<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 12, 1997
--------------
DUNN COMPUTER CORPORATION
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- -----------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-22263 54-1424654
- ------------------------ -----------------------
(Commission file Number) (IRS Employer ID Number)
1306 Squire Court, Sterling, Virginia, 21066
- -----------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (703) 450-0400
------------
N/A
- -----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 12, 1997, STMS Acquisition Corp., a wholly-owned subsidiary
of Dunn Computer Corporation ("Registrant") purchased all of the outstanding
common stock of STMS, Inc., a Virginia corporation. The purchase price was
One Hundred and Fifty Thousand shares of Registrant's common stock. STMS,
Inc.'s facilities are located in Sterling, Virginia.
In connection with the acquisition, Registrant settled an account
payable on behalf of, and a note payable to a former stockholder of STMS,
Inc. and acquired such stockholder's 47% economic interest in Glacier, LLC, a
Virginia limited liability company specializing in software distribution.
Such stockholder has also undertaken to use best efforts to transfer to the
Registrant his 47% voting interest in Glacier, LLC.
<PAGE>
<TABLE>
<CAPTION>
Page
Number
--------
<S> <C>
Report of Davis, Sita & Company, P.A., Independent Auditors........ F-1
Balance Sheets as of December 31, 1995 and 1996.................... F-2
Statements of Operations for the Years Ended
December 31, 1995 and 1996....................................... F-4
Statements of Stockholders' Deficit for the Years Ended
December 31, 1995 and 1996....................................... F-5
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996........................................ F-6
Notes to Financial Statements....................................... F-7
(b) Unaudited financial statements of the business acquired for the interim
period. As required by Item 7 of Form 8-K promulgated by the Commission
under the Act, the following interim financial information of the
business acquired are filed with this report:
Balance Sheet as of June 30, 1997................................... F-16
Statement of Operations
for the Six Months Ended June 30, 1996 and 1997................... F-17
Statement of Cash Flows
for the Six Months Ended June 30, 1996 and 1997................... F-18
Note to Interim Financial Statements................................ F-19
</TABLE>
(c) Pro Forma Financial Information. As required by Item 7 of Form 8-K
promulgated by the Commission under the Act, the following pro forma
financial information is filed with this report:
<TABLE>
<CAPTION>
Page
Number
--------
<S> <C>
Unaudited Pro Forma Combined
Balance Sheet as of April 30, 1997................................ F-20
Unaudited Pro Forma Combined
Statements of Operations for the Year
Ended October 31, 1996 and the Six
Months Ended April 30, 1997....................................... F-21
Notes to Pro Forma Balance Sheet
and Statements of Operations....................................... F-23
</TABLE>
<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.
August 25, 1997,
except for Note 9, as to which
the date is September 12, 1997
F-1
<PAGE>
STMS, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
----------- ----------
<S> <C> <C>
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
----------- ----------
----------- ----------
</TABLE>
F-2
<PAGE>
STMS, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
----------- ----------
<S> <C> <C>
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-3
<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-4
<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-5
<PAGE>
STMS, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996
----------- ----------
<S> <C> <C>
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-6
<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
F-7
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
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.
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.
F-8
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
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 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,
F-9
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
but requires 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
Corporation.
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.
INCOME TAXES
The Corporation provides for income taxes in accordance with the liability
method.
2. INCOME TAXES
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.
F-10
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------- --------
<S> <C> <C>
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.
F-11
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
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>
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.
F-12
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
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.
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:
F-13
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
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 Corporation 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>
YEAR ENDED DECEMBER 31, 1996
------------------------------
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
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 option 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.
F-14
<PAGE>
Notes to Financial Statements (continued)
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 stockholders 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
7 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-15
<PAGE>
STMS, Inc.
Balance Sheet
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
(unaudited)
<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-16
<PAGE>
STMS, Inc.
Statements of Operations
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997
-------------- --------------
(unaudited)
<S> <C> <C>
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-17
<PAGE>
STMS, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997
-------------- --------------
(unaudited)
<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............................................ (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-18
<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-19
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF OPERATIONS
The unaudited pro forma combined balance sheet gives effect to the
acquisition of STMS, Inc. completed by the Company on September 12, 1997 as
if it occurred on April 30, 1997.
The unaudited pro forma combined statements of operations for the year ended
October 31, 1996 gives effect to the acquisition of STMS, Inc. as if it had
occurred on November 1, 1995. The unaudited pro forma statement of operations
for the six months ended April 30, 1997 gives effect to the acquisition of
STMS, Inc. as if it had occurred on November 1, 1996.
STMS, Inc.
