<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1998
FILE NO. 333-47631
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DUNN COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
COMMONWEALTH OF VIRGINIA 5060 54-1890464
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation Classification Code Number)
or Organization)
</TABLE>
--------------------------
1306 SQUIRE COURT, STERLING VIRGINIA 20166 TEL. (703) 450-0400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's
Principal Executive Offices)
------------------------------
JOHN D. VAZZANA
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DUNN COMPUTER CORPORATION
1306 SQUIRE COURT
STERLING, VIRGINIA 20166
(703) 450-0400
(Name, Address Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH J. AYRES JOHN L. SULLIVAN, III
CATHERINE M. STAVRAKIS ANNE W. MARCULEWICZ
JONES, DAY, REAVIS & POGUE VENABLE, BAETJER AND HOWARD, LLP
1450 G STREET, N.W. 2010 CORPORATE RIDGE, SUITE 400
WASHINGTON, DC 20005 MCLEAN, VA 22102
(202) 879-3939 (703) 760-1655
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share 3,737,500 $9.50 $35,506,250 $10,475
</TABLE>
(1) Includes 487,500 shares subject to an option granted to the Underwriters to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee and based
upon the average of the high and low price of Dunn Computer Corporation, a
Delaware corporation, as reported on the Nasdaq National Market on March 25,
1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 1, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
3,250,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,250,000 shares of common stock, par value $.001 per share
("Common Stock") of Dunn Computer Corporation, a Virginia corporation (the
"Company") offered hereby (the "Offering") are being sold by the Company.
The Company will use a portion of the net proceeds of the Offering to close
the acquisition of International Data Products, Corp. and substantially all of
the net assets of its affiliate, Puerto Rico Industrial Manufacturing
Operations, Corp. (collectively, the "IDP Acquisition"). Concurrently with the
close of this Offering and the IDP Acquisition, the Company will become a
holding company owning 100% of Dunn Computer Corporation, a Delaware corporation
("Dunn"), through a subsidiary merger in which 5,097,743 shares of Common Stock
will be issued under a separate registration statement in a share-for-share
exchange for all of the outstanding shares of common stock of Dunn (the
"Merger"). The Offering, Merger and IDP Acquisition are each contingent upon
completion of the others. See "The Reorganization and the IDP Acquisition."
The Common Stock will trade on the Nasdaq National Market under the symbol
"DNCC," under which Dunn's common stock is traded prior to the Offering. On
March 25, 1998 the last reported bid price of Dunn's common stock was $9 7/16.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total (3)............................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the underwriters (the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $900,000.
(3) The Company and certain stockholders who are members of management of the
Company (the "Selling Stockholders") have granted to the Underwriters an
option, exercisable within 30 days of the date of this Prospectus (the
"Over-Allotment Option"), to purchase, in the aggregate, up to 487,500
additional shares of Common Stock, of which 243,750 shares will be sold by
the Selling Stockholders on the same terms set forth above, solely to cover
over-allotments, if any. The Company will not receive any of the proceeds
from the sale of any of the 243,750 shares of Common Stock sold by the
Selling Stockholders. If the Underwriters exercise this option in full, the
total Price to the Public, Underwriting Discounts and Commissions, Proceeds
to the Company and Proceeds to the Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
------------------------
The Shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices of
Ferris, Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C. or
through the facilities of the Depository Trust Company, on or about ,
1998.
------------------------
FERRIS, BAKER WATTS GERARD KLAUER MATTISON & CO., INC.
Incorporated
The date of this Prospectus is , 1998
<PAGE>
INSIDE FRONT COVER
ABOUT DUNN COMPUTER
[Graphics of Dunn Computer headquarters in Sterling]
Dunn's corporate headquarters are located in Sterling, VA with a Sales,
Marketing and Technical Services office in nearby Reston, VA. Manufacturing
facilities are in Sterling, VA; Gaithersburg, MD; and in Guayama, Puerto Rico.
Dunn Computer was founded in 1987 to manufacture computer systems for the
federal government and large corporate accounts. Dunn Computer offers an
award-winning line of servers, workstations and notebooks.
Dunn complements its computers with numerous specialized customer services
that make it easy for its volume customers to buy and use Dunn computers.
Specialized services include custom terms and conditions, custom configurations,
configuration management, asset tagging and bar coding, legacy software porting,
incident & customer tracking by contract, pre-loading customer-supplied
software, special features; (e.g., security locks) and custom testing and
packaging.
In addition to Dunn's hardware and computer services offerings, Dunn has a
large, experienced staff of network and system engineers with extensive
experience in a wide variety of applications such as Local & Wide Area Network
development, OS migrations, storage management, desktop management and help desk
support. This technical services organization designs, implements, and supports
complete IT solutions, specializing in Microsoft/Novell and network
infrastructure solutions.
In all, Dunn manufacturers custom-configured computers and delivers
specialized computer and network services for government and volume commercial
customers.
Dunn Computer Corporation
1306 Squire Court
Sterling, VA 20166
Toll Free (800) 296-DUNN
Phone (703) 450-0400
E-mail: [email protected]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE
"UNDERWRITING."
BACK COVER
DUNN PENTIUM NOTEBOOKS
[Graphics of Dunn notebook, server and Pentium Work Stations]
Equipped with up to a Pentium 233MHz processor, a 12.1 inch to 15.1 inch LCD
Active Matrix Screen, PnP architecture, removable 2.5 inch hard disk drive, 20x
CD-ROM and up to 144 MB of DRAM, this lightweight notebook is built with the
power and precision of a desktop. The Dunn Notebook comes with an array of
multimedia features, as well as multitude of other options.
2
<PAGE>
DUNN SINGLE TO QUAD SERVERS
Dunn manufactures a full line of high performing servers for every business
need. From economical, entry-level single processor servers to enterprise
caliber servers for business-critical applications. The Dunn Quad Pentium Server
includes many fault-tolerant features such as Hot Swappable disk drives and
power supplies; temperature and voltage monitoring; and alerts for fan failure
and chassis intrusion. Upgradable to over 2GB of memory and loaded with Windows
NT 4.0 or Novell, the Dunn Quad Server grows with the needs of your
organization.
DUNN PENTIUM WORKSTATIONS
Rated the Fastest Pentium and Best Buy by Federal Computer Week, the Dunn
Pentium II offers unparalleled performance for all your processing-intensive
applications. Utilizing Best-of-the-Breed technology, the Dunn Workstation
includes the latest MMX technology from Intel, and offers the latest in
break-neck speed and performance.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN A COMPLETE STATEMENT OF ALL MATERIAL
INFORMATION RELATING TO THIS OFFERING AND IS QUALIFIED BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION. ALL OF THIS PROSPECTUS SHOULD BE READ CAREFULLY.
THE COMPANY
Dunn Computer Corporation, a Delaware corporation ("Dunn"), manufactures and
markets build-to-order computer systems and provides related services to
departments, agencies and offices of the federal government (the "Government")
and selected businesses. Dunn provides its customers with single-source
solutions by manufacturing its own brand of desktop and portable computers and
high performance network client servers and by offering services, which include
network consulting, project implementation and technical support. Dunn currently
derives most of its revenue from computer hardware sales to the Government, but
also sells computer hardware and services to medium and large businesses.
In April 1997, Dunn completed an initial public offering of its common
stock, which since has traded on the Nasdaq National Market under the symbol
"DNCC." Since its initial public offering, Dunn has continued to pursue its
growth strategy of acquiring complementary businesses and further penetrating
its target markets.
In September 1997, Dunn acquired STMS, Inc. ("STMS"), a Virginia-based
network services company (the "STMS Acquisition"). This acquisition expanded
Dunn's capabilities to provide a wide variety of computer services, including
network consulting, project implementation and technical support. Additionally,
the STMS Acquisition provided Dunn with new opportunities to sell computer
hardware into the commercial marketplace as part of a total network solution.
Dunn believes that the rapid technological change and increased complexity of
the computer industry will result in an increasing number of entities
outsourcing total network solutions to third party providers.
On March 9, 1998, Dunn entered into an agreement (the "Acquisition
Agreement") to acquire International Data Products, Corp. ("IDP Co.") and its
affiliate, Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"; IDP
Co. and PRIMO are referred to collectively as "IDP"). IDP, which had 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. IDP is expected to retain its product brand names and continue to
service its existing contracts. See "Business."
Dunn's management believes that the acquisition of IDP (the "IDP
Acquisition") will result in several benefits, including: (i) doubling Dunn's
Government customer base; (ii) expanding Dunn's portable computer product line;
and (iii) providing cost savings and economies of scale. See "Business--The IDP
Acquisition."
Dunn has organized a new corporate entity, Dunn Computer Corporation, a
Virginia corporation (the "Company"), to be the vehicle for the IDP Acquisition.
At the time the IDP Acquisition is completed and the Merger (defined below) is
effective, the Company will become a holding company owning 100% of both Dunn
and IDP. After giving effect to the IDP Acquisition and the STMS Acquisition,
the Company's pro forma combined revenue for fiscal 1997 was $109.1 million and
for the first quarter of fiscal 1998 was $35.6 million.
With the combination of Dunn and IDP, the Company will sell its products and
services to more than 950 customers, including customers from agencies within
the Department of Defense, Department of Justice, Administrative Office of the
U.S. Courts, Social Security Administration, Lockheed Martin
3
<PAGE>
Corporation, Blue Cross and Blue Shield Association and Inova Health Care
Systems, Inc. The Government and commercial markets for computer systems and
services are large and growing. The Office of Management and Budget ("OMB")
proposed a Government information technology ("IT") budget of $29.5 billion for
fiscal 1998, which is expected to grow between 3% and 6% over the next five
years. Additionally, industry sources indicate that the total U.S. computer
hardware and systems IT market was $66.6 billion in 1996 and estimates growth of
approximately 10% over the next three years.
The Company intends to continue Dunn's strategy of increasing revenues and
profits by providing the Government market and selected businesses with
single-source computer network solutions. The Company plans to achieve this
objective by: (i) leveraging its Government customer base to increase sales of
products and network services; (ii) targeting the commercial market to expand
the sales of its own brand name computer hardware as part of a total network
solution; (iii) focusing on product quality; and (iv) pursuing targeted
acquisitions that complement its core skills and increase the overall value of
the Company.
------------------------
The principal executive offices of the Company and Dunn are located at 1306
Squire Court, Sterling, Virginia 20166 and its telephone number is (703)
450-0400.
THE REORGANIZATION AND THE IDP ACQUISITION
At the time the IDP Acquisition closes, a newly-formed subsidiary of the
Company, Dunn Merger Corp. ("Merger Sub"), will merge into Dunn (the "Merger").
In the Merger, each outstanding share of common stock of Dunn will be exchanged
on a one-for-one basis for a share of Common Stock of the Company, each
outstanding option and warrant of Dunn will be converted into an option or
warrant, respectively, of the Company on substantially the same terms as applied
to each such option or warrant of Dunn immediately prior to the Merger, and Dunn
will become a wholly-owned subsidiary of the Company.
On March 9, 1998, the Company and Dunn entered into the Acquisition
Agreement which provides for, among other things, the acquisition of all of the
stock of IDP Co. by the Company and the acquisition of substantially all of the
net assets of PRIMO by a newly-formed subsidiary of the Company. The
shareholders of both IDP Co. and PRIMO (the "IDP Sellers") are parties to the
Acquisition Agreement.
The aggregate purchase price payable by the Company in connection with the
IDP Acquisition consists of $14.9 million in cash (the "Cash Portion"), and
750,000 shares of common stock of the Company (the "Share Portion"), both
subject to adjustment under certain conditions. In connection with the IDP
Acquisition, two of the IDP Sellers, George D. Fuster and D. Oscar Fuster, who
respectively are the President and the Executive Vice President of IDP Co. and
the Vice President and President of PRIMO, will enter into employment agreements
with the Company pursuant to which they will each receive options to purchase
300,000 shares of Common Stock, subject to adjustment up to 400,000 shares under
certain conditions. See "Management--Employment Agreements." In addition, the
principal stockholders of Dunn have agreed to nominate each of the Fusters to
serve as directors of the Company. Upon completion of the IDP Acquisition and
the Offering, the IDP Sellers, in the aggregate, will own approximately 8.2% (or
8.0% if the Over-Allotment Option is exercised in full) of the outstanding
Common Stock.
The Merger and the IDP Acquisition will close concurrently with the closing
of this Offering (collectively, the "Closing"). Each of the Offering, the Merger
and the IDP Acquisition is contingent upon the consummation of the others, in
addition to the satisfaction or waiver of certain other conditions. See
"Business--The IDP Acquisition."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered..................... 3,250,000 shares
Common Stock Outstanding After the
Offering................................. 9,097,743 shares(1)
Use of Proceeds.......................... To fund the Cash Portion of the
consideration for the IDP Acquisition,
repayment of IDP's line of credit, and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol............ DNCC
</TABLE>
- ------------------------
(1) Does not include (a) an aggregate of 2,200,000 shares of Common Stock
reserved for issuance pursuant to the Company's Stock Option Plan of which
options for 1,832,000 shares have been granted; (b) an aggregate of up to
800,000 shares of Common Stock reserved for issuance pursuant to options
that may be granted pursuant to employment agreements with George D. Fuster
and D. Oscar Fuster, the President and the Executive Vice President of IDP,
respectively, or (c) 200,000 shares of Common Stock reserved for issuance
upon the exercise of certain warrants. See "Management-- Employment
Agreements," and "Management--Stock Option Plan."
CERTAIN DEFINITIONS
REFERENCES HEREIN TO THE "GOVERNMENT" ARE TO THE FEDERAL GOVERNMENT OF THE
UNITED STATES AND ITS DEPARTMENTS, AGENCIES AND OFFICES.
REFERENCES TO THE "COMPANY" ARE TO DUNN COMPUTER CORPORATION, A VIRGINIA
CORPORATION INCORPORATED ON FEBRUARY 26, 1998, AS IT EXISTS PRIOR TO THE CLOSING
OR, TOGETHER WITH ITS WHOLLY-OWNED SUBSIDIARIES UPON THE MERGER AND THE IDP
ACQUISITION, AS THEY EXIST AND WILL EXIST AFTER THE MERGER AND THE CLOSING, AS
THE CONTEXT MAY REQUIRE.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "DUNN" ARE TO DUNN
COMPUTER CORPORATION, A DELAWARE CORPORATION INCORPORATED ON JANUARY 3, 1997,
AND ITS WHOLLY-OWNED SUBSIDIARIES, AS THEY EXIST AND HAVE EXISTED PRIOR TO THE
CLOSING.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "IDP" ARE TO
INTERNATIONAL DATA PRODUCTS CORP. AND ITS AFFILIATE, PUERTO RICO INDUSTRIAL
MANUFACTURING OPERATIONS, CORP., AS THEY EXIST AND HAVE EXISTED PRIOR TO THE
CLOSING.
5
<PAGE>
DUNN SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary of consolidated financial information set forth below is
qualified by and should be read in conjunction with the consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. See "Summary Unaudited Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA PRO FORMA
1995 (1) 1996 (1) 1997 (1) 1997 (2)(3) 1997 1998 1998 (2)
----------- --------- --------- ----------- --------- --------- -----------
CONSOLIDATED STATEMENT OF INCOME DATA
Net revenues..................................... $ 7,491 $ 18,099 $ 21,766 $ 109,106 $ 5,505 $ 10,429 $ 35,630
Gross profit..................................... 1,445 3,996 4,217 19,029 1,306 2,439 6,540
Income from operations........................... 479 2,024 2,019 656 872 1,149 1,303
Net income (loss)................................ 243 1,239 1,322 (166) 546 689 571
Earnings per share (4)........................... $ 0.06 $ 0.31 $ 0.29 $ (0.02) $ 0.14 $ 0.13 $ 0.07
Earnings per share--assuming dilution (4)........ $ 0.06 $ 0.31 $ 0.28 $ (0.02) $ 0.13 $ 0.12 $ 0.06
Weighted average shares outstanding (4).......... 4,000 4,000 4,552 7,802 4,000 5,150 8,400
Weighted average shares outstanding-- assuming
dilution (4)................................... 4,000 4,000 4,679 7,929 4,050 5,715 8,965
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 31, 1998
-------------------------
PRO FORMA
AS ADJUSTED
ACTUAL (5)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital....................................................................................... $ 5,116 $ 20,028
Total assets.......................................................................................... 15,519 72,416
Long-term debt........................................................................................ 70 230
Total liabilities..................................................................................... 6,592 28,822
Stockholders' equity.................................................................................. 8,927 43,594
</TABLE>
- ------------------------
(1) The consolidated statement of income and balance sheet data is derived from
the audited consolidated financial statements of Dunn included elsewhere in
this Prospectus.
(2) Pro forma adjustments give effect to the Merger, the IDP Acquisition and the
STMS Acquisition as if they all occurred on November 1, 1996.
(3) Excluding the pro forma adjustments relating to the STMS Acquisition,
combined pro forma net revenues, income from operations and net income,
which include consolidated results of operations for Dunn's fiscal year
ended October 31, 1997 and combined results of operations for IDP's fiscal
year ended September 30, 1997, would have been $93.7 million, $2.3 million
and $1.5 million, respectively.
(4) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. For further discussion of earnings per share and the
impact of Statement No. 128, see Note 2 of the notes to Dunn's consolidated
financial statements included herein.
(5) Pro forma adjustments give effect to the Merger and the IDP Acquisition as
if they both had occurred on January 31, 1998 and reflect the sale of
3,250,000 shares of Common Stock offered by the Company hereby (at an
assumed price to the public of $9.44 per share) and the application of the
net proceeds therefrom.
6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and certain other
statements contained herein regarding matters that are not historical facts are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors."
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
COMPETITION. The markets for the Company's products and services are highly
competitive. Many of the Company's competitors offer broader product lines, have
substantially greater financial, technical, marketing and other resources than
the Company and may benefit from component volume purchasing and product and
process technology license arrangements that are more favorable in terms of
pricing and availability than the Company's arrangements. Competitive pressures
have intensified as large build-to-order multinational computer manufacturers
have entered the Government market. The Company also competes with a large
number of computer systems integrators and resellers. The Company believes that
it is likely that these competitive conditions will continue in the future.
There can be no assurance that the Company will continue to compete successfully
against existing or new competitors that may enter markets in which the Company
operates. See "Business--Competition."
RAPID CHANGES IN PRODUCT STANDARDS AND RISK OF INVENTORY OBSOLESCENCE. The
computer products market is characterized by rapid technological change and the
frequent introduction of new products and product enhancements. As a result,
computer components decline in value rapidly. Dunn has sought to minimize its
inventory exposure through a variety of inventory control procedures and
policies. Historically, Dunn has purchased inventory to fulfill existing orders.
With the IDP Acquisition, the Company will be required to carry increased
inventory levels in order to satisfy a larger number of customers, to obtain
greater purchasing discounts, and to fill commercial orders. The Company will
attempt to react to new product introductions and to mitigate its exposure to
losses from inventory obsolescence. There can be no assurance that such efforts
will be successful or that unexpected new product introductions will not have a
material adverse effect on the Company.
NEED FOR TECHNICAL PERSONNEL. The Company believes that its future success
will depend in large part upon its continued ability to attract and retain
highly qualified management, technical and sales personnel. The computer
industry is currently undergoing a shortage of trained and experienced
technicians. The Company endeavors to be attractive to current and prospective
employees and has an in-house training program to produce its own supply of
highly qualified technicians and service providers. However, there can be no
assurance that the Company will be able to attract and retain the qualified
personnel necessary for its business.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Both Dunn and IDP's results of
operations vary from quarter to quarter as a result of uneven purchasing
patterns and budgetary cycles. For example, in its fiscal year ended October 31,
1997 ("fiscal 1997"), Dunn's quarterly revenues were $5.5 million, $4.0 million,
$2.5 million and $9.8 million in the first, second, third and fourth quarters,
respectively. For IDP, the quarterly revenues for its fiscal year ended
September 30, 1997 ("IDP's fiscal 1997") were $36.0 million, $16.5 million, $7.7
million and $11.7 million in the first, second, third and fourth quarters,
respectively. In the first quarter of their respective fiscal years 1998, Dunn's
and IDP's revenues were $10.4 million and
7
<PAGE>
$25.2 million, respectively. These quarterly variations are likely to continue
in the future and may cause the market price of the Common Stock to fluctuate.
DEPENDENCE ON THE GOVERNMENT MARKET. The Company's business is highly
dependent on the Government market. Approximately 68% and 70% of Dunn's revenues
in its fiscal year ended October 31, 1996 ("fiscal 1996") and fiscal 1997,
respectively, and approximately 97% and 99% of IDP's revenues in its fiscal year
ended September 30, 1996 ("IDP's fiscal 1996") and IDP's fiscal 1997,
respectively, were derived from contracts or subcontracts with the Government.
The Company believes that the success and development of its business will
continue to be largely dependent upon its ability to participate in Government
contract programs. Accordingly, the Company's financial performance may be
directly affected by changes in Government contracting policies. Among the
factors that could materially adversely affect the Company's Government
contracting business are budgetary constraints and the adoption of new laws or
regulations. Most Government contracts are also subject to modification or
termination in the event of changes in funding, and the Company's contractual
costs and revenues are subject to adjustments as a result of audits by
Government auditors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company derives significant revenues from sales made pursuant to certain
major procurement programs awarded by the Government in the ordinary course of
business. These include its General Services Administration ("GSA") Schedules,
contracts with agencies within the Department of Defense, and contracts with the
Administrative Office of the U.S. Courts, among others. The GSA Schedules are
indefinite delivery, indefinite quantity ("IDIQ") contracts, which the GSA
negotiates with selected vendors and can be used by any Government agency. Both
Dunn and IDP currently have GSA Schedules that are three-year contracts which
expire in March 1999. Both GSA Schedules may be renewed for an additional three
years with the mutual consent of Dunn or IDP, as the case may be, and the GSA.
The inability of either Dunn or IDP to renew or replace its GSA Schedule or
other contracts could have a material adverse effect on the Company. See
"Business--Contracts."
GOVERNMENT CONTRACTING RISKS. Government contracts, by their terms,
generally can be terminated at any time, without cause, for the convenience of
the Government. If a Government contract is so terminated, the contractor
generally is entitled to receive compensation for the services provided or
certain costs incurred at the time of termination and a reasonable profit on the
contract work performed prior to the date of termination. In addition, all
Government contracts require compliance with various contract provisions and
procurement regulations and in certain cases, accounting requirements. If not
cured, certain violations of these regulations could result in the termination
of the contract, imposition of fines, and suspension or debarment from competing
for or receiving awards of additional Government contracts. Exclusion of the
Company from federal procurements, the termination of any of the Company's
significant Government contracts or the imposition of such penalties could have
a material adverse effect on the Company. See "Business-- Contracts."
RISKS RELATED TO THE IDP ACQUISITION AND FUTURE ACQUISITIONS. Following the
consummation of the IDP Acquisition, the Company plans to integrate certain
administrative operations of Dunn and IDP. There can be no assurance that the
Company will: (i) achieve its operating and growth strategies with respect to
these businesses; (ii) obtain increased revenue opportunities as a result of the
anticipated synergies created by expanded product offerings; and (iii) acquire
additional distribution channels or reduce the overall selling, general and
administrative expenses associated with the acquired operation. Additionally,
the integration of any other business the Company may acquire in the future
could involve unforeseen difficulties, which could have a material adverse
effect on the Company's business, financial condition and results of operations
and ultimately the market price of the Common Stock. See "Business--The IDP
Acquisition."
Until December 1997, IDP participated in the "8(a) Program" administered by
the Small Business Administration ("SBA"). The 8(a) Program affords eligible
firms with advantages in competing for Government contracts based on certain
disadvantaged statuses. Under SBA regulations, all contracts
8
<PAGE>
awarded to a firm under the 8(a) Program must be terminated for the convenience
of the Government if the program-eligible owner(s) relinquish ownership of the
firm, unless the procuring agency requests a waiver from the SBA. IDP has been
awarded a "Desktop V" contract with the U.S. Air Force pursuant to the 8(a)
Program, which has an estimated delivery quantity valued at $100 million. The
Air Force has been advised of the pending change in ownership of IDP, and has
requested a waiver from the SBA. The Company expects that the SBA will not
oppose the waiver. In the event that the SBA denies the waiver and the Company,
after the IDP Acquisition, will not be able to make sales pursuant to the
Desktop V contract, there would be a material adverse effect on the Company's
anticipated revenue from this contract. See "Business--Contracts."
DEPENDENCE ON MANAGEMENT PERSONNEL. The Company's future success will
depend to a significant extent on the continued efforts of key management
personnel, including Thomas P. Dunne and John D. Vazzana, Chief Executive
Officer and Executive Vice President of both Dunn and the Company, respectively.
Dunn has entered into employment contracts with Mr. Dunne and Mr. Vazzana. The
Company's future success also will depend to a significant extent on the
continued efforts of George D. Fuster and D. Oscar Fuster, from whom the Company
is purchasing IDP and who have heretofore served as President and Executive Vice
President of IDP, respectively. At the Closing, the Company will enter into
employment agreements with George D. Fuster and D. Oscar Fuster who will
thereafter continue in their present positions. The loss of one or more of these
key employees could have a material adverse effect on the Company's business.
See "Management."
CONTROL BY MANAGEMENT STOCKHOLDERS. Upon the completion of this Offering
and the IDP Acquisition, the Company's executive officers will collectively
beneficially own 49.9% (46.0% if the Over-Allotment Option is exercised in full)
of the Company's outstanding Common Stock. Because of their beneficial stock
ownership, these stockholders as a group will be in a position to elect the
members of the Board of Directors and decide most, if not all, matters requiring
stockholder approval. See "Principal Stockholders" and "Description of
Securities."
IDP'S STATUS UNDER THE 8(A) PROGRAM. IDP was approved to participate in the
SBA's 8(a) Program on June 3, 1994. IDP voluntarily withdrew from the 8(a)
Program on December 4, 1997, by entering into a Voluntary Withdrawal Agreement
with the SBA that, among other things, requires IDP to complete all previously
awarded 8(a) Program contracts and subcontracts, including modifications.
On January 21, 1998, SBA's Office of Inspector General ("OIG") issued a
final audit report closing out an audit concerning IDP's 8(a) Program
eligibility, and concluding that one of IDP's owners exceeded SBA's individual
net worth thresholds both at the time IDP was admitted to the 8(a) Program and
during 1996. The final audit report states, however, that IDP's voluntary
withdrawal from the 8(a) Program meets the intent of OIG's recommendation that
SBA initiate action to terminate IDP from the 8(a) Program. IDP is not aware of
any further SBA action or decision regarding the final audit report or its
recommendation.
While it is possible that the Government could initiate action against IDP
beyond the OIG's recommendation, including seeking to suspend or debar IDP from
contracting or to void or terminate IDP's 8(a) contracts, IDP believes the
following factors would weigh against initiation of such actions: (i) IDP has
already withdrawn from the 8(a) Program; (ii) IDP's Voluntary Withdrawal
Agreement with the SBA requires IDP to complete all of its 8(a) contracts; and
(iii) the OIG final audit report concludes that IDP's voluntary withdrawal from
the 8(a) Program satisfies the report's recommendation. Any action that results
in the voiding or termination of IDP's 8(a) contracts or exclusion of IDP from
federal procurements could have a material adverse effect on the Company. The
Company would expect to contest any such action vigorously.
BID PROTESTS AND SETTLEMENTS. From time to time, competitors of the Company
may commence protest proceedings with respect to Government contracts awarded to
the Company. In the past, Dunn and IDP,
9
<PAGE>
depending on the most advantageous course of action, have either defended or
settled such protests. Terms of settlement have included cash settlement,
payment of percentage of revenues received from the contract, or an agreement to
share the contract. In the past, certain of such proceedings or settlement
agreements have had a material adverse impact on IDP's results of operation.
There can be no assurance that such protests and or settlement agreements will
not have a material adverse effect on the Company in the future. See
"Business--Contracts."
SHARES ELIGIBLE FOR FUTURE SALE. At Closing, 9,097,743 shares of Common
Stock will be outstanding and the Company will also have outstanding options and
warrants to purchase up to a total of 2,832,000 shares of Common Stock. The
shares sold in this Offering and the 5,097,743 shares exchanged for Dunn's
common stock pursuant to the Merger (other than the 3,790,000 shares issued to
affiliates of the Company) will be freely tradable by the public. The 3,790,000
shares issued to affiliates of the Company in exchange for Dunn's common stock
pursuant to the Merger may be resold by them only in transactions permitted by
the resale provisions of Rule 145 promulgated under the Act (which incorporates
most of the conditions set forth in Rule 144, described below) or as otherwise
permitted under the Act and the rules and regulations thereunder. The remaining
750,000 outstanding shares of Common Stock (collectively, the "Restricted
Shares") have not been registered under the Act and may be resold publicly only
pursuant to an effective registration under that act or pursuant to an available
exemption from the registration requirements of that act (such as Rule 144
thereunder).
In general under Rule 144, if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from the issuer or
from an affiliate of the issuer, a person (or persons whose shares of Common
Stock are aggregated), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Common Stock that does not exceed the greater of: (i) 1% of the then
outstanding shares of Common Stock (i.e., 90,977 shares as of the Closing); and
(ii) the average weekly trading volume during a preceding period of four
calendar weeks. Sales under Rule 144 are also subject to certain provisions as
to the manner of sale, notice requirements and the availability of current
public information about the Company. In addition, under Rule 144(k), if a
period of at least two years has elapsed since the later of the date restricted
securities were acquired from the Company or the date they were acquired from an
affiliate of the Company, a stockholder who is not an affiliate of the Company
at the time of sale and has not been an affiliate for at least three months
prior to the sale would be entitled to sell shares of Common Stock in the public
market immediately without compliance with the foregoing requirements under Rule
144. In certain circumstances, Rule 144 permits a holder of restricted shares to
"tack" his holding period with that of his predecessor(s) who were not
affiliates at the time of transfer in order to meet Rule 144's holding period
requirements. Under Rule 144, an affiliate of the Company may sell shares of
Common Stock that are not "restricted securities" without regard to the one-year
holding period applicable in the case of restricted securities, subject to the
satisfaction of other conditions set forth in Rule 144. The foregoing summary of
Rule 144 is not intended to be a complete description thereof.
The Company, its directors and executive officers and certain other security
holders have agreed not to offer or sell any shares of Common Stock, or any
securities exchangeable, convertible or exercisable into or for shares of Common
Stock for a period of 180 days following the date of this Prospectus without the
prior approval of a representative for the Underwriters.
The effect, if any, of the availability for sale or the sale of the shares
of Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse. See "Shares Eligible For Future Sale."
VOLATILITY OF STOCK PRICE. The market prices of the stock of companies
providing IT products and services, including Dunn, have been highly volatile.
The market price of the Company's Common Stock is likely to be highly volatile
and may increase or may decrease significantly as a result of factors such as
actual or anticipated fluctuations in the Company's operating results, general
conditions in the computer
10
<PAGE>
hardware and software industries, announcements of new products, technological
innovations or new contracts by the Company or by its competitors, general
market conditions and other factors. In addition, shortfalls in sales or
earnings as compared with securities analysts' expectations, changes in such
analysts' recommendations or projections and general economic conditions, may
materially and adversely affect the market price of the Common Stock. Because it
is anticipated that there will be a limited public float in the Common Stock and
it will be thinly traded, sales of significant amounts of Common Stock in the
public market could have a material adverse effect on the market price for the
Common Stock. Although the Offering will result in there being a greater number
of shares of the Company's Common Stock publicly traded than the number of Dunn
shares publicly traded prior to the Offering, there can be no assurance that
there will be a more active trading market in the Company's Common Stock than
there has been in Dunn's shares.
REQUIREMENT TO MAINTAIN A SECURITY CLEARANCE. One of the Company's
Government contracts requires the Company to maintain a Government security
clearance. If the Company were to lose this clearance, the Company would not be
able to retain its current contract, and would not be able to obtain new
contracts requiring security clearances.
PROPRIETARY INFORMATION AND TECHNOLOGICAL CHANGE. The Company believes that
its business is dependent on its technical and organizational knowledge,
practices and procedures, and that the future success of the Company is based,
in part, on its ability to keep up to date with new technological breakthroughs
and incorporate such changes in its products, services and processes. Although
Dunn and IDP each seeks to protect its proprietary information by
confidentiality agreements with many of its employees, there can be no assurance
that these measures will prevent the unauthorized disclosure of such
information.
PREFERRED STOCK. The Company's Articles of Incorporation authorize the
issuance of 2,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be fixed from time to time by
amendment of the Articles of Incorporation adopted by the Company's Board of
Directors. Accordingly, the Company's Board of Directors is empowered, without
further stockholder approval, to cause the issuance of preferred stock with
dividend, liquidation, conversion, voting or other rights that could materially
and adversely affect the voting power or other rights of the holders of the
Common Stock. The Company has no current plans to issue any shares of preferred
stock; however, in the event of issuance, the preferred stock could be used,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of the Company. See "Description of Securities."
NO DIVIDENDS. To date, no dividends have been declared or paid by Dunn, or
by the Company on the Common Stock, and the Company does not anticipate
declaring or paying any dividends in the foreseeable future, but rather intends
to reinvest profits, if any, in its business. Investors should, therefore, be
aware that it is unlikely that any dividends will be paid on the Common Stock in
the foreseeable future. See "Dividend Policy."
YEAR 2000 UNCERTAINTIES. 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. 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 then. If they do not, the result could be 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. Further, if the software
applications of others on whose services the Company depends (such as suppliers
and subcontractors) 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 the application can be ported to a client/server network. The Company
believes with its technical services and its client/server hardware product
line, it will provide year 2000 solutions.
11
<PAGE>
THE REORGANIZATION AND THE IDP ACQUISITION
At Closing, (i) a subsidiary of the Company, Merger Sub, will merge into
Dunn, which will be the surviving corporation and will thereby become a
wholly-owned subsidiary of the Company, and (ii) the Company will acquire all
the issued and outstanding capital stock of IDP Co. and a newly-formed
subsidiary of the Company will acquire substantially all of the net assets of
PRIMO. The Company has agreed to pay $14.9 million in cash (the "Cash Portion"),
and 750,000 shares of Common Stock, (the "Share Portion") as consideration for
the IDP Acquisition.
The Cash Portion and the Share Portion are subject to adjustment under
certain conditions. If the average market closing price for shares of Dunn's
common stock during the 20 consecutive trading days immediately preceding two
business days before the Closing is less than $7.50, then the number of shares
of Common Stock included in the Share Portion will be increased to that number
of shares which multiplied by the average market closing price during such 20
trading day period equals $5,625,000. The amount of the Cash Portion may be
adjusted downward after the Closing if and to the extent that a combined balance
sheet of IDP Co. and PRIMO as at the date of the Closing reflects a net asset
value (net worth) of less than $5,108,826. Any such post-closing adjustment of
the Cash Portion will be made by Sellers paying to the Company the amount of the
shortfall in cash or in shares of Common Stock (which for this purpose will be
valued at $8.50 per share), as Sellers may elect. The amount of the Cash Portion
may be adjusted upward, by no more than $500,000, after the Closing if and to
the extent that a combined balance sheet of IDP Co. and PRIMO as at the date of
the Closing (after deducting from the liabilities reflected on such balance
sheet any amounts reflected in the liabilities for professional fees in
connection with the Acquisition Agreement and the Offering) reflects a net asset
value (net worth) of more than $5,242,634.
In connection with the Share Portion, the Company will grant George D.
Fuster and D. Oscar Fuster piggy-back registration rights and under certain
conditions demand registration rights. The Company intends to finance the Cash
Portion with part of the proceeds from this Offering. Upon Closing, George D.
Fuster and D. Oscar Fuster will own, in the aggregate, approximately 8.2% of the
Common Stock outstanding (or 8.0% if the Over-Allotment Option is exercised in
full). In addition to certain standard closing conditions, the IDP Acquisition
is contingent upon, among other things: (a) the execution of employment
agreements with George and Oscar Fuster pursuant to which they will receive,
among other things, stock options to purchase an aggregate of up to 600,000
shares of Common Stock subject to adjustment up to 800,000 shares under certain
conditions; (b) the election of George and Oscar Fuster to the Company's Board
of Directors; (c) payment by the Company of the Cash Portion; (d) completion of
this Offering; and (e) the prior transfer of certain assets and liabilities of
IDP's F Squared Engineering division to a separate subsidiary of the Company,
and the transfer of such subsidiary to certain IDP Sellers. See
"Management--Employment Agreements," "Principal Stockholders," "Management" and
"Certain Transactions."
The IDP Sellers have agreed to indemnify the Company and the Company has
agreed to indemnify the IDP Sellers until the second anniversary of the Closing
for losses resulting from breaches of certain representations and warranties.
Neither the Company nor the IDP Sellers are required to indemnify the other
unless and until the aggregate amount of such losses exceeds $500,000, whereupon
the Company or the IDP Sellers, as the case may be, are entitled to receive
indemnity payments to the full extent of the aggregate amount of losses not to
exceed $10.0 million.
The Acquisition Agreement may be terminated prior to the consummation of
this Offering, under certain circumstances. Specifically, the Acquisition
Agreement may be terminated (i) by the mutual consent of Dunn and the IDP
Sellers; (ii) if this Offering and the IDP Acquisition are not consummated by
June 30, 1998; or (iii) there shall have been entered a final non-appealable
order or injunction of any court or governmental authority restraining or
prohibiting the consummation of the transactions contemplated by the Acquisition
Agreement. There can be no assurance that the conditions to the closing of the
IDP Acquisition will be satisfied or waived or that the Acquisition Agreement
will not be terminated prior to Closing.
At the Closing, the Company will become a holding company owning 100% of
Dunn, through a subsidiary merger in which 5,097,743 shares of Common Stock will
be issued under a separate registration statement in a share-for-share exchange
for all of the outstanding shares of common stock of Dunn. Also in connection
with the Merger, the Company will issue options and warrants, on a one-for-one
basis, in exchange for all of the outstanding options and warrants of Dunn. At
the same time, the Company will use a portion of the net proceeds of the
Offering to close the IDP Acquisition. The Offering, Merger and IDP Acquisition
are each contingent upon completion of the others.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered hereby (at the assumed public offering price of $9.44 per
share) are estimated to be approximately $27,632,400 ($29,611,260 if the
Over-Allotment Option is exercised in full), after deduction of discounts and
commissions and Offering expenses payable by the Company.
Of such net proceeds, $14.9 million (or, in certain circumstances, up to
$15.4 million) will be used to finance the Cash Portion of the consideration for
the IDP Acquisition. The remainder of the net proceeds will be used to repay
IDP's line of credit that is used for accounts receivable and inventory
financing. At March 27, 1998, IDP's indebtedness amounted to $9,736,200, had an
annual interest rate of prime, and is payable on demand. See "Management's
Discussion and Analysis and Results of Operations--Liquidity and Capital
Resources."
Pending application of the net proceeds described above, the Company may
invest the funds in U.S. government securities, short-term certificates of
deposit, money market funds or other investment grade short-term
interest-bearing investments.
PRICE RANGE OF DUNN'S COMMON STOCK
Since April 1997, Dunn's common stock has been traded in the
over-the-counter market and prices are quoted on the Nasdaq National Market
under the symbol DNCC. The following table sets forth the high and low selling
prices for Dunn's common stock as reported by the Nasdaq National Market. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
------- --------
<S> <C> <C>
FISCAL 1997
First Quarter............... not public
Second Quarter.............. $ 7 1/8 $ 5
Third Quarter............... $ 7 1/4 $ 5 5/8
Fourth Quarter.............. $ 7 3/8 $ 5 1/2
FISCAL 1998
First Quarter............... $10 5/16 $ 6 21/32
Second Quarter (through
March 25, 1998)........... $10 $ 8 1/8
</TABLE>
On March 25, 1998, the closing price of Dunn's common stock as reported by
the Nasdaq National Market was $9 7/16 per share. There were approximately 1,000
beneficial holders of Dunn's common stock as of such date.
The Company's Common Stock has no trading history. The Common Stock will be
quoted on the Nasdaq National Market under the same symbol, DNCC, which has
previously been the symbol for Dunn's common stock.
DIVIDEND POLICY
Neither Dunn nor the Company has ever paid or declared a dividend. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business. See "Risk Factors--No Dividends."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization as of January 31, 1998 (i)
of Dunn on an actual basis; and (ii) of the Company on a pro forma as adjusted
basis, to give effect to the IDP Acquisition and the Merger as if both had
occurred on January 31, 1998 and to give effect to the issuance of 3,250,000
shares of Common Stock at an assumed public offering price of $9.44 per share in
this Offering and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
----------------------------
<S> <C> <C>
PRO FORMA
AS
ACTUAL ADJUSTED(2)
------------- -------------
Long-term debt..................................................................... $ 69,558 $ 230,418
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued
and outstanding on an actual, and pro forma as adjusted basis.................. --
Common Stock, $.001 par value; 20,000,000 shares authorized, 5,150,000(1) shares
issued and outstanding on an actual basis, and 9,150,000 shares issued and
outstanding on a pro forma as adjusted basis................................... 5,150 9,150
Additional paid-in capital....................................................... 5,087,371 39,750,771
Retained earnings................................................................ 3,834,340 3,834,340
------------- -------------
Total stockholders' equity....................................................... 8,926,861 43,594,261
------------- -------------
Total capitalization............................................................. $ 8,996,419 $ 43,824,679
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Does not include the following securities that were outstanding as of
January 31, 1998: (a) an aggregate of 2,200,000 shares of common stock
reserved for issuance pursuant to Dunn's 1997 Stock Option Plan of which
options to purchase 1,832,000 shares have been granted; (b) 25,000 shares of
common stock reserved for issuance pursuant to options granted in connection
with the STMS Acquisition, which options have since been repurchased by
Dunn; or (c) 200,000 shares of Dunn's common stock reserved for issuance
upon the exercise of certain warrants. See "Management--Stock Option Plan,"
and "Management--Employment Agreements."
(2) Pro forma adjustments give effect to the Merger and the IDP Acquisition as
if they both had occurred on January 31, 1998 and the sale of 3,250,000
shares of Common Stock offered by the Company hereby (at an assumed price to
the public of $9.44 per share) and the application of the net proceeds
therefrom.
14
<PAGE>
DILUTION
On a pro forma basis giving effect to the Merger, the Company's net tangible
book value at January 31, 1998 was approximately $6,006,347 or $1.17 per share
of Common Stock based on 5,150,000 shares of Common Stock outstanding. The net
tangible book value per share represents the amount of the Company's total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the IDP Acquisition, the Merger
and the receipt of the net proceeds (estimated to be approximately $27,632,400)
from the sale of the shares of Common Stock offered hereby at an assumed
offering price of $9.44 per share, the pro forma net tangible book value of the
Company at January 31, 1998 would have been $23,181,381 or $2.53 per share of
Common Stock. This would result in dilution to the public investors (i.e. the
difference between the estimated offering price per share of Common Stock and
the net tangible book value thereof after giving effect to this Offering) of
approximately $6.91 per share and dilution to former owners of IDP Co. of $6.85
as a result of the IDP Acquisition. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price..................................................... $ 9.44
Pro forma net tangible book value at January 31, 1998.................... $ 1.17
Increase in pro forma net tangible book value attributable to the IDP
Acquisition and this Offering.......................................... 1.36
-----
Pro forma net tangible book value after the IDP Acquisition and this
Offering................................................................. 2.53
-----
Pro forma dilution of net tangible book value to the new investors in this
Offering................................................................. $ 6.91
-----
-----
</TABLE>
The following table sets forth as of January 31, 1998, on a pro forma basis
giving effect to the Merger and the IDP Acquisition, with respect to the
Company's existing stockholders, the IDP Co. stockholders and investors in this
Offering, the number of shares of Common Stock acquired from the Company, the
percentage of ownership of such shares of Common Stock, the total consideration
paid, and the percentage of total consideration paid. The table assumes a public
offering price of $9.44 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 5,150,000 56.3% $ 5,008,521 11.7% $ 0.97
IDP Co. stockholders.......................... 750,000 8.2% 7,035,000 16.5% 9.38
New investors................................. 3,250,000 35.5% 30,680,000 71.8% 9.44
---------- --------- ------------- ---------
Total................................... 9,150,000 100.0% $ 42,723,521 100.0% $ 4.67
---------- --------- ------------- --------- -----
---------- --------- ------------- --------- -----
</TABLE>
15
<PAGE>
DUNN SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Dunn should be read in
conjunction with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The consolidated statement of income data
set forth below with respect to the fiscal years ended October 31, 1995, 1996
and 1997 and the consolidated balance sheet data as of October 31, 1996 and 1997
is derived from and is referenced to the audited consolidated financial
statements of Dunn (a predecessor to the Company) included elsewhere in this
Prospectus. The consolidated statement of income data set forth below with
respect to the fiscal years ended October 31, 1993 and 1994 and the consolidated
balance sheet data as of October 31, 1993, 1994 and 1995 is derived from audited
consolidated financial statements of Dunn not included in this Prospectus.
In the opinion of Dunn's management, the interim financial data reflect all
adjustments necessary to present fairly the results of operations for the three
months ended January 31, 1997 and 1998 and Dunn's financial position at January
31, 1998. These adjustments are of a normal, recurring nature. The results of
operations of the interim periods are not necessarily indicative of results that
may be expected for a year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED OCTOBER 31, ENDED JANUARY 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues.................................. $ 5,812 $ 4,429 $ 7,491 $ 18,099 $ 21,766 $ 5,505 $ 10,429
Costs of revenues............................. 4,858 3,444 6,046 14,103 17,549 4,199 7,990
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................................. 954 985 1,445 3,996 4,217 1,306 2,439
Selling, general and administrative........... 761 1,005 966 1,972 2,198 434 1,290
--------- --------- --------- --------- --------- --------- ---------
Income from operations........................ 193 (20) 479 2,024 2,019 872 1,149
Other income (expense)........................ (1) (32) 8 (9) 98 8 (43)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before income taxes......... 192 (52) 487 2,015 2,117 880 1,106
Provision for (benefit from) income taxes..... 65 (11) 244 776 795 334 417
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............................. $ 127 $ (41) $ 243 $ 1,239 $ 1,322 $ 546 $ 689
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share (1)................. $ 0.05 $ (0.01) $ 0.06 $ 0.31 $ 0.29 $ 0.14 $ 0.13
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earning (loss) per share(1)--assuming
dilution.................................... $ 0.05 $ (0.01) $ 0.06 $ 0.31 $ 0.28 $ 0.13 $ 0.12
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares outstanding(1)........ 2,800 3,158 4,000 4,000 4,552 4,000 5,150
Weighted average shares outstanding(1)
assuming dilution(1)........................ 2,800 3,158 4,000 4,000 4,679 4,050 5,715
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY
AT OCTOBER 31, 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $ 351 $ 340 $ 512 $ 1,722 $ 4,339 $ 5,116
Total assets...................................... 1,149 2,503 3,647 5,275 18,703 15,519
Long-term debt.................................... 75 23 -- -- 75 70
Total liabilities................................. 804 2,046 3,047 3,335 10,465 6,592
Stockholders' equity.............................. 345 457 600 1,939 8,238 8,927
</TABLE>
- ------------------------
(1) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. For further discussion of earnings per share and the
impact of Statement No. 128, see Note 2 of the notes to Dunn's consolidated
financial statements included herein.
16
<PAGE>
IDP SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS)
The following selected combined financial data of IDP should be read in
conjunction with the combined financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The combined statement of income data set
forth below with respect to the fiscal years ended September 30, 1995, 1996 and
1997 and the combined balance sheet data as of September 30, 1996 and 1997 are
derived from and are referenced to the audited combined financial statements of
IDP included elsewhere in this Prospectus. The combined statement of income data
set forth below with respect to the fiscal year ended February 28, 1993, the
seven month period ended September 30, 1993 and the fiscal year ended September
30, 1994 and the combined balance sheet data set forth below as of February 28,
1993, and September 30, 1993, 1994 and 1995 are derived from the unaudited
combined financial statements of IDP not included in this Prospectus.
In the opinion of IDP's management, the unaudited interim combined financial
data reflects all adjustments necessary to present fairly the combined results
of operations for the three months ended December 31, 1996 and 1997 and IDP's
combined financial position as of December 31, 1997. These adjustments are of a
normal, recurring nature. The results of operations of the interim periods are
not necessarily indicative of results that may be expected for a year.
<TABLE>
<CAPTION>
SEVEN
YEAR MONTHS
ENDED ENDED YEAR ENDED SEPTEMBER 30,
FEB. 28, SEPT. 30, --------------------------------------------------
1993 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF INCOME DATA:
Sales........................................... $ 7,860 $ 6,216 $ 33,354 $ 80,432 $ 84,292 $ 71,921
Cost of sales................................... 6,056 4,746 28,841 69,025 71,890 58,996
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................................... 1,805 1,470 4,513 11,407 12,402 12,925
Selling, general and administrative............. 1,827 1,156 3,865 8,709 11,233 11,599
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations................... (22) 314 648 2,698 1,169 1,326
Other income (expense).......................... (83) (87) 92 (483) (9) (563)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes............... (105) 227 740 2,215 1,160 763
Income tax expense (benefit).................... (25) 106 306 278 (18) (418)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ (80) $ 121 $ 434 $ 1,937 $ 1,178 $ 1,181
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
COMBINED STATEMENT OF INCOME DATA:
Sales........................................... $ 35,999 $ 25,201
Cost of sales................................... 30,838 21,100
----------- -----------
Gross profit.................................... 5,161 4,100
Selling, general and administrative............. 3,651 3,694
----------- -----------
Income (loss) from operations................... 1,510 406
Other income (expense).......................... (184) (218)
----------- -----------
Income (loss) before income taxes............... 1,326 188
Income tax expense (benefit).................... 290 54
----------- -----------
Net income (loss)............................... $ 1,036 $ 134
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT FEBRUARY 28, AT SEPTEMBER 30, AT DECEMBER 31,
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1993 1994 1995 1996 1997 1997
--------------- ----------- ----------- ----------- --------- --------- ---------------
COMBINED BALANCE SHEET DATA:
Working capital................. $ 7 $ 24 $ 136 $ 1,773 $ 2,640 $ 2,935 $ 2,980
Total assets.................... 2,366 2,684 9,444 22,154 25,738 27,312 39,405
Long-term debt.................. 21 49 134 144 225 164 161
Total liabilities............... 2,241 2,327 8,632 19,405 21,810 22,203 34,163
Stockholders' equity............ 125 247 812 2,749 3,928 5,109 5,242
</TABLE>
17
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined balance sheet gives effect to the Merger,
the IDP Acquisition and the sale of 3,250,000 shares of Common Stock offered by
the Company (at an assumed price to the public of $9.44 per share) and the
application of net proceeds therefrom, as if each had occurred on January 31,
1998.
