<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 12, 1997
---------------
DUNN COMPUTER CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-22263 54-1424654
-------------------------- -------------------------
(Commission file Number) (IRS Employer ID Number)
1306 Squire Court, Sterling, Virginia, 20166
--------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (703)450-0400
-------------
N/A
------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired. As required by Item 7
of Form 8-K promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended
(the "Act"), the following financial statements of the business acquired
are filed with this report:
Page
Number
------
Report of Independent Auditors .............................. F-1
STMS, Inc. Balance Sheets
as of December 31, 1995 and 1996............................. F-2
STMS, Inc. Statements of
Income for the Years Ended
December 31, 1995 and 1996................................... F-4
STMS, Inc. Statements of
Retained Earnings for the Years Ended
December 31, 1995 and 1996 ................................. F-5
STMS, Inc. Statements of
Cash Flows for the Years Ended
December 31, 1995 and 1996................................... F-6
Notes to Financial Statements .............................. F-8
(b) Unaudited financial statements of the business acquired for the interim
period. As required by Item 7 of Form 8-K promulgated by the Commission
under the Act, the following interim financial information of the
business acquired are filed with this report:
STMS, Inc. Balance Sheet as of June 30, 1997................ F-14
STMS, Inc. Statement of Operations
for the Six Months Ended June 30, 1997...................... F-15
STMS, Inc. Statement of Cash Flows
for the Six Months Ended June 30, 1997...................... F-16
Notes to Interim Financial Statements....................... F-17
(c) Pro Forma Financial Information. As required by Item 7 of Form 8-K
promulgated by the Commission under the Act, the following pro
forma financial information is filed with this report:
Page
Number
------
Unaudited Pro Forma Combined
Balance Sheet as of April 30, 1997 ........................ F-18
Unaudited Combined Pro Forma
Statements of Operations for the Year
Ended October 31, 1996 and the Six
Month Period Ended April 30, 1997 ........................ F-19
Notes to Pro Forma Balance Sheet
and Statements of Operations .............................. F-20
<PAGE>
(c) Exhibit.
2.1* Stock Purchase Agreement dated as of September 12,
1997, by and among the Registrant, STMS and shareholders of STMS.
*Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dunn Computer Corporation
Date: November 26, 1997 /s/ John D.Vazzana
-------------------------
John D. Vazzana
Chief Financial Officer
(Principal Executive Officer)
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
STMS, Inc.
Sterling, Virginia
We have audited the accompanying balance sheets of STMS, Inc. as of
December 31, 1996 and 1995, and the related statements of income, retained
earnings, 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 audits in accordance with generally accepted auditing
standards. 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 financial position of STMS, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Davis, Sita & Company, P.A.
Certified Public Accountants
Greenbelt, Maryland
August 25, 1997
(Except for Note 8 as to which
the date is September 30, 1997)
F-1
<PAGE>
EXHIBIT "A"
PAGE ONE
STMS, INC.
BALANCE SHEETS
AS OF
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 188,495 $ 178,167
Trade accounts receivable, net...................................................... 6,349,779 2,192,497
Inventory........................................................................... 263,108 698,091
Loans to employees.................................................................. 158,402 89,274
Prepaid expenses.................................................................... 76,115 7,232
Deposits and other.................................................................. 17,444 22,363
Deferred tax asset.................................................................. 110,836 109,625
------------ ------------
Total current assets.............................................................. 7,164,179 3,297,249
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment........................................................................... 416,964 195,251
Furniture and fixtures.............................................................. 94,869 83,019
Transportation equipment............................................................ 6,500 6,500
Equipment under capital lease....................................................... 61,928 46,695
Leasehold improvements.............................................................. 82,665 60,007
------------ ------------
Total cost........................................................................ 662,926 391,472
Less accumulated depreciation....................................................... 190,731 108,922
------------ ------------
Cost less accumulated depreciation.................................................. 472,195 282,550
OTHER ASSETS:
Software development cost
(Net of accumulated amortization
of $22,941 in 1996 and $4,588
in 1995).......................................................................... 101,438 148,369
------------ ------------
TOTAL ASSETS...................................................................... $ 7,737,812 $ 3,728,168
------------ ------------
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
F-2
<PAGE>
EXHIBIT "A"
PAGE TWO
STMS, INC.