Pro Forma Unaudited Combined Balance Sheet
As of April 30, 1997
<TABLE>
<CAPTION>
Historical Historical Acquisition
DUNN STMS, Inc. Adjustments Pro Forma
(a) (b) (c) Combined
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 5,722,833 $ 104,008 $ (1,204,500)(d) $ 4,622,341
Trade accounts receivable........................ 3,943,840 3,300,116 -- 7,243,956
Inventory........................................ 317,719 426,902 -- 744,621
Loans to stockholders............................ -- 148,197 -- 148,197
Prepaid expenses and other current assets....... 48,237 43,062 -- 91,299
Investments...................................... 150,000 -- 125,000 (e) 275,000
------------- ------------- ---------------- -------------
Total current assets............................. 10,182,629 4,022,285 (1,079,500) 13,125,414
Property and equipment, net...................... 72,809 474,264 -- 547,073
Goodwill and other intangibles................... -- -- 2,367,397 (f) 2,367,397
Capitalized software development costs........... -- 165,832 -- 165,832
------------- ------------- ---------------- -------------
Total assets..................................... $10,255,438 $ 4,662,381 $ 1,287,897 $16,205,716
------------- ------------- ---------------- -------------
------------- ------------- ---------------- -------------
Accounts payable................................. $ 3,085,580 $ 3,832,692 $ 318,561 (g) $ 7,236,833
Other accrued expenses............................ 510,621 185,766 -- 696,387
Note payable, current portion.................... -- 1,253,525 (1,235,000)(h) 18,525
Income taxes payable............................. 58,994 -- -- 58,994
Deferred tax liability........................... 8,700 -- -- 8,700
Current portion of capital lease obligations..... -- 16,037 -- 16,037
Deferred revenue................................. 22,896 492,269 -- 515,165
------------- ------------- ---------------- -------------
Current liabilties............................... 3,686,791 5,780,289 (916,439) 8,550,641
Notes payable, less current portion.............. -- 29,146 -- 29,146
Capital lease obligation, less current portion... -- 8,082 -- 8,082
Stockholders' equity (deficit):
Common Stock..................................... 5,000 1,000 (850)(i) 5,150
Additional paid-in capital....................... 4,065,078 100 1,048,950 (i) 5,114,128
Retained earnings (deficit)...................... 2,498,569 (1,156,236) 1,156,236 (i) 2,498,569
------------- ------------- ---------------- -------------
Total stockholders' equity (deficit)............. 6,568,647 (1,155,136) 2,204,336 7,617,847
Total liabilities and stockholders' equity
(deficit)...................................... $10,255,438 $ 4,662,381 $ 1,287,897 $16,205,716
------------- ------------- ---------------- -------------
------------- ------------- ---------------- -------------
</TABLE>
F-20
<PAGE>
STMS, Inc.
Pro Forma Unaudited Combined Statement of Operations
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
Historical Historical
DUNN STMS Acquisition Pro Forma
(j) (k) Adjustments Combined
------------- ------------- --------------- ------------
<S> <C> <C> <C> $ <C>
Net revenues....................................... $18,098,638 $20,249,828 -- $38,348,466
Cost of revenues................................... 14,102,442 16,716,376 -- 30,818,818
------------- ------------- ------------
Gross profit....................................... 3,996,196 3,533,452 -- 7,529,648
Selling and marketing.............................. 475,471 2,026,287 -- 2,501,758
General and administrative......................... 1,496,979 1,280,997 $ 188,476(l) 2,966,452
------------- ------------- --------------- ------------
Income (loss) from operations...................... 2,023,746 226,168 (188,476) 2,061,438
Interest expense................................... (57,925) (232,966) -- (290,891)
Interest income.................................... 33,300 -- -- 33,300
Other income....................................... 16,043 -- 16,043
------------- ------------- --------------- ------------
Income (loss) before taxes......................... 2,015,164 (6,798) (188,476) 1,819,890
Provision of income taxes.......................... 776,000 -- -- 776,000
------------- ------------- --------------- ------------
Income (loss) before extraordinary items........... 1,239,164 (6,798) (188,476) 1,043,890
Extraordinary gain on early extinguishment
of debt........................................... -- -- 466,161(m) 466,161
------------- ------------- ---------------- -------------
Net income......................................... $ 1,239,164 $ (6,798) $ 277,685 $ 1,510,051
------------- ------------- ---------------- -------------
------------- ------------- ---------------- -------------
Earnings per share (q)
Income (loss) before extraordinary gain.......... $ -- $ 0.25
------------- ------------
------------- ------------
Extraordinary gain............................... $ -- $ 0.11
------------- ------------
------------- ------------
Net income....................................... $ 0.31 $ 0.36
------------- ------------
------------- ------------
Weighted average shares outstanding (q)............ 4,050,150 4,200,150
------------- -------------
------------- -------------
</TABLE>
F-21
<PAGE>
STMS, Inc.
