UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1999
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. 0-24015
DUNN COMPUTER CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA
(State or other jurisdiction of incorporation or organization)
54-1890464
(I.R.S. Employer Identification No.)
1306 Squire Court, Sterling, VA. 20166
(Address of principal executive offices) (zip code)
(703)450-0400
(Registrant's telephone number, including area code)
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, 1999 there were 8,991,493 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 12 pages, of which this is
page 1.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
January 31,
----------------------
1998 1999
----------- -----------
Revenue $10,429,168 $11,711,620
Costs of revenue 7,989,879 9,684,993
----------- -----------
Gross profit 2,439,289 2,026,627
Selling and marketing 551,881 750,887
General and administrative 683,964 1,646,914
Amortization of goodwill 54,326 190,329
----------- -----------
Income from operations 1,149,118 (561,503)
Interest income(expense) (37,618) (211,170)
Other income (5,132) -
----------- -----------
Net income(loss) 1,106,368 (772,673)
=========== ===========
Before income taxes
Provision for (benefit from)
Income taxes 417,662 (225,000)
Net income (loss) $ 688,706 $ (547,673)
=========== ===========
Earnings(loss)per share $ 0.13 $ (0.06)
=========== ===========
Earnings(loss)per share assuming dilution $ 0.12 $ (0.06)
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, January 31,
1998 1999
<S> <C> <C>
----------- -----------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ - $ 2,629,242
Accounts receivable, net 16,792,889 9,000,122
Employee and stockholder advances 71,287 80,514
Inventory,net 10,928,736 9,896,371
Investment in sales-type leases, net-current 959,243 758,411
Deferred tax asset 630,000 630,000
Income tax receivable 597,325 597,325
Prepaid expenses and other current assets 248,143 251,161
----------- ----------
Total current assets 30,227,623 23,843,146
Property and equipment, net 1,927,148 1,766,841
Equipment on lease, net 4,096,483 3,672,710
Investment in sales-type leases, net-long-term 2,140,099 1,788,683
Goodwill and other intangible assets, net 24,231,852 24,041,523
Investments 150,000 150,000
Other assets 191,395 216,745
----------- ----------
Total assets $62,964,600 $55,479,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $12,151,163 $ 3,676,928
Accrued expenses 4,726,765 2,513,260
Line of credit 3,256,060 8,996,947
Notes payable-current portion 33,514 17,920
Notes payable-related parties 905,960 -
Unearned revenue 3,381,291 2,350,021
---------- ----------
Total current liabilities 24,454,753 17,555,076
Other long-term liabilities 137,155 101,678
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, 9,391,493 shares
issued and outstanding; 9,392 9,392
Additional paid-in capital,less treasury stock 34,237,745 34,235,620
Retained earnings 4,125,555 3,577,882
---------- ----------
Total stockholders' equity 38,372,692 37,822,894
---------- ----------
Total liabilities and stockholders' equity $62,964,600 $55,479,648
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
January 31,
----------------------
1998 1999
--------- ---------
OPERATING ACTIVITIES:
Net income(loss) $ 688,706 $ (547,673)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization,
Property and equipment 47,832 604,531
Amortization of goodwill and other intangibles 54,326 190,329
Changes in operating assets and liabilities
Accounts receivable 1,338,732 7,675,082
Inventory 1,605,183 1,032,364
Prepaid expenses and other assets (28,478) 80,090
Accounts payable (7,143,486) (8,474,232)
Accrued expenses (7,819) (2,213,506)
Income tax payable 417,662 -
Unearned revenue 51,438 (1,031,270)
Investment in sales-type leases - 552,248
--------- ---------
Net cash used in
operating activities (2,975,904) (2,132,037)
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,661) (20,451)
--------- ---------
Net cash used in investing activities (12,661) (20,451)
--------- ---------
FINANCING
ACTIVITIES:
Proceeds from bank line of credit 2,826,789 5,740,886
Payments on notes payable (2,847) (957,031)
Payments on capital leases (14,984) -
Purchase of treasury stock - (2,125)
--------- ---------
Net cash provided by financing
activities 2,808,958 4,781,730
Net(decrease)increase in cash and cash equivalents (179,607) 2,629,242
Cash and cash equivalents at
beginning of period 341,966 -
--------- ---------
Cash and cash equivalents at end of
period $ 162,359 $ 2,629,242
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 38,473 $ 216,507
=========== ===========
Income taxes paid $ 479,000 -
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Dunn Computer Corporation (the
"Company") for the three months ended January 31, 1998 and 1999 are unaudited
and include all adjustments which, in the opinion of management, are necessary
to present fairly the results of operations for the periods then ended. All such
adjustments are of a normal and recurring nature. These consolidated financial
statements should be read in conjunction with the 10-K of Dunn Computer
Corporation (the "Company") which includes consolidated financial statements and
notes thereto for the years ended October 31, 1997 and 1998. Interim operating
results are not necessarily indicative of operating results for the full year.
