U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to __________
Commission file number 1-11568
DYNTEK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4228470
-------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
18881 Von Karman Avenue, #250
Irvine, CA 92612
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (949) 955-0078
--------------
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filings requirements for
the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's Class A Common Stock,
$.0001 par value, as of February 14, 2003 was 35,501,450.
1
DYNTEK, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Number
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, 2002 3
and June 30, 2002
Consolidated Statements of Operations and Comprehensive Loss - For the
Three Months and Six Months ended December 31, 2002 and 2001, 4
Consolidated Statements of Cash Flows - For the 5
Six Months ended December 31, 2002 and 2001
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial 12 - 16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
CERTIFICATIONS 19
2
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, June 30,
ASSETS 2002 2002
------ ---- ----
CURRENT ASSETS: Unaudited
Cash (includes restricted cash of $719 and $986) $ 1,102 $ 1,012
Accounts receivable, net of allowance for doubtful accounts of $464 and $609 7,107 15,023
Tax refund receivable - 245
Inventories 288 1,008
Costs and estimated earnings in excess of billings on uncompleted contracts 303 3,015
Prepaid expenses and other assets 191 128
Note receivable - current portion 187 375
Other receivables 192 779
--------- ---------
TOTAL CURRENT ASSETS 9,370 21,585
RESTRICTED CASH 985 995
INVESTMENTS - Marketable Securities 348 366
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,247 and $2,844 1,117 1,514
GOODWILL 43,538 43,538
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $486 and $378 591 698
ACQUIRED CUSTOMER LIST, net of accumulated amortization of $4,128 and $3,110 8,962 9,979
PURCHASED SOFTWARE, net of accumulated amortization of $411 and $325 279 365
NOTES RECEIVABLE, long term, including receivable from officer $100 1,017 1,017
DEPOSITS AND OTHER ASSETS 320 462
--------- ----------
$ 66,527 $ 80,519
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,273 $ 16,963
Line of credit 2,778 6,347
Accrued expenses 2,880 4,437
Deferred revenue 1,147 4,658
Audit assessment 1,895 1,861
Notes payable 486 1,250
Capital leases, net of long term portion 84 144
--------- ---------
TOTAL CURRENT LIABILITIES 24,543 35,660
DEFERRED REVENUE - long term 985 995
LONG TERM PORTION CAPITAL LEASE 53 84
NOTE PAYABLE to STOCKHOLDER 5,000 -
--------- ---------
TOTAL LIABILITIES 30,581 36,739
--------- ---------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 10,000,000: shares authorized
1,607,535and 1,616,397 shares issued and outstanding as of December 31,
2002 and June 30, 2002, respectively 1 1
Class A Common stock, $.0001 par value, 70,000,000 shares authorized;35,501,450
shares and 23,533,692 shares issued and outstanding after deducting 300,000 in
treasury as of December 31, 2002. 4 2
Class B Common stock, $.0001 par value, 20,000,000 shares authorized;0 shares
and 18,336,663 shares issued and outstanding as of December 31, 2002 and June
30, 2002, respectively - 2
Additional paid-in-capital 80,801 86,193
Unrealized loss on securities (178) (131)
Deficit (44,682) (42,287)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 35,946 43,780
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,527 $ 80,519
========= =========
See notes to consolidated financial statements
3
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
----------- -----------
2002 2001 2002 2001
---------- --------- --------- ---------
REVENUES:
Product Revenues $ 4,963 $ 6,009 $ 11,125 $ 12,506
Service Revenues 16,747 6,221 35,840 11,309
---------- ---------- --------- ----------
Total revenues 21,710 12,230 46,965 23,815
---------- ---------- --------- ----------
COST OF REVENUES:
Cost of products 4,094 5,242 9,361 10,539
Cost of services 15,030 4,279 31,683 8,131
---------- ---------- ---------- ----------
Total cost of revenues 19,124 9,521 41,044 18,670
---------- ---------- ---------- ----------
GROSS PROFIT 2,586 2,709 5,921 5,145
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling expenses 1,400 2,144 3,584 4,108
General and administrative expenses 1,143 1,171 2,476 2,090
Application development - 152 - 492
Depreciation and amortization 804 566 1,614 1,110
---------- ---------- ---------- ----------
Total operating expenses 3,347 4,033 7,674 7,798
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (761) (1,324) (1,753) (2,654)
---------- ---------- ---------- ---------
OTHER INCOME (EXPENSE):
Loss on sale of marketable securities - (1,241) - (1,241)
Interest expense (420) (1,440) (594) (1,626)
Interest income 8 9 16 21
Equity interest in loss of investee (35) (85) (62) (192)
--------- ---------- ---------- ----------
Total other expense (447) (2,757) (640) (3,038)
--------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX $ (1,208) (4,081) (2,393) (5,691)
INCOME TAX - - 1 43
---------- ---------- ----------- ----------
NET LOSS $ (1,208) $ (4,081) $ (2,394) $ (5,734)
========== ========== =========== ==========
NET LOSS PER SHARE: Basic and Diluted $ (0.03) $ (0.18) $ (0.06) $ (0.26)
========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION - 35,461,592 22,455,383 37,053,818 21,689,798
========== ========== =========== ==========
Basic and Diluted
NET LOSS $ (1,208) $ (4,081) $ (2,394) $ (5,734)
OTHER COMPREHENSIVE LOSS, NET OF TAX
Change in unrealized gain (loss) on available-for-sale- (52) 969
securities (47) 913
---------- ---------- ---------- ----------
COMPREHENSIVE LOSS $ (1,260) $ (3,112) $ (2,441) $ (4,821)
========== ========== ========== ==========
4
See notes to consolidated financial statements.
DYNTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months ended
December 31,
2002 2001
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,395) $ (5,734)
---------- ---------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,506 1,002
Amortization of capitalized software costs 108 108
Amortization of deferred finance costs - 183
Equity interest in investee 62 192
Loss on sale of marketable securities - 1,241
Beneficial conversion feature of short-term notes - 763
Amortization of debt discount on short-term notes - 322
Interest on short term note payable 260
Settlement of Exodus future royalties, net (425) -
Changes in operating assets and liabilities:
Accounts receivable 7,916 (2,205)
Inventory 720 886
Costs and estimated earnings in excess of billings on uncompleted
contracts 1,712 -
Prepaid expenses and other current assets (5) (435)
Deposits and other assets 78 (54)
Accounts payable (1,690) 243
Deferred revenue (3,511) 1,222
State audit assessment 34 34
Accrued expenses (893) (439)
---------- --------
Total adjustments 5,872 3,063
---------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,477 (2,671)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable 311 -
Cash proceeds from sale of marketable securities - 362
Capital expenditures (6) (49)
---------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 305 313
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds under bank line of credit (3,569) 1,055
Notes payable (24) -
Securities issuance costs (33) -
Capital lease repayments (91) -
Cash proceeds from the sale of securities 25 -
Cash proceeds from exercise of stock options - 130
Issuance of short term notes payable, net - 1,627
---------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,692) 2,812
---------- --------
NET INCREASE IN CASH 90 454
CASH AT BEGINNING OF YEAR 1,012 1,309
---------- --------
CASH AT END OF PERIOD $ 1,102 $ 1,763
========== ========
See notes to consolidated financial statements.