The unaudited pro forma combined statement of operations for the Company's
fiscal year ended October 31, 1997 gives effect to the Merger and the IDP
Acquisition as if each had occurred on November 1, 1996. The unaudited pro forma
combined statement of operations for the Company's three month period ended
January 31, 1998 gives effect to the Merger and the IDP Acquisition as if each
had occurred on November 1, 1996.
The unaudited pro forma combined balance sheet and 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 do 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 consolidated
financial statements of Dunn, including the notes thereto, the combined
financial statements of IDP, including the notes thereto, and the financial
statements of STMS, including the notes thereto, included elsewhere in this
Prospectus.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION OFFERING PRO FORMA
DUNN (A) IDP (B) ADJUSTMENTS (C) ADJUSTMENTS (G) COMBINED
-------------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..... $ 162,359 $ 891,493 $ (14,900,000)(c) $ 14,900,000 $ 1,053,852
Accounts receivable, net...... 8,373,278 14,595,651 -- -- 22,968,929
Employee and stockholder
advances.................... -- 118,587 -- -- 118,587
Prepaid expenses and other
assets...................... 120,052 1,735,269 -- -- 1,855,321
Inventory, net................ 2,882,118 18,652,198 -- -- 21,534,316
Income taxes receivable....... -- 401,775 -- -- 401,775
Deferred income taxes......... -- 443,415 -- -- 443,415
-------------- ------------- --------------- --------------- -----------
Total current assets............ 11,537,807 36,838,388 (14,900,000) 14,900,000 48,376,195
Property and equipment, net... 598,257 2,325,143 -- -- 2,923,400
Deferred income taxes......... -- 17,631 -- -- 17,631
Investments................... 275,000 31,200 -- -- 306,200
Goodwill and other intangible
assets, net................. 2,920,514 -- 17,492,366(d) -- 20,412,880
Other assets.................. 186,958 193,027 -- -- 379,985
-------------- ------------- --------------- --------------- -----------
Total assets.................... $ 15,518,536 $ 39,405,389 $ 2,592,366 $ 14,900,000 $72,416,291
-------------- ------------- --------------- --------------- -----------
-------------- ------------- --------------- --------------- -----------
Liabilities and stockholders'
equity Current liabilities
Accounts payable.............. $ 2,153,011 $ 17,495,811 $ 800,000(e) $ -- $20,448,822
Accrued expenses.............. 483,151 2,839,493 -- -- 3,322,644
Income taxes payable.......... 417,662 112,174 -- -- 529,836
Notes payable--current
portion..................... 12,840 420,467 -- -- 433,307
Obligations under capital
leases-- current portion.... 54,319 -- -- -- 54,319
Notes payable--related
parties..................... -- 1,579,973 -- -- 1,579,973
Line of credit................ 2,826,789 11,340,942 -- (12,732,400) 1,435,331
Unearned revenue.............. 474,345 -- -- -- 474,345
Other liabilities............. -- 69,429 -- -- 69,429
-------------- ------------- --------------- --------------- -----------
Total current liabilities....... 6,422,117 33,858,289 800,000 (12,732,400) 28,348,006
Notes payable--long term
portion....................... 47,105 160,860 -- -- 207,965
Obligation under capital leases-
long-term portion............. 22,453 -- -- -- 22,453
Deferred rent................... -- 143,606 -- -- 143,606
Deferred tax credit............. 100,000 -- -- -- 100,000
-------------- ------------- --------------- --------------- -----------
Total liabilities............... 6,591,675 34,162,755 800,000 (12,732,400) 28,822,030
Commitments
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,
historical Dunn and
9,150,000 shares issued and
outstanding, pro forma
combined basis.............. 5,150 -- 750(f) 3,250 9,150
IDP common stock, no par
value; 5,000 shares
authorized, 100 shares
issued and outstanding...... -- 40,000 (40,000) (f) -- --
PRIMO common stock, no par
value; 10,000 shares
authorized, 7,000 shares
issued and outstanding...... -- 132,000 (132,000)(f) -- --
Additional paid-in capital.... 5,087,371 -- 7,034,250(f) 27,629,150 39,750,771
Retained earnings............. 3,834,340 5,070,634 (5,070,634)(f) -- 3,834,340
-------------- ------------- --------------- --------------- -----------
Total stockholders' equity........ 8,926,861 5,242,634 1,792,366 27,632,400 43,594,261
-------------- ------------- --------------- --------------- -----------
Total liabilities and
stockholders' equity.............. $ 15,518,536 $ 39,405,389 $ 2,592,366 $ 14,900,000 $72,416,291
-------------- ------------- --------------- --------------- -----------
-------------- ------------- --------------- --------------- -----------
</TABLE>
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR 1997
------------------------------------------------------------------------------------
IDP STMS
HISTORICAL HISTORICAL ACQUISITION HISTORICAL ACQUISITION
DUNN (H) IDP (I) ADJUSTMENTS SUBTOTAL (J) STMS (K) ADJUSTMENTS
-------------- ------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 21,766,465 $ 71,920,739 $ -- $93,687,204 $15,419,104 $ --
Costs of revenues............... 17,549,655 58,995,644 -- 76,545,299 13,532,509 --
-------------- ------------- ------------ ------------ ----------- ------------
Gross profit.................... 4,216,810 12,925,095 -- 17,141,905 1,886,595 --
Selling, general and
administrative expenses....... 2,197,704 11,598,705 -- 13,796,409 3,329,452 --
Amortization of intangible
assets........................ -- -- 1,006,761(l) 1,006,761 -- 240,000(l)
-------------- ------------- ------------ ------------ ----------- ------------
Income (loss) from operations... 2,019,106 1,326,390 (1,006,761) 2,338,735 (1,442,857) (240,000)
Other income (expense):
Interest income............... 109,877 31,359 -- 141,236 88,687 --
Interest expense.............. (11,813) (593,012) -- (604,825) (215,053) --
Miscellaneous, net............ -- (1,109) -- (1,109) (31,150) --
Loss on property and
equipment................... -- -- -- -- (182,338) --
-------------- ------------- ------------ ------------ ----------- ------------
Net income (loss) before income
taxes......................... 2,117,170 763,628 (1,006,761) 1,874,037 (1,782,711) (240,000)
Provision for (benefit from)
income taxes.................. 794,870 (417,447) -- 377,423 -- --
-------------- ------------- ------------ ------------ ----------- ------------
Income (loss) before
extraordinary item............ 1,322,300 1,181,075 (1,006,761) 1,496,614 (1,782,711) (240,000)
Extraordinary gain on debt
settlement.................... -- -- -- -- 359,716 --
-------------- ------------- ------------ ------------ ----------- ------------
Net income (loss)............... $ 1,322,300 $ 1,181,075 $(1,006,761) $1,496,614 $(1,422,995) $ (240,000)
-------------- ------------- ------------ ------------ ----------- ------------
-------------- ------------- ------------ ------------ ----------- ------------
EARNINGS PER COMMON SHARE:(P)
Income (loss) before
extraordinary item............ $ 0.29
Extraordinary gain on debt
settlement.................... --
--------------
Net income per common share..... $ 0.29
--------------
--------------
EARNINGS PER COMMON SHARE--
ASSUMING DILUTION(P):
Income (loss) before
extraordinary item............ $ 0.28
Extraordinary gain on debt
settlement.................... --
--------------
Net income per common share--
assuming dilution............. $ 0.28
--------------
--------------
<CAPTION>
PRO FORMA
COMBINED
-------------
<S> <C>
Net revenues.................... $ 109,106,308
Costs of revenues............... 90,077,808
-------------
Gross profit.................... 19,028,500
Selling, general and
administrative expenses....... 17,125,861
Amortization of intangible
assets........................ 1,246,761
-------------
Income (loss) from operations... 655,878
Other income (expense):
Interest income............... 229,923
Interest expense.............. (819,878)
Miscellaneous, net............ (32,259)
Loss on property and
equipment................... (182,338)
-------------
Net income (loss) before income
taxes......................... (148,674)
Provision for (benefit from)
income taxes.................. 377,423
-------------
Income (loss) before
extraordinary item............ (526,097)
Extraordinary gain on debt
settlement.................... 359,716
-------------
Net income (loss)............... $ (166,381)
-------------
-------------
EARNINGS PER COMMON SHARE:(P)
Income (loss) before
extraordinary item............ $ (0.07)
Extraordinary gain on debt
settlement.................... 0.05
-------------
Net income per common share..... $ (0.02)
-------------
-------------
EARNINGS PER COMMON SHARE--
ASSUMING DILUTION(P):
Income (loss) before
extraordinary item............ (0.07)
Extraordinary gain on debt
settlement.................... 0.05
-------------
Net income per common share--
assuming dilution............. $ 0.02
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER OF FISCAL YEAR 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
IDP
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
DUNN(M) IDP(N) ADJUSTMENTS COMBINED
--------------- ----------- -------------- ------------
Net revenues....................................................... $ 10,429,168 $25,200,523 $ -- $ 35,629,691
Costs of revenues.................................................. 7,989,879 21,100,060 -- 29,089,939
--------------- ----------- -------------- ------------
Gross profit....................................................... 2,439,289 4,100,463 -- 6,539,752
Selling, general and administrative expenses....................... 1,235,845 3,694,449 -- 4,930,294
Amortization of intangible assets.................................. 54,326 -- 251,690(o) 306,016
--------------- ----------- -------------- ------------
Income from operations............................................. 1,149,118 406,014 (251,690) 1,303,442
Other income (expense):
Interest income.................................................. -- 1,504 -- 1,504
Interest expense................................................. (37,618) (224,536) -- (262,154)
Miscellaneous, net............................................... (5,132) 4,544 -- (588)
--------------- ----------- -------------- ------------
Net income (loss) before income taxes.............................. 1,106,368 187,526 (251,690) 1,042,204
Provision for (benefit from) income taxes.......................... 417,662 53,718 -- 471,380
--------------- ----------- -------------- ------------
Net income (loss).................................................. $ 688,706 $ 133,808 $ (251,690) $ 570,824
--------------- ----------- -------------- ------------
--------------- ----------- -------------- ------------
Earnings per share................................................. $ 0.13 $ 0.07
--------------- ------------
--------------- ------------
Earnings per share--assuming dilution.............................. $ 0.12 $ 0.06
--------------- ------------
--------------- ------------
</TABLE>
20
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
- ------------------------
(a) Consolidated Balance Sheet of Dunn as of January 31, 1998.
(b) Combined Balance Sheet of IDP as of December 31, 1997.
(c) Represents adjustments for the IDP Acquisition based on a purchase price of
approximately $14.9 million in cash and an aggregate of 750,000 shares of
Common Stock. The 750,000 shares of the Company's Common Stock were valued
at a price per share of $9.38, which represents the closing market price of
Dunn's Common Stock on January 31, 1998, the assumed date of acquisition for
pro forma presentation. The purchase price has been allocated on a
preliminary basis to the assets and liabilities acquired based on fair
values of such assets and liabilities which are estimated to approximate
their book value.
(d) Represents certain intangible assets of IDP as determined by the Company.
The amounts allocated to intangible assets were as follows: $1,000,000 to
work force and $16,492,366 to goodwill and trademarks. All of the intangible
assets will be amortized on a straight-line basis over lives ranging from
five to twenty years.
(e) Represents $800,000 in estimated investment banking, legal, accounting and
printing expenses related to the IDP Acquisition.
(f) Represents elimination of IDP's stockholders' equity accounts, and issuance
of 750,000 shares of the Company's Common Stock valued at a price of $9.38
per share.
(g) Gives effect to the sale of 3,250,000 shares of Common Stock offered by the
Company hereby (at an assumed price to the public of $9.44 per share) and
the application of the net proceeds therefrom.
(h) Consolidated Statement of Operations for Dunn for the fiscal year ended
October 31, 1997.
(i) Combined Statement of Operations for IDP for the fiscal year ended
September 30, 1997.
(j) The Company has presented the combined statement of operations for Dunn and
IDP as the Company believes that this presentation is necessary for a
reader's understanding of the pro forma results of the combined entity. The
Company believes that STMS' statement of operations for the period from
November 1, 1996 to August 31, 1997 (effective date of the STMS Acquisition)
includes certain non-recurring charges that distort the overall pro forma
presentation. Futhermore, the Company believes that STMS will not operate in
the future at similar net loss levels.
(k) Statement of Operations for STMS from November 1, 1996 to August 31, 1997
(effective date of STMS Acquisition).
(l) Represents amortization expense of $1,006,761 and $240,000 related to the
intangible assets acquired in the IDP and STMS Acquisitions, respectively.
(m) Consolidated Statement of Operations for Dunn for the three months ended
January 31, 1998.
(n) Combined Statement of Operations for IDP for the three months ended December
31, 1997.
(o) Represents amortization expense of $251,690 related to the intangible assets
acquired in the IDP Acquisition.
(p) In 1997, the Financial Accounting Standards Board issued Statement No 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirement.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company manufactures and markets build-to-order computer systems and
provides related services to the Government and selected businesses. The Company
provides its customers with single-source solutions by manufacturing its own
brand of desktop and portable computers and high performance network client
servers and by offering services, which include network consulting, project
implementation, and technical support. The Company currently derives most of its
revenue from hardware sales to the Government, but also provides hardware and
services to medium and large businesses. The Company sells its products and
services to more than 950 customers.
Dunn was founded in 1987 and initially resold third party computers to the
Government. In 1991, Dunn began to manufacture and market its own line of
computers to better serve the rapidly changing Government market. Dunn completed
its initial public offering in April 1997. In September 1997, Dunn completed the
STMS Acquisition. The STMS Acquisition expanded Dunn's capabilities to provide a
wide variety of services including network consulting, project implementation
and technical support and provided new opportunities to sell computer hardware
into the commercial marketplace as part of a total network solution. By
manufacturing its own computer systems, the cost of which represents a
significant portion of the cost of a total solution, the Company believes it has
a sustainable competitive advantage over other network service providers and
computer resellers.
On March 9, 1998, Dunn entered into an agreement to acquire IDP, the second
largest supplier of portable computers and the ninth largest supplier of desktop
computers to the federal Government in 1996, according to industry sources. IDP
has two state-of-the-art manufacturing facilities located in Gaithersburg,
Maryland, and Guayama, Puerto Rico. The Gaithersburg facility is ISO 9000
certified and the Guayama facility is currently in the process of becoming ISO
9000 certified. Additionally, IDP has spent the last four years developing a
proprietary management information system that enables it to provide
build-to-order systems and world-wide customer support to the federal
Government. With the IDP Acquisition, the Company believes it has enhanced its
market position as a major supplier of computer systems and services to the
federal Government and to selected businesses.
Over 90% of the Company's revenues, on a pro forma basis, are generated from
the sale of hardware. Sales to customers within the U.S. Government accounted
for 70% of Dunn's revenues and 99% of IDP's revenues in their respective 1997
fiscal years. The Company's operating results are characterized by a number of
factors resulting from its emphasis on the Government market. For example, both
Dunn and IDP have historically experienced fluctuating quarterly results due to
uneven purchasing patterns of Government customers relating to the Government's
budgetary cycle. Consequently, sales for the first and fourth quarters typically
account for the greatest proportions of revenues each year. In addition, the
Company's Government contracts, which frequently provide for fixed prices, often
have initially low gross margins which will increase over the term of a contract
due to cost savings from technological improvements and shorter component life
cycles. Since most of the Company's Government contracts have 30-day delivery
terms, the Company is able to limit its inventory risks by purchasing components
to fill firm fixed-price contracts. Further, the Government is a reliable payor,
enabling the Company to predict cash flows and avoid losses from the bad debt.
The Company's most significant costs are components used in the manufacture
of desktop, portable and server systems. By manufacturing its own computer
systems instead of reselling third party products, the Company believes its
gross margin improves by at least 15%, which gives the Company a significant
advantage over computer resellers. The Company believes the combination of Dunn
and IDP will result in lower component costs because of increased volume
discounts.
The historical results of operation of IDP reflect a number of benefits
resulting from PRIMO being incorporated and located in Puerto Rico. For example,
the Puerto Rican government has granted PRIMO an exemption for 20 years from
property taxes and 90% of Puerto Rican income taxes. In addition, the
22
<PAGE>
Puerto Rican government subsidizes the employment and training of certain
employees. The government leases space to PRIMO for $2.20 per square foot. The
Company plans to apply to the government to receive similar benefits after the
IDP Acquisition and has already received positive indications that they will be
granted, but there can be no assurance in this regard.
RESULTS OF OPERATIONS OF DUNN
The following table sets forth for the fiscal years ended October 31, 1995,
1996 and 1997, and the three months ended January 31, 1997 and 1998, certain
income and expense items of Dunn as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 80.7% 77.9% 80.6% 76.3% 76.6%
--------- --------- --------- --------- ---------
Gross profit............................ 19.3% 22.1% 19.4% 23.7% 23.4%
Selling and marketing................... 2.1% 2.6% 3.9% 3.3% 5.3%
General and administrative.............. 10.8% 8.3% 6.2% 4.6% 7.1%
--------- --------- --------- --------- ---------
Income from operations.................. 6.4% 11.2% 9.3% 15.8% 11.0%
Other income (expense).................. 0.1% (0.1%) 0.4% 0.2% (0.4%)
--------- --------- --------- --------- ---------
Net income before income taxes.......... 6.5% 11.1% 9.7% 16.0% 10.6%
Provision for income taxes.............. 3.3% 4.3% 3.6% 6.1% 4.0%
--------- --------- --------- --------- ---------
Net income.............................. 3.2% 6.8% 6.1% 9.9% 6.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
Net revenues of Dunn for the first quarter ended January 31, 1998 ("first
quarter 1998") increased 89.4% to $10.4 million from $5.5 million for the first
quarter ended January 31, 1997 ("first quarter 1997"). This increase was
primarily due to additional revenue from STMS, which was acquired in the fourth
quarter of 1997, and increased revenues from certain Government contracts.
Gross profit of Dunn for the first quarter 1998 increased 86.8% to $2.4
million from $1.3 million for the first quarter 1997. However, the gross profit
as a percentage of net revenues during the same periods decreased to 23.4% from
23.7%. The decrease in gross profit margin is a result of an increase in the
percentage of lower margin third party hardware sales associated with the
network services business.
Selling and marketing expense of Dunn increased for the first quarter 1998
by 204.1% to $552,000 from $182,000 for the first quarter 1997. During the same
periods, as a percentage of net revenues, selling and marketing expenses
increased to 5.3% from 3.3%. The increase was primarily attributable to
increased sales and marketing expenses related to its network service products.
General and administrative expenses of Dunn for the first quarter 1998
increased 192.8% to $738,000 from $252,000 for the first quarter 1997. As a
percentage of net revenues, general and administrative expense increased to 7.1%
for the first quarter 1998 from 4.6% for the first quarter 1997. This increase
was primarily the result of additional administrative costs associated with
personnel retained in the STMS Acquisition.
Other income (expense) for the first quarter 1998 decreased to an expense of
$43,000 from income of $8,000 for the first quarter 1997. The increase in cost
is attributable to increased interest expense. The effective tax rate decreased
to 37.8% for the first quarter 1998 from 38.0% for the first quarter 1997. The
Company's net income increased by 26.2% for the first quarter 1998 to $689,000
from $546,000 for the first quarter 1997. Net income as a percentage of net
revenues during the same periods declined to 6.6% from 9.9%.
23
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
Net revenues of Dunn for the fiscal year ended October 31, 1997 ("fiscal
1997") increased 20.3% to $21.8 million from $18.1 million for fiscal year ended
October 31, 1996 ("fiscal 1996"). This increase was primarily due to additional
revenue resulting from the fourth quarter acquisition of STMS and increased
revenues from Government contracts.
Gross profit of Dunn for fiscal 1997 increased 5.5% to $4.2 million from
$4.0 million for fiscal 1996. However, the gross profit as a percentage of net
revenues during the same periods decreased to 19.4% from 22.1%. The decrease in
gross profit margin is a result of an increase in the percentage of lower margin
third party hardware sales, initial lower margins realized on two new contracts
and increased production costs.
Selling and marketing expense of Dunn increased for fiscal 1997 by 77.2% to
$842,000 from $475,000 for fiscal 1996. During the same periods, as a percentage
of net revenues, selling and marketing expenses increased to 3.9% from 2.6%. The
increase was primarily attributable to increased advertising in selected
publications, increased attendance at trade shows and the development of a
marketing campaign aimed at selected businesses.
General and administrative expense of Dunn for fiscal 1997 declined 9.5% to
$1.4 million from $1.5 million for fiscal 1996. As a percentage of net revenues,
general and administrative expense declined to 6.2% for fiscal 1997 from 8.3%
for fiscal 1996. Although Dunn increased its costs in almost all aspects of
general and administrative expenses, the increased costs were offset by a
decline in executive officers' incentive compensation.
Other income (expense) for fiscal 1997 increased to income of $98,000 from
an expense of $9,000 for fiscal 1996. The increase was a result of use of
proceeds from Dunn's initial public offering in April 1997 to reduce debt
obligations and to invest in tax-exempt securities. Dunn's effective tax rate
declined to 37.5% for fiscal 1997 from 38.5% for fiscal 1996 as a result of the
non-taxable interest income. Dunn's net income grew by 6.7% for fiscal 1997 to
$1.3 million from $1.2 million for fiscal 1996. Net income as a percentage of
net revenues during the same periods declined to 6.1% from 6.8%.
FISCAL YEAR ENDED OCTOBER 31, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1995
Net revenues of Dunn for fiscal 1996 increased 141.6% to $18.1 million from
$7.5 million for fiscal year ended October 31, 1995 ("fiscal 1995"). The
increase was due to four new contracts. Three of such contracts were with
commercial customers that sell to the federal Government. Net revenues in fiscal
1996 from each of these contracts were $1.6 million, $2.9 million, $3.1 million,
and $2.4 million.
Gross profit of Dunn for fiscal 1996 increased 176.6% to $4.0 million from
$1.4 million for fiscal 1995. The increase was a result of increased sales and
an increase in gross profit as a percentage of sales. The gross profit as a
percentage of net revenues during the same periods increased to 22.1% from
19.3%. The increase in gross profit margins resulted from an increase in volume
discounts for computer components and a reduction in warranty expense.
Selling and marketing expense of Dunn for fiscal 1996 increased by 208.5% to
$475,000 from $154,000 for fiscal 1995. During the same periods, as a percentage
of net revenues, selling and marketing expenses increased to 2.6% from 2.1%. The
increase was primarily attributable to increased sales personnel and
advertising.
General and administrative expense of Dunn for fiscal 1996 increased 84.3%
to $1.5 million from $812,000 for fiscal 1995. As a percentage of net revenues,
general and administrative expense declined to 8.3% for fiscal 1996 from 10.8%
for fiscal 1995. The increase in expense was attributable to increased incentive
compensation for executive officers.
Other income (expense) for fiscal 1996 declined to an expense of $9,000 from
an income of $8,000 for fiscal 1995 as a result of increased interest expense.
Dunn's effective tax rate declined to 38.5% for fiscal 1996 from 50.1% for
fiscal 1995. Dunn's net income grew by 409.8% for fiscal 1996 to $1.2 million
from
24
<PAGE>
$243,000 for fiscal 1995. Net income as a percentage of revenue during the same
periods increased to 6.8% from 3.2%.
RESULTS OF OPERATIONS OF IDP
The following table sets forth for the fiscal years ended September 30,
1995, 1996 and 1997 and the three months ended December 31, 1996 and 1997,
certain income and expense items of IDP as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 85.8% 85.3% 82.0% 85.7% 83.7%
--------- --------- --------- --------- ---------
Gross profit.......................... 14.2% 14.7% 18.0% 14.3% 16.3%
Operating expense..................... 10.8% 13.3% 16.1% 10.1% 14.7%
--------- --------- --------- --------- ---------
Income from operations................ 3.4% 1.4% 1.9% 4.2% 1.6%
Other income (expense)................ (0.6%) -- (0.8%) (0.5%) (0.9%)
--------- --------- --------- --------- ---------
Income before income taxes............ 2.8% 1.4% 1.1% 3.7% 0.7%
Income tax expense (benefit).......... 0.4% -- (0.5%) 0.8% 0.2%
--------- --------- --------- --------- ---------
Net income............................ 2.4% 1.4% 1.6% 2.9% 0.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
Net revenues of IDP for the three months ended December 31, 1997 decreased
30.0% to $25.2 million from $36.0 million for the three months ended December
31, 1996. The decrease was primarily attributable to the expiration of a large
agency-specific IDIQ contract in January 1997. This contract accounted for $9.3
million of revenues for the three month period ended December 31, 1996.
Gross profit for IDP's three months ended December 31, 1997 decreased 20.6%
to $4.1 million from $5.2 million for the three months ended December 31, 1996.
Gross profit as a percentage of revenues during the same periods increased to
16.3% from 14.3%. The decrease in gross profit dollars is a result of lower
revenues. The increase in gross profit as a percentage of revenues is a result
of lower component costs due to better negotiated supply contracts.
Operating expense for IDP's three months ended December 31, 1997 and
December 31, 1996 held flat as a gross dollar amount at $3.7 million. As a
percentage of revenues for the same periods, the operating expenses increased to
14.7% from 10.1%. This increase is a result of lower revenues and having kept
the infrastructure intact in order to perform on the Desktop V contract.
An income tax expense of $54,000 was recorded for the three month period
ending December 31, 1997, as compared to $290,000 for the three months ended
December 31, 1996. This decrease was a result of IDP (excluding PRIMO) having a
loss before income taxes of $1.2 million for the three months ended December 31,
1997 compared to income before income taxes of $618,000 for the three months
ended December 31, 1996. An income tax benefit was not recorded for the IDP
loss. PRIMO has a 90% exemption from Puerto Rico income taxes under the Puerto
Rico Tax Incentives Act of 1987, as amended.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net revenues of IDP for the fiscal year ended September 30, 1997 ("IDP's
fiscal 1997") decreased 14.7% to $71.9 million from $84.3 million for fiscal
year ended September 30, 1996 ("IDP's fiscal 1996"). The decrease was
attributable to the expiration of two large agency-specific IDIQ contracts, a
decline in revenue from its GSA Schedule and an extraordinary delay in sales
caused by a third party protest of the Desktop V contract protest. See
"Business--Contracts."
25
<PAGE>
Gross profit for IDP's fiscal 1997 increased 4.2% to $12.9 million from
$12.4 million for IDP's fiscal 1996. Gross profit as a percentage of net
revenues during the same periods increased to 18.0% from 14.7%. The increase was
primarily attributable to higher margins achieved in connection with certain
service and warranty revenue.
Operating expense for IDP's fiscal 1997 increased by 3.3% to $11.6 million
from $11.2 million for IDP's fiscal 1996. During the same periods, as a
percentage of net revenues, operating expenses increased to 16.1% from 13.3%.
This increase was primarily related to an increase in the number of technical
personnel in the customer service and sales departments.
Other income for IDP's fiscal 1997 decreased by 96.4% to $31,000 from
$870,000 for IDP's fiscal 1996. This decrease was a result of a one time bid
protest settlement payment of $750,000 that was received in IDP's fiscal 1996.
Other expenses for IDP's fiscal 1997 decreased by 32.4% to $594,000 from
$879,000 for IDP's fiscal 1996. The decrease was largely attributable to reduced
interest expense resulting from improved inventory management and an increased
cash position.
Income tax benefit for IDP's fiscal 1997 increased to $417,000 from $18,000
for IDP's fiscal 1996 as a result of IDP (excluding PRIMO) having a loss before
income taxes of $1.8 million in 1997 compared to a loss before income taxes of
$222,000 in 1996. Income earned by PRIMO is not subject to federal income taxes
(unless and until repatriated into the U.S.). PRIMO has been granted a 90%
exemption from Puerto Rico income taxes under the Puerto Rico Tax Incentives Act
of 1987, as amended. As a result of the IDP Acquisition, a significant portion
of the federal tax benefits that have accrued to PRIMO will not accrue to the
Company.
On January 9, 1998, IDP sold its partnership interest in the Maryland
general partnership known as the Justice Technology Partners ("Partnership"),
for the amount of approximately $758,000. The original investment of $31,200
made in fiscal year ended September 30, 1994 ("IDP's fiscal 1994"), equated to a
24.0% ownership. This amount will be distributed to the IDP Sellers as a
performance bonus prior to the Closing.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net revenue for IDP's fiscal 1996 increased by 4.8% to $84.3 million from
$80.4 million for the fiscal year ended September 30, 1995 ("IDP's fiscal
1995"). This growth was primarily attributable to increased sales from
agency-specific contracts and its GSA Schedule.
Gross profit for IDP's fiscal 1996 increased by 8.7% to $12.4 million from
$11.4 million for IDP's fiscal 1995. Gross margin as a percentage of net revenue
increased to 14.7% from 14.2% during the same period, as a result of lower
component prices due to increased volume and industry-wide price reductions.
Operating expense for IDP's fiscal 1996 increased by 29.0% to $11.2 million
from $8.7 million for IDP's fiscal 1995. Operating expense as percentage of net
revenue increased to 13.3% from 10.8% during the same period primarily as a
result of increased staffing and larger facilities in anticipation of securing
the Desktop V contract, increased professional fees, a write-off on repair
service parts and increased depreciation.
Other income for IDP's fiscal 1996 increased to $870,000 from $37,000 for
IDP's fiscal 1995. The increase was substantially related to a bid protest
settlement of $750,000 received in IDP's fiscal 1996. Other expenses for IDP's
fiscal 1996 increased by 69.1% to $879,000 from $520,000 for IDP's fiscal 1995.
This increase was largely attributable to an increase in interest expense.
Income tax benefit was $17,000 for IDP's fiscal 1996 versus an income tax
expense of $278,000 from IDP's fiscal 1995 as a result of IDP (excluding PRIMO)
having a loss before income taxes in 1996 of $222,000 compared to income before
taxes of $355,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter 1998, Dunn used net cash of $3.0 million for its
operating activities. Although Dunn generated net income of $689,000, Dunn used
$7.1 million in cash to reduce its accounts payable
26
<PAGE>
balance, which was primarily funded by increases in its line of credit
facilities. For IDP, for the quarter ended December 31, 1997, net cash used in
operating activities was approximately $5.7 million, which was attributable
mainly to period end sales resulting in increased accounts receivable of $8.9
million, partially offset by increases in accounts payable of $4.7 million. The
net cash used in operating activities was primarily financed through net
drawdowns on the IDP line of credit of $5.7 million.
In fiscal 1997 Dunn used $3.5 million in its operations. Although Dunn
generated cash from its net income of $1.3 million, the increase in accounts
receivable and inventories of $8.2 million was the principal use of funds. The
increase in revenue for fiscal 1997 from fiscal 1996 resulted in the increase in
accounts receivable in the fourth quarter. The $2.9 million increase in
inventory reflects the increased requirement for components to fill orders in
the first quarter of the fiscal year ended October 31, 1998 ("fiscal 1998"). The
use of funds was partially offset by the increase in accounts payable of $3.9
million. The Company used $1.0 million in its investing activities, of which
$900,000 was used in the STMS Acquisition and the balance used for property and
equipment.
IDP has historically met its cash flow needs through cash generated by
operations and its bank credit arrangements. In IDP's fiscal 1997, IDP generated
positive cash flow from operations of $3.1 million. The principal source of cash
was from a decrease in accounts receivable of $912,000 and an increase in
accounts payable of $1.2 million. In IDP's fiscal 1996, IDP generated positive
cash flow from operations of $440,000. The principal source of cash was a
decrease in accounts receivable of $9.2 million, an increase in inventory of
$6.4 million and a decrease in accounts payable of $3.2 million.
Dunn received $3.9 million in net proceeds from its initial public offering
in April 1997. Other significant financing activities were provided by Dunn's
bank line of credit with First Union Bank (formerly Signet Bank). In December
1997, the bank agreed to increase the line from $2.0 to $4.0 million. The line
of credit expires on May 31, 1998 and currently bears interest at prime. As of
March 25, 1998, Dunn had no outstanding balance on the line of credit.
IDP has borrowing agreements with Deutsche Financial Services for an
aggregate of $25.0 million, of which $15.0 million is secured by IDP's inventory
and $10.0 million is secured by IDP's accounts receivable. Each of these
facilities bears an annual interest rate of prime. Under the inventory financing
facility, IDP normally receives 30 days free of interest when purchases are made
from distributors, and 45 days free of interest when purchases are made from
manufacturers. Under the accounts receivable financing facility, IDP can borrow
against up to 85% of eligible receivables and is subject to various financial
covenants. There is no formal expiration date on these facilities, although it
is subject to annual re-evaluation. As of March 27, 1998 IDP had $9,736,200
outstanding on its line of credit.
IDP also maintains a banking relationship with Damascus Community Bank where
it holds a checking account, and has received demand loans, secured by the
checking account. As of December 31, 1997, IDP had notes payable to related
parties of $1.6 million bearing annual interest at rates ranging from 8.0% to
11.0% and are payable upon demand. The Company will assume $1.6 million of these
notes at Closing bearing annual interest rates from 8.0% to 11.0%, and
maturities from one to three years.
On October 31, 1997, Dunn had working capital of $4.3 million. The Company
believes the net proceeds from this Offering, the existing IDP and Dunn bank
facilities, together with cash on hand and the cash generated from operations,
will provide sufficient financial resources to finance the current operations of
the Company through fiscal 1998.
Dunn is the guarantor on $1.0 million of mortgage debt for a partnership
owned and controlled by the President and Vice President of the Company. The
mortgage debt is for the facilities currently occupied by Dunn in Sterling,
Virginia. See "Business--Facilities." In addition, Dunn has obligations under
its operating lease commitments of approximately $500,000 and obligations under
its existing employment contracts of approximately $1.0 million for fiscal 1998.
IDP has lease commitments of approximately $634,000 through December 31, 1998.
With the IDP Acquisition, the Company will assume annual obligations pursuant to
employment agreements of approximately $420,000.
27
<PAGE>
From time to time, the Company may pursue strategic acquisitions or mergers
which may require significant additional capital and, in such event, the Company
may seek additional financing of debt and/or equity.
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 the application can be ported to a client/server
network. The Company believes with its technical services and its client/server
hardware product line, it provides Year 2000 solutions. See "Risk Factors--Year
2000 Uncertainties."
The Desktop V contract was awarded to IDP in 1996 pursuant to the 8(a)
Program and therefore contains a "termination for convenience" clause if the
program-eligible owner(s) relinquish ownership of the firm, unless the procuring
agency requests a waiver from the SBA. The Air Force has been advised of the
pending change in ownership of IDP, and has requested a waiver. The Company
expects that the SBA will not oppose the waiver. A protestor has asserted that
IDP is bound by a settlement agreement that calls for payment of 1.8% of IDP's
revenues derived from the Desktop V contract. The Company contests the
assertion. See "Business--Contracts."
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 does not expect the adoption of SFAS 130 to be
material to its financial condition and results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial 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 disclosures for
segment information in the consolidated financial statements is not expected to
be material to its financial condition and results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting 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.
28
<PAGE>
BUSINESS
GENERAL
The Company manufactures and markets build-to-order computer systems and
provides related services to the Government and selected businesses. The Company
provides its customers with single-source solutions by manufacturing its own
brand of desktop and portable computers and high performance network client
servers and by offering services, which include network consulting, project
implementation, and technical support. The Company currently derives most of its
revenue from hardware sales to the Government, but also provides hardware and
services to medium and large businesses. The Company sells its products and
services to more than 950 customers, including customers from agencies within
the Department of Defense, Department of Justice, Administrative Office of the
U.S. Courts ("U.S. Courts"), Social Security Administration, Lockheed Martin
Corporation ("Lockheed"), Blue Cross and Blue Shield Association and Inova
Health Care Systems, Inc.
The Company believes that the rapid technological change and increased
complexity of the computer industry will result in an increasing number of
entities outsourcing total network solutions to third party providers. To
position the Company as a total network solution provider, Dunn completed the
STMS Acquisition in September 1997. This acquisition expanded Dunn's
capabilities to provide a wide variety of services including network consulting,
project implementation and technical support and provided Dunn with new
opportunities to sell computer hardware into the commercial marketplace as part
of a total network solution. By manufacturing its own computer systems, the cost
of which represents a significant portion of the cost of a total solution, the
Company believes it has a sustainable competitive advantage over other network
service providers and computer resellers.
The Company seeks to establish itself as a leading provider of network
solutions to the Government and to increase sales of its hardware and services
to the commercial market. One of the key elements of this strategy is
integrating the Company's hardware and network services into a total solution
for its Government customers, which management believes will increase revenues
and improve margins. In the commercial market, management plans to leverage the
Company's customer relationships developed through sales of its network services
to expand sales of its hardware products. The Company will continue to focus on
quality to attract and retain customers, increase efficiency and reduce costs.
Consistent with its overall strategy, the Company intends to pursue strategic
acquisitions that will complement its product or service capabilities and
increase its overall value.
THE IDP ACQUISITION
The Company has agreed to pay the IDP Sellers $14.9 million in cash and
750,000 shares of Common Stock, each subject to adjustment under certain
conditions, to acquire all of the outstanding capital stock of IDP Co. and,
through a newly-formed subsidiary, to acquire substantially all of the net
assets of PRIMO. See "The Reorganization and the IDP Acquisition." The Company
intends to finance the Cash Portion of the consideration for the IDP Acquisition
with part of the net proceeds from this Offering. In the Government market, IDP
is a leading manufacturer of portable and desktop computer systems and network
servers and a provider of repair and warranty services. IDP manufactures its
products in its ISO 9000 certified facility in Gaithersburg, Maryland and in its
facility in Guayama, Puerto Rico. Additonally, IDP has spent the last four years
developing a proprietary management information system that enables it to
provide build-to-order systems and world-wide customer support to the federal
Government.
According to estimates of an IT industry research group, IDP was the second
leading supplier of notebook computers ahead of International Business Machine
Corporation ("IBM"), Compaq Computer Corporation ("Compaq") and Dell Computer
Corporation ("Dell") and the ninth largest supplier of desktop systems to the
federal Government in its fiscal 1996. IDP's customers include the agencies
within the Department of Defense, Department of Justice and Social Security
Administration. IDP had total
29
<PAGE>
revenue of approximately $71.9 million for fiscal 1997 and after giving effect
to the IDP Acquisition and the STMS Acquisition, the Company's pro forma
combined revenues for fiscal 1997 was $109.1 million.
The Company's management considers the IDP Acquisition to be consistent with
its growth strategy and believes that the IDP Acquisition will result in the
benefits set forth below, among others.
DOUBLE EXISTING GOVERNMENT CUSTOMER BASE. The Company believes the increase
in the Company's Government customer base is the most important element of the
IDP Acquisition. Dunn's customer base as of January 31, 1998 was over 450. As of
the Closing, the Company's Government customer base will be more than 950. IDP
estimates that it has sold more than 54,000 portable computers and 47,000
desktop computers to the federal Government and actively maintains over 30,000
systems. The changes in the procurement regulations of the Government have
enabled Government purchasers to buy from an expanding array of vendors. The
Company believes that the vast majority of these customers will continue to
purchase their computer hardware and technical services needs from those vendors
with whom they have a satisfactory working relationship. By doubling its
customer base early in the new procurement landscape, management believes it
will obtain a competitive advantage by developing a large network of loyal and
satisfied customers.
EXPAND THE COMPANY'S PORTABLE COMPUTER PRODUCT LINE. IDP offers a full line
of portable notebook computers and provides the customer support organization
required to further penetrate both the Government and commercial markets.
Portable computers, which represent the fastest growing segment of the computer
hardware market, accounted for approximately 40% of revenues in IDP's fiscal
1997. Prior to the IDP Acquisition, Dunn has not had a full line of portables,
and has not had the required support organization. With the IDP Acquisition, the
Company is positioned to meet the portable computer needs of its Government and
commercial customers.
PROVIDE COST SAVINGS AND ECONOMIES OF SCALE. The Company expects
significant consolidated cost savings to result from the IDP Acquisition. For
example, the Company expects the IDP Acquisition to: (i) result in greater
volume discounts on purchased part inventory; (ii) reduce overhead expense
through the elimination of duplicative operations and centralization of certain
general and administrative functions; (iii) create economies of scale from
combined utilization of facilities and production lines; (iv) reduce outside
professional fees; and (v) reduce costs from the integration of benefit plans.
MARKET
According to an industry research firm, sales in the worldwide market for
computer hardware was projected to total approximately $117 billion in 1996 and
to grow to approximately $149 billion by 1999. Sales in the U.S. computer
hardware market totaled $49 billion in 1996 and is projected to grow to
approximately $63 billion by 1999.
Based upon industry projections, worldwide computer hardware shipments are
expected to grow at an annual compounded growth rate of 14.4% from 1996 through
1999. Shipments of portable computers are estimated to grow at an annual
compound rate of 20.3%, from approximately 11.7 million units in 1996 to
approximately 20.4 million units in 1999. Desktop shipments are estimated to
grow at an annual compound rate of 12.9%, from approximately 54.6 million units
in 1996 to 78.5 million units in 1999. Shipments in the client server network
market is estimated to grow at an annual compound growth rate of 20.3%, from 1.1
million units in 1996 to 1.9 million units in 1999.
An industry source estimates that sales in the worldwide systems integration
market increased 9.4% in 1996 to $35.3 billion and is estimated to grow at a
compound annual growth rate of 11.3% over the next five years. Aggregate sales
in the U.S. systems integration market, which accounts for 49.7% of the
worldwide market, increased 13.0% in 1996 to $17.6 billion and is estimated to
grow at a compound annual growth rate of 12.2% over the next five years.
30
<PAGE>
GOVERNMENT MARKET
The Office of Management and Budget ("OMB") submitted to Congress a
Government IT budget, which includes funding for hardware and services, of $29.5
billion for fiscal 1998. According to market researcher, Input, Inc., the IT
budget is expected to grow from 3% in 1999 to 6% in 2002, to approximately $35.0
billion. These figures do not include expenditures by the intelligence community
which are estimated to be significant. The Company believes that while
Government down-sizing has decreased the number of federal employees, there has
been a corresponding increase in the demand for productivity tools such as
computers. Moreover, the Company believes the current trend toward outsourcing
both products and services is expected to continue to escalate in coming years.
Accordingly, the Company believes that demand for IT products and services in
the Government market will continue to increase.
The Information Technology Management Reform Act (the "ITMRA"), which took
effect on August 8, 1996, has had a profound effect on the way Government
procures computers and related products and services. The changes were made in
an effort to reduce costs and expedite the IT procurement process. The most
sweeping changes were the repeal of the Brooks Act that had granted sole
authority for IT purchases to the GSA and the change in the GSA Schedule from a
single year small purchase contracting program to a multi-year IDIQ contract
with no limit on the value of purchases. Because all federal Government agencies
may purchase IT products from vendors on the GSA Schedule, the transformation of
the GSA Schedule to an IDIQ contract will permit the Company to sell an
unlimited amount of products and services through the GSA Schedule to Government
entities.
Recently national attention has been focused upon the Year 2000 issue. The
Year 2000 issue is the result of 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. OMB has notified all Government agencies that
the funds required to correct the Year 2000 programming problem must come from
existing funding. In addition, the Director of OMB recently stated that no
additional IT funding would be authorized until each agency adequately addressed
any potential Year 2000 problem. Progress includes establishing good management
plans and establishing management structures to address and solve the Year 2000
issues. The Year 2000 problem can be solved either by software programming
corrections or replacement of main frame computers with client server networks.
The Company believes it will be able to increase its sales of client server
equipment and network services to help solve this problem in the Government.
COMMERCIAL MARKET
Heightened competition, deregulation, globalization and rapid technological
advances are forcing organizations to make fundamental changes in their business
processes. These pressures have compelled organizations to improve the quality
of products and services, shorten time to market, reduce costs and strengthen
client relationships. Organizations are addressing these issues by utilizing IT
solutions that facilitate the rapid and flexible collection, analysis and
dissemination of information. Accordingly, an organization's ability to
integrate and deploy new information technologies in a cost-effective manner has
become critical to competing successfully in today's rapidly changing business
environment.
At the same time, rapid technological change is challenging the capabilities
of management information system departments within these organizations. The
pace of this change quickly renders existing IT infrastructure obsolete and
makes it more difficult for organizations to maintain the requisite internal
expertise needed to evaluate, develop and integrate new technologies. The use of
complex networks involving a variety of manufacturers' equipment, operating
systems and applications software has made it increasingly difficult to diagnose
problems and maintain the technical knowledge and repair parts necessary to
provide support services. As a result, organizations are increasingly turning to
third-party IT service providers to help them develop and support complex
systems.
31
<PAGE>
Organizations seeking computer products increasingly require prospective
vendors not only to offer products from many manufacturers and suppliers, but to
have available proficient service expertise to assist them in product selection,
system design, installation and post-installation support and service. The
Company believes that the ability to offer customers a single-source solution to
their IT needs, including the ability to work within customers' corporate
environments as integral members of their management information system staff,
are increasingly important in the commercial marketplace. Because the Company
offers total network solutions which includes experienced technical expertise
together with its own computer hardware, management believes it is well
positioned to meet the growing demand for business solutions and,
simultaneously, to expand its sales of desktops, portables and servers.
STRATEGY
The Company seeks to increase revenues and profits by further penetrating
the Government market and selected businesses with its own build-to-order
computer systems and network services. To pursue this strategy, the Company
will:
LEVERAGE GOVERNMENT CUSTOMER BASE. The Company believes that the Government
market is both quality and cost sensitive and that the ability to manufacture
its own brand products provides significant cost advantages over equipment
resellers. Through targeted marketing programs, the Company intends to leverage
its existing relationships with customers to increase sales of its hardware and
network services.
TARGET THE COMMERCIAL MARKET. Management believes that opportunities for
computer hardware sales in the commercial market are directly linked to the
Company's ability to provide consulting, implementation and support services
that meet the customer's IT needs. It is the Company's experience that computer
hardware represents approximately 80% of the cost of a customer's total
solution. The Company intends to leverage its service capabilities to expand the
sales of its own brand-name computer systems as part of a total network
solution. By manufacturing its own computer systems, the Company believes it has
a sustainable competitive advantage over other network service providers and
computer resellers.
FOCUS ON QUALITY. The Company believes that continued commitment to quality
will attract and retain customers, increase efficiency and reduce costs. This
commitment is evidenced by the fact that the Company's Gaithersburg facility is
ISO 9000 certified, and its Sterling and Guayama facilities are in the process
of becoming ISO 9000 certified and are expected to receive certification within
the next 12 months. The Company also intends to obtain ISO 9000 certification
for all of its technical service operations.
PURSUE STRATEGIC ACQUISITIONS. The Company seeks acquisitions that
complement its core skills and that have the potential to increase the overall
value of the Company. Examples of such companies would include those that
broaden the Company's product line, service capabilities or customer base.
PRODUCTS
The Company manufactures, markets, sells and supports a wide range of high
performance desktop and notebook computer systems and network servers under Dunn
and IDP's respective brand names. These systems primarily use Pentium, Pentium
Pro and Pentium II microprocessors manufactured by Intel Corporation ("Intel")
and are assembled according to customer specifications using various memory,
storage, operating system, and application software configurations. The Company
also offers a variety of other system components with their computer systems and
network servers, including monitors, modems, graphics cards, disk arrays,
network cards and CD-ROM drives. All computer systems are assembled and
configured in the U.S. or Puerto Rico. In addition, the Company provides
services, including network consulting, project implementation, and technical
support. The Company's product line includes the following:
DESKTOPS. The Company produces a complete line of state-of-the-art desktop
computer systems which combine single or dual microprocessors with clock speeds
of up to 300MHz. Typical features include
32
<PAGE>
a 17 inch monitor, a 32 MB RAM, a 24x CD-ROM, a 3.2 GB hard drive, a 3 1/2 inch
floppy drive and Microsoft Windows '95 software. The systems can be expanded to
21-inch high resolution monitors, 128 MB of memory and up to 9 GB hard drives.
The standard warranty for a desktop is at least one year but can be increased to
up to five years for an additional fee. The desktops are priced between $1,200
and $6,500.
SERVERS. The Company manufactures a complete line of powerful network
servers. The servers can be configured with up to four microprocessors, two GB
of memory, redundant disk subsystems, redundant hot swappable power supplies and
Microsoft Windows NT software. The Company believes that their servers offer the
latest or "best of breed" component technology with a price-performance
advantage over major competition such as Hewlett Packard Company ("HP") and
Compaq. Due to a higher level of required support, the Company believes that the
server market provides opportunities for higher profit margins compared to other
segments in the computer hardware industry. The typical system retails for
approximately $20,000 and includes a three-year on-site manufacturer's warranty.
PORTABLES. With the IDP Acquisition, the Company will offer its customers a
complete line of portable computer systems and services. The notebooks typically
utilize a modular design that allows the user to carry only those devices
required for the specific task and generally include an Intel Pentium processor,
a removable 20x CD-ROM, a removable 2.1 GB hard drive, a removable floppy drive,
a 56 KB modem and Microsoft Windows '95 software. All units carry a warranty of
at least two years and are priced between $1,500 and $4,500.
NETWORK CONSULTING. The Company provides network consulting services
including requirements analysis, network audits, security audits, security
policy planning, network capacity planning, server capacity planning, and
technology and feasibility studies. These services are generally provided on a
fixed hourly fee basis.
