<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
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 No. 0-22263
DUNN COMPUTER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
54-1424654
(I.R.S. Employer Identification No.)
1306 Squire Court, Sterling, VA. 20166
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code)
(703) 450-0400
NO CHANGE
--------------------------
Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No______.
As of September 15, 1997 there were 5,150,000 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 9 pages, of which this is page 1.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- -----------------------
1996 1997 1996 1997
-------- --------- ---------- ---------
Revenues $1,562,945 $2,489,533 $12,980,970 $11,981,962
Costs of revenues 1,427,812 1,874,980 10,108,441 9,545,190
---------- ---------- ----------- -----------
Gross profit 135,133 614,553 2,872,529 2,436,772
Selling and marketing 156,217 248,267 336,180 542,033
General and administrative 167,652 266,264 1,189,968 734,744
---------- ---------- ----------- -----------
Income (loss) from operations (188,736) 100,022 1,346,381 1,159,995
Interest income (expense) 13,686 44,275 (40,701) 75,229
Other income 7,790 592 16,036 3,200
---------- ---------- ----------- -----------
Net income (loss) (167,260) 144,889 1,321,716 1,238,424
before income taxes
Provision for (benefit from)
income taxes (64,000) 45,000 509,050 463,300
---------- ---------- ----------- -----------
Net income (loss) $ (103,260) $ 99,889 $ 812,666 $ 775,124
Earnings (loss) per share $ (0.03) $ 0.02 $ 0.20 $ 0.17
Weighted average number of
shares outstanding 4,050,150 5,093,226 4,050,150 4,498,266
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
July 31,
1997
-----------
ASSETS
Current assets
Cash and cash equivalents $4,313,702
Accounts receivable, less allowance for
doubtful accounts of $15,000 3,611,307
Inventory, less obsolescence reserve of $20,000 900,702
Prepaid income taxes 139,270
Investments 150,000
Prepaid expenses and other current assets 32,616
----------
Total current assets 9,147,597
Property and equipment, net 79,023
----------
Total assets $9,226,620
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 2,325,957
Accrued expenses 258,527
Deferred tax liability 8,700
----------
Total current liabilities 2,593,184
Stockholders' equity
Preferred Stock $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding
Common Stock, $.001 par value;
20,000,000 shares authorized, 5,000,000
shares issued and outstanding: 5,000
Additional paid-in capital 4,029,978
Retained earnings 2,598,458
----------
Total stockholders' equity 6,633,436
----------
Total liabilities and stockholders' equity $9,226,620
----------
----------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
July 31,
----------------------
1996 1997
--------- ---------
OPERATING ACTIVITIES:
Net income $ 812,666 $ 775,124
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 20,250 13,903
Changes in operating assets and liabilities
Accounts receivable 972,122 (437,247)
Inventory 651,155 84,901
Prepaid expenses and other assets 122 (29,076)
Prepaid income taxes - (139,270)
Accounts payable (732,786) (126,204)
Accrued expenses 3,587 (26,717)
Deferred tax liability (112,141) (2,386)
Income tax payable 174,362 (519,308)
Unearned revenue - (67,640)
--------- ---------
Net cash provided by (used in)
operating activities 1,789,337 (473,920)
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (24,000) (29,163)
Purchase of investment (150,000) -
--------- ---------
Net cash used in investing activities (174,000) (29,163)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from bank line of credit 2,122,245 -
Payments on bank line of credit (2,387,335) -
Proceeds from issuance of Common Stock - 3,919,121
Repayment from stockholder 100,000 -
--------- ---------
Net cash (used in) provided by financing
activities (165,090) 3,919,121
Net increase in cash and cash equivalents 1,450,247 3,416,038
Cash and cash equivalents at
beginning of period 138,938 897,664
--------- ---------
Cash and cash equivalents at end of
period $1,589,185 $4,313,702
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 59,058 -
--------- ---------
--------- ---------
Income taxes paid $ 277,000 $1,082,000
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Dunn Computer Corporation
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The consolidated financial statements for the three month and nine month
periods ended July 31, 1996 and 1997 are unaudited and include all
adjustments which, in the opinion of management, are necessary to present
fairly the results of operations for the periods then ended. All such
adjustments are of a normal and recurring nature. These consolidated
financial statements should be read in conjunction with the Registration
Statement on Form SB-2 of Dunn Computer Corporation (the "Company") which
includes consolidated financial statements and notes thereto for the years
ended October 31, 1995 and 1996 and for the three months ended January 31,
1996 and 1997.
2. RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted in the Company's
fiscal 1998 financial statements. At that time, the Company will be required
to change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of primary and
fully diluted earnings per share for the three and nine month periods ended
July 31, 1996 and 1997 is not expected to be material.
3. SUBSEQUENT EVENTS
On September 4, 1997, the Company increased the number of Common Stock
options available for grant under the Stock Option Plan from 600,000 to
2,200,000. This increase was approved by a majority of the Company's
stockholders on September 11, 1997.
On September 12, 1997, the Company acquired by merger substantially all of
the assets and liabilities of STMS, Inc., a Delaware corporation, ("STMS")
for 150,000 shares of the Company's Common Stock. In conjunction with the
acquisition, the Company settled a note payable and certain accounts payable
due to a former stockholder of STMS as well as the Company purchased this
stockholder's 47% ownership interest in Glacier Corporation, an affiliated
company of STMS. The Company paid this shareholder $1,044,500 in cash and
25,000 options to purchase Common Stock at $6.125 per share.
The Company entered into employment agreements with three officers of STMS
under which the Company is required to pay an aggregate of $525,000 in base
salary annually over the next three years and issue options to purchase
1,400,000 shares of the Company's Common Stock, at fair market value as of
September 12, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES:
Revenues for the quarter ended July 31, 1997 were $2,489,533 as compared to
$1,562,945 for the quarter ended July 31, 1996, an increase of 59.3%. In the
quarter ended July 31, 1997, the Company delivered $1,085,500 to Lockheed as
compared to $359,000 for the quarter ended July 31,1996. The increase
reflects the initial deployment of systems under the DMS contract. Increases
in revenue related to US Courts and GSA contracts accounted for the balance
of the increase.
Revenues for the nine months ended July 31, 1997 were $11,981,962 compared to
$12,980,970 for the nine months ended July 31, 1996. The 7.7% decline was
caused by the decline in revenue from the Lockheed contract and two other
contracts that affected the first quarter of fiscal 1997. Increased revenue
from the GSA and the US Courts contracts offset $3.4 million of the decline.
GROSS MARGIN:
Gross margin increased from 8.6% for the quarter ended July 31, 1996 to 24.7%
for the quarter ended July 31, 1997. The increase can be attributed to an
abnormally low gross margin in fiscal 1996, the increase in revenue, and
the product mix. Gross margins can fluctuate from quarter to quarter. The
target gross margin is 22.0%.
For the nine months ended July 31, gross margin declined from 22.1% in fiscal
1996 to 20.3% in fiscal 1997. The decline was caused by substantially lower
gross margins in the second quarter.
SELLING AND MARKETING:
For the quarter ended July 31, selling and marketing expenses increased from
$156,217 in fiscal 1996 to $248,267 in fiscal 1997. The increase is
attributable to the increase in the Company's personnel and an increase in
advertising . For the nine months ended July 31, selling and marketing
increased from $336,180 in fiscal 1996 to $542,033 in fiscal 1997 for the
reasons noted above. As a percentage of revenue, selling and marketing
expense increased from 2.6% for the nine months ended July 31, 1996 to 4.5%
for the nine months ended July 31, 1997. The increase was caused by the
decline in revenue and the increase in expenditures.
GENERAL AND ADMINISTRATIVE:
General and administrative expense increased from $167,652 for the quarter
ended July 31, 1996 to $266,264 for the quarter ended July 31, 1997. The
increase can be attributed to the increase in personnel, Stockholder's
relations and other operating expenses. For the nine months ended July 31,
general and administrative expense declined from $1,189,968 (9.2% of revenue)
in fiscal 1996 to $734,744 (6.1% of revenue) in fiscal 1997 because of the
decline in executive compensation offsets the other increases in operating
expenses.