5
DYNTEK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Dyntek, Inc. and
Subsidiaries ("DynTek") or ("the Company")have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Article 10 of Regulations S-X.
Accordingly, they do not include all of the information and disclosures required
for annual financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related footnotes for
the year ended June 30, 2002 included in the Form 10-K for the year then ended
and Form 10-K/A filed on October 13, 2002.
The accompanying financial statements reflect all adjustments, which, in the
opinion of management, are necessary for a fair presentation of financial
position, and the results of operations for the interim periods presented.
Except as otherwise disclosed, all such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a full fiscal year.
2. Recent Accounting Pronouncements
In December 2002, Financial Accounting Standards Board, "FASB" issued Statement
of Financial Accounting Standard, SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 is not expected to have a
material impact on the Company's financial statements.
3. Restricted Cash
As of December 31, 2002, cash of $ 1,704,000 has been 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, $719,000 will be released during the
2003 calendar year. The non-current portion, $985,000, has been classified as a
non-current asset.
6
4. Credit Facility
The credit agreement with Foothill Capital (the "Foothill Agreement") provides
for a revolving line of credit not to exceed $15,000,000. The available line of
credit at December 31, 2002, according to the collateral formula, was
approximately $5,148,000 of which $2,778,000 was outstanding. Borrowing limits
are determined based on a collateral formula, which includes 85% of qualified
trade receivables. Also, borrowings bear interest at 1% over Norwest Bank prime
(4.25% at December 31, 2002) with a minimum rate of 7%. The term of the
agreement has been extended through March 31, 2004 under similar terms.
In connection with the Foothill Agreement extension amendment, The Company's
Subsidiary, DynTek Services is required to maintain certain financial covenants,
based upon defined EBITDA, tangible net worth and interest coverage ratio of the
subsidiary. DynTek Services is not in compliance with the covenants as of
December 31, 2002. In connection with Foothill's consent for the merger with
DynCorp Management Services, Inc. ("DMR"), the Company agreed to raise an
additional $3 million of capital investment within 30 days of the consummation
of the merger. The company has raised $2.1 million of such amount as of December
31, 2002. The Company has received a waiver from Foothill, as of December 31,
2002, for non compliance with the financial covenants and an extension to March
15, 2003 in receiving the additional capital investment requirement.
5. Marketable Securities
Marketable securities have been classified as available for sale securities at
December 31, 2002 and, accordingly, the unrealized loss resulting from valuing
such securities at market value is reflected as a component of stockholders'
equity. At December 31, 2002, the unrealized loss on securities was $178,000.
6. Commitments, Contingencies, and Other Agreements
On July 28, 2000, a judgment was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina. The
plaintiff was awarded a judgment of $572,000 plus reasonable attorney fees and
interest, and the award was affirmed on appeal. An accrual has been established
in an aggregate amount of approximately $700,000. The Company has entered into a
payment plan agreement with the plaintiff of $100,000 cash on January 24, 2002,
$200,000 cash on February 15, 2003 and $400,000 in either cash or stock on April
15, 2003. The Company did not issue the February 15, 2003 payment and is in
negotiations with the plaintiff to amend the payment plan.
On July 10, 2000, the Company was named as a nominal defendant in a
stockholder's derivative action brought in the Supreme Court of New York, New
York County, on behalf of DynTek by Paul Miletich. On August 20, 2002, a final
order approving settlement and dismissing action by Paul Miletich was filed in
the New York County Clerk's Office. The settlement approved a stipulation that
The Rubin Family Trust transfer to DynTek 300,000 shares of DynTek common stock
and 125,000 shares of MedEmerg common stock, as full settlement of a guarantee
provided by Mr. Rubin pertaining to a transaction with StyleSite Marketing.
Additionally, the insurance underwriters for DynTek paid the Company $300,000 on
behalf of the director defendants. DynTek reimbursed plaintiff's counsel for
fees and expenses of $330,000, of which 20% was paid in MedEmerg stock (80,488
shares). The shares of DynTek common stock were received and will be retired and
the remaining shares of MedEmerg common stock are being held as marketable
securities. No gain or loss was recorded in connection with the settlement.
7
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, payable over three months ending March 31, 2003. The amount
is included in accrued expenses as of December 31, 2002.
On January 29, 2002, the Company was named as a third-party defendant 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). CA filed suit against COB alleging,
among others, that COB breached a contract with CA, that COB violated copyright
laws, and that COB owes the balance due under a multi-phase purchase agreement.
While CA has not asserted a specific damages amount, the total multi-phase
contract was in an amount of approximately $2 million. COB subsequently named
the Company as a third-party defendant, alleging that COB is entitled to
indemnification from the Company based on an alleged contract between the
Company and COB, that COB is entitled to contribution from the Company for any
amounts COB is ordered to pay CA, and that the Company misrepresented material
facts with respect to CA's product, services, and cost. COB's third-party
complaint against the Company seeks all damages as a result of the Company's
alleged acts. The matter is currently in the discovery stage. Company management
believes that COB's claims against the Company are without merit and that the
matter will be resolved favorably for the Company, either through trial or
settlement. However, there is no assurance that the resolution of this matter
will be favorable for the Company.
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 provide that the Company issue certain payments due to
transportation provider vendors according to an agreed-upon schedule, which
extends through June 11, 2003. The Company has included the third-party
transportation provider liabilities in its accounts payable as of December 31,
2002, and believes that it is in compliance with the terms of the Settlement
Agreement. The remaining payments due to transportation provider vendors will be
made in accordance with the Settlement Agreement terms. Several of the vendors
that provided transportation services in the Commonwealth of Virginia have
initiated legal demands to accelerate the payment for services, before the
payment dates stipulated in the Settlement Agreement with the Commonwealth of
Virginia, citing the terms of the individual subcontracts between the Company
and the providers have been breached. Some of the demands, either in whole or in
part, have been disputed by the Company as being without merit. As of December
31, 2002, actions for collection by 4 provider vendors have commenced for an
aggregate claim amount of approximately $728,000, a portion of which has been
disputed based on billings for services that were not provided under the
agreements. The Company believes that these claims will be fully resolved,
following evaluation of the claims against those services authorized by the
Company.
On March 20, 2002, two actions were commenced against the Company by Stride &
Associates (Stride) in Civil Court of New York, regarding the alleged breach of
two contracts in the aggregate amount of $40,000, for amounts due this placement
firm from the alleged hiring of two consultants by the Company. Additionally,
the two consultants have commenced separate actions in the Civil Court of New
York for compensation due in the aggregate amount of $53,000. The Company
believes that neither of these consultants was hired by the Company, and that
the actions by Stride are without merit. Additionally, the work performed by the
consultants pertained to a project undertaken by the Company's former Chief
Technology Officer, which was separate from any projects undertaken by the
Company. The Company believes that, to the extent that any damages may be
awarded, the costs shall be indemnified by the former Chief Technology Officer.