PROJECT IMPLEMENTATION. The Company works closely with its clients to
design, install, implement, test and monitor systems that meet their specific
needs. As part of its strategy, the systems will incorporate the Company's own
hardware in many cases, as well as a variety of third-party network products,
including those manufactured by 3COM Corporation ("3COM"), Banyan Systems
Incorporated, Cisco Systems, Inc. ("Cisco") and Novell Inc., among others.
SUPPORT SERVICES. The Company provides a wide range of support options that
can be customized to each client's specific needs. Clients may purchase blocks
of the Company's technical personnel hours over a period of up to three years
from the purchase date, allowing clients to plan ahead and take advantage of
prepaid discounts. The Company also provides full service, term maintenance
contracts on third-party server and networking equipment which are based on a
fixed price and include all parts and labor. Alternatively, clients may opt for
a labor-only program providing standard technical resources on a one-time or
recurring regular basis.
CONTRACTS
In fiscal 1997, Dunn and IDP derived approximately 70% and 99%,
respectively, of their net revenues from sales of hardware and services to the
federal Government pursuant to contracts with the GSA or other agencies. Most of
these contracts are IDIQ contracts with a specified estimated value. The
"Estimated Value" of a specified contract is derived from the Company's prices
set forth on its bid submission and the Government agency's own estimate of the
quantities that are likely to be purchased pursuant to the contract over the
term of the contract. Generally, the Government has no significant obligation to
purchase any particular amount of any contract and sometimes awards contracts to
several vendors who compete to supply all of the needs of the Government
agencies purchasing pursuant to each contract. Furthermore, each Government
purchaser is constrained by the amount of its funded budget allotted for IT
products each year. Thus, actual amounts sold under the contract may be
significantly more
33
<PAGE>
or less than the Estimated Value. There can be no assurance that the Company
will actually realize revenues in the amount set forth as the Estimated Value of
such contract. Furthermore, such Government contracts are subject to termination
by the Government at its convenience and may or may not be renewed to the full
extent contemplated by the Government. See "Risk Factors-- Government
Contracting Risks."
Since the repeal of the Brooks Act in August of 1996, the GSA Schedule
became an important vehicle for Dunn and IDP to increase their sales of products
and services to the federal Government. The GSA Schedule enables all Government
IT purchasers to fulfill their requirements from any vendor holding a GSA
Schedule. Dunn's and IDP's contracts were awarded in April of 1996 and both are
valid through March 1999. On a pro forma combined basis, for the two fiscal
years ended October 31, 1997, the Company generated GSA Schedule revenues of
approximately $21.3 million, as compared to less than $5.0 million for the two
years ended October 31, 1995. The Company believes that the GSA Schedule will be
the most important contract vehicle for selling products and services to the
federal Government and expects to generate significant revenue from its GSA
Schedules in the future.
In fiscal 1997, Dunn generated revenues of $2.4 million under its contract
with Lockheed to provide computer network servers for the Department of
Defense's Worldwide Defense Messaging System ("DMS"). Lockheed is the prime
contractor on the DMS contract, which is expected to be the largest private
messaging network in the world, supporting approximately 2 million users. The
contract is a year-to-year contract which has been renewed twice and can be
renewed for up to three additional years. Over the expected life of the contract
Dunn estimates the total value to be approximately $33 million based upon
initial requirements and terms described in the contract. As of October 31,
1997, Dunn had received an aggregate of $5.5 million from the Lockheed contract.
In fiscal 1997, Dunn generated revenues of $4.6 million under its contract
with the U.S. Courts. Pursuant to this contract, Dunn provides desktop computer
systems and components, operating system software and peripheral devices and
interfaces. The U.S. Courts contract has a term of three years, and expires in
September 1998. The initial Estimated Value on the contract was in excess of
$15.0 million and as of October 31, 1997, Dunn had earned an aggregate revenue
of $10.9 million from the U.S. Courts contract.
In fiscal 1997, Dunn generated revenues of $1.0 million under its contract
with an agency of the Government responsible for certain intelligence
activities. Pursuant to this contract, Dunn provides a wide array of computer
equipment. This contract, which has a term of two years and expires in May 1999,
has an initial Estimated Value of $24.0 million.
In connection with this contract, Dunn's Sterling facility and certain
employees obtained the necessary security clearances to perform the contract.
During IDP's fiscal 1997, IDP derived $20.6 million, $19.4 million and $15.4
million from the Department of Justice, the Department of the Army and the
Federal Bureau of Investigation contracts, respectively, which have since
expired. Since expiration, IDP has continued to receive orders from the
Department of Justice and the Department of the Army pursuant to its other
contract vehicles such as the GSA Schedule and expects such orders to continue.
In May 1997, IDP was awarded a contract by the U.S. Air Force to provide
high performance desktop computers, portable computers and network servers (the
"Desktop V contract"). The contract has a term of five years and expires in May
2002; however, the period for ordering computer systems is the first three
years. The Desktop V contract is a government-wide acquisition contract that is
open to all departments and agencies of the federal Government except for the
Department of the Army and the Department of the Navy. As of January 31, 1998,
IDP has received orders totalling approximately $8.7 million, of which $7.6
million has been recognized as revenues. In connection with the Desktop V
contract, a protestor has asserted that IDP is bound by a settlement agreement
that calls for payments of 1.8% of its revenues derived from such contract. The
Company contests the assertion. However, there can be no assurance that,
34
<PAGE>
should this matter be litigated, a court will not agree with the protestor's
assertion and will not require IDP to make such payments. The Desktop V contract
was awarded pursuant to the 8(a) program and therefore contains a "termination
for convenience" clause in the event the program-eligible owners relinquish
ownership of the firm, unless the procuring agency requests a waiver from the
SBA. The Air Force has been advised of the pending change in ownership of IDP
and has requested a waiver. The Company expects that the SBA will not oppose the
waiver. Over the life of the Desktop V contract, IDP estimates the total value
to be approximately $100.0 million. See "Risk Factors--Risks Related to the IDP
Acquisition and Future Acquisitions" and "Risk Factors--Bid Protests and
Settlements."
In January 1998, IDP was awarded a desktop management contract by the
Department of the Navy. This contract provides the Department of the Navy with
desktop, notebook and networking systems to modernize ship and shore-based IT
systems. The contract, which has a term of five years and expires in January
2003, has an Estimated Value of $21.0 million. The contract provides that the
Department of the Navy will acquire all IDP equipment under a leasing program
that includes technology upgrades and complete technical support. The initial
order under this contract provides for approximately $12.9 million in lease
payments to be received monthly over a five-year period.
SALES AND MARKETING
The Company sells its products and services primarily through an in-house
sales force, program managers and independent representatives. Historically,
sales efforts have been concentrated in the Washington D.C. metropolitan area
(D.C., Northern Virginia and Maryland), which accounts for approximately 60% of
all Government computers procured. Currently, however, IDP receives significant
revenue from its sales efforts outside the Washington, D.C. metropolitan area.
The Company's government sales are the result of prime contracts, sub-contracts
or agency-specific contracts and direct selling of products from the Company's
GSA Schedules or other Government-wide acquisition contracts. The Company also
utilizes its direct sales force to sell its products and services to selected
businesses.
The Company receives qualified network services leads through its marketing
efforts and referrals from suppliers such as Microsoft Corporation
("Microsoft"), Cisco and 3COM. These leads are referred to Dunn's dedicated
sales group, whose background includes both technical and sales experience. This
sales group is responsible for identifying clients' needs and promoting Dunn's
services to potential clients. Once potential clients are further qualified by
the sales group, Dunn assembles a team consisting of sales group members, the
appropriate business unit manager and a project delivery manager. This team
makes the client sales call and is ultimately responsible for closing the sale.
The Company runs major brand recognition marketing campaigns using direct
mail, public relations, radio, seminars, the Internet and selective print
advertising and trade shows. The campaigns promote "best value," single-source
solutions, commitment to customers and "best of breed" component technology. The
Company maintains several web sites wherein its GSA and other contract catalogs
and products can be referenced. The Company also has an interactive web site
which permits its customers to purchase goods and services electronically.
CUSTOMER SERVICE
The Company has dedicated substantial resources to building a customer
service and sales support group that currently employs 43 technical support
personnel to provide timely response to customers' requests. The Company strives
to minimize callers' waiting time and to make extensive use of the Company's web
site to provide on-line technical support. IDP has recently installed, and the
Company intends to utilize, a knowledge-based problem solving system that builds
on the customer support group's cumulative experience and allows an engineer to
duplicate the customer's specific setup and provide guidance over the telephone.
If the customer's issue cannot be resolved either on-line or over the
35
<PAGE>
telephone, the Company guarantees a 24-hour turnaround for most services
performed in-house and a 48-hour turnaround on all field repairs.
COMPETITION
The computer industry is highly competitive and has been characterized by
intense pricing pressure, declining gross margins, rapid technological advances
in hardware and software, frequent introduction of new products, and rapidly
declining component costs. Competition in the computer industry is based
primarily upon performance, price, reliability, service and support. As a result
of industry standardization, the Company uses many of the same components as its
competitors, typically from the same set of suppliers, which limits its ability
to technologically and functionally differentiate its products. The Company uses
its quality focus and customer services to differentiate itself from its
competitors.
GOVERNMENT MARKET
Since the passage of the ITMRA, the Government has increased the amount of
IT products acquired through the GSA Schedule. Although the Company believes it
has benefited from this reform, the emergence of the GSA Schedule as a
significant procurement vehicle has encouraged traditional mass market
commercial computer companies such as Dell, Gateway 2000, Inc. ("Gateway") and
Micron Electronics, Inc. to pursue the Government market.
However, the Government continues to rely on agency-specific contracts for
its more complex computer requirements. The Company believes that national brand
companies often are dissuaded from bidding for these agency-specific contracts
due to their complex terms and conditions and technical specifications. The
Company principally competes against large regional manufacturers and system
integrators such as Government Technology Solutions, Inc., Win Laboratories,
Inc. and Vanstar (formerly Sysorex Information Systems, Inc.) for these
agency-specific contracts. The Company believes that the Government's criteria
for vendor selection include price, quality, past performance, size and
financial responsibility.
COMMERCIAL MARKET
The Company competes in the Mid-Atlantic region with hundreds of IT service
companies. These companies typically service a small geographic area and resell
national brand computer hardware. By contrast, the Company manufactures its own
brand name computer systems, which it intends to install as part of a total
network solution.
The Company competes with a number of computer hardware manufacturers,
including Dell, Gateway, Compaq, HP, IBM and Toshiba Corporation, among others,
that traditionally have sold their products through distributors, dealers and
value-added resellers, retail stores and direct sales forces.
Many of the Company's competitors offer broader product lines, have
substantially greater financial, technical, marketing and other resources than
the Company and may benefit from component volume purchasing and product and
process technology license arrangements that are more favorable in terms of
pricing and availability than the Company's arrangements. There can be no
assurance that the Company will be able to compete effectively against existing
competitors in the future, especially companies that have historically focused
their energies on the commercial market or have greater financial resources. See
"Risk Factors--Competition."
SUPPLIERS
The Company devotes significant resources to establishing and maintaining
relationships with its suppliers. The Company, where possible, purchases
directly from component manufacturers such as Intel, Microsoft, Hitachi-Nissei
Sanyo America, Ltd., Sony Electronics Corporation and Clevo Corporation
36
<PAGE>
("Clevo"). The Company also purchases multiple products directly from large
national and regional distributors such as TechData Corporation, Ingram Micro
Incorporated and Decision Support Systems, Incorporated ("DSS").
Suppliers provide the Company with incentives in the form of discounts,
rebates, credits, cooperative advertising and market development funds. In
accordance with the terms of certain of the Company's Government contracts, the
Company provides periodic reporting of pertinent supplier contract terms and
conditions to contracting officials.
As a product reseller, the Company must continue to obtain products at
competitive prices from leading suppliers in order to provide competitively
priced products for its customers. During fiscal 1997, Dunn purchased
approximately 13% of its components from DSS and PRIMO purchased approximately
50% of its components from Clevo. In the event that the Company is unable to
continue to purchase components from these suppliers, the Company believes that
alternative suppliers are readily available. The Company believes its
relationships with its key suppliers to be good and believes that generally
there are multiple sources of supply available should the need arise.
EMPLOYEES
As of October 31, 1997, Dunn employed 85 persons on a full-time basis. Of
such persons, three were employed in executive capacities, 20 in sales and
marketing, 13 in administrative capacities, 23 in technical services and 26 in
operations. As of January 31, 1998, IDP employed 228 persons on a full-time
basis, including 58 in Puerto Rico. Of such persons, 49 are engaged in sales and
marketing, 44 in administrative capacities, 37 in technical services and 98 in
operations. Neither Dunn's nor IDP's employees are covered by a collective
bargaining agreement. Dunn and IDP consider their relationships with their
employees to be good.
FACILITIES
The Company leases approximately 19,000 square feet of office space in
Reston, Virginia which it uses primarily for sales, marketing and technical
services, and approximately 20,000 square foot facility in Sterling, Virginia
used primarily for manufacturing and administrative services. The Reston
facility's lease expires in 2003 and the Sterling facility lease expires in
1999. The Company has an option to renew the Sterling lease for a period of five
years. The Sterling facility is subject to a mortgage due 2019, for which the
Company is a guarantor. See "Certain Transactions". In addition, the Company is
presently seeking ISO 9000 certification for its Sterling facility. The Sterling
facility has obtained a top secret security clearance in connection with its
performance of one of its government contracts.
The Company also leases an approximately 55,000 square-foot facility in
Gaithersburg, Maryland, which it uses for sales, marketing, customer service,
manufacturing, and administrative functions, and an approximately 34,000
square-foot facility in Guayama, Puerto Rico, which is used for manufacturing,
technical support, and personal computer board level repair. The Gaithersburg
facility lease expires in 2000 and the Guayama facility lease expires in 1999.
Concurrently with the Closing of this transaction, the Company intends to enter
into a new lease with the Puerto Rican government under substantially the same
terms as PRIMO's current lease. The Gaithersburg facility is ISO 9000 certified,
and the Company is in the process of obtaining ISO 9000 certification for its
Guayama facility.
PATENTS, TRADEMARKS AND LICENSES
The Company does not maintain a traditional research and development group,
but works closely with computer product suppliers and other technology
developers to stay abreast of the latest developments in computer technology.
While the Company does not believe that its continued success will depend upon
the rights to a patent portfolio, there can be no assurance that the Company
will continue to have access to existing or new technology for use in its
products.
37
<PAGE>
The Company will conduct its business under the trademarks and service marks
of "Dunn", "Dunn Computer Corporation", "International Data Products," "IDP" and
"Vaquero." The Company believes its trademarks and service marks have
significant value and are an important factor in the marketing of its products.
Because most software used on the Company's computers is not owned by the
Company, the Company has entered into software licensing arrangements with
several software manufacturers, including Microsoft.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding other than
routine litigation that is incidental to its business.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers, directors and director nominees of Dunn and the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Thomas P. Dunne...................................... 55 Chairman, Chief Executive Officer, and President
John D. Vazzana...................................... 54 Executive Vice President, Chief Financial Officer,
Director
Claudia N. Dunne..................................... 38 Vice President, Director
George D. Fuster..................................... 38 President of IDP, Director Nominee *
D. Oscar Fuster...................................... 40 Executive Vice President of IDP, Director Nominee*
VADM E. A. Burkhalter, Jr., USN (Ret.)............... 69 Director
Daniel Sinnott....................................... 63 Director
</TABLE>
- ------------------------
* Will be elected as director of the Company by its sole shareholder prior to
Closing.
The directors of the Company are divided into three classes with staggered
terms. The current term of John D. Vazzana and Claudia N. Dunne is until the
first annual meeting of shareholders after the Closing, the current term of VADM
E. A. Burkhalter, Jr., USN (Ret.) and Daniel Sinnott is until the second annual
meeting after the Closing, and the current term of Thomas P. Dunne is, and the
term of George D. Fuster and D. Oscar Fuster will be, until the third annual
meeting after the Closing. Directors elected after the Closing will be elected
to three-year terms. Each director holds office until the annual meeting at
which his term expires or until a successor is elected and qualified unless the
director dies, resigns, or is removed from office. Executive officers hold
office until their successors are chosen and qualified, subject to earlier
removal by the Board of Directors. There are currently five directors on the
Company's Board of Directors which will be raised to seven at the Closing. After
the Closing, it is expected that all of the officers and directors of Dunn will
remain in such capacities with Dunn in addition to assuming the positions with
the Company indicated in the table above. Set forth below is a biographical
description of each executive officer and director of the Company.
THOMAS P. DUNNE has been Chairman, Chief Executive Officer and President of
Dunn since he founded the company in 1987. From 1982 to 1987, Mr. Dunne was the
Director of Sales of Syntrex Inc., a corporation that supplies computer hardware
and software to the legal profession. Prior thereto, Mr. Dunne spent 12 years
with the computer division of Perkin Elmer Corporation, where he held several
positions, including Director of North American Sales. Mr. Dunne also served in
the United States Army for two years where he was a Senior Instructor with the
Army Electronics Command. Mr. Dunne is married to Ms. Claudia N. Dunne, the Vice
President of the Company.
JOHN D. VAZZANA has been the Executive Vice President, Chief Financial
Officer and a director of Dunn since 1994. From 1992 to 1994, Mr. Vazzana was
the Chief Executive Officer of Hitchler Industry, a manufacturer of plastic
lumber made from recycled plastic. From 1986 to 1992, Mr. Vazzana was founder
and Chief Executive Officer of NRM Steelastic, a company engaged in the
manufacture of capital equipment for the tire industry. Prior thereto, Mr.
Vazzana was Executive Vice President for C3, Inc., a federal computer systems
integrating company, which he joined in 1974.
CLAUDIA N. DUNNE, a co-founder of Dunn, has been Vice President and a
director of Dunn since its inception. From 1985 to 1987, Ms. Dunne was Federal
Proposal Manager for Syntrex, Inc. From 1983 to 1985, Ms. Dunne was Proposal
Manager for Harris & Paulson, which also sold minicomputers and
39
<PAGE>
proprietary time and accounting software for law firms. Ms. Dunne is married to
Mr. Thomas P. Dunne, the President of the Company.
GEORGE D. FUSTER founded IDP in 1984 and has been the President since 1987.
From 1983 to 1984, he was Eastern Regional Manager for Sales Support Engineering
at Fujitsu Microelectronics Corporation, where his responsibilities included
coordinating third party hardware and software relationships between the
regional offices and the corporate office. Prior thereto, George D. Fuster
served as a Systems Engineer for Advanced Technology Corporation, where he
helped develop financial models for the U.S. Navy Marine Gas Turbines Program.
The principal stockholders of Dunn have agreed to elect George D. Fuster as a
director of the Company immediately preceding the Offering. George D. Fuster is
a brother of D. Oscar Fuster, the Executive Vice President of IDP.
D. OSCAR FUSTER has been Executive Vice President of IDP since 1986, where
his primary responsibility is for the overall operations of the company. Prior
to joining IDP, he was Vice President of Marketing for SMS Data Products,
Financial Analyst for Electronic Data Systems, Incorporated and Accounting
Manager for Genasys Corporation. The principal stockholders of Dunn have agreed
to elect D. Oscar Fuster as a director of the Company immediately preceding the
Offering. D. Oscar Fuster is a brother of George D. Fuster, the President and
founder of IDP.
VICE ADMIRAL E. A. BURKHALTER, JR., USN (RET.) has been a director of Dunn
since January 1997. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc., a consulting firm providing services in the areas of
international and domestic strategy, management policy and technology
applications, for both government and industry. Mr. Burkhalter spent 40 years as
a member of the United States Navy, during which time he held several positions,
including Director of Strategic Operations for the Chairman of the Joint Chiefs
of Staff. He is currently the Chairman of the Attorney General's Policy Advisory
Panel for Law Enforcement Technology, a member of the Director of Central
Intelligence (DCI) Military Advisory Panel and an advisor to the Defense
Intelligence Agency. He is also an officer and director of the Navy Submarine
League.
DANIEL SINNOTT has been a director of Dunn since January 1997. Mr. Sinnott
is currently a consultant with Worldwide Internet Solutions Network, Inc.
("WIZnet"). WIZnet provides electronic catalogs and adaptive recognition search
technology and facilitates electronic commerce linking buyers and sellers via
secure mail. From 1995 until March 1998, Mr. Sinnott was Chief Executive Officer
of WIZnet. In 1991 Mr. Sinnott was a founder of Sinnott Bruno & Company
("SB&C"). SB&C is a management consulting firm providing advisory services to
executive and management organizations that are in the emerging transition
stages of development. Mr. Sinnott worked full time with SB&C from 1991 until
joining WIZnet in 1995. In 1996, Dunn purchased shares of Common Stock of WIZnet
for an aggregate of $150,000. See "Certain Transactions."
In connection with Dunn's initial public offering in April 1997, Dunn
granted the underwriter, Network 1 Financial, for a three year period from the
effective date of the initial public offering, the right to designate one
director to serve as a member of Dunn's Board of Directors. As of the date of
this Prospectus, Network 1 Financial has not named a nominee for election to
board membership.
COMMITTEES OF THE BOARD
The Company's Board of Directors has an Audit Committee, comprised of the
two outside directors, and a Compensation Committee, comprised of two outside
directors and Thomas P. Dunne.
COMPENSATION OF DIRECTORS
Dunn has not paid, and the Company does not presently propose to pay,
compensation to any director for acting in such capacity, except for nominal
sums for attending Board of Directors meetings and reimbursement for reasonable
expenses in attending those meetings. In January 1997, Dunn granted each
40
<PAGE>
of its two outside directors a stock option to purchase 20,000 shares of Dunn's
common stock at an exercise price of $4.15 per share. The Company believes the
exercise price of $4.15 per share was the fair market value at the time of the
grants.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by Dunn during each of the last three fiscal years to the Chief Executive
Officer and the executive officers of Dunn who earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION* YEAR SALARY BONUS
- ---------------------------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Thomas P. Dunne................................................................... 1997 $ 240,000 0
Chairman, Chief Executive Officer 1996 $ 240,000 $ 275,000
and President 1995 $ 240,000 0
John D. Vazzana................................................................... 1997 $ 240,000 0
Executive Vice President, Chief 1996 $ 240,000 $ 275,000
Financial Officer, Director 1995 $ 240,000 0
</TABLE>
- ------------------------
* George D. Fuster and D. Oscar Fuster have served, respectively, as President
of IDP and Executive Vice President of IDP during each of the last three
fiscal years. Each of them received compensation from IDP in excess of
$100,000 during each of these three years.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Thomas P. Dunne and John D.
Vazzana, and will have employment agreements with George D. Fuster and D. Oscar
Fuster. The agreements for Mr. Vazzana and Mr. Dunne run for a term of three
years effective April 1997 and automatically renew for additional one year terms
unless terminated by either Dunn or the employee. Both agreements provide for a
$240,000 annual salary and a bonus at the discretion of Dunn's Board of
Directors. The bonus may not exceed the lesser of 5% of the Company's pre-tax
income for the preceding fiscal year or $250,000.
The employment agreements with George D. Fuster and D. Oscar Fuster, which
will be effective at Closing, have a term of three years, unless renewed,
provide for a $200,000 annual salary, an annual bonus, and a stock option (the
"Option") to purchase up to 300,000 shares, under certain conditions, of the
Common Stock, at a price per share to be determined based upon the Nasdaq price
as of the Closing, to be exercisable as to 50% of the shares subject to the
Option six months from the effective date of the employment contract, and as to
the remaining 50% of the shares within one year of such date. Each of the
options to be granted to the Fusters will be adjusted to cover 400,000 shares of
Common Stock if the price per share for which the Common Stock is sold in this
Offering exceeds $10.
All employment contracts contain confidentiality provisions and covenants
not to compete with the Company during the term of the employment and for a
period of one year following the termination of the agreements.
STOCK OPTION PLAN
Under Dunn's 1997 Stock Option Plan, options to purchase a maximum of
2,200,000 shares of common stock of Dunn (subject to adjustments in the event of
stock splits, stock dividends, recapitalizations and other capital adjustments)
may be granted to employees, officers and directors of Dunn and
41
<PAGE>
other persons who provide services to Dunn. As of the date of this Prospectus,
options relating to 1,832,000 shares were previously granted under Dunn's 1997
Stock Option Plan at a weighted average exercise price of $6.18 per share. As of
the date of this Prospectus, options relating to 66,250 shares are exercisable,
and none of the options have been exercised. In the Merger, each outstanding
option under Dunn's 1997 Stock Option Plan will be converted into an option to
purchase, at the same exercise price, the same number of shares of Common Stock
of the Company under a stock option plan of the Company under which options to
purchase a total of 2,200,000 shares of common stock will be authorized (subject
to adjustments in the event of stock splits, stock dividends, recapitalizations
and other capital adjustments).
The options to be granted under the Company's Stock Option Plan may be
designated as incentive stock options or non-incentive stock options by the
Board of Directors, which also has discretion as to the persons to be granted
options, the number of shares subject to the options and the terms of the option
agreements. Only employees, including officers and part time employees of the
Company, may be granted incentive stock options.
RETIREMENT PLANS
Dunn established a discretionary contribution plan effective November 1,
1995 (the "401(k) Plan") for its employees who have completed one month of
service with Dunn. The 401(k) Plan is administered by Benefit Plan Services,
Inc. and permits pre-tax contributions by participants pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), up to the
maximum allowable contributions as determined by the Code. Dunn may match
participants' contributions on a discretionary basis. In fiscal 1995 and 1996
Dunn contributed $.25 for each $1.00 contributed by the employees.
IDP established a discretionary contribution plan in 1993 (the "IDP 401(k)
Plan") for its employees who have completed one half year of service with IDP.
The IDP 401(k) Plan is administered by IDP and permits pre-tax contributions by
participants pursuant to Section 401(k) of the Code up to the maximum allowable
contributions as determined by the Code. IDP may match a participant's
contributions, on a discretionary basis. In fiscal 1997 and 1996, IDP
contributed an aggregate of $261,000 and $210,000, respectively, matching $1.00
for each $1.00 contributed by its employees.
Effective November 1, 1995, Dunn established a defined benefit plan covering
substantially all salaried employees who have completed twelve months of service
with Dunn (the "Pension Plan"). The Pension Plan benefits are based on the years
of service and the employee's compensation. Dunn contributes, on an annual
basis, amounts sufficient to meet the minimum funding requirements set forth in
the Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future. The assets of the Pension
Plan are invested in money markets and investment-grade corporate debt and
equity instruments. Dunn contributed an aggregate of approximately $135,000 for
the Pension Plan years ending October 31, 1995 and 1996, which amount met the
minimum funding requirements under ERISA. Dunn has accrued, but not yet paid,
$51,450, which amount represents its minimum funding requirements under ERISA
for fiscal 1997.
A participant's benefit under the Pension Plan is calculated as the lesser
of (i) the average of such participant's last three years' salary multiplied by
40 percent, or (ii) $60,000. The estimated annual benefits under the Pension
Plan payable upon retirement at normal retirement age for each of Dunn's
Executive Officers is $60,000.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, with respect to the
common stock of Dunn as of March 25, 1998, and with respect to the Common Stock
of the Company, as adjusted to give effect to the Offering, the Merger and the
IDP Acquisition, with respect to the beneficial ownership of each beneficial
owner of more than 5% of the outstanding shares thereof, by each director, each
nominee to become a director and each executive officer named in the Summary
Compensation Table and by all executive officers, directors and nominees to
become directors of the Company as a group both before and after giving effect
to the Offering.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY
PRIOR TO OWNED AFTER
OFFERING(4) OFFERING(7)
------------------ ------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF
BENEFICIAL OWNER(1) SHARES PERCENT SHARES PERCENT
- -------------------------------------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Thomas P. Dunne (2)............................................................. 2,645,000(5) 51.9% 2,645,000 29.1%(8)
John D. Vazzana (2)............................................................. 1,145,000 22.5% 1,145,000 12.6%(8)
Claudia N. Dunne (2)............................................................ 2,645,000(6) 51.9% 2,645,000 29.1%
VADM E. A. Burkhalter USN (Ret.) (2)............................................ 10,000(1) * 10,000 *
Daniel Sinnott (2).............................................................. 10,000(1) * 10,000 *
George D. Fuster (3)............................................................ -0- -0- 375,000 4.1%(9)
D. Oscar Fuster (3)............................................................. -0- -0- 375,000 4.1%(9)
All Executive Officers and Directors
as a Group before Closing (5 persons)......................................... 3,790,000 74.3% -- --
as a Group after Closing (7 persons).......................................... -- -- 4,540,000 49.9%
</TABLE>
- ------------------------
* Beneficial ownership is less than 1%
(1) Under the rules of the Commission, a person is deemed to be a beneficial
owner of a security if he or she has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the
disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same securities. Unless otherwise
indicated by footnote, the persons named in the table have sole voting and
investment power with respect to the shares of Common Stock beneficially
owned. A person is also deemed to be a beneficial owner of any securities of
which that person has the right to acquire beneficial ownership within 60
days. Accordingly, the beneficial ownership amounts include shares of stock
that may be acquired pursuant to stock options exercisable within 60 days
from March 25, 1998 by VADM E. A. Burkhalter USN (Ret.) (10,000 shares) and
by Daniel Sinnott (10,000 shares) and all directors and executive officers
as a group (20,000 shares).
(2) The address of each such individual is: c/o Dunn Computer Corporation, 1306
Squire Court, Sterling, Virginia 21066.
(3) The address of each such individual is: c/o International Data Products,
Corp., 20 Firstfield Road, Gaithersburg, Maryland 20878.
(4) Calculated based upon 5,097,743 shares outstanding prior to the Closing and
does not give effect to: (a) an aggregate of 2,200,000 shares of Dunn common
stock reserved for issuance pursuant to Dunn's 1997 Stock Option Plan of
which options to purchase 1,832,000 shares have been granted; (b) an
aggregate of up to 800,000 shares of Common Stock reserved for issuance
pursuant to employment agreements with George D. Fuster and D. Oscar Fuster;
or (c) 200,000 shares of common stock issuable upon the exercise of certain
warrants.
(5) Includes 560,000 shares of stock held by Claudia N. Dunne, the Company's
Vice President, and Mr. Dunne's wife, of which Mr. Dunne disclaims
beneficial ownership.
43
<PAGE>
(6) Includes 2,085,000 shares of stock held by Thomas P. Dunne, the Company's
Chairman, Chief Executive Officer and President, and Ms. Dunne's husband, of
which Ms. Dunne disclaims beneficial ownership.
(7) Assumes 9,097,743 shares outstanding after the Closing giving effect to the
issuance of 750,000 shares of Common Stock in the IDP Acquisition and
3,250,000 shares of Common Stock offered hereby and not giving effect to:
(a) the exercise of the Over-Allotment Option (b) an aggregate of 2,200,000
shares of Common Stock reserved for issuance pursuant to the Company's Stock
Option Plan of which options to acquire 1,832,000 have been granted; (c) an
aggregate of up to 800,000 shares of Common Stock reserved for issuance
pursuant to employment agreements with George D. Fuster and D. Oscar Fuster
or (d) 200,000 shares of Common Stock issuable upon the exercise of certain
warrants.
(8) If the Over-Allotment Option is exercised in full, Thomas P. Dunne will sell
170,625 shares and will beneficially own 2,474,375 shares representing 26.5%
of the Common Stock outstanding after the Closing, and John D. Vazzana will
sell 73,125 shares and will beneficially own 1,071,875 shares representing
11.5% of the Common Stock outstanding after the Closing.
(9) Represents 375,000 shares of Common Stock to be issued pursuant to the IDP
Acquisition to each of D. Oscar Fuster and George D. Fuster.
44
<PAGE>
CERTAIN TRANSACTIONS
At Closing, (i) Merger Sub, a subsidiary of the Company will merge into Dunn
which will be the surviving corporation and will thereby become a wholly-owned
subsidiary of the Company, and (ii) the Company will acquire all the issued and
outstanding capital stock of IDP Co. and a newly-formed subsidiary of the
Company will acquire substantially all of the net assets of PRIMO. The aggregate
consideration that will be paid for IDP Co. and PRIMO consists of $14.9 million
in cash and 750,000 shares of Common Stock of the Company, each of which is
subject to adjustment, which will be paid to George D. Fuster, President of IDP
and director nominee of the Company, D. Oscar Fuster, Executive Vice President
of IDP Co. and director nominee of the Company and to PRIMO, which is owned by
the wives of George D. Fuster and D. Oscar Fuster.
Prior to the IDP Acquisition and this Offering, substantially all of the net
assets of F Squared Engineering Corp. which, as of January 31, 1998, had an
aggregate value of approximately $198,000, will be transferred from IDP Co. to F
Squared Engineering, Corp. and will be distributed to the individual IDP Sellers
in partial redemption of their IDP Co. shares.
At Closing, certain IDP Co. notes in the aggregate amount of $1.6 million
payable to the IDP Sellers and certain related parties will be assumed by the
Company. The notes will have terms of one to three years and bear interest at
the annual rate of 8.0% to 11.0%.
In connection with the IDP Acquisition, George D. Fuster and D. Oscar Fuster
will enter employment agreements, pursuant to which each will be granted options
to acquire 300,000 shares, subject to adjustment to 400,000 shares under certain
conditions, of the Company's Common Stock at a price per share to be determined
based upon the Nasdaq price as of the Closing. See "Management--Employment
Agreements."
In March 1998, Dunn repurchased 50,000 shares of its common stock and an
option to acquire 25,000 shares of its common stock for $457,500 and $75,750,
respectively, pursuant to contractual arrangements with two of the persons from
whom Dunn purchased STMS in September 1997.
On January 6, 1997, Dunn entered into a share exchange agreement (the "Share
Exchange Agreement") with Dunn Computer Corporation (now named Dunn Computer
Operating Company), a Virginia corporation incorporated in 1987, whereby such
Virginia corporation became a wholly-owned subsidiary of Dunn. Pursuant to the
Share Exchange Agreement, Dunn exchanged its stock on a 2,799.160251 for 1 basis
with the holders of stock of the Virginia corporation.
In November 1997, Dunn reacquired 2,257 shares of its common stock in
connection with a loan forgiveness of approximately $63,000.
In May 1996, Dunn entered into a line of credit agreement with a bank that
was personally guaranteed by the principal stockholders of Dunn. In June 1997,
the loan agreement was amended to cancel the personal guarantees of the
principal stockholders of Dunn.
The Company leases its Sterling facility from C&T Partnerships, an entity
owned and controlled by Thomas and Claudia Dunne, both affiliates of the
Company. The lease agreement terminates in October 1999, but provides for a five
year renewal at Dunn's option. Rent expense under this lease was $154,000 for
each of the years ended October 31, 1996 and 1997, respectively. In addition,
the mortgage on the facility of approximately $1,000,000, which has a 25 year
term and bears interest at 2% over prime, is guaranteed by the Company. The
Company has been advised that all payments with respect to the mortgage are
current. For additional terms of the lease and a description of the facility,
see "Business-- Facilities."
In 1996, Dunn made a stock investment of $150,000 in WIZnet, an
Internet-related company. Daniel Sinnott, a director of the Company, is the
President and Chief Executive Officer of WIZnet. Mr. Sinnott was not a director
of Dunn at the time of the investment. The Company believes that the transaction
was fair and reasonable.
45
<PAGE>
DESCRIPTION OF SECURITIES
The following is a description of all material terms and features of the
securities of the Company, but does not purport to be complete and is subject in
all respects to applicable Virginia law and to the provisions of the Company's
articles of incorporation ("Articles of Incorporation") and bylaws ("Bylaws"),
copies of which will be filed with the Commission as Exhibits to the
Registration Statement of which this Prospectus is a part.
GENERAL
The Company is authorized by its Articles of Incorporation to issue an
aggregate of 20,000,000 shares of Common Stock, $.001 par value per share, and
2,000,000 shares, $.001 par value per share, of preferred stock (the "Preferred
Stock"). At the Closing, 5,097,743 shares of Common Stock will be issued in
exchange for the common stock of Dunn in the Merger. See "The Reorganization and
the IDP Acquisition." No shares of the authorized Preferred Stock are issued and
outstanding. All shares of Common Stock are of the same class and have equal
rights and attributes.
PREFERRED STOCK
The Company is authorized by its Articles of Incorporation to issue a
maximum of 2,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
dividend rates, conversion privileges, redemption rights and terms, redemption
prices and liquidation preferences, as the Board of Directors of the Company
may, from time to time, fix by amendment of the Articles of Incorporation. No
shares of the Preferred Stock have been issued, and the Company has no present
plans to issue any Preferred Stock.
The issuance of shares of Preferred Stock pursuant to the Board's authority
described above could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and, coupled with special voting rights
could otherwise materially and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Board of Directors does not
currently intend to seek stockholder approval prior to any issuance of
authorized but unissued Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any shares of Preferred Stock that may be outstanding from time to
time. In the event of the dissolution, liquidation or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of all liabilities of the Company, subject to the prior
distribution rights of the holders of any Preferred Stock that may be
outstanding at that time. All outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby when issued will be, fully paid and
nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to issue additional shares of Common Stock following this Offering,
persons acquiring Common Stock in this Offering would have no right to purchase
additional shares and, as a result, their percentage equity interest in the
Company would be reduced.
The holders of Common Stock do not have cumulative voting rights.
Accordingly, all directors will be elected by the affirmative vote of the
holders of a majority of the Company's outstanding Common Stock.
46
<PAGE>
The Board is empowered to fill any vacancies on the Board created by the
resignation, death or removal of directors.
Upon completion of this Offering (but without giving effect to the exercise
of the Over-Allotment Option, or any outstanding stock options or warrants), the
Company's executive officers and directors will beneficially own approximately
49.9% of the outstanding shares of Common Stock, and will be in a position to
control the voting results of certain actions required or permitted to be taken
by stockholders of the Company, including the election of directors. However, as
no voting agreement exists among these executive officers and directors, each is
able to vote as he or she may desire on any issue affecting the Company.
VIRGINIA ANTI-TAKEOVER LAW
Under the Virginia Control Share Acquisition statute (Section 13.1-728 et
seq. of the Virginia Stock Corporation Act ("VSCA")), a person ( the "acquiror")
who makes a bona fide offer to acquire, or acquires, shares of stock of a
Virginia corporation that when combined with shares already owned, would
increase the acquiror's ownership to at least 20%, 33 1/3%, or a majority of the
voting stock of the corporation, must obtain the approval of a majority in
interest of the shares held by all shareholders (except the acquiror and
officers and inside directors of the corporation) in order to vote the shares
acquired. The statute does not apply to mergers pursuant to a merger or plan of
share exchange effected in compliance with the relevant provision of the VSCA.
The Control Share Acquisition statute permits a Virginia corporation to elect
not to be governed by these provisions by including such an election in its
articles of incorporation or bylaws, and does not apply to companies with less
than 300 shareholders. The Company has elected not to be governed by the Control
Share Acquisition statute in its Articles of Incorporation.
Virginia's Affiliated Transactions statute (Section 13.1-725 et seq. of the
VSCA) provides that if a person acquires 10% or more of the stock of a Virginia
corporation without the approval of its board of directors (an "interested
shareholder"), such person may not engage in certain transactions with the
corporation (including a merger and purchase or sale of greater than 5% of the
corporation's assets or voting stock) for a period of three years, and then only
with the specified supermajority shareholder vote, disinterested director
approval or fair price and procedural protections. Virginia's statute includes
certain exceptions to this prohibition; for example, if a majority of
disinterested directors approves the acquisition of stock or the transaction
prior to the time that the person became an interested shareholder, or if the
transaction is approved by the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock which is not owned by the interested
shareholder, the prohibition does not apply.
The VSCA contains provisions which permit a corporation to take the steps
necessary to implement a shareholder rights plan, sometimes referred to as a
"poison pill", whereby all shareholders, except for the acquiror, have certain
economically powerful rights that are activated upon an acquiror obtaining a 20%
(or other percentage) stock ownership position. The Company has not implemented
a "poison pill." The Company's Articles of Incorporation do provide for
preferred stock as to which the board of directors has authority to determine
the terms of such stock, which is generally a prerequisite to implementing a
"poison pill."
PERSONAL LIABILITY OF DIRECTORS
Under the VSCA, the liability of an officer or director for a single
transaction in a proceeding brought by or in the right of a corporation or on
behalf of shareholders is limited to damages not exceeding the lesser of (i) the
monetary amount, including the elimination of liability, specified in the
articles of incorporation or, if approved by the shareholders, in the bylaws, as
a limitation on or elimination of the liability of the officer or director; or
(ii) the greater of $100,000 or the amount of cash compensation received by the
officer or director from the corporation during the 12 months immediately
preceding the
47
<PAGE>
act or omission for which liability was imposed. The liability of an officer or
director may not be so limited if the officer or director engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law, including, without limitation, any claim of federal or state
securities law, including, without limitation, any claim of unlawful insider
trading or manipulation of the market for any security.
The Company's Articles of Incorporation include a provision eliminating, to
the fullest extent permitted by law, the personal liability of directors.
The Articles of Incorporation provide for the indemnification of, and
advancement of litigation expenses to, the directors and officers of the Company
to the fullest extent permitted by Virginia law. Furthermore, the Company may
enter into indemnification agreements with its directors and officers for the
indemnification of and advancing of expenses to such person to the fullest
extent permitted by law.
Dunn has directors' and officers' liability insurance in the amount of $1.0
million.
TRANSFER AGENT
The Transfer Agent for the Common Stock of the Company is Continental Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
At Closing, 9,097,743 shares of Common Stock will be outstanding and the
Company will also have outstanding options and warrants to purchase up to a
total of 2,832,000 shares of Common Stock. The shares sold in this Offering and
the 5,097,743 shares exchanged for Dunn's common stock pursuant to the Merger
(other than the 3,790,000 shares issued to affiliates of the Company) will be
freely tradable by the public. The 3,790,000 shares issued to affiliates of the
Company in exchange for Dunn's common stock pursuant to the Merger may be resold
by them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Act (which incorporates most of the conditions set forth
in Rule 144, described below) or as otherwise permitted under the Act and the
rules and regulations thereunder.
The remaining 750,000 shares of Common Stock to be outstanding after the
Closing will be "restricted securities" as that term is defined under Rule 144,
and may not be sold unless registered under the Act or exempted therefrom. The
persons who will be holders of the 750,000 shares of restricted securities will
have piggy-back registration rights with respect to such shares as well as two
demand registration rights exercisable only after such persons cease to be
affiliates of the Company. If such stock is not resold pursuant to such
registration rights, they will be eligible for resale pursuant to Rule 144 one
year from the date of the Closing, subject to all of Rule 144's restrictions
discussed below.
In general, under the Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
the Company, as that term is defined in Rule 144, (or persons whose shares are
aggregated), who for at least one year has beneficially owned restricted
securities acquired directly or indirectly from the Company or an affiliate of
the Company in a private transaction is entitled to sell in brokerage
transactions within any three-month period, a number of shares that does not
exceed the greater of (i) 1% of the total number of outstanding shares of the
same class, or (ii) if the stock is quoted on the Nasdaq National Market, the
average weekly trading volume in the stock during the four calendar weeks
preceding the day notice is given to the Securities and Exchange Commission with
respect to such sale. A person (or persons whose shares are aggregated) who is
not an affiliate and has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned restricted
securities for at least two years is entitled to sell such shares pursuant to
subparagraph (k) of Rule 144 without regard to any of the limitations described
above. Under Rule 144, an affiliate of the Company may sell shares of Common
Stock that are not "restricted securities" without regard to the one-year
holding period applicable in the case of restricted securities, subject to the
satisfaction of other
48
<PAGE>
conditions set forth in Rule 144. The foregoing summary of Rule 144 is not
intended to be a complete description thereof.
Approximately 3,790,000 shares of non-restricted Common Stock and 750,000
shares of restricted Common Stock will be held by affiliates as of the Closing.
Without regard to the contractual restrictions discussed below, so long as such
stock remains in the hands of affiliates, unless sold pursuant to a registration
statement, it will be subject to all of the conditions of Rule 144, except for
the holding period. If the holders of such stock cease to be affiliates (and, in
the case of restricted stock, the two-year holding period of Rule 144(k) has
been met), such shares may become freely tradable, without regard to most of
Rule 144 restrictions, including the volume limitation. The Company intends to
register the shares subject to issuance under the Company's Stock Option Plan.
In addition, the Company has agreed to register 200,000 shares of Common Stock
issuable upon the exercise of certain outstanding warrants. As a result, shares
of Common Stock issued upon exercise of such outstanding options and warrants
will be freely tradeable without restriction except for the contractual
restrictions described below.
All of the Company's directors, executive officers, and certain security
holders, who will hold securities relating to an aggregate 4,676,939 shares of
Common Stock, including the 750,000 shares of restricted Common Stock), have
agreed not to sell, offer to sell or otherwise dispose of any shares of the
Company's Common Stock or any securities exchangeable, convertible or
exercisable into shares of Common Stock until 180 days from the date of this
Prospectus without the prior approval of a representative for the Underwriters,
except pursuant to gifts or pledges in which the donee or pledgee agrees to be
bound by such restrictions, without the prior written consent of the
Representative. These agreements are enforceable only by the parties thereto,
and are subject to rescission or amendment at any time without approval of other
stockholders.
Sales of significant amounts of the Company's Common Stock by stockholders
in the future, under Rule 144 or otherwise, may have a depressive effect on the
price of the Company's Common Stock. See "Risk Factors--Shares Eligible for
Future Sale."
49
<PAGE>
UNDERWRITING
The Company has agreed to sell, and the Underwriters have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, the form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part (the "Underwriting Agreement"), to purchase from the
Company on a firm commitment basis, the number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Ferris, Baker Watts, Incorporated................................................
Gerard Klauer Mattison & Co., Inc................................................
----------
Total............................................................................ 3,250,000
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to the approval
of certain legal matters by counsel and various other conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Common Stock offered hereby, if any are purchased
(without consideration of any shares that may be purchased through the
Over-Allotment Option).
The Underwriters have advised the Company that they propose to offer the
3,250,000 shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus and to selected dealers who are
members of the National Association of Securities Dealers, Inc., at such price
less a concession not in excess of $. per share of Common Stock of which
not more than $. per share of Common Stock may be re-allowed to certain
other dealers. After the Offering, the public offering price, concessions and
reallowances may be changed by Ferris, Baker Watts, Incorporated ("FBW"), the
lead managing underwriter.
The Company and certain stockholders ("Selling Stockholders") have granted
to the Underwriters an option exercisable for a period of 30 calendar days after
the closing of the Offering, to purchase up to 487,500 additional shares of
Common Stock at the public offering price, less underwriting discounts and
commissions, solely to cover over-allotments, if any, incurred in connection
with the sale of shares of common stock offered hereby.
The Company has retained FBW as exclusive advisor in connection with the IDP
Acquisition, for which it will receive an advisory fee equal to $300,000 upon
closing of the Offering. In addition, IDP has entered into an agreement with a
financial advisor with respect to advisory services to be performed in
connection with the IDP Acquisition. Pursuant to the Acquisition Agreement, IDP
will be responsible for payment of 50% of these advisory fees and expenses up to
one half of the first $600,000 incurred, and the IDP Sellers will be responsible
for the remainder.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Selling Stockholders and the Underwriters against certain
liabilities in connection with the Offering, including liabilities under the
Act.
The Company has agreed, for a period of 180 days after the date of this
Prospectus, not to issue any shares of Common Stock or Preferred Stock or any
warrants, options or other rights to purchase Common Stock or Preferred Stock
without the prior written consent of FBW. Notwithstanding the foregoing, the
Company may issue shares upon exercise of any warrants or options outstanding on
the date hereof or to be outstanding upon completion of the Offering pursuant to
the terms thereof, and may issue options or shares reserved for issuance under
the Company's Stock Option Plan. The executive officers, directors and certain
security holders of the Company have agreed not to sell any of their shares of
Common Stock, options to acquire Common Stock or securities exercisable for or
convertible into shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of FBW on behalf of the
Underwriters.
50
<PAGE>
The Underwriters intend to make a market in the Common Stock, as permitted
by applicable laws and regulations. The Underwriters, however, are not obligated
to make a market in the Common Stock and any such market making may be
discontinued at any time at the sole discretion of the Underwriter.
The Underwriters have informed the Company that it does not intend to
confirm any sales to accounts over which they exercise discretionary authority.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Common Stock in
the open market to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
LEGAL MATTERS
The legality of the Common Stock offered by this Prospectus will be passed
upon for the Company by Jones, Day, Reavis and Pogue, Washington, D.C. Certain
legal matters will be passed upon by Venable, Baetjer and Howard, LLP, counsel
for the Underwriters in connection with the Offering.
EXPERTS
The consolidated financial statements of Dunn Computer Corporation, a
Delaware corporation, at October 31, 1996 and 1997, and for each of the three
years in the period ended October 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of STMS at December 31, 1995 and 1996 and for each
of the two years in the period ended December 31, 1996, appearing in this
Prospectus and Registration Statement have been audited by Davis, Sita &
Company, P.A., independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The combined financial statements of International Data Products, Corp. and
Combined Company, at September 30, 1996 and 1997, and for each of the three
years in the period ended September 30, 1997, have been included herein and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
The balance sheet of Dunn Computer Corporation, a Virginia corporation, at
February 26, 1998, appearing in this Prospectus and Registration Statement has
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedule thereto. Statements contained in this Prospectus as to the contents of
any contract or other
51
<PAGE>
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected by
anyone without charge at the Commission's principal office located at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Northeast Regional
Office located at 7 World Trade Center, 13th Floor, New York, New York, 10048,
and the Midwest Regional Office located at Citicorp Center, 500 West Madison
Street, 14th floor, Chicago, Illinois 60661-2511, and copies of all or any part
thereof may be obtained from the Public Reference Branch of the Commission upon
the payment of certain fees prescribed by the Commission. In addition, the
Registration Statement may be accessed electronically at the Commission's site
on the World Wide Web located at http://www.sec.gov.
The Company currently is not a reporting company. The Company intends to
furnish to its stockholders annual reports containing audited financial
statements and quarterly reports containing unaudited interim financial
information for each of the first three quarters of each fiscal year of the
Company.