2. Acquisition-related liabilities
During fiscal year 1998, the Company recorded $1,376,000 of acquisition-related
liabilities in connection with the IDP Acquistion. These liabilities were
recorded after certain actions had been identified quantified and approved by
management of the Company having authority to commit the Company to the plan
Those certain actions included closing the IDP facility in Maryland, integrating
IDP and the Company's production, warehouse, sales, marketing and administrative
functions, eliminating duplicative jobs and expanding space in the Company's
office space in Virginia. The Company vacated the production and warehouse space
in the IDP facility in June 1998 and intends to vacate the remaining space in
the facility in February, 1999. During fiscal 1998, $232,000 of costs and in the
first quarter of fiscal 1999, $201,600 of costs were charged against the
liability, reducing the liability to $942,400 at January 31, 1999.
4
<PAGE>
3. Recent pronouncements.
June 1997, the Financial Accounting Standards Board issued Statement No. 130
("SFAS 130"), "Reporting Comprehensive Income", which establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain non-owners items that are reported directly within
a separate component of stockholders' equity. The provisions of SFAS 130 are
effective for fiscal years beginning after December 15, 1997. The Company has
adopted SFAS 130 on November 1, 1998. The adoption did not have a material
impact on the Company's consolidated financial position or results of
operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Finanical Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted for
companies with fiscal years beginning after December 15, 1997. 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. SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise." The Company adopted SFAS 131 on November 1,
1998. The adoption did not have a material impact on the disclosure for segment
information on the financial statements.
In February 1998, the Finanical Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which is required to be
adopted for companies with fiscal years beginning after December 15, 1997. SFAS
132 amends Statements of Financial Accounting Standards No. 87 "Employers'
Accounting for Pensions," No.88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefits" and No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions,"by revising employers' disclosures
about pension and other postretirement benefit plans SFAS 132 doesn't change the
measurement or recognition of those plans. The disclosure requirements of SFAS
132 will not have a material impact on the Company's consolidated financial
position or results of operations.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"), "Accounting
for the Costs of Computer Software Developed For or Obtained for Internal Use".
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. SOP
98-1 will require the capitalization of certain costs incurred after the date of
adoption in connection with developing software for internal use. The Company
currently expenses such costs incurred. The Company has not yet assessed what
the impact of SOP 98-1 will be on the Company's future earnings or financial
position.
4. Management's use of estimates
The preparation of financial statements in comformity 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 financilal statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this section 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, risks associated with the integration of
businesses following an acquisition, competitiors with broader product lines and
greater resources, the termination of any of the Company's significant contracts
or the Company's inability to attract and retain highly qualified management,
technical and sales personnel.
RESULTS OF OPERATIONS
REVENUES:
Revenues for the quarter ended January 31, 1999 were $11,711,620 as compared to
$10,429,168 for the quarter ended January 31, 1998, an increase of $1,282,452 or
12%. The increase in revenue is a result of revenue from the Desktop V contract
which was assumed in the acquisition of International Data Products, Corp. in
May 1998.
GROSS MARGIN:
Gross margin decreased from $2,439,289 to $2,026,627 for the quarter ended
January 31, 1999 as compared to the quarter ended January 31, 1998. As a
percentage of revenue, gross margin declined from 23.4% to 17.3%. The decline
was the result of fixed production costs, and the increase in the costs of
customer service. The Company expects gross margin to return to a 20% to 21%
level with an increase in revenues.
SELLING AND MARKETING:
For the quarter ended January 31, selling and marketing expenses increased from
$551,881 in fiscal 1998 to $750,887 in fiscal 1999. The increase is attributable
to the increase in the Company's personnel and an increase in advertising. As a
percentage of revenue, selling and marketing expense increased from 5.3% for the
three months ended January 31, 1998 to 6.4% for the three months ended January
31, 1999.
