As filed with the Securities and Exchange Commission on April 1, 2004.
Registration No. 333-112555
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DYNTEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 5961 95-4228470
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
corporation or organization) Classification Code Number) Identification
Number)
18881 Von Karman Avenue, Suite 250
Irvine, California 92612
(949) 955-0078
(Address and telephone number of Registrant's principal executive offices)
Steven J. Ross
Chief Executive Officer
18881 Von Karman Avenue, Suite 250
Irvine, California 92612
Ph.: (949) 955-0078
(Name, address and telephone number of agent for service)
Copy of all communications to:
Peter W. Rothberg, Esq.
Nixon Peabody LLP
437 Madison Avenue
New York, New York 10022
Ph.: (212) 940-3000
Fax: (212) 940-3111
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement, as
determined by the selling stockholders.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered Share (2) Price (2) Registration Fee
- --------------------------------------------------------------------------------------------------------------
Class A Common Stock,
$.0001 par value per
share (the common stock) 8,744,084 (1) $.84 $7,345,030 $931 (3)
(1) Includes 277,273 additional shares of common stock beyond that which was
included in this Registration Statement as previously filed with the
Commission (the "Additional Shares"), 75,758 of which Additional Shares are
added to the 2,166,667 shares of common stock which may be issued upon
exercise of certain warrants held by the selling stockholders listed in
this Registration Statement as previously filed with the Commission (for a
total of 2,242,425 shares of common stock all of which may be issued upon
the exercise of warrants held by the selling stockholders listed in this
Amendment No. 1 to this Registration Statement). Pursuant to Rule 416 under
the Securities Act of 1933, as amended (the Act), in addition, such
undeterminable number of shares of common stock as may be issued on
exercise of warrants by reason of adjustments in the number of shares of
common stock issuable pursuant to antidilution provisions contained in the
warrants. Such additional common stock, if issued, will be issued for no
additional consideration.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Act, based on the average of the high
and low bid prices of one share of the common stock, as reported on the
Nasdaq SmallCap Market, on February 2, 2004, a date within five (5)
business days of the initial filing of this Registration Statement. The
average of the high and low bid prices of one share of the common stock, as
reported on the Nasdaq SmallCap Market, on March 24, 2004 was $.75. For
purposes of filing Amendment No. 1 to this Registration Statement covering
the Additional Shares, the Registrant used the $.84 price per share in
calculating the proposed maximum aggregate offering price for the 277,273
Additional Shares being registered hereunder.
(3) Reflects the amount paid in connection with the registration of the
distribution of the original 8,466,811 shares of common stock covered by
the initial filing of this Registration Statement, as well as the
registration of the distribution of the 277,273 Additional Shares included
in Amendment No. 1 to this Registration Statement.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the Act or
until this Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed without
notice. We and the selling shareholder may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, and we and
the selling shareholder are not soliciting offers to buy these securities, in
any state where the offer or sale of these securities is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 1, 2004
8,744,084 SHARES
DYNTEK, INC.
CLASS A
COMMON STOCK
This prospectus relates to 8,744,084 shares of the Class A common stock of
DynTek, Inc. (the common stock) that may be offered for resale by certain of our
stockholders referred to in this prospectus as selling stockholders, or their
transferees, pledges, donees or successors. The selling stockholders may sell
the shares at fixed prices, prevailing market prices at the time of sale,
varying prices determined at the time of sale or at negotiated prices.
Certain of the shares of our common stock covered by this prospectus may be
issued by us upon the exercise of outstanding warrants to purchase our common
stock held by the selling stockholders. We will not receive any of the proceeds
from the resale of shares by the selling stockholders, but we may receive
proceeds from the selling stockholders when and if they exercise their warrants.
The 6,501,659 shares of common stock and the 2,242,425 shares of common stock
underlying the warrants were issued in private placements pursuant to which the
selling stockholders were granted the right to have registered the common stock
and the common stock underlying the warrants.
Our common stock trades on the Nasdaq SmallCap Market under the symbol "DYTK."
The last reported sale price for our common stock on March 24, 2004 was $.75 per
share.
Investment in the common stock offered by this prospectus involves a high degree
of risk. You may lose your entire investment. Consider carefully the "risk
factors" beginning on page 5 of this prospectus before investing.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, ____.
TABLE OF CONTENTS
Page
Prospectus Summary ...................................................... 1
Forward Looking Statements .............................................. 8
Use of Proceeds ......................................................... 8
Dividend Policy ......................................................... 8
Capitalization .......................................................... 9
Nature of Trading Market ................................................ 9
Selected Consolidated Financial Data .................................... 9
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 11
Business ................................................................ 18
Certain Relationships and Related Transactions .......................... 24
Transactions Management ................................................. 25
Security Ownership of Certain Beneficial Owners and Management .......... 29
Description of Securities ............................................... 31
Shares Eligible for Resale .............................................. 32
Selling Stockholders .................................................... 32
Plan of Distribution .................................................... 35
Legal Matters ........................................................... 36
Experts ................................................................. 36
Where You Can Find Additional Information ............................... 36
Index to Consolidated Financial Statements .............................. F-1
You should rely only on the information contained in this prospectus. We have
not, and the selling stockholders have not, authorized anyone to provide you
with different information. If anyone provides you with different information,
you should not rely on it. We are not, and the selling stockholders are not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
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PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including the more detailed information regarding
our company, the risks of purchasing our common stock discussed under "Risk
Factors," and our financial statements and the accompanying notes.
DynTek, Inc.
DynTek, Inc. is a professional services firm specializing in information
technology (IT) 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 IT 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 IT services include consulting, infrastructure planning and
deployment, IT application development, legacy systems integration, IT security
consulting, IT 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 IDC Opinion "U.S. State
and Local Government IT Spending Forecast, 2002 - 2007" market analysis report,
published in July 2003, spending among state and local government agencies
totaled $7.2 billion in 2002, and spending is expected to increase to $9.2
billion in 2007, demonstrating a five-year compound annual growth rate of 5.1%.
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.
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. Our goal is to integrate data with services to provide
efficient and low-cost business processes for our clients.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE OFFERING
Securities offered by selling
stockholders................. Up to 8,744,084 shares of common stock, of
which 6,501,659 were issued and outstanding
and 2,242,425 which underly the warrants may
be offered and sold by the selling
stockholders. These shares were issued to
the selling stockholders in recent private
placements or may be issued to the selling
stockholders upon exercise of warrants
issued in connection with those private
placements.
Use of Proceeds................ We will not receive any proceeds from the
sale of shares by the selling stockholders.
We may receive proceeds from the issuance of
shares upon the exercise of the warrants. We
expect any such proceeds to be used for
working capital and for other general
corporate purposes.
Risk Factors................... An investment in our common stock involves a
high degree of risk and could result in a
loss of your entire investment.
Nasdaq SmallCap Market Symbol.. DYTK
Executive Offices
Our executive offices are located at 18881 Von Karman Ave., Suite 250, Irvine,
California 92612. Our telephone number is (949) 955-0078, and our website is
www.dyntek.com. The information on our website is not part of this prospectus.
-2-
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- --------------------------------------------------------------------------------
SUMMARY HISTORICAL FINANCIAL INFORMATION
(000's except share data)
The following table presents summarized financial information as of and for the
fiscal quarter ended December 31, 2003 and 2002 and as of and for the fiscal
years ended June 30, 2003, 2002 and 2001. The information is extracted from the
consolidated financial statements presented elsewhere in the prospectus and in
previous filings and should be read in conjunction therewith.
For the
Three Months
Ended December 31, For the Fiscal Year Ended June 30,
------------------------ ----------------------------------------------
2003 2002 2003 2002 2001
---- ---- ---- ---- ----
(Unaudited)
Continuing Operations Data:
Revenue ......................... 9,801 11,840 52,647 60,077 44,910
General & administrative
expenses ...................... 1,259 904 3,759 5,279 4,054
Total operating expenses ..............6,744 2,918 56,850 72,456 55,732
Net (loss) ...................... (5,480) (1,208) (4,203) (12,379) (10,822)
Net (loss) per share ............ (.12) (.03) (.11) (.43) (.63)
Weighted average shares
outstanding ................... 44,102,624 35,461,592 36,639,261 29,103,092 17,168,883
As of
December 31, As of June 30,
------------------------ -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
Balance Sheet Data:
Current assets...................... 8,280 9,370 10,914 21,585
Total assets .................... 46,467 66,527 53,127 80,519
Current liabilities ............. 18,107 24,453 22,187 35,660
Long-term liabilities ........... 210 6,038 5,317 1,079
Stockholders' equity
(deficiency) .................. 28,150 35,946 25,623 43,780
Working capital deficiency ...... 9,827 15,173 11,273 14,075
-3-
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RISK FACTORS
Please consider the following risks and uncertainties together with the other
information presented in this prospectus, including the financial statements and
the notes thereto, before investing in our common stock. The trading price of
our common stock could decline due to any of the following risks, and you might
lose all or part of your investment. The risks and uncertainties we have
described are not the only ones our company faces. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also affect our business.
Risks Related to Our Business
We may need to obtain additional financing.
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 sale 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.
We have a dependence on contracts with government agencies, which, if terminated
or reduced, would have a material adverse effect on our company.
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 particular project 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.
We may not be able 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. 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. 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. 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.
We may not be able to compete successfully in the information technology and
consulting services markets.
The information technology (IT) 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
such as national accounting firms and related entities, 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.
-4-
We may not be able to identify, acquire or integrate new businesses, which could
adversely impact our business.
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.
We anticipate that our revenue and operating results will fluctuate, which could
adversely affect the price of our common stock.
Our operating results have fluctuated and will fluctuate in the future as a
result of many factors, including:
o general economic conditions and weakness in IT spending;
o the loss or consolidation of one or more of our significant suppliers
or customers;
o market acceptance and product life of the products we distribute;
o competitive conditions in our industry, which may impact our margins;
o pricing, margin and other terms with our suppliers; and
o changes in our costs and operating expenses.
Although we attempt to control our expense levels, these levels are based, in
part, on anticipated revenue. Therefore, we may not be able to control spending
in a timely manner to compensate for any unexpected revenue shortfall.
We depend on a small number of vendors to supply the IT products that we sell
and the loss of, or a material change in, our business relationship with a major
supplier could adversely affect our business, financial position and operating
results.
Our future success is highly dependent on our relationships with a small number
of manufacturers and distributors such as Tech Data and Ingram Micro
Corporation. While we are an authorized reseller of products for over 50
manufacturers, the sales of products manufactured by Cisco and Novell accounted
for approximately 51% of our product revenues in the information technologies
segment during the last fiscal year and approximately 21% of our total revenues
for the same period. Our reseller agreements are generally 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 be unavailable to us. In addition, our suppliers
may face liquidity or solvency issues, which, in turn, could negatively affect
our business and operating results.
Our gross margins are low, which magnifies the impact of variations in revenue,
operating costs, bad debts and interest expense on our operating results.
As a result of intense price competition in the IT products industry, our gross
margins are low, and we expect them to continue to be low in the future.
Increased competition arising from industry consolidation and low demand for
certain IT products may hinder our ability to maintain or improve our gross
margins. These low gross margins magnify the impact of variations in revenue,
operating costs, bad debts and interest expense on our operating results. A
portion of our operating expenses is relatively fixed, and planned expenditures
are based in part on anticipated orders that are forecasted with limited
visibility of future demand. As a result, we may not be able to reduce our
operating expenses as a percentage of revenue to mitigate any further reductions
in gross margins in the future. If we cannot proportionately decrease our cost
structure in response to competitive price pressures, our business and operating
results could suffer.
We receive purchase discounts and rebates from third-party suppliers based on
various factors, including sales or purchase volume and breadth of customers. A
decrease in net sales could negatively affect the level of volume rebates
received from our third-party suppliers and thus, our gross margins. A decrease
or elimination of purchase discounts and rebates from our third-party suppliers
could adversely affect our business and operating results.
-5-
We rely upon third-party vendors for the provision of a significant portion of
the IT services that we provide to our customers. The deterioration of our
relationship with a major third-party service provider could have an adverse
impact on our business.
Our professional workforce is partially comprised of individuals under contract
from third-party professional staffing firms. We currently employ approximately
90 professionals from such firms for the provision of services to our customers,
representing approximately 60 percent of our total professional services
workforce. If professional staff that we are utilizing become unavailable from a
significant vendor, we would be required to find alternative sources of such
professional staffing services. Interruptions in services provided to our
customers could have an adverse impact on our business.
We depend on third-party suppliers to maintain an adequate supply of products to
fulfill customer orders on a timely basis, and any supply shortages or delays
could cause us to be unable to fulfill orders on a timely basis, which, in turn,
could harm our business, financial position and operating results.
Our ability to obtain particular products in the required quantities and to
fulfill customer orders on a timely basis is critical to our success. In most
cases, we have no guaranteed price or delivery agreements with our third-party
suppliers. We occasionally experience a supply shortage of certain products as a
result of strong demand or problems experienced by our third-party suppliers. If
shortages or delays persist, the price of those products may increase, or the
products may not be available at all. In addition, our third-party suppliers may
decide to distribute, or to substantially increase their existing distribution
business, through other distributors, their own dealer networks, or directly to
our customers. Accordingly, if we are not able to secure and maintain an
adequate supply of products to fulfill our customer orders on a timely basis,
our business, financial position and operating results may be adversely
affected.
We may become involved in intellectual property or other disputes that could
cause us to incur substantial costs, divert the efforts of our management,
require us to pay substantial damages or require us to obtain a license, which
may not be available on commercially reasonable terms, if at all.
We may from time to time receive notifications alleging infringements of
intellectual property rights allegedly held by others relating to our business
or the products we sell or resell. Litigation with respect to patents or other
intellectual property matters could result in substantial costs and diversion of
management and other resources and could have an adverse effect on our business.
Although we generally have various levels of indemnification protection from our
suppliers, in many cases any indemnification to which we may be entitled is
subject to maximum limits or other restrictions. If any infringement claim is
successful against us and if indemnification is not available or sufficient, we
may be required to pay substantial damages or we may need to seek and obtain a
license of the other party's intellectual property rights. We may be unable to
obtain such a license on commercially reasonable terms, if at all.
We are from time to time involved in other litigation in the ordinary course of
business. We may not be successful in defending these or other claims.
Regardless of the outcome, litigation can result in substantial expense and
could divert the efforts of our management.
The intellectual technology industry is subject to rapidly changing technologies
and process developments, and we may not be able to adequately adjust our
business to these changes, which, in turn, would harm our business and operating
results.
Dynamic changes in the intellectual technology industry have resulted in new and
increased responsibilities for management personnel and have placed, and
continue to place, a significant strain upon our management, operating and
financial systems and other resources. We may be unable to successfully respond
to and manage our business in light of industry developments and trends. Also
crucial to our success in managing our operations will be our ability to achieve
additional economies of scale. Our failure to achieve these additional economies
of scale or to respond to changes in the intellectual technology industry could
adversely affect our business and operating results.