Until the Closing, Dunn is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected without charge and
copies may be had at the prescribed fees at the Commission's addresses set forth
above and at the Commission's website. Dunn common stock is listed on the Nasdaq
National Market under the symbol "DNCC", and material filed by Dunn can be
inspected at the offices of the Nasdaq National Market, 1735 K Street,
Washington, D.C. 20006.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DUNN COMPUTER CORPORATION (A DELAWARE CORPORATION)
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets as of October 31, 1996 and 1997 and as of January 31,
1998 (unaudited)................................................................... F-3
Consolidated Statements of Income for the three years in the period ended October 31,
1997 and for the three months ended January 31, 1997 and 1998 (unaudited).......... F-4
Consolidated Statements of Stockholders' Equity for the three years in the period
ended October 31, 1997 and for the three months ended January 31, 1998
(unaudited)........................................................................ F-5
Consolidated Statements of Cash Flows for the three years in the period ended
October 31, 1997 and for the three months ended January 31, 1997 and 1998
(unaudited)........................................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
STMS, INC.
Report of Davis, Sita & Company, P.A., Independent Auditors ......................... F-18
Balance Sheets as of December 31, 1995 and 1996...................................... F-19
Statements of Operations for the years ended December 31, 1995 and 1996.............. F-20
Statements of Stockholders' Deficit for the years ended December 31, 1995 and 1996... F-21
Statements of Cash Flows for the years ended December 31, 1995 and 1996.............. F-22
Notes to Financial Statements........................................................ F-23
Balance Sheet as of June 30, 1997 (unaudited)........................................ F-29
Statements of Operations for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-30
Statements of Cash Flows for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-31
Notes to Financial Statements (unaudited)............................................ F-32
DUNN COMPUTER CORPORATION (A VIRGINIA CORPORATION)
Report of Ernst & Young LLP, Independent Auditors.................................... F-33
Balance Sheet as of February 26, 1998................................................ F-34
Note to Balance Sheet................................................................ F-35
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY..............................
Report of KPMG Peat Marwick LLP, Independent Auditors................................ F-36
Combined Balance Sheets as of September 30, 1996 and 1997 and as of December 31, 1997
(unaudited)........................................................................ F-37
Combined Statements of Income and Retained Earnings for the three years in the period
ended
September 30, 1997 and for the three months ended December 31, 1996 and 1997
(unaudited)........................................................................ F-38
Combined Statements of Cash Flows for the three years in the period ended September
30, 1997 and for the three months ended December 31, 1996 and 1997 (unaudited)..... F-39
Notes to Combined Financial Statements............................................... F-40
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
We have audited the accompanying consolidated balance sheets of Dunn
Computer Corporation (a Delaware corporation) as of October 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the three years in the period ended October 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dunn Computer Corporation as of October 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for the three years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
January 7, 1998, except for Notes
2 and 11, with respect to the
earnings per share calculations, as
to which the date is March 5, 1998
F-2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------------- -------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 897,664 $ 341,966 $ 162,359
Accounts receivable, net.......................................... 3,174,060 9,712,010 8,373,278
Inventory, net.................................................... 985,603 4,487,301 2,882,118
Prepaid expenses and other assets................................. -- 87,457 120,052
------------- ------------- -------------
Total current assets................................................ 5,057,327 14,628,734 11,537,807
Property and equipment, net......................................... 63,763 633,428 598,257
Goodwill and other intangible assets, net........................... -- 2,974,840 2,920,514
Investments......................................................... 150,000 275,000 275,000
Other assets........................................................ 3,540 191,075 186,958
------------- ------------- -------------
Total assets........................................................ $ 5,274,630 $ 18,703,077 $ 15,518,536
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 2,452,161 $ 9,296,497 $ 2,153,011
Accrued expenses.................................................. 285,244 490,970 483,151
Income taxes payable.............................................. 519,308 -- 417,662
Deferred tax credit............................................... 11,086 -- --
Line-of-credit.................................................... -- -- 2,826,789
Notes payable--current portion.................................... -- 12,840 12,840
Obligations under capital leases-current portion.................. -- 66,294 54,319
Unearned revenue.................................................. 67,640 422,907 474,345
------------- ------------- -------------
Total current liabilities........................................... 3,335,439 10,289,508 6,422,117
Notes payable-long-term portion..................................... -- 49,952 47,105
Obligations under capital leases-long-term portion.................. -- 25,462 22,453
Deferred tax credit................................................. -- 100,000 100,000
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,
4,000,000 and 5,150,000 and 5,150,000 shares issued and
outstanding at October 31, 1996 and 1997 and January 31, 1998,
respectively.................................................... 4,000 5,150 5,150
Additional paid-in capital........................................ 111,857 5,087,371 5,087,371
Retained earnings................................................. 1,823,334 3,145,634 3,834,340
------------- ------------- -------------
Total stockholders' equity.......................................... 1,939,191 8,238,155 8,926,861
------------- ------------- -------------
Total liabilities and stockholders' equity.......................... $ 5,274,630 $ 18,703,077 $ 15,518,536
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------ ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $ 7,491,452 $ 18,098,638 $ 21,766,465 $ 5,505,350 $ 10,429,168
Costs of revenues..................... 6,046,480 14,102,442 17,549,655 4,199,577 7,989,879
------------ ------------- ------------- ------------- -------------
Gross profit.......................... 1,444,972 3,996,196 4,216,810 1,305,773 2,439,289
Selling and marketing................. 154,110 475,471 842,281 181,507 551,881
General and administrative............ 812,046 1,496,979 1,355,423 252,119 738,290
------------ ------------- ------------- ------------- -------------
Income from operations................ 478,816 2,023,746 2,019,106 872,147 1,149,118
Other income (expense):
Other income (expense).............. 34,512 49,343 -- 7,668 (5,132)
Interest income..................... -- -- 109,877 -- --
Interest expense.................... (26,246) (57,925) (11,813) -- (37,618)
------------ ------------- ------------- ------------- -------------
Net income before income taxes........ 487,082 2,015,164 2,117,170 879,815 1,106,368
Provision for income taxes............ 244,000 776,000 794,870 334,000 417,662
------------ ------------- ------------- ------------- -------------
Net income............................ $ 243,082 $ 1,239,164 $ 1,322,300 $ 545,815 $ 688,706
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Earnings per share.................... $ 0.06 $ 0.31 $ 0.29 $ 0.14 $ 0.13
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Earnings per share--
assuming dilution................... $ 0.06 $ 0.31 $ 0.28 $ 0.13 $ 0.12
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- PAID-IN FROM RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS TOTAL
---------- --------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994................. 4,000,000 $ 4,000 $ 111,857 $(132,538) $ 341,088 $ 324,407
Cash receipts from Stockholder.............. -- -- -- 32,538 -- 32,538
Net Income.................................. -- -- -- -- 243,082 243,082
---------- --------- ------------ ----------- ------------ ------------
Balance at October 31,1995.................. 4,000,000 4,000 111,857 (100,000) 584,170 600,027
Cash receipts from stockholder.............. -- -- -- 100,000 -- 100,000
Net income.................................. -- -- -- -- 1,239,164 1,239,164
---------- --------- ------------ ----------- ------------ ------------
Balance at October 31, 1996................. 4,000,000 4,000 111,857 -- 1,823,334 1,939,191
Issuance of common stock, net of offering
expenses of $1,083,336.................... 1,000,000 1,000 3,916,664 -- -- 3,917,664
Issuance of stock related to acquisition of
STMS...................................... 150,000 150 974,850 -- -- 975,000
Issuance of options related to STMS
acquisition recorded at fair value........ -- -- 84,000 -- -- 84,000
Net income.................................. -- -- -- -- 1,322,300 1,322,300
---------- --------- ------------ ----------- ------------ ------------
Balance at October 31, 1997................. 5,150,000 5,150 5,087,371 -- 3,145,634 8,238,155
Net income (unaudited)...................... -- -- -- -- 688,706 688,706
---------- --------- ------------ ----------- ------------ ------------
Balance at January 31, 1998 (unaudited)..... 5,150,000 $ 5,150 $ 5,087,371 $ -- $ 3,834,340 $ 8,926,861
---------- --------- ------------ ----------- ------------ ------------
---------- --------- ------------ ----------- ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- ---------- ---------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 243,082 $1,239,164 $1,322,300 $ 545,815 $ 688,706
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment.............................................. 25,441 32,300 46,029 6,450 47,832
Amortization of goodwill and other intangible assets..... -- -- 22,448 -- 54,326
Changes in operating assets and liabilities:
Accounts receivable.................................... (734,660) (951,553) (5,354,279) 1,782,772 1,338,732
Inventory.............................................. (515,426) 211,763 (2,865,750) (339,822) 1,605,183
Prepaid expenses and other assets...................... (8,000) 9,460 (85,966) (88,039) (28,478)
Accounts payable....................................... 652,864 471,636 3,920,267 (344,813) (7,143,486)
Accrued expenses....................................... 309,471 (193,084) 51,930 35,823 (7,819)
Income taxes payable................................... 223,582 260,947 (519,308) (136,150) 417,662
Deferred tax credit.................................... 9,399 (66,276) 88,914 (8,850) --
Unearned revenue....................................... -- 67,640 (110,734) (67,640) 51,438
--------- ---------- ---------- ----------- -----------
Net cash provided by (used in) operating activities........ 205,753 1,081,997 (3,484,149) 1,385,546 (2,975,904)
INVESTING ACTIVITIES
Purchases of property and equipment........................ (15,617) (21,040) (93,389) -- (12,661)
Acquisition of STMS, net of cash acquired.................. -- -- (928,550) -- --
Purchase of investments.................................... -- (150,000) -- -- --
--------- ---------- ---------- ----------- -----------
Net cash used in investing activities...................... (15,617) (171,040) (1,021,939) -- (12,661)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock................. -- -- 3,917,664 -- --
Proceeds of loans for purchase of certain asset............ -- -- 64,226 -- --
Payments on notes payable.................................. -- -- (10,551) -- (2,847)
Proceeds from bank line of credit.......................... -- 2,122,245 -- 200,000 2,826,789
Payments on bank line of credit............................ (194,809) (2,374,476) -- (200,000) --
Repayment from stockholder................................. 32,538 100,000 -- -- --
Payments on capital leases................................. -- -- (20,949) -- (14,984)
--------- ---------- ---------- ----------- -----------
Net cash (used in) provided by financing activities........ (162,271) (152,231) 3,950,390 -- 2,808,958
Net increase (decrease) in cash and cash equivalents....... 27,865 758,726 (555,698) 1,385,546 (179,607)
Cash and cash equivalents at beginning of the period....... 111,073 138,938 897,664 897,664 341,966
--------- ---------- ---------- ----------- -----------
Cash and cash equivalents at end of the period............. $ 138,938 $ 897,664 $ 341,966 $2,283,210 $ 162,359
--------- ---------- ---------- ----------- -----------
--------- ---------- ---------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................................. $ 26,246 $ 57,925 $ 11,813 $ -- $ 38,473
--------- ---------- ---------- ----------- -----------
--------- ---------- ---------- ----------- -----------
Income taxes paid.......................................... $ -- $ 581,000 $1,323,308 $ 479,000 $ --
--------- ---------- ---------- ----------- -----------
--------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Dunn Computer Corporation (the "Corporation") was incorporated on July 27,
1987 under the laws of the Commonwealth of Virginia.
On January 3, 1997, Dunn Computer Corporation (the "Company"), a Delaware
corporation, was formed as a holding company for the stock of Dunn Computer
Corporation, the Virginia corporation. On January 6, 1997, the Board of
Directors and stockholders of the Corporation approved and effected a
2,799.160251 for 1 stock exchange with the Company whereby the holders of the
Corporation's Common Stock would receive 2,799.160251 shares of Common Stock in
the Company for each share of Common Stock in the Corporation. All references in
the accompanying consolidated financial statements as to the number of shares of
Common Stock and per-share amounts have been restated to reflect the stock
exchange. Also, the Company authorized 2,000,000 shares of Preferred Stock with
rights and preferences to be determined by the Board of Directors at a later
date.
The Company is engaged in the business of providing build-to-order computer
systems and related equipment to businesses and government agencies.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions eliminate upon consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
INVESTMENTS
At October 31, 1996 and 1997, investments consisted of shares of common
stock of a privately-held internet company, Worldwide Internet Solutions
Network, Inc. ("WIZnet"), with a cost basis of approximately $150,000. The
Company believes that this carrying amount represents the lower of cost or
market. The Company is accounting for this investment using the cost method
since the Company's investment represents less than 20% of the privately-held
internet company's outstanding stock. The President and Chief Executive Officer
of WIZnet is a member of the Company's Board of Directors.
In connection with the acquisition of STMS, the Company also purchased a 47%
interest in Glacier Corporation. This investment was recorded at its fair value
of $125,000 on the purchase date. The Company is accounting for this investment
using the equity method. The Company believes that the carrying amount
represents the lower of cost or market at October 31, 1997. During the period
from the
F-7
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquisition date (September 12, 1997) to October 31, 1997, the Company's portion
of net income (loss) related to the Glacier investment was immaterial to the
financial statements.
INVENTORY
Inventory is stated at the lower of cost or market as determined by the
first-in first-out (FIFO) method. The Company periodically evaluates its
inventory obsolescence reserve to ensure inventory is recorded at net realizable
amounts.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets (contracts), which resulted from the
Company's acquisition of STMS, Inc. ("STMS") in September 1997, are being
amortized on a straight-line basis over twenty and five years, respectively. At
October 31, 1997, intangible assets were comprised of:
<TABLE>
<S> <C>
Goodwill........................................................ $2,397,287
Contracts....................................................... 600,000
Less accumulated amortization................................... (22,447)
---------
$2,974,840
---------
---------
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121, ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The
Company made no adjustments to the carrying values of the assets during the
years ended October 31, 1995, 1996 and 1997.
STOCK COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation" which is effective for the Company's fiscal 1997
consolidated financial statements. SFAS 123 allows companies to account for
stock-based compensation under either the new provisions of SFAS 123 or the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," but requires pro forma disclosure in the
footnotes to the consolidated financial statements as if the measurement
provisions of SFAS 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB 25.
REVENUE RECOGNITION
The Company generally recognizes revenues based on shipment of products.
Revenues are earned principally pursuant to various contracts with agencies of
the Federal government and commercial customers. The Company generally does not
require collateral on such contracts. The length of the Company's contracts
generally range from one to three years.
F-8
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The products sold are generally covered by a warranty for periods ranging
from two to three years. The Company accrues a warranty reserve for revenues
recognized during the year to record estimated costs to provide warranty
services.
Unearned revenue relates to cash received from credit card sales as of year
end for which the related inventory was shipped subsequent to year end.
During the year ended October 31, 1995, the Company had revenues from two
agencies of the Federal government which represented 73% and 12% of total
revenues. During the year ended October 31, 1996, the Company had revenues from
two agencies of the Federal government which represented 22% and 14% of total
revenues. In addition, during 1996, the Company had revenues from one Federal
government contractor and one commercial customer which represented 17% and 16%
of total revenues, respectively. As of October 31, 1996, accounts receivable
from agencies of the Federal government represented 92% of total accounts
receivable. During the year ended October 31, 1997, the Company had revenues
from one agency of the Federal government and one Federal government contractor
which represented 21% and 11% of total revenues, respectively. As of October 31,
1997, accounts receivable from agencies of the Federal government represented
64% of total accounts receivable.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, investments and accounts receivable.
The cash is held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations. The concentration of credit risk is mitigated by the
diverse customer base and the amount of receivables due by the Federal
government. The carrying amount of the receivables approximates their fair
value.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
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
F-9
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Financial 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.
INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet, statements of income,
stockholders' equity and cash flows as of January 31, 1998 and for the three
months ended January 31, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions of Regulation S-X. 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, 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated and amortized using the
straight-line method over the estimated useful lives of five years. Leasehold
improvements are amortized over the lesser of the related lease term or the
useful life.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Computer and office equipment......................................... $ 69,626 $ 505,920
Furniture and fixtures................................................ 20,663 57,076
Leasehold improvements................................................ 27,424 96,326
Other................................................................. 78,742 143,060
---------- ----------
196,455 802,382
Less accumulated depreciation and amortization........................ (132,692) (168,954)
---------- ----------
$ 63,763 $ 633,428
---------- ----------
---------- ----------
</TABLE>
4. ACQUISITION OF STMS, INC.
On September 12, 1997, the Company acquired all of the outstanding stock of
STMS, Inc., a Virginia corporation ("STMS"), for 150,000 shares of the Company's
Common Stock, an option to purchase 25,000 shares of the Company's Common Stock,
and $1,044,500 in cash used specifically to repay certain debt of STMS. The
transaction was accounted for using the purchase method. The 150,000 shares of
Common
F-10
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF STMS, INC. (CONTINUED)
Stock were valued at the market price of the Company's common stock or $975,000
on the date of transaction. The options to purchase 25,000 shares of Common
Stock were issued to a stockholder/creditor of STMS and was valued at fair value
of $84,000 using the Black-Scholes option-pricing model. The purchase price was
allocated to the assets and liabilities acquired based on their estimated fair
values. In conjunction with the acquisition, the Company recorded goodwill in
the amount of $2,397,287 and other intangible assets (contracts) in the amount
of $600,000. The operations of STMS are included in the consolidated financial
statements of the Company as of and for the year ended October 31, 1997.
The Company granted options to purchase an aggregate of 1,330,000 shares of
the Company's Common Stock, at an exercise price equivalent to its fair market
value at the date of grant, to the former stockholders of STMS in conjunction
with their three-year employment agreements (see Note 7). The options vest over
a three-year period.
The selected pro forma information for the years ended October 31, 1996 and
1997 includes the operating results of STMS as if the Company acquired STMS on
November 1, 1995.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Pro Forma net revenues............................................................. $ 38,348,000 $ 37,186,000
------------- -------------
------------- -------------
Pro Forma net income (loss)........................................................ $ 1,548,000 $ (101,000)
------------- -------------
------------- -------------
Pro Forma earnings per share....................................................... $ 0.37 $ (0.02)
------------- -------------
------------- -------------
Pro Forma earnings per share--assuming dilution.................................... $ 0.37 $ (0.02)
------------- -------------
------------- -------------
Pro Forma weighted average shares outstanding...................................... 4,150,000 4,681,507
------------- -------------
------------- -------------
Pro Forma weighted average shares outstanding--assuming dilution................... 4,150,000 4,808,295
------------- -------------
------------- -------------
</TABLE>
5. BANK LINES OF CREDIT AND NOTES PAYABLE
In April 1996, the Company entered into a line of credit agreement with a
bank whereby the Company could borrow up to $2,000,000. Outstanding borrowings
bear interest at the prime rate. As of October 31, 1997, there were no
outstanding borrowings under this line of credit facility. The Company pays a
commitment fee equivalent to a certain percentage (approximately . 3/8%) of the
unused borrowings under the line of credit facility. The line of credit is
secured by all assets of the Company. Under the line of credit agreement, the
Company is required to maintain a net worth of $1,250,000 as well as submit
periodic financial statements. For the years ended October 31, 1996 and 1997,
the Company is in compliance with these covenants. The line of credit agreement
expires May 31, 1998.
During July 1997, the Company obtained a certain asset in the amount of
$64,227 through loan proceeds bearing interest annually at 7.9%. The Company is
required to make monthly payments of $1,303 until July, 2004.
6. RELATED PARTY TRANSACTION
Thomas Dunne, the Company's President, and his wife, Claudia Dunne, the
Company's Vice President, acquired a building for the purpose of leasing office
space to the Company. In connection with
F-11
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTION (CONTINUED)
the acquisition of the building, the Company guaranteed the building's $1
million mortgage. The term of the mortgage is 25 years. The Company subsequently
executed a noncancelable operating lease with Mr. and Mrs. Dunne. The Company
believes that the lease agreement is on terms no less favorable to the Company
than could be obtained from unaffiliated third parties (see Note 7).
7. COMMITMENTS
OPERATING LEASES
The Company leases office space under a noncancelable operating lease
agreement with two stockholders (see Note 6). The lease agreement terminates in
October 1999, but provides for a five year renewal at the Company's option.
Additionally, the Company leases various office equipment under non-cancelable
operating leases. Rent expense under these leases was $144,000, $154,000 and
$175,000 for the years ended October 31, 1995, 1996, and 1997, respectively.
Future minimum lease payments under noncancelable operating leases,
including the lease assumed in the STMS purchase, at October 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................ $ 468,995
1999............................................................ 454,982
2000............................................................ 286,170
2001............................................................ 285,709
2002............................................................ 293,843
Thereafter...................................................... 225,304
---------
Total $2,015,003
---------
---------
</TABLE>
CAPITAL LEASES
In connection with the acquisition of STMS, the Company assumed certain
capital lease obligations. The capital leases are related to the use of certain
computer equipment, and are included in fixed assets and depreciated
accordingly. The total obligation under capital lease agreements at October 31,
1997 was $91,756, at an imputed interest rate of 8%. Future minimum lease
payments are $66,294 and $25,462 for the years ending October 31, 1998 and 1999,
respectively.
EMPLOYMENT AGREEMENTS
During the year ended October 31, 1997, the Company executed employment
agreements with certain key executives under which the Company is required to
pay the following base salaries annually over the next three years:
<TABLE>
<S> <C>
1998............................................................................ $1,005,000
1999............................................................................ 1,005,000
2000............................................................................ 637,501
---------
Total........................................................................... $2,647,501
---------
---------
</TABLE>
F-12
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
EQUITY TRANSACTIONS
On April 21, 1997, the Company sold 1,000,000 shares of Common Stock in an
initial public offering for net proceeds of $3,917,664. In connection with the
offering, warrants were issued to the underwriter for 100,000 shares of Common
Stock at an exercise price of $6.00 per share. Beginning April 21, 1998, the
warrants are exercisable for a period of four years.
STOCK OPTION PLAN
On January 6, 1997, the Company adopted the 1997 Stock Option Plan (the
"Option Plan") which permits the Company to grant up to 600,000 options to
officers, directors and employees who contribute materially to the success of
the Company. In September 1997, the Company increased the number of options
available for grant under the plan to 2,200,000. Stock options are generally
granted at prices which the Company's Board of Directors believes approximates
the fair market value of its Common Stock at the date of grant. The options vest
over a stated period of time not to exceed four years. The contractual term of
the options is ten years.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------------
<S> <C> <C>
Outstanding at October 31, 1996.................................... -- $
Options granted.................................................... 1,927,000 6.11
Options exercised.................................................. -- --
Options canceled or expired........................................ 70,000 4.15
---------- -----
Outstanding at October 31, 1997.................................... 1,857,000 $ 6.18
---------- -----
Exercisable at October 31, 1997.................................... -- $ --
---------- -----
---------- -----
</TABLE>
As of October 31, 1997, there were 343,000 options available for future
grants under the Option Plan.
The following table summarizes information about fixed-price stock options
outstanding at October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------
<S> <C> <C> <C>
NUMBER AVERAGE WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE OCTOBER 31, CONTRACTUAL EXERCISE
PRICES 1997 LIFE PRICE
- -------------- ------------------ ------------------- ---------------
$4.01--$6.00 275,000 4.20 $ 4.44
$6.01--$8.00 1,582,000 4.96 6.48
---------- --- -----
$4.01--$8.00 1,857,000 4.67 $ 6.18
---------- --- -----
---------- --- -----
</TABLE>
F-13
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation expense related to the stock option plan been determined
based on the fair value at the grant date for options granted during the years
ended October 31, 1996 and 1997 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
Net income--pro forma............................................. $ 1,239,164 $ 1,098,900
------------ ------------
Earnings per share--pro forma..................................... $ 0.31 $ 0.24
------------ ------------
------------ ------------
Earnings per share--assuming dilution--pro forma.................. $ 0.31 $ 0.23
------------ ------------
------------ ------------
</TABLE>
The effect of applying SFAS 123 on pro forma net income as stated above is
not necessarily representative of the effects on reported net income for future
years due to, among other things, the vesting period of the stock options and
the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1997: dividend yield of 0%,
expected volatility of 46%; risk-free interest rate of 5.75%; and expected life
of the option term of 5 years. The weighted average fair values of the options
granted in 1997 with a stock price equal to the exercise price is $6.18.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the Company's net deferred tax asset (credit) balance are as
follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
<S> <C> <C>
1996 1997
---------- -----------
Deferred tax assets:
Accrued expenses................................................... $ 50,037 $ 24,800
Net operating loss carryforwards................................... -- 454,000
Asset reserves..................................................... 14,000 14,000
---------- -----------
Total deferred assets................................................ 64,037 492,800
Deferred tax credit:
Acquisition of intangible assets................................... -- (100,000)
Change from cash to accrual method for tax purposes................ (75,123) (38,800)
Valuation allowance.................................................. -- (454,000)
---------- -----------
Net deferred tax asset (credit).................................... $ (11,086) $ (100,000)
---------- -----------
---------- -----------
</TABLE>
As of October 31, 1997, the Company had approximately $1,100,000 in net
operating loss carryforwards primarily related to STMS, which expire at varying
dates through 2012. These carryforwards may be significantly limited under
Section 382 of the Internal Revenue Service Code and the SRLY rules. The Company
has fully reserved the net deferred tax assets because realizability of such
assets is uncertain.
F-14
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ----------- -----------
Current tax expense:
Federal..................................................................... $ 188,242 $ 709,195 $ 671,070
State....................................................................... 35,340 133,081 125,900
---------- ----------- -----------
223,582 842,276 796,970
Deferred tax expense:
Federal..................................................................... 17,355 (55,800) (1,800)
State....................................................................... 3,063 (10,476) (300)
---------- ----------- -----------
20,418 (66,276) (2,100)
---------- ----------- -----------
Total provision for income taxes............................................ $ 244,000 $ 776,000 $ 794,870
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The reconciliation of income tax from the statutory rate of 34% is:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- -----------
Tax at statutory rates...................................................... $ 165,608 $ 685,156 $ 719,838
Non-deductible expenses..................................................... 58,675 9,610 8,291
State income tax net of federal benefit..................................... 19,717 81,234 66,741
---------- ---------- -----------
$ 244,000 $ 776,000 $ 794,870
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
10. RETIREMENT PLANS
401(K) PLAN
Effective April 1, 1995, the Company adopted a 401(k) Plan (the "Plan").
Employees are eligible to participate after completing six months of service and
attaining age 18. Employees can defer up to 15 percent of compensation. Employee
contributions are subject to Internal Revenue Service limitations. All employees
who contribute to the Plan are eligible to share in discretionary Company
matching contribution. During the years ended October 31, 1995, 1996 and 1997,
the Company contributed $4,469, $3,300 and $11,855, respectively, to the Plan.
DEFINED BENEFIT PLAN
During the fiscal year ended October 31, 1995, the Company implemented a
defined benefit plan (the "Pension Plan") covering substantially all salaried
employees. The Pension Plan benefits are based on years of service and the
employee's compensation. The Company's funding policy is to annually contribute
amounts sufficient to meet minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future. The assets of the Pension
Plan are invested in money markets and corporate debt and equity instruments.
The Company contributed, in the aggregate, approximately $135,000, for the
Pension Plan years ending October 31, 1995 and 1996, which amount met the
minimum funding requirements under ERISA. Dunn has accrued, but not yet paid,
$51,450, which amount represents its minimum funding requirements under ERISA
for fiscal 1997.
F-15
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RETIREMENT PLANS (CONTINUED)
On January 6, 1997, the Company amended the Pension Plan to change the
benefits to be paid out after retirement from 100% to 40% of its initial
liability. This will result in a reduction of the projected benefit obligation
by $150,000.
The following table sets forth the Pension Plan's funded status as reported
on activity, and amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
<S> <C> <C>
1996 1997
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of ($238,619) and ($171,593)
at October 31, 1996 and 1997, respectively.......................................... $ (320,973) $ (321,599)
----------- -----------
----------- -----------
Projected benefit obligation............................................................ (320,973) (321,559)
Pension Plan assets at fair value....................................................... 168,336 147,041
----------- -----------
Funded status--projected benefit obligation in excess of fair value of Pension Plan
assets................................................................................ $ (152,637) $ (174,518)
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Net periodic pension cost:
Service cost..................................................................... $ 54,945 $ 59,066 $ 44,140
Interest cost.................................................................... 12,810 17,892 19,355
Actual return on assets.......................................................... -- (33,982) 21,295
Net amortization and deferral.................................................... 6,832 38,127 (33,340)
--------- --------- ---------
Total net periodic pension cost.................................................. $ 74,587 $ 81,103 $ 51,450
--------- --------- ---------
--------- --------- ---------
</TABLE>
Key assumptions used in the actuarial valuation were:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Weighted average discount note.................................................................... 7.5% 7.5%
Rate of return on assets:
Pre-retirement.................................................................................. 8.0% 8.0%
Post-retirement................................................................................. 8.0% 8.0%
</TABLE>
F-16
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income............................... $ 243,082 $ 1,239,164 $ 1,322,300 $ 545,815 $ 688,706
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Denominator:
Denominator for basic earnings per
share--weighted-average shares......... 4,000,000 4,000,000 4,552,055 4,000,000 5,150,000
Effect of dilutive securities:
Employee stock options............... -- -- 124,906 50,150 539,535
Warrants............................. -- -- 1,887 -- 25,373
------------ ------------ ------------ ------------ ------------
Dilutive potential common shares......... -- -- 126,793 50,150 564,908
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions..... 4,000,000 4,000,000 4,678,848 4,050,150 5,714,908
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic earnings per share................... $0.06 $0.31 $0.29 $0.14 $0.13
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted earnings per share................. $0.06 $0.31 $0.28 $0.13 $0.12
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
12. SUBSEQUENT EVENT
On December 10, 1997, the Company increased the amount available under the
current line-of-credit arrangement with a bank from $2,000,000 to $4,000,000.
F-17
<PAGE>
REPORT OF DAVIS, SITA & COMPANY, P.A., INDEPENDENT AUDITORS
The Board of Directors
STMS, Inc.
We have audited the accompanying balance sheets of STMS, Inc. as of December
31, 1995 and 1996, and the related statements of operations, stockholders'
deficit and cash flows for the years 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 audits.
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, 1995 and 1996, 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.
Greenbelt, Maryland
August 25, 1997,
except for Note 9, as to which
the date is September 12, 1997
F-18
<PAGE>
STMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 178,167 $ 188,495
Trade accounts receivable, net of $21,744 and $22,363 at December 31, 1995 and 1996,
respectively...................................................................... 2,192,497 6,349,779
Inventory........................................................................... 698,091 263,108
Loans to stockholders............................................................... 89,274 158,402
Prepaid expenses and other current assets........................................... 7,232 76,115
Deposits............................................................................ 22,363 17,444
------------ ------------
Total current assets.................................................................. 3,187,624 7,053,343
Property and equipment:
Equipment........................................................................... 201,751 423,464
Furniture and fixtures.............................................................. 83,019 94,869
Equipment under capital leases...................................................... 46,695 61,928
Leasehold improvements.............................................................. 60,007 82,665
------------ ------------
Less accumulated depreciation and amortization........................................ (108,922) (190,731)
------------ ------------
282,550 472,195
Capitalized software development costs, net of accumulated amortization of $4,588 and
$22,941, at December 31, 1995 and 1996, respectively................................ 148,369 101,438
------------ ------------
Total assets.......................................................................... $ 3,618,543 $ 7,626,976
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............................................... $ 2,281,644 $ 6,190,597
Current portion of notes payable.................................................... 971,030 54,895
Current portion of capital lease obligations........................................ 16,761 22,020
Deferred revenue.................................................................... 323,222 382,176
------------ ------------
Total current liabilities............................................................. 3,592,657 6,649,688
Notes payable, less current portion................................................. 58,465 4,569
Capital lease obligations, less current portion..................................... 5,395 19,012
Deferred revenue.................................................................... 246,521 --
Commitments
Redeemable convertible Preferred Stock, 18% cumulative, $1,000 par value; 1,235 shares
authorized, issued and outstanding at December 31, 1996............................. -- 1,235,000
Stockholders' deficit:
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 at
December 31, 1996................................................................. -- 100
Additional paid-in capital.......................................................... -- 9,900
Accumulated deficit................................................................. (285,495) (292,293)
------------ ------------
Total stockholders' deficit........................................................... (284,495) (281,293)
------------ ------------
Total liabilities and stockholders' deficit........................................... $ 3,618,543 $ 7,626,976
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
STMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Net revenues...................................................................... $ 10,371,065 $ 20,249,828
Costs of revenues................................................................. 8,354,253 16,716,376
------------- -------------
Gross profit...................................................................... 2,016,812 3,533,452
------------- -------------
General and administrative........................................................ 1,361,340 1,280,997
Selling and marketing............................................................. 716,046 2,026,287
------------- -------------
Income (loss) from operations..................................................... (60,574) 226,168
Interest expense.................................................................. 235,665 232,966
------------- -------------
Net loss.......................................................................... $ (296,239) $ (6,798)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-20
<PAGE>
STMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------- ---------------
COMMON STOCK COMMON STOCK ADDITIONAL
----------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........................... 8,065,600 $1,000 -- $-- $-- $ 10,744 $ 11,744
Net loss............................................. -- -- -- -- -- (296,239) (296,239)
--------- ------ ------ ------ ---------- ----------- ---------
Balance at December 31, 1995........................... 8,065,600 1,000 -- -- -- (285,495) (284,495)
Issuance of common stock............................. -- -- 100 100 9,900 -- 10,000
Net loss............................................. -- -- -- -- -- (6,798) (6,798)
--------- ------ ------ ------ ---------- ----------- ---------
Balance at December 31, 1996........................... 8,065,600 $1,000 100 $100 $9,900 $(292,293) $(281,293)
--------- ------ ------ ------ ---------- ----------- ---------
--------- ------ ------ ------ ---------- ----------- ---------
</TABLE>
See accompanying notes.
F-21
<PAGE>
STMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
<S> <C> <C>
1995 1996
------------ -----------
OPERATING ACTIVITIES
Net loss.............................................................................. $ (296,239) $ (6,798)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization....................................................... 33,570 100,162
Write-off of capitalized software development costs................................. -- 99,412
Changes in operating assets and liabilities:
Trade accounts receivable........................................................... 298,087 (4,157,282)
Inventory........................................................................... (549,672) 434,983
Deposits............................................................................ (250) 4,919
Prepaid expenses and other current assets........................................... 9,633 (68,883)
Accounts payable and accrued expenses............................................... 462,288 3,908,953
Deferred revenue.................................................................... 486,478 (187,567)
------------ -----------
Net cash provided by operating activities............................................. 443,895 127,899
INVESTING ACTIVITIES
Advances to stockholders.............................................................. -- (69,128)
Purchase of property and equipment.................................................... (77,891) (271,454)
Capitalized software development costs................................................ (152,957) (70,834)
------------ -----------
Net cash used in investing activities................................................. (230,848) (411,416)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock................................................ -- 10,000
Proceeds from borrowing on notes payable, net of payments............................. (70,650) 283,845
------------ -----------
Net cash (used in) provided by financing activities................................... (70,650) 293,845
------------ -----------
Net increase in cash.................................................................. 142,397 10,328
Cash at beginning of year............................................................. 35,770 178,167
------------ -----------
Cash at end of year................................................................... $ 178,167 $ 188,495
------------ -----------
------------ -----------
Supplemental disclosures:
Interest paid......................................................................... $ 235,665 $ 209,495
------------ -----------
------------ -----------
Significant non-cash transactions:
Notes payable exchanged for convertible Preferred Stock............................... $ 1,235,000 $ --
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-22
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STMS, Inc. (the "Corporation") was incorporated under the laws of the
Commonwealth of Virginia on November 1, 1990. The Corporation is in the business
of selling and installing networked micro computer systems. The Corporation
offers hardware, software, training, on-going support and related consulting to
its customers and provides comprehensive hardware, software and network
maintenance services. The Corporation is headquartered in Sterling, Virginia,
but offers its products and services on a national basis.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
INVENTORY
Inventory consists of computers, computer software, accessories and other
related items. The inventory is stated at the lower of cost or market as
determined by the first-in, first-out method. Administrative, storage and
material handling costs have been added to inventory in the amount of $22,934
and $8,651 as of December 31, 1995 and 1996, respectively.
CAPITALIZED 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's policy is to amortize capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product (three year period) including the period being reported on. During 1996,
the Corporation amortized 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 also discontinued one product and
accordingly, wrote off the accumulated costs of $99,412.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and equipment are
depreciated using the straight-line method over the estimated lives of five to
seven years and leasehold improvements are amortized over the lesser of the
related lease term or the useful life of 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that long-lived assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down is required. If a write-down is required, the
Corporation would prepare a discounted cash flow analysis to determine the
amount of the write-down.
F-23
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Corporation to
significant concentrations of credit risk primarily consist of cash equivalents
and trade accounts receivable. The Corporation periodically performs credit
evaluations of its customers' financial condition and generally requires no
collateral. 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.
DEFERRED 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 three years. The Corporation records the
maintenance contract revenue when service is 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.
REVENUE RECOGNITION
The Corporation generally recognizes revenues based on shipment of products.
Revenues are earned pursuant to various contracts with agencies of the Federal
government and commercial customers. The Corporation generally does not require
collateral on such contracts. The length of the Corporation's contracts are
generally range for one year.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" which is effective for any
complete set of financial statements for any period presented subsequent to
December 15, 1995. SFAS No. 123 allows companies to account for stock-based
compensation under either the new provisions of SFAS No. 123 or the provisions
of APB No. 25, but disclosure in the footnotes to the financial statements as if
the measurement provisions of SFAS No. 123 had been adopted. The Corporation
intends to continue accounting for stock based compensation in accordance with
the provision of APB No. 25. As such, the implementation of SFAS No. 123 will
not materially impact the financial position or results of operations of the
Company.
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.
2. INCOME TAXES
The Corporation provides for income taxes in accordance with the liability
method.
F-24
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES (CONTINUED)
The Corporation incurred net operating losses of $296,239 in the year ended
December 31, 1995 and $6,798 in the year ended December 31, 1996. A net
operating loss results in an income tax benefit due to reductions in either
prior or future income taxes.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
---------- ---------
Deferred tax assets:
Net operating loss carryforwards............................................................. $ 109,625 $ 1,211
---------- ---------
Total deferred assets........................................................................ 109,625 1,211
Deferred tax credit:
Valuation allowance.......................................................................... (109,625) (1,211)
---------- ---------
Net deferred tax asset....................................................................... $ -- $ --
---------- ---------
---------- ---------
</TABLE>
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 stockholders.
Accordingly, as of December 31, 1994, there was no provision for an income tax
liability. Effective January 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/stockholders. The loans are unsecured. Payments on these loans are due
on demand. Effective January 1, 1996, interest is being charged at 6% per annum.
The Corporation purchases inventory from Primary Telecommunications, Inc., a
company which is owned by a principal stockholder 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
At December 31, 1995, notes payable consisted of the following loans from
Barry D. and Jacqueline L. Bergman:
<TABLE>
<S> <C>
Term loans...................................................... $ 144,495
Credit line loan................................................ 885,000
---------
$1,029,495
---------
---------
</TABLE>
F-25
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
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 stockholders, payable in
monthly installments of $4,645 which includes interest at 12% per annum.
Annual principal curtails are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 54,895
1998............................................................... 4,569
---------
$ 59,464
---------
---------
</TABLE>
5. CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 28,917
1998............................................................... 23,845
---------
52,762
Amounts representing interest...................................... (11,730)
---------
$ 41,032
---------
---------
</TABLE>
Amortization of assets recorded under capital lease obligations is included
in depreciation and amortization expense.
6. 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 as of December 31,
1996:
<TABLE>
<S> <C>
1997............................................................ $ 151,160
1998............................................................ 266,906
1999............................................................ 274,913
2000............................................................ 283,160
2001............................................................ 291,655
---------
$1,267,794
---------
---------
</TABLE>
Rent expense under operating leases were $90,719 and $90,055 for the years
ended December 31, 1995 and 1996, respectively.
F-26
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK
REDEEMABLE 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 stockholder who has the
option to convert the Preferred Stock into a senior debt instrument (promissory
note payable) on demand. At the stockholder'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 Corporation 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
In January 1996, the Corporation adopted an Incentive Stock Option Plan
("the Plan") 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 reserved 500,000 shares of its Class A Common
Stock for this purpose. Options are granted at the fair market value of the
Corporation's Common Stock on the date of grant. The term of the stock options
granted under the Plan may not exceed 10 years. The stock options granted as of
December 31, 1996, vest over a 4 year period.
Additional information with respect to stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding at beginning of period..................................................... -- --
Options granted........................................................................ 9,500 $ 0.13
Options exercised...................................................................... -- --
Outstanding at end of period........................................................... 9,500 $ 0.13
----- -----
Options exercisable at end of period -- --
----- -----
</TABLE>
At December 31, 1996, there were 490,500 options available for future grants
under the Plan. The Corporation applies APB No. 25 in accounting for the
incentive stock option plan, and, accordingly, recognizes compensation expense
for the difference between the deemed fair market value of the
F-27
<PAGE>
STMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK (CONTINUED)
underlying Common Stock and the grant price of the option at the date of grant.
During the year ended December 31, 1996, the Corporation did not grant any
options at exercise prices which were less than the fair market value of the
Common Stock at the grant date.
The Corporation has adopted the disclosure provisions only of SFAS No. 123.
The effect of applying SFAS No. 123 for the year ended December 31, 1996 on pro
forma net loss is not necessarily representative of the effects on reported net
loss for future years due to, among other things, (1) the vesting period of the
stock options and the (2) fair value of additional stock options in future
years.
Had compensation expense for the Corporation's stock options been determined
based upon the fair value at the grant date for awards under the Plan consistent
with the underlying methodology prescribed under SFAS No. 123, the Corporation's
net loss for the year ended December 31, 1996 would have been approximately
$7,110. The fair value of each options grant is estimated on the date of grant
using the Minimum Value option pricing model with the following weighted-average
assumptions for 1996: average risk-free interest rate of 6%, dividend yield 0%,
and expected life of option four years, and a five year contractual life.
8. 401(K) PLAN
The Corporation sponsors a 401(k) plan which covers substantially all
employees who have provided at least six months service and attained the age of
twenty-one. Participants may contribute up to 15% of their annual compensation.
Participants are immediately vested in their voluntary contributions plus their
earnings thereon. The Corporation may make discretionary contributions at the
option of the Board of Directors.
9. 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 150,000 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-28
<PAGE>
STMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 104,008
Trade accounts receivable, net of allowance for doubtful accounts of $22,190 3,300,116
Inventory......................................................................................... 426,902
Prepaid expenses and other current assets......................................................... 43,062
Loans to stockholders............................................................................. 148,197
------------
Total current assets................................................................................ 4,022,285
Property and equipment, net......................................................................... 474,264
Capitalized software development costs, net......................................................... 165,832
------------
Total assets........................................................................................ $ 4,662,381
------------
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................................................. $ 3,832,692
Accrued expenses.................................................................................. 185,766
Current portion of note payable................................................................... 1,253,525
Current portion of capital lease obligations...................................................... 16,037
Deferred revenue.................................................................................. 492,269
------------
Total current liabilities........................................................................... 5,780,289
Capital lease obligations, less current portion..................................................... 8,082
Note payable, less current portion.................................................................. 29,146
Commitments......................................................................................... --
Stockholders' deficit:
Common Stock...................................................................................... 1,100
Additional paid-in capital........................................................................ --
Accumulated deficit............................................................................... (1,156,236)
------------
Total stockholders' deficit......................................................................... (1,155,136)
------------
Total liabilities and stockholders' deficit......................................................... $ 4,662,381
------------
------------
</TABLE>
See accompanying notes.
F-29
<PAGE>
STMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997
-------------- --------------
<S> <C> <C>
Net revenues..................................................................... $ 5,957,622 $ 7,812,531
Costs of revenues................................................................ 4,932,821 5,721,002
-------------- --------------
Gross profit..................................................................... 1,024,801 2,091,529
General and administrative....................................................... 353,990 1,034,507
Selling and marketing............................................................ 689,256 1,772,964
-------------- --------------
Loss from operations............................................................. (18,445) (715,942)
Other income (expense)........................................................... 133 (21,372)
Interest expense................................................................. (119,200) (118,003)
-------------- --------------
Net loss......................................................................... $ (137,512) $ (855,317)
-------------- --------------
-------------- --------------
</TABLE>
See accompanying note.
F-30
<PAGE>
STMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss......................................................................... $ (137,512) $ (855,317)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................ 30,297 60,427
Changes in operating assets and liabilities:
Trade accounts receivable.................................................... 440,528 3,049,663
Inventory.................................................................... 444,410 (163,794)
Loans to stockholders........................................................ (10,553) 10,205
Prepaid expenses and other current assets.................................... (5,850) 50,497
Accounts payable............................................................. (823,096) (2,357,905)
Accrued expenses............................................................. 77,376 185,766
Deferred revenue............................................................. (70,694) 110,093
-------------- --------------
Net cash (used in) provided by operating activities.............................. (55,094) 89,635
INVESTING ACTIVITIES
Purchases of property and equipment.............................................. (8,542) (62,496)
Capitalized software development costs........................................... (17,463) (64,394)
-------------- --------------
Net cash used in investing activities............................................ (26,005) (126,890)
FINANCING ACTIVITIES
Proceeds from long-term debt..................................................... 42,974 24,577
Payments on capital lease obligations............................................ (8,291) (16,913)
Payments on long-term debt....................................................... (86,030) (54,896)
Distributions to stockholders.................................................... (37,400) --
-------------- --------------
Net cash used in financing activities............................................ (88,747) (47,232)
Net decrease in cash and cash equivalents........................................ (169,846) (84,487)
Cash and cash equivalents at beginning of the period............................. 178,167 188,495
-------------- --------------
Cash and cash equivalents at end of the period................................... $ 8,321 $ 104,008
-------------- --------------
-------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................................... $ 119,200 $ 123,069
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-31
<PAGE>
STMS, INC.
NOTE 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. 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
December 31, 1997. For further information, refer to the audited financial
statements and footnotes thereto included elsewhere herein.
F-32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
We have audited the accompanying balance sheet of Dunn Computer Corporation
(a Virginia Corporation) as of February 26, 1998. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Dunn Computer Corporation as
of February 26, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
February 26, 1998
F-33
<PAGE>
DUNN COMPUTER CORPORATION
BALANCE SHEET
FEBRUARY 26, 1998
<TABLE>
<S> <C>
ASSETS
Cash............................................................................. $ 1
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Preferred stock; $.001 par; 2,000,000 shares authorized;
no shares issued and outstanding............................................... $ --
Common stock; $.001 par; 20,000,000 shares authorized; one share issued and
outstanding.................................................................... --
Additional paid-in capital....................................................... 1
-----------
$ 1
-----------
-----------
</TABLE>
See accompanying note.
F-34
<PAGE>
DUNN COMPUTER CORPORATION
NOTE TO FINANCIAL STATEMENT
FEBRUARY 26, 1998
1. ORGANIZATION
Dunn Computer Corporation was incorporated in the Commonwealth of Virginia
on February 26, 1998 to become a holding company for Dunn Computer Corporation,
a Delaware Corporation, and International Data Products Corp., a Maryland
corporation, as provided in the Acquisition Agreement.