GENERAL AND ADMINISTRATIVE:
General and administrative expense increased from $683,964 for the quarter ended
January 31, 1998 to $1,646,914 for the quarter ended January 31, 1999. The
increase can be attributed to the acqusition of IDP an increase in personnel,
stockholder's relations and an increase in legal, accounting and other operating
expenses. Amortization expense increased from $54,326 for the quarter ended
January 31, 1998 to $190,329 for the quarter ended January 31, 1999, due to the
increase in goodwill recorded in connection with the acquisition of IDP.
INTEREST AND OTHER INCOME:
Interest expense net of interest income and other income was $211,170 for the
quarter ended January 31, 1999 as compared to an expense of $42,750 for the
quarter ended January 31, 1998. Interest expense increased because of the cost
associated with certain operating leases and interest expense on debt assumed in
the IDP acquisition.
INCOME TAXES:
The Company provides for income taxes in accordance with the liability method.
As a result income tax expense declined from $417,662 for the quarter ended
January 31, 1998 to a tax benefit of $225,000 for the quarter ended January 31,
1999.
6
<PAGE>
NET INCOME AND QUARTERLY RESULTS
Net income decreased from $688,706 in the first quarter of 1998 to a loss of
$547,674 for the quarter ended January 31, 1999, due to the above factors.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal quarter ended January 31, 1999 Dunn used $2,132, 037 in its
operations. Dunn generated cash of $7,675,082 and $1,032,364, respectively, from
the collection of accounts receivable and the sale of inventory. The operating
loss of $547,673, the payment of accounts payable of $8,474,232, and the
reduction of $2,213,506 of accrued expenses were the principal use of funds.
Funds used for investing activities were $20,451. Financing activities provided
$5,740,886 from the bank line of credit and used $957,031 of those funds to pay
notes payable to related parties. Other significant financing activities were
provided by Dunn's bank line of credit with First Union Bank (formerly Signet
Bank). The line of credit expires on March 31, 1999 and currently bears interest
at prime. As of January 31, 1999, Dunn had no outstanding balance on the line of
credit. Dunn's subsidiary, IDP has borrowing agreements with Deutsche Financial
Services for an aggregate of $25.0 million, of which $13.0 million is secured by
IDP's inventory and $12.0 million is secured by IDP's accounts receivable. Each
of these facilities bears an annual interest rate of LIBOR plus 2.05%. 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 up to 85% of eligible receivables and is subject to
various financial covenants, which they are in compliance as of January 31,
1999. There is no formal expiration date on these facilities, although it is
subject to annual re-evaluation. As of January 31, 1999 IDP had $9.0 million
outstanding on its line of credit. Dunn is a guarantor of this credit facility.
On January 31, 1998, Dunn had working capital of $6,288,070. The Company
believes the 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 1999.
Year 2000 Issues
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
7
<PAGE>
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.
In response to the Year 2000 problem and the associated risks, the Company has
developed a comprehensive compliance program to evaluate, address and remedy the
date related problems with respect to the Company's internal systems, third
party relationships, and Company products and services.
The compliance program is managed by the Company's Director of Engineering, and
is tailored after the guidance promulgated by the General Accounting Office
(GAO) in their publication, Year 2000 Computing Crisis: An Assessment Guide and
by the Department of the Navy Year 2000 Action Plan.
The Company has adopted the following five-phase approach that was endorsed by
the GAO and recognized by the U.S. Congress:
AWARENESS PHASE. The Company's management is familiarized with the scope of the
Year 2000 impact, the problem is defined, compliance standards are established
and an overall strategy is developed. A Year 2000 program team is formed to
organize and implement the Company's Year 2000 compliance program.
ASSESSMENT PHASE. The Year 2000 team determines the impact on the Company's
systems, tools, products and contracts. The team creates an inventory and
evaluation of systems that support the core business sectors. Third party
service providers are contacted concerning their compliance with the Year
2000problem with regard to the products and services they provide. The team then
prioritizes the conversion or replacement of existing systems that are confirmed
to be Year 2000 non-compliant.
RENOVATION PHASE. The Year 2000 program team rectifies the problems discovered
in the assessment phase by modifying or replacing systems that are Year 2000
non-compliant.
VALIDATION PHASE. The renovated or replaced systems, applications and databases
are tested and certified as Year 2000 compliant.
IMPLEMENTATION PHASE. The renovated or replaced systems are fully implemented
and extensive testing is performed to insure coordination with other systems and
databases. Backup and recovery plans are put in place. The Company anticipates
that it will have all internal Year 2000 solutions in place by July 1, 1999.
