<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 April 30, 1998
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 June 1, 1998 there were 9,341,493 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-QSB contains 13 pages, of which this
is page 1.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------- ----------------------
1997 1998 1997 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenue $3,987,079 6,352,969 9,492,429 16,782,138
Costs of revenue 3,470,633 5,034,789 7,670,210 13,024,668
--------- ---------- ---------- ----------
Gross profit 516,446 1,318,180 1,822,219 3,757,470
Selling and marketing 112,259 476,438 293,766 1,028,318
General and administrative 216,361 593,144 468,480 1,340,234
--------- ---------- ---------- ----------
Income from operations 187,826 248,598 1,059,973 1,388,918
Other income (expense) 25,894 (38,248) 33,562 (34,580)
Interest income -- 21,255 -- 22,110
Interest expense -- (16,365) -- (54,839)
--------- ---------- ---------- ----------
Net income 213,720 215,240 1,093,535 1,321,609
Before income taxes
Provision for Income taxes 84,300 82,867 418,300 500,529
--------- ---------- ---------- ----------
Net income 129,420 132,373 675,235 821,080
Basic earnings per share $0.03 $0.03 $0.16 $0.16
Diluted earnings per share $0.03 $0.02 $0.16 $0.14
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
April 30,
1998
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 328,416
Accounts receivable, less allowance for
doubtful accounts of $15,000 3,959,987
Inventory, less obsolescence reserve of $20,000 2,001,164
Prepaid expenses and other current assets 657,384
-----------
Total current assets 6,946,951
Property and equipment, net 568,230
Goodwill and other intangible assets, net 2,866,184
Investments 275,000
Other assets 186,958
-----------
Total assets $10,843,323
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 1,084,115
Accrued expenses 507,573
Income taxes payable 83,790
Notes payable- current portion 11,770
Obligations under capital leases-current portion 45,128
Unearned revenue 431,988
-----------
Total current liabilities 2,164,364
Notes payable-long-term portion 48,175
Obligations under capital leases-long-term portion 6,549
Deferred tax credit 100,000
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, 5,150,000 shares
issued and outstanding; 5,150
Additional paid-in capital,less Treasury Stock 4,552,371
Retained earnings 3,966,714
-----------
Total stockholders' equity 8,524,235
-----------
Total liabilities and stockholders' equity $10,843,323
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
April 30,
----------------------
1997 1998
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 675,235 $ 821,080
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,053 202,374
Changes in operating assets and liabilities
Accounts receivable (769,780) 5,752,023
Inventory 667,884 2,486,137
Prepaid expenses and other assets (44,697) (565,810)
Prepaid income taxes -
Accounts payable 633,419 (8,212,382)
Accrued expenses 225,377 16,602
Deferred tax liability (2,386) -
Income tax payable (460,314) 83,790
Unearned revenue (44,744) 9,081
----------- --------
Net cash provided by (used in)
operating activities 888,047 592,895
----------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (17,099) (28,519)
----------- --------
Net cash used in investing activities (17,099) (28,519)
----------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 3,954,221 -
Purchase of Treasury Stock - (535,000)
Payments on capital lease obligations and notes - (42,926)
payable ---------- -------
Net cash (used in) provided by financing
activities 3,954,221 (577,926)
Net increase (decrease)in cash and cash equivalents 4,825,169 (13,550)
Cash and cash equivalents at
beginning of period 897,664 341,966
---------- --------
Cash and cash equivalents at end of
period $5,722,833 $328,416
---------- --------
---------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 51,999
---------- --------
---------- --------
Income taxes paid $ 881,000 $660,033
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the three month and six month periods
ended April 30, 1997 and 1998 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 S-1 of Dunn Computer
Corporation (the "Company") which includes consolidated financial statements and
notes thereto for the years ended October 31, 1996 and 1997 and for the three
months ended January 31, 1997 and 1998.
2. Recent pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income",
which is required to be adopted in the year ended October 31, 1998 consolidated
financial statements. SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in the financial statements and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the Statement of
Stockholders' Equity. The Company will be required to restate earlier periods
provided for comparative purposes, but doesn't believe that the adoption of SFAS
130 will be material to the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Finanical Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted in
the year ended October 31, 1998 consolidated financial statements. SFAS 131
changes the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. The disclosure for
segment information on the consolidated financial statements is not expected to
be material.