F-35
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Boards of Directors
International Data Products, Corp. and Puerto Rico Industrial Manufacturing
Operations, Corp.:
We have audited the accompanying combined balance sheets of International
Data Products, Corp. and combined company as of September 30, 1996 and 1997, and
the related combined statements of income and retained earnings and cash flows
for each of the years in the three-year period ended September 30, 1997. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of International Data
Products, Corp. and combined company as of September 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
November 7, 1997
F-36
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------- -------------
ASSETS 1996 1997 1997
- --------------------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents.......................................... $ 314,677 1,013,198 891,493
Accounts receivable--trade (net of allowance of $127,733 as of
September 30, 1996 and $131,821 as of September 30, 1997) 6,635,990 5,724,022 14,595,651
Employee and stockholder advances.................................. 109,883 119,390 118,587
Inventory, net..................................................... 15,339,842 15,991,331 18,652,198
Income taxes receivable............................................ -- 401,775 401,775
Deferred income taxes.............................................. 9,557 443,415 443,415
Prepaid expenses................................................... 1,368,640 790,160 1,631,934
Other current assets............................................... 210,486 327,150 103,335
------------- ------------ -------------
Total current assets................................................. 23,989,075 24,810,441 36,838,388
Fixed assets, net of accumulated depreciation and amortization....... 1,640,423 2,252,851 2,325,143
Deferred income taxes................................................ -- 17,631 17,631
Investment in joint venture, at cost................................. 31,200 31,200 31,200
Other assets......................................................... 77,570 199,732 193,027
------------- ------------ -------------
Total assets....................................................... $ 25,738,268 27,311,855 39,405,389
------------- ------------ -------------
------------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................................... $ 6,585,689 5,634,687 11,340,942
Accounts payable--trade............................................ 11,654,404 12,810,200 17,495,811
Accrued expenses................................................... 745,797 1,446,074 2,839,493
Income taxes payable............................................... 180,372 58,456 112,174
Notes payable--current portion..................................... 425,554 368,792 420,467
Notes payable--related parties..................................... 1,604,462 1,498,397 1,579,973
Other liabilities.................................................. 152,553 58,950 69,429
------------- ------------ -------------
Total current liabilities............................................ 21,348,831 21,875,556 33,858,289
Long-term liabilities:
Notes payable, net of current portion.............................. 224,926 164,308 160,860
Deferred income taxes.............................................. 10,538 -- --
Deferred rent...................................................... 226,222 163,165 143,606
------------- ------------ -------------
Total liabilities.................................................... 21,810,517 22,203,029 34,162,755
------------- ------------ -------------
Commitments and contingencies
Stockholders' equity:
International Data Products, Corp. common stock, no par value,
5,000 shares authorized, 100 shares issued and outstanding....... 40,000 40,000 40,000
Puerto Rico Industrial Manufacturing Operations Corp. common stock,
no par value, 10,000 shares authorized, 7,000 shares issued and
outstanding...................................................... 132,000 132,000 132,000
Retained earnings.................................................. 3,755,751 4,936,826 5,070,634
------------- ------------ -------------
Total stockholders' equity........................................... 3,927,751 5,108,826 5,242,634
------------- ------------ -------------
Total liabilities and stockholders' equity........................... $ 25,738,268 27,311,855 39,405,389
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, --------------------------
----------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Sales.................................... $ 80,432,480 84,291,838 71,920,739 35,999,417 25,200,523
Cost of sales............................ 69,024,772 71,889,685 58,995,644 30,838,159 21,100,060
------------- ------------ ------------ ------------ ------------
Gross profit............................. 11,407,708 12,402,153 12,925,095 5,161,258 4,100,463
Operating expenses....................... 8,709,038 11,232,702 11,598,705 3,650,900 3,694,449
------------- ------------ ------------ ------------ ------------
Income from operations................... 2,698,670 1,169,451 1,326,390 1,510,358 406,014
Other income (expenses):
Bid protest settlement................. -- 750,000 --
Interest income........................ 36,736 120,369 31,359 1,442 1,504
Interest expense....................... (524,329) (884,818) (593,012) (222,876) (224,536)
Miscellaneous, net..................... 4,411 5,742 (1,109) 37,169 4,544
------------- ------------ ------------ ------------ ------------
Income before income taxes............... 2,215,488 1,160,744 763,628 1,326,093 187,526
Income tax expense (benefit)............. 278,305 (17,708) (417,447) 289,915 53,718
------------- ------------ ------------ ------------ ------------
Net income............................... 1,937,183 1,178,452 1,181,075 1,036,178 133,808
Retained earnings, beginning of year..... 640,116 2,577,299 3,755,751 3,755,751 4,936,826
------------- ------------ ------------ ------------ ------------
Retained earnings, end of year........... $ 2,577,299 3,755,751 4,936,826 4,791,929 5,070,634
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, --------------------------
---------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income............................................. $ 1,937,183 1,178,452 1,181,075 1,036,178 133,808
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 259,356 411,979 573,228 120,980 205,968
Deferred income taxes.............................. (21,602) (363,121) (462,026) (10,538) --
Loss on disposal of fixed assets................... 3,167 3,963 -- -- --
(Increase) decrease in:
Accounts receivable -- trade, net................ (8,083,405) 9,167,428 911,968 (7,376,401) (8,871,629)
Employee and stockholder advances................ (139,101) 102,282 (9,507) 20,249 803
Inventory, net................................... (4,253,509) (6,374,158) (651,489) 3,972,991 (2,660,867)
Prepaid expenses and other assets................ (90,802) (731,624) 339,654 1,419,743 (611,254)
Income taxes receivable.......................... 76,000 -- (401,775) -- --
Increase (decrease) in:
Accounts payable -- trade........................ 5,465,918 (3,151,190) 1,155,796 1,218,782 4,685,611
Accrued expenses................................. 105,756 148,761 700,277 (52,593) 1,393,419
Other liabilities................................ (141,337) 184,064 (156,660) (139,043) (9,080)
Income taxes payable............................. 317,641 (137,269) (121,916) 419,509 53,718
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities...... (4,564,735) 439,567 3,058,625 629,857 (5,679,503)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisitions of fixed assets........................... (664,085) (882,550) (1,186,157) (434,769) (278,260)
Proceeds from sale of fixed assets..................... 32,378 15,723 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities.................... (631,707) (866,827) (1,186,157) (434,769) (278,260)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit.......... 524,098 (1,336,363) (951,002) 39,425 5,706,255
Proceeds from notes payable............................ 4,677,424 2,789,644 320,758 118,286 309,466
Principal payments on notes payable.................... (179,977) (811,781) (543,703) (67,488) (179,663)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities...... 5,021,545 641,500 (1,173,947) 90,223 5,836,058
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents..... (174,897) 214,240 698,521 285,311 (121,705)
Cash and cash equivalents, beginning of year............. 275,334 100,437 314,677 314,677 1,013,198
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of year................... $ 100,437 314,677 1,013,198 599,988 891,493
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Supplemental Cash Flow Information:
The Company paid income taxes of approximately $26,000, $224,000 and
$713,000, and paid interest of approximately $365,000, $629,000 and $496,000,
during the years ended September 30, 1995, 1996, and 1997, respectively.
See accompanying notes to combined financial statements.
F-39
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1996, AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS
ORGANIZATION
The International Data Products, Corp. combined financial statements include
the accounts of International Data Products, Corp. ("IDP") and Puerto Rico
Industrial Manufacturing Operations, Corp. ("PRIMO"). IDP and PRIMO are under
common family ownership control. All material intercompany accounts and
transactions have been eliminated in combination. IDP and PRIMO combined is
hereinafter referred to as the "Company".
IDP was incorporated in Maryland on February 27, 1984. The Company sells
computer equipment and provides computer training and maintenance service
primarily to agencies and suppliers of the federal government. For each of the
three years ended September 30, 1995, 1996 and 1997, approximately 1 percent, 8
percent and 6 percent, respectively, of the Company's revenue was from federal
contracts that were awarded under section 8(a) of the Small Business Act.
Puerto Rico Industrial Manufacturing Operations, Corp. is incorporated under
the laws of the Commonwealth of Puerto Rico. PRIMO manufactures computers and
peripheral equipment for IDP. Substantially all of PRIMO's sales are to IDP,
which have been eliminated in the accompanying combined financial statements.
The Company operates in a competitive environment subject to technological
change and the emergence of new technologies, although the Company believes that
its products and services are, or would be, upgradable to new technologies.
CASH AND CASH EQUIVALENTS
The Company maintains demand deposits with several financial institutions.
At times, deposits exceed federally insured limits, but management does not
consider this a significant concentration of credit risk. Cash equivalents
consist of highly liquid investments with original maturities of 90 days or
less. The fair market value of such instruments approximates cost.
INVENTORY
Inventory consists of parts and material and is stated at the lower of cost,
using weighted average cost method, or market. The Company has established
reserves for obsolete and excess inventory at $0 and $796,404 as of September
30, 1996 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method based on estimated useful lives of three to seven years.
Maintenance and repair costs are charged to expense as incurred. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
improvement or the remaining term of the lease.
REVENUE RECOGNITION
The Company recognizes revenues from hardware and software sales at time of
receipt by the customer. Service revenues are recognized over the contractual
period as the service is provided.
F-40
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
ADVERTISING
The Company expenses the production costs of advertising the first time the
advertising is published, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefit (generally
three months) based on the ratio of current direct response revenue to estimated
total direct response revenue. Direct response advertising consists primarily of
magazine advertisements which include item order numbers unique to the
advertising campaign.
At September 30, 1996, approximately $246,000 of advertising costs were
reported as prepaid expenses. There were no advertising costs reported as
prepaid expenses at September 30, 1997. For the years ended September 30, 1995,
1996 and 1997, total advertising expense was approximately $252,000, $255,000,
and $535,000, respectively.
WARRANTY EXPENSE
The Company reserves for estimated future warranty costs that may be
required to satisfy contractual requirements. Such provisions are accrued as the
related revenue is recognized. The typical warranty period ranges from one to
three years.
INCOME TAXES
The Company applies the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts and income tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. The income tax provisions for IDP and PRIMO are
prepared separately and combined for financial reporting purposes.
PRIMO has been granted a tax exemption, with certain normal reservations,
from Puerto Rico income (90%), property (90%), and municipal license taxes (60%)
on its manufacturing operations under the Puerto Rico Tax Incentives Act of
1987, Act No. 8, as amended. This tax exemption is for a period of 20 years
ending on September 12, 2014.
CHANGE IN REPORTING PERIODS
PRIMO's reporting periods, as previously audited, were the year ended
December 31, 1995 and the nine months ended September 30, 1996. For purposes of
presenting the combined financial statements of the Company, PRIMO's financial
statements were conformed to reflect each of the years ended September 30, 1995
and 1996, respectively.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported assets
F-41
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
and liabilities and disclosures of contingent assets and liabilities. Actual
results may differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited combined balance sheet, statements of income and retained
earnings and cash flows as of December 31, 1997 and for the three months ended
December 31, 1996 and 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions of Regulation S-X. 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 ending September 30, 1998.
(2) ACCOUNTS RECEIVABLE
Accounts receivable, which are substantially all billed or billable, at
September 30, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ----------
<S> <C> <C>
U.S. Government and agencies....................................... $ 3,934,632 5,236,309
Commercial......................................................... 270,201 327,535
JTP Joint Venture (note 3)......................................... 2,431,157 160,178
------------ ----------
$ 6,635,990 5,724,022
------------ ----------
------------ ----------
</TABLE>
Management of the Company believes that substantially all of the outstanding
accounts receivable will be collected within one year.
Revenues from several U.S. government agencies totaled approximately
$72,820,000, $69,111,000 and $57,871,000, for the years ended September 30,
1995, 1996 and 1997, respectively, including approximately $22,298,000,
$22,117,000 and $15,282,000 from the JTP Joint Venture in 1995, 1996 and 1997,
respectively (see note 3).
(3) INVESTMENT IN JOINT VENTURE
In November 1993, IDP formed a joint venture entity, Justice Technology
Partners Joint Venture ("JTP") with two other companies for the purpose of
obtaining and performing under a certain contract. JTP has a contract with a
federal government agency involving the sale and maintenance of computer
equipment. IDP provides the computer equipment to the joint venture and records
sales at cost plus its estimated share of the joint venture profits.
IDP has a 24 percent interest in JTP and the initial investment of $31,200
is recorded at cost. IDP's equity in the estimated earnings of the joint venture
is included in accounts receivable.
F-42
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(3) INVESTMENT IN JOINT VENTURE (CONTINUED)
Summarized financial information for this unconsolidated joint venture
entity, as of and for the years ended December 31, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Contract revenue......................................................... $ 44,574 43,417
Net income............................................................... 7,902 5,992
Total current assets..................................................... 3,437 12,252
Total assets............................................................. 3,487 12,293
Total liabilities........................................................ 3,006 9,979
--------- ---------
--------- ---------
</TABLE>
Distributions received in excess of profit recognized, amounting to
approximately $59,000 is included as a reduction of accounts receivable at
September 30, 1996; and profits recognized in excess of distributions received,
amounting to approximately $116,000 is included in accounts receivable at
September 30, 1997.
(4) FIXED ASSETS
Fixed assets as of September 30, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Furniture and equipment........................................... $ 1,499,006 2,385,410
Transportation equipment.......................................... 425,404 445,353
Leasehold improvements............................................ 230,105 357,123
Testing lab and equipment......................................... 195,152 340,072
Production equipment.............................................. 159,931 143,585
------------ -----------
Total............................................................. 2,509,598 3,671,543
Less accumulated depreciation and amortization.................... (869,175) (1,418,692)
------------ -----------
Fixed assets, net................................................. $ 1,640,423 2,252,851
------------ -----------
------------ -----------
</TABLE>
(5) INDEBTEDNESS
Notes payable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
Secured demand bank loan, interest at 10.25%...................... $ 374,760 291,689
Secured automobile loans, interest ranging from 3.7% to 11.5%..... 275,720 241,411
------------ ------------
Total notes payable............................................... 650,480 533,100
Less current portion.............................................. 425,554 368,792
------------ ------------
Notes payable, noncurrent......................................... $ 224,926 164,308
------------ ------------
------------ ------------
</TABLE>
F-43
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(5) INDEBTEDNESS (CONTINUED)
Principal payments on the long-term debt for each of the fiscal years from
1998 to 2002 and thereafter are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 368,792
1999.............................................................................. 65,723
2000.............................................................................. 49,292
2001.............................................................................. 42,598
2002.............................................................................. 6,695
----------
$ 533,100
----------
----------
</TABLE>
Other notes payable consist of automobile loans and a demand bank loan. The
automobile loans are secured by the respective automobile, and the demand loan
is secured by the Company's accounts at the respective bank. The notes mature at
intervals between November 1997 and September 2001. Interest rates on the notes
range from 3.7 percent to 11.5 percent.
Notes payable to related parties are payable to certain stockholders and
their relatives, and employees. All notes payable to related parties are
classified as current liabilities as they are callable by the holder at any
time. Notes payable to related parties bear interest at rates ranging from 8 to
11 percent. The total amounts outstanding on these related party notes payable
were approximately $1,604,000 and $1,498,000 at September 30, 1996 and 1997,
respectively.
The Company has a line of credit facility of $15,000,000, of which
$5,000,000 is secured by the Company's inventory and $10,000,000 is secured by
accounts receivable. The outstanding balance on this line of credit at September
30, 1996 and 1997 was approximately $6,586,000 and $5,635,000, respectively. The
interest rates applicable to this line of credit as of September 30, 1996 and
1997 were 8.25 percent and 8.5 percent, respectively. Subsequent to year-end,
the amounts available under this credit facility were increased to $25,000,000
with an additional temporary overline of $7,000,000 available through January
31, 1998. There is no formal expiration date on this facility although it is
subject to annual re-evaluation by the financial institution.
(6) INCOME TAXES
For combined financial reporting purposes, income (loss) before income taxes
for the years ended September 30, 1995, 1996 and 1997 include the following
components:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic (IDP)..................................... $ 355,436 (222,933) (1,769,240)
Foreign (PRIMO).................................... 1,860,052 1,383,677 2,532,868
------------ ---------- -----------
$ 2,215,488 1,160,744 763,628
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
As discussed in Note 2, PRIMO has been granted a 90 percent exemption, with
certain reservations, for income taxes on its manufacturing operations under the
Tax Incentives Act of Puerto Rico of 1987, Act No. 8, as amended. This exemption
is for a period of twenty years and ends in September 2014. Further,
F-44
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(6) INCOME TAXES (CONTINUED)
PRIMO has no temporary differences that would create deferred tax assets or
liabilities as of September 30, 1996 or 1997.
The components of income tax expense (benefit) for the Company for the years
ended September 30, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................................. $ 197,116 232,015 (60,439)
State................................................... 43,637 51,363 (13,380)
Foreign (PRIMO)......................................... 59,154 62,035 118,398
---------- ---------- ----------
299,907 345,413 44,579
---------- ---------- ----------
Deferred:
Federal................................................. (17,687) (297,303) (356,045)
State................................................... (3,915) (65,818) (105,981)
---------- ---------- ----------
(21,602) (363,121) (462,026)
---------- ---------- ----------
$ 278,305 (17,708) (417,447)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income tax expense (benefit) amounted to $278,305 for 1995, an effective
rate of 13 percent; ($17,708) for 1996, an effective rate of (2) percent; and
($417,447) for 1997, an effective rate of (55) percent. The actual expense
(benefit) differs from the "expected expense (benefit)" for those years,
computed by applying the U.S. federal corporate tax rate of 34 percent in 1995,
1996 and 1997 to earnings (loss) before income tax expense, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)......................................... $ 753,266 394,653 259,634
Increase (decrease) in income taxes resulting from:
Foreign income not subject to U.S. federal taxes, net of foreign taxes.......... (573,264) (408,416) (742,756)
State and local income tax expense (benefit), net of federal benefit............ 24,881 (15,605) (78,710)
Increase in valuation allowance................................................. -- -- 122,690
Nondeductible meals and entertainment expenses.................................. 31,645 27,199 17,581
Other, net...................................................................... 41,777 (15,539) 4,114
---------- ---------- ----------
$ 278,305 (17,708) (417,447)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-45
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1996 and
1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Inventory obsolescence reserve...................................... $ -- 267,870
Warranty reserve.................................................... -- 76,799
Accrued interest on related party notes............................. 67,207 116,331
Deferred rent....................................................... 90,266 85,779
Section 263(A) inventory adjustment................................. 26,682 45,020
Accrued vacation.................................................... 42,319 43,977
Allowance for doubtful accounts..................................... 49,330 50,908
Other............................................................... -- 30,242
---------- ----------
Total gross deferred tax assets....................................... 275,804 716,926
Less: valuation allowance............................................. -- (122,690)
---------- ----------
Net deferred tax assets............................................... 275,804 594,236
---------- ----------
Deferred tax liabilities:
Income from JTP joint venture....................................... (266,247) (133,190)
Other............................................................... (10,538) --
---------- ----------
Total deferred tax liabilities........................................ (276,785) (133,190)
---------- ----------
Net deferred tax asset (liability).................................... $ (981) 461,046
---------- ----------
---------- ----------
</TABLE>
The net deferred tax asset (liability) is reflected in the accompanying
balance sheets as:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets.............................................. $ 9,557 443,415
Noncurrent deferred tax assets........................................... -- 17,631
Noncurrent deferred tax liabilities...................................... (10,538) --
--------- ---------
Net deferred tax asset (liability)....................................... $ (981) 461,046
--------- ---------
--------- ---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Management considers scheduled
reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by IDP in making this assessment.
Management has established a valuation allowance of $122,690 in 1997 to reduce
the deferred tax asset to a level where based upon the level of historical
taxable income, scheduled reversal of deferred tax liabilities, and projections
of future taxable income over the periods in which the temporary differences
become deductible based on available tax planning strategies, management
presently believes that it is more likely than not that IDP will realize the
benefits of these deductible differences.
F-46
<PAGE>
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under various noncancelable operating leases for
office/warehouse space and office equipment. The future minimum lease
obligations under these noncancelable operating leases as of September 30, 1997
are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 625,283
1999............................................................................ 661,680
2000............................................................................ 292,397
2001............................................................................ 38,568
2002 and thereafter............................................................. --
------------
$ 1,617,928
------------
------------
</TABLE>
Rent expense under these operating leases amounted to approximately
$453,000, $556,000, and $538,000 for the periods ended September 30, 1995, 1996,
and 1997, respectively. Rent payments are being expensed on a straight-line
basis over the life of the lease, with the difference recorded as deferred rent.
BID PROTEST SETTLEMENT
During the year ended September 30, 1996, IDP settled a contract award
dispute with a third party and recorded a $750,000 gain on settlement. Costs
relating to the bid protest were expensed in the period incurred and recorded as
operating expenses.
(8) RETIREMENT PLAN
IDP maintains a tax-deferred savings plan under Section 401(k) of the
Internal Revenue Code which is offered to all employees who have attained the
age of 21. The plan provides for contributions by employees as well as matching
and discretionary contributions by IDP. IDP made contributions of approximately
$150,000, $210,000, and $261,000 to the plan during the years ended September
30, 1995, 1996, and 1997.
F-47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
--------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Dunn Summary Consolidated Financial Data.................................. 6
Risk Factors.............................................................. 7
The Reorganization and the IDP Acquisition................................ 12
Use of Proceeds........................................................... 13
Price Range of Dunn's Common Stock........................................ 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Dunn Selected Consolidated Financial Data................................. 16
IDP Selected Combined Financial Data...................................... 17
Summary Unaudited Pro Forma Combined Financial Data....................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 29
Management................................................................ 39
Principal Stockholders.................................................... 43
Certain Transactions...................................................... 45
Description of Securities................................................. 46
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,250,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
GERARD KLAUER MATTISON
& CO., INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the Offering described in this
Registration Statement, all of which shall be paid by the Company. All of such
amounts (except the SEC Registration Fee, and the NASD Filing Fee) are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 10,475
NASD Filing Fee................................................... 2,980
Nasdaq Filing Fee................................................. 17,500
Blue Sky Fees and Expenses........................................ 5,000
Printing and Engraving Costs...................................... 150,000
Legal Fees and Expenses........................................... 225,000
Accounting Fees and Expenses...................................... 150,000
Transfer Agent and Registrar Fees and Expenses.................... 5,500
Miscellaneous..................................................... 333,545
---------
Total......................................................... $ 900,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
VIRGINIA STOCK CORPORATION ACT
Section 697 A of the Virginia Stock Corporation Act ("VSCA") provides that a
corporation may indemnify an individual made a party to a proceeding because he
is or was a director against liability incurred in the proceeding if (1) he
conducted himself in good faith, (2) he believed, in the case of conduct in his
official capacity with the corporation, that his conduct was in its best
interests, and, in all other cases, that his conduct was at least not opposed to
its best interests, and (3) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Section 697 C of the VSCA
provides that the termination of a proceeding by judgment, order, settlement or
conviction is not, of itself, determinative that the director did not meet the
standard of conduct set forth in Section 697 A.
Section 697 D of the VSCA provides that a corporation may not indemnify a
director under Section 697 in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation, or
in connection with any other proceeding charging improper personal benefit to
him, whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 697 of the VSCA in connection with
a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 698 of the VSCA states that, unless limited by its articles of
incorporation, a corporation shall indemnify a director who entirely prevails in
the defense of any proceeding to which he was a party because he is or was a
director of the corporation against reasonable expenses incurred by him in
connection with the proceeding.
Section 701 of the VSCA provides that a corporation may not indemnify a
director under Section 697 unless authorized in the specific case after a
determination has been made that indemnification of the director is permissible
in the circumstances because he has met the standard of conduct set forth in
Section 697. Such determination is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors not at the time parties to the
proceeding, (2) if such a quorum is not obtainable, by
II-1
<PAGE>
majority vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
or more directors not at the time parties to the proceeding, (3) by special
legal counsel selected as set forth in the statute, or (4) by the shareholders
(without the vote of shares owned by or voted under the control of directors who
are at the time parties to the proceeding).
Section 699 of the VSCA provides that a corporation may pay for or reimburse
the reasonable expenses incurred by a director who is a party to a proceeding in
advance of the final disposition of the proceeding if (1) the director furnishes
the corporation a written statement of his good faith belief that he has met the
standard of conduct described in Section 697, (2) the director furnishes the
corporation a written undertaking to repay the advance if it is ultimately
determined that he did not meet the standard of conduct, and (3) a determination
is made that the facts then known to those making the determination would not
preclude indemnification. Determinations and authorizations of payments under
Section 699 are to be made in the manner specified in Section 701 of the VSCA.
Under Section 700.1 of the VSCA, an individual who is made a party to a
proceeding because he is or was a director of a corporation may apply to a court
for an order directing the corporation to make advances or reimbursement for
expenses or to provide indemnification. The court shall order the corporation to
make advances and/or reimbursement for expenses or to provide indemnification if
it determines that the director is entitled to such advances, reimbursement or
indemnification and shall also order the corporation to pay the director's
reasonable expenses incurred to obtain the order. With respect to a proceeding
by or in the right of the corporation, the court may (1) order indemnification
of the director to the extent of his reasonable expenses if it determines that,
considering all the relevant circumstances, the director is entitled to
indemnification even though he was adjudged liable to the corporation and (2)
also order the corporation to pay the director's reasonable expenses incurred to
obtain the order of indemnification.
Section 702 of VSCA states that, unless limited by a corporation's articles
of incorporation, (1) an officer of the corporation is entitled to mandatory
indemnification under Section 698 of the VSCA, and is entitled to apply for
court-ordered indemnification under Section 700 of the VSCA, to the same extent
as a director, and (2) the corporation may indemnify and advance expenses to an
officer, employee or agent of the corporation to the same extent as to a
director.
Section 703 of the VSCA provides that a corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against liability asserted against
him or incurred by him in that capacity, or arising from his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of Sections 697 or 698 of the VSCA.
Section 704 of the VSCA states that a corporation shall have power to make
any further indemnity, including indemnity with respect to a proceeding by or in
the right of the corporation, and to make additional provision for advances and
reimbursement of expenses, to any director, officer, employee or agent that may
be authorized by its articles of incorporation or any bylaw made by the
shareholders or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against (1) his willful misconduct, or (2) a
knowing violation of the criminal law. Unless the articles of incorporation, or
any such bylaw or resolution expressly provide otherwise, any determination as
to the right to any further indemnity shall be made in accordance with Section
701 B of the VSCA. Each such indemnity may continue as to a person who has
ceased to have the capacity referred to above and may inure to the benefit of
the heirs, executors and administrators of such person.
II-2
<PAGE>
CERTIFICATE OF INCORPORATION
Article 11 of the Company's Articles of Incorporation provides that the
Company shall, to the fullest extent permitted by the law of Virginia, indemnify
an individual who is or was a director or officer of the Company and who was,
is, or is threatened to be made, a named defendant or respondent in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(collectively, a "proceeding"), against any obligation to pay a judgment,
settlement, penalty, fine (including any excise tax assessed with respect to any
employee benefit plan) or other liability and reasonable expenses (including
counsel fees) incurred with respect to such a proceeding, except such
liabilities and expenses as are incurred because of such director's or officer's
willful misconduct or knowing violation of criminal law.
Article 11 also provides that unless a determination has been made that
indemnification is not permissible, the Company shall make advances and
reimbursements for expenses reasonably incurred by a director or officer in a
proceeding as described above upon receipt of an undertaking from such director
or officer to repay the same if it is ultimately determined that such director
or officer is not entitled to indemnification.
Article 11 also provides that the determination that indemnification is
permissible, the authorization of such indemnification (if applicable), and the
evaluation as to the reasonableness of expenses in a specific case shall be made
as provided by law. Special legal counsel selected to make determinations under
such Article 11 may be counsel for the Company. The termination of a proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not of itself create a presumption that a director or
officer acted in such a manner as to make him or her ineligible for
indemnification.
For the purposes of Article 11, every reference to a director or officer
includes, without limitation, (1) every individual who is a director or officer
of the Company, (2) an individual who, while a director or officer, is or was
serving at the Company's request as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, (3) an individual who
formerly was a director or officer of the Company or who, while a director or
officer, occupied at the request of the Company any of the other positions
referred to in clause (2) of this sentence, and (4) the estate, personal
representative, heirs, executors and administrators of a director or officer of
the Company or other person referred to herein. Service as a director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
controlled by the Company is deemed service at the request of the Company. A
director or officer is deemed to be serving an employee benefit plan at the
Company's request if such person's duties to the Company also impose duties on,
or otherwise involve services by, such person to the plan or to participants in
or beneficiaries of the plan.
INDEMNIFICATION AGREEMENTS
The Company may enter into indemnification agreements with its directors and
officers for the indemnification of and advancing of expenses to such persons to
the fullest extent permitted by law.
UNDERWRITING AGREEMENT
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Act.
INSURANCE
Dunn has purchased directors and officers liability insurance in the amount
of $1.0 million.
II-3
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of Dunn Delaware issued or
sold within the past three years which were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof:
During the past three years, the Company sold securities in the transactions
described below. There were no underwriters involved in the transactions and
there were no underwriting discounts or commissions paid in connection
therewith, except as disclosed below. The issuance of these securities were
considered to be exempt from registration under Section 4(2) of the Act, as
amended, and the regulations promulgated thereunder. The purchasers of the
securities in such transactions represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
certificate for the securities issued in such transaction. The purchaser of the
securities in such transactions had adequate access to information about the
Registrant.
In September, 1997 Dunn Delaware issued 150,000 shares of common stock to
the shareholders of STMS, a Virginia-based IT services company, as consideration
valued at $975,000 for all of the outstanding shares of common stock of STMS. In
addition, two selling stockholders received an option to purchase an additional
25,000 shares of Dunn common stock at an exercise price of $6.125 per share,
exercisable at any time prior to September 12, 2000. In November 1997, Dunn
reacquired 2,257 shares of its common stock in connection with a loan
forgiveness of approximately $63,000. In March 1998, Dunn repurchased from two
of the STMS selling stockholders 50,000 shares of its common stock and an option
to acquire 25,000 shares of its common stock for $457,500 and $75,750,
respectively.
In connection with Dunn's initial public offering in April 1997, Dunn sold
to the underwriter a warrant to purchase up to 100,000 shares of Dunn's common
stock, exercisable at $6.00 per share for a period of four years commencing
April 21, 2002.
In connection with a consulting agreement with JDK Associates, Inc., Dunn
granted a warrant to purchase up to 100,000 shares of Dunn, which vests over a
period of one year, exercisable at $6.50 per share.
As of the date of this Prospectus under Dunn's 1997 Stock Option Plan, Dunn
has granted 1,832,000 options to purchase shares of Dunn.
In the Merger, all of the shares, options and warrants of Dunn will be
exchanged on a one-for-one basis for shares of the Company (subject to
adjustments in the event of stock splits, stock dividends, recapitalizations and
other adjustments). The Company has filed a separate registration statement on
Form S-4 relating to the Merger.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Underwriting Agreement.
2.1 Acquisition Agreement, dated March 9, 1998, by and among Dunn Computer Corporation, a Delaware
corporation, Dunn Computer Corporation, a Virginia corporation, George D. Fuster, D. Oscar Fuster, Carol
N. Fuster and Wendy E. Fuster.
*2.2 Agreement of Merger, dated as of , 1998 between Dunn Computer Merger Subsidiary, Inc., Dunn
Computer Corporation, a Delaware corporation and Dunn Computer Corporation, a Virginia corporation.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.3 Stock Purchase Agreement, dated September 12, 1997, by and among STMS Acquisition Corp., Dunn Computer
Corporation, STMS, Inc., John Signorello, Timothy McNamee, Steve Salmon and certain other stockholders
of Dunn Computer Corporation. (Filed as Exhibit 2.1 to Dunn Computer Corporation's Current Report on
Form 8-K, dated September 12, 1997, filed September 27, 1997 (File No. 0-22263) and hereby incorporated
by reference).
3.1 Articles of Incorporation of the Company, dated February 25, 1998, and effective as of February 26,
1998.
3.2 By-laws of the Company, effective as of March 5, 1998.
3.3 Certificate of Incorporation and amendments thereto of Dunn Computer Corporation (Filed as Exhibit 3.1
to Dunn Computer Corporation's Registration Statement on Form SB-2, dated January 13, 1997 (File No.
333-19635) and hereby incorporated by reference).
3.4 By-Laws and amendments thereto of Dunn Computer Corporation (Filed as Exhibit 3.3 to Dunn Computer
Corporation's Registration Statement, on Form SB-2, dated January 13, 1997 (File No. 333-19635) and
hereby incorporated by reference).
4.1 Form of Underwriters Warrants (Filed as Exhibit 4.2 to Dunn Computer Corporation's Registration
Statement on Form SB-2, dated January 13, 1997 (File No. 333-19635) and hereby incorporated by
reference).
4.2 Loan and Security Agreement, dated as of May 28, 1996 by and between Dunn Computer Corporation and
SIGNET BANK and Amendment Nos 1, 2 and 3 thereto (Filed as Exhibit 4.2 to Dunn Computer Corporation's
Form 10-KSB, for the fiscal year ended October 31, 1997 (File No. 0-22263) and hereby incorporated by
reference).
4.3 Specimen common stock certificate for the Company.
*4.4 Amendment No. 4, dated February 28, 1998 to the Loan and Security Agreement by and between Dunn Computer
Corporation and SIGNET BANK, dated as of May 28, 1996.
*4.5 Consulting Agreement, dated as of October 1997, by and between Dunn Computer Corporation, and JDK &
Associates, Inc. (entitling JDK & Associates to warrants to purchase up to 100,000 shares of Dunn
Computer Corporation's Common Stock).
*5.1 Opinion of Jones, Day, Reavis & Pogue regarding the validity of the securities being registered.
10.1 GSA Schedule (Filed as Exhibit 10.2 to Dunn Computer Corporation's Registration Statement on Form SB-2,
Amendment 1, dated March 14, 1997 (File No. 333-19635) and hereby incorporated by reference).
10.2 Agreement, dated November 21, 1995, by and between GCH Systems, Inc. and Dunn Computer Corporation
regarding Lockheed (Filed as Exhibit 10.4 to Dunn Computer Corporation's Registration Statement on Form
SB-2, Amendment 1, dated March 14, 1997 (File No. 333-19635) and hereby incorporated by reference).
10.3 Agreement, dated March 25, 1997, by and between Dunn Computer Corporation and the Social Security
Administration (Filed as Exhibit 10.5 to Dunn Computer Corporation's Registration Statement on Form
SB-2, Amendment 2, dated April 4, 1997 (File No. 333-19635) and hereby incorporated by reference).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Agreement, dated June 12, 1995, by and between Dunn Computer Corporation and the Administrative Office
of the U.S. Courts (Filed as Exhibit 10.6 to Dunn Computer Corporation's Registration Statement on Form
SB-2, Amendment 2, dated April 4, 1997 (File No. 333-19635) and hereby incorporated by reference).
10.5 Agreement, dated September 29, 1994, by and between Dunn Computer Corporation and the Health Care
Finance Administration (Filed as Exhibit 10.7 to Dunn Computer Corporation's Registration Statement on
Form SB-2, Amendment 2, dated April 4, 1997 (File No. 333-19635) and hereby incorporated by reference).
10.6 Agreement effective September 8, 1997, by and between Virginia Contracting Authority and Dunn Computer
Corporation (Filed as Exhibit 10.6 to Dunn Computer Corporation's Form 10-KSB, dated January 30, 1998
(File No. 0-22263) and hereby incorporated by reference).
10.7 Employment Agreement by and between Dunn Computer Corporation and John D. Vazzana (Filed as Exhibit 99.1
to Dunn Computer Corporation's Registration Statement on Form SB-2, Amendment 2, dated April 4, 1997
(File No. 333-19635) and hereby incorporated by reference).
10.8 Employment Agreement by and between Dunn Computer Corporation and Thomas P. Dunne (Filed as Exhibit 99.2
to Dunn Computer Corporation's Registration Statement on Form SB-2, Amendment 2, dated April 4, 1997
(File No. 333-19635) and hereby incorporated by reference).
10.9 Deed of Lease, dated October 31, 1994, between C&T Partnership and Dunn Computer Corporation and
addendums thereto (Filed as Exhibit 10.9 to Dunn Computer Corporation's Form 10-KSB, dated January 30 ,
1998 (File No. 0-22263) and hereby incorporated by reference).
10.10 Deed of Lease, dated February 7, 1997, between APA Properties No. 6 L.P. and STMS, Inc. and First
Amendment thereto, dated July 23, 1997 (Filed as Exhibit 10.10 to Dunn Computer Corporation's Form
10-KSB, dated January 30, 1998 (File No. 0-22263) and hereby incorporated by reference).
10.11 1997 Stock Option Plan (Filed as Exhibit 10.11 to Dunn Computer Corporation's Form 10-KSB, dated January
30, 1998 (File No. 0-22263) and hereby incorporated by reference).
*10.12 General Service Administration Schedule for International Data Products, Corp.
*10.13 Agreement, dated May 5, 1997, by and between International Data Products, Corp. and the U.S. Air Force,
the Desktop V Contract.
*10.14 Agreement, dated January 6, 1998, by and between International Data Products, Corp. and the Department
of the Navy.
*10.15 Deed of Lease, dated January 31, 1995, between Northtech Business Park and International Data Products.
*10.16 Deed of Lease, dated July 15, 1994, between Puerto Rico Industrial Development Company and Puerto Rico
Industrial Manufacturing Operations, Corp.
*10.17 Agreement, dated July 11, 1995, by and between International Data Products, Corp. and the Social
Security Administration.
10.18 Form of Employment Agreement by and between the Company and D. Oscar Fuster.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.19 Form of Employment Agreement by and between the Company and George D. Fuster (included in Exhibit
10.18).
21.1 List of Subsidiaries.
23.1 Consents of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.3 Consent of Davis, Sita & Company, P.A., Independent Auditors
*23.4 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
24.1 Power of Attorney (previously filed).
27.1 Financial Data Schedule (previously filed).
27.2 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
(b) Financial Statement Schedule.
Schedule II - Valuation and Account Reserve.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or
497(h), under the Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective.
(ii) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the Securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering of those securities.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF STERLING, COMMONWEALTH OF
VIRGINIA ON APRIL 1, 1998.
DUNN COMPUTER CORPORATION
BY: /S/ THOMAS P. DUNNE
-----------------------------------------
Thomas P. Dunne
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
- --------------------------------- --------------------------- -------------------
<C><C> <S> <C>
Chairman, Chief Executive
/s/ THOMAS P. DUNNE Officer and President
- --------------------------------- (Principal Executive April 1, 1998
Thomas P. Dunne Officer)
Executive Vice President,
/s/ JOHN D. VAZZANA Chief Financial Officer
- --------------------------------- and Director (Principal April 1, 1998
John D. Vazzana Financial and Accounting
Officer)
*
- --------------------------------- Vice President and Director April 1, 1998
Claudia N. Dunne
*
- --------------------------------- Director April 1, 1998
VADM E.A. Burkhalter, Jr., USN
(Ret.)
*
- --------------------------------- Director April 1, 1998
Daniel Sinnott
</TABLE>
By his signature set forth below, John D. Vazzana, pursuant to duly executed
Powers of Attorney duly filed with the Securities and Exchange Commission, has
signed this Amendment No. 1 to the Registration Statement on behalf of the
persons whose signatures are printed above, in the capacities set forth opposite
their respective names.
/s/ JOHN D. VAZZANA
-----------------------------------------
John D. Vazzana
II-8
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
We have audited the consolidated financial statements of Dunn Computer
Corporation (a Virginia corporation) as of October 31, 1996 and 1997, and for
each of the three years in the period ended October 31, 1997 and have issued our
report thereon dated January 7, 1998, except for Notes 2 and 11, with respect to
the earnings per share calculations, as to which the date is March 5, 1998,
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Vienna, Virginia
January 7, 1998, except for Notes 2 and 11,
with respect to the earnings per
share calculations, as to which
the date is March 5, 1998
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYNG ACCOUNT AND RESERVE
DUNN COMPUTER CORPORATION
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------ ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1995............................... $ -- -- -- $ --
Year ended October 31, 1996............................... $ -- 15,000 -- $ 15,000
Year ended October 31, 1997............................... $ 15,000 62,000* -- $ 77,000
Three months ended January 31, 1998 (unaudited)........... $ 77,000 -- -- $ 77,000
Inventory reserve:
Year ended October 31, 1995............................... $ -- -- -- $ --
Year ended October 31, 1996............................... $ -- 20,000 -- $ 20,000
Year ended October 31, 1997............................... $ 20,000 230,000* -- $ 250,000
Three months ended January 31, 1998 (unaudited)........... $ 250,000 -- -- $ 250,000
</TABLE>
- ------------------------
* Additions represent purchase price adjustments relating to the acquisition
of STMS, Inc.
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Boards of Directors
International Data Products, Corp. and Puerto Rico Manufacturing Operations
Corp.:
Under date of November 7, 1997, we reported on the combined balance sheets
of International Data Products, Corp. and Combined Company as of September 30,
1996 and 1997, and the related combined statements of income, retained earnings,
and cash flows for each of the years in the three-year period ended September
30, 1997, which are included in the prospectus. In connection with our audits of
the aforementioned combined financial statements, we also audited the related
combined financial statement schedule in the registration statement. This
financial statement schedule is the responsibility of the Companies' management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic combined financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
November 7, 1997
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYNG ACCOUNT AND RESERVE
INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1995.............................. $ -- -- -- $ --
Year ended September 30, 1996.............................. $ -- 127,733 -- $ 127,733
Year ended September 30, 1997.............................. $ 127,733 4,088 -- $ 131,821
Inventory reserve:
Year ended September 30, 1995.............................. $ -- -- -- $ --
Year ended September 30, 1996.............................. $ -- -- -- $ --
Year ended September 30, 1997.............................. $ -- 796,404 -- $ 796,404
</TABLE>
<PAGE>
Exhibit 2.1
ACQUISITION AGREEMENT
This ACQUISITION AGREEMENT (the "Agreement") is made and entered into
on the 9th day of March, 1998 among George Fuster, an individual resident in
Maryland, D. Oscar Fuster, an individual resident in Maryland, Carol N. Fuster,
an individual resident in Maryland and Wendy E. Fuster, an individual resident
in Maryland (collectively the "Sellers", and individually each a "Seller"), Dunn
Computer Corporation, a Delaware corporation, with its principal place of
business in Virginia (the "Purchaser") and Dunn Computer Corporation, a Virginia
corporation ("AHC");
RECITALS
A. George Fuster and D. Oscar Fuster (the "IDP Sellers") together own
all of the issued and outstanding capital stock of International Data Products,
Corp., a Maryland corporation ("IDP");
B. Carol N. Fuster and Wendy E. Fuster (the "PRIMO Sellers") together
own all of the issued and outstanding capital stock of Puerto Rico Industrial
Manufacturing Operations Corp., a Puerto Rican corporation ("PRIMO");
C. The Purchaser has caused to be established AHC, and AHC will cause
to be established two wholly-owned subsidiaries of AHC, Dunn Computer Merger
Subsidiary, Inc., a Delaware corporation ("Merger Sub"), a company set up solely
for the purpose of carrying out the merger contemplated in Section 1.2 hereof,
and a Puerto Rican corporation to which will be
<PAGE>
2
transferred the PRIMO Assets and the PRIMO Liabilities at Closing (as such terms
are defined below) ("PAC"), all with a view to carrying out the following
transactions concurrently with the closing of the initial public offering of
shares of common stock of AHC referred to in Sections 5.1(i) and 5.2(j) hereof
(the "IPO"): (i) Merger Sub will merge into the Purchaser which will be the
surviving corporation (and all of the outstanding securities of the Purchaser
will be converted into and become securities of AHC), (ii) all of the
outstanding capital stock of IDP after giving effect to the Redemption (as
defined in Section 1.9 hereof) (the "IDP Shares") will be contributed by the IDP
Sellers to AHC in exchange for shares of AHC and cash and (iii) the PRIMO
Sellers will cause all of the assets of PRIMO (as defined in Section 2.11(h)
hereof) except for the Inter-company Indebtedness (as defined in Section 1.7
hereof) (the "PRIMO Assets"), and all of the liabilities of PRIMO reflected on
the audited balance sheet of PRIMO as of September 30, 1997 attached hereto as
Schedule A, and liabilities incurred by PRIMO in the ordinary course of business
in arms length transactions, or incurred by PRIMO with the consent of the
Purchaser in accordance with Section 4.4 hereof, since September 30, 1997, (the
"PRIMO Liabilities") to be transferred to PAC for cash, all with the result that
AHC will acquire and own all of the capital stock of the Purchaser and of IDP
and PAC will acquire and own all of the PRIMO Assets and assume all of the PRIMO
Liabilities.
NOW, THEREFORE, in consideration of the mutual promises,
representations and covenants set forth herein, and other good and valuable
consideration, the parties hereto hereby agree as follows:
<PAGE>
3
I. The Acquisition Transactions
1.1 The Closing. Each of the transactions described in Sections 1.2-1.4
hereof (collectively, the "Closing") shall take place concurrently with the
closing of the IPO (the "Closing Date").
1.2 The Merger. On the terms and conditions of the Agreement of Merger
attached hereto as Exhibit A (the "Agreement of Merger"), Merger Sub will be
merged into the Purchaser which will be the surviving corporation, and which
will be named Dunn Computer Corporation (the "Merger"). Pursuant to the Merger
the shareholders of Purchaser will receive solely AHC voting stock in exchange
for their Purchaser stock.
1.3 Contribution of IDP Shares. On the terms and conditions hereof, the
IDP Sellers shall contribute to AHC the IDP Shares. In consideration of the
contribution of the IDP Shares, AHC shall issue to the IDP Sellers 750,000
shares of AHC (Dunn Computer Corporation) common stock, par value $.001 per
share ("Dunn Common") (the "Share Portion") and shall pay to the IDP Sellers in
cash the "IDP Cash Amount" as determined as provided on Exhibit B hereto. If AHC
declares or effects a stock dividend, reclassification, recapitalization,
split-up, combination, exchange of shares or similar transaction between the
date of this Agreement and the Closing Date, the Share Portion shall be
appropriately adjusted to account therefor.
1.4 Transfer of PRIMO Assets and Liabilities. On the terms and
conditions hereof, the PRIMO Sellers shall cause PRIMO to transfer to PAC (i)
good and valid, and as to owned real property, marketable, title to all of the
PRIMO Assets, free and clear of any mortgage, claim, lien, security interest or
other encumbrance whatsoever (collectively, "Liens"), except as provided in
Section 2.11(g) hereof, and (ii) the PRIMO Liabilities. All of the other
liabilities of PRIMO shall be retained by and shall be the sole responsibility
of PRIMO. In consideration of the transfer of
<PAGE>
4
the PRIMO Assets and the other undertakings of the Sellers herein, AHC shall pay
to the PRIMO Sellers in cash $2,500,000, the "PRIMO Cash Amount".
1.5 Adjustment to Share Portion. If the Average Closing Price (as
defined below) for a share of Dunn Computer Corporation (the Purchaser) common
stock, par value $.001 per share ("Purchaser Common") is less than $7.50, the
Share Portion shall be adjusted upward to that number of shares which multiplied
by the Average Closing Price equals $5,625,000. "Average Closing Price" shall be
the average of the mean between the closing high bid and asked prices for a
share of Purchaser Common, as reported on the Nasdaq National Market System for
the twenty consecutive trading days immediately preceding the date two business
days before the Closing Date. If the Purchaser declares or effects a stock
dividend, reclassification, recapitalization, split-up, combination, exchange of
shares or similar transaction between the date of this Agreement and the Closing
Date, the Share Portion shall be appropriately adjusted to account therefor.
1.6 Adjustment to Purchase Price.
(a) The "Purchase Price" shall mean the Share Portion plus the
sum of the IDP Cash Amount, the PRIMO Cash Amount and the Inter-company
Indebtedness (which sum shall equal $14,900,000).
(b) The Purchase Price shall be adjusted downward if and to
the extent that the Closing Balance Sheet (as defined in Section 1.6(c) hereof)
reflects a net asset value (net worth) of IDP and PRIMO on a combined basis of
less than $5,108,826 at Closing (any such difference, the "Shortfall Amount"),
and the Sellers shall pay to AHC the Shortfall Amount, in cash or shares of Dunn
Common (valued for this purpose at $8.50 per share), or a combination thereof,
as the IDP Sellers shall elect, within ten days of written acceptance by AHC of
the Closing Balance
<PAGE>
5
Sheet or within ten days of completion of the Revised Closing Balance Sheet (as
defined in Section 1.6(d) hereof), as the case may be.
(c) Within thirty days after the Closing Date, the Sellers
shall cause to be delivered to AHC a combined balance sheet of IDP and PRIMO as
at the Closing Date prepared on the basis of the same accounting principles,
consistently applied, as were used in the preparation of the Sellers' Balance
Sheet (as defined in Section 2.4 hereof) and reviewed by KPMG Peat Marwick, LLP
("Sellers' Accountants") (the "Closing Balance Sheet").
(d) Sellers' Accountants shall make available to the
Purchaser's independent public accountants, Ernst & Young ("Purchaser's
Accountants") all work papers used in connection with the preparation of the
Closing Balance Sheet. Upon review of the Closing Balance Sheet and such work
papers, if Purchaser's Accountants disagree with the Closing Balance Sheet and
if Purchaser's Accountants and Sellers' Accountants fail to resolve such
disagreement within thirty days following receipt by the Purchaser of the
Closing Balance Sheet and the work papers of Sellers' Accountants, then at the
request of either Purchaser or Sellers, a third independent public accountant,
selected jointly by the Sellers' Accountants and the Purchaser's Accountants
shall resolve the disagreement between Purchaser's Accountants and Sellers'
Accountants and shall revise the Closing Balance Sheet (the "Revised Closing
Balance Sheet") to reflect the resolution. On the basis of the Closing Balance
Sheet, if Purchaser advises Sellers in writing that the Closing Balance Sheet is
accepted (either after review or after Purchaser's Accountants and Sellers'
Accountants have resolved any disagreements in respect of the Closing Balance
Sheet) or, if required, on the basis of the Revised Closing Balance Sheet, it
shall be determined whether or not there is a Shortfall Amount.
<PAGE>
6
(e) The Purchase Price shall be adjusted upward if the Closing
Balance Sheet, or if there is a Revised Closing Balance Sheet, the Revised
Closing Balance Sheet, reflects a net asset value (net worth) of IDP and PRIMO
on a combined basis of more than $5,242,634 at Closing (any such difference, the
"Excess Amount"); such adjustment shall be the amount of the Excess Amount up to
a maximum adjustment of $500,000. For purposes of this Section 1.6(e) there
shall be deducted from the liabilities reflected on the Closing Balance Sheet
(or the Revised Closing Balance Sheet, as the case may be) any amounts reflected
in the liabilities for accounting, investment banking and legal fees in
connection with this Agreement and the IPO.
1.7 Discharge of IDP Indebtedness. Promptly after the Closing, AHC
shall pay to PRIMO on behalf of IDP, and in full discharge thereof, the
inter-company indebtedness running from IDP to PRIMO, which amount shall be
agreed in good faith by the Sellers and the Purchaser two business days before
Closing (the "Inter-company Indebtedness"). The Inter-company Indebtedness shall
not exceed $12,400,000 as provided on Exhibit B hereto.
1.8 Payments by Wire Transfer. All of the cash payments to be made in
this Article I shall be made by bank wire transfers to accounts designated by
the appropriate Seller to AHC prior to the Closing.
1.9 Redemption. The IDP Sellers shall surrender to IDP for redemption
an appropriate number of IDP Shares (the "IDP Redemption Shares") pursuant to
the procedures, and in exchange for the consideration, described in Section 1.10
hereof (the "Redemption"), so that after the Redemption the IDP Shares shall
constitute all of the then issued and outstanding shares of capital stock of
IDP.
1.10 Redemption Procedures and Consideration. Prior to the Closing, IDP
shall transfer and assign all of the assets and liabilities of its IDP F2
Engineering division (as described
<PAGE>
7
in Exhibit G hereto) to F2 Engineering Corp., an inactive corporation previously
formed by IDP which has issued no shares of capital stock, has no assets or
liabilities and has conducted no activities, and at the Closing, IDP shall
transfer, or cause F2 Engineering Corp. to issue, all of the authorized shares
of capital stock of F2 Engineering Corp. to the IDP Sellers as consideration for
the IDP Redemption Shares.
II. Representations and Warranties of the Sellers
Each Seller hereby jointly and severally represents and warrants to the
Purchaser as follows:
2.1 Organization of IDP and PRIMO and Related Matters. IDP is a
corporation duly organized, validly existing and in good standing under the laws
of Maryland; PRIMO is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Puerto Rico; each of IDP and
PRIMO has all requisite power and authority to own, operate and lease its
assets, and to carry on its business as heretofore and as presently conducted.
