<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
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 99-9999999
(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 2,875,000 $8.625 $24,796,875 $7,316
</TABLE>
(1) Includes 375,000 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 6,
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.
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<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 10, 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>
2,500,000 SHARES
DUNN COMPUTER CORPORATION [LOGO]
COMMON STOCK
All of the 2,500,000 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 5,150,000 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
consummation 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 6, 1998 the last reported bid price of Dunn's common stock was $8 3/4.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 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 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 $[ ].
(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 375,000
additional shares of Common Stock, of which 185,000 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 185,000 shares of Common Stock sold by the
Selling Stockholders. If the Underwriter exercises 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
Incorporated
The date of this Prospectus is [ ], 1998
<PAGE>
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.
2
<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
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.
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 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 its
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 closes, 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 Corporation, Blue
Cross and Blue Shield Association and Inova Health Care Systems, Inc. The
Company's target markets are large and growing. The Office of Management and
Budget ("OMB") proposed in January 1998 a Government information technology
("IT") budget of $29.5 billion, which is expected to
3
<PAGE>
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 will merge into Dunn (the "Merger"). In the Merger, each outstanding
share, option and warrant of Dunn will be exchanged on a one-for-one basis for a
share, option or warrant, respectively, of the Company, and Dunn will become a
wholly-owned subsidiary of the Company.
On March 9, 1998, the Company and Dunn entered into an agreement (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, (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, 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 8.9% (or 8.7% 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
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THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered..................... 2,500,000 shares
Common Stock Outstanding After the
Offering................................. 8,400,000 shares(1)
Use of Proceeds.......................... To fund the cash portion of the
consideration for the IDP Acquisition,
and for general corporate purposes, which
may include repayment of IDP's line of
credit. 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) 25,000 shares of Common
Stock reserved for issuance pursuant to options granted in connection with
the STMS Acquisition; (c) 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 (d)
200,000 shares of Common Stock reserved for issuance upon the exercise of
certain warrants. See "Risk Factors," "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, AS THEY 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 (5)
ACTUAL AS ADJUSTED
--------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital........................................................................................ $ 5,116 $
Total assets........................................................................................... 15,519
Long-term debt......................................................................................... 70
Total liabilities...................................................................................... 6,592
Stockholders' equity................................................................................... 8,927
</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 to 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 net revenues, income from operations and net income, which includes
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
2,500,000 shares of Common Stock offered by the Company hereby (at an
assumed price to the public of $[ ] per share) and the application of the
net proceeds therefrom.
6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management 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
attempts 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 an
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 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.
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 status. 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. In addition to the Desktop V contract,
IDP has other contracts under the 8(a) Program for which a waiver from the SBA
will be required in connection with the Company's acquisition of IDP. 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.
CONTROL BY MANAGEMENT STOCKHOLDERS. Upon the completion of this Offering
and the IDP Acquisition, the Company's management will collectively beneficially
own 54% (51% if the Over-Allotment Option is exercised in full) of the Company's
outstanding Common Stock. Because of their beneficial stock ownership, these
stockholders 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."
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 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 excluding IDP from
federal procurements could have a material adverse effect on the Company. The
Company would expect to contest any such action vigorously.