In February 1998, the Finanical Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which is
required to be adopted in the October 31, 1999 consolidated financial
statements. SFAS 132 eliminates certain existing disclosure requirements, but
at the same time adds new disclosures. The Company does not expect any
significant impact on its financial condition and results of its operations
as a result of adoption of SFAS 132.
5
<PAGE>
3. Subsequent events
On May 1, 1998, the Company acquired International Data Products, Corp. ("IDP
Co.") and substantially all of the net assets of IDP's Puerto Rico affiliate,
Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"; "IDP Co and
PRIMO are referred to collectively") as IDP, for a combined purchase price of
$14.9 million in cash and 750,000 shares of Common Stock, both of which are
subject to adjustment under certain conditions (the "IDP Acquisition"). IDP,
which had a total combined revenue of approximately $71.9 million for its
fiscal year ended September 30, 1997, is primarily a manufacturer of
notebooks, desktops and high performance network servers. IDP manufactures
its products in its ISO 9000 certified facility in Gaithersburg, Maryland and
in its facility in Guayama, Puerto Rico. The Company expects to retain IDP's
product brand names and for IDP continue to service its existing contracts.
In connection with the IDP Acquisition, the Company effected a reorganization
whereby a new corporate entity, Dunn Computer Corporation, a Viriginia
corporation ("Dunn-VA"), became a holding company, owning 100% of the Company,
IDP and a newly formed Puerto Rican subsidiary ("PAC") which acquired
substantially all of the net assets of PRIMO. In the reorganization, each
outstanding share of the Company's Common Stock became exchangeable on a
one-for-one basis for a share of Common Stock of Dunn-VA. The Company's
outstanding options and warrants were also converted into similar securities of
Dunn-VA on substantially identical terms. On April 30, 1998, the shareholders of
the Company approved the IDP Acquisition and the related reorganization.
Upon the closing of the IDP Acquisition, George D. Fuester and D. Oscar
Fuester, who respectively are the President and the Executive Vice President
of IDP Co. and the Vice President and President of PRIMO (now "PAC"), became
directors of Dunn-VA and entered into employment agreements with the Company
pursuant to which they will each receive options to purchase 300,000 shares
of the Common Stock, of Dunn-VA subject to adjustment up to 400,000 shares
under certain conditions. Subsequent to the IDP Acquisition, George and Oscar
Fuester own an aggregate of approximately 8% of Dunn-VA's Common Stock.
The purchase of the IDP Acquisition was financed through the offering and
sale of 3,250,000 shares of its Common Stock through a registered public
offering, which also closed on May 1, 1998 and resulted in net proceeds to
the Company of approximately $27,618,094 (before deducting expenses of the
offering).
The following is an unaudited pro forma combined statement of operations for the
Company for the three and six months ended April 30, 1998 which gives effect to
the IDP Acquisition as if it had occurred on November 1, 1997.
6
<PAGE>
<TABLE>
<CAPTION>
Second Quarter of Fiscal Year 1998 First six months of iscal Year 1998
--------------------------------------------------- ---------------------------------------------------
IDP IDP
Historical Historical Acquisit Pro Forma Historical Historical Acquisit Pro Forma
Dunn(a) IDP(b) Adjust Combined Dunn(a) IDP(b) Adjust Combined
----------- ----------- -------- ------------ ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 6,352,969 20,156,348 $ 26,509,317 $ 16,782,138 45,356,871 $ 62,139,009
Cost of revenues 5,034,789 15,954,719 20,989,508 13,024,668 37,054,779 50,079,447
----------- ----------- -------- ------------ ------------ ----------- --------- ------------
Gross profit 1,318,180 4,201,629 5,519,809 3,757,470 8,302,092 12,059,562
Selling, general 1,069,582 4,173,428 5,243,010 2,368,552 7,867,877 10,236,429
& administrative exp
Amortization (153,077) (153,077) (153,077) (153,077)
of intangible assets (c )
----------- ----------- -------- ------------ ------------ ----------- --------- ------------
Income from 248,598 28,201 (153,077) 123,722 1,388,918 434,215 (153,077) 1,670,056
operations
Other income
(expense)
Interest income 21,255 19,012 40,267 22,110 20,516 42,626
Interest expense (16,365) (442,525) (458,890) (54,839) (667,061) (721,900)
Miscellaneous, net (38,248) 482,368 444,120 (34,580) 486,912 452,332
----------- ----------- -------- ------------ ------------ ----------- -------- ------------
Net income 215,240 87,056 (153,077) 149,219 1,321,609 274,582 (153,077) 1,443,114
before income taxes
Provision for 82,867 9,894 56,702 500,529 63,612 548,383
income tax
----------- ----------- ------------ ------------ ----------- ------------
Net income 132,373 77,162 92,517 821,080 210,970 894,731
----------- ----------- ------------ ------------ ----------- ------------
----------- ----------- ------------ ------------ ----------- ------------
Basic earnings per share $ 0.03 -- $ 0.01 $ 0.16 $ 0.11
Diluted earnings per share $ 0.02 $ 0.01 $ 0.14 $ 0.10
</TABLE>
(a) Consolidated Statement of Operations for the Company for the three and six
months ended April 30, 1998.