INTEREST AND OTHER INCOME:
Interest and other income derived primarily from tax free interest income
increased from $21,476 in the quarter ended July 31, 1996 to $44,867 for the
quarter ended July 31, 1997. For the nine months ended July 31, interest and
other income increased from an expense of $ 24,665 in 1996 to income of
$78,429 in 1997. The increase was primarily due to interest income.
<PAGE>
PROVISION FOR INCOME TAXES:
For the quarter ended July 31, 1997 the effective tax rate was 31.1% of
taxable income. The decline from the historical rate of 38.5% is the result
of the benefit of tax free interest income. For the quarter ended July
31,1996, the Company recorded a negative tax expense as a result of the
operating loss. For the nine months ended July 31, 1996 the effective tax
rate was 38.5% of taxable income compared to 37.4% for the nine months ended
July 31, 1997. The reduction was due to a minor decrease in non-deductible
expenses and the effect of the tax free interest income.
NET INCOME AND QUARTERLY RESULTS
Net income increased from a loss of $103,260 to a net profit of $99,889 in
the third quarter of 1997 compared to the third quarter of 1996. Net income
for the first nine months declined from $812,666 to $775,124 as a result of
the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash flows needs through cash generated
by operations and its bank credit arrangement.
The Company has generated positive cash flows in the nine months ended July
31, 1996 and 1997. In the nine months ended July 31, 1997, the Company
utilized $473,920 in operating activities. Cash from operating activities
decreased primarily due to the payment of income taxes and the increase in
accounts receivable. In the nine months ended July 31, 1996, the Company
generated $1,789,337 from operating activities. Cash from operating
activities increased principally from the payment of outstanding accounts
receivable and the net income for the period offset by the decrease in
accounts payable.
In the nine months ended July 31, 1997, the Company used $29,163 of its
investing cash flow to purchase capital equipment. In the nine months ended
July 31, 1996, the Company used $174,000 of its investing cash flow to
purchase $24,000 of capital equipment and to invest $150,000 in WIZnet, an
Internet related company.
In the nine months ended July 31, 1997, the Company generated $3,919,121 from
financing activities from net proceeds from the initial public offering. In
the nine months ended July 31, 1996, the Company used $165,090 of financing
cash flow due primarily to the repayment of debt outstanding offset by the
repayment of an account receivable from a stockholder.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share.
Exhibit 27: Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended July 31, 1997.
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 thereunto duly authorized.
Dunn Computer Corporation
(Registrant)
Date June 16, 1997 By: /s/ John D. Vazzana
- --------------------- -------------------------------------------
John D. Vazzana,
Executive Vice-President,
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- ------------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Weighted average number
of shares outstanding 4,000,000 5,000,000 4,000,000 4,373,626
Common equivalent shares from
options issued during the
twelve month period to the
filing of the SB-2 (using
the treasury stock method) 50,150 - 50,150 31,413
Weighted average number of
common stock equivalent
shares from options and
warrants (using the
treasury stock method) - 93,226 - 93,227
--------- ---------- ---------- ----------
Total 4,050,150 5,093,226 4,050,150 4,498,266
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income (loss) ($103,260) $ 99,889 $ 812,666 $ 775,124
--------- ---------- ---------- ----------
Earnings (loss) per share ($0.03) $0.02 $0.20 $0.17
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JULY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 4,313,702
<SECURITIES> 150,000
<RECEIVABLES> 3,626,307
<ALLOWANCES> 15,000
<INVENTORY> 900,702
<CURRENT-ASSETS> 9,147,597
<PP&E> 225,618
<DEPRECIATION> 146,595
<TOTAL-ASSETS> 9,226,620
<CURRENT-LIABILITIES> 2,593,184
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 6,628,436
<TOTAL-LIABILITY-AND-EQUITY> 9,226,620
<SALES> 11,981,962
<TOTAL-REVENUES> 11,981,962
<CGS> 9,545,190
<TOTAL-COSTS> 9,545,190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,238,424
<INCOME-TAX> 463,300
<INCOME-CONTINUING> 775,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775,124
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