BALANCE SHEETS
AS OF
DECEMBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 6,190,597 $ 2,281,644
Notes payable....................................................................... 54,895 971,030
Capital lease obligations........................................................... 22,020 16,761
Deferred revenue.................................................................... 382,176 323,222
------------ ------------
Total current liabilities......................................................... 6,649,688 3,592,657
------------ ------------
LONG-TERM LIABILITIES:
Notes payable....................................................................... 4,569 58,465
Capital lease obligations........................................................... 19,012 5,395
Deferred revenue.................................................................... -- 246,521
------------ ------------
Total long-term liabilities....................................................... 23,581 310,381
------------ ------------
Total liabilities................................................................. 6,673,269 3,903,038
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 18% cumulative, $1,000 par value, 1,235 shares
authorized, issued and outstanding (Note 6)....................................... 1,235,000 --
Class A Common stock, no par value, 10,000,000 shares authorized, 8,065,600 shares
issued and outstanding............................................................ 1,000 1,000
Class B Common stock, $1 par value, 100 shares authorized, issued and outstanding... 100 --
Additional paid-in capital.......................................................... 9,900
Retained earnings (Exhibit "C")..................................................... (181,457) (175,870)
------------ ------------
Total stockholders' equity........................................................ 1,064,543 (174,870)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 7,737,812 $ 3,728,168
------------ ------------
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
F-3
<PAGE>
EXHIBIT "B"
STMS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
REVENUE:
Sales.............................................................................. $ 20,249,828 10,371,065
Less cost of sales................................................................. 16,616,964 8,354,253
------------- -------------
Gross profit..................................................................... 3,632,864 2,016,812
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and commissions......................................................... 2,128,463 1,132,321
Professional fees................................................................ 151,901 136,444
Administrative and office........................................................ 225,794 125,083
Occupancy........................................................................ 113,170 108,728
Payroll and other taxes.......................................................... 152,218 160,607
Advertising and promotion........................................................ 66,873 19,270
Telephone........................................................................ 73,516 49,347
Insurance........................................................................ 65,011 45,294
Equipment expenses............................................................... 128,517 87,514
Other expenses................................................................... 60,105 38,675
Bad debts........................................................................ -- 54,490
Research and development......................................................... -- 61,356
Depreciation and amortization.................................................... 100,141 33,570
Training......................................................................... 41,575 24,687
------------- -------------
Total.......................................................................... 3,307,284 2,077,386
------------- -------------
Net operating income (loss)...................................................... 325,580 (60,574)
OTHER EXPENSES:
Abandoned software development cost.............................................. 99,412 --
Interest and finance charges..................................................... 232,966 235,665
------------- -------------
Total other expenses........................................................... 332,378 235,665
------------- -------------
Net income (loss) for the year before provision for income taxes................. (6,798) (296,239)
Provision for income tax benefit................................................. 1,211 109,625
------------- -------------
Net income (loss) for the year................................................... $ (5,587) $ (186,614)
------------- -------------
------------- -------------
</TABLE>
See Accompanying Notes to Financial Statements
F-4
<PAGE>
EXHIBIT "C"
STMS, INC.
