<PAGE>
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 July 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)
54-1424654
(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 June 1, 1999 there were 9,341,493 shares of the registrant's
common stock outstanding.
This quarterly report on Form 10-Q contains 14 pages, of which this is
page 1.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- --------------------------
1998 1999 1998 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenue $ 28,821,249 $ 7,255,482 $ 45,603,387 $ 28,407,906
Costs of revenue 23,218,733 6,905,927 36,243,401 23,381,954
------------ ------------ ------------ ------------
Gross profit 5,602,516 349,555 9,359,986 5,025,952
Selling and marketing 820,496 377,206 1,848,814 1,745,723
General and administrative 3,007,704 2,657,241 4,347,938 6,090,823
Amortization of goodwill -- 193,249 -- 555,796
Impairment of Goodwill 20,638,187 20,638,187
------------ ------------ ------------ ------------
Income from operations 1,774,316 (23,516,328) 3,163,234 (24,004,577)
Other income (expense) 5,104 (166,237) (29,476) (126,735)
Interest income -- -- -- --
Interest expense (216,567) (185,803) (249,296) (555,316)
------------ ------------ ------------ ------------
Net income (loss) 1,562,853 (23,868,368) 2,884,462 (24,686,628)
Before income taxes
Provision for (benefit from)
Income taxes 593,550 1,012,350 1,094,079 1,237,350
------------ ------------ ------------ ------------
Net income (loss) 969,303 (22,856,018) 1,790,383 (23,449,278)
Basic earnings per share $ 0.19 (2.56) $ 0.35 (2.62)
Diluted earnings per share $ 0.17 (2.56) $ 0.31 (2.62)
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, July 31,
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents -- $ 686,096
Accounts receivable, net 16,792,889 9,276,502
Employee and Stockholder Advances 71,287 7,794
Inventory, net 10,928,736 6,873,664
Investment in sales-type lease, net current 959,243 149,852
Deferred Tax Asset 630,000 1,867,350
Income Tax Receivable 597,325 --
Prepaid Expenses and other current assets 248,143 599,719
---------- ----------
Total current assets 30,227,623 19,460,977
Property and equipment, net 1,927,148 1,482,557
Equipment on Lease, net 4,096,483 3,344,175
Investment in sales-type leases, net long term 2,140,099 --
Goodwill and other intangible assets, net 24,231,852 3,671,991
Investments 150,000 150,000
Other assets 191,395 127,685
---------- ----------
Total assets $ 62,964,600 $ 28,237,385
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable $ 12,151,163 $ 3,701,903
Accrued Expenses 4,726,765 1,899,968
Line of Credit 3,256,060 7,054,465
Notes Payable, current 33,514 7,669
Notes Payable, related parties 905,960 --
Unearned Revenue 3,381,291 671,464
---------- ----------
Total Current Liabilities 24,454,753 13,335,469
Other Long Term liabiities 137,155 --
Stockholders' equity
Preferred Stock $.001 par value;
2,000,000 share 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 (19,343,096)
---------- ----------
Total Stockholders' equity 38,372,692 14,901,916
---------- ----------
Total liabilities and stockholders' equity $ 62,964,600 $ 28,237,385
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income/(Loss) $ 1,790,383 (23,449,278)
Adjustments to reconcile net income/(loss)to
net cash used in operating activities:
Depreciation and amortization,
Property and equipment 279,908 1,958,147
Amortization of goodwill 162,985 477,450
Provision for Income Tax benefit (1,237,350)
Impairment of Goodwill 20,638,187
Changes in operating assets and liabilities
Accounts Receivable 4,843,306 8,177,205
Inventory 10,613,750 4,055,073
Prepaid expenses (1,580,394) (351,576)
Accounts Payable (12,983,345) (8,449,260)
Accrued Expenses (718,470) (2,826,797)
Income tax payable 462,491 --
Unearned Revenue (231,084) (2,709,827)
Investment in sales-type leases 2,949,490
Other assets 63,710
------------ ------------
Net cash provided by operating activities 2,639,538 (704,826)
INVESTING ACTIVITIES:
Purchase of property and equipment (807,746) (684,398)
Purchase of IDP, net of cash aquired (20,560,021) (652,000)
------------ ------------
Net cash used in investing activities (21,367,767) (1,336,398)
FINANCING ACTIVITIES:
Purchase of Treasury Stock (533,250) (2,125)
Payments on notes payable (12,297,708) (931,805)
Proceeds from Line of Credit -- 3,798,405
Payments on Capital Lease (108,285) --
Proceeds from issuance of Common Stock 32,664,253 --
Other Long Term Liabilities (137,155)
------------ ------------
Net cash provided by (used in) financing activities 19,725,010 2,727,320
Net increase (decrease) in cash and cash equivalents 996,781 686,096
Cash and cash equivalents at beginning of period 341,966 --
------------ ------------
Cash and cash equivalents at end of period $ 1,338,747 $ 686,096
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 319,258 $ 185,803
------------ ------------
------------ ------------
Income taxes paid $ 855,033
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the three month and nine month periods
ended July 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 Annual Report on Form 10-K of Dunn Computer Corporation
(the "Company") which includes consolidated financial statements and notes
thereto for the years ended October 31, 1998 and 1997.