Internal solutions include information technology systems such as local and wide
area network systems and non-IT systems such as embedded micro-controllers
within facility, security, telephone and others systems. The Company is
assessing the status of third parties with which it has a material relationship.
Third parties include vendors and suppliers of essential hardware, software and
services and Company customers who may fund Year 2000compliance efforts in lieu
of contracting services to the Company. The Company is assessing the
8
<PAGE>
status of its products and Year 2000-relatedservices. All products sold via the
GSA schedule are Year 2000 compliant. Other products developed and sold by the
Company are being assessed for Year 2000compliance. The Company also performs
Year 2000-related services for both government and industry and is assessing the
potential risk to the Company of performing these services and is taking action
to mitigate these risks as they are identified.
CONTINGENCY PLANS The Company currently is developing contingency plans. The
Company anticipates that its internal systems will be Year 2000 compliant by
July 1,1999. The status of third parties with which the Company has a material
relationship and the Companies products and services are being assessed. The
Company will continue to develop contingency plans as required to mitigate the
effects of delays, if any, in internal systems compliance, third party business
interruption, non-compliant Company products and risks associated with providing
Year 2000-related services.
COST FOR YEAR 2000 COMPLIANCE
The Company estimates that the total cost for Year 2000 compliance will be
approximately $75,000. As of January 31, 1999, the Company has spent
approximately $55,000 on Year 2000 compliance.
YEAR 2000 RISKS
The Company expects to fund the remaining aspects of its program with cash on
hand or internally generated cash. The Company believes that its Year 2000
compliance plan is a comprehensive one and that all internal systems, including
both information technology systems and non-information technology systems, will
be compliant by the end of calendar 1999. The Company, however, may not be able
to identify or remedy all Year 2000 compliance issues with respect to its
internal systems, suppliers, customers, products and services. As a result, the
Year 2000 problem could have a materially adverse effect on the Company's
financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On December 18, 1998, the Office of the United States Attorney for the District
of Maryland, Northern Division (the "U.S. Attorney"), informed the Company that
it was of the view that a civil False Claims Act violation was assessable
against certain parties, including IDP, George and Oscar Fuster (the former
principal owners of IDP) and the Company involving allegations of fraudulent
misrepresentations by the Fusters in IDP's
9
<PAGE>
1994 application for participation in the Section 8(a) program administered by
the SBA. On February 26, 1999, the Company and the other parties entered into a
settlement agreement with respect to this matter with the U.S. Attorney pursuant
to which the matter was settled without determination of liability against or
monetary payment by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share.
Exhibit 27.1: Financial Data Schedule
(b) Reports on Form 8-K.
none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dunn Computer Corporation
(Registrant)
Date June 16, 1997 By: /s/ John D. Vazzana
- --------------------- -------------------------------------------
John D. Vazzana,
Executive Vice-President,
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
10
Exhibit 11.1
COMPUTATION OF EARNINGS (LOSS) PER SHARE
Three Months Ended
January 31,
------------------
1998 1999
-------- ------
Numerator:
Net Income (loss) $688,706 $(547,673)
======== =========
Denominator:
Denominator for basic earnings
Per share-weighted-average shares 5,150,000 8,941,493
Effect of dilutive securities:
Employee stock options 539,535 -
Warrants 25,373 -
--------- ----------
Total 5,714,908 8,941,493
========= ==========
Basic Earnings (loss)
Per share $0.13 $(0.06)
========= ==========
Diluted earning (loss)
Per share $0.12 $(0.06)
========= ==========
<TABLE> <S> <C>
<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, 1999, 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-01-1998
<PERIOD-END> Jan-31-1999
<CASH> 2,629,242
<SECURITIES> 150,000
<RECEIVABLES> 9,000,122
<ALLOWANCES> 15,000
<INVENTORY> 9,896,371
<CURRENT-ASSETS> 23,843,146
<PP&E> 5,439,551
<DEPRECIATION> 1,805,657
<TOTAL-ASSETS> 55,479,648
<CURRENT-LIABILITIES> 17,555,076
<BONDS> 0
0
0
<COMMON> 9,391
<OTHER-SE> 34,235,620
<TOTAL-LIABILITY-AND-EQUITY> 55,479,648
<SALES> 11,711,620
<TOTAL-REVENUES> 11,711,620
<CGS> 9,684,993
<TOTAL-COSTS> 2,588,130
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211,170
<INCOME-PRETAX> (772,673)
<INCOME-TAX> (225,000)
<INCOME-CONTINUING> (547,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547,673)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