9
<PAGE>
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, certain of Dunn and IDP, 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, 8,400,000 shares of Common
Stock will be outstanding and the Company will also have outstanding options and
warrants to purchase up to a total of 2,657,000 shares of Common Stock. The
shares sold in this Offering and the 5,150,000 shares exchanged for Dunn's
common stock pursuant to the Merger (other than the approximately 4,000,000
shares issued to affiliates of the Company) will be freely tradable by the
public. The remaining 750,000 outstanding shares of Common Stock (collectively,
the "Restricted Shares") have not been registered under the Securities 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., 84,000 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. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
The Company and its directors and executive officers, persons who acquire
shares of Common Stock in the IDP Acquisition and all warrant holders have
agreed not to offer or sell any shares for a period of 180 days following the
date of this Prospectus.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale will have 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 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
10
<PAGE>
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 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") both subject to adjustment under certain
conditions, as consideration for the IDP Acquisition. 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 8.9% of the Common Stock outstanding
(or 8.7% 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: (i) the execution of employment agreements with George and
Oscar Fuster pursuant to which they will receive stock options to purchase an
aggregate of up to 600,000 shares of Common Stock subject to adjustment up to
800,000 under certain conditions; (ii) the appointment of George and Oscar
Fuster to the Company's Board of Directors; (iii) payment by the Company (as
part of the Cash Portion) on behalf of IDP Co. of an inter-company indebtedness
running from IDP Co. to PRIMO; (iv) this Offering; and (v) 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 5,150,000 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 consummation of the others.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby (at the assumed public offering price of $
per share) are estimated to be approximately $[ ] ($[ ] 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 will be used to finance the Cash Portion
of the consideration for the IDP Acquisition. The remainder of the net proceeds
will be used for general corporate purposes, which may include the repayment of
IDP's line of credit that is used for accounts receivable and inventory
financing. At March 6, 1998, such indebtedness amounted to $7,779,292, had an
annual interest rate of 8.5% 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 5/16 $ 5 1/2
FISCAL 1998
First Quarter............... $10 5/16 $ 6 21/32
Second Quarter (through
March 5, 1998)............ $ 9 1/2 $ 8 1/4
</TABLE>
On March 6, 1998, the closing price of Dunn's common stock as reported by
the Nasdaq National Market was $8 3/4 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.
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; (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 2,500,000
shares of Common Stock at an assumed public offering price of $[ ] 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 $
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 8,400,000 shares issued and
outstanding on a pro forma as adjusted basis................................... 5,150
Additional paid-in capital....................................................... 5,087,371
Retained earnings................................................................ 3,834,340
------------- -------------
Total stockholders' equity....................................................... 8,926,861
------------- -------------
Total capitalization............................................................. $ 8,996,419 $
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Does not include: (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 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; (c) an aggregate of up to 800,000 shares of common
stock reserved for issuance pursuant to options to be granted under
employment agreements with George D. Fuster and D. Oscar Fuster, the
President and the Executive Vice President respectively, of IDP; or (d)
200,000 shares of Dunn's common stock reserved for issuance upon the
exercise of certain warrants. See "Risk Factors," "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 2,500,000
shares of Common Stock offered by the Company hereby (at an assumed price to
the public of $[ ] 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 $ )
from the sale of the shares of Common Stock offered hereby at an assumed
offering price of $ per share, the pro forma net tangible book value of the
Company at January 31, 1998 would have been $ or $ 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 $ per share and dilution to former owners of IDP of $ as a
result of the IDP Acquisition. The following table illustrates the per share
dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
------------------------
<S> <C> <C>
Assumed offering price........................................................................ $
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..................................................................................
-----
Pro forma net tangible book value after the IDP Acquisition and this Offering.................