(b) Consolidated Statement of Operations for IDP Co. for the three and six
months ended March 31, 1998.
(c) Represents amortization expense related to the intangible assets acquired
in the IDP Acquisition.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net revenues for the quarter ended April 30, 1998 were $6,352,969 as compared
to $3,989,079 for the quarter ended April 30, 1997, an increase of 59.3%. In
the quarter ended April 30, 1998, the Company delivered products resulting in
net revenues of $2,594,474 to Lockheed Martin Corporation ("Lockheed") as
compared to $114,831 for the quarter ended April 30,1997. The increase
reflects additional deployments of systems under the DMS contract with
Lockheed. An increase in revenues from the Company's contract with an
intelligence agency of the federal government and the addition of revenue
from operations of the Company's STMS subsidiary offset a decline in revenue
from the US Courts.
Revenues for the six months ended April 30, 1998 were $16,782,138 compared to
$9,492,429 for the six months ended April 30, 1997. The 76.8% increase was a
result of the increase in revenues from Lockheed, intelligence agency and
STMS.
Gross margin increased from 12.9% for the quarter ended April 30, 1997 to
20.7% for the quarter ended April 30, 1998. The increase can be attributed to
an abnormally low gross margin in second quarter of 1997, the increase in
revenue, and a higher concentration of higher margin products. Gross margin
can fluctuate from quarter to quarter. For the six months ended April 30,
gross margin was 19.2% in fiscal 1997, as compared to 22.4% in fiscal 1998.
For the quarter ended April 30, selling and marketing expenses increased from
$112,259 in fiscal 1997 to $476,438 in fiscal 1998. The increase is
attributable to increases in the Company's personnel, advertising, and the
acquisition of STMS. For the six months ended April 30, selling and marketing
increased from $293,766 in fiscal 1997 to $1,028,318 in fiscal 1998. As a
percentage of revenue, selling and marketing expense increased from 3.1% for
the six months ended April 30, 1997 to 6.1% for the six months ended April
30, 1998. The increase was a result of the Company's expansion of its
marketing and sales personel and additional expenditures in advertising.
General and administrative expense increased from $216,361 for the quarter
ended April 30, 1997 to $593,144 for the quarter ended April 30, 1998. The
increase can be attributed to the increase in personnel, stockholders'
relations, amortization of goodwill and the acquisition of STMS. For the six
months ended April 30, general and administrative expense increase from
$468,480 (4.9% of revenue)in fiscal 1997 to $1,340,234 (7.9% of revenue) in
fiscal 1998 because of the increases to personel (23.1% of increase),
stockholders' relations (7.2% of increase), and amortization of goodwill
(14.4% of increase) and other operating expenses associated with the
acquisition of STMS.
8
<PAGE>
Other income (expense) decreased from income of $25,894 in the quarter ended
April 30, 1997 to expense of ($38,248) for the quarter ended April 30, 1998. For
the six months ended April 30, other income decreased from $ 33,562 in 1997 to
expense of ($34,580) in 1998. For the quarter ended April 30, 1998 and for the
six months ended April 30, 1998 the effective tax rate was 38.5% and 37.9%,
respectively, of taxable income. Net income increased from $129,420 to a net
income of $132,373 in the second quarter of 1998 compared to the second quarter
of 1997. Net income for the first six months increased from $675,235 to $821,080
as a result of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash flow needs through cash generated
by operations and its bank credit arrangement.
The Company has a bank line of credit with First Union Bank for $4 million which
expires on July 31, 1998. As of April 30, 1998 the Company had no outstanding
balance on the line.