In a matter relating to a prior business of the Company, divested in 1998, one
of the Company's discontinued wholly-owned subsidiaries was issued a Letter of
Demand for $1.3 million, as a result of an audit by the California State
Controller's Office, Division of Audits, that was conducted on behalf of the
California Department of Health Services. Additionally, accrued interest on the
amount demanded was also sought. On January 20, 1999, the California Superior
Court recommended that the Demand be upheld. On January 26, 2000, the California
Court of Appeals upheld the demand. The Company has provided a reserve for the
principal amount of $1,340,000 plus $555,000 in accrued interest, or $1,895,000
in total as of December 31, 2002. The Company has decided not to appeal the
decisions. The California Department of Health Services has not taken legal
action to obtain a judgment against the Company in order to collect this
obligation.
8
On October 11, 2002, Merisel Americas, Inc. filed a breach of contract complaint
in Superior Court of California, Southwest District. The complaint arose from
the Company's failure to make payments within the terms of the reseller
agreement. The Company does not dispute the claim of $483,000 and is negotiating
payment terms. This amount is included in the Company's accounts payable.
7. 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, 2002, 582,265 of such shares were
converted into 1,454,614 shares of Class A common stock, with a remainder of
1,607,535 shares not yet converted.
In connection with the settlement of the Miletich Derivative Action, the Company
received 300,000 shares of its Class A Common Stock. Such shares were held as
treasury stock at December 31, 2002, and the Company plans to retire the shares
shortly. The treasury shares have been recorded by the constructive retirement
method of accounting.
In June 2002, the Company sold 1,389,293 shares of Common Stock for $1.50 per
share to accredited investors, and converted short-term notes payable into
1,042,039 shares of Class A Common Stock for $1.50 per share to accredited
investors. Part of the share issuances were completed in June 2002, and the
remaining shares were issued during July 2002. During the six months ended
December 31, 2002, 1,511,844 shares of Class A Common Stock were issued in
connection with this placement and conversion of short-term notes.
In July 2002, 24,534 shares of Class A Common Stock were issued to an accredited
investor as an extinguishment of an account payable.
During August 2002, the Company repurchased and retired 8,000,000 shares of its
Class B Common Stock (see note 8), and converted the remaining 10,336,663 shares
of Class B Common Stock into the same number of Class A Common Stock shares.
During the quarter ended December 31, 2002 8,862 shares of Preferred Stock were
converted into 22,155 Class A Common shares. An additional 72,562 previously
retired shares were reissued.
8. Dyncorp Settlement Agreement
On August 20, 2002, DynTek entered into the Settlement Agreement with DynCorp
its principal stockholder, pursuant to which each of DynTek and DynCorp agreed
to settle all disputes between them, including those resulting from DynTek's
acquisition by merger of DynCorp's former wholly-owned subsidiary, DMR in
December 2001. As part of the Settlement Agreement, DynCorp sold to DynTek
8,000,000 shares of DynTek Class B common stock at a price of $.625 per share,
converted its remaining 10,336,663 shares of Class B common stock (constituting
the balance of all outstanding Class B common stock) to DynTek Class A common
stock, paid to DynTek $5 million to defray losses incurred by DynTek from its
operations under the terms of a contract with the Commonwealth of Virginia
acquired by DynTek in connection with the DMR merger, and provided a general
release to DynTek and its affiliates from any and all claims that it might have
against such persons. Such reimbursement of $5 million has been treated as an
offset to costs incurred under the Virginia contract. Under the Settlement
Agreement, DynTek agreed to pay for the Class B common stock shares acquired
from DynCorp with a $5 million principal unsecured, subordinated note maturing
on January 2, 2007, bearing interest at 15%. DynTek also agreed to issue to
DynCorp warrants to acquire 7,500,000 shares of Class A common stock exercisable
for three years at $4.00 per share (the "Warrants"), grant demand registration
rights with respect to the Warrants and DynCorp's Class A common stock shares
(including those to be acquired upon Warrant exercise), and provide a general
release to DynCorp and its affiliates from any and all claims that it might have
against such persons.
9
9. Business Segments
The following table provides actual selected financial data for our business
segments (in thousands):
Reportable Business Segments
--------------------------------------------------
Business
Process Network
Outsourcing Services Total
Six months ended December 31, 2002
Sales to external customers $ 26,333 $ 20,632 $ 46,965
Depreciation and amortization expense 446 1,168 1,614
Operating income (loss) (433) (1,320) (1,753)
Net interest expense (income) 438 140 578
Total assets 40,602 25,925 66,527
Capital expenditures 5 1 6
Three months ended December 31, 2002
Sales to external customers $ 12,764 $ 8,946 $ 21,710
Depreciation and amortization expense 224 581 805
Operating income (loss) (79) (682) (761)
Net interest expense (income) 349 63 412
Total assets 40,602 25,925 66,527
Capital expenditures - - -
During the three months and six months ended December 31, 2001 the Company did
not have segment reporting, since the only business segment was Network
Services.
10. 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. As of December 31, 2002, the Company had outstanding receivables
for such services in the total amount of $500,000, representing unpaid charges
since April 2001 and an allowance reserve of $200,000. The Company accounts for
its investment under the equity method of accounting, and has therefore
recognized its pro-rata portion of the losses incurred by this affiliate, since
March 2001, in the amount of $383,000. Such losses have reduced the carrying
value of its investment to $73,000 at December 31, 2002.
10
11. Subsequent Event
In January 2003, the Company commenced discussions and negotiations regarding
the sale of its remaining non-emergency medical transportation brokerage
services contracts, which includes three contracts with the State of
Connecticut, the State of Illinois and with the city of Arlington, Virginia. In
December 2002, the Company had previously canceled its contract with the
Commonwealth of Virginia for the provision of such services. While the final
terms of the sale of the remaining contracts have not been finalized, the
Company believes that there is reasonable possibility that a transaction will be
consummated during the quarter ending March 31, 2003.
During the quarter ended December 31, 2002, the operating results from the
services provided under the non-emergency transportation brokerage contracts
were included in the business process outsourcing segment reporting. Provided
that the remaining contracts are sold, the Company will commence classifying any
operating results of this asset group as discontinued operations during periods
following December 31, 2002. Results from the operations of the services
provided under non-emergency transportation brokerage contracts during the three
and six months ended December 31, 2002 are as follows:
Other Total
Non-Emergency Business Business
Transportation Process Process
Brokerage Outsourcing Outsourcing
Services Services Services
------------- ----------- ------------
Three Months ended December 31, 2002
Revenues $ 9,869 $ 2,895 $ 12,764
Depreciation and amortization 101 113 214
Operating income (loss) (144) 65 (79)
Six Months ended December 31, 2002
Revenues $ 20,977 $ 5,356 $ 26,333
Depreciation and amortization 202 244 446
Operating income (loss) (427) (6) (433)
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in the Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result"
and "the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Such risks and
uncertainties include, among others, success in reaching target markets for
services and products in a highly competitive market and the ability to attract
future customers, the size and timing of additional significant orders and their
fulfillment, the success of the Company's business emphasis, the ability to
finance and sustain operations, including the ability to maintain and extend the
Foothill Agreement when it becomes due and the ability to raise equity capital
in the future, despite continuing losses from operations and a "going concern"
opinion from our auditors, the Company's ability to arrange successfully for
extended payment terms for certain overdue obligations and judgments against the
Company, the ability to fulfill the Company's obligations to third parties,
including the ability to obtain performance bonds to support certain such
contractual obligations, the size and timing of additional significant orders
and their fulfillment, the ability to turn contract backlog into revenue and net
income, the continuing desire of state and local governments to outsource to
private contractors and the ability of the Company to obtain extensions of the
profitable DMR contracts at their maturity, the performance of governmental
services, the ability to develop and upgrade our technology, the ability to
successfully integrate the operations of DMR with DynTek, and the continuation
of general economic and business conditions that are conducive to governmental
outsourcing of service performance. The Company has no obligation to publicly
release the results of any revisions, which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
RESULTS OF OPERATIONS
The three months ended December 31, 2002 (the "2002 Three Month Period") as
compared to the three months ended December 31, 2001 (the "2001 Three Month
Period").