2. Impairment of Long-Lived Assets
Statement of Finanical Accounting Standards No. 121 ("SFAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires that long-lived assets and certain identifable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may net be
recoverable. In May 1999, the U.S. Air Force determined not to exercise the
remaining option buying period years for all vendors participating in the
contract. Furthermore, in August 1999, the Small Business Administration (SBA)
ruled that the U.S. Air Force must terminate the contract for the convenience of
the government. This contract was a significant component of the IDP
acquisition. The Company had anticipated that the contract would have generated
future revenues of approximately $65 million had all option years been renew.
The termination of this contract impairs the recoverability of the goodwill
associated with the purchase. In addition, the Company believes that this
termination adversely impacts that its ability to attract future business
opportunities with the IDP name and reputation. Furthermore, the Company intends
to focus on consulting service opportunities. In accordance with SFAS 121, the
Company has performed an analysis of the goodwill and has determined that the
fair value of the remaining IDP goodwill is approximately $1.1 million.
Therefore, the Company has recorded an impairment charge of approximately $20
million for the quarter ending July 31, 1999.
3. Acquisition-related liabilities
During fiscal year 1998, the Company recorded $1,376,000 of acquisition-related
liabilities in connection with the IDP acquisition. These liabilities were
recorded after certain actions had been identified, quantified and approved by
management of the Company having the authority to commit the Company to the
plan. Those certain actions included warehouse, sales, marketing and
administrative functions, eliminating duplicative jobs and fully vacating the
IDP office and facility space in May 1999. During the first, second and third
quarters of 1999, cost of approximately $201,000, $212,000 and $576,000 were
charged against the liability, respectively. The remaining liability at July 31,
1999 is approximately $200,000.
4. Contingencies
In November 1998, a former employee of the Company (who had previously been an
employee and stockholder of STMS) filed a demand for arbitration with the
American Arbitration Association, alleging a breach of his employment agreement
with the Company and seeking "in
5
<PAGE>
excess of $2,350,000" in damages from the Company. The Company filed an answer
denying the former employee's allegations and a counterclaim for the former
employee's breach of the employment and for conversion of certain of the
Company's property. In September 1999, an arbitration was rendered against the
Company in the approximate amount of $1.6 million related the the alleged breach
of the aforementioned employment contract. The Company plans to aggressively
pursue all available avenues to challenge the award and, as such, the Company
has not recorded any amount relating to this matter in the accompanying
consolidated financial statements.
5. Recent pronouncements
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 in
the 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 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 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, 1999 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 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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net revenues for the quarter ended July 31, 1999 were $7,255,482 as compared to
$28,821,249 for the quarter ended July 31,1998, a decrease of 74.8%. Net
revenues for the nine months ended July 31, 1999 were $28,407,906 compared to
$45,603,387 for the nine months ended July 31, 1998. The decrease revenues is
primarily due to the termination of the buying period under the Desktop V
contract with the U.S. Air Force. This contract was awarded in May 1997 for a
one year base period with four one-year options (a three year buying period and
a two year warranty and spare part purchasing period). In May 1999, the U.S. Air
Force determined not to exercise any of the remaining buying period option
years. 1998 and 1999 revenues related to this contract were approximately $35
million and $2 million, respectively. On August 31 1999, the Small Business
Administration ruled that the U.S. Air Force must terminate-for-convenience the
IDP Desktop V contract. Under a termination-for-convenience, the U.S. Air Force
is required to negotiate a settlement with the Company for costs associated with
the termination. The proceeds from the termination will reduce future operating
costs.
Included in the cost of revenue is an inventory reserve charge of approximately
$900,000. The Company has performed an inventory reserve analysis and believes
that the charge was necessary in order to properly state certain inventory
assets at their net realizable value. The Company believes that this is a
nonrecurring adjustment. Excluding this adjustment, gross margin, as a
percentage of sales, decreased from 19.4% for the quarter ended July 31, 1998 to
17.1% for the quarter ended July 31, 1999. The decrease in gross margin reflects
the competitive environment in the computer hardware business over the last
year. Note that gross margin from the Company's consulting services business
have been continually increasing over the last year. The increase in the service
margin mitigates declining margins from the hardware business. Accordingly, the
Company will continue to develop and expand their consulting services
organization as the Company has experienced significant growth in this business.