-----
Pro forma dilution of net tangible book value to the new investors in this Offering........... $
-----
-----
</TABLE>
The following table sets forth as of January 31, 1998, on a pro forma basis,
giving effect to the Merger, with respect to the Company's existing
stockholders, the IDP Co. stockholders and the IDP Acquisition 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, the percentage of total consideration paid, and the average
price per share paid by the existing stockholders and by the investors in this
Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT NUMBER PERCENT PER SHARE
---------- --------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 5,150,000 61.3% $ 5,008,521 $ 0.97
IDP Co. stockholders.............................. 750,000 8.9% 7,035,000 9.38
New investors..................................... 2,500,000 29.8%
---------- --------- ------------ ----- -----
Total....................................... 8,400,000 100%
---------- --------- ------------ ----- -----
---------- --------- ------------ ----- -----
</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, EXCEPT PER SHARE DATA)
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 income statement 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 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 MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
FEBRUARY 28, SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------- ------------- -------------------------------------------- -------------
1993 1993 1994 1995 1996 1997 1996
------------- ------------- ----------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF INCOME
DATA:
Sales........................... $ 7,860 $ 6,216 $ 33,354 $ 80,432 $ 84,292 $ 71,921 $ 35,999
Cost of sales................... 6,056 4,746 28,841 69,025 71,890 58,996 30,838
------------- ------------- ----------- --------- --------- --------- -------------
Gross profit.................... 1,805 1,470 4,513 11,407 12,402 12,925 5,161
Selling, general and
administrative................ 1,827 1,156 3,865 8,709 11,233 11,599 3,651
------------- ------------- ----------- --------- --------- --------- -------------
Income (loss) from operations... (22) 314 648 2,698 1,169 1,326 1,510
Other income (expense).......... (83) (87) 92 (483) (9) (563) (184)
------------- ------------- ----------- --------- --------- --------- -------------
Income (loss) before income
taxes......................... (105) 227 740 2,215 1,160 763 1,326
Income tax expense (benefit).... (25) 106 306 278 (18) (418) 290
------------- ------------- ----------- --------- --------- --------- -------------
Net income (loss)............... $ (80) $ 121 $ 434 $ 1,937 $ 1,178 $ 1,181 $ 1,036
------------- ------------- ----------- --------- --------- --------- -------------
------------- ------------- ----------- --------- --------- --------- -------------
<CAPTION>
1997
-------------
<S> <C>
COMBINED STATEMENT OF INCOME
DATA:
Sales........................... $ 25,201
Cost of sales................... 21,100
-------------
Gross profit.................... 4,100
Selling, general and
administrative................ 3,694
-------------
Income (loss) from operations... 406
Other income (expense).......... (218)
-------------
Income (loss) before income
taxes......................... 188
Income tax expense (benefit).... 54
-------------
Net income (loss)............... $ 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.................. 451 575 1,039 6,015 2,255 2,031 2,161
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 2,500,000 shares of Common Stock offered by
the Company (at an assumed price to the public of $ 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) -- $(13,846,148)
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) -- 33,476,195
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 -- $57,516,291
-------------- ------------- --------------- --------------- -----------
-------------- ------------- --------------- --------------- -----------
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 -- -- 14,167,731
Unearned revenue.............. 474,345 -- -- -- 474,345
Other liabilities............. -- 69,429 -- -- 69,429
-------------- ------------- --------------- --------------- -----------
Total current liabilities....... 6,422,117 33,858,289 800,000 41,080,406
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 -- 41,554,430
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
8,400,000 shares issued and
outstanding, pro forma
combined basis.............. 5,150 -- 750(f) 5,900
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) -- 12,121,621
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 -- 15,961,861
-------------- ------------- --------------- --------------- -----------
Total liabilities and
stockholders' equity.............. $ 15,518,536 $ 39,405,389 $ 2,592,366 -- $57,516,291
-------------- ------------- --------------- --------------- -----------
-------------- ------------- --------------- --------------- -----------
</TABLE>
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
IDP STMS
HISTORICAL HISTORICAL ACQUISITION HISTORICAL ACQUISITION
DUNN (H) IDP (I) ADJUSTMENTS SUBTOTAL (J) STMS (K) ADJUSTMENTS (K)
-------------- ------------- ------------ ------------ ----------- ----------------
<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>
THREE MONTHS ENDED
----------------------------------------------------------
<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 identified 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 2,500,000 shares of Common Stock offered by the
Company hereby (at an assumed price to the public of $[ ] per share) and
the application of the net proceeds therefrom (amounts to be completed upon
determination of pricing upon the effective date).