Revenues for the 2002 Three Month Period increased to approximately
$21,710,000 from approximately $12,230,000 for the 2001 Three Month Period,
primarily due to the December 27, 2001 merger with DynCorp Management Resources
(DMR). The revenue mix of product and services was 23% and 77%, respectively,
for the 2002 Three Month Period, as compared to 49% and 51%, respectively, for
the 2001 Three Month Period. This change in revenue mix is primarily due to the
increased service revenues from business process outsourcing contracts assumed
in the merger with DMR.
Cost of revenues for the 2002 Three Month Period increased to approximately
$19,125,000 from approximately $9,521,000 for the 2001 Three Month Period, due
to the December 27, 2001 merger of DMR. The overall gross margin percentage
decreased to 13% for the 2002 Three Month Period from 22% for the 2001 Three
Month Period. This decrease was primarily due to lower margin business assumed
in the December 27, 2001 DMR merger.
12
Selling, general and administrative expenses for the 2002 Three Month
Period decreased to approximately $2,543,000 from approximately $3,315,000 for
the 2001 Three Month Period. The royalty settlement with Exodus communications
of $425,000 during the 2002 Three Month Period accounts for 55% of the decrease.
The Company has realized cost savings from consolidating administration centers,
personnel and management that were assumed in the December 27, 2001 merger of
DMR. As a percentage of total revenues, such costs decreased to 12% during the
2002 Three Month Period, from 27% in the prior 2001 Three Month Period.
Application development expense for the 2002 Three Month Period was zero
compared to approximately $152,000 for the 2001 Three Month Period. The
elimination of such costs was primarily due to a restructuring of the Company to
reduce software development activities related to new products, notwithstanding
the continuation of normal software development services provided to customers
under ongoing service agreements. Depreciation and amortization expense for the
2002 Three Month Period increased to approximately $805,000 from approximately
$566,000 for the 2001 Three Month Period. This increase is primarily
attributable to the addition of amortizable intangible assets recorded in the
December 27, 2001 merger of DMR.
Interest income for the 2002 Three Month Period decreased to approximately
$8,000 from approximately $9,000 for the 2001 Three Month Period. Interest
expense for the 2002 Three Month Period was approximately $420,000, as compared
to $1,440,000 during the 2001 Three Month Period. This decreased expense is a
result of interest on the short-term convertible notes payable incurred during
the 2001 Three Month Period that did not recur during the 2002 Three Month
Period. The interest from the Foothill line of credit borrowings decreased
$12,000 during the 2002 Three Month Period. During the 2001 Three Month Period
we realized a loss of $1,241,000 on the sale of marketable securities whereas,
we did not have such losses in 2002.
We recognized our pro-rata portion of the losses incurred by an affiliate,
LaborSoft, in the amount of $35,000 during the 2002 Three Month Period compared
to $85,000 during the 2001 Three Month Period. The decrease is a result of the
improvement of LaborSoft's operations resulting in a decreased loss for the 2002
Three Month Period. Such losses have reduced the carrying value of our
investment in LaborSoft to $73,000 at December 31, 2002.
Net loss decreased to $1,208,000 for the 2002 Three Month Period, as compared to
a loss of $4,081,000 for the 2001 Three Month Period. The loss reduction of
$2,873,000 is attributed to primarily to the 2001 loss on sale of marketable
securities and interest on the short-term convertible notes, both of which did
not recur during the 2002 Three Month Period, and to a decrease of selling
expenses.
The six months ended December 31, 2002 (the "2002 Six Month Period") as compared
to the six months ended December 31, 2001 (the "2001 Six Month Period").
Revenues for the 2002 Six Month Period increased to approximately $
46,965,000 from approximately $ 23,815,000 for the 2001 Six Month Period The
increase is primarily due to the December 27, 2001 merger with DMR. The revenue
mix from product sales and services was 24% and 76%, respectively, for the 2002
Six Month Period, as compared to 53% and 47%, respectively, for the 2001 Six
Month Period. This change in revenue mix is primarily due to the increased
service revenues from business process outsourcing contracts assumed in the
merger with DMR.
Cost of revenues for the 2002 Six Month Period increased to approximately
$41,044,000 from approximately $18,670,000 for the 2001 Six Month Period. The
overall gross margin percentage decreased to 13% for the 2002 Six Month Period
from 22% for the 2001 Six Month Period. This decrease was primarily due to lower
margin business assumed in the December 27, 2001 DMR merger.
13
Selling, general and administrative expenses for the 2002 Six Month Period
decreased to approximately $6,060,000 from approximately $6,198,000 for the 2001
Six Month Period.
Product development expense for the 2002 Six Month Period eliminated from
approximately $492,000 for the 2001 Six Month Period. This is due to a
restructuring of the Company to reduce software development activities related
to new products, notwithstanding the continuation of normal software development
services provided to customers under ongoing service agreements. Depreciation
and amortization expense for the 2002 Six Month Period increased to
approximately $1,614,000 from approximately $1,110,000 for the 2001 Six Month
Period. This increase is primarily attributable to the addition of amortizable
intangible assets recorded in the December 27, 2001 merger of DMR.
Interest income for the 2002 Six Month Period decreased to approximately
$16,000 from approximately $21,000 for the 2001 Six Month Period. This decrease
is attributable to a decrease in the amount of interest earned on
interest-bearing investments, due to lower amounts of funds available for
working capital on deposit and lower interest rates paid on those deposits.
Interest expense for the 2002 Six Month Period was approximately $594,000, as
compared to $1,626,000 during the 2001 Six Month Period. This decrease in
interest expense was a result of a decrease in interest on short term notes
payable, which included non-cash charges for the beneficial conversion feature
($763,000) and the amortization of debt discount ($323,000).
During the quarter ended December 31, 2001, marketable securities were
sold, for net proceeds of $ 362,000 and a recognized loss of $1,241,000, of
which $980,000 was previously provided as a valuation reserve as unrealized loss
on securities. The Company has recognized its pro-rata portion of the losses
incurred by an affiliate, in the amount of $62,000 during the 2002 Six Month
Period compared to $192,000 during the 2001 Six Month Period.
The decrease in net loss to $2,394,000 for the 2002 Six Month Period, as
compared to a loss of $5,734,000 for the 2001 Six Month Period, is attributed
primarily to the 2001 loss on sale of marketable securities and interest on the
short-term convertible notes, both of which did not recur during the 2002 Six
Month Period.
Liquidity and Capital Resources
As of December 31, 2002 the Company had a working capital deficiency of
approximately $15,172,000 compared to a working capital deficiency of
$14,075,000 at June 30, 2002. This decrease in working capital is primarily due
to losses from operations.