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of year............................................................ $ (175,870) $ 10,744
Net income (loss) for the year (Exhibit "B")............................................ (5,587) (186,614)
----------- -----------
Balance at end of year.................................................................. $ (181,457) $ (175,870)
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE>
EXHIBIT "D"
PAGE ONE
STMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) Exhibit "B" $(...................................................... $(5,587) $ (186,614)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization..................................................... 100,141 33,570
Abandoned software development costs.............................................. 70,367 --
Decrease (increase):
Accounts receivable............................................................. (4,157,282) 298,087
Inventory....................................................................... 434,983 (549,672)
Deposits and other.............................................................. 4,919 (250)
Prepaid expenses................................................................ (68,883) 9,633
Deferred tax asset.............................................................. (1,211) (109,625)
Increase (decrease):
Accounts payable................................................................ 3,908,974 462,288
Deferred revenue................................................................ (187,567) 486,478
------------- -----------
Net cash provided by operating activities............................................. 98,854 443,895
------------- -----------
Cash Flows From Investing Activities:
Acquisitions of equipment........................................................... (271,454) (77,891)
Investment in software development costs............................................ (41,789) (152,957)
------------- -----------
Net cash provided by (used in) investing activities................................... (313,243) (230,848)
------------- -----------
Cash Flows From Financing Activities:
Advances to employees............................................................... (69,128) --
Proceeds from issuance of capital stock............................................. 10,000 --
Proceeds from borrowing on notes payable, net of payments........................... 283,845 (70,650)
------------- -----------
Net cash provided by (used in) financing activities................................... 224,717 (70,650)
------------- -----------
Net increase in cash.................................................................. 10,328 142,397
Cash, beginning of year............................................................... 178,167 35,770
------------- -----------
Cash, end of year..................................................................... $ 188,495 $ 178,167
------------- -----------
------------- -----------
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE>
EXHIBIT "D"
PAGE TWO
STMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Supplemental Disclosures:
Interest paid......................................................................... $ 209,495 $ 235,665
------------ ----------
------------ ----------
Significant non-cash transactions:
Notes payable exchanged for convertible preferred stock............................... $ 1,235,000
------------ ----------
------------ ----------
</TABLE>
See Accompanying Notes to Financial Statements
F-7
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
STMS, Inc. was incorporated under the laws of the Commonwealth of Virginia
on November 1, 1990. STMS, Inc. is in the business of selling and installing
networked micro computer systems. In that regard, it offers hardware, software,
training, on-going support and related consulting to its customers. In
addition, it provides comprehensive hardware, software and network maintenance
services. The Company has its headquarters in Sterling, Virginia, however, its
products and services are offered on a national basis.
METHOD OF ACCOUNTING
The Corporation records its financial transactions using the accrual basis
of accounting.
ACCOUNTS RECEIVABLE
The Corporation has established an allowance for doubtful accounts based on
management's estimates. As of December 31, 1996 and 1995 accounts receivable
consisted of the following:
1996 1995
Amounts due from customers $ 6,372,142 $ 2,214,241
Allowance for doubtful accounts ( 22,363) ( 21,744)
----------- -----------
$ 6,349,779 $ 2,192,497
----------- -----------
----------- -----------
INVENTORY
Inventory consists of computers, computer software, accessories and other
related items. The inventory is calculated using the first-in, first-out method
at the lower of cost or market. Administrative, storage and material handling
costs have been added to the inventory in the amount of $8,651 in 1996 and
$22,934 in 1995.
F-8
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
DEPRECIATION
Property and equipment are recorded at cost. Property and equipment are
depreciated using the straight-line method for financial reporting purposes and
principally accelerated methods for income tax purposes. The estimated useful
lives of property and equipment are as follows:
Equipment, furniture and fixtures 5-7 years
Transportation equipment 7 years
Equipment under capital lease 5-7 years
Leasehold improvements 20 years
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SOFTWARE DEVELOPMENT COSTS
The Corporation accumulates the costs associated with the development of
new software which it plans to offer for sale. Costs to establish the
technological feasibility of the developing product are considered to be
research and development costs and accordingly, are charged to current year
operations when incurred. Once technological feasibility has been established,
cost incurred to produce a master, including coding and testing, are
capitalized. When the product is ready for general release to the public, the
capitalization of costs ends. The Corporation amortizes the costs of software
development over a three year period on the straight-line basis. Software
development costs are reflected on the financial statements at the lower of the
unamortized costs or the net realizable value. During 1996 the Corporation
determined that one product in process was not feasible and accordingly, wrote
off the accumulated costs of $99,412.
DEFERRED MAINTENANCE REVENUE
The Corporation offers computer hardware, software and network maintenance
services to customers. The services are paid in advance and are packaged in
various arrangements including hours, period of coverage and availability. The
maintenance contracts can extend up to
F-9
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
three years. It is the practice of the Corporation to record the maintenance
contract revenue when service is requested and provided. At year end, the
unearned portion of each contract is allocated between current and long-term
based on the time remaining on the contract and assuming a straight line
amortization. At the end of the contract, any unused portion is considered
to be revenue in the year the contract ends.
2. INCOME TAXES
The Corporation incurred net operating losses of $6,798 in the year ended
December 31, 1996 and $296,239 in the year ended December 31, 1995. A net
operating loss results in an income tax benefit due to reductions in either
prior or future income taxes. As a result of losses in the respective years,
the financial statements reflect the following income tax benefits:
1996 1995
---- ----
Net loss $ 6,798 $ 296,239
Income tax benefit $ 1,211 $ 109,625
The tax is calculated using prevailing Federal and state income tax rates.