Risks Related to Our Offering
Significant fluctuations in the market price of our common stock could result in
securities class action claims against us, which could seriously harm our
business.
Securities class action claims have been brought against companies in the past
where volatility in the market price of that company's securities has taken
place. This kind of litigation could be very costly and divert our management's
attention and resources, and any adverse determination in this litigation could
also subject us to significant liabilities, any or all of which could adversely
affect our business and operating results.
-6-
You may suffer dilution in your ownership of our shares from the exercise or
conversion of options, warrants, and convertible securities issued to other
persons.
There are outstanding options, warrants, and convertible securities to acquire
shares of our common stock and we may grant additional rights in the future. If
any of the outstanding options, warrants, or convertible securities are
exercised or converted, your percentage ownership in the common stock will be
reduced. So long as these options, warrants, and convertible securities are
exercisable, the holders will have the opportunity to profit from a rise in the
price of our common stock. The existence of such options, warrants, and
convertible securities may adversely affect the terms on which we can obtain
additional financing. The holders of such options, warrants, and convertible
securities can be expected to exercise them at a time when we would probably be
able to obtain additional capital by an offering of our common stock at a price
higher than the exercise price of these outstanding options, warrants, and
convertible securities.
If we or our existing stockholders sell additional shares of our common stock
after this offering, the market price of our common stock could decline. The
market price of our common stock could decline as a result of sales of a large
number of shares of common stock in the market after this offering, or the
perception that such sales could occur. These sales, or the possibility that
these sales may occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
A limited public market for our common stock may impair your liquidity and/or
return on investment.
There is currently a limited trading market for our shares of common stock, and
there can be no assurance that a more substantial market will ever develop or be
maintained. Any market price for shares of our common stock is likely to be very
volatile, and numerous factors beyond our control may have a significant adverse
effect. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capital companies and which have often been unrelated
to the operating performance of these companies. The price for our common stock
and the volume of shares traded fluctuate. Consequently, persons who invest in
our common stock may not be able to use their shares as collateral for loans and
may not be able to liquidate at a suitable price in the event of an emergency.
In addition, holders may not be able to resell their shares, or may not be able
to sell their shares at or above the price they paid for them.
We do not anticipate that we will pay cash dividends on our common stock.
We have never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Our governing document and applicable laws discourage takeover attempts even if
doing so might be beneficial to our stockholders.
Our governing documents and applicable laws include provisions that may
discourage a takeover attempt. Provisions contained in our certificate of
incorporation and by-laws, including the following provisions and Delaware law,
could make it difficult for a third party to acquire us, even if doing so might
be beneficial to our stockholders:
o a staggered board of directors, where stockholders elect only a
minority of the board each year; and
o the ability of our board of directors to issue preferred stock without
a stockholder vote.
Certain of our shares are eligible for future sales and may affect the price of
our common stock.
Sales of unrestricted securities may also have an adverse effect on any market
that may develop in our common stock. Of the 50,141,883 outstanding shares of
our common stock on March 25, 2004, 20,523,930 are free trading, meaning that
they can presently be sold. In addition, of the 29,617,953 restricted shares,
6,441,792 were issued on or before March 1, 2003, and under Rules 144, 144(d)
and 701 of the Securities Act of 1933, if certain conditions are satisfied, a
limited number of these shares, up to 1% of the total of our issued and
outstanding shares, could be sold during any three month period. In addition, of
the 29,617,953 restricted shares, 3,342,322 were issued on or before March 1,
2002, and a stockholder who is not our affiliate, who has not been our affiliate
for 90 days prior to the sale may resale these shares pursuant to Rule 144(k)
without compliance with many of the conditions under Rule 144. Once these shares
enter the market, their sale may have a depressive effect on the market price of
our stock.
-7-
We cannot assure you of the continued listing of our securities on the Nasdaq
SmallCap Market and other securities exchanges and associations.
Although our common stock is currently listed on The Nasdaq SmallCap Market, we
cannot assure you that we will be able to continue to satisfy the minimum
listing requirements. Since October 23, 2003, the closing price of our common
stock as reported on The Nasdaq SmallCap Market has been below $1.00 per share,
the minimum requirement for continued inclusion on The Nasdaq SmallCap Market. A
failure to meet the continued inclusion requirement for closing price of our
common stock shall be determined to exist if the deficiency continues for a
period of more than 30 consecutive trading days. Upon notification by Nasdaq of
such failure, we shall have a period of 90 calendar days from such notification
to achieve compliance.
In the event our common stock is delisted from Nasdaq, the trading market for
such securities could be disrupted. This could make it difficult for investors
to trade in our common stock and attain liquidity for their investment in our
common stock. If our common stock is delisted from The Nasdaq SmallCap Market,
we may or may not apply for listing on the OTC Bulletin Board or another
quotation system or exchange on which we could qualify. We cannot guarantee,
however, that we would apply for listing on another quotation system or exchange
if we are delisted from The Nasdaq SmallCap Market, or that if we do apply for
listing that we would be eligible for such listing, Even if we do become listed
on such alternative quotation system or exchange, we cannot guarantee that we
would be able to maintain such status.
FORWARD LOOKING STATEMENTS
When used in this prospectus 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, 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 contracts of certain of our subsidiaries
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.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling stockholders of
shares in this offering. We may receive proceeds from the issuance of shares
upon the exercise of the warrants by the selling stockholders pursuant to their
warrants. We expect to use such proceeds for working capital and for other
general corporate purposes.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our board of directors after
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
-8-
CAPITALIZATION
The following table sets forth our capitalization (unaudited) as of December 31,
2003. You should read this information in conjunction with our financial
statements, the accompanying notes and the other financial information appearing
elsewhere in this prospectus.
Long-term debt ............................................. $ 0
============
Stockholders' equity (deficiency):
Common stock, $.0001 par value
Authorized, 70,000,000 shares
Issued and outstanding, 46,720,235 shares ............. $ 4,000
Stockholders' equity (deficiency):
Series A Preferred Stock, $.0001 par value
Authorized, 10,000,000 shares
Issued and outstanding, 1,458,023 shares ................... 1,000
Additional paid-in capital .............................. 91,525,000
Accumulated other comprehensive loss .................... (148,000)
Accumulated deficit ..................................... $(63,232,000)
------------
Total Stockholders' equity ................................. $ 28,150,000
------------
Total Capitalization ....................................... $ 28,150,000
============
NATURE OF TRADING MARKET
Our common stock is listed on the Nasdaq SmallCap Market under the symbol
"DYTK." The following table sets forth the high and low bid prices for each
fiscal quarter during the fiscal years indicated below, as reported by the
Nasdaq SmallCap Market.
Quarter Ended High Low
- ------------- ---- ---
December 31, 2001 $2.64 $1.63
March 31, 2002 2.44 1.86
June 30, 2002 2.11 1.56
September 30, 2002 1.90 0.80
December 31, 2002 1.49 0.68
March 31, 2003 1.04 0.55
June 30, 2003 1.05 0.61
September 30, 2003 1.41 0.77
December 31, 2003 1.11 0.70
On March 24, 2004, the last reported sale price for our common stock was $.75
per share. On March 25, 2004, we had approximately 270 holders of record of our
common stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together with
our consolidated financial statements and related notes to those statements, pro
forma financial information and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The consolidated statement of operations presented below for the
fiscal years ended June 30, 2001, 2002 and 2003 and the consolidated balance
sheet data as of June 30, 2002 and 2003 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated statements of operations and cash flow data for the fiscal years
ended June 30, 1999 and 2000 and the consolidated balance sheet data as of June
30, 1999, 2000 and 2001 have been derived from our audited consolidated
financial statements that are not included in this prospectus. The consolidated
statement of operations and cash flow data for
-9-
the three months ended December 31, 2003 and the consolidated balance sheet data
as of December 31, 2003 have been derived from our unaudited consolidated
financial statements that appear elsewhere in this prospectus. These unaudited
consolidated financial statements include all adjustments that we consider
necessary for a fair presentation of that information. These adjustments are
only of a normal and recurring nature. Historical operating results are not
necessarily indicative of the results that may be expected for any future
period. Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations," including notes thereto, appearing elsewhere in this
prospectus.
On August 14, 2000, we acquired the assets of Data Systems Network Corporation,
causing a significant increase in our revenues and costs for the fiscal year
ended June 30, 2001 and subsequent periods.
Statement of Operations Data
(000's except share data)
For the Three Months
Ended December 31, Years Ended June 30,
--------------------- ------------------------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
Operating revenues .......... $ 9,801 $ 11,840 $ 52,647 $ 60,077 $ 44,910 $ 1,962 $ 1,515
Loss from continuing
operations .................. (5,450) (1,385) (4,203) (12,379) (10,822) (3,947) (479)
Loss from continuing
operations - per share ...... (.12) (.04) (.11) (.43) (.63) (.25) (.03)
Net Income (Loss) from discontinued
operations - per share ...... -- .01 (.26) (.24) -- -- --
Balance Sheet Data
(000's)
For the Three Months
Ended December 31, Years Ended June 30,
--------------------- ------------------------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
Total assets ................ 46,467 66,527 53,127 80,519 33,997 12,525 16,488
Long term debt .............. -- 53 5,000 -- -- 18 18
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under "Risk Factors" described elsewhere in this prospectus.
Results of Continuing Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales.
For the Three Months
Ended December 31, Year Ended June 30,
-------------------- ------------------------------------------
2003 2002 2003 2002 2001
---- ---- ---- ---- ----
(Unaudited)
Product Revenue ........................................ 35% 42% 42% 52% 56%
Service Revenue-Information
Technology ........................................... 41% 34% 42% 40% 44%
Service Revenue-Business
Process Outsourcing .................................. 23% 24% 16% 8% 0%
Cost of Product ........................................ 89% 82% 85% 85% 83%
Cost of Service-Information ............................ 85% 84% 80% 76% 75%
Technology
Cost of Service-Business Process
Outsourcing .......................................... 85% 84% 77% 79% 0%
Gross Profit ........................................... 14% 17% 18% 19% 21%
Selling General & Administrative
Expenses ............................................. 32% 19% 21% 26% 28%
Loss from operations ................................... (55)% (12)% (6)% (20)% (24)%
Interest income ........................................ -- -- -- -- --
Total income/(loss) from
discontinued operations .............................. (1)% 1% (18)% (12)% (0)%
Net income/(loss) ...................................... (56)% (10)% (24)% (32)% (24)%
Three months ended December 31, 2003 and December 31, 2002 - Continuing
Operations
Revenues for the 2003 Three Month Period decreased to $9,801,000 from
$11,840,000 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 35% and 65%, respectively, for the 2003 Three Month
Period, as compared to 42% and 58%, respectively, for the 2002 Three Month
Period.
Cost of revenues for the 2003 Three Month Period decreased to $8,448,000 from
$9,865,000 for the 2002 Three Month Period, due to the decrease in revenue. The
overall gross margin percentage decreased to 14% for the 2003 Three Month Period
from 17% for the 2002 Three Month Period. This decrease in margin primarily
resulted from lower margins on software license sales.
Selling, general and administrative expenses for the 2003 Three Month Period
increased to $3,076,000 from $2,214,000 for the 2002 Three Month Period. The
increase is due primarily from an expansion in sales personnel in new geographic
regions and lines of business. As a percentage of total revenues, such costs
increased to 31% during the 2003 Three Month Period, from 19% in the prior 2002
Three Month Period.
Due to a re-focus of business strategy, the Company has determined that the
projected revenues from contract renewals in the future may be lower than in
prior projections, used for impairment analysis. As a result, the Company has
determined that there has been impairment of goodwill requiring an adjustment of
$3,000,000 to reduce the carrying value of goodwill for the outsourced
management business.
Depreciation and amortization expense for the 2003 Three Month Period decreased
to $668,000 from $704,000 for the 2002 Three Month Period.
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Interest expense for the 2003 Three Month Period was $147,000, as compared to
$420,000 during the 2002 Three Month Period. Interest of $250,000 was attributed
to long term note payable in the 2002 Three Month Period which did not exist in
the comparable 2003 period. Interest from the credit facility borrowings
decreased $23,000 during the 2003 Three Month Period due to reduced fees on the
new Textron Factoring Facility entered into on June 30, 2003.
Net loss from continuing operations was $5,450,000 for the 2003 Three Month
Period, as compared to a net loss of $1,385,000 for the 2002 Three Month Period.
The increase in loss attributed primarily to factors identified above.
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, in large part due to reduced
or delayed IT 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 IT 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 the
2003 fiscal year, from approximately 26% in the 2002 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 the
2003 fiscal year, from $492,000 during the 2002 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 2002 fiscal
year.
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 2002 fiscal year. The decrease in expense is
primarily a result of interest and finance costs on short-term convertible notes
payable incurred during the 2002 fiscal year of $1,156,000, which did not recur
in the 2003 fiscal year. The decrease in interest income from the fiscal year
ended June 30, 2003 to $69,000 from $294,000 during the fiscal year ended June
30, 2002 is due primarily to non-recurring note receivable interest.
The loss on sale of marketable securities of $1,241,000 in the 2002 fiscal year
did not recur in the 2003 fiscal year.
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 IT 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
-12-
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 2001 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 2001
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
the 2001 fiscal year.
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 note receivable from Private
Label Cosmetics, Inc. 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 2002 fiscal year of $1,156,000.
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 2001 fiscal 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, we entered into an Asset Purchase Agreement with First
Transit, Inc. (First Transit), pursuant to which we sold to First Transit
certain specific assets relating to the non-emergency transportation brokerage
services business previously provided by us. The assets sold consisted of our
interests in three contracts to provide non-emergency transportation related
services and related assets used in connection with performance of such
contracts by us as well as the assumption of all vendor and services
sub-contract agreements relating to the contracts. The purchase price consisted
of cash payments of $6,450,000 and an additional cash payment of up to
$1,750,000 to be paid in the event that First Transit is able to obtain an
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, we also agreed to not compete with First Transit in the
business which was sold.
As a result of the Asset Purchase Agreement with First Transit and the mutual
Settlement Agreement we entered into on December 15, 2002 to cancel a contract
to provide non-emergency transportation brokerage services with the Commonwealth
of Virginia, we have discontinued all non-emergency transportation services
which was a component and separate reporting unit of our 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 the fiscal year ended June 30, 2002.
Net loss from discontinued operations was $30,000 for the three months ended
December 31, 2003, as compared to a net gain of $177,000 for the three months
ended December 31, 2002. The loss was due to ongoing legal and facility costs
associated with the discontinued operations.
Liquidity and Capital Resources
As of December 31, 2003, the Company had a working capital deficiency of
approximately $9,800,000. 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.