(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 restated 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, replaced 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 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 February 27, 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 being
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 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 it can
increase its gross margin 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,
under an agreement with the Puerto Rican government, PRIMO is exempt for 20
years from property taxes and 90% of Puerto Rican income taxes. In
22
<PAGE>
addition, the Puerto Rican government subsidizes the employment and training of
certain employees. The government leases space to PRIMO for $2.70 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 below 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 from 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 revenue
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 revenue, 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 revenue,
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 is 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
revenue 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 which were with commercial
customers that sell to the federal Government. 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 revenue, 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 revenue,
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 the Desktop V contract protest.
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 from PRIMO is not subject to federal income taxes and
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 IDP's Fiscal 1994, equated to a 24.0% ownership. This amount has been
distributed to the IDP Sellers as performance bonus.
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 U.S. Air Force 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 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
26
<PAGE>
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
January 31, 1998, Dunn had $2.8 million drawn 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.
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 $1.4 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.
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.
27
<PAGE>
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. In addition to the Desktop V
contract, IDP has other contracts under the 8(a) Program for which a waiver from
the SBA will be required in connection with the Company's acquisition of IDP.
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 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 disclosures for
segment information in the consolidated financial statements is not expected to
be material to the current financial statement presentation.
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 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, 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, each subject to adjustment under certain conditions, to acquire
the 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 an IT industry research group, International Data Corporation
("IDC"), 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 1996. IDP's customers include
the agencies within the Department of Defense, Department of Justice and Social
Security Administration. IDP had total revenue of approximately $71.9 million
for fiscal 1997 and after giving effect to the IDP
29
<PAGE>
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
has sold more than 60,000 portable computers and 40,000 desktop computers to the
federal Government and actively maintains over 35,000 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 the research firm Workgroup Strategic Services, Inc. ("WGSS"),
sales in the worldwide market for computer hardware totalled approximately $117
billion in 1996 and is projected to grow to approximately $150 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.
Worldwide computer hardware shipments are projected to grow at an annual
compounded growth rate of 14.4%, with portable computer shipments among the
fastest growing segments. According to WGSS, shipments of portable computers are
estimated to grow at an annual compound rate of 20.4%, 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 20.0%, from 1.1 million units in 1996 to 1.9 million
units in 1999.
According to IDC, 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 in January
1998 a Government IT budget, which includes funding for hardware and services,
of $29.5 billion. 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.
In addition, the Electronic Industries Association, a major industry trade
association, estimated that an additional $20.0 billion would be spent in 1997
by the intelligence community, which is not required to disclose such
expenditures. 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
31
<PAGE>
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.
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 build-to-order computer
systems and network services. The key elements of the strategy include:
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 Government entities 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 consult, implement and support 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
32
<PAGE>
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 a 17 inch monitor, a 32 MB RAM, a 24x
CD-ROM, a 3.2 GB hard drive and a 3 1/2 inch floppy drive with Microsoft Windows
'95. 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 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
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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 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
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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. 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 68% 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
staff in three shifts to provide timely response to customers' requests 24-hours
a day, 7 days a week. 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
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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 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."
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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
("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, 47 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. 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.
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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.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers, directors and director nominees of 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>
- ------------------------
* Appointment will become effective as of the Closing.
The directors 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 qualify, 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
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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 has been President of IDP since he founded IDP in 1984.
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 shareholders 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 shareholders 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 President and Chief Executive Officer of 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. Mr. Sinnott has been serving as CEO
of WIZnet since 1995. In 1992 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
1992 until joining WIZnet. In 1995, the Company 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
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of its two outside directors a stock option to purchase 20,000 shares of 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>
LONG-TERM
COMPENSATION
--------------------------
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 (each an "Employee" and collectively the "Employees"). 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
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, subject to adjustment up to 400,000
shares under certain conditions, of the Common Stock, at a price per share equal
to the Nasdaq closing bid 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.