The credit agreement with Foothill Capital (the "Foothill Agreement") provides
for a revolving line of credit not to exceed $15,000,000. The available line of
credit at December 31, 2002, according to the collateral formula, was
approximately $5,148,000 of which $2,778,000 was outstanding. Borrowing limits
are determined based on a collateral formula, which includes 85% of qualified
trade receivables. Also, borrowings bear interest at 1% over Norwest Bank prime
(4.25% at December 31, 2002) with a minimum rate of 7%. The term of the
agreement has been extended through March 31, 2004 under terms similar to the
current agreement.
In connection with the Foothill Agreement extension amendment, DynTek Services
is required to maintain certain financial covenants, based upon defined EBITDA,
tangible net worth and interest coverage ratio of the subsidiary. DynTek
Services is not in compliance with the covenants as of December 31, 2002. In
connection with Foothill's consent for the merger with DynCorp Management
Services, Inc. ("DMR"), the Company agreed to raise an additional $3 million of
capital investment within 30 days of the consummation of the merger. The Company
has raised $2.1 million of such amount as of December 31, 2002, however, the
Company is in default with regard to the remaining $904,000. The Company has
received a waiver from Foothill, as of December 31, 2002, for non compliance
with the financial covenants and an extension to March 15, 2003 in receiving the
additional capital investment requirement per the agreement.
14
On July 28, 2000, a judgment was entered against Data Systems in favor of J.
Alan Moore in Mecklenburg County Superior Court Division, North Carolina. The
plaintiff was awarded a judgment of $572,000 plus reasonable attorney fees and
interest, and the award was affirmed on appeal. An accrual was established in an
aggregate amount of approximately $700,000. The Company has entered into a
payment plan agreement with the plaintiff consisting of $100,000 cash on January
24, 2002, $200,000 cash on February 15, 2003 and $400,000 in either cash or
stock on April 15, 2003. The Company was unable to issue the February 15, 2003
payment and is in negotiations with the plaintiff to amend the payment plan.
On December 31, 2002, the Company settled all amounts due under the previous
agreement to purchase the assets of Exodus Communications, Inc. ("Exodus") for a
total amount of $100,000, payable over three months ending March 31, 2003.
In a matter relating to a prior business of the Company, divested in 1998, one
of the Company's discontinued wholly-owned subsidiaries was issued a Letter of
Demand for $1.3 million, as a result of an audit by the California State
Controller's Office, Division of Audits, that was conducted on behalf of the
California Department of Health Services. Additionally, accrued interest on the
amount demanded was also sought. On January 20, 1999, the California Superior
Court recommended that the Demand be upheld. On January 26, 2000, the California
Court of Appeals upheld the demand. The Company has provided a reserve for the
principal amount of $1,340,000 plus $555,000 in accrued interest, or $1,895,000
in total as of December 31, 2002. The Company has decided not to appeal the
decisions. The California Department of Health Services has not taken legal
action to obtain a judgment against the Company in order to collect this
obligation.
On October 11, 2002, Merisel Americas, Inc. filed a breach of contract complaint
in Superior Court of California, Southwest District. The complaint arose from
the Company's failure to make payments within the terms of the reseller
agreement. The Company does not dispute the claim of $483,000 and is negotiating
payment terms.
We may expand the scope of our product offerings by pursuing acquisition
candidates with complementary technologies, services or products. Should we
commence such acquisitions, we anticipate that we would finance the transactions
with a combination of working capital and the issuance of additional equity
securities. We would attempt to secure additional funding, including equity
financing where appropriate, for acquisitions. There can be no assurance,
however, that we will be successful in identifying appropriate acquisition
candidates or that, if appropriate candidates are identified, that we will be
successful in obtaining the necessary financing to complete the acquisitions.
We have had recurring losses from continuing operations and negative cash flows
from operations. Such losses have been funded primarily from cash received from
sales of stock, cash received in 1999 from the sale of discontinued operations
and cash received from DynCorp in settlement of issues resulting from the DMR
merger. As additional funds are necessary, we would consider reducing the scope
of our operations, divesting of long-term contracts or business segments, or
seeking other forms of financing. We received an explanatory paragraph about our
ability to continue as a going concern from our auditors in connection with the
audit of our financial statements for the 2002 fiscal year end and since the end
of the 2002 fiscal year we have continued to generate losses from our continuing
operations and negative cash flows from our operations. Such losses have been
funded primarily from cash received from the sales of stock in prior periods and
cash received from DynCorp in settlement of issues resulting from the DMR
merger.
15
During the quarter ended December 31, 2002, we have reduced our operating costs
by enacting staff reductions and have been successful in reducing the negative
cash flow derived from the operations under Virginia transportation contract by
terminating our obligations to perform that contract under the terms of an
agreement reached in December 2002. The terms of the Settlement Agreement
provide that the Company issue certain payments due to transportation provider
vendors according to an agreed-upon schedule, which extends through June 11,
2003. During future quarters, we believe that losses and negative cash flows
from operations will be significantly reduced or eliminated through continuing
cost savings measures and increasing margin contributions.
In January 2003, the Company commenced discussions and negotiations regarding
the sale of its remaining non-emergency medical transportation brokerage
services contracts, which includes three contracts with the State of
Connecticut, the State of Illinois and with the city of Arlington, Virginia.
While the final terms of the sale of the remaining contracts have not been
finalized, the Company believes that there is reasonable possibility that a
transaction will be consummated during the quarter ending March 31, 2003. If
consummated, such transaction is expected to create a material improvement in
the Company's working capital position.
During the next 12 months, however, we will be required to make payments that
may exceed the positive cash flows that may be generated from operations. We are
planning to negotiate extended payment terms wherever possible, including with
respect to the Moore judgment, the payments to Virginia transportation vendors,
and Merisel America. However, there is no assurance that extended payment terms
offered by us will be acceptable.
Our lending institution has provided waivers of the financial covenants in our
lending agreement, in order to avoid being in breach of the terms of that
agreement, and has been receptive to periodic re-negotiations of the terms of
such covenants. There is no guarantee that we will be able to continue to obtain
such waivers in the future, or that we will be able to obtain a refinancing of
our obligations under that agreement at its maturity in March 2004, or earlier
upon an unwaived breach of its terms. Our inability to do either would have a
material adverse effect on our business and future prospects.
As additional funds are necessary, we would consider divesting of long-term
contracts or business components that are not core to our business expansion
plans, reducing the scope of our operations and business development efforts
requiring investment, or seeking other forms of financing. Should we not
generate sufficient cash flow from operations to support our ongoing
obligations, or if we are unable to arrange successfully for extended payment
terms for those obligations or obtain financing from some other source or
arrange other waivers of obligations as necessary, our continuing operations
will be severely compromised.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Foothill Agreement exposes the Company to the risk of earnings or cash flow
loss due to changes in market interest rates. The Foothill Agreement accrues
interest at 1% over Norwest Bank prime (4.25% at December 31, 2002) with a
minimum rate of 7%.
The table below provides information on the Foothill Agreement as of December
31, 2002.
Weighted Average
Principal Balance Interest Rate at December 31, 2002
----------------- ----------------------------------
Revolving credit facility $ 2,778,000 7%
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded
that the our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.2 Virginia Department of Medical Assistance Settlement
Agreement
10.3 Exodus Settlement Agreement
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 of Steven Ross
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 of Steven Ross
(b) Reports on Form 8-K
Current Report on Form 8-K filed December 18, 2002,
in connection with Settlement Agreement with the
Commonwealth of Virginia, Department of Medical
Assistance
17
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNTEK, INC.