Management anticipates that the entire net operating loss will be absorbed by
taxable income in 1997 and accordingly, the income tax benefit is reflected as a
current asset.
Prior to December 31, 1994, the Corporation elected to be treated as an S
Corporation for income tax purposes. S Corporations are generally not taxable
at the corporate level, but instead, income is taxable to the shareholders.
Accordingly, as of December 31, 1994, there was no provision for an income tax
liability. Effective January 1, 1995 the Corporation voluntarily terminated its
S Corporation status, and as such, became subject to corporate income taxes as
of that date.
3. TRANSACTIONS WITH RELATED PARTIES
As of December 31, 1996, the Corporation had loaned $133,507 to certain
officer/shareholders and employees. The loans are unsecured. Payments on these
loans are due on demand. Effective January 1, 1996
F-10
<PAGE>
interest is being charged at 6% per annum.
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
The Corporation purchases inventory from Primary Telecommunications, Inc.,
a Company which is owned by a principal shareholder of STMS, Inc. Purchases
during 1996 amounted to $341,427. At December 31, 1996 the Corporation owed
$160,426 to Primary Telecommunications, Inc.
4. NOTES PAYABLE
As of December 31, 1996, notes payable consisted of a term loan from Barry
D. Bergman and Jacqueline L. Bergman dated July 11, 1994, in the amount of
$125,000, secured by the personal guarantees of the shareholders, payable in
monthly installments of $4,645 which includes interest at 12% per annum.
Annual principal curtails are as follows:
1997 $ 54,895
1998 4,569
At December 31, 1995 notes payable consisted of the following loans from
Barry D. and Jacqueline L. Bergman:
Term loans $ 144,495
Credit line loan 885,000
----------
$1,029,495
----------
----------
5. OPERATING LEASES
The Corporation is currently obligated under a lease for its office space
which expires in April 1999. However, under the provisions of a termination
option in the lease, the Corporation has terminated its lease effective during
June 1997. The Corporation has entered into a new lease for 19,195 square feet
of office and warehouse space in Reston, Virginia to be effective upon the
vacating of its current space.
The Corporation is obligated under non-cancelable, long-term leases for
office space with the following minimum annual lease payments:
1997 $151,160
1998 266,906
1999 274,913
2000 283,160
2001 291,655
F-11
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
6. CAPITAL STOCK
Convertible Preferred Stock
In December 1996 the Corporation authorized and issued 1,235 shares of
$1,000 par value preferred stock. The stock provides for cumulative dividends
at 18%, payable monthly. The stock is held by a single shareholder who has the
option to convert the preferred stock into a senior debt instrument (promissory
note payable) on demand. At the shareholder's option, the stock will convert
into a one year note with interest only payable at 18% per annum until maturity.
COMMON STOCK
On October 1, 1995 the Company amended its articles of incorporation to
provide for the authorization of new issues of common stock as follows:
CLASS A
10,000,000 shares of no par common stock were authorized. Each share of
the previously authorized and issued common stock was exchanged for 6,930 shares
of the new Class A common stock. All common stock issued prior to October 1,
1995 was retired.
CLASS B
100 shares of Class B no par common stock were authorized. The holders of
Class B common stock are limited to a maximum of 10% of the total votes of the
Corporation. Class B stock can be converted to Class A stock upon the
occurrence of the Company achieving certain stated levels of outside financing,
as defined in the amendment to articles of incorporation.
INCENTIVE STOCK OPTION PLAN
The Corporation initiated an incentive stock option plan in January 1996 in
order to advance the interests of the Corporation by providing eligible
employees with an opportunity to acquire a proprietary interest in the
Corporation. The Corporation has earmarked 500,000 shares of its Class A Common
Stock for this purpose.
The option price is fixed by the Board of Directors from time to time.
As of December 31, 1996 there were options outstanding for 9,500 shares.
F-12
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
7. CONCENTRATION OF RISK
At December 31, 1996 the Corporation maintained cash balances at $88,495 in
excess of the Federal insurance limits. From time to time during the year cash
balances exceeded the Federal insurance limit of $100,000.