True and complete copies of the currently effective articles of incorporation
and bylaws of IDP and PRIMO are attached to this Agreement as Schedules 2.1(a)
and (b). Each of IDP and PRIMO is duly authorized, qualified or licensed as a
foreign corporation and is in good standing in each jurisdiction where its
business, operations or assets requires it so to be. Schedule 2.1(c) identifies
all of the jurisdictions in which IDP and PRIMO, respectively, are authorized,
qualified or licensed as a foreign corporation. Neither IDP nor PRIMO has any
subsidiaries or equity interests in any other entity.
<PAGE>
8
2.2 The Shares.
(a) Each Seller owns of record and beneficially, free and
clear of any Liens, the number of IDP Shares (before giving effect to the
Redemption, which shall reduce such number of Shares by the number of IDP
Redemption Shares) or PRIMO Shares listed by such Seller's name on Exhibit C;
collectively the Sellers so own all of the Shares. The only authorized, issued
and outstanding capital stock of IDP are the IDP Shares; the only authorized,
issued and outstanding capital stock of PRIMO are the PRIMO Shares.
(b) Each of the Shares is duly authorized, validly issued and
outstanding, fully paid and non-assessable. None of the Shares has been issued
in violation of, or is subject to, any preemptive or subscription rights and
there are no outstanding convertible or exchangeable securities, calls,
preferential rights, options or warrants relating to any of the Shares. Except
as set forth on Schedule 2.2, there are no voting trust agreements or other
agreements restricting or otherwise relating to the voting, dividend rights or
the disposition of any of the Shares.
2.3 Due Authorization and Execution; No Conflict; Consents. Each Seller
has all requisite power and authority and full capacity to execute, deliver and
perform this Agreement. This Agreement has been duly and validly executed and
delivered by each Seller, and constitutes a valid and binding obligation of each
Seller enforceable against each Seller in accordance with its terms except to
the extent that enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium, conservatorship, receivership or other similar laws
now or hereafter in effect relating to or affecting the enforcement of
creditors' rights generally. Except as set forth on Schedule 2.3, the execution,
delivery and performance of this Agreement will not (a) conflict with or violate
(i) the articles of incorporation or bylaws of IDP or PRIMO, (ii) any term of
any agreement, contract, instrument, lease, commitment or other obligation to
which IDP, PRIMO or
<PAGE>
9
any Seller is a party or by which IDP, PRIMO or any Seller is bound, (iii) any
order, judgment or decree to which IDP, PRIMO or any Seller is a party or
subject, or by which any properties and assets of IDP or PRIMO are bound or (iv)
any provision of any applicable law, statute, ordinance, rule or regulation or
common law obligation and (b) will not result in the creation or imposition of
any Lien in favor of any third party with respect to any of the properties and
assets of IDP or PRIMO. Except as described on Schedule 2.3, (y) the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby by the Sellers will not require the consent or approval of
or notice to any governmental authority, or constitute a violation of any law,
regulation or order of any such authority, by IDP, PRIMO, or any Seller; and (z)
none of IDP, PRIMO or any Seller is a party to or bound by any agreement,
instrument, order, judgment or decree which would require the consent of another
person to the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby.
2.4 Financial Statements. The Sellers have delivered to the Purchaser
the combined statements of profit and loss for the years ended September 30,
1996 and 1997 and the combined balance sheet as at September 30, 1996 and 1997
(the balance sheet at September 30, 1997 shall be referred to as the "Sellers'
Balance Sheet" and September 30, 1997 shall be referred to as the "Sellers'
Balance Sheet Date") of IDP and PRIMO, as audited by Sellers' Accountants, and
the respective individual statements of profit and loss and balance sheets for
IDP and PRIMO for such period and at such date, as audited by Sellers'
Accountants (collectively, the "Sellers' Financial Statements"). The Sellers'
Financial Statements were prepared in accordance with generally accepted
accounting principles, consistently applied as in prior periods, are correct and
complete, and fairly present the financial condition of IDP and PRIMO on a
combined basis, and of IDP and PRIMO individually, as the case may be, and the
results of their combined operations,
<PAGE>
10
or their respective operations, as the case may be, as of the dates and for the
periods indicated therein.
2.5 Liabilities. Except as set forth on Schedule 2.5 hereto, neither
IDP nor PRIMO has any liabilities or obligations (whether accrued, absolute,
contingent, known, unknown, derivative or otherwise) other than those (i)
reflected in the Sellers' Balance Sheet and not since paid or otherwise
discharged, (ii) listed or described on any Schedule hereto and (iii)
liabilities arising after the Sellers' Balance Sheet Date in the ordinary course
of business of IDP or PRIMO.
2.6 Interim Operations.
(a) Ordinary Course. Except as described on Schedule 2.6
hereto, the business of each of IDP and PRIMO has been conducted only in the
ordinary course since the Sellers' Balance Sheet Date.
(b) Absence of Adverse Change. There has not been, since the
Sellers' Balance Sheet Date, any material adverse change in the business, assets
or financial condition of IDP and PRIMO considered as one entity. To the
knowledge of Sellers, there has been no occurrence, circumstance or combination
thereof which might reasonably be expected to result in any such material
adverse change.
2.7 Litigation. Except as set forth on Schedule 2.7 hereto, there is no
action, suit, proceeding, arbitration, demand, claim or investigation pending
or, to any Seller's knowledge, threatened against or involving IDP or PRIMO or
affecting or which might materially adversely affect this Agreement or the
business or assets of IDP or PRIMO or the consummation of the transactions
contemplated hereby before any court or arbitral tribunal or before or by any
governmental department, agency or body, or otherwise. Neither IDP nor PRIMO is
subject to any judgment, order, writ, injunction, decree, settlement agreement,
compliance agreement or
<PAGE>
11
consent decree of any court, administrative or governmental authority or
arbitrator except as set forth on Schedule 2.7 hereto.
2.8 Agreements and Commitments.
(a) Written and Oral Agreements and Commitments. Schedules
2.8(a)(i) through and including 2.8(a)(xii) hereto set forth a complete list as
of the date hereof of all written agreements (true and correct copies of each of
which have heretofore been delivered to Purchaser) and describe all oral
agreements and commitments of IDP and of PRIMO in force as of the date hereof,
as follows:
(i) Supply Contracts; Purchase Orders. Each outstanding supply
contract or purchase order and commitment as of December 31, 1997 exceeding
$250,000 for the purchase by IDP or PRIMO of capital assets, inventory,
semi-finished goods, supplies, services or other items.
(ii) Customer Contracts. Each outstanding contract and
commitment as of December 31, 1997 exceeding $150,000 for the sale by IDP or
PRIMO of goods or services, including all Government Contracts (as defined in
Section 2.9(g)).
(iii) Licenses. Each patent, trademark, copyright, technology
and other license agreement to which IDP or PRIMO is a party, either as licensor
or as licensee.
(iv) Real Estate Documents. Each lease and sublease relating
to the real estate interests of IDP and of PRIMO; neither IDP nor PRIMO owns any
real estate.
(v) Leases. Each lease to which either IDP or PRIMO is a
party, either as lessor or as lessee not identified in response to Section
2.8(a)(iv);
<PAGE>
12
(vi) Distributorship and Sales Representation Agreements. Each
distributorship, sales representation and similar agreement to which either IDP
or PRIMO is a party.
(vii) Indebtedness. Each outstanding loan, loan agreement,
credit agreement, note, guarantee, security agreement, book entry advance in
respect of borrowing or commitment (including, without limitation, any amounts
owing to IDP or PRIMO from, or owed by IDP or PRIMO to, any affiliated
individual or entity) to which either IDP or PRIMO is a party or by which any of
the assets of either are bound.
(viii) Employment and Benefit Agreements. Each employment,
consulting, or collective bargaining agreement to which either IDP or PRIMO is a
party, and each, pension, retirement, profit sharing, deferred compensation,
bonus, life insurance and other benefit plan or agreement which applies in any
way to past or present directors, officers, employees or consultants of either
IDP or PRIMO.
(ix) Stock Option Plans. Each stock option plan and each
option granted under each stock option plan of IDP or PRIMO.
(x) Insurance Contracts. Each insurance contract to which
either IDP or PRIMO is a party.
(xi) Product and Service Warranties. A sample of each type of
product, service or other guarantee, warranty or indemnity by which IDP or PRIMO
is bound.
(xii) Other Agreements. Each material contract, agreement, and
commitment to which either IDP or PRIMO is a party or by which the assets of
either are bound other than those disclosed pursuant to the preceding clauses of
this Section 2.8.
<PAGE>
13
(b) Status of Agreements. Except as set forth on Schedule
2.8(b) hereto, each of the contracts, agreements, commitments, licenses and
leases to which either IDP or PRIMO is a party, is a valid, legally binding and
enforceable obligation of IDP or PRIMO, and is in full force and effect. There
is no default by either IDP or PRIMO or, to the knowledge of any Seller, by the
other parties thereto under the terms of any such material contract, commitment,
license or lease, and no condition (including without limitation, the execution,
delivery and performance of this Agreement) exists which, with the passage of
time, the giving of notice, or both, is likely to result in a default by IDP or
PRIMO, as the case may be, under the terms of any thereof.
2.9 Government Contracts.
(a) Except as set forth on Schedule 2.9 hereto, to the
knowledge of the Sellers, each of IDP and PRIMO has complied in all material
respects with all applicable laws, rules, policies, procedures, regulations,
accounting standards, cost principles, cost accounting standards, solicitation
provisions and contract clauses in conducting all past and present activities
relating to Government Contracts (as defined in Section 2.9(g)) and Government
Contract procurements, including, without limitation, accounting and record
keeping activities, disclosures, reports, wage and hour regulations,
certifications and representations, product testing, marketing activities,
proposal and bid preparation and submissions, negotiations and contract
performance. To the knowledge of the Sellers, all proposals, representations,
statements, disclosures, reports, invoices and certifications made in connection
with Government Contracts were, when made, current, accurate and complete in all
material respects. Except as set forth on Schedule 2.9 hereto, there are not
now, nor have there been since the formation of IDP or PRIMO, as the case may
be, any government investigations or
<PAGE>
14
audits of the IDP or PRIMO, or any officer or employee of either in connection
with Government Contract activities. Each Government Contract of IDP and of
PRIMO, as the case may be, is expected to finish on schedule and within budget
and neither IDP nor PRIMO presently has any basis to conclude that existing
schedules or budgets are not reasonable.
(b) To the knowledge of the Sellers, neither IDP nor PRIMO has
been determined by a governmental agency to be "non-responsible" in connection
with any Government Contract procurement. Neither IDP nor PRIMO has received any
notice, and neither IDP, nor PRIMO, nor any Seller is aware of any circumstances
that reasonably would be expected to justify such a notice, that any of its
Government Contracts have been or may be terminated for default. Neither IDP nor
PRIMO is debarred or suspended, or proposed for debarment or suspension from
procurements or other activities at the federal, state or local governmental
levels, and none of IDP, PRIMO or any Seller is aware of any circumstances that
would justify a proposal or decision to suspend or debar IDP or PRIMO from
procurement or other activities. IDP and PRIMO and their respective personnel
have all necessary security clearances to perform outstanding Government
Contracts and neither IDP, nor PRIMO, nor any Seller is aware of any
circumstances (including the transfer of the IDP Shares to the Purchaser) that
may lead to the suspension or revocation of such security clearances. Neither
IDP nor PRIMO has engaged in any illegal or fraudulent conduct in connection
with Government Contract activities.
(c) Each Government Contract of IDP and of PRIMO that was
awarded, or is being considered for award, on the basis that IDP or PRIMO, as
the case may be, is classified as a small business, a small disadvantaged
business or a minority-owned business
<PAGE>
15
under a set aside or similar program under any federal, state or local laws or
procurement regulations is identified on Schedule 2.9 hereto.
(d) Neither IDP, nor PRIMO, nor any Seller has received
written notice from, or engaged in any discussions with, any Governmental
Authority (as defined in Section 2.9(g)) regarding the termination of any
Government Contract, the cessation of any delivery orders thereunder, any
reduction by any Governmental Authority in the amount of its business with IDP
or PRIMO or allegations of defective pricing in connection with Government
Contract activities.
(e) Except as set forth on Schedule 2.9 hereto, there have
been no outstanding claims (as defined by the Federal Acquisition Regulations)
by any government procurement agency submitted by or against IDP or PRIMO in
connection with its Government Contract activities and neither IDP nor PRIMO has
any basis to conclude that any claims may be submitted by or against either
company in connection with past or present government contracting activities.
(f) To the knowledge of Sellers, each of IDP and PRIMO has at
all times complied in all material respects with all governmental and state
rules, laws and regulations relating to the payment of commissions or contingent
fees and those relating to disclosure of the payment of commissions or
contingent fees in connection with Government Contract activities.
(g) For purposes of this Agreement, (i) "Government Contracts"
shall mean contracts for procurements by or on behalf of any Governmental
Authority, including instances when IDP, PRIMO or Purchaser, as the case may be,
has acted as a subcontractor at any tier,
<PAGE>
16
and (ii) "Governmental Authority" shall mean any government or political
subdivision, whether federal, state, local or foreign, or any agency or
instrumentality of any such government or political subdivision, or any federal,
state, local or foreign court or arbitrator.
2.10 Certain Governmental Matters.
(a) Taxes.
(i) Each of IDP and PRIMO has filed all federal, state and
local returns, reports, schedules, declarations and estimates related to taxes
("Tax Returns") required to be filed. All such Tax Returns were correct and
complete in all respects. All taxes owed by IDP and PRIMO, as the case may be,
for all periods (and any portion of any period) have been paid or reflected as a
liability on the Sellers' Balance Sheet or will be reflected as a liability on
the Closing Balance Sheet. No claim has ever been made by an authority in a
jurisdiction where either IDP or PRIMO does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no security interests
on any of the assets of IDP or PRIMO that arose in connection with any failure
(or asserted failure) to pay any tax.
(ii) Each of IDP and PRIMO has withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or other third
party.
(iii) There is no dispute or claim concerning any tax liability
of either of IDP or PRIMO either (A) claimed or raised by any authority in
writing or (B) as to which any of the Sellers has knowledge based upon personal
contact with any agent of such authority. Schedule 2.10(a) lists all federal,
state, local, and foreign income tax returns filed with respect to either IDP
or PRIMO for taxable periods ended on or after January 1, 1992, indicates those
tax returns that have been audited, and indicates those tax returns that
currently are the subject of
<PAGE>
17
audit. The Sellers have delivered to the Purchaser correct and complete copies
of all federal, state, and foreign income tax returns, examination reports, and
statements of deficiencies assessed against or agreed to by IDP or PRIMO since
January 1, 1992.
(iv) Neither IDP nor PRIMO has waived any statute of limitations
in respect of taxes or agreed to any extension of time with respect to a tax
assessment or deficiency.
(v) Neither IDP nor PRIMO has filed a consent under Code
- -SECTION-341(f) concerning collapsible corporations. Neither IDP nor PRIMO has
made any payments, is obligated to make any payments, or is a party to any
agreement that under certain circumstances could obligate it to make any
payments that will not be deductible under -SECTION-280G of the Internal Revenue
Code of 1986, as amended (the "Code"). Neither IDP nor PRIMO has been a United
States real property holding corporation within the meaning of Code
- -SECTION-897(c)(2) during the applicable period specified in Code
- -SECTION-897(c)(1)(A)(ii). Neither IDP nor PRIMO is a party to any tax
allocation or sharing agreement. Neither IDP nor PRIMO (A) has been a member of
an affiliated group filing a consolidated federal income tax return, or (B) has
any liability for the taxes of any person under Reg. -SECTION-1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(vi) For purposes of this Agreement, the following definitions
shall apply:
"tax" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code
- -SECTION-59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use,
<PAGE>
18
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not; and
"tax return" means any return, declaration, report, claim for refund,
or information return or statement relating to taxes, including any schedule or
attachment thereto, including any amendment thereof.
(b) Compliance with Legal Requirements. The business and
operations of each of IDP and PRIMO have not involved and do not now involve,
and, assuming that no changes occur in applicable law, the continuation thereof
in the manner in which they are now conducted will not involve, a violation of
any material legal requirement of or administered by any federal, state or local
governmental agency. To the extent that compliance with this Section 2.10 (b)
depends upon the existence or continuing validity of any governmental permit or
other authorization, each such permit or authorization is identified on Schedule
2.10 (b) hereto, and the Sellers have heretofore delivered or have caused to be
delivered to Purchaser true and correct copies of each thereof. Except as set
forth on Schedule 2.10(b), each such permit and other authorization is valid and
in full force and effect, and will not be affected by the execution, delivery
and performance of this Agreement and the change in control of IDP and PRIMO
resulting therefrom. All material obligations with respect to such permits and
other authorizations have been fulfilled, and no event has occurred which
allows, or after notice or lapse of time or both, would allow suspension,
revocation, material adverse variation or termination thereof or result in any
other impairment of the rights of IDP or PRIMO, and no Seller is aware of any
facts or circumstances which will or are likely to result in any of such permits
or other authorizations being suspended, revoked, materially and adversely
varied or terminated, or which may prejudice their renewal. To the knowledge of
the Sellers, all certificates of occupancy and permits
<PAGE>
19
necessary for the present use and occupancy of any building by IDP or PRIMO have
been obtained.
(c) ERISA. Schedule 2.10(c) attached hereto is a complete list
of all employee benefit plans, as such term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), life
insurance, hospitalization, medical and dental plans, severance, executive
compensation, bonus, deferred compensation, pension, retirement, profit sharing,
excess benefit, stock purchase and option plans (including multi-employer and
multiple employer plans), and all other plans, arrangements or practices whether
written or oral, qualified or nonqualified, sponsored, maintained, contributed
to or required to be contributed to by IDP or PRIMO or any trade or business
whether or not incorporated that together with IDP and/or PRIMO is treated as a
"single employer" under Section 414(b), (c), (m) or (o) of the Code and the
rules and regulations promulgated thereunder (referred to as "ERISA Affiliate")
(each such plan is hereinafter referred to as an "Employee Benefit Plan").
Neither IDP nor PRIMO nor its ERISA Affiliates maintains or has any liability in
respect of any Employee Benefit Plan which is not disclosed on Schedule 2.10(c)
hereto. Each Employee Benefit Plan has been operated and administered in
accordance with its provisions and is in compliance in all respects with all
applicable federal and state laws, rules and regulations governing each such
plan including but not limited to ERISA, the Code, and the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA") except to the extent
that failure to so qualify, administer or comply would not have a material
adverse effect on the business of IDP and PRIMO taken as a whole.
<PAGE>
20
There have been no non-exempt "prohibited transactions" within
the meaning of Section 4975 of the Code or Section 406 of ERISA resulting in the
imposition of excise taxes or other monetary liability on IDP or PRIMO. Neither
IDP nor PRIMO nor any ERISA Affiliate has sponsored, ever maintained, or
contributed to an Employee Benefit Plan that is subject to Title IV of ERISA.
Each Employee Benefit Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code is so qualified and the trusts maintained thereunder
are exempt from taxation under Section 501(a) of the Code. No Employee Benefit
Plan provides benefits, including without limitation, death or medical benefits
(whether or not insured), with respect to current or former employees of the
company or any ERISA Affiliate beyond their retirement or other termination of
service other than coverage mandated by COBRA or applicable state or local law.
There is no pending or, to the knowledge of Sellers threatened assessment,
complaint, proceeding, voluntary compliance application or investigation of any
kind in any court or government agency with respect to any Employee Benefit
Plan. All benefits, expenses and other amounts due and payable under any
Employee Benefit Plan and all contributions, transfers or payments required to
be made, accrued or booked to any Employee Benefit Plan, have been paid or made,
accrued and booked. With respect to each Employee Benefit Plan, Sellers have
heretofore delivered to the Purchaser true and complete copies of any documents
requested by the Purchaser.
(d) Worker's Compensation. Except as described on Schedule
2.10(d) hereto, worker's compensation and unemployment compensation matters with
respect to IDP or PRIMO have been conducted and are being conducted so as to be
in compliance in all material respects with all laws and regulations applicable
thereto.
<PAGE>
21
(e) Plant Closing Legislation. As of the Closing Date, no
employee of IDP or PRIMO, without 60 days written notice, shall have suffered,
an "employment loss" as a result of a "plant closing" or "mass layoff" as those
terms are defined in the Worker Adjustment and Retraining Notification Act, 29
U.S.C. -SECTION-2101-2109 ("WARN") in either case during the six month period
ending with and including the Closing Date. Each of IDP and PRIMO is in
compliance in all material respects with the requirements of WARN.
(f) Environmental Matters. Each of IDP and PRIMO and any other
person or entity for whose conduct they are or may be held responsible, have no
liability under, have never violated, and are presently in compliance in all
material respects with all Environmental Laws (as defined below) applicable to
the properties owned, leased or used by such parties (collectively, the
"Sellers' Properties") and any facilities and operations thereon, and, except as
set forth on Schedule 2.10(f) hereto, to the best of each Seller's knowledge,
there exists no Environmental Condition (as defined below) with respect to the
Sellers' Properties or any facilities or operations thereon, or with respect to
any property at which materials from the Sellers' Properties have been disposed.
Neither IDP, nor PRIMO, nor any Seller has generated, manufactured, refined,
transported, treated, stored, handled, disposed, transferred, produced, or
processed any Hazardous Material (as defined below) or any solid waste on, under
or about the Sellers' Properties. Seller has no knowledge of the Release or
threat of Release (as defined below) of any Hazardous Material at the Sellers'
Properties. Neither IDP, nor PRIMO, nor any Seller has received notice under the
citizen suit provision of any Environmental Law in connection with the Sellers'
Properties or any facilities or operations thereon.
<PAGE>
22
For purposes of this Agreement, (i) "Environment" shall mean soil,
surface waters, groundwaters, land, stream sediments, surface or subsurface
strata, ambient air and any environmental medium, (ii) "Environmental Condition"
shall mean any condition with respect to the Environment on or off the Sellers'
Properties or Purchaser Properties, as the case may be, that could or does
result in any damage, loss, cost, expense, claim, demand, order or liability to
any Seller, IDP, PRIMO or Purchaser by any third party (including, without
limitation, any government entity), including, without limitation, any condition
resulting from the operation of the business of IDP, PRIMO or Purchaser, as the
case may be, or any activity or operation in the vicinity of the Sellers'
Properties or the Purchaser Properties, as the case may be, or any activity or
operation formerly conducted by any person or entity on or off the Sellers'
Properties or the Purchaser Properties, as the case may be, (iii) "Environmental
Law" shall mean any environmental or health and safety related law, regulation,
rule, ordinance, bylaw, order or determination of any governmental or judicial
authority at the federal, state or local level, whether existing as of the date
hereof, previously enforced or subsequently enacted, (iv) "Hazardous Material"
shall include, without limitation, any pollutant, contaminant, toxic substance,
hazardous waste, hazardous material, hazardous substance, petroleum or petroleum
product, asbestos, polychlorinated biphenyls, underground storage tanks and the
contents thereof or any other material defined in or regulated pursuant to any
Environmental Law, whether existing as of the date hereof, previously enforced,
or subsequently enacted, including, without limitation, the Resource
Conservation and Recovery Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Federal Clean Water
Act, as amended, and the Toxic Substances Control
<PAGE>
23
Act, as amended, and (v) "Release" shall mean any releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing, dumping or migrating into the Environment.
2.11 Assets.
(a) Real Estate. Schedule 2.11(a) hereto sets forth a true and
complete list and a description of all of the land and interests in land of IDP
and of PRIMO (the "Sellers' Land") and a description of all of the buildings and
other structures of IDP and of PRIMO including leases of buildings and other
structures (and fixtures therein and improvements thereto), and the improvements
on and to the Sellers' Land (the "Sellers' Buildings"). The Sellers' Buildings
are located entirely on the Sellers' Land and, except as provided in Schedule
2.11(a) hereto, none of the Sellers' Buildings is subject to any mortgages,
liens, encumbrances, equities, restrictions, easements, rights-of-way or other
conflicting interests except (i) those items that secure liabilities that are
reflected in the Sellers' Balance Sheet, and (ii) statutory liens for amounts
not yet delinquent or which are being contested in good faith. To the knowledge
of Sellers, the Sellers' Buildings are in good structural condition except as
set forth on Schedule 2.11(a) hereto.
(b) Inventories. Schedule 2.11(b) hereto sets forth a
description of all of the inventories as of December 31, 1997, of raw materials,
parts, supplies, work-in-progress and finished goods of IDP and PRIMO (the
"Sellers' Inventories"), and identifies all such inventories that, as of
December 31, 1997, are more than 90 days old. Substantially all of the Sellers'
Inventories consist of quantities and qualities usable and salable in the
ordinary course of the business of IDP and PRIMO. Except as set forth on
Schedule 2.11(b) hereto, all of the Sellers' Inventories are located in the
Sellers' Buildings.
<PAGE>
24
(c) Machinery, Equipment and Other Tangibles. Schedule 2.11(c)
hereto sets forth a description as of December 31, 1997 (including the location)
of all of the machinery, equipment and other tangible assets of every kind and
description and wheresoever situated (whether real or personal and whether
attached or unattached to real estate) which at December 31, 1997 were used or
useful in the business of IDP or PRIMO (the "Sellers' Machinery, Equipment and
Other Tangibles"). The Sellers' Machinery, Equipment and Other Tangibles are in
good operating condition and repair, ordinary wear and tear excepted, and are
free of any material defects, and are located in the Sellers' Buildings.
(d) Intellectual Property. The business and operations of
neither IDP nor PRIMO have infringed or violated or required the use of, except
as set forth on Schedule 2.11(d) hereto, and do not now infringe or violate or
require the use of, except as set forth on Schedule 2.11(d) hereto, any patent,
copyright, trademark, trade name, invention, discovery, trade secret, secret
process or other proprietary asset of any other person. Except as set forth in
Schedule 2.11(d) hereto, there are no patents or patentable inventions developed
by any director, officer or employee of IDP or PRIMO used or useful in the
business of IDP and PRIMO considered as one enterprise which have not been
transferred to, and are not owned free of any encumbrances by, IDP or PRIMO.
(e) Accounts and Notes Receivable. All accounts and notes
receivable reflected in the Sellers' Balance Sheet and all accounts and notes
receivable arising subsequent to the Sellers' Balance Sheet Date (the "Sellers'
Accounts and Notes Receivable"), have arisen in the ordinary course of business
of IDP or PRIMO and represent valid obligations due to IDP or PRIMO, as the case
may be, and, except as set forth on Schedule 2.11(e) hereto, have been collected
or are collectible in accordance with their terms in the ordinary course of
business of
<PAGE>
25
IDP or PRIMO, as the case may be, in the aggregate recorded amounts thereof less
the bad debt reserve shown on the Sellers' Balance Sheet or accrued after the
Sellers' Balance Sheet Date in accordance with past practice.
(f) Assets Used in Business. Since one year before the
Sellers' Balance Sheet Date, neither IDP nor PRIMO has utilized any assets in
the conduct of its business and operations other than (i) assets reflected on
the Sellers' Balance Sheet or the combined balance sheet of IDP and PRIMO as of
September 30, 1996 included in the Sellers' financial statements, (ii) assets
set forth on Schedules 2.11(a) through and including 2.11(f) hereto and (iii)
supplies and inventories consumed or disposed of by IDP or PRIMO in the ordinary
course of business.
(g) Title to Assets. Except as set forth on Schedule 2.11(g)
hereto, either IDP or PRIMO has good, and as to owned real property, marketable,
title to, or in the case of property held under lease, a valid and enforceable
right to use, all of the Sellers' Land, Buildings, Inventories, Machinery,
Equipment and Other Tangibles, Intellectual Property, Accounts and Notes
Receivable and all assets reflected in the Sellers' Balance Sheet except those
disposed of in the ordinary course of business since the Sellers' Balance Sheet
Date, and such assets are not subject to any Liens except as set forth on
Schedule 2.11(g) hereto except (i) those items that secure liabilities that are
reflected in the Sellers' Balance Sheet and (ii) statutory liens for amounts not
yet delinquent or which are being contested in good faith. None of the assets of
either IDP or PRIMO are subject to any pending or, to the knowledge of Sellers,
threatened judicial order, ordinance or planning restriction as to which any
Seller has knowledge which might have a material adverse effect on the business
of IDP and PRIMO. Except as affected by the transactions contemplated hereby,
IDP and PRIMO as lessees have the right under valid and
<PAGE>
26
subsisting leases to occupy, use, possess and control all real property leased
by IDP and PRIMO as presently occupied, used, possessed and controlled by IDP
and PRIMO.
(h) PRIMO Assets. The assets of PRIMO reflected on the PRIMO
Balance Sheet, the names "PRIMO" and "Puerto Rico Industrial Manufacturing
Operations Corp.", and all other assets of PRIMO and all contracts to which
PRIMO is a party, other than assets disposed of in the ordinary course of
business since the date of the PRIMO Balance Sheet, are the "PRIMO Assets."
2.12 Insurance. All of the assets of IDP and of PRIMO are insured in
accordance with good industry practice with respect to loss due to fire and
other risks (except that PRIMO does not have product liability insurance), in
amounts and coverage which are reasonable and customary in light of the business
conducted by IDP or PRIMO, as the case may be, pursuant to the policies of
insurance listed and described on Schedule 2.8(a)(x) hereto. All insurance
policies in effect on the date hereof which relate to product liability of IDP,
together with the amounts reserved on the Sellers' Balance Sheet for product
liability and expenses to contest product liability, are in amounts and coverage
which are reasonable and customary in light of the business conducted by IDP.
The amount of insurance coverage with respect to the risks associated with the
operation of PRIMO meet the minimum requirements mandated by the government of
Puerto Rico.
2.13 Distributions. Prepayment. Etc. Except as set forth on Schedule
2.13 hereto, neither IDP nor PRIMO has since the Sellers' Balance Sheet Date
sold or disposed of, or created Liens upon, any material assets, except in the
ordinary course of business. Except as set forth on Schedule 2.13 hereto,
neither IDP nor PRIMO has since the Sellers' Balance Sheet Date declared or paid
any dividend or made any other distribution to any of its shareholders; and has
not prepaid
<PAGE>
27
or otherwise discharged any outstanding indebtedness, or made any expenditures
or disbursements of funds or commitments, except in the ordinary course of
business.
2.14 Concerning Employees.
(a) Labor Relations. Except as described on Schedule 2.14(a)
hereto, there are no labor controversies pending against either IDP or PRIMO in
the form of a proceeding, claim or litigation. Neither IDP nor PRIMO has, with
respect to its employees, recognized any labor organization; no such
organization has been certified as the exclusive bargaining agent of any such
employees; there has been no demand on behalf of any labor organization to
represent any such employees; and no Seller has any knowledge of any present
efforts of any labor organization seeking to represent any such employees.
Except as set forth on Schedule 2.14(a) hereto, neither IDP nor PRIMO has had,
and to the knowledge of any Seller there is not now threatened, a strike, work
stoppage or work slowdown.
(b) Set forth on Schedule 2.14(b) hereto is a true and
complete list of all employees of IDP and of PRIMO and their respective
compensation (including commissions and bonuses), dates of birth and dates of
hire.
(c) There are no employee benefits provided by IDP or PRIMO
except for benefits disclosed on Schedule 2.8(a)(viii) or Schedule 2.10(c)
hereto and matters covered by insurance.
2.15 Warranties. All products and services have been produced,
performed or sold heretofore by IDP and by PRIMO in a condition which meets all
applicable written warranty obligations and applicable governmental and industry
standards, codes and regulations.
<PAGE>
28
2.16 Books and Records. All books and records of IDP and of PRIMO are
in all material respects complete and correct and have been maintained in
accordance with good industry practice and have heretofore been made available
to Purchaser.
2.17 Investment Intent. The IDP Sellers are purchasing the shares
included in the Share Portion for their own account and each IDP Seller has the
present intention of holding such shares for investment purposes and not with a
view to any public distribution of such shares in violation of any federal or
state securities laws.
2.18 Registration Statement. To the best knowledge and belief of the
IDP Sellers, the descriptions of IDP and PRIMO and their historical businesses
and operations contained in the registration statement of AHC (Dunn Computer
Corporation), draft of the date hereof do not contain any untrue statement of
material fact and do not omit to state a material fact required in order to make
the statements therein not misleading. This representation is made only by the
IDP Sellers.
III. Representations and Warranties of the Purchaser and AHC
The Purchaser (which term shall mean for purposes of this Article III
the Purchaser and Dunn Computer Corporation, a Virginia corporation, except
where the context requires otherwise) and AHC hereby represent and warrant to
the Sellers as follows:
3.1 Organization of Purchaser and Related Matters. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware and has all requisite power and authority to enter into and perform
this Agreement. Dunn Computer Corporation, a Virginia corporation, is a
wholly-owned subsidiary of the Purchaser, is duly organized, validly existing
and in good standing under the laws of Virginia, and has all requisite power and
authority to own its assets and to carry on its business as it has been and is
conducted.
<PAGE>
29
3.2 Due Authorization and Execution; No Conflict. This Agreement has
been duly and validly authorized, executed and delivered by the Purchaser and
constitutes a valid and legally binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms. The execution, delivery and
performance of this Agreement by the Purchaser does not and will not conflict
with or violate its charter and by-laws or any term of any agreement, contract,
instrument, lease, commitment or other obligation to which the Purchaser is a
party or by which the Purchaser is bound, or any order, judgment or decree to
which the Purchaser is a party or subject, by which any properties and assets of
the Purchaser are bound, or any provision of any applicable law, statute,
ordinance, rule, regulation or common law obligation and will not result in the
creation or imposition of any Lien in favor of any third party with respect to
any of the properties and assets of Purchaser. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby by
the Purchaser and AHC will not require the consent or approval of or notice to
any governmental authority, or constitute a violation of any law, regulation or
order of any such authority by the Purchaser or AHC, and neither the Purchaser
nor AHC is a party to or bound by any agreement, instrument, order, judgement or
decree which would require the consent of another person to the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby.
3.3 Capitalization. The authorized capital stock of the Purchaser is
20,000,000 shares of Dunn Computer Corporation common stock, $.001 par value per
share ("Purchaser Common") of which (i) 5,150,000 shares are issued and
outstanding, (ii) 2,200,000 shares underlie employee stock options that may be
granted pursuant to the 1997 stock option plan of Purchaser, options to purchase
1,832,000 shares have been granted in accordance therewith, (iii) 25,000 shares
underlie options granted to Barry D. Bergman and Jacqueline L. Bergman in
September 1997 in
<PAGE>
30
connection with the Purchaser's acquisition of STMS, and (iv) 100,000 shares
underlie warrants held by the underwriters in the initial public offering of the
shares of Purchaser, and 2,000,000 shares of Dunn Computer Corporation preferred
stock, $.001 par value per share, none of which have been issued, and there is
no present intention to issue any such shares. All of such Purchaser Common are,
or when issued upon exercise of such employee stock options or such warrants
will be, duly authorized, validly issued and outstanding, fully paid and
non-assessable. There are no voting trust agreements or other agreements
restricting or otherwise relating to the voting, dividend rights or the
disposition of any Purchaser Common. Except as set forth above, there are no
Purchaser Common reserved for issuance. All of the outstanding Purchaser Common,
and all of the Purchaser Common which underlie such employee stock options and
warrants will be converted into shares of Dunn Common on a one-for-one basis
pursuant to the Agreement of Merger.
3.4 Interim Operations - Ordinary Course. The business of the Purchaser
has been conducted only in the ordinary and usual course since the Purchaser
Balance Sheet Date.
3.5 Absence of Adverse Change. There has not been, since the Purchaser
Balance Sheet Date any material adverse change in the business, assets,
financial condition or prospects of the Purchaser. There has been no occurrence,
circumstance or combination thereof which might reasonably be expected to result
in any such material adverse change.
3.6 Investment Intent. AHC is purchasing the IDP Shares for its own
account and AHC has the present intention of holding the IDP Shares for
investment purposes and not with a view to any public distribution of the IDP
Shares in violation of any federal or state securities laws.
<PAGE>
31
3.7 Reports.
(a) As of their respective dates, none of the registration
statement of AHC on Form S-1, expected to be filed with the SEC soon after the
date hereof, or the related Prospectus nor the Purchaser's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1997, nor any other document filed
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date hereof, each in the form (including exhibits and any documents
specifically incorporated by reference therein) filed with the SEC contained or
will contain any untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
(b) The Purchaser has timely filed all material reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that it was required to file since April 21, 1997, with
(i) any federal or state regulatory authority having jurisdiction over the
Purchaser, (ii) the SEC, and (iii) the National Association of Securities
Dealers, Inc., and any other self-regulatory organization), and has paid all
fees and assessments due and payable in connection therewith.
3.8 Financial Statements. The Purchaser has delivered to the Sellers
the statement of profit and loss for the years ended October 31, 1996 and 1997
and the balance sheet as at October 31, 1996 and 1997 (the balance sheet at
October 31, 1997 shall be referred to as the "Purchaser Balance Sheet" and
October 31, 1997 shall be referred to as the "Purchaser Balance Sheet Date"), as
audited by Purchaser's Accountants (collectively, the "Purchaser Financial
Statements"). The Purchaser Financial Statements were prepared in accordance
with generally accepted accounting principles, consistently applied as in prior
periods, are correct and complete, and fairly present the
<PAGE>
32
financial condition of Purchaser and the results of its operations as of the
dates and for the periods indicated therein.
3.9 Liabilities. The Purchaser has no liabilities or obligations
(whether accrued, absolute, contingent, known, unknown, derivative or otherwise)
other than those (i) reflected in the Purchaser Balance Sheet or the notes
thereto and not since paid or otherwise discharged, (ii) listed or described on
any Schedule hereto and (iii) liabilities arising after the Purchaser Balance
Sheet Date in the ordinary course of business of Purchaser.
3.10 Litigation. Except for the Pulsar litigation involving a dispute
as to a rebate from Hewlett-Packard in the amount of approximately $125,000,
there is no action, suit, proceeding, arbitration, demand, claim or
investigation pending or, to Purchaser's knowledge, threatened against or
involving Purchaser or affecting or which might materially adversely affect this
Agreement or the business or assets of Purchaser or the consummation of the
transactions contemplated hereby before any court or arbitral tribunal or before
or by any governmental department, agency or body, or otherwise. Purchaser is
not subject to any judgment, order, writ, injunction, decree, settlement
agreement, compliance agreement or consent decree of any court, administrative
or governmental authority or arbitrator except as set forth on Schedule 3.10
hereto.
3.11 Agreements and Commitments. Each of the contracts, agreements,
commitments, licenses and leases to which Purchaser is a party, is a valid,
legally binding and enforceable obligation of Purchaser, and is in full force
and effect. There is no default by Purchaser or, to the knowledge of Purchaser,
by the other parties thereto under the terms of any such material contract,
commitment, license or lease, and no condition (including without limitation,
the execution, delivery and performance of this Agreement) exists which, with
the passage of time,
<PAGE>
33
the giving of notice, or both, is likely to result in a default by Purchaser
under the terms of any thereof.
3.12 Government Contracts.
(a) To the knowledge of Purchaser, Purchaser has complied in
all material respects with all applicable laws, rules, policies, procedures,
regulations, accounting standards, cost principles, cost accounting standards,
solicitation provisions and contract clauses in conducting all past and present
activities relating to Government Contracts and Government Contract
procurements, including, without limitation, accounting and record keeping
activities, disclosures, reports, wage and hour regulations, certifications and
representations, product testing, marketing activities, proposal and bid
preparation and submissions, negotiations and contract performance. To the
knowledge of Purchaser, all proposals, representations, statements, disclosures,
reports, invoices and certifications made in connection with Government
Contracts were, when made, current, accurate and complete in all material
respects. Except as set forth on Schedule 3.12 hereto, there are not now, nor
have there been since the formation of Purchaser, any government investigations
or audits of Purchaser, or any officer or employee of Purchaser in connection
with Government Contract activities. Each Government Contract of Purchaser is
expected to finish on schedule and within budget and Purchaser presently does
not have any basis to conclude that existing schedules or budgets are not
reasonable.
(b) To the knowledge of Purchaser, Purchaser has not been
determined by a governmental agency to be "non-responsible" in connection with
any Government Contract procurement. Purchaser has not received any notice and
Purchaser is not aware of any
<PAGE>
34
circumstances that reasonably would be expected to justify such a notice, that
any of its Government Contracts have been or may be terminated for default.
Purchaser is not debarred or suspended, nor proposed for debarment or suspension
from procurements or other activities at the federal, state or local
governmental levels, and Purchaser is not aware of any circumstances that would
justify a proposal or decision to suspend or debar Purchaser from procurement or
other activities. Purchaser and its personnel have all necessary security
clearances to perform outstanding Government Contracts and Purchaser is not
aware of any circumstances that may lead to the suspension or revocation of such
security clearances. Purchaser has not engaged in any illegal or fraudulent
conduct in connection with Government Contract activities.
(c) Purchaser has not received written notice from, or engaged
in any discussions with, any Governmental Authority regarding the termination of
any Government Contract, the cessation of any delivery orders thereunder, any
reduction by any Governmental Authority in the amount of its business with the
Purchaser or allegations of defective pricing in connection with Government
Contract activities.
(d) There are no outstanding claims (as defined by the Federal
Acquisition Regulations) by any government procurement agency submitted by or
against Purchaser in connection with its Government Contract activities and
Purchaser has no basis to conclude that any claims may be submitted by or
against Purchaser in connection with past or present government contracting
activities.
(e) To the knowledge of Purchaser, Purchaser has at all times
complied in all material respects with all governmental and state rules, laws
and regulations relating to the
<PAGE>
35
payment of commissions or contingent fees and those relating to disclosure of
the payment of commissions or contingent fees in connection with Government
Contract activities.
3.13 Certain Governmental Matters.
(a) Taxes.
(i) Purchaser has filed all Tax Returns required to be filed.
All such Tax Returns were correct and complete in all respects. As of the
Purchaser Balance Sheet Date, all taxes owed by Purchaser for all periods (and
any portion of any period) have been paid or reflected as a liability on the
Purchaser Balance Sheet. No claim has ever been made by an authority in a
jurisdiction where Purchaser does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction. There are no security interests on any
of the assets of Purchaser that arose in connection with any failure (or
asserted failure) to pay any tax.
(ii) Purchaser has withheld and paid all taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
(iii) There is no dispute or claim concerning any tax
liability of
Purchaser either (A) claimed or raised by any authority in writing or (B) as to
which Purchaser has knowledge based upon personal contact with any agent of such
authority.
(iv) Purchaser has not waived any statute of limitations in
respect of taxes or agreed to any extension of time with respect to a tax
assessment or deficiency.
(b) Compliance with Legal Requirements. The business and operations
of Purchaser have not involved and do not now involve, and, assuming that no
changes occur in applicable law, the continuation thereof in the manner in which
they are now conducted will not involve, a violation of any material legal
requirement of or administered by any federal, state or
<PAGE>
36
local governmental agency. Except as set forth on Schedule 3.13(b), each permit
and other authorization of Purchaser is valid and in full force and effect, and
will not be affected by the execution, delivery and performance of this
Agreement. All material obligations with respect to such permits and other
authorizations have been fulfilled, and no event has occurred which allows, or
after notice or lapse of time or both, would allow suspension, revocation,
material adverse variation or termination thereof or result in any other
impairment of the rights of Purchaser, and Purchaser is not aware of any facts
or circumstances which will or are likely to result in any of such permits or
other authorizations being suspended, revoked, materially and adversely varied
or terminated, or which may prejudice their renewal. All certificates of
occupancy and permits necessary for the present use and occupancy of any
building by Purchaser have been obtained.
(c) ERISA. Neither Purchaser nor its ERISA Affiliates
maintains or has any liability in respect of any Employee Benefit Plan. Each
Employee Benefit Plan has been operated and administered in accordance with its
provisions and is in compliance in all respects with all applicable federal and
state laws, rules and regulations governing each such plan including but not
limited to ERISA, the Code, and COBRA except to the extent that failure to so
qualify, administer or comply would not have a material adverse effect on the
business of Purchaser.
There have been no non-exempt "prohibited transactions" within
the meaning of Section 4975 of the Code or Section 406 of ERISA resulting in the
imposition of excise taxes or other monetary liability on Purchaser. Neither
Purchaser nor any ERISA Affiliate has sponsored, ever maintained, or contributed
to an Employee Benefit Plan that is subject to Title IV of ERISA. Each Employee
Benefit Plan intended to be "qualified" within the meaning of Section 401(a) of
the Code is so qualified and the trusts maintained thereunder are exempt
<PAGE>
37
from taxation under Section 501(a) of the Code. No Employee Benefit Plan
provides benefits, including without limitation, death or medical benefits
(whether or not insured), with respect to current or former employees of
Purchaser or any ERISA Affiliate beyond their retirement or other termination of
service other than coverage mandated by COBRA or applicable state or local law.
There is no pending or, to the knowledge of Purchaser, threatened assessment,
complaint, proceeding, voluntary compliance application or investigation of any
kind in any court or government agency with respect to any Employee Benefit
Plan. All benefits, expenses and other amounts due and payable under any
Employee Benefit Plan and all contributions, transfers or payments required to
be made, accrued or booked to any Employee Benefit Plan, have been paid or made,
accrued and booked.
(d) Worker's Compensation. Worker's compensation and
unemployment compensation matters with respect to Purchaser have been conducted
and are being conducted so as to be in compliance in all material respects with
all laws and regulations applicable thereto.
(e) Plant Closing Legislation. As of the Closing Date, no
employee of Purchaser, without 60 days written notice, shall have suffered, an
"employment loss" as a result of a "plant closing" or "mass layoff" as those
terms are defined in WARN. Purchaser is in compliance in all material respects
with the requirements of WARN in either case during the six month period ending
with and including the Closing Date.
(f) Environmental Matters. Purchaser and any other person or
entity for whose conduct it is or may be held responsible, have no liability
under, have never violated, and are presently in compliance in all material
respects with all Environmental Laws applicable to the properties owned, leased
or used by such parties (collectively, the "Purchaser
<PAGE>
38
Properties") and any facilities and operations thereon, and, to the best of
Purchaser's knowledge, there exists no Environmental Condition with respect to
the Purchaser Properties or any facilities or operations thereon, or with
respect to any property at which materials from the Purchaser Properties have
been disposed. Purchaser has not generated, manufactured, refined, transported,
treated, stored, handled, disposed, transferred, produced, or processed any
Hazardous Material or any solid waste on, under or about the Purchaser
Properties. Purchaser has no knowledge of the Release or threat of Release of
any Hazardous Material at the Purchaser Properties. Purchaser has not received
notice under the citizen suit provision of any Environmental Law in connection
with the Purchaser Properties or any facilities or operations thereon.
3.14 Assets.
(a) Real Estate. None of the real estate assets of Purchaser
is subject to any mortgages, liens, encumbrances, equities, restrictions,
easements, rights-of-way or other conflicting interests. To the knowledge of
Purchaser, the real estate assets of Purchaser are in good structural condition.
(b) Inventories. Substantially all of the Purchaser's
inventories consist of quantities and qualities usable and salable in the
ordinary course of the business of Purchaser.
(c) Machinery, Equipment and Other Tangibles. The Purchaser's
machinery, equipment and other tangibles are in good operating condition and
repair, ordinary wear and tear excepted, and are free of any material defects,
and are located at the Purchaser Properties.
(d) Intellectual Property. The business and operations of
Purchaser have not infringed or violated or required the use of, and do not now
infringe or violate or require the use of, any patent, copyright, trademark,
trade name, invention, discovery, trade secret, secret process
<PAGE>
39
or other proprietary asset of any other person. There are no patents or
patentable inventions developed by any director, officer or employee of
Purchaser used or useful in the business of Purchaser which have not been
transferred to, and are not owned free of any encumbrances by, Purchaser.
(e) Accounts and Notes Receivable. All accounts and notes
receivable of Purchaser have arisen in the ordinary course of business of
Purchaser and represent valid obligations due to Purchaser, and have been
collected or are collectible in accordance with their terms in the ordinary
course of business of Purchaser in the aggregate recorded amounts thereof less
the bad debt reserve shown on the Purchaser's balance sheet in accordance with
past practice.
(f) Assets Used in Business. Since one year before the
Purchaser Balance Sheet Date, Purchaser has not utilized any assets in the
conduct of its business and operations other than (i) assets reflected on the
Purchaser Balance Sheet and (ii) supplies and inventories consumed or disposed
of by Purchaser in the ordinary course of business.
(g) Title to Assets. Purchaser has good, and as to owned real
property, marketable, title to, or in the case of property held under lease, a
valid and enforceable right to use, all of Purchaser's land, buildings,
inventories, machinery, equipment and other tangibles, intellectual property,
accounts and notes receivable and all assets reflected in the Purchaser Balance
Sheet except those disposed of in the ordinary course of business since the
Purchaser Balance Sheet Date, and such assets are not subject to any Liens. None
of the assets of Purchaser are subject to any pending or, to the knowledge of
Purchaser, threatened judicial order, ordinance or planning restriction as to
which Purchaser has knowledge which might have a material adverse effect on the
business of Purchaser. Purchaser as lessee has the right under valid and
subsisting
<PAGE>
40
leases to occupy, use, possess and control all real property leased by Purchaser
as presently occupied, used, possessed and controlled by Purchaser.
3.15 Insurance. All of the assets of Purchaser are insured in
accordance with good industry practice with respect to loss due to fire and
other risks in amounts and coverage which are reasonable and customary in light
of the business conducted by Purchaser.
3.16 Distributions. Prepayment. Etc. Since the Purchaser Balance Sheet
Date, Purchaser has not sold or disposed of, or created Liens upon, any material
assets, except in the ordinary course of business. Since the Purchaser Balance
Sheet Date, Purchaser has not declared or paid any dividend or made any other
distribution to any of its shareholders; and has not prepaid or otherwise
discharged any outstanding indebtedness, or made any expenditures or
disbursements of funds or commitments, except in the ordinary course of
business.