All employment contracts contain confidentiality provisions and covenants
not to compete with the Company 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
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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 Stock
Option Plan at a weighted average exercise price of $6.18 per share. As of the
date of this Prospectus, options relating to 86,250 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. Officers
and directors who currently own more than 5% of the outstanding stock are not
eligible to participate in the Plan.
RETIREMENT PLANS
Dunn established a discretionary contribution plan effective March 1, 1995
(the "401(k) Plan") for its employees who have completed three months of service
with Dunn. The 401(k) Plan is administered by Dunn 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. The Company may match a participant's
contributions, on a discretionary basis, up to eight percent of a participant's
annual earnings. 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.
During the fiscal year ended October 31, 1995, Dunn established a defined
benefit plan covering substantially all salaried employees (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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, with respect to the
common stock of Dunn as of February 27, 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) 51.4% 2,645,000 31.5%(8)
John D. Vazzana (2)............................................................. 1,145,000 22.2% 1,145,000 13.6%(8)
Claudia N. Dunne (2)............................................................ 2,645,000(6) 51.4% 2,645,000 31.5%
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 4.5%(9)
D. Oscar Fuster (3)............................................................. -0- -0- 375,000 4.5%(9)
All Executive Officers and Directors
as a Group before Closing (5 persons)......................................... 3,790,000(1) 73.6%
as a Group after Closing (7 persons).......................................... -- -- 4,540,000(1) 54.0%
</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 February 27, 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 5,150,000 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 1,832,000 have been granted; (b) 25,000 shares reserved for issuance
pursuant to an agreement with certain selling shareholders in the STMS
Acquisition; (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.
(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 8,400,000 shares outstanding after the Closing giving effect to the
issuance of 750,000 shares of Common Stock in the IDP Acquisition and
2,500,000 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)
25,000 shares reserved for issuance pursuant to an agreement with certain
selling shareholders in the STMS Acquisition; (d) 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 (e) 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
125,000 shares and will beneficially own 2,520,000 shares representing 30.0%
of the Common Stock outstanding after the Closing, and John D. Vazzana will
sell 60,000 shares and will beneficially own 1,085,000 shares representing
12.9% of the Common Stock outstanding after the Closing.
(9) Represents 375,000 shares of Common Stock to be issued pursuant to the IDP
Acquisition.
44
<PAGE>
CERTAIN TRANSACTIONS
At Closing, (i) 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 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 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 to F
Squared Engineering, Corp. and will be distributed to the individual IDP Sellers
in partial redemption of their IDP shares.
At Closing, certain IDP notes in the aggregate amount of $1.4 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
have entered employment agreements, pursuant to which each has been 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 equal to
the Nasdaq closing bid as of the Closing. See "Management--Employment
Agreements."
On January 6, 1997, Dunn entered into a share exchange agreement (the "Share
Exchange Agreement") with Dunn Computer Corporation, 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 April 1996, Dunn entered into a line of credit agreement with a bank that
was personally guaranteed by the principal stockholders of Dunn. In May 1997,
the loan agreement was modified to cancel the personal guarantees of the
principal stockholders of Dunn.
Dunn leases its 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 1995, 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, 5,150,000 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
54% 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, 8,400,000 shares of Common Stock will be outstanding and the
Company will also have outstanding options and warrants to purchase up to a
total of 2,657,000 shares of Common Stock. The shares sold in this Offering and
the 5,150,000 shares exchanged for Dunn's Common Stock pursuant to the Merger
(other than the approximately 4,000,000 shares issued to affiliates of the
Company) will be freely tradeable by the public. 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 exercised
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.
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
48
<PAGE>
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.
All of the Company's directors, executive officers, and certain existing
stockholders, who will hold securities relating to an aggregate $4,675,000
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 until 180 days from the date of this
Prospectus, 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................................................ 2,500,000
----------
Total............................................................................ 2,500,000
</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
2,500,000 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 375,000 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.
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
stockholders 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.
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.
50
<PAGE>
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 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
Northwestern Atrium Center, 500 West Madison Street, 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.