8. SUBSEQUENT EVENTS
SIGNIFICANT CHANGE IN OWNERSHIP
On September 12, 1997 all of the outstanding common stock of STMS, Inc. was
purchased by Dunn Computer Corporation through an exchange of stock in which the
shareholders of STMS, Inc. received 100,000 shares of Dunn Computer Corporation
in exchange for all shares of STMS, Inc.
CONVERSION OF PREFERRED STOCK
As of September 12, 1997, the holder of the preferred stock described in
Note 6 exercised the option which allowed him to convert the preferred stock
into a one year promissory note. Subsequently the note was paid in full.
F-13
<PAGE>
STMS, INC.
BALANCE SHEET
June 30,
1997
----------
Assets
Current assets:
Cash and cash equivalents $ 104,008
Accounts receivable, less allowance for
doubtful accounts of $22,190 3,300,116
Inventory 198,902
Prepaid expenses 43,062
Loans to employees 148,197
Deferred tax asset 110,836
----------
Total current assets 3,905,121
Property and equipment, net 474,264
Other assets 165,832
----------
Total assets $4,545,217
----------
----------
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $3,832,692
Accrued expenses 185,766
Note payable 1,235,000
Capital lease obligation 16,037
Unearned revenue 492,269
----------
Total current liabilities 5,761,764
Long-term capital lease obligation, net current 8,082
Long-term debt 29,146
Commitments --
Stockholders' deficit:
Common Stock 1,000
Additional paid-in capital 10,000
Accumulated deficit (1,264,775)
----------
Total stockholders' deficit (1,253,775)
----------
Total liabilities and stockholders' deficit $4,545,217
----------
----------
See accompanying notes.
F-14
<PAGE>
STMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997
----------------
<S> <C>
Revenues $ 7,812,531
Costs of revenues 5,951,002
----------------
Gross profit 1,861,529
Selling and marketing 1,772,964
General and administrative 1,032,509
----------------
Loss from operations (943,944)
Other expense (21,372)
Interest expense (118,003)
----------------
Net income loss $(1,083,319)
================
</TABLE>
See accompanying notes
F-15
<PAGE>
STMS, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED JUNE 30,
1997
--------------
OPERATING ACTIVITIES
Net loss $(1,083,318)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60,427
Changes in operating assets and liabilities:
Accounts receivable 3,049,663
Inventory 64,206
Loans to employees 10,205
Prepaid expenses 50,497
Other assets (64,394)
Accounts payable (2,357,905)
Accrued expenses 130,871
Unearned revenue 110,093
--------------
Net cash provided by (used in) operating activities (29,655)
INVESTING ACTIVITIES
Purchases of property and equipment (62,496)
--------------
Net cash used in investing activities (62,496)
FINANCING ACTIVITIES
Proceeds from long-term debt 24,577
Payments on capital lease obligations (16,913)
--------------
Net cash used in financing activities 7,664
Net increase in cash and cash equivalents (84,487)
Cash and cash equivalents at beginning of the year 188,495
--------------
Cash and cash equivalents at end of the period $ 104,008
--------------
--------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 123,069
--------------
--------------
Income taxes paid $ --
--------------
--------------
See accompanying notes.
F-16
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
Note A:
Interim Financial Information
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Article 10 of Regulation S-B. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim period are not necessarily indicative of the results
that may be expected for any future period, including the year ended October
31, 1997. For further information, refer to the audited financial statements
and footnotes thereto included elsewhere herein.
See accompayning notes.
F-17
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF OPERATIONS
The unaudited pro forma combined balance sheet gives effect to the
acquisition of STMS, Inc. completed by the Company on September 12, 1997
as if it occurred on April 30, 1997.
The unaudited pro forma combined statements of operations for the year
ended October 31, 1996 gives effect to the acquisition of STMS, Inc. as
if it had occurred on November 1, 1995. The unaudited pro forma
combined statements of operations for the six months ended April 30,
1997 gives effect to the acquisition of STMS, Inc. as if it had occurred
on November 1, 1995.