-13-
The Company obtained a limited release of indemnification from DynCorp of its
obligation to pay to a bonding company, and limited release of the Company's
obligation to reimburse DynCorp for its obligation to fund, respectively, an
amount of approximately $2.4 million under a performance bond related to the
Company's 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 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. 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. Through
December 30, 2003, the Company has itself paid $534,000 to such providers.
On March 1, 2003, the Company entered into the First Transit Agreement with
First Transit, pursuant to which it sold to First Transit certain specified
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.
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 15%.
Interest is charged on the outstanding balance at the Prime rate plus 2.5% (6.5%
at December 31, 2003). Additionally, a 0.25% discount fee is charged at the time
of purchase. The Textron Credit Facility replaced the former agreement with
Foothill Capital. As of December 31, 2003, $1,887,000 was outstanding under the
Textron Credit Facility.
Under agreements dated as of December 5, 2003, the Company entered into a series
of agreements, including a Securities Purchase Agreement and a Registration
Rights Agreement, in connection with a private placement of shares of the
Company's common stock, par value $0.0001 per share ("Common Stock"), at a price
equal to $0.66 per share for an aggregate gross purchase price of $2,200,000. On
December 9, 2003, the Company closed the private placement and issued 3,333,333
shares of Common Stock to the purchasers and two tranches of common stock
purchase warrants. One tranche to purchase up to 20% of the Common Stock issued
at an exercise price equal to $1.00 per share (the "20% Investor Warrants") and
the other tranche to purchase up to 30% of the Common Stock issued at an
exercise price equal to $0.75 per share (the "30% Investor Warrants"). Both the
20% Investor Warrants and the 30% Investor Warrants are exercisable immediately
at closing and have a five-year term of exercise. In addition, the placement
agent received, placement agent fee (including expense reimbursement) of
$189,050 and placement agent warrants equal to 10% of the aggregate shares of
Common Stock issued on the closing date (and issuable under 20% Investor
Warrants and 30% Investor Warrants) at an exercise price of $0.91 per share.
At a closing on January 29, 2004, the Company sold an additional $300,000 of
Common Stock, 30% Investor Warrants and 20% Investor Warrants to three
investors, becoming obligated to issue to the investors 454,545 shares of Common
Stock, 30% Investor Warrants to acquire 136,364 shares of Common Stock and 20%
Investor Warrants to acquire 90,909 shares of Common Stock, all on the same
terms as offered to the investors in the December 2003 private placement, as
amended by the January 15, 2004 Registration Right Agreement Amendment and
Allonges. The placement agent for this $300,000 offering received $24,000 in
cash and warrants, exercisable at $.091 per share, to acquire 68,182 shares of
Common Stock.
On January 30, 2004, DynTek closed the private placement of a $3,500,000
principal secured convertible three-year term note to an institutional investor,
Laurus Funds. This note bears interest at the greater of the Prime Rate or 4%,
plus 1%, with interest payable monthly on a current basis commencing in March
2004 and level payments of principal commencing August 1, 2004. The note is
convertible to DynTek common stock at the option of the investor. Monthly
payments of principal and accrued interest under the note can be made by DynTek
delivering common stock shares instead, if at the time such stock payment is
delivered (i) there exists an effective registration statement covering the
distribution of such shares by the investor and (ii) the market price for such
shares is greater than 115% of $.90 per share, the price fixed for conversion to
common stock of amounts outstanding under the note. Subject to the same
restrictions on stock payments of monthly accrued interest
-14-
and principal, the entire principal and accrued interest of the note may be
prepaid by DynTek in common stock. Any amounts of note principal paid in cash,
including prepayments of the entire note principal, shall be subject to a 2%
premium payment (which is increased to a 4% premium payment in the event that an
effective registration statement covering the conversion shares is not in
place). Principal and interest under the note, and other obligations of DynTek
to Laurus Funds under the ancillary agreements entered into in connection with
the private placement, are secured by all assets of DynTek and its principal
operating subsidiary. As part of the transaction, the investor also received a
five-year warrant to purchase 425,000 shares of DynTek common stock, exercisable
as follows: 125,000 shares at $1.1225 per share; 175,000 shares at $1.347 per
share; and 125,000 shares at $1.5715 per share. DynTek paid to the investor's
affiliate a closing fee equal to $122,500, agreed to make renewal payments to
such affiliate equal to .5% of outstanding note principal on each anniversary of
the closing and paid $29,500 as reimbursement for the investor's legal and due
diligence expenses. Under the terms of its Investment Banking Advisory Agreement
with Duncan Capital, in connection with closing the Laurus Funds private
placement the Company became obligated (i) to pay to Duncan Capital a fee equal
to $280,000 (8% of offering proceeds), $210,000 in cash and $70,000 in the form
of 77,778 shares of DynTek common stock (at a value of $0.90 per share), and
(ii) to issue additional warrants to Duncan Capital to acquire 388,889 shares of
DynTek common stock at $0.99 per share.
On March 17, 2004, DynTek closed its offering of up to 150 Units maximum
($2,040,000) private placement of securities (the "Offering"), with Network 1
Financial Securities, Inc. acting as the placement agent (the "Broker") pursuant
to a Placements Agent's Agreement, dated as of February 27, 2004, between DynTek
and the Broker. DynTek sold 89 Units in the Offering for an aggregate purchase
price of $1,210,400, with each Unit bearing a purchase price of $13,600. Each
Unit consisted of 20,000 shares of DynTek common stock (an aggregate of
1,780,000 shares sold in the Offering), at $0.68 per share, and 5-year warrants
to acquire 4,000 shares of DynTek common stock, exercisable at $0.90 per share
(the "Warrants"). The Broker's compensation under the Placement Agent's
Agreement consisted of a commission equal to 5% of the aggregate price of the
Units sold in the Offering, a 2% non-accountable expense allowance based on the
aggregate price of the Units sold in the Offering, a Placement Agent's Warrant
(the "Placement Warrant") exercisable at $.90 per share to acquire 20% of the
number of shares of DynTek common stock sold in the Offering, plus a Warrant
exercise fee equal to 5% of the exercise price of any Warrants exercised during
the period of 4 years commencing one year after the final closing of the
Offering. All of shares of DynTek common stock sold in the Offering, as well as
all of the shares underlying the Warrants and the Placement Warrant, are covered
by registration rights.
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. 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 December 31, 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.
Recent Accounting Standards
The following pronouncements have been issued by the Financial Accounting
Standards Board (FASB).
In January 2003, and revised in December 2003, the FASB issued FASB
Interpretation (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. 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 June 30, 2003.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on DynTek's financial statements.
In April 2003, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS No. 149 is
effective for contracts entered into or modified after December 31, 2003, with
certain exceptions and for hedging relationships designated after December 31,
2003. The guidance should be applied prospectively.
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Management does not believe that the adoption of any of these pronouncements
will have a material effect on DynTek'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 a 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. There was no effect on the
Condensed Consolidated Financial Statements from the adoption of this
pronouncement.
Critical Accounting Policies and Estimates
Our 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.
Basis of Presentation. During the fiscal year ended June 30, 2003, we adopted a
plan to sell our non-emergency 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. Our policy follows the guidance from the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition in Financial Statements." 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 collectibility is reasonably assured.
Generally, IT processing revenues are recognized as services are provided to the
client. Revenues from annual maintenance contracts services provided by us 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 and 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 No. 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. As of December 31, 2003, goodwill associated with certain child
support enforcement outsource services contracts was evaluated for impairment.
Due to a re-focus of business strategy, the Company has determined that the
projected revenues from contract renewals in the future will be lower and as a
result, the Company has determined in accordance with the provisions of SFAS No.
142, that there has been impairment of goodwill requiring an adjustment of
$3,000,000 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 resting of goodwill will determine if further adjustments to reduce
the carrying value are required.
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Quantitative and Qualitative Disclosures About Market Risk
The Textron credit agreement and the Laurus Funds Secured Term Note expose us 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 Laurus Funds note requires interest to be paid at 1% over the
prime rate (but not lower than a rate of 5% per annum). The table below provides
information on the Textron factoring facility as of December 31, 2003, and on
the Laurus Funds note as of February 1, 2004.
Interest Rate Rate
(Prime plus 2.5%)
Principal Balance at December 31, 2003
----------------- --------------------
Textron credit agreement....... $1,887,800 6.5%
Laurus Funds................... $3,500,000 5.0%
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BUSINESS
General
We are a professional services firm specializing in IT 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 IT 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 IT services include consulting, infrastructure planning and
deployment, IT application development, legacy systems integration, IT system
support, and business process outsourcing services for state government
agencies.
History of Our Business
We are a Delaware corporation initially incorporated on May 27, 1989 as
Universal Self Care, Inc. Universal supplied and distributed both prescription
and non-prescription medications and durable medical equipment and supplies
principally to persons suffering from diabetes. These businesses were sold in
January 1998, and we changed our name to Tadeo Holdings, Inc. We subsequently
changed our name to TekInsight.com, Inc. in November 1999. We changed our name
to DynTek in December 2001, following the merger with DynCorp Management
Resources Inc.
Our operating subsidiary, DynTek Services, formerly known as TekInsight
Services, Inc., is a successor by merger with Data Systems Network Corporation
in August 2000. We acquired Data Systems Network Corporation to expand upon our
nascent information technology oriented business being developed after the sale
of the Universal Self Care diabetes products business. In February 2002,
pursuant to the merger with DynCorp Management Resources, TekInsight Services
was renamed DynTek Services. As a part of the DynCorp Management Resources
business acquired, we have contracted to be responsible for outsourced program
operations for state government agencies in several areas.
Although prior to the acquisition of Data Systems we did provide these services,
we no longer provide standalone consulting services or standalone research and
product development. All consulting services and product development services we
currently provide are ancillary services under specific client service
contracts.
We formerly provided non-emergency medical transportation brokerage services as
a part of our 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 sale of our interests in all remaining
transportation brokerage outsourcing contracts to First Transit Inc.
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 IDC Opinion "U.S. State
and Local Government IT Spending Forecast, 2002 - 2007" market analysis report,
published in July 2003, spending among state and local government agencies
totaled $7.2 billion in 2002, and spending is expected to increase to $9.2
billion in 2007, demonstrating a five-year compound annual growth rate of 5.1%.
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
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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.
Current Operations
We provide segment reporting for the results of our operations in two segments,
Information Technology Services and Business Process Outsourcing Services.
Information Technology Services. We provide a range of specialized IT
infrastructure services, including 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.
During our fiscal year ended June 30, 2003, we had approximately $21,882,000 in
product sales and $22,272,000 in IT service sales which account for 42% and 42%
of our total revenue from both of our business segments, respectively, from both
of our business segments. 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, we 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. We currently have 43 in-house technicians and approximately 25
subcontractor third-party suppliers who have, in the aggregate, approximately 90
technicians supplying services.
Business Process Outsourcing. We provide 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 and Beaufort County Department of Social Services in North
Carolina, pursuant to which we assume 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, we
also provide consulting expertise to state and local governments interested in
designing and evaluating outsourced operations. During our fiscal year ended
June 30, 2003, we had approximately $8,493,000 in service sales which accounted
for approximately 16% of our total sales from both of our business segments.
Such services are provided through in-house customer service representatives and
attorneys and third-party attorneys. We currently have an in-house support staff
of 100 and approximately 5 third-party support contractors.
We formerly provided non-emergency medical transportation brokerage services as
a part of our 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. Our provision
of all such services is reflected as discontinued operations.
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Customers
Our customers in both our information technology services and business process
outsourcing segments 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 IT 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 (there was only one business segment during the 2001 fiscal year). We act
as a reseller for all of our product sales. We sell products and services to the
State of New York and its agencies and are authorized 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. Revenues generated from
New York State agencies, Approximately 63%, 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 the 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 obtains the authority to issue a valid
purchase order.
Sales and Marketing
Our sales and marketing objective in both our information technology and
outsourcing segments 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 RFPs, 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 services and products. 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 fluctuate from period to period based on usage criteria set forth in
each contract.
Our IT 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 IT 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 IT services contracts to be a significant indicator of our
future IT services revenue.
Our outsource services contracts firm backlog is approximately $16 million as of
December 15, 2003, realizable primarily over the next 36 months.
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Vendors
In connection with sales of our IT 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 of 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 IT segment during
the fiscal year ended June 30, 2003 (or 21% of our total revenue during the same
period). 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 IT 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 are
reputation, project management expertise, industry expertise, speed of project
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 increase our revenue base by capitalizing on our
core competencies in the IT and outsourced services markets. Our strategies for
obtaining this objective include:
Increase 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.
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 as an ancillary part of our product
and services offered 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 technical work similar to that already provided by us to
organizations outside our current client base or to support
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solution sets for our existing client base, 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 December 31, 2003, we and our subsidiaries had 222 employees. We also have
sub-contract relationships with approximately 95 consultants for technical
support. We believe that our relationships with our employees are good. None of
our personnel is covered by a collective bargaining agreement.
Insurance Coverage
We maintain general liability insurance, which includes directors and officers
liability coverage, and workers compensation and professional liability
insurance, and other insurance coverage customary for businesses of the types we
operate in amounts deemed adequate by the Board of Directors.
Properties
Our corporate headquarters are 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 at current rentals of $16,544 per month.
There is an administrative office located in Farmington Hills, Michigan, in a
leased facility consisting of approximately 7,000 square feet of office space.
Current rentals are $23,576 per month and 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 at a current rental of $5,698 per month. 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 5 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.
Legal Proceedings
Commonwealth of Virginia. Effective December 15, 2002, we cancelled a contract
to provide non-emergency transportation brokerage services in certain regions of
the Commonwealth of Virginia (the Virginia Contract), by entering into a mutual
Settlement Agreement with the Commonwealth. The terms of the Settlement
Agreement provided that we make payments due to transportation provider vendors
for services rendered under the contract. Under an interim letter of
understanding, beginning in September 2003 we offered to make payments in the
aggregate amount of approximately $100,000 per month to various providers. As of
December 31, 2003, we had paid an aggregate of $534,000 to providers as a result
of this Settlement Agreement.
In connection with initially entering the Virginia 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.