3.17 Employee Matters. There are no labor controversies pending against
Purchaser in the form of a proceeding, claim or litigation. Purchaser has not,
with respect to its employees, recognized any labor organization; no such
organization has been certified as the exclusive bargaining agent of any such
employees; there has been no demand on behalf of any labor organization to
represent any such employees; and Purchaser has no knowledge of any present
efforts of any labor organization seeking to represent any such employees.
Except as set forth on Schedule 3.17 hereto, Purchaser has not had, and to the
knowledge of Purchaser, there is not now threatened, a strike, work stoppage or
work slowdown.
3.18 Warranties. All products and services have been produced,
performed or sold heretofore by Purchaser in a condition which meets all
applicable written warranty obligations and applicable governmental and industry
standards, codes and regulations.
<PAGE>
41
3.19 Books and Records. All books and records of Purchaser are in all
material respects complete and correct and have been maintained in accordance
with good industry practice.
3.20 Organization of AHC and Related Matters. AHC is a corporation duly
organized, validly existing and in good standing under the laws of Virginia. AHC
has engaged in no business since the date of its incorporation, except for
entering into this Agreement and preparing and filing the Registration Statement
in connection with the proposed IPO (the "Registration Statement"), and will
engage in no business until the Closing except amending the Registration
Statement. The execution, delivery and performance of this Agreement by AHC does
not and will not conflict with or violate its charter and by-laws or any term of
any agreement, contract, instrument, lease, commitment or other obligation to
which AHC is a party or by which AHC is bound, or any order judgment or decree
to which AHC is a party or subject, by which any properties and assets of AHC
are bound, or any provision of any applicable law, statute, ordinance, rule or
regulation and will not result in the creation or imposition of any Lien in
favor of any third party with respect to any of the properties and assets of
AHC.
3.21 Due Authorization and Execution by AHC. AHC has all requisite
power and authority to execute, deliver and perform this Agreement. This
Agreement has been duly and validly executed and delivered by AHC, and
constitutes a valid and binding obligation of AHC enforceable against AHC in
accordance with its terms.
3.22 Capitalization of AHC. The authorized capital stock of AHC is
20,000,000 shares of common stock, $.001 par value per share ("Dunn Common"), of
which (i) 5,150,000 shares will be issued in the Merger, (ii) 2,200,000 shares
will underlie employee stock options granted pursuant to the 1997 stock option
plan of Purchaser (which plan will be adopted by and become a
<PAGE>
42
plan of AHC), 1,832,000 of which have been issued in accordance therewith, (iii)
25,000 shares will underlie options granted to Barry D. Bergman and Jacqueline
L. Bergman in September 1997 in connection with the Purchaser's acquisition of
STMS (which options will be adopted by and become options of AHC), (iv) 100,000
shares will underlie warrants held by the underwriters in the initial public
offering of the shares of Purchaser (which warrants will be adopted by and
become warrants of AHC), (v) 7,500,000 shares are proposed to be issued in the
IPO, (vi) 750,000 shares will be issued as provided in Section 1.3 hereof, and
(vii) 600,000 shares underlie options to be issued (300,000 to each) to the IDP
Sellers pursuant to the employment agreements referred to in Sections 5.1(e) and
5.2(d), subject to increase to 800,000 (400,000 to each IDP Seller) as provided
in such agreements, and 2,000,000 shares of preferred stock, $.001 par value per
share, none of which have been issued, and there is no present intention to
issue any such shares. All of such shares of Dunn Common when issued will be
duly authorized, validly issued and outstanding, fully paid and non-assessable.
There are no voting trust agreements or other agreements restricting or
otherwise relating to the voting, dividend rights or the disposition of any
shares of Dunn Common.
3.23 Concerning Merger Sub. Merger Sub will be organized by AHC solely for
the purpose of carrying out the Merger; AHC will own all of the outstanding
shares of capital stock of Merger Sub; there will be no options, warrants or
rights to acquire shares of Merger Sub outstanding ; and Merger Sub will engage
in no business activity and will hold no assets other than those necessary to
consummate the Merger.
IV. Pre-Closing Covenants
4.1 Press Releases. Prior to the Closing, no party will issue or cause
the publication of any press release or other public announcement with respect
to this Agreement or the transactions
<PAGE>
43
contemplated hereby without the prior consent of, the other (in the case of the
Sellers, George Fuster or D. Oscar Fuster) which consent will not be
unreasonably withheld; provided, however, that nothing herein will prohibit any
party from issuing or causing the publication of any such press release or
public announcement to the extent that such party determines such action to be
required by law or the rules of any stock exchange applicable to it, in which
case the party making such determination will use reasonable efforts to allow
the other parties reasonable time to comment on such release or announcement in
advance of its issuance.
4.2 Registration Statement. From the date hereof until the Closing
Date, the Sellers and AHC and the Purchaser will cooperate among themselves and
use all reasonable efforts to respond to comments of the Securities and Exchange
Commission ("SEC"), prepare amendments to the Registration Statement, and
generally to seek to have the Registration Statement declared effective by the
SEC as soon as is practicable.
4.3 Confidential Nature of Information. Subject to Section 4.1, whether
or not the Closing occurs, each of the parties hereto will treat, and will cause
their respective advisors and representatives (collectively, "Representatives")
to treat, in confidence all documents, materials and other information disclosed
by the other party, whether during the course of the negotiations leading to the
execution of this Agreement or thereafter, in its investigation of the other
party and in the preparation of agreements and other documents relating to the
consummation of such transactions. Prior to the Closing, and if this Agreement
is terminated, none of the parties will use, and each of them will cause its
Representatives not to use in its business, any non-public information furnished
by any other party. If this Agreement is terminated, each of the parties will
return, and will cause its Representatives to return, to the other party all
originals and copies of
<PAGE>
44
non-public documents and materials of the type provided for in this Section 4.3
which have been furnished in connection with this Agreement.
4.4 Operation of the Business.
(a) Except as contemplated herein or as otherwise consented to
by the Purchaser in writing (which consent will not be unreasonably withheld),
prior to the Closing, the Sellers will cause IDP and PRIMO to:
(i) Use reasonable efforts to keep the business of IDP and of
PRIMO intact and not take or knowingly permit to be taken or do or knowingly
suffer to be done anything other than in the ordinary course of business as the
same is presently being conducted, to maintain the goodwill and reputation
associated with their business;
(ii) Continue their existing practices relating to the
maintenance of assets used in their business;
(iii) Not purchase, sell, lease or dispose of, or make any
contract for the purchase, sale, lease or disposition of, or subject to Lien,
any assets other than in the ordinary course of their business;
(iv) Except to the extent required by law or specifically
provided for elsewhere herein or on Schedule 4.4(d) hereto, not increase the
rates of compensation of any employee except for normal salary increases in the
ordinary course of business consistent with past practice; and
(v) Not amend their governing documents or make any change in
their capital stock or grant any option, warrant or other right to purchase or
to convert any obligation into shares of capital stock
<PAGE>
45
(b) Except as contemplated herein or as otherwise consented to
by the IDP Sellers in writing (which consent will not be unreasonably withheld),
prior to the Closing, the Purchaser (which shall mean for purposes of this
Section 4.4(b) the Purchaser and Dunn Computer Corporation, a Virginia
corporation and AHC) will:
(i) Use reasonable efforts to keep the business of the
Purchaser intact and not take or not permit to be taken or do or knowingly
suffer to be done anything other than in the ordinary course of business as the
same is presently being conducted, and to maintain the goodwill and reputation
associated with the business of the Purchaser;
(ii) Continue its existing practices relating to the maintenance
of assets used in its business; and
(iii) Not amend its governing documents, or make any change in
its capital stock or, except pursuant to the Purchaser's existing Employee Stock
Option Plan, grant any option, warrant or other right to purchase or to convert
any obligation into shares of capital stock.
4.5 Satisfaction of Conditions. Prior to the Closing, each of the
parties hereto will use reasonable efforts to satisfy promptly all conditions
required hereby to be satisfied by such party in order to expedite the
consummation of the transactions contemplated hereby.
4.6 Registration Statement, Amendments. At the time the Registration
Statement is filed with the SEC and at the time each amendment thereto is filed
with the SEC, the IDP Sellers shall certify in writing to AHC and the Purchaser
to the effects set forth in Section 2.18 hereof to their best knowledge and
belief, referring to the relevant filing.
4.7 Waivers by Small Business Administration. The Purchaser and the IDP
Sellers shall, together, use reasonable efforts to seek to have IDP's
governmental counterparty in each
<PAGE>
46
"Section 8(a)" contract request from the Small Business Administration a waiver
of termination for convenience that would result from the transfer of control of
IDP upon the Closing.
V. Conditions Precedent to the Closing
5.1 Conditions Precedent to Obligations of the Purchaser. The
obligations of the Purchaser under this Agreement to consummate the transactions
contemplated hereby are subject to the satisfaction, at or prior to the Closing,
of all of the following conditions, any one or more of which, other than the
condition set forth in Section 5.1(i) hereof, may be waived at the option of the
Purchaser:
(a) No Misrepresentation or Breach of Covenants and Warranties. There
shall have been no material breach by the Sellers in the performance of any of
the covenants herein to be performed by them prior to the Closing, and the
representations and warranties of the Sellers contained in this Agreement shall
be true and correct in all material respects as of the Closing, except for
representations and warranties made as of a specified date (other than those
contained in Sections 2.11(e) and (f) which shall be dated within two weeks of
the Closing Date), which shall be true and correct in all material respects as
of the specified date, and the Sellers shall have delivered to the Purchaser a
certificate of all of the Sellers certifying each of the foregoing, dated the
Closing Date;
(b) Transfer Documents. There shall have been delivered to AHC
by the IDP Sellers certificates representing the IDP Shares, which certificates
shall be duly endorsed for transfer or accompanied by duly executed stock
powers. There shall have been delivered to PAC bills of sale and all other
documents appropriate to transfer to PAC all of the PRIMO Assets. There shall
have been entered into assignment and assumption agreements as to all of the
<PAGE>
47
contracts of PRIMO and the PRIMO Liabilities transferring such contracts and
Liabilities to PAC.
(c) Consents; No Legal Obstruction. Except for (i) the
approval of the tax authority in Puerto Rico, (ii) any approval of the Small
Business Administration, and (iii) the approvals marked with an asterisk, each
as referred to on Schedule 2.3 hereto, the governmental and private approvals
and consents identified on Schedule 2.3 hereto shall have been obtained and
shall be in full force and effect. As to the approvals and consents marked with
an asterisk, the Sellers shall use commercially reasonable efforts to obtain
them. There shall not have been entered a preliminary or permanent injunction,
temporary restraining order or other judicial or administrative order or decree
in any jurisdiction, the effect of which prohibits the Closing;
(d) No Material Adverse Change. Without limiting the
generality of Section 5.1(a), since the Sellers' Balance Sheet Date, no material
adverse change shall have occurred with respect to the financial condition,
assets or business of IDP and PRIMO considered as one entity;
(e) Employment Agreements. IDP and PRIMO shall have entered into
employment agreements with each of George Fuster and D. Oscar Fuster in the
forms attached as Exhibits D and E hereto;
(f) Certain Indebtedness. The IDP indebtedness in the
principal amount of $1,557,057 as of January 31, 1998, running to the Sellers
and certain relatives of the Sellers and set forth on Exhibit F hereto shall
have been refinanced (i) to provide for three year terms and interest rates of
8% per annum in the case of indebtedness running to a Seller and (ii) to provide
for one year terms and interest rates of 11% per annum in the other cases. The
IDP Sellers shall cause IDP and PRIMO not to incur indebtedness from any Seller
or any relative of any Seller
<PAGE>
48
other than on commercially reasonable and arms length terms between the date
hereof and the Closing Date.
(g) The Redemption provided for in Sections 1.9 and 1.10 hereof shall
have occurred.
(h) Opinion of Counsel. The Sellers shall have furnished to
the Purchaser a favorable opinion of Thacher Proffitt & Wood dated the Closing
Date substantially in the form attached as Exhibit H hereto.
(i) Concurrent Public Offering. The IPO in which the net
proceeds are at least equal to the Cash Portion shall have occurred, and the
shares of Dunn Common to be issued in the Merger and such shares to be issued in
the IPO shall have been designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
5.2 Conditions Precedent to Obligations of the Sellers. The obligations
of the Sellers under this Agreement to consummate the transactions contemplated
hereby are subject to the satisfaction, at or prior to the Closing, of all the
following conditions, any of or more of which, other than the condition set
forth in Section 5.2(j) hereof, may be waived at the option of the Sellers:
(a) No Misrepresentation or Breach of Covenants and
Warranties. There shall have been no material breach by the Purchaser in the
performance of any of the covenants herein to be performed by it prior to the
Closing, and the representations and warranties of the Purchaser contained in
this Agreement shall be true and correct in all material respects as of the
Closing, except for representations and warranties made as of a specified date,
which shall be true and correct in all material respects as of the specified
date, and the Purchaser shall have delivered to
<PAGE>
49
the Sellers a certificate certifying each of the foregoing, dated the Closing
Date and signed by one of its executive officers on its behalf;
(b) Purchase Price. AHC shall have (i) delivered to the IDP
Sellers share certificates standing in the respective names of the IDP Sellers
representing the Share Portion of the Purchase Price and (ii) delivered to the
IDP Sellers the IDP Cash Amount and to PRIMO the PRIMO Cash Amount.
(c) No Legal Obstruction. There shall not have been entered a
preliminary or permanent injunction, temporary restraining order or other
judicial or administrative order or decree in any jurisdiction, the effect of
which prohibits the Closing;
(d) Employment Agreements. IDP and PRIMO shall have entered into
employment agreements with each of George Fuster and D. Oscar Fuster in the
forms attached as Exhibits D and E hereto;
(e) No Material Adverse Change. Without limiting the
generality of Section 5.2(a), since the date of this Agreement, no material
adverse change shall have occurred with respect to the financial condition,
assets, business or prospects of the Purchaser;
(f) Registration Rights Agreement. AHC shall have entered into
a registration rights agreement in the form attached as Exhibit I hereto.
(g) Opinion of Counsel. The Purchaser shall have furnished to
the Sellers a favorable opinion of Jones, Day, Reavis & Pogue dated the Closing
Date substantially in the form set forth in Exhibit J hereto.
(h) Fairness Opinion. Purchaser shall have received an opinion
from Ferris Baker Watts, to the effect that, in its opinion, the consideration
to be paid by the Purchaser hereunder is fair to the Purchaser and its
stockholders from a financial point of view ("Fairness
<PAGE>
50
Opinion"), and Purchaser shall not have taken any action which causes Ferris
Baker Watts to withdraw its Fairness Opinion prior to Closing;
(i) Directors. George Fuster and D. Oscar Fuster shall be duly
appointed by the Boards of Directors of AHC and PAC to the Boards of Directors
of AHC and PAC effective on the Closing Date;
(j) Concurrent Public Offering. The IPO in which the net
proceeds are at least equal to the Cash Portion shall have occurred.
VI. The Closing.
6.1 The Closing. Subject to the fulfillment of the conditions precedent
specified in Article V, the Closing will take place concurrently with the
closing of the IPO or on such other date as the parties may agree. The Closing
will take place at the offices of Jones, Day, Reavis & Pogue at 1450 G Street,
N.W., Washington, D.C. 20005.
6.2 Sellers' Obligations. At the Closing, the Sellers will deliver to the
Purchaser the following:
(a) Transfer Documents. The documents referred to in Section 5.1(b);
(b) Receipts. Appropriate receipts; and
(c) Other. All other documents and papers required to be delivered by
Section
5.1 as conditions to the Closing.
6.3 AHC's Obligations. At the Closing, AHC will deliver to the
Sellers:
(a) Purchase Price. The Purchase Price, in the manner specified in
Sections 1.3, 1.4 and 1.7; and
(b) Other. All other documents and papers required to be
delivered by Section 5.2 as conditions to the Closing.
<PAGE>
51
VII. Survival and Indemnification
7.1 Survival of Representations and Warranties. The respective
representations and warranties of the Sellers and of the Purchaser and AHC
herein shall survive until and including the second anniversary of the Closing,
provided that the representations and warranties of the Sellers contained in
Sections 2.2, 2.5, 2.9 and 2.10(a) hereof and of the Purchaser and AHC contained
in Sections 3.3, 3.9, 3.12, 3.13(a) and 3.22 hereof shall survive without
limitation. The parties hereto shall be entitled to rely on the representations
and warranties made pursuant to this Agreement notwithstanding any investigation
conducted before or after the Closing for or on behalf of any party.
7.2 General Indemnification Obligation of the Sellers.
(a) Subject to the limitations contained in Sections 7.1 and
7.4 hereof, each Seller jointly and severally agrees to indemnify and hold
harmless the Purchaser and AHC from and against any and all losses, liabilities,
damages, penalties, costs or expenses (including attorneys fees and expenses)
("Losses") based upon, arising out of or otherwise in respect of (i) any alleged
or actual inaccuracy in or breach of any representation or warranty of any
Seller contained in this Agreement or in any document delivered hereunder, or
(ii) any breach by any Seller of any covenant contained in this Agreement.
(b) The IDP Sellers shall indemnify and hold IDP harmless for
any tax liability attributable to any gain realized by IDP by reason of the
Redemption.
(c) The Purchaser shall, as to any asserted liability of
Sellers for taxes under Section 7.2(a) or (b), promptly notify Sellers of, and
permit the participation of Sellers in any investigation, audit or other
proceeding by any tax authority empowered to administer or enforce such tax and
shall not consent to the settlement or final determination in such proceeding
without
<PAGE>
52
the prior written consent of Sellers, which consent will not be unreasonably
withheld; provided, however that this Section 7.2(c) shall not permit Sellers to
have knowledge of or participate in the resolution of any other issues that may
be a part of any such investigation, audit or proceeding.
7.3 General Indemnification Obligation of the Purchaser and AHC.
Subject to the limitations contained in Sections 7.1 and 7.4 hereof, the
Purchaser and AHC jointly and severally agree to indemnify and hold harmless the
Sellers from and against any and all Losses based upon, arising out of or
otherwise in respect of (i) any alleged or actual inaccuracy in or breach of any
representation or warranty of the Purchaser and AHC contained in this Agreement
or in any document delivered hereunder, or (ii) of any breach by the Purchaser
or AHC of any covenant contained in this Agreement.
7.4 Limitations; Notice and Opportunity to Defend.
(a) Limitations. Neither the Purchaser, nor AHC nor any Seller
shall have any liability, or be subject to any claim under this Article VII
unless a Claims Notice (as defined in Section 7.4(b) hereof) in respect thereof
is given by the Purchaser or the Sellers, as the case may be, on or before the
second anniversary of the Closing, and unless and until all Losses on account of
matters covered by this Article VII (suffered by the Purchaser and AHC or the
Sellers, as the case may be) exceed $500,000, whereupon the Purchaser and AHC or
the Sellers, as the case may be, shall be entitled to receive indemnity payments
to the full extent of the aggregate amount of Losses not to exceed $10,000,000.
Notwithstanding anything else herein to the contrary, the provisions and
limitations contained in this Section 7.4 shall not apply to Losses (and
indemnifications in respect thereof) arising out of or otherwise in respect of
any alleged or actual (i) inaccuracies in or breach of any representation or
warranty of any Seller contained in Sections 2.2, 2.5, 2.9, or 2.10(a) hereof,
(ii) inaccuracies in or breach of any representation or warranty of
<PAGE>
53
the Purchaser contained in Sections 3.3, 3.9, 3.12, 3.13(a) or 3.22 hereof, or
(iii) breach of any covenant contained in this Agreement by the Purchaser or any
Seller.
(b) Notice and Opportunity to Defend.
(i) Notice of Asserted Liability. As soon as is reasonably
practicable after any party hereto becomes aware of any claim that it has under
this Article VII that may result in a Loss (a "Liability Claim"), the party
shall give notice thereof (a "Claims Notice") to the other parties. A Claims
Notice shall be given in good faith and shall describe the Liability Claim in
reasonable detail, and shall indicate the amount (estimated, if necessary and to
the extent feasible) of the Loss that has been or may be suffered by the party.
(ii) The Sellers' Opportunity to Defend. The Sellers may elect
to defend, at their own expense and by their own counsel, any Liability Claim
given by the Purchaser by giving notice to such effect to the Purchaser within
thirty days (or sooner if circumstances so require) of the receipt of the Claims
Notice; provided that if the Sellers so elect, the Purchaser shall cooperate
with such defense. If the Sellers elect to defend such Liability Claim, the
Purchaser shall have the right to participate, at the expense of the Purchaser,
in the defense of such Liability Claim. If the Sellers do not elect to defend a
Liability Claim, the Purchaser may defend, pay, or settle such Liability Claim
as it determines to be appropriate, provided that the Purchaser may not settle
or compromise any proceeding in respect of any Liability Claim without the prior
written consent of the Sellers, which consent shall not be unreasonably
withheld.
(iii) The Purchaser's and AHC's Opportunity to Defend. The
Purchaser and AHC may elect to defend on all the same terms upon which the
Sellers may do so under Section 7.4(b)(ii) hereof.
<PAGE>
54
VIII. Termination
8.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
(a) By the mutual written consent of the Purchaser and the Sellers;
(b) By either the Purchaser or the Sellers if the Closing shall not
have occurred on or before June 30, 1998; or
(c) By either the Purchaser or the Sellers if there shall have
been entered a final non-appealable order or injunction of any court or
governmental authority restraining or prohibiting the consummation of the
transactions contemplated hereby or any material part thereof.
8.2 Expenses in the Event of Termination. In the event of termination
of this Agreement under Section 8.1 (except by the Sellers pursuant to clause
(b) thereof), no party shall have any obligation to reimburse the other for its
fees and expenses incurred in connection with this Agreement or transactions
contemplated hereby. There will be no further liability hereunder on the part of
any party hereto if this Agreement is so terminated, except under Section 4.3
and except by reason of a material breach of any covenant contained in this
Agreement. If this Agreement is terminated as provided in Section 8.1(b) hereof,
the Purchaser shall pay to the Sellers a termination fee in the amount of
$500,000, provided that if the Closing does not occur on or before June 30, 1998
because (i) the conditions in Section 5.1 were not met, or (ii) the IPO is
postponed or terminated because of general market conditions on the basis of a
joint decision of Ferris Baker Watts and Gruntal & Co. (or if such firms do not
agree, upon the decision of a third investment banking firm chosen by Ferris
Baker Watts and Gruntal & Co.), then no termination fee shall be paid.
<PAGE>
55
IX. Miscellaneous Provisions
9.1 Notices. All notices and other communications required or permitted
hereunder will be in writing and, unless otherwise provided in this Agreement,
will be deemed to have been duly given when delivered in person or when
dispatched by telegram or electronic facsimile transfer (confirmed in writing by
mail simultaneously dispatched) to the appropriate party at the address
specified below:
(a) If to the Purchaser or to AHC, to:
Dunn Computer Corporation
1306 Squire Court
Sterling, Virginia 20166
Facsimile No.: 703-450-0406
Attention: President
(b) If to the Sellers, to:
George and D. Oscar Fuster
20 Firstfield Road
Gaithersburg, MD 20878
Facsimile No.: 301-590-8133
With a copy not necessary to constitute notice to:
Robert C. Azarow
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Facsimile No.: 212-912-7751
or to such other address or addresses as any such party may from time to time
designate as to itself by like notice.
9.2 Brokers. Each Seller represents and warrants to the Purchaser and
the Purchaser represents and warrants to the Sellers that it has not dealt with
any broker or finder in connection with any of the transactions contemplated by
this Agreement and, to its knowledge, no broker or
<PAGE>
56
other person is entitled to any commission or finder's fee in connection
therewith, except that the Sellers have engaged and, subject to Section 9.3
hereof, will pay Gruntal & Co. as their investment bankers in respect of such
transactions.
9.3 Expenses. Each of IDP and the Sellers will pay one-half of the fees
and expenses of IDP and Sellers (except that to the extent that payments to
Gruntal & Co. for their advice and services exceed $600,000 the excess will be
solely the responsibility of the Sellers), and the Purchaser will pay the
expenses of Purchaser, in connection with this Agreement and the consummation of
the transactions contemplated herein.
9.4 Headings. The headings in this Agreement are included for purposes
of convenience only, and shall not affect the construction or interpretation of
any of its provisions. Terms used in the Exhibits and Schedules hereto that are
defined herein are used therein as so defined.
9.5 Integration, Modification and Waiver. This Agreement and the
agreements contemplated herein constitute the entire agreement between the
parties pertaining to the subject matter hereof and supersede all prior
understandings of the parties. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by all of the parties. No
waiver of any of the provisions of this Agreement shall be deemed to be or shall
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
9.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which together shall constitute one and the same
instrument.
9.7 Definition of "State". For purposes of this Agreement, "state"
shall include the Commonwealth of Puerto Rico.
<PAGE>
57
9.8 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of New York without giving effect to
its principles of conflicts of laws.
9.9 Further Assurances. Each party hereto agrees to execute and deliver
such instruments and take such other actions as may reasonably be requested in
order to carry out the intent of any of the agreements herein.
9.10 Knowledge. Any reference to a person's knowledge or best knowledge
shall mean, as of the date of the statement in question, such person's actual
knowledge and what such person should have known in the ordinary exercise of
that person's duties as an officer or director of IDP and PRIMO, considering for
these purposes, each Seller to be an officer and director of both IDP and PRIMO.
9.11 Puerto Rico Tax Exemption. If within 180 days of the Closing Date,
the appropriate tax authority in Puerto Rico has not granted or approved a tax
exemption for PAC that is substantially equivalent to the tax exemption now
enjoyed by PRIMO in Puerto Rico, then the Sellers shall reimburse and indemnify
PAC for the first $200,000 of taxes paid in or to Puerto Rico by PAC for the
period commencing on the Closing Date that PAC would not have paid if such tax
exemption had been granted or approved. Any such reimbursement will not be
subject to or counted against the $500,000 threshold set forth in Section 7.4.
9.12 Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective successors,
heirs, personal representatives and permitted assigns, but will not be
assignable by any party without the prior written consent of the other parties.
<PAGE>
58
IN WITNESS WHEREOF, each party hereto has executed, or caused to be
executed by its representative thereunto duly authorized, this Agreement on the
date first above written.
-------------------------
George Fuster
-------------------------
D. Oscar Fuster
-------------------------
Carol N. Fuster
-------------------------
Wendy E. Fuster
DUNN COMPUTER CORPORATION
(Virginia)
By:
-----------------------
DUNN COMPUTER CORPORATION
(Delaware)
By:
-----------------------
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
DUNN COMPUTER CORPORATION
The undersigned, being an individual, does hereby
act as incorporator in adopting the following Articles of Incorporation for the
purpose of organizing a corporation authorized by law to issue shares, pursuant
to the provisions of the Virginia Stock Corporation Act, Chapter 9 of Title 13.1
of the Code of Virginia.
ARTICLE l. NAME
The name of this corporation is Dunn Computer
Corporation (the "Corporation").
ARTICLE 2. PURPOSE
The purpose of the Corporation is to engage in any
lawful business not required to be set forth in the articles of incorporation
for which corporations may be organized under the Virginia Stock Corporation
Act.
ARTICLE 3. CAPITAL STOCK
The total number of shares that the Corporation
shall have authority to issue is twenty-two million (22,000,000) shares, of
which twenty million (20,000,000) shares shall be Common Stock, par value $0.001
per share ("Common Stock"), and two million (2,000,000) shares shall be
Preferred Stock ("Preferred Stock"), par value $0.001 per share. To the extent
permitted by the Virginia Stock Corporation Act, the Board of Directors, by an
adoption of an amendment to the articles of incorporation, may fix in whole or
part, the preferences, limitations and relative rights of (i) any class or
shares before the issuance of any shares of that class or (ii) one or more
series within a class before the issuance of any shares of that series.
ARTICLE 4. DURATION
The duration of the Corporation shall be perpetual.
<PAGE>
ARTICLE 5. BOARD OF DIRECTORS
5.1 TERMS OF DIRECTORS
The directors shall be classified with respect to the
time for which they severally hold office into three classes, Class I, Class II
and Class III, with each group containing one-third of the total, as near as may
be, and as shall be adjusted from time to time by the Board of Directors of the
Corporation to maintain such proportionality. Each initial director in Class I
shall hold office for a term expiring at the 1999 annual meeting of
shareholders; each initial director in Class II shall hold office for a term
expiring at the 2000 annual meeting of shareholders; and each initial director
in Class III shall hold office for a term expiring at the 2001 annual meeting of
shareholders. Notwithstanding the foregoing provisions of this Section 5.1, each
director shall serve until such director's successor is duly elected and
qualified or until such director's earlier death, resignation or removal. At
each annual meeting of shareholders, the successors to the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of shareholders held in the third year following
the year of their election and until their successors have been duly elected and
qualified or until any such director's earlier death, resignation or removal.
5.2 NUMBER OF DIRECTORS
(a) The total number of directors on the Board of
Directors shall be within a variable range of a maximum of fifteen (15)
directors and a minimum of five (5) directors. The number of directors shall be
as fixed or changed from time to time by (i) the Board of Directors, within the
minimum and maximum, or (ii) the affirmative vote, at a meeting of the
shareholders called for such a purpose, of not less than 66-2/3% of the total
number of votes of the then outstanding shares of stock of the Corporation
entitled to vote, voting together as a single class, but only if notice of such
proposal was contained in the notice of such meeting.
(b) In the event of any increase or decrease in the
number of directors, the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to maintain such classes as nearly as
equal as possible. No decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.
5.3 REMOVAL OF DIRECTORS
(a) Except as otherwise provided pursuant to the
provisions of the articles of incorporation relating to the rights of the
holders of any class or series of shares of
<PAGE>
Preferred Stock, voting separately by class or series, to elect directors under
specified circumstances, any director or directors may be removed from office at
any time, but only for cause (as defined in Section 5.3(b) hereof) and only by
the affirmative vote, at a meeting of the shareholders called for such a
purpose, of not less than 66-2/3% of the total number of votes of the then
outstanding shares of stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, but only if notice of
such proposal was contained in the notice of such meeting. At least 30 days
prior to such meeting of shareholders, written notice shall be sent to the
director or directors whose removal will be considered at such meeting.
(b) For purposes of this Section 5.3, "cause"
shall mean (i) conduct as a director of the Corporation or any subsidiary
involving dishonesty of a material nature or (ii) criminal conduct (other than
minor infractions and traffic violations) that relates to the performance of the
director's duties as a director of the Corporation or any subsidiary.
5.4 VACANCIES ON THE BOARD OF DIRECTORS
Any vacancy occurring on the Board of Directors
resulting from resignation, removal, death, an increase in the number of
directors, or otherwise shall be filled only by vote of a majority of the
directors then in office, whether or not a quorum, and the term of any directors
so chosen shall expire at the next shareholders meeting at which directors are
elected and until their successors shall be elected and qualified or until any
such director's earlier death, resignation or removal.
5.5 DIRECTORS ELECTED BY HOLDERS OF PREFERRED STOCK
The Board of Directors shall have the authority to
authorize the election of all or a specified number of directors by the holders
of one or more authorized classes of shares of Preferred Stock. Each class, or
classes, of shares entitled to elect one or more directors is a separate voting
group for purposes of the election of directors.
ARTICLE 6. PREEMPTIVE RIGHTS
No shareholder of the Corporation shall have any preemptive rights
to purchase, subscribe for or otherwise acquire any stock or other securities of
the Corporation, whether now or hereafter authorized, and any and all preemptive
rights hereby are denied.
<PAGE>
ARTICLE 7. SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time but
only by (i) the Chairman of the Board of Directors of the Corporation, (ii) the
President of the Corporation, (iii) a majority of the directors in office, even
if less than a quorum, or (iv) the holders of more than 50% of the total number
of votes of the then outstanding shares of stock of the Corporation entitled to
vote generally in the election of directors, voting together as a single class,
if such holders sign, date and deliver to the Corporation's secretary one or
more written demands for the meeting describing the purpose or purposes for
which it is to be held, provided that if an annual shareholders' meeting has not
been held within 15 months after the Corporation's last annual shareholders'
meeting, then the requisite percentage in clause (iv) of this Article 7 shall be
20%.
ARTICLE 8. CRITERIA FOR EVALUATING CERTAIN OFFERS
The Board of Directors, when evaluating any offer of another party
to (i) make a tender or exchange offer for any equity security of the
Corporation, (ii) merge or consolidate the Corporation with another institution,
or (iii) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, shall, in connection with the exercise
of its judgment in determining what is in the best interests of the Corporation
and its shareholders, be authorized to give due consideration to any such
factors as the Board of Directors determines to be relevant, including, without
limitation:
(a) the interests of the shareholders of the Corporation;
(b) whether the proposed transaction might violate federal or
state laws;
(c) the consideration being offered in the proposed
transaction, in relation to the then current market price for the outstanding
capital stock of the Corporation, the market price for the capital stock of the
Corporation over a period of years, the estimated price that might be achieved
in a negotiated sale of the Corporation as a whole or in part or through orderly
liquidation, the premiums over market price for the securities of other
corporations in similar transactions, current political, economic and other
factors bearing on securities prices and the Corporation's financial condition
and estimated future value as an independent entity; and
<PAGE>
(d) the social, legal and economic effects upon employees,
suppliers, subscribers and others having similar relationships with the
Corporation, and the communities in which the Corporation conducts its business.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
ARTICLE 9. CONTROL SHARE ACQUISITIONS
Article 14.1 of the Virginia Stock Corporation Act shall not apply
to acquisitions of shares of the Corporation.
ARTICLE 10. LIMITATION ON LIABILITY
To the fullest extent permitted by the law of the Commonwealth of
Virginia, as presently in effect or as the same hereafter may be amended and
supplemented, in any proceeding brought by or in the right of the Corporation or
brought by or on behalf of shareholders of the Corporation, the damages assessed
against an officer or director arising out of the single transaction, occurrence
or course of conduct shall not exceed the sum of one dollar ($1.00). The
liability of an officer or director shall not be limited as provided in this
Article 10 if the officer or director engaged in willful misconduct or a knowing
violation of the criminal law or of any federal or state securities law,
including, without limitation, any claim of unlawful insider trading or
manipulation of the market for any security.
ARTICLE 11. INDEMNIFICATION
(a) The Corporation shall to the fullest extent permitted by the
law of the Commonwealth of Virginia, as presently in effect or as the same
hereafter may be amended and supplemented, indemnify an individual who is or was
a director or officer of the Corporation and who was, is, or is threatened to be
made a named defendant or respondent in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (collectively, a "proceeding"),
against any obligation to pay a judgment, settlement, penalty, fine (including
any excise tax assessed with respect to any employee benefit plan) or other
liability and reasonable expenses (including counsel fees) incurred with respect
to such a proceeding, except such liabilities and expenses as are incurred
because of such director's or officer's willful misconduct or knowing violation
of the criminal law. The Corporation is authorized to contract in advance to
indemnify and to make advances and reimbursements
<PAGE>
for expenses to any of its directors or officers to the same extent provided in
this Article 11.
(b) Unless a determination has been made that indemnification is
not permissible, the Corporation shall make advances and reimbursements for
expenses reasonably incurred by a director or officer in a proceeding as
described above upon receipt of an undertaking from such director or officer to
repay the same if it is ultimately determined that such director or officer is
not entitled to indemnification. Such undertaking shall be an unlimited,
unsecured general obligation of the director or officer and shall be accepted
without reference to such director's or officer's ability to make repayment.
(c) The determination that indemnification under this Article 11
is permissible, the authorization of such indemnification (if applicable), and
the evaluation as to the reasonableness of expenses in a specific case shall be
made as provided by law. Special legal counsel selected to make determinations
under this Article 11 may be counsel for the Corporation. The termination of a
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that a
director or officer acted in such a manner as to make him or her ineligible for
indemnification.
(d) For the purposes of this Article 11, every reference to a
director or officer shall include, without limitation, (i) every individual who
is a director or officer of the Corporation, (ii) an individual who, while a
director or officer, is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, (iii) an individual who formerly was a director or officer
of the Corporation or who, while a director or officer, occupied at the request
of the Corporation any of the other positions referred to in clause (ii) of this
sentence, and (iv) the estate, personal representative, heirs, executors and
administrators of a director or officer of the Corporation or other person
referred to herein. Service as a director, officer, partner, trustee, employee
or agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise controlled by the Corporation
shall be deemed service at the request of the Corporation. A director or officer
shall be deemed to be serving an employee benefit plan at the Corporation's
request if such person's duties to the Corporation also impose duties on, or
otherwise involve services by, such person to the plan or to participants in or
beneficiaries of the plan.
<PAGE>
(e) Indemnification pursuant to this Article 11 shall not be
exclusive of any other right of indemnification to which any person may be
entitled, including indemnification pursuant to a valid contract,
indemnification by legal entitles other than the Corporation and indemnification
under policies of insurance purchased and maintained by the Corporation or
others. No person shall be entitled to indemnification by the Corporation,
however, to the extent such person is actually indemnified by another entity,
including an insurer. In addition to any insurance that may be maintained on
behalf of any director, officer or other person, the Corporation is authorized
to purchase and maintain insurance against any liability it may have under this
Article 11 to protect any of the persons named above against any liability
arising from their service to the Corporation or to any other enterprise at the
Corporation's request, regardless of the Corporation's power to indemnify
against such liability. The provisions of this Article 11 shall not be deemed to
preclude the Corporation from entering into contracts otherwise permitted by law
with any individuals or entities other than those named in this Article 11.
(f) The provisions of this Article 11 shall be applicable from
and after its adoption even though some or all of the underlying conduct or
events relating to a proceeding may have occurred before such adoption. No
amendment, modification or repeal of this Article 11 shall diminish the rights
provided hereunder to any person arising from conduct or events occurring before
the adoption of such amendment, modification or repeal. If any provision of this
Article 11 or its application to any person or circumstance is held invalid by a
court of competent jurisdiction, the invalidity shall not affect other
provisions or applications of this Article 11, and to this end the provisions of
this Article 11 are severable.
ARTICLE 12. AMENDMENT OF BYLAWS
To the extent permitted by the Virginia Stock Corporation Act, the
bylaws may be amended only by (i) the Board of Directors or (ii) the affirmative
vote, at a meeting of the shareholders called for such a purpose, of not less
than 66-2/3% of the total number of votes of the then outstanding shares of
stock of the Corporation entitled to vote, voting together as a single class.
ARTICLE 13. REGISTERED AGENT
The post office address with street and number, if any, of the
initial registered office of the Corporation in the Commonwealth of Virginia is
c/o Parker Pollard & Brown, 5511 Staples Mill Road, Richmond, Virginia 23228.
The county or city
<PAGE>
in the Commonwealth of Virginia in which the said registered office of the
Corporation is located is the County of Henrico.
The name of the initial registered agent of the Corporation at the
said registered office is Edward R. Parker. The said initial registered agent
meets the requirements of Section 13.1-619 of the Virginia Stock Corporation
Act, inasmuch as he is a resident of the Commonwealth of Virginia and a member
of the Virginia State Bar. The business office of the said registered agent of
the Corporation is identical with the said registered office of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation this 25th day of February, 1998.
-----------------------------
John D. Vazzana
February 25, 1998
<PAGE>
Exhibit 3.2
DUNN COMPUTER CORPORATION
BYLAWS
Adopted by the Board of Directors
Effective as of
March 5, 1998
<PAGE>
TABLE OF CONTENTS
1. CORPORATE OFFICES.........................................................1
1.1. Registered Office..............................................1
1.2. Other Offices..................................................1
2. MEETINGS OF SHAREHOLDERS..................................................1
2.1. Time...........................................................1
2.2. Place..........................................................1
2.3. Notice.........................................................1
2.3.1. Time.............................................1
2.3.2. Purpose of Meeting...............................2
2.3.3. Adjournment......................................2
2.3.4. Exceptions.......................................2
2.3.5. Waiver of Notice.................................2
2.3.6. Nominations; Proposals...........................2
2.4. Special Meetings...............................................3
2.5. Quorum.........................................................3
2.5.1. Requirement......................................3
2.5.2. Articles of Incorporation........................3
2.6. Voting.........................................................4
2.6.1. Votes Per Share..................................4
2.6.2. Signature........................................4
2.6.3. Action on a Matter...............................4
2.6.4. Election of Directors............................4
2.7. Proxies........................................................5
2.7.1. Terms............................................5
2.7.2. Means to Grant Authority.........................5
2.8. Fixing Record Date.............................................6
2.9. Conduct of Meetings............................................6
2.10. Shareholder List for Meeting...................................6
2.11. Voting Procedures and Inspectors of Elections..................7
2.11.1. Appointment of Inspector........................7
2.11.2. Inspector's Duties..............................7
2.11.3. Polls...........................................7
2.11.4. Counting of Proxies and Ballots.................7
3. DIRECTORS.................................................................8
3.1. Powers.........................................................8
3.2. Term of Office.................................................8
3.3. Number of Directors............................................8
3.4. Consent........................................................8
3.5. Resignation and Removal of Directors...........................8
3.5.1. Resignation......................................8
3.5.2. Removal..........................................9
i
<PAGE>
3.6. Place of Meetings..............................................9
3.7. Regular Meetings...............................................9
3.8. Special Meetings - Call and Notice.............................9
3.9. Waiver of Notice...............................................9
3.10. Meetings by Telephone.........................................10
3.11. Quorum; Vote..................................................10
3.12. Presumption of Assent.........................................10
3.13. Board Action Without a Meeting................................10
3.14. Compensation..................................................10
4. COMMITTEES...............................................................11
4.1. Creation of Committees.......................................11
4.2. Committee Authority..........................................11
4.3. Executive Committee..........................................11
4.4. Audit Committee..............................................12
4.5. Compensation Committee.......................................12
4.6. Committee Membership.........................................12
4.6.1. Term of Office..................................12
4.6.2. Resignation and Removal.........................12
4.6.3. Vacancies.......................................12
5. OFFICERS.................................................................13
5.1. Appointment of Officers.......................................13
5.2. Election and Term of Office...................................13
5.3. Resignation and Removal of Officers...........................13
5.4. Duties and Powers.............................................13
5.4.1. Chairman of the Board...........................13
5.4.2. President.......................................14
5.4.3. Vice President..................................14
5.4.4. Chief Financial Officer.........................14
5.4.5. Secretary.......................................14
5.4.6. Treasurer.......................................15
5.5. Compensation of Officers......................................15
6. SHARE PROVISIONS.........................................................15
6.1. Issuance of Shares............................................15
6.2. Liability for Shares Issued before Payment....................16
6.3. Certificates Evidencing Shares................................16
6.4. Shares without Certificates...................................16
6.5. Lost Certificates.............................................16
6.6. Shareholders of Record........................................17
6.7. Distributions to Shareholders.................................17
7. MISCELLANEOUS............................................................17
7.1. Corporate Records.............................................17
7.2. Corporation Seal..............................................18
ii
<PAGE>
7.3. Fiscal Year...................................................18
7.4. Checks, Notes and Drafts......................................18
7.5. Voting of Shares Held.........................................18
iii
<PAGE>
BYLAWS
OF
DUNN COMPUTER CORPORATION
1. CORPORATE OFFICES
1.1. Registered Office
The address of the registered office of the Corporation shall
be c/o Parker Pollard & Brown, 5511 Staples Mill Road, Richmond, Virginia 23228.
1.2. Other Offices
The Corporation may also have other offices at such locations
both within and without the Commonwealth of Virginia as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
2.MEETINGS OF SHAREHOLDERS
2.1. Time
Annual meetings of shareholders shall be held on such date and
at such time as shall be designated from time to time by the Board of Directors
and as shall be stated in a notice of the meeting or a duly executed waiver of
notice thereof. The annual meeting shall be held within fifteen (15) months of
the previous annual meeting.
2.2. Place
All meetings of shareholders shall be held in the County of
Fairfax, in the Commonwealth of Virginia or at such other place within or
without Virginia as may be designated for that purpose from time to time by the
Board of Directors and stated in the notice of the meeting or a duly executed
waiver of notice thereof.
2.3. Notice
2.3.1. Time
The Corporation shall notify shareholders of the date, time,
place of each annual and special shareholders' meeting. Such notice shall be
given no less than 10 nor more than 60 days before the meeting date, except that
notice of a shareholders' meeting to act on an amendment of the articles of
incorporation, a plan of merger or share exchange, a proposed sale of assets
which must be approved by the shareholders, or the dissolution of the
Corporation, shall be given not less than 25 nor more than 60 days before the
meeting date. Unless otherwise required by the articles of incorporation or by
law, the Corporation is required to give notice only to shareholders entitled to
vote at the meeting.
<PAGE>
2.3.2. Purpose of Meeting
Unless otherwise required by the articles of incorporation or
by law, notice of an annual meeting need not state the purpose or purposes for
which the meeting is called. Notice of a special meeting shall state the purpose
or purposes for which the meeting is called.
2.3.3. Adjournment
If an annual or special meeting is adjourned to a different
date, time, or place, notice need not be given if the new date, time, or place
is announced at the meeting before adjournment. If a new record date for the
adjourned meeting is fixed as specified in Section 2.8. of these Bylaws
("Bylaws") or by law, however, notice of the adjourned meeting shall be given to
persons who are shareholders as of the new record date.
2.3.4. Exceptions
Notwithstanding the foregoing, no notice of a shareholders'
meeting need be given to a shareholder if (i) an annual report and proxy
statements for two consecutive annual meetings of shareholders or (ii) all, and
at least two, checks in payment of dividends or interest on securities during a
twelve-month period, have been sent by first-class United States mail, addressed
to the shareholder at his or her address as it appears on the share transfer
books of the Corporation, and returned undeliverable. The obligation of the
Corporation to give notice of shareholder meetings to any such shareholder shall
be reinstated once the Corporation has received a new address for such
shareholder for entry on its share transfer books.
2.3.5. Waiver of Notice
A shareholder may waive any notice required by law, the
articles of incorporation or these Bylaws before or after the date and time of
the meeting that is the subject of such notice. The waiver shall be in writing,
signed by the shareholder entitled to the notice, and delivered to the Secretary
for inclusion in the minutes or filing with the corporate records. A
shareholder's attendance at a meeting (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter when it is presented.
2.3.6. Nominations; Proposals
Nominations for the election of directors and proposals for
consideration at a meeting shall be made by the Board of Directors or by any
shareholder entitled to vote in elections of directors. However, any shareholder
entitled to vote in elections of directors may nominate one or more persons for
election as directors or may present a proposal for
<PAGE>
consideration at an annual meeting only if written notice of such shareholder's
intent to make such proposal, nomination or nominations has been given, either
by personal delivery or by United States registered or certified mail, postage
prepaid, to the Secretary of the Corporation not later than 90 days prior to the
date of the anniversary of the immediately preceding annual meeting. Each notice
shall set forth (i) the name and address of the shareholder who intends to make
the nomination, (ii) a representation that the shareholder is a holder of record
of shares of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice or to present the proposal, (iii) a description of all
arrangements, understandings or relationships between the shareholder and each
nominee and any other person or persons pursuant to which the proposal,
nomination or nominations are to be made by the shareholder and (iv) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to have been nominated, by the Board of Directors, and shall include a
consent signed by each such nominee to serve as a director of the Corporation if
so elected. The chairperson of the meeting may refuse to acknowledge any
proposal or the nomination of any person not made in compliance with the
foregoing procedure.
2.4. Special Meetings
Special meetings of shareholders may be called as provided in
the articles of incorporation. Only business within the purpose or purposes
described in the meeting notice may be conducted at a special shareholders
meeting.
2.5. Quorum
2.5.1. Requirement
Shares entitled to vote, whether as all of the shares of a
single class or as a separate voting group, may take action on a matter at a
meeting only if a quorum of those shares exists with respect to that matter.
Unless otherwise provided by the articles of incorporation or by law, a majority
of the votes entitled to be cast on the matter by the voting group constitutes a
quorum of that voting group for action on that matter. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or shall be set for the adjourned meeting.
Less than a quorum may adjourn a meeting for which a quorum does not exist.
2.5.2. Articles of Incorporation
The articles of incorporation may provide for (i) a lesser or
greater quorum requirement for shareholders, but not less than one-third of the
shares eligible to vote, or voting groups of shareholders, or (ii) a greater
voting requirement for shareholders, or voting groups of shareholders, than is
provided in this Section 2.5.
<PAGE>
2.6. Voting
2.6.1. Votes Per Share
Unless provided otherwise by the articles of incorporation or
by law, each outstanding share, regardless of class, is entitled to one vote on
each matter voted on at a shareholders' meeting. Unless the articles of
incorporation provide otherwise, in the election of directors, each outstanding
share, regardless of class, is entitled to one vote for as many persons as there
are directors to be elected at that time and for whose election the shareholder
has a right to vote. The shareholders do not have a right to cumulate their
votes for directors.
2.6.2. Signature
If the name signed on a vote, consent, waiver or proxy
appointment corresponds to the name of a shareholder, the Corporation, if acting
in good faith, is entitled to accept the vote, consent, waiver, or proxy
appointment and give it effect as the act of the shareholder. If the name signed
on a vote, consent, waiver or proxy appointment does not correspond to the name
of its shareholder, the Corporation, if acting in good faith, is nevertheless
entitled to accept the vote, consent, waiver or proxy appointment and give it
effect as the act of the shareholder to the full extent permitted by law. The
Corporation is entitled to reject a vote, consent, waiver or proxy appointment
if the Secretary or other officer or agent authorized to tabulate votes, acting
in good faith, has reasonable basis for doubt about the validity of the
signature on it or about the signatory's authority to sign for the shareholder.
2.6.3. Action on a Matter
If a quorum exists, action on a matter, other than the
election of directors, by a voting group is approved if the votes cast within
the voting group favoring the action exceed the votes cast opposing the action,
unless a greater number of affirmative votes is required by the articles of
incorporation or by law. If the articles of incorporation or law provides for
voting by a single voting group on a matter, action on that matter is taken when
voted upon by that voting group as provided in this Section 2.6. or by law. If
the articles of incorporation or law provides for voting by two or more voting
groups on a matter, action on that matter is taken only when voted upon by each
of those voting groups counted separately as provided in this Section 2.6. or by
law. Action may be taken by one voting group on a matter even though no action
is taken by another voting group entitled to vote on the matter.