Pro Forma Unaudited Combined Statement of Operations
For the Six Months Ended April 30, 1997
<TABLE>
<CAPTION>
Historical Historical
DUNN STMS Acquisition Pro Forma
(n) (o) Adjustments Combined
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues........................................ $9,492,429 $ 7,812,531 $ -- $ 17,304,960
Costs of revenues................................... 7,670,210 5,721,002 -- 13,391,212
------------- ------------- -------------- ------------
Gross profit........................................ 1,822,219 2,091,529 -- 3,913,748
Sales and Marketing................................. 293,766 1,772,964 -- 2,066,730
General and administrative.......................... 468,480 1,034,507 $ 104,185(p) 1,607,172
------------- ------------- -------------- ------------
Income (loss) from operations....................... 1,059,973 (715,942) (104,185) 239,846
Interest expense.................................... 0 (123,069) -- (123,069)
Interest income..................................... 30,954 5,066 -- 36,020
Other Income........................................ 2,608 (21,372) -- (18,764)
------------- ------------- -------------- -------------
Income (loss) before taxes.......................... 1,093,535 (855,317) (104,185) 134,033
Income taxes........................................ 418,300 -- -- 418,300
------------- ------------- -------------- -------------
Net income (loss)................................... $ 675,235 $ (855,317) $ (104,185) $ (284,267)
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Net loss per share (q).............................. $ 0.16 $ .07
------------- -------------
------------- -------------
Weighted average shares outstanding (q)............. 4,210,166 4,360,166
------------- -------------
------------- -------------
</TABLE>
F-22
<PAGE>
STMS, Inc.
Notes to Pro Forma Financial Statements (continued)
(a) Unaudited consolidated balance sheet of Dunn Computer Corporation as
of April 30, 1997.
(b) Unaudited balance sheet of STMS, Inc as of June 30, 1997.
(c) Represents adjustments for the STMS, Inc ("STMS") acquisition based on a
purchase price of approximately $2,337,000. The STMS acquisition has been
accounted for using the purchase method. The purchase price has been
allocated to the assets and liabilities acquired
based on fair value of such assets and liabilities which are estimated to
equal their book value.
(d) Represents cash paid to settle the note payable and certain accounts
payable due to a related party stockholder of STMS ($1,044,500) and payment
of fees related to the acquisition.
(e) Represents the fair value of the investment in Glacier of $125,000.
(f) Represents the goodwill and customer lists identified by the Company. The
intangible assets will be amortized on a straight-line basis over the
following lives: goodwill will be amortized over twenty years and customer
lists will be amortized over five years.
(g) Represents approximately $308,000 in accrued legal, accounting and printing
expenses, and other payables related to the acquisition offset by the
settlement of certain accounts payable due to a related party of STMS.
(h) Represents the settlement of $1,235,000 in notes payable due to a related
party of STMS.
(i) Represents the stockholders' deficit not acquired by the Company
offset by $975,000 related to the issuance of 150,000 shares of Dunn's
Common Stock at $6.50 per share (the market price of the Company's Common
Stock) and fair value of options issued to former stockholders of
STMS of $84,000. (using Black-Scholes model)
(j) Audited consolidated Statement of Operations for the year ended
October 31, 1996.
(k) Audited Statement of Operations for the year ended December 31, 1996.
F-23
<PAGE>
STMS, Inc.
Notes to Financial Statements (continued)
(l) Represents the amortization expense for the year related to the intangible
assets acquired.
(m) Represents the gain on retirement of debt and payables due to a related
party stockholder of STMS immediately prior to the acquisition.
(n) Unaudited consolidated Statement of Operations of Dunn for the six months
ended April 30, 1997.
(o) Unaudited consolidated Statement of Operations of STMS for the six months
ended June 30, 1997.
(p) Represents the amortization expense for the six months ended April 30, 1997,
related to the intangible assets acquired.
(q) The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding. Pursuant to the requirements of the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, options to purchase Common
Stock issued at prices below the estimated initial public offering ("IPO")
price during the 12 months immediately preceding the initial filing of the
registration statement relating to the IPO, (collectively the "cheap stock")
have been included in the computation of net loss per share as if they were
outstanding for all periods presented (using the treasury method assuming
repurchase of Common Stock at the estimated IPO price). For the six months
ended April 30, 1997, the cheap stock is weighted for the period outstanding
through the effective date of the IPO. Other shares issuable upon the
exercise of the stock have been excluded from the computation if the effect
of their inclusion would be antidilutive due to the Company's pro forma net
losses.
F-24