The unaudited pro forma combined statements of operations are based on
available information and on certain assumptions and adjustments
described in the accompanying notes which the Company believes are
reasonable. The unaudited pro forma combined statements of operations
are provided for informational purposes only and does not purport to
present the results of operations of the Company had the transactions
assumed therein occurred on or as of the dates indicated, nor are they
necessarily indicative of the results of operations which may be
achieved in the future. The unaudited pro forma combined statements of
operations should be read in conjunction with the financial statements
of the Company, including the notes thereto and the financial statements
of STMS, Inc.
Pro Forma Balance Sheet
As of April 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL STMS, INC. ACQUISITION PRO FORMA
DUNN (a) (b) ADJUSTMENTS (c) COMBINED
------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 5,722,833 104,008 $ (1,204,500) (d) $ 4,622,341
Accounts receivable.............................. 3,943,840 3,300,116 7,243,956
Inventory........................................ 317,719 198,902 516,621
Investments...................................... 150,000 -- 150,000
Prepaid/deferred tax asset....................... -- 110,836 110,836
Loans receivable from related parties............ -- 148,197 148,197
Prepaid expenses and other current assets........ 48,237 43,062 91,299
------------- ------------ ---------------- -------------
Total current assets............................... 10,182,629 3,905,121 (1,204,500) 12,883,250
Property and equipment, net...................... 72,809 474,264 547,073
Other assets..................................... -- 165,832 165,832
Goodwill and other intangibles, net.............. -- -- 2,226,775 (e) 2,226,775
------------- ------------ ---------------- -------------
Total assets....................................... $ 10,255,438 $ 4,545,217 $ 1,022,275 $ 15,822,930
------------- ------------ ---------------- -------------
------------- ------------ ---------------- -------------
Liabilities and Stockholders' equity (deficit)
Current liabilities:
Accounts payable................................. $ 3,085,580 $ 3,832,692 $ 28,500 (f) $ 6,946,772
Accrued expenses................................. 510,621 185,766 696,387
Note payable..................................... -- 1,235,000 (1,235,000) (g) --
Current portion of capital lease obligation...... -- 16,037 16,037
Deferred revenues................................ 22,896 492,269 515,165
Deferred income taxes............................ 67,694 -- 67,694
------------- ------------ ---------------- -------------
Total current liabilities.......................... 3,686,791 5,761,764 (1,206,500) 8,242,055
Long-term debt..................................... -- 29,146 29,146
Long-term capital lease obligation, net current
portion ......................................... -- 8,082 8,082
Stockholders' equity (deficit):
Common Stock..................................... 5,000 1,000 (850) (h) 5,150
Additional paid-in capital....................... 4,065,078 10,000 964,850 (h) 5,039,928
Retained earnings (deficit)...................... 2,498,569 (1,264,775) 1,264,775 (h) 2,498,569
------------- ------------ ---------------- -------------
Total stockholders' equity (deficit)............... 6,568,647 (1,253,775) 2,228,775 7,543,647
------------- ------------ ---------------- -------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 10,255,438 $ 4,545,217 $ 1,022,275 $ 15,822,930
------------- ------------ ---------------- -------------
------------- ------------ ---------------- -------------
</TABLE>
F-18
<PAGE>
Pro Forma Statement of Operations
Year Ended October 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL STMS, INC. ACQUISITION PRO FORMA
DUNN (i) (j) ADJUSTMENTS (c) COMBINED
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 18,098,638 $ 20,249,828 $ -- $ 38,348,466
Costs of revenues.................................. 14,102,442 16,616,964 30,719,406
------------- ------------- -------------
Gross profit....................................... 3,996,196 3,632,864 7,629,060
Sales and marketing................................ 475,471 1,349,292 1,824,763
General and administrative......................... 1,496,979 1,957,992 188,200 (k) 3,643,171
------------- ------------- --------------- -------------
Income from operations............................. 2,023,746 325,580 (188,200) 2,161,126
Other income (expense)............................. 49,343 (99,412) -- (50,069)
Interest expense................................... (57,925) (232,966) -- (290,891)
------------- ------------- --------------- -------------
Income (loss) before income taxes.................. 2,015,164 (6,798) (188,200) 1,820,166
Provision for (benefit from) income tax............ 776,000 (1,211) -- 774,789
------------- ------------- --------------- -------------
Net income (loss).................................. 1,239,164 (5,587) (188,200) 1,045,377