By:/s/James Linesch
--------------------
James Linesch
Chief Financial Officer
Date: February 19, 2003
18
CERTIFICATIONS
I, Steven J. Ross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DynTek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 19, 2003
By:_/s/ Steven J. Ross_______
Steven J. Ross
Chief Executive Officer
19
I, James Linesch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DynTek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 19, 2003
By: _/s/ James Linesch_______
James Linesch
Chief Financial Officer
20
Exhibit 10.2
SETTLEMENT AGREEMENT
This Settlement Agreement is entered into this ____ day of December 2002 by
DynTek Services, Inc., for itself and its principals, officers, directors,
employees, agents, parent, subsidiaries, affiliates, successors and assigns
("DynTek"), and the Commonwealth of Virginia, Department of Medical Assistance
Services ("DMAS"), for itself and its officers, employees, agents, successors
and assigns.
WHEREAS the purpose of this Settlement Agreement is to provide final
resolution of all disputes and claims, asserted or otherwise, arising from or
related to Contract Number 80649 (the "Contract") for the provision of
non-emergency transportation brokerage services in Regions 2, 3, 4, and 7 of the
Commonwealth of Virginia.
WHEREAS on or about April 10, 2001, DynTek and the Commonwealth entered
into the Contract for DynTek to provide non-emergency transportation brokerage
services in Regions 2, 3, 4 and 7 of the Commonwealth of Virginia;
WHEREAS DMAS claims that DynTek has not complied with the terms and
conditions of the Contract, including, but not limited to, providing
transportation services on a timely basis, paying transportation providers on a
timely basis, and providing DMAS with complete and timely management reports,
and that, accordingly, DynTek is in material breach of the Contract, which
claims DynTek denies;
WHEREAS DynTek claims that DMAS has required it to perform
extra-contractual services without compensation and made material
misrepresentations to it in its request for proposal which induced DynTek to
enter into the Contract at payment levels which were grossly inadequate, which
claims DMAS denies;
21
WHEREAS both DynTek and the Commonwealth desire to cancel the Contract
before the expiration of the Contract on June 30, 2003; and
WHEREAS DynTek and the Commonwealth wish to resolve their disputed claims
in a fair and amicable manner and to release each other from any and all claims
against each other that may arise related to the Contract, the cancellation
thereof and all related matters, in accordance with the terms and conditions
hereafter set forth;
NOW, THEREFORE, in consideration of the factors stated above, the mutual
promises set forth below, DynTek and the Commonwealth agree as follows:
1. The "Cancellation Date" shall be December 15, 2002. Beginning the first
day after the "Cancellation Date," DynTek shall have no further
responsibility to provide non-emergency transportation brokerage services
under the Contract nor any right to receive any payment for any services
rendered after said date.
2. DynTek shall be obligated to provide non-emergency transportation brokerage
services through and including the Cancellation Date. Unless hereafter
directed in writing by DMAS, such service shall include scheduling, in the
ordinary course of business, such trips as Medicaid recipients may seek
to schedule but which will not actually occur until after the Cancellation
Date; however, DynTek shall not be responsible for paying any provider for
any such trip which occurs after such date, and DMAS or its designee shall
be solely responsible for making payment to the authorized provider.
3. Following execution of this Settlement Agreement by DynTek and DMAS (and
without awaiting approvals required by Paragraph 14 hereof) , DynTek shall:
(a) Provide to DMAS or its designee, in hard copy and electronically, a
list of all recipients receiving transportation services in Regions
2, 3, 4 and 7 within the last year, which list shall include the name,
address and phone number of each recipient;
22
(b) Provide to DMAS or its designee, in hard copy and electronically, a
current list of all companies that are currently subcontracted with
DynTek for Regions 2, 3,4 and/or 7, as well as a list of any companies
not currently subcontracted but that were so subcontracted with DynTek
at any time during the last year;
(c) Provide to DMAS or its designee, in hard copy and electronically,
completed ACD reports for its call center(s) for the months of
September and October 2002 as well as for any subsequent months or
partial months for which such data is available to DynTek;
(d) Provide to DMAS or its designee, in hard copy and electronically, a
current order list, which list shall include for the the next ninety
(90) days the Medicaid number of the recipient, point of origin and
destination, date of trip, and transportation provider and a list of
all standing order Medicaid recipients by name, Medicaid number, and
address;
(e) Provide to DMAS or its designee, in hard copy and electronically, a
current facilities list;
(f) Provide DMAS or its designee documentsdescribed in subsections(a)
through (e) hereof within two (2) business days after the execution
of this Settlement Agreement;
(g) Reasonably cooperate with DMAS and its designee in the transition
of non-emergency transportation brokerage services in Regions 2, 3, 4
and 7 of the Commonwealth to another Contractor on December 16, 2002;
and
(h) Immediately upon execution of the Settlement Agreement, DynTek shall
begin the process of assigning, transferring and conveying to the
Commonwealth or its designee all of its right, title and interest in
its toll-free phone numbers for trip reservations, free and clear of
all liens, debts and encumbrances to the extent permitted under its
telephone contracts, and such assignment, transfer and conveyance
shall be completed by the Cancellation Date.
23
4. Within forty five (45) days of the approval of the Settlement Agreement by
the Governor, DynTek shall pay not less than twenty percent (20%)of all
transportation claims received by it for services which (i) were pre-
authorized by DynTek, (ii) were provided prior to the Cancellation Date,
(iii) have been verified by DynTek to be payable under the terms of the
applicable provider contract and the Contract, to have been provided in
conformance to DynTek's authorization, and to have no other legitimate
basis for denying payment (the "Certified Claims"). Within ninety (90) days
of the approval of the Settlement Agreement by the Governor, DynTek shall
pay not less than fifty percent (50%) of the certified claims. Within one
hundred and eighty (180) days of the approval of the Settlement Agreement
by the Governor (the "Payment Period"), DynTek shall pay the balance of the
Certified Claims. Notwithstanding the release of DynTek by DMAS, if any
Certified Claims remain unpaid by DynTek at the expiration of the Payment
Period, DMAS shall have the right to enforce DynTek's payment obligations
hereunder in an action for specific performance. Nothing contained herein
shall be construed to release, discharge or otherwise diminish the
obligations of DynTek to make payments of legitimate claims presented to it
by providers of transportation services.
5. Nothing contained herein shall be construed, and the parties shall take no
action, to either waive, grant, diminish or expand any right, or to
release, discharge or diminish or expand, create or increase any
obligation, created by, secured by, or otherwise related to that certain
bond #216933 issued by National Union Fire Insurance Company of Pittsburgh,
PA and others and on which DMAS is the Obligee and Owner (the "bond").
6. DynTek, for itself and its principals, officers, directors, employees,
agents, affiliates, successors and assigns hereby releases and forever
discharges any and all claims whatsoever, known or unknown, contingent
or otherwise, in law or in equity, which DynTek has ever had, now has, or
in the future may have against DMAS (and/or the Commonwealth), as well as
its respective principals, officers, directors, employees, agents,
affiliates, successors and/or assigns, based upon or resulting from any
matter relating to or arising out of the Contract and further covenants and
agrees not to institute any administrative or legal proceedings based upon
or related to or arising out of the Contract; provided, however, that this
release shall not apply to any claim based on or arising out of this
Settlement Agreement.