2.6.4. Election of Directors
Unless otherwise provided in the articles of incorporation,
directors are elected by a plurality of the votes cast by the shares entitled to
vote in the election at a meeting of shareholders at which a quorum is present.
<PAGE>
2.7. Proxies
2.7.1. Terms
A shareholder may vote his or her shares in person or by
proxy. An appointment of a proxy when received by the Secretary or other officer
or agent authorized to tabulate votes. An appointment is valid for 11 months
unless a longer period is expressly provided in the appointment form. An
appointment of a proxy is revocable by the shareholder unless the appointment
form conspicuously states that it is irrevocable and the appointment is coupled
with an interest. An irrevocable appointment is revoked when the interest with
which it is coupled is extinguished. The death or incapacity of the shareholder
appointing a proxy does not affect the right of the Corporation to accept the
proxy's authority unless notice of the death or incapacity is received by the
Secretary or other officer or agent authorized to tabulate votes before the
proxy exercises such proxy's authority under the appointment. Subject to any
express limitation on the proxy's authority appearing on the face of the
appointment form and other limitations provided by law, the Corporation is
entitled to accept the proxy's vote or other action as that of the shareholder
making the appointment. Any fiduciary who is entitled to vote any shares may
vote such shares by proxy.
2.7.2. Means to Grant Authority
Without limiting the manner in which a shareholder may
authorize another person or persons to act for such shareholder as proxy
pursuant to this Section, the following shall constitute a valid means by which
a shareholder may grant such authority.
A shareholder may execute a writing authorizing another person
or persons to act for such shareholder as proxy. Execution may be accomplished
by the shareholder or such shareholder's authorized officer, director, employee
or agent signing such writing or causing his or her signature to be affixed to
such writing by any reasonable means including, but not limited to, by facsimile
signature.
A shareholder may authorize another person or persons to act
for such shareholder as proxy by transmitting or authorizing the transmission of
a telegram, cablegram or other means of electronic transmission to the person
who will be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the person who
will be the holder of the proxy to receive such transmission, provided that any
such telegram, cablegram or other means of electronic transmission must either
set forth or be submitted with information from which the inspectors of election
can determine that the telegram, cablegram or other electronic transmission was
authorized by the shareholder. If it is determined that such telegrams,
cablegrams or other electronic transmissions are valid, the inspectors, or if
there are no inspectors, such other persons making that determination, shall
specify the information upon which they relied.
<PAGE>
Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this subsection
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmissions could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
2.8. Fixing Record Date
The Board of Directors may fix a future date as the record
date for one or more voting groups in order to make a determination of
shareholders for any purpose. The record date may not be more than 70 days
before the meeting for action requiring a determination of shareholders. A
determination of shareholders entitled to notice of or to vote at a shareholders
meeting is effective for any adjournment of the meeting unless the Board of
Directors fixes a new record date, which it shall do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
2.9. Conduct of Meetings
The Chairman shall preside over all meetings of the
shareholders as chairperson of the meeting. If the Chairman is not present, a
chairperson shall be elected by the meeting. The Secretary of the Corporation
shall act as secretary of all the meetings if the Secretary is present. If the
Secretary is not present, the chairperson shall appoint a secretary of the
meeting.
2.10. Shareholder List for Meeting
The officer or agent having charge of the share transfer books
of the Corporation shall make, at least 10 days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, with the address of and the number of shares
held by each. The list shall be arranged by voting group and within each voting
group by class or series of shares. For a period of 10 days prior to the
meeting, the list of shareholders shall be kept on file at the registered office
of the Corporation or at its principal office or at the office of its transfer
agent or registrar and shall be subject to inspection during regular business
hours by any shareholder who meets the specifications of ss. 13.1.771 (C) of the
Virginia Stock Corporation Act.
Such list shall be produced and kept open at the time and
place of the meeting. The original share transfer books shall be prima facie
evidence as to who are the shareholders entitled to examine such list or
transfer books or to vote at any meeting of shareholders.
If the requirements of this Section have not been
substantially complied with, the meeting shall, on the demand of any shareholder
in person or by proxy, be adjourned until the requirements are complied with.
Refusal or failure to prepare or make available the shareholder list does not
affect the validity of action taken at the meeting prior to the
<PAGE>
making of any such demand, but any action taken by the shareholders after the
making of any such demand shall be invalid and of no effect.
2.11. Voting Procedures and Inspectors of Elections
2.11.1. Appointment of Inspector
The Corporation shall, in advance of any meeting of
shareholders, appoint one or more inspectors to act at the meeting and make a
written report thereof. The Corporation may designate one or more persons as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternative is able to act at a meeting of shareholders, the person presiding
at the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his or her ability.
2.11.2. Inspector's Duties
The inspectors shall (i) ascertain the number of shares
outstanding and the voting powers of each, (ii) determine the shares represented
at a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determines and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
2.11.3. Polls
The date and time of the opening and the closing of the polls
for each matter upon which the shareholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the circuit court of the city or county where the
corporation's principal office is located or, if none in this Commonwealth,
where its registered office is located, upon application by a shareholder, shall
determine otherwise.
2.11.4. Counting of Proxies and Ballots
In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 13.1-663(B)(2) of the Virginia Stock Corporation Act, ballots and the
regular books and records of the Corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a
<PAGE>
proxy is authorized by the record owner to cast or more votes than the
shareholder holds of record. If the inspectors consider other reliable
information for the limited purpose permitted herein, the inspectors at the time
they make their certification pursuant to Section 2.12.2(v) herein shall specify
the precise information considered by them including the person or persons from
whom they obtained the information, when the information was obtained, the means
by which the information was obtained and the basis for the inspectors' belief
that such information is accurate and reliable.
3. DIRECTORS
3.1. Powers
All corporate powers shall be exercised by or under the
authority of , and the business and affairs of the Corporation managed under the
direction of, the Board of Directors, subject to any limitation set forth in the
articles of incorporation.
3.2. Term of Office
Unless otherwise provided in the articles of incorporation,
the Board of Directors shall divide the directors into three classes; and, when
the number of directors is changed, shall determine the class or classes to
which the increased or decreased number of directors shall be apportioned;
provided, however, that no decrease in the number of directors shall shorten an
incumbent director's term. At each annual meeting of shareholders, directors
elected to succeed those whose terms are expiring shall be elected for a term of
office expiring at the annual meeting of shareholders held in the third year
following their election and until their respective successors are elected and
qualified, or until such director's earlier death, resignation or removal.
3.3. Number of Directors
The number of directors which shall constitute the whole board
shall be as provided from time to time by the board of directors, within the
range provided by the articles of incorporation.
3.4. Consent
No individual shall be named or elected as a director without
such individual's prior consent.
3.5. Resignation and Removal of Directors
3.5.1. Resignation
A director may resign at any time by delivering written notice
to the Board of Directors, the Chairman, or the Secretary. A resignation is
effective when the notice is delivered unless the notice specifies a later
effective date. If a resignation is made effective
<PAGE>
at a later date, the Board of Directors may fill the pending vacancy before the
effective date if the Board of Directors provides that the successor does not
take office until the effective date.
3.5.2. Removal
If a director is elected by a voting group of shareholders,
only the shareholders of that voting group may participate in the vote to remove
such director. A director may be removed by the shareholders only at a meeting
called for the purpose of removing such director and the meeting notice must
state that the purpose, or one of the purposes of the meeting, is the removal of
the director.
3.6. Place of Meetings
The Board of Directors may hold regular or special meetings in
or out of the Commonwealth of Virginia.
3.7. Regular Meetings
Unless the articles of incorporation provide otherwise,
regular meetings of the Board of Directors may be held, without notice of the
date, time, place, or purpose of the meeting, as may be designated from time to
time by resolution of the Board.
3.8. Special Meetings - Call and Notice
Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board, or by directors constituting at least
one-third of the full Board of Directors. Written notice of any special meeting
shall be given to each director (i) at least one day prior thereto either
personally or by telegram or by telecopy, (ii) at least two days prior thereto
by overnight delivery, or (iii) at least five days prior thereto by United
States mail, addressed to such director at the director's address as it appears
in the records of the Corporation. Such notice shall be deemed to be delivered
when deposited in the United States mail so addressed, with postage thereon
prepaid, or when delivered to the telegraph company if sent by telegram. The
notice need not describe the purpose of the special meeting unless required by
the articles of incorporation.
3.9. Waiver of Notice
A director may waive any notice required by law, the articles
of incorporation or these Bylaws before or after the date and time stated in the
notice, and such waiver shall be equivalent to the giving of such notice. Except
as provided in this Section 3.9, the waiver shall be in writing, signed by the
director entitled to the notice, and delivered to the Secretary for inclusion in
the corporate records. A director's attendance at or participation in a meeting
waives any required notice to such director of the meeting unless the director
at the beginning of the meeting or promptly upon such director's arrival
<PAGE>
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.
3.10. Meetings by Telephone
Unless the articles of incorporation provide otherwise, the
Board of Directors may permit any or all directors to participate in a regular
or special meeting by, or conduct the meeting through the use of, any means of
communication by which all directors participating may simultaneously hear each
other during the meeting. A director participating in a meeting by this means is
deemed to be present in person at the meeting.
3.11. Quorum; Vote
Unless the articles of incorporation require a greater number
for the transaction of all business or any particular business, a quorum of a
Board of Directors consists of a majority of the number of directors in office
immediately before the meeting begins. If a quorum is present when a vote is
taken, the affirmative vote of a majority of directors present is the act of the
Board of Directors unless the articles of incorporation require the vote of a
greater number of directors.
3.12. Presumption of Assent
A director who is present at a meeting of the Board of
Directors or a committee of the Board of Directors when corporate action is
taken is deemed to have assented to the action taken unless (i) such director
objects at the beginning of the meeting, or promptly upon such director's
arrival, to holding it or to transacting specified business at the meeting, or
(ii) such director votes against, or abstains from, the action taken.
3.13. Board Action Without a Meeting
Unless the articles of incorporation provide otherwise, action
required or permitted by law to be taken at a Board of Directors' meeting may be
taken without a meeting if the action is taken by all members of the Board. The
action shall be evidenced by one or more written consents stating the action
taken, signed by each director either before or after the action taken, and
included in the minutes or filed with the corporate records reflecting the
action taken. Action taken under this Section 3.13 is effective when the last
director signs the consent, except that the action may be effective as of a
different effective date if such effective date is specified in the consent and
the consent states the date of execution by each director. A consent signed
under this Section 3.13 has the effect of a meeting vote and may be described as
such in any document.
3.14. Compensation
Unless the articles of incorporation provide otherwise, the
Board of Directors shall fix the compensation of directors and members of
committees and may provide for
<PAGE>
reimbursements for expenses. No such compensation
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation therefor.
4. COMMITTEES
4.1. Creation of Committees
Unless the articles of incorporation provide otherwise, the
Board of Directors may create one or more committees and appoint members of the
Board of Directors to serve on them. Each committee may have two or more
members, who serve at the pleasure of the Board of Directors. The creation of a
committee and appointment of members to it shall be approved by a majority of
all the directors in office when the action is taken. The same rules that govern
meetings, action without meetings, notice and waiver of notice, and quorum and
voting requirements of the Board of Directors apply to committees and their
members as well.
4.2. Committee Authority
To the extent specified by the Board of Directors or in the
articles of incorporation or these Bylaws, each committee may exercise the
authority of the Board of Directors, except that a committee may not: (i)
approve or recommend to shareholders action that is required by law to be
approved by shareholders; (ii) fill vacancies on the Board or on any of its
committees; (iii) amend the articles of incorporation; (iv) adopt, amend, or
repeal these Bylaws; (v) approve a plan of merger not requiring shareholder
approval; (vi) authorize or approve a distribution, except according to a
general formula or method prescribed by the Board of Directors; or (vii)
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences, and limitations of a
class or series of shares, except that the Board of Directors may authorize a
committee, or a senior executive officer of the Corporation, to do so within
limits specifically prescribed by the Board of Directors.
4.3. Executive Committee
The Board of Directors, by resolution adopted by a majority of
the number of directors then in office, may elect an Executive Committee which
shall consist of not less than three directors, including the Chief Executive
Officer. When the Board of Directors is not in session, the Executive Committee
shall have all power vested in the Board of Directors by law, by the articles of
incorporation, or by these Bylaws other than power vested in another committee
of the Board and provided that the Executive Committee, in addition to the
limitations set forth in Section 4.2 above, shall not have power to elect
officers. The Executive Committee shall report at the next regular or special
meeting of the Board of Directors all action which the Executive Committee may
have taken on behalf of the Board since the last regular or special meeting of
the Board of Directors:
<PAGE>
4.4. Audit Committee
The Board of Directors, by resolution adopted by a majority of
the number of directors then in office, may elect an Audit Committee, which
shall consist of not less than two directors. The Audit Committee shall consider
and make recommendations to the Board with respect to accounting matters and
internal controls and shall perform the functions generally performed by audit
committees of public corporations and such other matters relating to the
financial affairs of the Corporation as may be requested by the Board or the
appropriate officers of the Corporation.
4.5. Compensation Committee
The Board of Directors, by resolution adopted by a majority of
the number of directors then in office, may elect a Compensation Committee,
which shall consist of not less than three directors. The Compensation Committee
shall consider and make recommendations to the Board with respect to the
individual compensation of corporate officers, but it shall not have the power
to take any action on these matters unless delegated authority to do so by the
Board of Directors, and shall perform such other functions as may be delegated
by the Board of Directors.
4.6. Committee Membership
4.6.1. Term of Office
Members of any committee shall be elected as provided above
and shall hold office until the earliest of the following: (a) their successors
are elected and qualified, or until such committee member's earlier death,
resignation or removal; (b) such committee is dissolved by the Board of
Directors; or (c) they are no longer members of the Board of Directors.
4.6.2. Resignation and Removal
Any member of a committee may resign at any time by giving
written notice of his intention to do so to the Chairman or the Secretary of the
Corporation, or may be removed, with or without cause, at any time by such vote
of the Board of Directors as would suffice for his or her election.
4.6.3. Vacancies
Any vacancy occurring in a committee resulting from any cause
whatever may be filled by a majority of the number of directors then in office.
<PAGE>
5. OFFICERS
5.1. Appointment of Officers
The Corporation shall have a Chairman of the Board, a Chief
Executive Officer, a President, a Secretary, a Chief Financial Officer and such
other officers as are appointed by the Board of Directors or by an officer
authorized by the Board of Directors to make such appointment. Such other
officers may include, without limitation, a Treasurer and one or more Vice
Presidents, Assistant Secretaries or Assistant Treasurers.
5.2. Election and Term of Office
Each officer of the Corporation shall be elected by the Board
of Directors or appointed by an officer authorized by the Board of Directors to
make such appointment and shall serve until such officer's successor is elected,
qualifies, or until such officer's earlier death, resignation or removal.
Election or appointment of an officer shall not of itself create any contractual
rights.
5.3. Resignation and Removal of Officers
An officer may resign at any time by delivering notice to the
Corporation. A resignation is effective when the notice is delivered unless the
notice specifies a later effective date. If a resignation is made effective at a
later date and the Corporation accepts the future date, the Corporation may fill
the pending vacancy before the effective date if the successor does not take
office until the effective date. The Board of Directors may remove and officer
or assistant officer at any time with or without cause and any officer or
assistant officer, if appointed by another officer, may likewise be removed by
such officer. Removal of an officer shall not affect any such officer's contract
rights, if any, with the Corporation, nor shall the resignation of an officer
affect the Corporation's contract rights, if any, with such officer.
5.4. Duties and Powers
Officers of the Corporation shall, unless these Bylaws
otherwise provide, perform such duties as generally pertain to their offices, in
addition to or as limited by, such powers and duties as are prescribed by law,
the Board of Directors, these Bylaws, or by direction of an officer authorized
by the Board of Directors to prescribe the duties of other officers. The same
individual may simultaneously hold more than one office.
5.4.1. Chairman of the Board
The Chairman of the Board shall be the Chief Executive Officer
of the Corporation and shall preside at all meetings of shareholders and of the
Board of Directors at which he is present. He shall have authority over the
general management and direction of the business and operations of the
Corporation and its divisions, if any, subject only to the ultimate authority of
the Board of Directors. He shall be a director, and except as
<PAGE>
otherwise provided in these Bylaws or in the resolutions establishing such
committees, he shall be ex officio a member of all committees of the Board.
5.4.2. President
The President may sign and execute, in the name of the
Corporation, deeds, mortgages, bonds, contracts, or other instruments except in
cases where the signing and the execution thereof shall be expressly delegated
by the Board of Directors or by these Bylaws to some other officer or agent of
the Corporation or shall be required by law otherwise to be signed or executed.
In addition, he shall perform all duties incident to the office of the President
and such other duties as from time to time may be assigned to him by the Board
of Directors.
5.4.3. Vice President
Each Corporate Vice President, if any, shall have such powers
and duties as may from time to time be assigned to him by the President or the
Board of Directors. Any Vice President may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts, or other instruments authorized
by the Board of Directors except where the signing and execution of such
documents shall be expressly delegated by the Board of Directors or the
President to some other officer or agent of the Corporation or shall be required
by law otherwise to be signed or executed.
5.4.4. Chief Financial Officer
The Chief Financial Officer shall be the chief financial and
accounting officer of the Corporation, shall have supervision over the
maintenance and custody of the financial and accounting operations of the
Corporation, and shall have all powers and duties usually incident to the office
of Chief Financial Officer, except as specifically limited by a resolution of
the Board of Directors. He shall be responsible (i) for maintaining adequate
financial accounts and records in accordance with generally accepted accounting
practices; (ii) for the preparation of appropriate operating budgets and
financial statements; (iii) for the preparation and filing of all tax returns
required by law; and (iv) for the performance of all duties incident to the
office of the Chief Financial officer and such other duties as from time to time
may be assigned to him by the Board of Directors, the Audit Committee, or the
President. The Chief Financial Officer may sign and execute in the name of the
Corporation share certificates, deeds, mortgages, bonds, contracts, or other
instruments, except in cases where the signing and the execution thereof shall
be expressly delegated by the Board of Directors or by these Bylaws to some
other officer or agent of the Corporation or shall be required by law otherwise
to be signed or executed.
5.4.5. Secretary
The Secretary shall act as secretary of all meetings of the
shareholders of the Corporation. The Secretary shall also act as secretary of
the meetings of the Board of Directors and of committees of the board when
requested by the Board of Directors or
<PAGE>
committee, as the case may be. The Secretary shall keep and preserve the minutes
of all such meetings in permanent books. The Secretary shall see that all
notices required to be given by the Corporation are duly given and served; shall
have custody of the seal of the Corporation and shall affix the seal or cause it
to be affixed to all share certificates of the Corporation and to all documents
the execution of which on behalf of the Corporation under its corporate seal is
duly authorized in accordance with law or the provisions of these Bylaws; shall
have custody of all deeds, leases, contracts, and other important corporate
documents; shall have charge of the stock ledgers, books, records, and papers of
the Corporation relating to its organization and management as a Corporation;
shall see that all reports, statements, and other documents required by law
(except tax returns) are properly filed; and shall in general perform all the
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him by the Board of Directors or the President.
5.4.6. Treasurer
The Treasurer, if any, shall have such powers and duties as
may from time to time be assigned to him by the President or the Board of
Directors. The Treasurer shall have the responsibility for collecting all moneys
due the Corporation and for maintaining custody of the funds of the Corporation
and for placing the same in such depositories in the name and to the credit of
the Corporation as may be approved by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as ordered by the Board of
Directors, shall keep accurate accounts of all receipts and disbursements, and
shall render to the President (and to the Board of Directors, when the Board of
Directors so requires) an account of all transactions and of the financial
condition of the Corporation. The Treasurer shall perform such other duties as
the Board of Directors or the President may from time to time prescribe.
5.5. Compensation of Officers
The Board of Directors shall fix the compensation of corporate
officers and may provide for reimbursement of expenses.
6. SHARE PROVISIONS
6.1. Issuance of Shares
Any issuance of shares must be authorized by the Board of
Directors. Shares may be issued for consideration consisting of any tangible or
intangible property or benefit to the Corporation, including cash, promissory
notes, services performed, contracts for services to be performed, or other
securities. A good faith determination by the Board of Directors that the
consideration received or to be received for the shares to be issued is adequate
is conclusive insofar as the adequacy of consideration relates to whether the
shares are validly issued, fully paid and nonassessable. When the Board of
Directors has made such a determination and the Corporation has received the
consideration, the shares issued therefor are fully paid and nonassessable.
Where it cannot be determined that
<PAGE>
outstanding shares are fully paid and nonassessable, there shall be a conclusive
presumption that such shares are fully paid and nonassessable if the Board of
Directors makes a good faith determination that there is no substantial evidence
that the full consideration for such shares has not been paid.
6.2. Liability for Shares Issued before Payment
A purchaser of shares from the Corporation is not labile to
the Corporation with respect to the shares except to pay the consideration for
which the shares were authorized to be issued as provided in Section 6.1.
6.3. Certificates Evidencing Shares
Shares may but need not be represented by certificates. Each
share certificate shall state on its face (i) the name of the Corporation and
that the Corporation is organized under the law of the commonwealth of Virginia,
(ii) the name of the person to whom issued, and (iii) the number and class of
shares and the designation of the series, if any, that the certificate
represents. If the Corporation is authorized to issue different classes of
shares or different series within a class, the designations, relative rights,
preferences, and limitations applicable to each class and the variations in
rights, preferences, and limitations determined for each series (and the
authority of the Board of Directors to determine variations for future series)
shall be summarized on the front or back of each certificate for shares of such
class or series. Alternatively, each certificate may state conspicuously on its
front or back that the Corporation will furnish the shareholder this information
on request in writing and without charge. Each share certificate shall be signed
(i) by the Chairman or the President or a Vice President and by the Secretary or
Assistant Secretary or Treasurer or Assistant Treasurer, or (ii) by the Board of
Directors, and each such share certificate may bear the corporate seal or its
facsimile. Any or all of the signatures on the certificates may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect, as if he or she were such
officer, transfer agent or registrar on the date of issue.
6.4. Shares without Certificates
Unless the articles of incorporation provide otherwise, the
Board of Directors may authorize the issue of some or all of the shares of any
or all of its classes or series without certificates. Within a reasonable time
after the issue or transfer of shares without certificates, the Corporation
shall send the shareholder a written statement of the information required on
certificates by law and by Section 6.3. of these Bylaws.
6.5. Lost Certificates
The Board of Directors or the President may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the
<PAGE>
Corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificates for shares to
have been lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or such owner's legal representative (i) to
advertise the same in such manner as it shall require and/or (ii) to give the
Corporation a bond in such sum as it may direct as indemnity or otherwise to
indemnify the Corporation against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
6.6. Shareholders of Record
The Corporation shall be entitled to recognized the exclusive
right of a person or entity shown by the records of the Corporation to be the
owner of shares of its outstanding capital stock, to vote such shares, to
receive dividends and notifications, and to exercise all the rights and powers
of an owner; and the Corporation shall not be bound to recognize any equitable
or other claim or interest in such shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
6.7. Distributions to Shareholders
The Board of Directors may authorize and the Corporation may
make distributions to its shareholders, subject to restrictions in the articles
of incorporation and the limitations in this Section 6.7. If the Board of
Directors does not fix the record date for determining shareholders entitled to
a distribution, other than one involving a repurchase or reacquisition of
shares, it is the date the Board of Directors authorizes the distribution. No
distribution may be made if, after giving it effect (i) the Corporation would
not be able to pay its debts as they become due in the usual course of business;
or (ii) the Corporation's total assets would be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise) the
amount that would be needed, if the Corporation were to be dissolved at the time
of the distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. The Board of Directors may base a determination that a
distribution is not prohibited under this Section 6.7 either on financial
statements prepared on the basis of accounting practices and principles that are
reasonable in the circumstances or on a fair valuation or other method that is
reasonable in the circumstances.
7. MISCELLANEOUS
7.1. Corporate Records
The Corporation shall keep as permanent records minutes of all
meetings of the shareholders and the Board of Directors, a record of all actions
taken by the shareholders or the Board of Directors without a meeting and a
record of all actions taken by a committee of the Board of Directors in place of
the Board of Directors on behalf of the
<PAGE>
Corporation. The Corporation shall maintain appropriate accounting records. The
Corporation or its agent shall maintain a record of the shareholders, in a form
that permits preparation of a list of the names and addresses of all
shareholders, in alphabetical order by class and series, if any, of shares
showing the number and class and series, if any, of shares held by each. The
Corporation shall keep a copy of those records required by law.
7.2. Corporation Seal
The seal of the Corporation shall be in such form as shall be
approved from time to time by the Board of Directors. The seal, or a facsimile
of it, may be used by impressing or affixing it or in any other manner
reproducing it.
7.3. Fiscal Year
The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
7.4. Checks, Notes and Drafts
Checks, notes, drafts, and other orders for the payment of
money may be signed by the President, the Chief Financial Officer or the
Treasurer or by such person or persons as the Board of Directors may from time
to time designate. The signature of any such person or persons may be a
facsimile when authorized by the Board of Directors.
7.5. Voting of Shares Held
Unless otherwise provided by resolution of the Board of
Directors or of the Executive Committee, if any, the President may from time to
time appoint an attorney or attorneys as agent or agents of the Corporation, in
the name and on behalf of the Corporation, to cast the vote which the
Corporation may be entitled to cast as a shareholder or otherwise in any other
corporation any of whose securities may be held by the Corporation, at meetings
of the holders of the shares or other securities of such other corporation, or
to consent in writing to any action by any such other corporation; and the
President shall instruct the person or persons so appointed as to the manner of
casting such votes or giving such consent and may execute or cause to be
executed on behalf of the Corporation, and under its corporate seal or
otherwise, such written proxies, consents, waivers, or other instruments as may
be necessary or proper in the premises. In lieu of such appointment the
President may himself attend any meetings of the holders of shares or other
securities of any such other corporation and there vote or exercise any or all
power of the Corporation as the holder of such shares or other securities of
such other corporation.
<PAGE>
INCORPORATED UNDER THE LAWS OF
VIRGINIA
NUMBER SHARES
DUNN COMPUTER CORPORATION
Common Stock, par value $.001 per share
THIS CERTIFIES THAT Specimen is the registered holder of ________ Shares
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ____ day of ____ A.D. 19__.
<PAGE>
CERTIFICATE FOR ________ SHARES OF __________ ISSUED TO _______________
DATED _________________
For Value Received, _________ hereby sell, assign and transfer unto __________
_______________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint _______________________________________________________ Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________ 19__
In presence of ________________________ __________________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 10.18
DUNN COMPUTER CORPORATION
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of this ____ day of
___________, 1998 by and between DUNN COMPUTER CORPORATION, a Virginia
corporation, having an office at 1306 Squire Court, Sterling, Virginia 20166
(hereinafter referred to as "Employer") and [George Fuster/D. Oscar Fuster], an
individual residing at [Residential address] (hereinafter referred to as
"Employee");
W I T N E S S E T H:
WHEREAS, Employer has entered into an Acquisition Agreement, dated
March 6, 1998 to purchase, inter alia, all of the outstanding stock of
International Data Products, Corp. ("IDP"), a Maryland corporation; and
WHEREAS, Employee is a selling stockholder of IDP and has been acting
as [President/Vice President] of IDP; and
WHEREAS, as a condition to entering into the Acquisition Agreement,
Employer desires to ensure that Employee continues to serve as [President/Vice
President] of IDP; and
WHEREAS, Employee is willing to continue to be employed as
[President/Vice President] of IDP in the manner provided for herein, and to
perform the duties of [President/Vice President] of IDP upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein set forth it is agreed as follows:
1. Employment of [President/Vice President]. Employer hereby employs
Employee as [President/Vice President] of IDP.
2. Term of Employment.
(a) The Employee's term of employment under this Agreement
shall commence on the date hereof (the "Commencement Date") and, except for the
provisions of Section 8 hereof, shall expire three (3) years from the
Commencement Date unless Employee's employment is terminated earlier pursuant to
Section 9 (the "Term of Employment").
3. Duties. During the Term of Employment, the Employee shall perform
those functions generally performed by persons of such title and position and
such duties as may be assigned to him from time to time by the President and
Chief Executive Officer of Employer (the "CEO"), and
<PAGE>
2
shall at all times be subject to the direction and control of the CEO. During
the Term of Employment, Employee shall serve the Employer faithfully and to the
best of his abilities and shall devote substantially all of his business time
and efforts to Employer and its subsidiaries and affiliates. Employee shall give
the CEO periodic reports and shall keep the CEO informed on a current basis
concerning the duties assigned to Employee. Other than for customary and
reasonable business travel, Employee shall not be required to perform his duties
outside of a 60 mile radius of Washington, D.C.
4. Compensation and Benefits.
(a) (i) During the Term of Employment, IDP shall pay to Employee as
compensation for services hereunder a salary at the annual rate of Two Hundred
Thousand Dollars ($200,000), which amount shall be payable in approximately
equal monthly installments or at more frequent intervals in accordance with
IDP's customary compensation policies. The Board of Directors of Employer (the
"Board"), in the exercise of its sole discretion, may increase the Employee's
salary based upon his performance with Employer.
(ii) During the Term of Employment, Employee shall be eligible
to earn and receive an annual bonus on the last day of Employer's fiscal year,
commencing with the fiscal year ended October 31, 1998, which bonus, if any,
shall be paid within ninety (90) days following the end of each such fiscal
year. The calculation of the amount of such bonus will be determined by the
Board and shall be equal to the amount determined by the application of the
formulas set forth on Schedule A hereto.
(b) Employer hereby grants Employee a nonqualified stock option
(the "Option") to purchase from the Employer 300,000 shares (or, if the price
per share at which the Employer's shares are sold in the initial public
offering which is a condition to the execution and delivery of the Acquisition
Agreement is greater than $10.00, 400,000 shares) of Employer's common stock at
a price per share of $____, to be exercisable as to 50% of the shares subject to
the Option on or after that date which is six (6) months after the date hereof;
and as to the remaining 50% of the shares on or after that date which is one (1)
year after such date; and provided that this Option shall expire ten (10) years
after the date of grant and must be exercised, if at all, on or before such
date. The Option shall be evidenced by a written instrument, in such form and
substance not inconsistent with this section 4(b) as the Employer may reasonably
prescribe, which shall provide (i) that the Option shall be fully vested and
nonforfeitable when granted, (ii) that Option, or any part thereof, may be
transferred by the Employee to any one or more of his spouse and lineal
descendants, or any entity wholly-owned by any one or more of them, (iii) that
the Option shall be subject to customary anti-dilution adjustments, and (iv)
that shares of common stock acquired upon exercise of the Option shall not be
subject to any contractual holding period. As soon as practicable following the
execution of this Agreement, the Employer shall take all corporate action
necessary to reserve for future issuance a sufficient number of shares of its
common stock to provide for the satisfaction of its obligations with respect to
the Option and after one year from the date hereof, register on Form S-8 the
common stock issuable upon exercise of the Option.
<PAGE>
3
(c) Employee shall be entitled to participate in all Employer
benefit plans as are maintained, from time to time, on behalf of Employer and
which are available to employees of Employer generally, subject to eligibility
requirements then in effect; provided however, that nothing herein shall require
the Employer at any time to create or maintain any such plan, program or
arrangement. Employer shall pay all costs for health insurance benefits for
Employee and his immediate family.
(d) Employee shall be entitled to vacation, sick leave and
holidays at full pay in accordance with the Employer's policies established and
in effect from time to time; provided however, that in no event shall Employee
be entitled to less than four (4) weeks paid vacation in any one (1) year. Upon
separation of employment, for any reason, vacation time accrued and not used
shall be paid at the salary rate of Employee in effect at the time of employment
separation.
5. Board of Directors. Employer agrees that so long as this Agreement
is in effect, Employee will be nominated to the Board as part of management's
slate of Directors.
6. Expenses. During the Term of Employment, (i) Employer shall pay or
reimburse Employee for all ordinary and necessary business expenses incurred and
paid by Employee in the course of and within the scope of the performance of his
duties hereunder, provided such expenses are reasonable and are documented in
accordance with Employer's policies in effect from time to time with respect to
travel, entertainment and other business expense, and (ii) Employer shall pay to
Employee $1,000 per month for an automobile and pay dues at one club up to
$4,800 per year.
7. Confidential Information. Employee acknowledges that all
information that is or will be in his possession relating to Employer or any of
its affiliates which is of a secret or confidential nature, including, without
limitation, financial information, market research and development, lists of
customers, technical and production know-how, inventions, processes and
administrative procedures (collectively, "Confidential Information"), is the
exclusive property of Employer or its affiliates, as the case may be provided,
however, that Confidential Information shall not include information which (a)
is or becomes generally available to the public other than as the result of a
disclosure by Employee, or (b) is or becomes available to Employee on a
non-confidential basis from a source other than the Employee or its affiliates;
provided, however, that such source is not known by Employee to be bound by a
confidentiality agreement with or other obligation of secrecy to or for the
benefit of the Employee or any of its affiliates. In the event Employee shall be
legally compelled to make disclosures covered by this Section 7 to any
governmental or regulatory agency or subdivision thereof, such disclosure shall
not constitute a breach by Employee of his obligations hereunder; provided that
Employee shall have consulted with the Employer in advance of, and cooperated
with the Employer with respect to the form of, such disclosure to the extent
permitted by law. Employer shall not, during the Term of Employment or any time
thereafter, use Confidential Information in any manner other than for the
benefit of the Employer or its affiliates or disclose any Confidential
Information to any third party except as required by law. Employer shall, upon
termination of his employment hereunder, immediately surrender and turn over to
the Employer all books, forms, accounts, records, customer lists and any other
documents and information relating to the Employer or any of its affiliates in
his
<PAGE>
4
possession or in the possession of his agents or representatives, without
retaining any copy, summary or extract thereof on any storage medium whatsoever.
8. Covenant Not to Compete. Employee agrees that during the term of
Employment and for a period of one (1) year thereafter (the "Noncompetition
Period"), Employee shall not, either alone or in conjunction with any
individual, firm, corporation, association or other entity, whether as
principal, agent, shareholder (except as a passive investor owning less than 5%
of any class of voting securities of any entity if such securities are
registered pursuant to the Securities Exchange Act of 1934, as amended),
officer, director or in any other capacity whatsoever, without the prior written
consent of the Board, which consent may be withheld at the sole discretion of
such Board:
(i) engage or participate in, assist or have an interest in,
directly or indirectly, any business or enterprise which is directly or
substantially in competition with the present or presently contemplated Business
(as defined below) or prospects of the Employer or its affiliates within the
territories in which such Business of Employer or its affiliates is then carried
on or engaged in starting or acquiring a business;
(ii) attempt to direct any supplier or customer of the
Employer or its affiliates away from business for products competitive with
those products of the Employer or its affiliates;
(iii) solicit or attempt to solicit any employee of the
Employer or its affiliates to leave his or her employment and accept employment
elsewhere within three (3) months following their termination of such employee's
employment with the Employer or its affiliates; or
(iv) take any action as a result of which the relations between
the Employer and its affiliates and their suppliers, customers or others are
impaired or which is otherwise detrimental to the business of the Employer and
its affiliates as then conducted.
As used in this Agreement, the "Business" of Employer and its
affiliates shall be deemed to include the manufacturing and marketing of
computer systems.
9. Death, Disability and Termination.
(a) This Agreement shall terminate immediately upon the death of
Employee and may be terminated by the Employer upon the giving of at least
thirty (30) days written notice of its intention to do so, consistent with all
applicable laws and regulations, if Employee becomes ill or is injured or
otherwise incapacitated (either mentally or physically) and such illness, injury
or incapacity shall meet the standard for disability benefits under the federal
Social Security Act.
(b) The Employer may terminate this Agreement and Employee's
employment hereunder for cause immediately upon delivery of written notice to
Employee. For purposes of this Agreement, "cause" shall mean (i) any act or
omission which results in a breach of any
<PAGE>
5
material term or condition of this Agreement (for reasons other than disability
or death), provided such breach continues for a period of thirty (30) days after
the Employer shall have notified the Employee in writing of such breach; (ii)
any act or omission which constitutes fraud, misappropriation or embezzlement in
the performance of his duties or in the course of his employment hereunder;
(iii) any act or omission which constitutes a felony involving moral turpitude
for which Employee is convicted; (iv) any breach of fiduciary duty by the
Employee for personal gain or enrichment, and (v) any act or omission intended
by Employee to cause a material adverse effect on the Employer.
(c) The Employer's obligation to pay Employee in accordance with
the provisions of Section 4 hereof shall immediately terminate in the event of
termination of Employee's employment hereunder pursuant to paragraphs (a) or (b)
of this Section 9. If Employee's employment is terminated by the Employer other
than pursuant to Sections 9(a) or (b), or if Employee resigns for "good reason"
(as defined in Section 9(d) hereof), the Employee will be entitled to receive
promptly after such termination or resignation a lump sum payment in respect of
his base salary and all other benefits under Section 4 hereof, for the duration
of the three (3) year period commencing the date hereto, and for the duration of
such three year period, Employee shall be entitled to any bonus that is payable
under Section 4(a)(ii) hereof, provided that in the second and third bonus
periods (as set forth in Schedule A hereto), the bonus shall not exceed the
bonus paid in the preceding such period.
(d) Employee shall have the right to terminate his employment
under this Agreement upon 30 days' notice to Employer given within 90 days
following the occurrence of any of the following events (i) through )(vi) or
within three years following the occurrence of event (vii) (any of such events,
"good reason"):
(i) Employee is not elected to or retained in the position
stated in Section 1 hereof;
(ii) Employer acts to materially reduce Employee's duties and
responsibilities hereunder. Employee's duties and responsibilities shall not be
deemed materially reduced for purposes hereof solely by virtue of the fact that
Employer is (or substantially all of its assets are) sold to, or is combined
with, another entity, provided that Employee shall continue to have the same
duties and responsibilities with respect to Employer's business, and Employee
shall report directly to the chief executive officer and/or board of directors
of the entity that acquires Employer or its assets;
(iii) Employer acts to change the geographic location of the
performance of Employee's duties from the Washington, D.C. Metropolitan area.
For purposes of this Agreement, the Washington D.C. Metropolitan area shall be
deemed to be the area within 60 miles of Washington, D.C.;
(iv) A Material Reduction (as hereinafter defined) in
Employee's rate of base compensation, or Employee's other benefits. "Material
Reduction" shall mean a ten percent (10%) differential;
<PAGE>
6
(v) A failure by Employer to obtain the assumption of this
Agreement by any successor;
(vi) A material breach of this Agreement by Employer, which
is not cured within thirty (30) days of written notice of such breach by
Employer.
(vii) A Change of Control (as defined in the following
paragraph). For purposes of this Section 9, the term "Change of Control" shall
mean:
a. A person (other than a person who is an officer or a
director of Employer on the effective date hereof),
including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, becomes, or
obtains the right to become, the beneficial owner of
Employer securities having 30% or more of the
combined voting power of the then outstanding
securities of Employer that may be cast for the
election of directors of Employer;
b. At any time, the Board-nominated slate of candidates
for the Board is not elected;
c. Employer consummates a merger in which it is not the
surviving entity;
d. Substantially all of Employer's assets are sold; or
e. Employer's stockholders approve the dissolution or
liquidation of Employer.
(e) Upon the termination pursuant to this Section 9, for any
reason, Employee shall have no further obligation to the Employer except that he
shall (i) continue to be bound by the provisions of Sections 7 and 8 hereto; and
(ii) remain subject to liability to the Employer for any damages caused by
Employees conduct described in paragraph (b) of this Section 9.
10. Corporate Opportunities. Employee agrees that during the Term of
Employment he will not take any action to divert from the Employer any
opportunity which is within the scope of any of the businesses or prospects of
the Employer or its affiliates.
11. Injunctive Relief. It is understood and agreed by and between the
parties hereto that the obligations of Employee as set forth in Sections 7 and 8
hereof, and the rights and privileges granted to the Employer by Employee
hereunder, are of a special, unique, extraordinary and intellectual character,
the loss of which cannot be reasonably or adequately compensated in damages in
any action at law, and that a breach by Employee of the terms and conditions
contained in Sections 7 or 8 of this Agreement will cause the Employer
irreparable damage. Employee hereby expressly agrees that the Employer shall be
entitled to the remedies of
<PAGE>
7
injunction, specific performance and other equitable relief to prevent a breach
or anticipated breach by Employee of Sections 7 or 8 hereof, without being
required to prove damages or furnish any bond or other security. This provision
shall be in addition to any other remedies which the Employer may have as a
result of a breach of this Agreement and shall not be construed as a waiver of
any of the rights which the Employer may have for damages or otherwise.
12. Arbitration. Any controversies between Employer and Employee
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, save and except for any breaches arising out of
Sections 7 and 8 hereof, shall on the written request of either party served on
the other be submitted to arbitration. Such arbitration shall comply with and be
governed by the rules of the American Arbitration Association. An arbitration
demand must be made within one (1) year of the date on which the party demanding
arbitration first had notice of the existence of the claim to be arbitrated, or
the right to arbitration along with such claim shall be considered to have been
waived. An arbitrator shall be selected according to the procedures of the
American Arbitration Association. The cost of arbitration shall be borne by the
losing party or in such proportions as the arbitrator shall decide. The
arbitrator shall have no authority to add to, subtract from or otherwise modify
the provisions of this Agreement, or to award punitive damages to either party.
This Section 12 shall not prevent the Employer from seeking equitable relief as
contemplated in Section 11.
13. Attorneys; Fees and Costs. In the event that any party commences
legal action or proceeding to enforce any of the terms or provisions of this
Agreement, the substantially prevailing party shall be entitled to recover
reasonable attorney's fees and costs incurred in the trial court and on appeal,
and in enforcing any judgment obtained.
14. Entire Agreement, Modification and Waiver. This Agreement
constitutes the entire agreement between the parties hereto pertaining to the
subject matter hereof and supersedes all prior understandings, representations,
and warranties, agreements, communications and discussions, whether oral or
written, of the parties. No supplement, modification, or amendment of this
Agreement shall be binding unless executed in writing by all of the parties
hereto. No waiver shall be binding unless executed in writing by the party
making the waiver. No waiver of any of the provisions of this Agreement shall be
deemed to be or shall constitute a continuing waiver.
15. Severability. If any provision of this Agreement is held to be
invalid, void or unenforceable, in whole or in part, then such provision shall
be deemed to be modified or restricted to the extent and in the manner necessary
to render the same valid and enforceable, or shall be deemed excised from this
Agreement, as the case may require, and this Agreement shall be construed and
enforced to the maximum extent permitted by law as if such provision had been
originally incorporated herein as so modified or restricted or as if such
provision had not been originally incorporated herein, as the case may be. In
the event that any provision of this Agreement is held to be invalid, void or
unenforceable, the remaining provisions shall continue in full force and effect,
without being impaired or invalidated in any way.
<PAGE>
8
16. Survival of Certain Obligations. The obligations of the Employer
and the Employee set forth in this Agreement which by their terms extend beyond
or survive the termination of the Term of Employment shall not be affected or
diminished in any way by the termination or expiration of the Term of
Employment.
17. No Assignment.
(a) This Agreement is personal to the Employee and, without
the prior written consent of the Employer, is not assignable by the Employee.
(b) This Agreement shall inure to the benefit of and be
binding upon the Employer and its successors and assigns. The Employer shall be
entitled to assign all its obligations hereunder to IDP and treat the Employee
as an employee of IDP for all purposes, but Employer shall remain liable for the
full, timely performance of all the obligations so assigned as if the assignment
had not been made.
18. No Third Party Beneficiaries. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
or entity other than the parties hereto and the parties specified in Section 17,
any rights or remedies by reason of this Agreement.
19. Governing Law. This Agreement and all the amendments hereof, and
waivers and consents with respect thereto shall be governed by the internal laws
of the Commonwealth of Virginia, without regard to the conflicts of laws
principles thereof.
20. Notices. Any notice or other communications required or permitted
under this Agreement shall be sufficiently given if in writing and delivered by
hand or sent by telex or telefax, (with receipt confirmed), provided that a copy
is mailed by registered or certified mail, postage prepaid, return receipt
requested; or sent by overnight courier addressed as follows:
If to the Employer to:
Dunn Computer Corporation
1306 Squire Court
Sterling, Virginia 20166
Attention: John D. Vazzana
Telefax: (703) 450-0406
<PAGE>
9
Telephone: (703) 450-0400
If to the Employee to:
[Oscar/George Fuster]
[Residential Address]
[Tel/Fax Numbers]
Unless otherwise specified herein, such notices or other communication
shall be deemed received (a) on the date delivered, if delivered personally, by
telex or telefax or (b) one business day after being sent, if sent by overnight
courier. Each of the addressees shall be entitled to specify a different address
by giving notice as aforesaid to the parties hereto in accordance with this
notice provision.
21. Further Assurances. Each party hereto agrees to execute and deliver
all documents and instruments and to take or cause to be taken such other
actions that are reasonably necessary or appropriate to consummate the
transactions contemplated by this Agreement.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
DUNN COMPUTER CORPORATION
By:
-----------------------------
John D. Vazzana
Executive Vice President
EMPLOYEE
----------------------------
[George/D. Oscar Fuster]
<PAGE>
Schedule A
To [George/Oscar]
Fuster Employment Agreement
Bonus Formulas
1. If the combined operating profits of IDP and PRIMO from the earlier
to occur of the closing date and May 1, 1998 through October 31, 1998, exceed
$5.0 million, then the following portion of such operating profits (i.e., income
before interest and income taxes) will be contributed to a bonus pool: 20% of
the amount of operating profits (if any) between $5.0 and $7.0 million, plus 35%
of the amount of operating profits (if any) between $7.0 and $9.0 million plus
50% of the amount of operating profits (if any) in excess of $9.0 million.
George D. Fuster and D. Oscar Fuster will each be entitled to receive 30% of
this bonus pool, and the other 40% of the bonus pool will be paid to other
members of the IDP management team.
2. If the combined operating profits of IDP and PRIMO for the period
November 1, 1998 - October 31, 1999 exceed $10 million, then the following
portion of such operating profits (i.e. income before interest and income taxes)
will be contributed to a bonus pool: 20% of the amount of operating profits (if
any) between $10 million and $16 million, plus 35% of the amount of operating
profits (if any) between $16 million and $20 million, plus 50% of the operating
profits (if any) in excess of $20 million. George D. Fuster and D. Oscar Fuster
will each be entitled to receive 30% of this bonus pool, and the other 40% of
the bonus pool will be paid to other members of the IDP management team.
3. If the combined operating profits of IDP and PRIMO for the period
November 1, 1999 - October 31, 2000 exceed $15 million, then the following
portion of such operating profits (i.e. income before interest and income taxes)
will be contributed to a bonus pool: 20% of the amount of operating profits (if
any) between $15 million and $22 million, plus 35% of the amount of operating
profits (if any) between $22 million and $30 million, plus 50% of the operating
profits (if any) in excess of $30 million. George D. Fuster and D. Oscar Fuster
will each be entitled to receive 30% of this bonus pool, and the other 40% of
the bonus pool will be paid to other members of the IDP management team.
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF DUNN COMPUTER CORPORATION,
A VIRGINIA CORPORATION
The following companies will be subsidiaries of the Company as of the Closing:
1. Dunn Computer Corporation, a Delaware Corporation.
2. Dunn Computer Operating Company, a Virginia Corporation.
3. STMS, Inc., a Virginia Corporation.
4. STMS Acquisitions Corporation, a Delaware Corporation.
5. International Data Products, Corp., a Maryland Corporation.
6. In addition, prior to the Closing, the Company will form subsidiary
corporation in Puerto Rico.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 26, 1998 in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-47631) and related Prospectus of Dunn
Computer Corporation (a Virginia corporation) for the registration of 3,250,000
shares of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
March 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Boards of Directors
International Data Products, Inc. and
Puerto Rico Industrial Manufacturing Operations Corp.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
March 31, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF DAVIS, SITA & COMPANY, P.A., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 25, 1997, except for Note 9, as to which the
date is September 12, 1997, in Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-47631) and related Prospectus of Dunn Computer Corporation (a
Virginia corporation) for the registration of 3,250,000 shares of Dunn Computer
Corporation's Common Stock.
/s/ Davis, Sita & Company, P.A.
Greenbelt, Maryland
March 27, 1998
<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 APRIL 30 AND JULY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1997
<PERIOD-START> NOV-01-1996 NOV-01-1996
<PERIOD-END> APR-30-1997 JUL-31-1997
<CASH> 5,722,833 4,313,702
<SECURITIES> 150,000 150,000
<RECEIVABLES> 3,958,840 3,626,307
<ALLOWANCES> 45,000 15,000
<INVENTORY> 317,719 900,702
<CURRENT-ASSETS> 10,182,629 9,147,597
<PP&E> 213,554 225,618
<DEPRECIATION> 140,745 146,595
<TOTAL-ASSETS> 10,255,438 9,226,620
<CURRENT-LIABILITIES> 3,686,791 2,593,184
<BONDS> 0 0
0 0
0 0
<COMMON> 5,000 5,000
<OTHER-SE> 6,563,647 6,628,436
<TOTAL-LIABILITY-AND-EQUITY> 10,255,438 9,226,620
<SALES> 9,492,429 11,981,962
<TOTAL-REVENUES> 9,492,429 11,981,962
<CGS> 7,670,210 9,545,190
<TOTAL-COSTS> 7,670,210 9,545,190
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,093,535 1,238,424
<INCOME-TAX> 418,320 963,300
<INCOME-CONTINUING> 675,235 775,124
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 675,235 775,124
<EPS-PRIMARY> 0.16 0.18<F1>
<EPS-DILUTED> 0.16 0.17<F1>
<FN>THE EARNINGS PER SHARE AMOUNTS HAVE BEEN RESTATED AS REQUIRED TO COMPLY
WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE".
FOR FURTHER DISCUSSION OF EARNINGS PER SHARE AND THE IMPACT OF STATEMENT NO.
128, SEE NOTE 2 TO DUNN'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED HEREIN.
</FN>
</TABLE>