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In a separate transaction, we have entered into a limited release of
indemnification to reimburse the guarantor for funding the bond. As a result,
our liability to such vendors will in effect be extinguished to the extent of
the funds disbursed. The amount of $2.4 million deposited in escrow for the
payment to our vendors has not yet been recorded as an offset to our 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, we will
evaluate the overall accrual for such payables and adjust the liability
accordingly. Once the courts determine the valid claim amounts, the interpleader
funds shall be disbursed and the payable shall be adjusted accordingly. Should
valid claims remain outstanding after the disbursement of the interpleader
funds, certain vendors may continue to pursue their claims after the
interpleader proceedings are concluded. However, such claims may not exceed the
amounts determined by the courts to be due. We believe that the aggregate
interpleader claims ultimately due, as determined by the courts, will be less
than the combined total of the bond amount and our payables currently recorded
as due to such vendors, and that a substantial amount of these claims are
without merit and 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 under the Virginia
Contract 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 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 interpleader action for
all purposes. In addition to the Ali Medical claimants, an additional six
defendants in the interpleader action have filed cross-claims for an aggregate
amount of approximately $449,000. The remaining 11 proceedings, which claim an
aggregate amount of approximately $669,000, have been temporarily stayed by an
order of the court overseeing the interpleader action. In both the outside
lawsuits and the cross-claims, all or a portion of the amounts claimed have been
disputed.
Provisions in our condensed consolidated 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 Legal Proceedings. 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, we 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 December 31, 2003,
$267,000 was outstanding and payable.
On December 31, 2002, we 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., for a total amount of $95,000. As of
December 31, 2003, $20,000 remains due and payable under this agreement. We are
currently making progress payments on this amount.
-23-
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 our investment, we assigned Dr. Grieves,
one of our directors, 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. We account for our
investment under the equity method of accounting and have therefore recognized
our pro-rata portion of the losses incurred by this affiliate, since March 2001,
in the amount of $392,000. These losses have reduced the carrying value of our
investment to $64,000 as of June 30, 2003.
On August 20, 2002, we entered into a Stock Purchase and Settlement Agreement
(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 our 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) was converted by DynCorp to our
Class A common stock. As part of the Settlement Agreement, DynCorp also was
granted 3-year warrants to acquire 7,500,000 shares of Class A common stock
exercisable at $4.00 per share.
By agreement dated as of June 30, 2003, a group of private and institutional
investors agreed to forgive our $5 million subordinated, unsecured note, the
associated $625,000 in accrued interest on the note and cancel common stock
purchase warrants to acquire 7,500,000 shares of our common stock which note the
group acquired from DynCorp in connection with a sale of 10,336,663 shares of
our common stock by DynCorp to the same investors on July 3, 2003. As
consideration for the forgiveness of the note, the accrued interest and the
cancellation of the common stock purchase warrants, we agreed to extend certain
registration rights to the investors, and pay the related costs for such
registration. At the time of the stock, warrants and note sale by DynCorp, we
received a limited release and indemnification by DynCorp of our obligation to
indemnify DynCorp and the surety, respectively, against certain liabilities
under a $2.4 million payment bond which was issued and recently drawn upon in
connection with the Virginia Contract.
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MANAGEMENT
Our executive officers and directors as of March 25, 2004 are as follows:
Name Age Principal Occupation,
Business Name and Directorships
Steven J. Ross 45 Since February 2000, Mr. Ross has been our
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's
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 our Chief Financial and Chief
Accounting Officer, Executive Vice President
and Secretary and, since February 1997, as a
Director. 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 our Vice President and
Chief Financial Officer 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.
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., which
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 our President and
Chief Executive Officer 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 Azurel, Ltd. In May
2003, he became Chief Operating Officer 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 served as
Data Systems' 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
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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 Core
Strategies, a consulting firm, in 1996, of
which he remains Chief Executive Officer.
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 an 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.
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 $100,000 for all
services rendered to us during each such annual period.
Annual Compensation Long Term Compensation
----------------------------------------------------- -----------------------------------------------
Other Restricted
Fiscal Annual Stock Options/ LTIP All Other
Name and Position Year Salary ($) 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 2001 $175,000 -- $25,000 -- 810,000 -- --
and Chairman of the
Board
James Linesch 2003 $200,000 $ 25,000 $25,000 -- -- -- $ 6,000
Chief Financial 2002 $179,000 $ 75,000 $25,000 -- 45,000 -- $ 6,321
Officer, Executive 2001 $138,000 $ 10,000 $25,000 -- 335,000 -- --
Vice President and
Director
Wade Stevenson 2003 $140,000 $ 10,000 -- --
Vice President 2002 $129,000 $ 20,000 -- -- 20,000 -- --
Finance 2001 $ 98,000 $ 26,000 -- -- -- -- --
Annual Compensation Long Term Compensation
----------------------------------------------------- -----------------------------------------------
Other Restricted
Fiscal Annual Stock Options/ LTIP All Other
Name and Position Year Salary ($) Bonus ($) Compensation Awards SARs (#) Payouts Compensation
- ----------------- ------ ---------- --------- ------------ ---------- -------- ------- ------------
Arion Kalpaxis 2003 $175,000 -- -- -- -- -- --
Chief Technology 2002 $176,000 -- -- -- -- -- --
Officer 2001 $153,798 -- -- -- 15,000 -- --
Option Grants
The following table sets forth certain information, as of June 30, 2003,
concerning individual grants of stock options made during the fiscal year ended
June 30, 2003 to each of the persons named in the summary compensation table
above.
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Option/SAR Grants in Fiscal Year Ended June 30, 2003
Number of
Securities Potential Realizable Value at
Underlying Percent of Total Exercise of Assumed Annual Rates of
Options/SAR Options/SARs Base Price Stock Price Appreciation
Name Grants Granted in Fiscal Year ($/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 $3,000
The following table sets forth information concerning exercises of stock options
by each of the executive officers named in the summary compensation table during
the fiscal year ended June 30, 2003 and the fiscal year-end value of options
held by such named individuals.
Aggregated Option/SAR Exercised in Fiscal Year Ended June 30, 2003 and Fiscal
Year-Ended Option/SAR Values
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options/SARs At Fiscal In-The-Money Options/SARs At
Acquired on Value Year-End (#) Fiscal Year-End ($)
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. On October 16, 2003, the Board of
Directors approved an increase in Mr. Ross's base salary from $400,000 to
$440,000, effective October 1, 2003. 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 our 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 August 2003, Mr. Ross received
$100,000 in 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 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
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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.
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 and again on October 8, 2003. Under the
revised terms, we 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 us. 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 of up to $1 for a million life insurance policy 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 an
aggregate of $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 our 1997 Non-Employee Directors' Stock Option Plan. The
Non-Employee Directors' Stock Option 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 our 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, our Compensation Committee consisted of Messrs. Ross,
Grieves and Toplansky, with only Mr. Ross being an employee of DynTek. For
information concerning Mr. Ross's Employment Agreement, see "Employment
Agreements" above. As of March 25, 2004, our Compensation Committee consisted of
Messrs. Grieves and Toplansky.
In March 2001, we purchased 25% of the equity in LaborSoft. As a result of our
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.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
outstanding common stock as of March 25, 2004 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 (5% owners). For purposes
of the following table, the number of shares of common stock assumes the
conversion to common stock of all outstanding shares of Series A Preferred
Stock. No person holds 5% or more of the outstanding Series A 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 & Sons, Inc. (4) 3,935,550 7.3%
9040 Governors Row
P.O. Box 569360 Dallas, TX 75356
Estate of Fred Kassner (3) 3,045,610 5.8%
59 Spring Street
Ramsey, NJ 07446
Steven J. Ross (5) 961,939 1.8%
Michael W. Grieves (6) 562,729 1.1%
34705 West 12 Mile Road, Suite 300
Farmington Hills, MI 48009
James Linesch (7) 565,573 1.1%
Brian D. Bookmeier (8) 60,000 *
19327 Agusta Dr.
Livonia, MI 48152
Arion Kalpaxis (9) 274,000 *
Marshall Toplansky (10) 130,000 *
Wade Stevenson (11) 62,250 *
All Officers and Directors 2,616,491 4.8%
as a group (7 persons)(6)(7)(8)(9)(10)
- ----------
* 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.
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(3) Includes 40 shares of common stock underlying 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) The person having sole voting and dispositive power over the shares owned
by H.T. Ardinger & Sons, Inc. is H.T. Ardinger. Mr. Ardinger disclaims
beneficial ownership of the shares held by H.T. Ardinger & Sons, Inc. The
number of shares stated for H.T. Ardinger & Sons, Inc. beneficial ownership
includes 1,374,247 shares which may be acquired upon the exercise of
warrants, and 15,750 shares which may be acquired upon conversion of Series
A Preferred Stock shares. Does not include 1,140,310 shares held by the
Ardinger Family Trust, over which shares Mr. Ardinger has sole voting and
dispositive power but not beneficial ownership.
(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 our
1992 and 2001 Employee Stock Option Plans and our 1997 Non-Employee
Directors' Stock Option Plan, 7,939 shares of common stock and 49,000
shares of common stock underlying options to purchase 19,600 shares of our
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 Series A 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 Series A Preferred Stock. Also
includes 30,000 options exercisable for common stock granted to Dr. Grieves
under our 1997 Non-Employee Directors' Stock Option Plan at prices between
$0.80 and $2.25.
(7) Includes 420,000 options granted to Mr. Linesch under our 1997 Non-Employee
Directors' Stock Option Plan, 1992 Plan and 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
Series A Preferred Stock held by him.
(8) Includes options to purchase 60,000 shares of common stock granted under
our 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 our 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 our 2001
Employee Stock Option Plan and 20,000 options to purchase shares of common
stock granted at $0.80 and $1.00 per share under our 1997 Non-Employee
Directors' Stock Option Plan.
(11) Includes options to purchase 62,250 shares of our common stock with strike
prices between $0.96 and $2.04 per share under our 1992 and 2001 Employee
Stock Option Plans.
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DESCRIPTION OF SECURITIES
The following summary is a description of our common stock and certain
provisions of our Articles of Incorporation, By-Laws and Delaware law.
General
Our authorized capital consists of 70,000,000 shares of common stock, par value
$.0001 per share and 10,000,000 shares of Series A Preferred Stock, par value
$.001 per share.
Common Stock
Since December 31, 2003, the outstanding number of shares of our Class A common
stock has increased from 46,720,235 at December 31, 2003 to 50,141,883 as of
March 19, 2004. This increase is primarily attributable to the private placement
of the 3,333,333 shares of common stock being registered herein, additional
private placements (and issuance of investment banking compensation shares) in
January and March 2004 of an aggregate 2,312,323 shares of common stock as well
as, the conversion by several of our preferred stockholders of 474,841 shares of
Series A Preferred Stock into 1,187,103 shares of Class A Common Stock. In
addition we issued 50,000 shares as partial settlement of an outstanding
liability and issued 108,434 shares in connection with an acquisition. Each
share of our common stock is entitled to one vote at all meetings of our
stockholders. Our stockholders are not permitted to cumulate votes in the
election of directors. All shares of our common stock are equal to each other
with respect to liquidation rights and dividend rights. There are no preemptive
rights to purchase any additional shares of our common stock. In the event of
our liquidation, dissolution or winding up, holders of our common stock will be
entitled to receive, on a pro rata basis, all of our assets remaining after
satisfaction of all liabilities and preferences of outstanding preferred stock,
if any. Neither our Articles of Incorporation nor our By-Laws contain any
provisions which limit or restrict the ability of another person to take over
our company; however, our By-Laws do permit our Board of Directors to be
classified. We have 20,000,000 shares of Class B Common Stock authorized, none
of which is outstanding.
Series A Preferred Stock
Our Board of Directors has the authority to issue up to 10,000,000 shares of our
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such series, including dividend rights,
conversion rights, voting rights, liquidation preferences and the number of
shares constituting any series or the designation of such series, without any
further vote or action by stockholders. Our Board of Directors may designate and
authorize the issuance of new series of our preferred stock with voting and
other rights that could adversely affect the voting power of holders of our
common stock and the likelihood that such holder will receive dividend payments
and payments upon our liquidation and could have the effect of delaying,
deferring or preventing a change in control of DynTek.
As of March 25, 2004, we had 959,692 shares of Series A Preferred Stock
outstanding. The Series A Preferred Stock rank prior to the common stock and
prior to any class or series of our capital stock that may be issued in the
future, other than any class or series of capital stock created specifically
ranking on parity with the Series A Preferred Stock. Holders of our Series A
Preferred Stock are entitled to cause any or all of such shares to be converted
into shares of our common stock at all meetings of our stockholders. Each share
of our Series A Preferred Stock is entitled on such number of votes per share as
shall equal the number of shares of common stock into which each share of Series
A Preferred stock is convertible. Holders of our Series A Preferred Stock shall
be entitled to receive, when, as and if declared by our Board of Directors, out
of our funds legally available therefore, dividends in the same amount per share
as dividends are paid with respect to the common stock (treating each shares of
Series A Preferred Stock as being equal to the number of shares of common stock
into which each such share of Series A Preferred Stock could be converted). In
the event of our liquidation, dissolution or winding up, holders of our Series A
Preferred Stock will be entitled to receive, out of our assets available for
distribution to stockholders, before any distribution of assets is made to
holders of (1) any other shares of our preferred stock ranking junior to such
series of preferred stock as to rights upon liquidation, dissolution or winding
up and (2) shares of our common stock, on a pro rata basis with any other shares
of our capital stock ranking as to any such distribution on a parity with the
Series A Preferred Stock, the amount of the liquidation distributions to which
they are entitled.
Options and Warrants
As of March 25, 2004, we had outstanding options to purchase an aggregate of
3,182,641 shares of our common stock pursuant to our stock option plans at a
weighted-average exercise price of $1.77 per share. These options are held by
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directors, officers, key employees and consultants, and as of March 25, 2004,
options to purchase 2,766,937 shares were exercisable.
As of March 19, 2004, we also have outstanding warrants to purchase an
additional 12,664,074 shares of our common stock having a weighted-average
exercise price of $1.32 per share. In addition, as of March 25, 2004, we have
outstanding publicly-traded warrants to purchase 1,707,875 shares of our common
stock at an exercise price of $2.00 per share. These warrants will expire on
December 11, 2005.
Transfer Agent
The transfer agent for our common stock is American Stock Transfer & Trust
Company, 59 Maiden Lane, New York, New York 10038, (800) 937-5449.
SHARES ELIGIBLE FOR RESALE
Future sales of a substantial number of shares of our common stock in the public
market could adversely affect market prices prevailing from time to time. Under
the terms of this offering, the shares of common stock offered may be resold
without restriction or further registration under the Securities Act of 1933,
except that any shares purchased by our "affiliates," as that term is defined
under the Securities Act, may generally only be sold in compliance with Rule 144
under the Securities Act.
Sale of Restricted Shares
Certain shares of our outstanding common stock were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act and have not been registered for resale. Additional shares may be
issued pursuant to outstanding warrants and options. Such shares may be sold
only pursuant to an effective registration statement filed by us or an
applicable exemption, including the exemption contained in Rule 144 promulgated
under the Securities Act.