------------- ------------- --------------- -------------
------------- ------------- --------------- -------------
Net loss per share (p)............................. $ 0.31 $ 0.25
------------- -------------
------------- -------------
Weighted average shares outstanding (p)............ 4,050,150 4,200,150
------------- -------------
------------- -------------
</TABLE>
Six Months Ended April 30, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
DUNN (l) STMS, INC. (m) ADJUSTMENTS (c) COMBINED
------------ -------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 9,492,429 $ 7,812,531 $ -- $ 17,304,960
Costs of revenues.................................. 7,670,210 5,951,002 13,621,212
------------ -------------- -------------
Gross profit....................................... 1,822,219 1,861,529 3,683,748
Sales and marketing................................ 293,766 1,772,964 -- 2,066,730
General and administrative......................... 468,480 1,032,509 93,169 (n) 1,594,158
------------ -------------- --------------- -------------
Income (loss) from operations...................... 1,059,973 (943,944) (93,169) 22,860
Other income (expense):............................ 2,608 (21,372) (18,764)
Interest income (expense).......................... 30,954 (118,003) -- (87,049)
------------ -------------- --------------- -------------
Net income (loss) before income taxes.............. 1,093,535 (1,083,319) (82,953)
Provision for (benefit from) income tax............ 418,300 -- (418,300)(o) --
------------ -------------- --------------- -------------
Net income (loss).................................. $ 675,235 $ (1,083,319) $ (325,131) $ (82,953)
------------ -------------- --------------- -------------
------------ -------------- --------------- -------------
Earnings (net loss) per share (p).................. 4,210,166 4,150,000
------------ -------------
------------ -------------
Weighted average shares outstanding (p)............ $ 0.16 $ (0.02)
------------ -------------
------------ -------------
</TABLE>
F-19
<PAGE>
(a) Balance Sheet as of April 30, 1997.
(b) Balance Sheet as of June 30, 1997.
(c) Represents adjustments for the STMS, Inc. ("STMS") acquisition
based on a purchase price of approximately $2,088,000. The STMS
acquisition has been accounted for using the purchased method. The
purchase price has been allocated on a preliminary basis to the
assets and liabilities acquired based on fair value of such assets
and liabilities which are estimated to equal their book value.
(d) Represents the cash paid to settle the note payable and certain
accounts payable due to a related party of STMS and payment of fees
related to the acquisition.
(e) Represents goodwill and customer lists identified by the Company.
The intangible assets will be amortized on a straight-line basis
over the following lives: goodwill will be amortized over twenty
years and customer lists will be amortized over five years.
(f) Represents $208,500 in estimated accrued legal, accounting and
printing expenses related to the acquisition offset by the
settlement of certain accounts payable due to a related party of
STMS.
(g) Represents the settlement of $1,235,000 in notes payable due to a
related party of STMS
(h) Represents the stockholders equity not acquired by the Company
offset $975,000 related to the issuance of 150,000 shares of Dunn's
Common Stock at $6.50 per share (the price per share on the date of
acquisition).
(i) Statement of operations for the year ended October 31, 1996.
(j) Statement of operations for the year ended December 31, 1996.
(k) Represents the amortization expense for the year related to the
intangible assets acquired.
(l) Statement of operations for the six months ended April 30, 1997.
(m) Statement of operations for the six months ended June 31, 1997.
(n) Represents the amortization expense for the six months ended April
30, 1997, related to the intangible assets acquired.
(o) Reprsennts effect on taxes if the Company was able to apply the net loss
of the subsidiary against the net income.
(p) The Company's net loss per share calculations are based upon
the weighted average number of shares of Common Stock and
Common Stock equivalents outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff
Accounting Bulletin No. 83, options to purchase Common Stock issued
at prices below the estimated initial public offering ("IPO") price
during the 12 months immediately preceding the initial filing
of the registration statement relating to the IPO, (collectively
the "cheap stock") have been included in the computation of net
loss per share as if they were outstanding for all periods
presented (using the treasury method assuming repurchase of Common
Stock at the estimated IPO price). For the six months ended April
30, 1997, the cheap stock is weighted for the period outstanding
through the effective date of the IPO. Other shares issuable upon
the exercise of stock have been excluded from the computation if
the effect of their inclusion would be antidilutive due to the
Company's pro forma net losses.
F-20