51
<PAGE>
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-17
Balance Sheets as of December 31, 1995 and 1996...................................... F-18
Statements of Operations for the years ended December 31, 1995 and 1996.............. F-19
Statements of Stockholders' Deficit for the years ended December 31, 1995 and 1996... F-20
Statements of Cash Flows for the years ended December 31, 1995 and 1996.............. F-21
Notes to Financial Statements........................................................ F-22
Balance Sheet as of June 30, 1997 (unaudited)........................................ F-28
Statements of Operations for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-29
Statements of Cash Flows for the six months ended June 30, 1996 and 1997
(unaudited)........................................................................ F-30
Notes to Financial Statements (unaudited)............................................ F-31
DUNN COMPUTER CORPORATION (A VIRGINIA CORPORATION)
Report of Ernst & Young LLP, Independent Auditors.................................... F-32
Balance Sheet as of February 26, 1998................................................ F-33
Note to Balance Sheet................................................................ F-34
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, 1995,
1996 and 1997 includes the operating results of STMS as if the Company acquired
STMS on November 1, 1994.
<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 February 28, 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............................................... -- 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
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.
2,500,000 SHARES
DUNN COMPUTER
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
[ ], 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, the Nasdaq Filing Fee and the NASD
Filing Fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ *
NASD Filing Fee................................................... *
Nasdaq Filing Fee................................................. *
Blue Sky Fees and Expenses........................................ *
Printing and Engraving Costs...................................... *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Transfer Agent and Registrar Fees and Expenses.................... *
Miscellaneous..................................................... *
---------
Total......................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
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
II-1
<PAGE>
consisting of directors not at the time parties to the proceeding, (2) if such a
quorum is not obtainable, by 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 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 an option 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) pursuant to a separate registration statement on Form S-4.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*2.1 Acquisition Agreement, dated March 9, 1998, by and among the Company, International Data Products, Corp.
and Puerto Rico Industrial Manufacturing, Corp.
*2.2 Agreement of Merger, dated March [ ], 1998 between Dunn Computer Merger Subsidiary, Inc. and the
Company.
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 Certificate of Incorporation of the Company, dated February 26, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*3.2 By-laws of the Company, dated February 26, 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).
*5.1 Opinion of Jones, Day, Reavis & Pogue.
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).
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).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 September 15, 1995, by and between International Data Products, Corp. and FEDSIM.
*10.15 Agreement, dated January 6, 1998, by and between International Data Products, Corp. and the Department
of the Navy.
*10.16 Deed of Lease, dated January 31, 1995, between Northtech Business Park and International Data Products,
Corp. and addendums thereto.
*10.17 Deed of Lease, dated July 15, 1994, between Puerto Rico Industrial Development Company and Puerto Rico
Industrial Manufacturing Operations, Corp. and addendums thereto.
*10.18 Agreement, dated July 11, 1995, by and between International Data Products, Corp. and the Social
Security Administration.
*10.19 Supply Agreement, dated September 23, 1997, by and between International Data Products, Corp. and Intel
Corporation.
*10.20 Supply Agreement, dated November 1, 1997, by and between International Data Products, Corp. and
Microsoft Corporation.
*10.21 Supply Agreement, dated August 7, 1996, by and between International Data Products, Corp. and Tech Data
Corporation.
*10.22 Supply Agreement, dated January 14, 1998, by and between International Data Products, Corp. and Clevo
Corporation.
*10.23 Employment Agreement by and between the Company and D. Oscar Fuster.
*10.24 Employment Agreement by and between the Company and George D. Fuster.
*21.1 List of Subsidiaries.
23.1 Consents of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 (set forth on page II-8 of this Registration Statement).
*27.1 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 MARCH , 1998.
