<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File No. 0-22263
DUNN COMPUTER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
54-1424654
(I.R.S. Employer Identification No.)
1306 Squire Court, Sterling, VA. 20166
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code)
(703) 450-0400
NO CHANGE
_________
Former name or former address, if changed since last report) Indicate by
check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No ___ .
As of March 16, 1998 there were 5,150,000 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 11 pages, of which this is page 1.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
---------------------------
<S> <C> <C>
1997 1998
------------ -------------
Net revenues......................................................................... $ 5,505,350 $ 10,429,168
Costs of revenues.................................................................... 4,199,577 7,989,879
------------ -------------
Gross profit......................................................................... 1,305,773 2,439,289
Selling and marketing................................................................ 181,507 551,881
General and administrative........................................................... 252,119 738,290
------------ -------------
Income from operations............................................................... 872,147 1,149,118
Other income (expense):
Other income (expense)............................................................. 7,668 (5,132)
Interest income.................................................................... -- --
Interest expense................................................................... -- (37,618)
------------ -------------
Net income before income taxes....................................................... 879,815 1,106,368
Provision for income taxes........................................................... 334,000 417,662
------------ -------------
Net income........................................................................... $ 545,815 $ 688,706
------------ -------------
------------ -------------
Earnings per share................................................................... $ 0.14 $ 0.13
------------ -------------
------------ -------------
Earnings per share assuming dilution................................................. $ 0.13 $ 0.12
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31,
1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 162,359
Accounts receivable, net......................................................................... 8,373,278
Inventory, net................................................................................... 2,882,118
Prepaid expenses and other assets................................................................ 120,052
-------------
Total current assets............................................................................... 11,537,807
Property and equipment, net........................................................................ 598,257
Goodwill and other intangible assets, net.......................................................... 2,920,514
Investments........................................................................................ 275,000
Other assets....................................................................................... 186,958
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Total assets....................................................................................... $ 15,518,536
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-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................. $ 2,153,011
Accrued expenses................................................................................. 483,151
Income taxes payable............................................................................. 417,662
Deferred tax credit.............................................................................. --
Line-of-credit................................................................................... 2,826,789
Notes payable-current portion.................................................................... 12,840
Obligations under capital leases-current portion................................................. 54,319
Unearned revenue................................................................................. 474,345
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Total current liabilities.......................................................................... 6,422,117
Notes payable-long-term portion.................................................................... 47,105
Obligations under capital leases-long-term portion................................................. 22,453
Deferred tax credit................................................................................ 100,000
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding................................................... --
Common Stock, $.001 par value; 20,000,000 shares authorized,
5,150,000 shares issued and outstanding at January 31, 1998.................................... 5,150
Additional paid-in capital....................................................................... 5,087,371
Retained earnings................................................................................ 3,834,340
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Total stockholders' equity......................................................................... 8,926,861
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Total liabilities and stockholders' equity......................................................... $ 15,518,536
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-------------------------
<S> <C> <C>
1997 1998
------------ -----------
OPERATING ACTIVITIES
Net income............................................................................ $ 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............................. 6,450 47,832
Amortization of goodwill and other intangible assets................................ -- 54,326
Changes in operating assets and liabilities:
Accounts receivable............................................................... 1,782,772 1,338,732
Inventory......................................................................... (339,822) 1,605,183
Prepaid expenses and other assets................................................. (88,039) (28,478)
Accounts payable.................................................................. (344,813) (7,143,486)
Accrued expenses.................................................................. 35,823 (7,819)
Income taxes payable.............................................................. (136,150) 417,662
Deferred tax credit............................................................... (8,850) --
Unearned revenue.................................................................. (67,640) 51,438
------------ -----------
Net cash provided by (used in) operating activities................................... 1,385,546 (2,975,904)
INVESTING ACTIVITIES
Purchases of property and equipment................................................... -- (12,661)
Acquisition of STMS, net of cash acquired............................................. -- --
Purchase of investments............................................................... -- --
------------ -----------
Net cash used in investing activities................................................. -- (12,661)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock............................................ -- --
Proceeds of loans for purchase of certain asset....................................... -- --
Payments on notes payable............................................................. -- (2,847)
Proceeds from bank line of credit..................................................... 200,000 2,826,789
Payments on bank line of credit....................................................... (200,000) --
Payments on capital leases............................................................ -- (14,984)
------------ -----------
Net cash (used in) provided by financing activities................................... -- 2,808,958
Net increase (decrease) in cash and cash equivalents.................................. 1,385,546 (179,607)
Cash and cash equivalents at beginning of the period.................................. 897,664 341,966
------------ -----------
Cash and cash equivalents at end of the period........................................ $ 2,283,210 $ 162,359
------------ -----------
------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................................................... $ 0 $ 38,473
------------ -----------
------------ -----------
Income taxes paid..................................................................... $ -- $ 479,000
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</TABLE>
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-QSB and should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended October 31, 1997
which include information and note disclosures not included herein. In the
opinion of management all adjustments, which include only those of a normal
recurring nature, necessary to fairly present the Company's financial
position, results of operations and cash flows have been made to the
accompanying financial statements. The results of operations for the three
month period ended January 31, 1998 may not be indicative of the results
that may be expected for the year ending October 31, 1998.
2. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive
Income", which is required to be adopted in the year ended October 31, 1998
consolidated financial statements. SFAS 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in the financial
statements and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the Statement of Stockholders' Equity. The Company will be required to
restate earlier periods provided for comparative purposes, but doesn't
believe that the adoption of SFAS 130 will be material to the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
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.
<PAGE>
3. SUBSEQUENT EVENTS
On March 9, 1998, the Company 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."
The Company'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 ("Dunn"), to be the vehicle for the IDP Acquisition. At
the time the IDP Acquisition closes, Dunn will become a holding company
owning 100% of both the Company and IDP.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net revenues for the Company 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 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 for the Company 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 for the Company 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%.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter 1998, the Company used net cash of $3.0 million for
its operating activities. Although the Company generated net income of
$689,000 The Company used $7.1 million in cash to reduce its accounts payable
balance, which was primarily funded
<PAGE>
by increases in its line of credit facilities.
The Company received $3.9 million in net proceeds from its initial public
offering in April 1997. Other significant financing activities were provided
by the Company'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, the Company had $2.8 million drawn
on the line of credit.
The Company 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 the
Company in Sterling, Virginia. See "Business Facilities." In addition,
the Company 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. Acquisition, the
Company will assume annual obligations pursuant to employment agreements of
approximately $420,000, and lease commitments of approximately $634,000
through December 31, 1998.
From time to time, the Company may pursue strategic acquisitions or
mergers which may require significant additional capital and, in such event,
the Company may seek additional financing of debt and/or equity.
Recently, national attention has focused on the potential problems and
costs resulting from computer programs being written using two digits rather
than four to define the applicable year. Any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. While the Company believes that
its internal software applications and the software in the systems it sells
are Year 2000 compliant, there can be no assurance until the year 2000 that
all systems will function adequately. Further, if the software applications
of others on whose services the Company depends are not Year 2000 compliant,
such noncompliance could have a material adverse effect on the Company. The
Year 2000 problem can be corrected either through software programming or the
application can be ported to a client/server network. The Company believes
with its technical services and its client/server hardware product line, it
provides Year 2000 solutions.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Statement of computation of earnings per share.
Exhibit 27: Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended January 31,
1998. The Company filed an amendment to the 8K filed in connection with
the STMS Inc. acqusition which occurred on September 12, 1997. The
FORM 8-K/a was filed on March 12, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUNN COMPUTER CORPORATION
(REGISTRANT)
DATE MARCH 17, 1998 BY: /S/ JOHN D. VAZZANA
- --------------------- ----------------------------------------------
JOHN D. VAZZANA,
EXECUTIVE VICE-PRESIDENT,
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER
AND DULY AUTHORIZED OFFICER)
<PAGE>
Exhibit 11.1
COMPUTATION OF EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------------
1997 1998
<S> <C> <C>
NUMERATOR:
Net income................................ $ 545,815 $ 688,706
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Denominator:
Denominator for basic earnings per
share_ weighted-average shares.......... 4,000,000 5,150,000
Effect of dilutive securities:
Employee stock options.................. 50,150 539,535
Warrants................................ 25,373
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Dilutive potential common shares............ 50,150 564,908
Denominator for diluted earnings
per share_ adjusted
weighted-average shares and
assumed conversions..................... 4,050,150 5,714,908
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Basic earnings per share.................... $ 0.14 $ 0.13
---------- ----------
Diluted earnings per share.................. $ 0.13 $ 0.12
---------- ----------
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 162,359
<SECURITIES> 275,000
<RECEIVABLES> 8,373,278
<ALLOWANCES> 15,000
<INVENTORY> 2,882,118
<CURRENT-ASSETS> 11,537,807
<PP&E> 815,043
<DEPRECIATION> 216,786
<TOTAL-ASSETS> 15,518,536
<CURRENT-LIABILITIES> 6,422,117
<BONDS> 0
0
0
<COMMON> 5,150
<OTHER-SE> 8,921,711
<TOTAL-LIABILITY-AND-EQUITY> 15,518,536
<SALES> 10,429,168
<TOTAL-REVENUES> 10,429,168
<CGS> 7,989,879
<TOTAL-COSTS> 9,280,050
<OTHER-EXPENSES> 5,132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,618
<INCOME-PRETAX> 1,106,368
<INCOME-TAX> 417,662
<INCOME-CONTINUING> 688,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 688,706
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
</TABLE>