In general, under Rule 144 as currently in effect, a stockholder, including one
of our affiliates, may sell shares of common stock after at least one year has
elapsed since such shares were acquired from us or our affiliate. The number of
shares of common stock which may be sold within any three-month period is
limited to the greater of (i) one percent of our then outstanding common stock
or (ii) the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144. Certain other requirements of Rule 144 concerning availability of
public information, manner of sale and notice of sale must also be satisfied. In
addition, a stockholder who is not our affiliate, who has not been our affiliate
for 90 days prior to the sale, and who has beneficially owned shares acquired
from us or our affiliate for over two years may resell the shares of common
stock without compliance with many of the foregoing requirements under Rule 144.
SELLING STOCKHOLDERS
All of the offered shares are to be sold by persons who are existing security
holders of DynTek. The selling stockholders acquired their shares and warrants
in private placements occurring in June and July 2003, in a private placement
completed on December 9, 2003, and in a private placement completed in January
2004. In connection with the December 2003 offering of our common stock and
warrants, we delivered to designees of Rockwood, the placement agent for the
offering, warrants to purchase up to 500,000 shares of our common stock and a
cash payment of $188,950 in consideration for its services. For purposes of this
prospectus, we have assumed that the number of shares issuable upon exercise of
warrants, and available for resale hereunder, is subject to adjustment in
connection with the occurrence of a stock split, stock dividend, or similar
transaction resulting in an adjustment in the number of shares subject to
warrants.
Pursuant to securities purchase agreements and registration rights agreements
with each of the selling stockholders, we filed a registration statement, of
which this prospectus forms a part, in order to permit those stockholders to
resell to the public the shares of common stock that they purchased pursuant to
those agreements and that they acquire upon any exercise of warrants acquired in
the same transactions.
Pursuant to piggyback registration rights granted to Rockwood, Inc., the
placement agent for the December 2003 private placement, Rockwood's assignees of
its compensation warrants Duncan Capital LLC, David Fuchs, Robert MacGregor and
Bradford E. Monks, shall also be considered selling stockholders for the
purposes of this prospectus and the registration statement filed as a part of
this prospectus in order to permit Duncan Capital and each of Messrs. Fuchs,
MacGregor and
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Monks to resell to the public the shares of common stock they may acquire upon
any exercise of the warrants to purchase common shares they received as
compensation for the private placement from Rockwood.
The selling stockholders may sell up to 8,744,084 shares of our common stock
pursuant to this prospectus.
The table that follows sets forth as of March 25, 2004:
o the name of each selling stockholders;
o certain beneficial ownership information with respect to the selling
stockholders;
o the number of shares that may be sold from time to time by each
selling stockholder pursuant to this prospectus; and
o the amount (and, if one percent or more, the percentage) of common
shares to be owned by each selling stockholder if all offered shares
are sold.
Beneficial ownership is determined in accordance with Securities and Exchange
Commission rules and generally includes voting or investment power with respect
to securities. Common shares that are issuable upon the exercise of outstanding
options, warrants or other purchase rights, to the extent exercisable within 60
days of March 1, 2004, are treated as outstanding for purposes of computing each
selling stockholder's percentage ownership of outstanding common shares.
Prior to Offering After Offering (1)
------------------------ -------------------------
Name Shares Percent (2) Shares Offered Shares Percent (2)
- ---- ------ ----------- -------------- ------ -----------
Adkins, M. Douglas (3) 771,600 1.7% 284,091 487,509 1.0%
Alpha Capital AG (4) 681,818 1.4% 681,818 -0- 0%
Boehm, David Phillip 100,000 *% 100,000 -0- 0%
Bridges and PIPES, LLC (5) 681,818 1.4% 681,818 -0- 0%
Bristol Investment Fund, Ltd. (6) 909,091 1.9% 909,091 -0- 0%
Corsair Capital Partners, LP.(7) 720,000 1.5% 720,000 -0- 0%
Corsair Long Short International, Ltd. (8) 60,000 *% 60,000 -0- 0%
Curran Management Company Ltd. 300,000 *% 300,000 -0- 0%
Duncan Capital LLC (9) 375,000 *% 375,000 -0- 0%
Fuchs, David 25,000 *% 25,000 -0- 0%
Gamma Opportunity Capital Partners LP (10) 681,818 1.4% 681,818 -0- 0%
H.T. Ardinger & Sons, Inc. (11) 2,838,423 5.6% 728,174 2,110,249 4.2%
Levine, Douglas 200,000 *% 200,000 -0- 0%
McGregor, Robert 75,000 *% 75,000 -0- 0%
Monks, Bradford E. 25,000 *% 25,000 -0- 0%
Neptune Partners LP (12) 220,000 *% 220,000 -0- 0%
PC PS Plan FBO Brian Weiss 100,000 *% 100,000 -0- 0%
Purjes, Dan (13) 113,637 *% 113,637 -0- 0%
Raskas, Stanley 100,000 *% 100,000 -0- 0%
Reichenbaum, Eric 200,000 *% 200,000 -0- 0%
RHP Master Fund, Ltd. (14) 454,546 1.0% 454,546 -0- 0%
Scholl, George 100,000 *% 100,000 -0- 0%
Sitt, David 100,000 *% 100,000 -0- 0%
Strategic Partners Ltd. 50,000 *% 50,000 -0- 0%
Stonestreet LLP (15) 681,818 1.4% 681,818 -0- 0%
WEC Partners, LLC (16) 150,000 *% 150,000 -0- 0%
Whalehaven Fund Limited (17) 227,273 *% 227,273 -0- 0%
Wolf, Carl 100,000 *% 100,000 -0- 0%
Deania Investment 100,000 *% 100,000 -0- 0%
Zoltan, Donald J. 205,000 *% 200,000 5,000 *%
* Represents less than one percent of the outstanding common shares.
(1) Assuming the sale by each selling stockholder of all of the shares offered
hereunder by such selling stockholder. There can be no assurance that any
of the shares offered hereby will be sold.
(2) The percentages set forth above have been computed assuming the number of
common shares outstanding equals the sum of (a) 46,705,793, which is the
number of common shares actually outstanding on December 19, 2003, and (b)
common shares subject to exercisable warrants and conversion rights held by
each selling stockholder, respectively.
(3) Includes 52,500 shares which may be acquired upon conversion of Series A
Preferred Stock shares.
-33-
(4) The person having sole voting and dispositive power over the shares offered
by Alpha Capital AG is Konrad Ackerman, a director of Alpha Capital AG. Mr.
Ackerman disclaims beneficial ownership of the shares held by Alpha Capital
AG
(5) The managing member of Bridges & Pipes, LLC is David Fuchs. Mr. Fuchs has
sole voting and dispositive power over the shares offered by Bridges &
Pipes, LLC. Mr. Fuchs disclaims beneficial ownership of the shares held by
Bridges & Pipes, LLC.
(6) The person having sole voting and dispositive power over the shares offered
by Bristol Investment Fund, Ltd. is Paul Kessler. Mr. Kessler disclaims
beneficial ownership of the shares held by Bristol Investment Fund, Ltd.
(7) Corsair Capital Advisors, LLC is the general partner to Corsair Capital
Partners, LP, with the power to vote and dispose of the shares offered by
Corsair Capital Partners, LP. As such, Corsair Capital Advisors, LLC may be
deemed to be the beneficial owner of the shares offered. Jay Petschek and
Steven Major are the managing members of Corsair Capital Advisors, LLC,
each possessing the power to act on its behalf. Corsair Capital Advisors,
LLC and Messrs Petschek and Major each disclaim beneficial ownership of the
shares held Corsair Capital Partners, LP.
(8) Corsair Long Short Advisors, LLC is the general partner to Corsair Long
Short International, Ltd., with the power to vote and dispose of the shares
offered by Corsair Long Short International, Ltd. As such, Corsair Long
Short Advisors, LLC may be deemed to be the beneficial owner of the shares
offered. Jay Petschek and Steven Major are the managing members of Corsair
Long Short Advisors, LLC, each possessing the power to act on its behalf.
Corsair Long Short Advisors, LLC and Messrs Petschek and Major each
disclaim beneficial ownership of the shares held Corsair Long Short
International, Ltd.
(9) Michael Crow and Dan Purjes are the managing members of Duncan Capital LLC,
with voting and dispositive power over the shares offered by Duncan Capital
LLC. Messrs. Crow and Purjes disclaim beneficial ownership of the shares
held by Duncan Capital LLC.
(10) Gamma Capital Advisors, Ltd. is the general partner to Gamma Opportunity
Capital Partners, LP, with the power to vote and dispose of the shares
offered by Gamma Opportunity Capital Partners, LP. As such, Gamma Capital
Advisors, Ltd. may be deemed to be the beneficial owner of the shares
offered. Christopher Rossman and Jonathan P. Knight, PhD. are the directors
of Gamma Capital Advisors, Ltd., each possessing the power to act on its
behalf. Gamma Capital Advisors, Ltd. and Messrs Rossman and Knight each
disclaim beneficial ownership of the shares held by Gamma Opportunity
Capital Partners, LP.
(11) The person having sole voting and dispositive power over the shares owned
by H.T. Ardinger & Sons, Inc. is H.T. Ardinger. Mr. Ardinger disclaims
beneficial ownership of the shares held by H. T. Ardinger and Sons, Inc.
The number of shares stated for H.T. Ardinger & Sons, Inc., beneficial
ownership includes 1,355,308 shares which may be acquired upon the exercise
of warrants, 15,750 shares which may be acquired upon conversion of Series
A Preferred Stock shares. Does not include 1,140,310 shares held by the
Ardinger Family Trust, over which shares Mr. Ardinger has sole voting and
dispositive power but not beneficial ownership.
(12) Major Capital Management, LLC is the general partner to Neptune Partners,
L.P., with the power to vote and dispose of the shares offered by Neptune
Partners, L.P. As such, Major Capital Management, LLC may be deemed to be
the beneficial owner of the shares offered. Steven Major is the managing
members of Major Capital Management, LLC, each possessing the power to act
on its behalf. Major Capital Management, LLC and Mr. Major disclaim
beneficial ownership of the shares held Neptune Partners, L.P.
(13) Dan Purjes is also a beneficial owner of Duncan Capital LLC.
(14) RHP Master Fund, Ltd. is a party to an investment management agreement with
Rock Hill Investment Management, L.P., a limited partnership of which the
general partner is RHP General Partner, LLC. Pursuant to such agreement,
Rock Hill Investment Management directs the voting and disposition of
shares owned by RHP Master Fund, Ltd. Wayne Bloch, Gary Kaminsky and Peter
Lockhart own all of the interests in RHP General Partner, LLC. The
aforementioned entities and individuals disclaim beneficial ownership of
the shares held by RHP Master Fund, Ltd.
(15) Stonestreet Corporation is the general partner of Stonestreet LP. Michael
Finkelstein and Elizabeth Leonard are the stockholders in Stonestreen
Corporation and have sole voting and dispositive power over the shares
offered by Stonestreet LP. Mr. Finkelstein and Ms. Leonard disclaim
beneficial ownership of shares held by Stonestreet LP.
-34-
(16) The persons having sole voting and dispositive power over the shares
offered by WEC Partners, LLC are Ethan Benovitz, Daniel Saks, and Jaime
Hartman. Messrs. Benovitz, Saks, and Hartman disclaim beneficial ownership
of the shares held by WEC Partners, LLC.
(17) The persons having sole voting and dispositive power over the shares
offered by Whalehaven Fund Limited are Michael Finkelstein and Eric
Weisblum. Messrs. Finkelstein and Weisblum disclaim beneficial ownership of
the shares held by Whalehaven Fund Limited.
The shares beneficially owned by the selling stockholders as a group include
shares of common stock issuable by us upon the exercise of warrants held by the
selling stockholders, all of which are offered pursuant to this prospectus.
We believe that voting and investment power with respect to shares shown as
beneficially owned by selling stockholders that are entities resides with the
individuals identified in the preceding table. There can be no assurance that
any of the shares offered hereby will be sold.
PLAN OF DISTRIBUTION
General
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock offered through this prospectus on any stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. The selling stockholders may
use any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker/dealer solicits purchasers;
o block trades in which the broker/dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker/dealer as principal and resale by the
broker/dealer for its account;
o an exchange distribution in accordance with the Rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker/dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Exchange Act of 1993, as amended (the Act), if available, rather than
under this prospectus.
Broker/dealers engaged by the selling stockholders may arrange for other
brokers/dealers to participate in sales. Broker/dealers may receive commissions
from the selling stockholders (or, if any broker/dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions to exceed what is customary
in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act of 1933 amending the list of
selling stockholders to include the pledgee, transferee or other successors in
interest as selling stockholders under this prospectus.
-35-
The selling stockholders and any broker/dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Act in connection with such sales. In such event, any commissions received by
such broker/dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions under the Act.
The selling stockholders have informed us that they does not have any agreement
or understanding, directly or indirectly, with any person to distribute the
common stock.
We are required to pay all fees and expenses incident to the registration of the
shares. We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the Act.
The anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934, as amended, may apply to sales of our common stock and activities of the
selling stockholders.
Registration Obligations
Under the securities purchase agreement and registration rights agreement, as
well as investment banking advisory agreement with Rockwood, we have agreed to
register the shares for resale by the selling stockholders under the Act and to
maintain the effectiveness of that registration until the earliest date on
which:
o all the shares acquired by selling stockholder under the securities
purchase agreement have been disposed of pursuant to the registration
statement;
o all shares acquired by selling stockholders under the securities
purchase agreement that are then held by selling stockholders may be
sold under the provisions of Rule 144 without limitation as to volume,
whether pursuant to Rule 144(k) or otherwise; or
o we have determined that all shares acquired by selling stockholders
under the securities purchase agreement that are then held by selling
stockholders may be sold without restriction under the Securities Act
and we have removed any stop transfer instructions relating to such
shares.
We will pay the costs of registering the shares as contemplated by the
subscription agreement, including the expenses of preparing this prospectus and
the related registration statement of which it is a part. We estimate that our
costs associated with such registration will be approximately $50,000.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be passed
upon for us by Nixon Peabody LLP, New York, New York.
EXPERTS
Our financial statements as of and for the year ended June 30, 2003, appearing
in this prospectus, have been audited by Marcum & Kliegman, P.C., Certified
Public Accountants, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing. Our financial statements as
of and for the year ended June 30, 2002 and June 30, 2001, appearing in this
prospectus, have been audited by Grassi & Co., P.C., Certified Public
Accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We currently file quarterly and annual reports with the SEC on Forms 8-K, 10-Q
and 10-K. We have filed with the SEC, under the Securities Act of 1933, a
registration statement on Form S-1 with respect to the shares being offered in
this offering. This prospectus does not contain all of the information set forth
in the registration statement, certain items of which are omitted in accordance
with the rules and regulations of the SEC. The omitted information may be
inspected and copied at the Public Reference Room maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov. Copies of
such materials can be obtained from the public reference section of the SEC at
prescribed rates. Statements contained in this prospectus as to the contents of
any contract or
-36-
other document filed as an exhibit to the registration statement are not
necessarily complete and in each instance reference is made to the copy of the
document filed as an exhibit to the registration statement, each statement made
in this prospectus relating to such documents being qualified in all respect by
such reference.