DUNN COMPUTER CORPORATION
BY: /S/ THOMAS P. DUNNE
-----------------------------------------
Thomas P. Dunne
PRESIDENT
KNOW ALL MEN BY THESE PRESENTS, that each of the directors and officers of
the Company whose signatures are set forth below hereby (1) constitute and
appoints Thomas P. Dunne and John D. Vazzana, jointly and severally, as his or
her agent and attorney-in-fact with full power of substitution and
resubstitution to (a) sign and file on his or her behalf and in his or her name,
place and stead in any and all capabilities any and all (i) amendments,
including post-effective amendments, in this Registration Statement and any and
all exhibits thereto, (ii) any registration statement for the same offering that
is to be effective under Rule 462(b) of the Securities Act, and (iii) other
documents to be filed with the Securities and Exchange Commission with respect
to the securities covered by this Registration Statement and (b) do and perform
any and all other lawful acts and deeds whatsoever that may be necessary or
required in the premises and (2) ratifies and approves any and all lawful
actions that may be taken pursuant hereto by either or both of the above-named
agents and attorneys-in-fact or their substitutes.
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.
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
Chairman, Chief Executive
/s/ THOMAS P. DUNNE Officer and President
- ------------------------------ (Principal Executive March 10, 1998
Thomas P. Dunne Officer)
Executive Vice President,
/s/ JOHN D. VAZZANA Chief Financial Officer
- ------------------------------ and Director (Principal March 10, 1998
John D. Vazzana Financial and Accounting
Officer)
/s/ CLAUDIA N. DUNNE Vice President and Director
- ------------------------------ March 10, 1998
Claudia N. Dunne
/s/ VADM E. A. BURKHALTER, Director
JR., USN (RET.)
- ------------------------------ March 10, 1998
VADM E. A. Burkhalter, Jr.,
USN (Ret.)
/s/ DANIEL SINNOTT Director
- ------------------------------ March 10, 1998
Daniel Sinnott
II-8
<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 on Dunn Computer Corporation (a Delaware corporation)
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, in the
Registration Statement (Form S-1 No. 333- ) and related Prospectus of Dunn
Computer Corporation (a Virginia corporation) for the registration of 2,500,000
shares of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
March 6, 1998
<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 the Registration Statement
(Form S-1 No. 333- ) and related Prospectus of Dunn Computer Corporation (a
Virginia corporation) for the registration of 2,500,000 shares of its Common
Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
March 6, 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 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DUNN
COMPUTER CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED OCTOBER 31, 1997 & 1996.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 JAN-31-1998
<PERIOD-START> NOV-01-1996 NOV-01-1997
<PERIOD-END> OCT-31-1997 JAN-31-1998
<CASH> 341,966 162,359
<SECURITIES> 275,000 275,000
<RECEIVABLES> 9,789,010 8,450,355
<ALLOWANCES> 77,000 327,000
<INVENTORY> 4,487,301 3,132,118
<CURRENT-ASSETS> 14,628,734 11,537,807
<PP&E> 802,382 815,045
<DEPRECIATION> 168,954 216,788
<TOTAL-ASSETS> 18,703,077 15,518,536
<CURRENT-LIABILITIES> 10,289,508 6,422,117
<BONDS> 0 0
0 0
0 0
<COMMON> 5,150 5,150
<OTHER-SE> 8,233,005 8,921,711
<TOTAL-LIABILITY-AND-EQUITY> 18,703,077 15,518,536
<SALES> 21,766,465 10,429,168
<TOTAL-REVENUES> 21,766,465 10,429,168
<CGS> 17,549,655 7,989,879
<TOTAL-COSTS> 17,549,655 7,989,879
<OTHER-EXPENSES> 0 5,132
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,813 37,618
<INCOME-PRETAX> 2,117,170 1,106,368
<INCOME-TAX> 794,870 417,662
<INCOME-CONTINUING> 1,322,300 688,706
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,322,300 688,706
<EPS-PRIMARY> 0.29 0.13
<EPS-DILUTED> 0.28 0.12
</TABLE>