7. Once DynTek has complied with the obligations set forth in paragraph 2 and
3 to DMAS' reasonable satisfaction, DMAS shall immediately execute a
release of its claims against DynTek, which is attached hereto as Exhibit
A, and shall forego all proceedings related to debarment in the
Commonwealth. Nothing contained in this Settlement Agreement shall be
construed to release DynTek from any claim for sums expended or damages
suffered by DMAS in obtaining a new Contractor for Regions 2, 3 4 and 7
unless and until DynTek has timely complied with the obligations under
Paragraphs 2 and 3 The failure of DynTek to comply with said obligations
shall entitle DMAS to assert against DynTek any and all claims and defenses
that DMAS may be entitled to assert under this Settlement Agreement and/or
that DMAS would be entitled to assert in the absence thereof, and DynTek
shall be entitled to assert against DMAS any and all claims and defenses
that it may be entitled to assert under this Settlement Agreement and/or it
would be entitled to assert in its absence. In the event that DMAS does not
execute the release attached as Exhibit A, and brings a claim that is
barred by said release, if executed, then DynTek's release as set forth
in Paragraph 6 shall be null and void.
24
8. This Settlement Agreement shall be deemed the product of joint authorship
and shall not be construed against any party upon the ground of authorship.
9. The terms of this Settlement Agreement are contractual and not merely a
recital, and there are no other agreements, understandings, or
representations made by the parties, except as expressly stated in this
document.
10. This Settlement Agreement shall be governed by and interpreted and
construed in accordance with the laws of the Commonwealth of Virginia.
Each provision is intended to be severable. If any provision is held
invalid, void or unenforceable by a court of competent jurisdiction for
any reason whatsoever, such ruling shall not affect the validity of the
remainder of the Settlement Agreement so long as such enforcement is
practical and is otherwise supported by adequate consideration;
provided, however, that DynTek's release shall always be void if DMAS'
release is not issued or if it is held invalid, void or unenforceable
for any reason as the mutual release of the parties is the essence of
this Settlement Agreement.
11. Any party shall be entitled to seek relief in the Circuit Court for the
City of Richmond for the purpose of enforcing the provisions of this
Settlement Agreement and that Court shall have exclusive original
jurisdiction over disputes arising under this Settlement Agreement.
12. This Settlement Agreement constitutes the entire agreement of the parties
and may not be amended or modified orally.
13. This Settlement Agreement and the rights and obligations of the parties set
forth in the agreement shall be binding upon and inure to the benefit of
the Commonwealth and DynTek and their respective successors and assigns.
14. This Settlement Agreement shall become effective upon its execution by the
parties and its approval by the Attorney General and the Governor of
Virginia pursuant to Virginia Code Section 2.2-514. In the event said
approval is not obtained within 15 days, DMAS shall pay DynTek the sum of
$100, which sum DynTek agrees shall be sufficient to bind it to the terms
of this Settlement Agreement for an additional period of 21 days pending
such approval. If this Settlement Agreement is not so approved within this
additional period, it shall be null and void unless otherwise agreed by the
parties. DMAS represents and warrants that it will seek such approvals in
good faith and is aware of no information which would preclude approval as
of the date of the execution of this Settlement Agreement.
15. It is agreed by and among each of the parties that nothing herein shall be
deemed to be evidence, or an admission or concession on the part of any
party, of any liability or wrongdoing whatsoever.
25
THE PERSONS SIGNING THIS SETTLEMENT AGREEMENT ARE AUTHORIZED REPRESENTATIVES OF
DYNTEK AND THE COMMONWEALTH AND ACKNOWLEDGE THAT EACH PARTY AGREES TO BE BOUND
BY THE TERMS AND CONDITIONS OF THE SETTLEMENT AGREEMENT.
DYNTEK SERVICES, INC.
By:
-----------------------------------------------------------
Title:
--------------------------------------------------------
Date:
---------------------------------------------------------
COMMONWEALTH OF VIRGINIA, DEPARTMENT OF
MEDICAL ASSISTANCE SERVICES
By:
-----------------------------------------------------------
Title:
--------------------------------------------------------
Date:
---------------------------------------------------------
26
EXHIBIT A
RELEASE BY THE COMMONWEALTH
The Commonwealth of Virginia, Department of Medical Assistance Services
("DMAS"), on behalf of itself and its principals, officers, directors,
employees, agents, affiliates, successors and assigns hereby releases and
forever discharges any and all claims whatsoever, known or unknown, contingent
or otherwise, in law or in equity, which DMAS has ever had, now has, or in the
future may have against DynTek Services, Inc., and/or their respective
principals, officers, directors, employees, agents, affiliates, successors
and/or assigns, based upon or resulting from any matter relating to or arising
out of Contract Number 80649 (the"Contract") and further covenants and agrees
not to institute any administrative or legal proceedings, including without
limitation debarment proceedings, based upon or related to or arising out of the
Contract; provided, however, that nothing contained in this Release shall apply
to any obligation or claim based on or arising out of the Settlement Agreement,
including but not limited to, the obligations contained in paragraphs 4 and 5 of
the Settlement Agreement.
COMMONWEALTH OF VIRGINIA, DEPARTMENT OF
MEDICAL ASSISTANCE SERVICES
By:
-----------------------------------------------------------
Title:
--------------------------------------------------------
Date:
---------------------------------------------------------
27
Exhibit 10.3
PROMISSORY NOTE
$95,000.00 December 31, 2002
DynTek, Inc. (the "Maker"), for the value received, thereby promises to pay
to the order of EXDS, Inc., or its successors or assigns (the "Holder"), the
principal sum of Ninety-Five Thousand Dollars ($95,000.00), payable over three
(3) months in the following installments: (i) February 10, 2003 the amount of
Twenty Thousand ($20,000), (ii) February 28, 2003 the amount of Twenty-Five
Thousand ($25,000) and (iii) March 31, 2003 the amount of Twenty-Five Thousand
($25,000).
All payments hereunder shall be made without set-of or counterclaim by
Maker and shall be made to Holder in lawful money of the United States and in
collected funds on the date due at such other place as may be designated by
Holder to Maker in writing.
Maker waives presentment and demand for payment, protest, notice of
protest, notice of nonpayment, notice of dishonor, notice of intent to
accelerate, notice of acceleration, and diligence in collection and consents to
all extensions without notice for any period or periods of time before or after
maturity, without prejudice to Holder. Holder shall have the right to grant any
extensions of time for payment of any indebtedness hereunder, or to grant any
other indulgences or forebearances whatsoever, without notice and without
affecting the liability of Maker. No delay or omission on the part of Holder,
nor shall any delay, omission, or waiver on any one occasion be deemed a bar to
or waiver of the same or any other right on any future occasion.