For further information with respect to DynTek and the securities being offered
hereby, reference is hereby made to the registration statement, including the
exhibits thereto and the financial statements, notes, and schedules filed as a
part thereof.
-37-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports ...............................................F-2
Consolidated Financial Statements as of June 30, 2001, 2002 and 2003
Consolidated Balance Sheets..................................................F-4
Consolidated Statements of Operations and Comprehensive Income
(Loss).......................................................................F-6
Consolidated Statement of Changes in Stockholders' Equity....................F-7
Consolidated Statements of Cash Flows........................................F-9
Notes to Consolidated Financial Statements..................................F-11
Condensed Consolidated Financial Statements for the Three Months
Ended December 31, 2002 and 2003
Condensed Consolidated Balance Sheets.......................................F-28
Condensed Consolidated Statements of Operations and
Comprehensive Loss (Unaudited)..............................................F-29
Condensed Consolidated Statements of Cash Flows (Unaudited).................F-30
Notes to Condensed Consolidated Financial Statements (Unaudited)............F-32
F-1
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
F-2
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
F-3
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
June 30,
--------------------
2003 2002
-------- --------
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
======= =======
F-4
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 June 30,
2002, respectively 1 1
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.
F-5
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 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.
F-6
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(in thousands)
Un-realized
Class A Common Class B Common Gain
Preferred Stock Stock Stock Additional (Loss) Total
--------------- --------------- -------------- Paid-In on Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Securities Deficit Equity
------ ------ ------ ------ ------ ------ ---------- ----------- ----------- -------------
Balance - June 30, 2000 16,294 2 20,764 964 (12,111) 9,619
Shares issued in
connection with the
acquisition of Data
Systems Network
Corporation 2,190 1 130 12,800 12,801
Shares issued in
connection with the
exercise of employee
stock options 250 337 337
Shares issued in
connection with the
acquisition of Big
Technologies, Inc. 78 217 217
Options issued in
connection with
consulting agreements 779 779
Shares issued in 2,718 2,535 2,535
connection 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 2,190 1 19,470 2 40,060 (954) (22,874) 16,235
Shares issued in
connection with the
acquisition of DMR 18,337 2 40,339 40,341
Shares issued in
connection with the
exercise of employee
stock options 184 131 131
Conversion of
short-term notes to
subscriptions due 316 473 473
Shares issued in
connection with
private offering 625 938 938
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 (574) 1,433 -- --
stock to common
Convert shares issued
in connection with
BugSolver, Inc.
private offering 1,500 222 222
Shares issued in
connection with the
acquisition of Big
Technologies 78 216 216
Options issued for
services 325 325
Retirement of shares (72) -- --
Changes in unrealized
gain (loss) on
securities available
for sale 823 823
Net loss (19,413) (19,413)
------ ---- ------- ---- ------- ---- ------- ------- ------- --------
F-7
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (Continued)
(in thousands)
Un-realized
Class A Common Class B Common Gain
Preferred Stock Stock Stock Additional (Loss) Total
--------------- --------------- -------------- Paid-In on Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Securities Deficit Equity
------ ------ ------ ------ ------ ------ ---------- ----------- ----------- -------------
Balance - June 30, 2002 1,616 $ 1 23,534 $ 2 18,337 $ 2 $ 86,193 $ (131) $(42,287) $ 43,780
Conversion of
short-term notes to 1
private offering 776 --
Shares issued in
connection with
private offering 726 12 12
Shares issued for 25
services rendered 50 50
Convert preferred (126) 314 -- --
stock to common
Buyback of Class B
shares (8,000) (1) (4,999) (5,000)
Convert Class B shares
to Class A 10,337 1 (10,337) (1) -- 1
Shares issued in
connection with
private offering 2,889 1,111 1,111
Options issued for
services -- 16 16
Stock option exercise 10 10 10
Retirement of shares (300) (435) (435)
Reverse Retirement of 72
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 1,490 $ 1 38,383 $ 4 -- $ -- $ 81,918 $ (244) $(56,056) $ 25,623
=== ==== ===== ==== ====== ==== ======= ==== ======== ======= ======== ========
See notes to consolidated financial statements.
F-8
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.
F-9
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.
F-10
DYNTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Organization Summary - DynTek, Inc. ("DynTek" or the "Company") 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.
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
F-11
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.
(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:
F-12
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.
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.
F-13
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.
NOTE 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.
NOTE 3 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
(thousands of dollars) Additions:
------------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at end
of Year Expenses Accounts Deductions of year
----------- ---------- ---------- ---------- -------
Accounts Receivable Reserves:
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
NOTE 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
==== ====
NOTE 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.
F-14
NOTE 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.
NOTE 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 Company 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, Company forgave $70,000 of
such note as a bonus to Mr. Ross. At June 30, 2003, $100,000 remained
outstanding under the note receivable.
NOTE 8 - PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are as follows (in thousands):
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.
NOTE 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.
NOTE 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.
F-15
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
-----------
NOTE 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
F-16
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.
NOTE 12 - BUSINESS ACQUISITIONS
On December 27, 2001, the Company acquired all of the outstanding capital stock
of 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:
(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.
NOTE 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.
F-17
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.
NOTE 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.
NOTE 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.
F-18
Deferred tax assets and liabilities consist of the following (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 continuing operations differs from the amount
computed applying the statutory federal income tax rate to loss before income
taxes as follows:
(in thousands) 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.
NOTE 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.
F-19
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 stockholder 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 shares of Class A Common Stock. An additional
72,000 previously retired shares were reissued.
NOTE 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
F-20
1992 plan is determined to be in the best interest of DynTek by the
compensation committee. In August 2000, Directors and Stockholders
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.
NOTE 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).
F-21
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
Average Average
Weighted Remaining Remaining
Average Contractual Contractual
Exercise Life Life
Shares Price (years) Exercisable Shares Price (years) Exercisable
------ --------- ----------- ----------- ------ ----- ------------ -----------
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
========== ===========
NOTE 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).
NOTE 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.
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.
F-22
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 - LEGAL MATTERS, Commonwealth of
Virginia).
NOTE 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.
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):
F-23
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.
NOTE 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.
F-24
NOTE 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.
NOTE 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.
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
F-25
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.
NOTE 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 - LEGAL MATTERS, Commonwealth
of Virginia).
NOTE 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)
NOTE 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.
F-26
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.
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.
F-27
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS December 31, June 30,
2003 2003
------------ --------
CURRENT ASSETS: (unaudited)
Cash - Restricted 941 920
Accounts receivable, net of allowance for doubtful accounts of $139 and $463 6,608 9,370
Inventories 513 351
Prepaid expenses and other assets 98 151
Other receivables 120 122
-------- --------
TOTAL CURRENT ASSETS 8,280 10,914
RESTRICTED CASH - over one year 210 317
INVESTMENTS - Marketable Securities 199 282
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,004 and $2,904 640 624
GOODWILL 28,214 31,214
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $701 and $594 375 483
ACQUIRED CUSTOMER LIST, net of accumulated amortization of $6,008 and $4,955 6,549 7,602
PURCHASED SOFTWARE, net of accumulated amortization of $584 and $498 106 192
NOTES RECEIVABLE, long term, including receivable from officer of $100, net of
allowance for doubtful accounts of $200 517 1,204
DEPOSITS AND OTHER ASSETS 1,377 295
-------- --------
$ 46,467 $ 53,127
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,922 $ 11,714
Line of credit 1,887 708
Accrued expenses 1,571 2,271
Deferred revenue 924 981
Notes payable-accrued interest -- 625
Current liabilities of discontinued operations 4,803 5,888
-------- --------
TOTAL CURRENT LIABILITIES 18,107 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; 1,231,331
and 1,490,437 shares issued and outstanding as of December 31, 2003 and
June 30, 2003, respectively 1 1
Class A Common stock, $.0001 par value, 70,000,000 shares authorized;
46,720,235 shares and 38,382,705 shares issued and outstanding as of
December 31, 2003 and June 30, 2003 respectively 4 4
Additional paid-in capital 91,525 81,918
Accumulated other comprehensive loss (148) (244)
Accumulated deficit (63,232) (56,056)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 28,150 25,623
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,467 $ 53,127
======== ========
See notes to condensed consolidated financial statements.
F-28
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ---------- ---------
REVENUES:
Product Revenues $ 3,470 $ 4,963 $ 9.063 $11,125
Service Revenues 6,331 6,877 13,644 14,863
------------ ------------ --------- --------
Total revenues 9,801 11,840 22,727 25,988
------------ ------------ --------- --------
COST OF REVENUES:
Cost of products 3,086 4,094 8,047 9,361
Cost of services 5,362 5,770 11,042 11,814
------------ ------------ -------- ------
Total cost of revenues 8,448 9,864 19,090 21,175
------------ ------------ ------- -------
GROSS PROFIT 1,353 1,976 3,637 4,813
------------ ------------ ------ -------
OPERATING EXPENSES:
Selling expenses 1,817 1,310 3,639 3,437
General and administrative expenses 1,259 904 2,113 1,988
Depreciation and amortization 668 704 1,341 1,412
Goodwill Impairment 3,000 -- 3,000 --
------------ ------------ ------ ------
Total operating expenses 6,744 2,918 10,093 6,837
------------ ------------ ------------ -------
LOSS FROM OPERATIONS (5,391) (942) (6,456) (2,024)
------------ ------------ ------------ -------
OTHER INCOME (EXPENSE):
Loss on sale of marketable securities -- -- (107) --
Interest expense (147) (420) (502) (585)
Interest income 88 3 93 16
Equity interest in loss of investee -- (34) -- (62)
------------ ------------ ------------ -----
Total other income (expense) (59) (451) (516) (631)
LOSS FROM CONTINUING OPERATIONS $ (5,450) $ (1,385) $ (6,972) $ (2,655)
DISCONTINUED OPERATIONS
Gain (loss) on disposal of discontinued operations (30) 177 (205) 262
------------ ------------ ----------- -------
NET LOSS $ (5,480) $ (1,208) $ (7,177) $ (2,393)
============ ============ ============ =========
NET INCOME (LOSS) PER SHARE: Basic and Diluted
Continuing Operations (.12) (.04) (.16) (.07)
Discontinued Operations -- .01 (.01) .01
------------ ------------ ------------ --------
$ (.12) $ (.03) $ (.17) (.06)
============ ============ =========== =========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION -
Basic and Diluted 44,102,624 35,461,592 43,345,273 37,053,816
============ ============ =========== ===========
NET LOSS $ (5,480) $ (1,208) $ (7,177) (2,393)
COMPREHENSIVE LOSS, NET OF TAX
Change in unrealized gain (loss) on available-for-sale-
securities 22 (52) 96 (47)
------------ ------------ --------- ---------
COMPREHENSIVE LOSS $ (5,458) $ (1,260) $ (7,081) $ (2,441)
============ ============ ========== =========
See notes to condensed consolidated financial statements.
F-29
DYNTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six months ended
December 31,
------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss - Continuing Operations $(6,971) (2,656)
------- -------
Adjustments to reconcile net loss, excluding
discontinued operations, to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,245 1,304
Amortization of capitalized software costs 108 108
Equity interest in investee -- 62
Loss on sale of marketable securities 107 --
Interest on note payable -- 260
Settlement of future royalties, net -- (425)
Impairment of goodwill 3,000
State audit assessment -- 34
Changes in operating assets and liabilities:
Accounts receivable 2,345 4,184
Inventories (162) 720
Prepaid expenses and other current assets 55 (5)
Deposits and other assets 22 79
Accounts payable (2,792) (3,781)
Deferred revenue (57) (463)
Restricted cash (21) (90)
Accrued expenses (694) (894)
------- -------
Total adjustments 3,156 1,093
NET CASH (USED IN) CONTINUING OPERATIONS (3,827) (1,563)
------- -------
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (1,301) 4,835
------- -------
NET CASH (USED IN) PROVIDED BY OPERATIONS (5,116) 3,272
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes Receivable -- 311
Cash proceeds from sale of marketable securities 71 --
Capital expenditures (116) (6)
------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (45) 305
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under bank line of credit 1,179 (3,569)
Net Cash proceeds from the issuance of common stock 3,982 (8)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,161 (3,577)
------- -------
NET INCREASE (DECREASE) IN CASH -- --
CASH AT BEGINNING OF YEAR -- --
------- -------
CASH AT END OF PERIOD $ -- $ --
======= =======
See notes to condensed consolidated financial statements.
F-30
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands, except share data)
Six months
ended
December 31,
---------------
2003 2002
------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 355 $ 291
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.
F-31
DYNTEK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(UNAUDITED)
NOTE 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 December 31, 2003, the Company had a working capital deficiency of
approximately $9.8 million. During January 2004, the Company received proceeds
from a convertible debt placement of $3.5 million.
The Company during fiscal 2004 is planning further reductions of administrative
overhead expenses as well as pursing new business opportunities and expansion of
services offered to customers. The Company believes that its present cash on
hand as well as obtaining additional debt and/or equity financing should provide
adequate funding through December 31, 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.
NOTE 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 fiscal year 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.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities have been classified as available for sale securities at
December 31, 2003 and, accordingly, the unrealized loss resulting from valuing
such securities at market value is reflected as a component of stockholders'
equity. At December 31, 2003, the unrealized loss on such securities was
$148,000.
NOTE 4 - NOTE RECEIVABLE
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 which is
included in other assets. 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.
F-32
NOTE 5 - GOODWILL AND OTHER INTANGIBLES
The Company evaluates the recoverability of its goodwill and other intangibles
in accordance with the Statement of Financial Accounting Standards Board
("SFAS") No. 142, Goodwill and Other Intangible Assets. As of December 31, 2003,
goodwill associated with certain child support enforcement outsource services
contracts was evaluated for impairment. Due to a re-focus of business strategy,
the Company has determined that the projected revenues from contract renewals in
the future will be lower and as a result, the Company has determined in
accordance with the provisions of SFAS No. 142, that there has been impairment
of goodwill requiring an adjustment of $3,000,000 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.
NOTE 6 - 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 15%. Interest is
charged on the outstanding balance at Prime rate plus 2.5% (6.5% at December 31,
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 December 31, 2003, $1,887,000 was outstanding under the
agreement.