The Company has generated positive cash flows in the six months ended April 30,
1998. Cash from operating activities increased primarily from the payment of
outstanding accounts receivable and the net income for the period offset by the
decrease in accounts payable. In the six months ended April 30, 1997, the
Company generated $592,895 from operating activities. In the six months ended
April 30, 1998, the Company used $28,519 of its investing cash flow to purchase
capital equipment. In the six months ended April 30, 1998, the Company used
$535,000 in its financing activities to purchase treasury stock and payment of
$42,926 on its capital lease obligations and notes payable.
Recently, national attention has focused on the potential problems and costs
resulting from computer programs being written using two digits rather than
four to define the applicable year. Any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. While the Company believes that
its internal software applications and the software in the systems it sells
are year 2000 compliant, there can be no assurance until the year 2000 that
all systems will function adequately. Further, if the software applications
of others on whose services the Company depends are not Year 2000 compliant,
such noncompliance could have a material adverse effect on the Company. The
Year 2000 problem can be corrected either through software programming or by
porting the application to a client/server network. The Company believes with
its technical services and its client/server hardware product line, it
provides Year 2000 solutions.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders was held on April 30, 1998. The prior
Board of Directors comprised of Thomas P. Dunne, John d. Vazzana, Claudia N.
Dunne, Vice Admiral E.A. Burkhalter, Jr., USN (Ret) and Daniel D. Sinnott,
was re-elected, in its entirety, for a new one year term. Stockholders voted
and approved an Agreement of Merger dated March 18, 1998 among the Company,
Dunn Computer Corp., a Virginia corporation, ("Dunn-VA") and a wholly-owned
subsidiary of the Company, under which all the outstanding shares of the
Company's Common Stock will be exchanged for Common Stock of Dunn-VA and the
Company would become a wholly-owned subsidary of Dunn-VA. The stockholders
also voted and approved an amendment of the Company's 1997 Stock Option Plan
to increase from 600,000 to 2,200,000 the number of shares of Dunn common
stock subject to issuance thereunder and adoption of Dunn-VA's 1998 stock
option plan that would replace the Company's 1997 Stock Option Plan. There were
3,692,774 shares present in person or by proxy, or 71.7% of the total shares
outstanding, all of which were voted in favor of each proposal and the
re-election of each of the directors of the Company.
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) The Company filed an amendment to the Form 8-K filed in connection with
the STMS Inc. acquisition which occurred on September 12, 1997. The Form
8-K/A was filed on March 12, 1988.
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 15, 1998 By: /s/ John D. Vazzana
- --------------------- -------------------------------------------
John D. Vazzana,
Executive Vice-President,
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
10
<PAGE>
Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
1997 1998 1997 1998
-------- ------ ------- ------
<S> <C> <C> <C> <C>
NUMERATOR:
Net Income $129,420 $132,373 $675,235 $821,080
Denominator:
Demonimator for basic earnings
Per share-weighted-average shares 4,000,000 5,100,000 4,000,000 5,100,000
Effect of diluted securities:
Employee stock options 50,150 693,811 50,150 693,811
Warrants - 57,143 - 57,143
--------- -------- -------- --------
Dilutive potental common shares 50,150 750,954 50,150 750,954
Denominator for diluted earnings
Per share-adjusted,
Weighted-average shares and
Assumed conversions 4,050,150 5,850,954 4,050,150 5,850,954
--------- -------- --------- ---------
Basic earnings per share $0.03 $0.03 $0.16 $0.16
--------- -------- --------- ---------
Diluted earnings per share $0.03 $0.02 $0.16 $0.14
--------- --------- --------- --------
--------- --------- --------- --------
</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-QSB FOR
THE PERIOD ENDING APRIL 30,1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 328,416
<SECURITIES> 275,000
<RECEIVABLES> 3,974,987
<ALLOWANCES> 15,000
<INVENTORY> 2,001,164
<CURRENT-ASSETS> 6,946,951
<PP&E> 830,901
<DEPRECIATION> 262,671
<TOTAL-ASSETS> 10,843,323
<CURRENT-LIABILITIES> 2,164,363
<BONDS> 0
0
0
<COMMON> 5,150
<OTHER-SE> 8,519,085
<TOTAL-LIABILITY-AND-EQUITY> 10,843,323
<SALES> 16,782,138
<TOTAL-REVENUES> 16,782,138
<CGS> 13,024,668
<TOTAL-COSTS> 15,393,220
<OTHER-EXPENSES> 34,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,839
<INCOME-PRETAX> 1,321,609
<INCOME-TAX> 500,529
<INCOME-CONTINUING> 821,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 821,080
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.14
</TABLE>
