November 1, 2003. On November 1,
2004, his salary shall be further reduced to an annual rate of $100,000 for one
year, and the Employment Agreement shall terminate on October 31, 2005 without
further obligation by the Company.
On October 16, 2003, the board of directors approved an increase in the base
salary of Steven J. Ross, its Chief Executive Officer, from $400,000 to $440,000
effective October 1, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Amendment of Employment Agreement with James Linesch,
dated October 8, 2003.
31.1 Rule 13a-14(a) / 15d-14(a), Certification of Steven
J. Ross.
31.2 Rule 13a-14(a) / 15d-14(a), Certification of James
Linesch.
32.1 Section 1350 Certification of Steven J. Ross.
32.2 Section 1350 Certification of James Linesch.
(b) Reports on Form 8-K
21
The following reports on Form 8-K were filed by the Company during the quarter
ended September 30, 2003:
(1) On July 9, 2003, the Company filed a Current Report on Form 8-K regarding
the change in the primary borrowing facility of DynTek Services, Inc. from one
with Foothill Capital Corporation to one with Systran Financial Services
Corporation, together with the Factoring Agreement, dated July 1, 2003, between
Systran Financial Services Corporation, DynTek, Inc. and DynTek Services, Inc.
as an exhibit thereto.
(2) On July 25, 2003, the Company filed Current Report on Form 8-K, in
connection with the Agreement, dated as of June 30, 2003, pursuant to which a
group of private and institutional investors agreed to forgive DynTek's $5
million subordinated, unsecured note, which note the group then acquired from
DynCorp in connection with a sale of 10,336,663 shares of DynTek common stock by
DynCorp to the same investors on July 3, 2003.
22
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNTEK, INC.
By:/s/James Linesch
--------------------
James Linesch
Chief Financial Officer
Date: November 14, 2003
23