NOTE 7 - COMMITMENTS, CONTINGENCIES, AND OTHER AGREEMENTS
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 make payments to transportation
provider vendors according to an agreed-upon schedule, which expired in June
2003. This was extended under an interim letter understanding. In connection
with initially entering into the contract, a performance bond was posted by a
third party guarantor 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 be 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. When the individual claims are determined for
each vendor, in accordance with court procedures, the inter-plead funds shall be
disbursed and the payable shall be reduced accordingly. Should valid claims
remain outstanding after the disbursement of the inter-pleader 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 courts are currently in the process of assembling the
amounts of the claims due. The Company believes 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, or may already have been settled with claimants. Since August
2003, the Company has made payments in the aggregate amount of approximately
$100,000 per month to various providers. As of December 31, 2003, the Company
paid $534,000 to providers as a result of this offer.
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 December 31, 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 11
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.
F-33
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.
Other Agreements
On April 7, 2003 Westcon, Inc. filed a breach of contract complaint in the
Supreme Court of New York State, County of Westchester. The complaint arose from
the Company's failure to make payments within the terms of the reseller
agreement. The Company does not dispute the amount due of $ 413,000 and is
currently negotiating payment terms. Such amount is included in the Company's
accounts payable.
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.
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.
On November 4, 2003, New England Financial filed a breach of contract complaint
in Orange County Superior Court of California. The complaint arose from the
cancellation of a contract for health insurance benefits and non payment of
remaining fees. The claim is for $ 534,000 of which the company partially
disputes and is currently negotiating settlement terms.
NOTE 8 - 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 December 31, 2003 $267,000
of this amount remained outstanding.
As of December 31, 2003, $20,000 remains due and payable under a settlement
agreement with Exodus Communications, Inc. The Company is making progress
payments to pay off this liability by the end of February, 2004.
NOTE 9 - 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.
NOTE 10 - 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 presents
pro- forma net loss and basic and diluted loss per share as if the fair
value-based method had been applied to all awards.
F-34
Three Months Ended Six Months Ended
------------------ -----------------
Periods Ended December 31, 2003 2002 2003 2002
- -------------------------- ------ ------ ------ ------
Net Loss $5,480 $1,208 $7,177 $2,393
Stock-based employee compensation
cost, net of tax effect, under
fair value accounting 9 49 18 98
------ ------ ------ ------
Pro-forma net loss under Fair Value $5,489 $1,257 $7,195 $2,491
Method ===== ===== ===== =====
Loss per share
Basic and Diluted $ .12 $ .03 $ .17 $ .60
Per share stock-based employee
compensation cost, net of tax
effect, under fair value
accounting $ -- $ -- $ -- $ --
Pro-forma loss share basic & diluted
------ ------ ------ ------
$ .12 $ .03 $ .17 $ .06
====== ====== ====== ======
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%
NOTE 11 - STOCKHOLDERS' EQUITY
On August 14, 2001, the Company's preferred stock became convertible into the
Company's Class A common stock, at a rate of 2.5 common shares for each
preferred share tendered. As of December 31, 2003, 958,469 of such shares were
converted into 2,396,173 shares of Class A common stock, with a remainder of
1,231,331 shares not yet converted.
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.
On October 9, 2003, the Company issued 50,000 shares of its Common Stock as
payment of an outstanding payable for services rendered in connection with the
DynCorp Management Acquisition on December 27, 2001.
On October 16, 2003, the Company issued 108,434 shares of its Common Stock
valued at $90,000 in connection with the April 1, 2003 Asset Purchase Agreement
with Entellus Technology Group.
F-35
Under agreements dated as of December 5, 2003, the Company entered into a series
of agreements, including a Securities Purchase Agreement and a Registration
Rights Agreement, in connection with a private placement of shares of the
Company's common stock, par value $0.0001 per share ("Common Stock"), at a price
equal to $0.66 per share for an aggregate gross purchase price of $2,200,000. On
December 9, 2003, the Company closed the private placement and issued 3,333,333
shares of Common Stock to the purchasers and two tranches of common stock
purchase warrants. One tranche to purchase up to 20% of the Common Stock issued
at an exercise price equal to $1.00 per share (the "20% Investor Warrants") and
the other tranche to purchase up to 30% of the Common Stock issued at an
exercise price equal to $0.75 per share (the "30% Investor Warrants"). Both the
20% Investor Warrants and the 30% Investor Warrants are exercisable immediately
at closing and have a five-year term of exercise. In addition, the placement
agent received, placement agent fee (including expense reimbursement) of
$189,050 and placement agent warrants equal to 10% of the aggregate shares of
Common Stock issued on the closing date (and issuable under 20% Investor
Warrants and 30% Investor Warrants) at an exercise price of $0.91 per share.
Pursuant to an amendment to the above-identified Registration Rights Agreement
and Allonges to the 20% Investor Warrants granted by the Company, all dated as
of January 15, 2004, in connection with the permitted inclusion of 3,000,000
additional shares held by third parties is the registration statement filed
pursuant to the Registration Rights Agreement identified above, the exercise
price of the 20% Investor Warrants was reduced to $0.75 per share.
NOTE 12 - 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 64,331,225 were not included in the calculation of diluted
earnings per share as the results would be anti-dilutive.
Total outstanding stock, options, convertible preferred stock and warrants as of
December 31, 2003 are as follows:
Shares
Outstanding
------------
Common stock 46,720,235
Options and warrants 14,532,662
Convertible preferred stock 3,078,328
----------
64,331,225
==========
NOTE 13 - DISCONTINUED OPERATIONS
During 2003, the Company disposed of its non-emergency transportation business.
As of December 31, 2003, total remaining liabilities of discontinued operations
were $4,803,000. A significant portion of such payables are owed to third party
vendors and are subject to an inter-pleader action (see note 7 Commitments,
Contingencies and Other Agreements - COMMONWEALTH OF VIRGINIA).
NOTE 14 - 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
F-36
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):
Reportable Business Segments:
Business Information
Process Technology
Outsourcing Services Total
----------- -------- -----
Three months ended December 31, 2003
- ------------------------------------
Sales to external customers $ 2,302 $ 7,499 $ 9,801
Depreciation and amortization expense 111 557 668
Operating income (loss) (3,001) (2,390) (5,391)
Net interest expense (income) -- 59 59
Total assets 22,299 24,169 46,468
Capital expenditures -- 35 35
Three months ended December 31, 2002
- ------------------------------------
Sales to external customers $ 2,894 $ 8,946 $ 11,840
Depreciation and amortization expense 123 581 704
Operating income (loss) (260) (682) (942)
Net interest expense (income) 353 63 416
Total assets 28,175 25,925 54,100
Capital expenditures -- -- --
Six months ended December 31, 2003
- ----------------------------------
Sales to external customers $ 5,014 $ 17,713 $ 22,727
Depreciation and amortization expense 222 1,119 1,341
Operating income (loss) (3,137) (3,319) (6,456)
Net interest expense (income) -- 409 409
Total assets 22,299 24,169 46,468
Capital expenditures 78 38 116
Six months ended December 31, 2002
- ----------------------------------
Sales to external customers $ 5,356 $ 20,632 $ 25,988
Depreciation and amortization expense 244 1,168 1,412
Operating income (loss) (703) (1,321) (2,024)
Net interest expense (income) 447 140 587
Total assets 28,175 25,925 54,100
Capital expenditures 5 1 6
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NOTE 15 - 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 December 31, 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 $636,000 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 December 31, 2003), with the principal amount due on
September 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 maintains a reserve against this Promissory Note of
$200,000.
NOTE 16 - SUBSEQUENT EVENTS
At a closing on January 29, 2004, the Company sold an additional $300,000 of
Common Stock, 30% Investor Warrants and 20% Investor Warrants to three
investors, becoming obligated to issue to the investors 454,545 shares of Common
Stock, 30% Investor Warrants to acquire 136,364 shares of Common Stock and 20%
Investor Warrants to acquire 90,909 shares of Common Stock, all on the same
terms as offered to the investors in the December 2003 private placement, as
amended by the January 15, 2004 Registration Right Agreement Amendment and
Allonges. The placement agent for this $300,000 offering received $24,000 in
cash and warrants, exercisable at $.091 per share, to acquire 68,182 shares of
Common Stock.
On January 30, 2004, DynTek closed the private placement of a $3,500,000
principal secured convertible three-year term note to an institutional investor,
Laurus Funds. This note bears interest at the greater of the Prime Rate or 4%,
plus 1%, with interest payable monthly on a current basis commencing in March
2004 and level payments of principal commencing August 1, 2004. The note is
convertible to DynTek common stock at the option of the investor. Monthly
payments of principal and accrued interest under the note can be made by DynTek
delivering common stock shares instead, if at the time such stock payment is
delivered (i) there exists an effective registration statement covering the
distribution of such shares by the investor and (ii) the market price for such
shares is greater than 115% of $.90 per share, the price fixed for conversion to
common stock of amounts outstanding under the note. Subject to the same
restrictions on stock payments of monthly accrued interest and principal, the
entire principal and accrued interest of the note may be prepaid by DynTek in
common stock. Any amounts of note principal paid in cash, including prepayments
of the entire note principal, shall be subject to a 2% premium payment (which is
increased to a 4% premium payment in the event that an effective registration
statement covering the conversion shares is not in place). Principal and
interest under the note, and other obligations of DynTek to Laurus Funds under
the ancillary agreements entered into in connection with the private placement,
are secured by all assets of DynTek and its principal operating subsidiary. As
part of the transaction, the investor also received a five-year warrant to
purchase 425,000 shares of DynTek common stock, exercisable as follows: 125,000
shares at $1.1225 per share; 175,000 shares at $1.347 per share; and 125,000
shares at $1.5715 per share. DynTek paid to the investor's affiliate a closing
fee equal to $122,500, agreed to make renewal payments to such affiliate equal
to .5% of outstanding note principal on each anniversary of the closing and paid
$29,500 as reimbursement for the investor's legal and due diligence expenses.
Under the terms of its Investment Banking Advisory Agreement with Duncan
Capital, in connection with closing the Laurus Funds private placement the
Company became obligated (i) to pay to Duncan Capital a fee equal to $280,000
(8% of offering proceeds), $210,000 in cash and $70,000 in the form of 77,778
shares of DynTek common stock (at a value of $0.90 per share), and (ii) to issue
additional warrants to Duncan Capital to acquire 388,889 shares of DynTek common
stock at $0.99 per share.
As a result of a delay in filing a required registration statement with respect
to the distribution of Company Common Stock by certain investors, the Company
has agreed to issue warrants to such investors. When issued such warrants will
give the investors the right to acquire, in the aggregate, up to 2,596,558
shares of common stock at $0.75 per share, all of which underlying shares of
common stock are subject to registration rights.
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NOTE 17 - 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 December 31, 2003, with certain exceptions, and (2) for hedging
relationships designated after December 31, 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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
All amounts, except the SEC registration fee, are estimates. None of the
expenses will be paid by the selling stockholders.
SEC Registration Fee .............................. $ 931.00
Nasdaq SmallCap Market Listing Fee ................ 0.00
Printing Costs .................................... 15,000.00
Legal Fees and Expenses ........................... 50,000.00
Accounting Fees and Expenses ...................... 7,500.00
Blue Sky Fees and Expenses ........................ 5,000.00
Transfer Agent and Registrar Fees ................. 0.00
Miscellaneous ..................................... 1,569.00
----------
Total.............................................. $80,000.00
==========
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to award
or a corporation's board of directors to grant indemnification to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the Securities
Act).
Our Certificate of Incorporation and By-Laws provide for indemnification of our
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. Our By-Laws
require us to, among other things, indemnify them against certain liabilities
that may arise by reason of their status or service as directors or officers to
the fullest extent not prohibited by law. We have purchased an insurance policy
that insures both DynTek and its officers and directors against exposure and
liability normally insured against under such policies.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities
The securities of DynTek that we issued or sold within the past 3 years and were
not registered with the SEC are described below.
(a) During the fiscal years ended June 30, 2001, 2002 and 2003, we issued
options to purchase a total of 3,569,521 shares of our common stock to key
employees and consultants. These include the following:
o During the fiscal year ended June 30, 2001, we issued options to
purchase 144,000 shares of our common stock to certain consultants for
services rendered, at exercise prices between $0.59 and $2.22. The
Board of Directors determined that the value of these services was
fair and adequate consideration for the options issued, and DynTek
recorded compensation expense of $77,000 with respect to those
options.
o Also during the fiscal year ended June 30, 2001, we issued options to
purchase 1,983,521 shares of our common stock at market prices
pursuant to the 1992 Employee Stock Option Plan, options to purchase
an aggregate of 40,000 shares of our Class A common stock at market
prices pursuant to the 1997 Non-Employee Directors' Stock Option Plan.
We valued these options at $1,809,000.
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o During the fiscal year ended June 30, 2002, we issued options to
purchase 229,000 shares of our common stock to certain consultants for
services rendered, at exercise prices between $2.00 and $2.28. The
Board of Directors determined that the value of these services was
fair and adequate consideration for the options issued, and DynTek
recorded compensation expense of $325,000 with respect to those
options.
The issuances of the above options were exempt under Section 4(2) of the
Securities Act of 1933 as the options were offered and issued in private
transactions to a limited number of accredited investors who had access to al
relevant information about DynTek, including annual and periodic filing with the
SEC, necessary to evaluate their investment, and who acquired the options
without a view to distribution. There was not solicitation involved in the
issuances of the securities, rather the securities were issued pursuant to
contractual relationship for which the recipients of the securities provided
services.
(b) In March 2001, we issued 2,718,550 shares of our common stock to
accredited investors resulting in aggregate net proceeds of $2,718,550. In
connection with these sales, we paid to a related party a cash fee of $194,709
and issued options to purchase 271,855 shares of our common stock at $1.25 per
share pursuant to the 1992 Employee Stock Option Plan.
(c) On November 1, 2001, we issued an aggregate of $1,057,000 in principal
of short-term notes payable that bear interest at 12% per annum during a term of
90 days and an aggregate of $750,000 in principal of short-term notes payable
that bear interest at 8% per annum during a term of 180 days. In connection with
the acquisition of these notes, the investors received a three year warrant to
acquire one-third of a share of common stock for each dollar of note principal,
bearing exercise prices of $1.50 and $1.70 per share and were convertible to
common stock. During the quarter ended March 31, 2002, $300,000 of such notes
was repaid, and the balance of the principal and accrued interest was exchanged
for 1,042,039 shares of the offering in June 2002, mentioned above.
(d) In June 2002, we sold 2,431,332 shares of our common stock for $1.50
per share to accredited investors, and issued warrants to purchase 1,215,666
shares of our common stock for $1.50 per share. In connection with these sales,
we paid to Network 1, Inc., the placement agent for the offering, a cash fee of
$262,000.
(e) In May 2003, we sold units consisting of 2,221,932 shares of our common
stock and warrants to purchase 1,110,966 shares of our common stock to
accredited investors, resulting in aggregate net proceeds of $1,110,966. In
connection with these sales, we paid to Network 1, the placement agent for the
offering, 666,570 shares of our common stock.