In the event Maker fails to make any installment payment of principal when
due, Holder shall give Maker written notice of default, and if Maker has not
fully paid such past-due payment within ten (10) days after such default notice
is given, Holder shall have the right to immediately accelerate the unpaid
balance of this Note. If Holder gives Maker notice of a default in payment
hereunder, and Maker has not cured such default within ten (10) days, all unpaid
amounts hereunder, whether or not such installments are themselves in default or
whether or not the unpaid balance of this Note has been accelerated, shall bear
interest, compounded monthly, at the lesser of (i) ten percent (10%) or (ii) the
maximum interest rate allowed by law.
This Note may be prepaid, in whole or in part, at any time without penalty;
provided that any partial prepayment shall be applied to principal payments due
in inverse order of maturity.
Maker shall be liable to Holder and shall pay to Holder immediately on
demand, as part of its liability under this Note, all reasonable costs and
expenses of Holder, including reasonable attorneys' fees and disbursements of
Holder's counsel, incurred subsequent to any payment default or enforcement of
Holder's rights under this Note, or the attempted collection or enforcement of
Holder's rights under this Note, whether within or apart from any legal action
or proceeding and whether or not suite is actually instituted.
28
All notices, requests and demands to or upon Maker or Holder shall be
effective when actually received if made in writing and delivered by hand or by
overnight courier, or when confirmed receipt if transmitted by telex, telegram,
telecopy, e-mail or other form of rapid transmission if notices given by such
means of communication are capable of being confirmed upon delivery by
electronic means, or five days after being sent by first class mail, in each
case prepaid and addressed to the following address or to such other address of
Holder or Maker as may be hereunder notified by Holder or Maker to the other:
(i) if to Maker, at:
DynTek, Inc.
Suite 250
18881 Von Karman Avenue
Irvine, California 92612
Attention: Chief Financial Officer
Fax No.: 949-203-8524
and (ii) if to Holder, at:
c/o Brook Taube
T3 Group LLC
440 Locust Street
San Francisco, CA 94118
Fax No.: 509-463-2274
This Note shall insure to the benefit of, and be binding upon, Maker,
Holder, any owner of this Note, and their respective successors and permitted
assigns. Whenever any of the parties hereto is referred to, such reference shall
be deemed to include the successors and assigns of such party, and in the case
of Holder, any other owner of this Note.
No change, modification or amendment to this Note shall be effective unless
made by an instrument in writing signed by both Maker and Holder, and any such
change, modification and amendment shall be narrowly construed and effective
only to the extend expressly set forth in such instrument.
This Note shall be governed as to validity, interpretation, construction,
effect and in all other respects by the laws and decisions of the State of New
York.
DynTek, Inc.
By: /s/ James Linesch
---------------------------------------
James Linesch
Executive Vice President, Chief Financial Officer
29
SETTLEMENT AGREEMENT
THIS AGREEMENT, entered into as of this 31st day of December, 2002, by and
between the estate of EXDS, Inc. ("EXDS"), and DynTek, Inc, ("DynTek");
WHEREAS effective September 28, 2001, EXDS and DynTek entered into the
Exodus Alliance Accounts Receivable Collection Agreement and the Asset Purchase
Agreement between Exodus Communications, Inc. as Seller and TekInsight.com, Inc
(renamed DynTek, Inc. on December 27, 2002) as Purchaser, pursuant to which
DynTek agreed to assume the operations and purchase the business assets of the
Seller's Gulf Professional Services Business (collectively, the "AGREEMENTS");
and
WHEREAS the Exodus Alliance Accounts Receivable Collection Agreement ended
on December 31, 2002, with an amount due to DynTek, and the Asset Purchase
Agreement between Exodus Communications, Inc. and DynTek, Inc. was approved by
the United States Bankruptcy Court for the District of Delaware on February 6,
2002; and
WHEREAS DynTek desires to individually settle and resolve any and all
claims other liabilities or causes of action that EXDS may have against them,
and EXDS likewise wishes to settle all such claims, allegations, liabilities or
causes of action that DynTek may have against them, all such settlements being
without admission of wrongdoing;
NOW, THEREFORE, the parties, for good and valuable consideration identified
herein, do hereby agree to release and discharge each other from any and all
liabilities related to the AGREEMENTS, all as more specifically described in the
release contained in Section 2 below;
1. Consideration
Within 2 days from the execution of this Agreement, DynTek shall deliver the
following consideration to EXDS:
1.1 DynTek shall pay to EXDS the amount of $5,000 in cash, which payment
shall be wired to EXDS's designated account;
1.2 DynTek shall deliver to EXDS a DynTek promissory note, in the form
attached hereto, under which it will be obliged to pay EXDS a total
of $95,000 over three months. The install payments due are as follows:
February 10, 2003 $20,000
February 28, 2003 $25,000
March 31, 2003 $25,000
2. Releases
Effective upon the execution of this Agreement and receipt of (A) the
consideration described on Section 1.1 above and (B) all payments due under the
promissory note referred to in Section 1.2 hereof, the parties hereby agrees as
follows:
30
2.1 EXDS hereby releases, discharges and forever excuses DynTek, its
affiliated organizations, and all of their officers,
directors, employees, representatives, stockholders and agents, from
any and all liability, claim, or cause of action in any way related to
or arising out of the AGREEMENTS, and agrees to defend and hold all of
the aforementioned harmless from any released claim or liability that
may be asserted against any of them by any subcontractor, vendor,
affiliate, officer, employee, director, stockholder or other
representative of EXDS, relating to the AGREEMENTS.
2.2 DynTek hereby releases, discharges and forever excuses ESDS, its
affiliated organizations, and all of their officers, directors,
employees, representatives, stockholders and agents, from any and all
liability, claim, or cause of action in any way related to or arising
out of the AGREEMENTS.
3. Miscellaneous Provisions
3.1 This Agreement shall be governed, and its terms construed, in
accordance with the laws of the State of new York.
3.2 This Agreement represents the only agreement among the parties
concerning the subject matter described herein and supercedes and
replaces all prior agreements concerning such matters, whether written
or oral.
3.3 No amendment to this Agreement shall be effective unless it is
finalized in written form and signed by all the parties hereto.
3.4 All parties acknowledge that they have been represented by counsel in
the negotiation and finalization of this Agreement, and in particular
the consequences of the releases contained herein.
3.5 Facsimile copies of signatures on this Agreement shall be accepted by
the parties hereto as original signatures.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the year and date set forth above.
DynTek, Inc.
By: /s/ James Linesch
James Linesch
Executive Vice President, Chief Financial Officer
T3 Group LLC, as agent for the ESDS estate
By: /s/ Brook Taube
Name: Brook Taube
Title: Partner
31
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
In connection with the Quarterly Report of DynTek, Inc., a Delaware corporation
(the "Company"), on Form 10-Q for the quarter ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, the Chief Executive Officer, hereby certifies pursuant to 18
U.S.C. ss.1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 that:
(1) the Report of the Company filed today pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), fully complies
with the requirements of Section 13(a) of the Exchange Act; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Steven J. Ross
Steven J. Ross
Chief Executive Officer
February 19, 2003
32
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
In connection with the Quarterly Report of DynTek, Inc., a Delaware corporation
(the "Company"), on Form 10-Q for the quarter ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, the Chief Financial Officer, hereby certifies pursuant to 18
U.S.C. ss.1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 that:
(1) the Report of the Company filed today pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), fully complies
with the requirements of Section 13(a) of the Exchange Act; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ James Linesch
James Linesch
Chief Financial Officer
February 19, 2003
33