(f) In July 2003, we sold 4,198,000 shares of our common stock to
accredited investors, resulting in aggregate net proceeds of $2,099,000. In
connection with these sales, we paid to Network 1, the placement agent for the
offering, 5-year warrants to purchase up to 419,000 shares of common stock at an
exercise of $1.02 per share.
(g) During the fiscal year ended June 30, 2003, we issued options to
purchase 50,000 shares of our common stock to a consultant for services
rendered, at an exercise price of $1.00. The Board of Directors determined that
the value of these services was fair and adequate consideration for the options
issued, and we recorded compensation expense of $16,000 with respect to those
options.
(h) On December 9, 2003, we sold 3,333,333 shares of our common stock and
warrants to purchase 1,666,668 shares of our common stock to accredited
investors, resulting in aggregate net proceeds of $2,200,000. In connection with
these sales, we paid to Rockwood, the placement agent for the offering, a 5-year
warrant to purchase up to 500,000 shares of common stock at an exercise price of
$0.913 per share.
On January 29, 2004, we sold an additional 454,545 shares of our common stock
and warrants to purchase 227,273 shares of our common stock, to accredited
investors all on the same terms as offered to the investors in the December 2003
private placement, resulting in aggregate net proceeds of $300,000. The
placement agent for this $300,000 offering received $24,000 in cash and
warrants, exercisable at $0.91 per share, to acquire 68,182 shares of our common
stock.
(i) On January 30, 2004, we sold a $3,500,000 principal secured convertible
three-year term note to an institutional accredited investor. The note is
convertible to our common stock at the option of the investor. Monthly payments
of principal and accrued interest under the note may be made by delivering
common stock shares instead, if at the time such stock payment is delivered (i)
there exists an effective registration statement covering the distribution of
such shares by the investor and (ii) the market price for such shares is greater
than 115% of $.90 per share, the price fixed for conversion to common stock of
amounts outstanding under the note. Subject to the same restrictions on stock
payments of monthly accrued interest and principal, the entire principal and
accrued interest of the note may be prepaid in common stock. As part of the
II-2
transaction, the investor also received a five-year warrant to purchase 425,000
shares of our common stock, exercisable as follows:
125,000 shares at $1.1225 per share; 175,000 shares at $1.347 per share; and
125,000 shares at $1.5715 per share. Distribution by the investor of all of the
common stock shares subject to note conversion and issuable upon exercise of the
warrant are covered by a Registration Rights Agreement in favor of the investor.
We paid to the manager of the investor a closing fee equal to $122,500, agreed
to make renewal payments to such affiliate equal to .5% of outstanding note
principal on each anniversary of the closing and paid $29,500 as reimbursement
for the investor's legal and due diligence expenses.
On March 17, 2004, DynTek closed its offering of up to 150 Units maximum
($2,040,000) private placement of securities (the "Offering"), with Network 1
Financial Securities, Inc. acting as the placement agent (the "Broker") pursuant
to a Placements Agent's Agreement, dated as of February 27, 2004, between DynTek
and the Broker. DynTek sold 89 Units in the Offering for an aggregate purchase
price of $1,210,400, with each Unit bearing a purchase price of $13,600. Each
Unit consisted of 20,000 shares of DynTek common stock (an aggregate of
1,780,000 shares sold in the Offering), at $0.68 per share, and 5-year warrants
to acquire 4,000 shares of DynTek common stock, exercisable at $0.90 per share
(the "Warrants"). The Broker's compensation under the. Placement Agent's
Agreement consisted of a commission equal to 5% of the aggregate price of the
Units sold in the Offering, a 2% non-accountable expense allowance based on the
aggregate price of the Units sold in the Offering, a Placement Agent's Warrant
(the "Placement Warrant") exercisable at $.90 per share to acquire 20% of the
number of shares of DynTek common stock sold in the Offering, plus a Warrant
exercise fee equal to 5% of the exercise price of any Warrants exercised during
the period of 4 years commencing one year after the final closing of the
Offering. All of shares of DynTek common stock sold in the Offering, as well as
all of the shares underlying the Warrants and the Placement Warrant, are covered
by registration rights.
The private offerings of the securities described in (b) through (j) above were
exempt from registration under Regulation D, Rule 506 of the Securities Act of
1933 because (i) the securities were offered and sold only to accredited
investors; (ii) there was no general solicitation or general advertising related
to the offerings; (iii) each investor was given the opportunity to ask questions
and receive answers concerning the terms of and conditions of the offering and
to obtain additional information; (iv) the investors represented that they were
acquiring the securities for their own account and for investment; and (v) the
securities were issued with restrictive legends.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
See Exhibit Index immediately following the Signatures.
(b) Financial Statement Schedules
None.
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
(1) It will file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) For the purpose of determining any liability under the Securities Act
of 1933, treat each such post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time to be the initial bona fide offering thereof; and
II-3
(3) It will remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 1st day of April, 2004.
DynTek, Inc.
By: /s/ Steven J. Ross
-----------------------------------------------
Steven J. Ross
President, Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Steven J. Ross
- ----------------------- Director, President April 1, 2004
Steven J. Ross Chief Executive Officer,
and Chairman
(Principal Executive Officer)
/s/ James Linesch
- ----------------------- Director, Executive Vice President, April 1, 2004
James Linesch Chief Financial Officer
(Principal Financial and
Accounting Officer)
*
- ----------------------- Director April 1, 2004
Brian D. Bookmeier
*
- ----------------------- Director April 1, 2004
Dr. Michael W. Grieves
*
- ----------------------- Director April 1, 2004
Marshall Toplansky
/s/ Steven J. Ross*
-----------------------------
Steven J. Ross, By Power of Attorney
granted in original filing of this
Registration Statement, Registration
No. 333-112555, that was filed with
the Securities and Exchange
Commission on February 6, 2004.
II-5
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger, dated February 18, 2000, among DynTek,
DynTek Services, Inc. and Data Systems Network Corporation. (1)
2.2 Second Amendment to Agreement and Plan of Merger, dated as of June 28,
2000, among DynTek, DynTek Services, Inc. and Data Systems Network
Corporation (24)
2.3 Agreement and Plan of Merger, dated May 17, 2000, between DynTek, Inc.,
Big Tech Acquisition Corp. and Big Technologies, Inc. (3)
2.4 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. (4)
2.5 Agreement and Plan of Reorganization, dated as of April 25, 2001, among
DynCorp Management Resources, Inc., Newport Acquisition Corp., DynCorp
and DynTek, Inc. (5)
2.6 Agreement and Plan of Merger, dated as of December 27, 2001, among
DynCorp Management Resources, Inc., Newport Acquisition Corp., DynCorp
and DynTek, Inc. (23)
2.7 Stock Option Agreement, dated as of April 25, 2001, between DynTek, Inc.
and DynCorp. (5)
2.8 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. (5)
2.9 Fourth Amendment to Agreement and Plan of Reorganization, dated as of
December 27, 2001, DynCorp Management Resources, Inc., Newport
Acquisition Corp., DynCorp and DynTek, Inc. (23)
3(i) Amended and Restated Charter of DynTek, Inc. (2)(4)(23)
3(ii) Amended and Restated By-Laws of DynTek, Inc. (23)
4.1 Specimen Common Stock Certificate of DynTek, Inc. (6)
4.2 Specimen of Series A Convertible Preferred Stock Certificate of DynTek,
Inc. (4)
4.3 Specimen of Redeemable Common Stock Purchase Warrant. (8)
4.4 Form of Warrant Agent Agreement between the Company and American Stock
Transfer and Trust Company. (7)
4.5 Amended Warrant Agreement, dated November 30, 1999, between the Company
and American Stock Transfer and Trust Company. (2)
4.6 Second Amended Warrant Agreement, dated as of November 30, 2000, between
DynTek, Inc. and American Stock Transfer & Trust Company. (10)
4.7 Third Amended Warrant Agreement, dated as of April 10, 2001, between
DynTek, Inc. and American Stock Transfer & Trust Company. (11)
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4.8 Form of Amendment to 1992 Employee Incentive Stock Option Plan. (12)
4.9 1998 Non-Employee Director Stock Option Plan. (13)
4.10 2001 Employee Incentive Stock Option Plan. (14)
4.11 Form of Securities Purchase Agreement between DynTek, Inc. and the
purchasers listed therein. (26)
4.12 Form of Registration Rights Agreement between DynTek, Inc. and the
purchasers listed therein. (26)
4.13 Form of 20% Investor Warrant. (26)
4.14 Form of 30% Investor Warrant. (26)
4.15 Form of Placement Agent Warrant Agreement DynTek, Inc. and Rockwood Inc.
(26)
5 Opinion of Nixon Peabody LLP.
10.1 Letter Agreement, dated May 24, 2000, between Core Strategies, LLC and
DynTek, Inc. (4)
10.2 Form of Consulting Agreement, dated June 1, 2000, between The Exigo Group
and DynTek, Inc. (4)
10.3 Employment Agreement, dated as of August 14, 2000, between DynTek, Inc.
and James Linesch. (15)
10.4 Letter, dated August 15, 2001, from DynTek, Inc. to James Linesch
amending the Employment Agreement, dated as of August 14, 2000, between
DynTek, Inc. and James Linesch. (16) 10.5 Letter Agreement, dated
November 3, 2000, between DynTek, Inc. and LaborSoft Corporation. (17)
10.6 Employment Agreement, dated as of December 10, 2001, between DynTek, Inc.
and Steven J. Ross. (23)
10.7 Registration Rights Agreement, dated as of December 27, 2001, between
DynTek, Inc. and DynCorp (23)
10.8 Stock Purchase and Settlement Agreement, dated August 20, 2002, between
DynCorp and DynTek, Inc. (25)
10.9 General Release, dated August 20, 2002, of DynTek, Inc. by DynCorp. (25)
10.10 Form of Settlement Agreement between the Commonwealth of Virginia
Department of Medical Assistance and DynTek Services, Inc. (27)
10.11 Asset Purchase Agreement, effective March 1, 2003, among DynTek Services,
Inc. and First Transit, Inc. (20)
10.12 Factoring Agreement, dated as of July 1, 2003, between Systran Financial
Services Corporation, DynTek, Inc. and DynTek Services, Inc. (21)
10.13 Limited Release and Agreement to Indemnify, dated as of July 3, 2003,
executed by DynCorp in favor of DynTek, Inc. (16)
10.14 Amendment to Employment Agreement, dated October 8, 2003, between James
Linesch and DynTek, Inc. (22)
10.15 Securities Purchase Agreement, dated January 30, 2004, by and between
DynTek, Inc. and an institutional investor with respect to the purchase
of DynTek's $3,500,000 Secured Convertible Term Note of even date. (28)
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10.16 $3,500,000 Secured Convertible Term Note, dated January 30, 2004, made by
DynTek, Inc. in favor of an institutional investor. (28)
10.17 Common Stock Purchase Warrant, dated January 30, 2004, made by DynTek,
Inc. in favor of an institutional investor for 425,000 shares of common
stock. (28)
10.18 Registration Rights Agreement, dated January 30, 2004, by and between
DynTek, Inc. and an institutional investor. (28)
10.19 Security Agreement, dated January 30, 2004, by and between DynTek, Inc.
and an institutional investor. (28)
10.20 Security Agreement, dated January 30, 2004, by and between DynTek
Services, Inc. and an institutional investor. (28)
10.21 Guaranty, dated January 30, 2004, made by DynTek Services, Inc. in favor
of an institutional investor. (28)
10.22 Placement Agent's Agreement, dated as of February 27, 2004, by and
between DynTek, Inc. and Network 1 Financial Securities, Inc. with
respect to the offering of up to 150 Units of securities consisting of
shares of common stock and warrants (the "Network 1 Offering"). (29)
10.23 Form of Subscription Agreement with investors in the Network 1 Offering.
(29)
10.24 Form of Registration Rights Agreement with investors in the Network 1
Offering. (29)
10.25 Form of Warrant issuable to investors in the Network 1 Offering. (29)
10.26 Form of Placement Warrant issuable to Network 1 Financial Securities,
Inc. in connection with the Network 1 Offering. (29) 21 Subsidiaries of
DynTek, Inc. (10)
23.1 Consent of Marcum & Kliegman LLP
23.2 Consent of Grassi & Co., P.C.
23.3 Consent of Nixon Peabody LLP (contained in the opinion filed as Exhibit
5)
1. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed on February 29, 2000.
2. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed on December 6, 1999.
3. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed on May 19, 2000.
4. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Amendment No. 1 to Registration Statement on Form S-4, filed on July 13,
2000 (File No. 333-36044).
5. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed May 2, 2001.
6. Incorporated by reference, filed as an exhibit to Amendment No. 2 to
DynTek, Inc.'s Registration Statement on Form S-1 filed on November 10,
1992 (File No. 333-50426).
II-8
7. Incorporated by reference, filed as an exhibit to Amendment No. 1 to
DynTek, Inc.'s Registration Statement on Form S-1 filed on October 13,
1992 (File No. 333-50426).
8. Incorporated by reference, filed as an exhibit to Amendment No. 4 to
DynTek, Inc.'s Registration Statement on Form S-1 filed on December 4,
1992 (File No. 333-50426).
9. Incorporated by reference, filed as an exhibit to Amendment No. 5 to
DynTek, Inc.'s Registration Statement on Form S-1 filed on December 8,
1992 (File No. 333-50426).
10. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed on January 11, 2001.
11. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed on April 17, 2001.
12. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Registration Statement on Form S-4, filed on May 1, 2000 (File No.
333-36044).
13. Incorporated by reference, filed as an exhibit to DynTek, Inc.'s
Quarterly Report on Form 10-Q, filed on December 24, 1998.
14. Incorporated by reference, filed as Annex D to DynTek, Inc.'s definitive
Proxy Statement for Special Meeting of Stockholders, filed November 6,
2001.
15. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Annual
Report on Form 10-K/A, filed on October 27, 2000.
16. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Annual
Report on Form 10-K, filed October 7, 2003.
17. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Quarterly Report of Form 10-Q, filed on December 31, 2000.
18. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Quarterly Report on Form 10-Q, filed May 15, 2001.
19. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Annual
Report on Form 10-K, filed on September 26, 2001.
20. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed March 25, 2003.
21. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on From 8-K, filed July 9, 2003.
22. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Quarterly Report on Form 10-Q, filed November 14, 2003.
23. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on From 8-K, filed January 7, 2002.
24. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on From 8-K, filed August 28, 2000.
25. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on From 8-K, filed August 23, 2002.
26. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed December 10, 2003.
27. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s
Quarterly Report on Form 10-Q, filed February 20, 2003.
28. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed February 3, 2004.
29. Incorporated by reference, filed as an Exhibit to DynTek, Inc.'s Current
Report on Form 8-K, filed April 1, 2004.
II-9