For the quarter ended July 31, 1999, service revenue represented approximately
40% of total net revenue. The Company believes this trend will continue.
For the quarter ended July 31, selling and marketing expenses decreased from
$820,496 in fiscal 1998 to $377,206 in fiscal 1999. The decrease is attributable
to elimation of expensive marketing programs as well as a signification
reduction in the sales workforce.
General and administrative expenses decreased from $3,007,704 for the quarter
ended July 31, 1998 to $2,657,241 for the quarter ended July 31, 1999. The
decrease can be attributed to a significant reduction in workforce,
centralization of the facilities and workplace and implementation of stronger
cost and expense controls. Dunn Computer Corporation will continue to benefit
from these cost controls into the fourth quarter. For the nine months ended July
31, general and administrative expense increased from $4,347,938 in fiscal 1998
to $6,090,823 in fiscal 1999. This increase is attributable to duplicate job
functions as well as two facilities in operation during the previous quarters.
Note that these duplicate functions were eliminated through workforce reductions
in the third quarter. In addition, the Maryland facility was fully vacated in
May 1999.
7
<PAGE>
In accordance with FAS 121, the Company recorded a goodwill impairment charge of
approximately $20 million related to the purchase of IDP. The Company believes
that the goodwill is impaired due to the termination of the Desktop V contract
with the U.S. Air Force which resulted in a significant revenue decrease for
1999. The Company had anticipated that the contract would have generated future
revenues of approximately $65 million had all option years been renewed. Given
the significance of this contract, its termination impairs the goodwill
associated with the purchase of IDP. Furthermore, the Company believes that this
termination adversely impacts their adversely impacts their ability to attract
future business opportunities from the IDP name and reputation. Therefore, the
Company has properly recorded the impairment in accordance with generally
accepted accounting principles.
Net income decreased from an income $969,303 in the third quarter 1998 to a net
loss of $22,856,018 in the third quarter of 1999. Net income for the first nine
months of 1998 decreased from an income of $1,790,383 to a loss of $23,449,278
as a result of the factors mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended July 31, 1999 the Company incurred a loss of $704,826
from its operating activities. The Company generated cash $8,177,205 and
$4,055,073 respectively from the collection of accounts receivable and sale of
inventory. The operating loss of $23,449,278 the payment of accounts payable of
$8,449,260, and the reduction of $2,826,797 of accrued expenses and a decrease
in unearned revenue of $2,709,827 were the principal use of funds.
Other significant financing activities were provided by Company's bank line of
credit with First Union Bank (formerly Signet Bank). The $15 million line of
credit expires on June 1, 2002 and currently bears interest at Libor plus 2.25%.
As of July 31, 1999, the Company's outstanding balance on the line of credit is
$2,300,000. Dunn Computer Corporation has not met the financial covenants of
this line as of July 31, 1999 but is in the process of obtaining a waiver from
First Union.
The Company's subsidiary, IDP has borrowing agreements with Deutsche Financial
Services for an aggregate of $25.0 million, of which $15.0 million is secured by
IDP's inventory and $10.0 million is secured by IDP's accounts receivable. Each
of these facilities bears an annual interest rate of prime. Under the inventory
financing facility, IDP normally receives 30 days free of interest when
purchases are made from distributors and 45 days free of interest when purchases
are made from manufacturers. Under the accounts receivable financing facility,
IDP can borrow against up to 85% of eligible receivables and is subject to
various financial covenants. As of July 31, 1999 IDP had $4.7 million
outstanding on its line of credit. Dunn is a guarantor of this credit facility.
Dunn Computer Corporation intends to terminate this facility and consolidate the
line of credit with the First Union facility mentioned above.
On July 31, 1999, the Company had working capital of $6.1 million. 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.
8
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YEAR 2000 DISCLOSURE
OVERVIEW
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.
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 2000
problem 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.
9
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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 believes all
internal Year 2000 solutions are in place. 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 2000 compliance efforts in lieu of contracting services to the
Company. The Company is assessing the status of its products and Year
2000-related services. All products sold via the GSA schedule are Year 2000
compliant. Other products developed and sold by the Company are being assessed
for Year 2000 compliance. 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 is finalizing its contingency plans. The Company
believes that its internal systems will be Year 2000 compliant. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1998, a former employee of the Company (who had previously been an
employee and stockholder of STMS) filed a demand for arbitration with the
American Arbitration Assciation, alleging a breach of his employment agreement
with the company and seeking "in excess of $2,350,000" in damages from the
Company. The Company filed an answer denying the former employee's allegations
and a counterclaim for this former employee's breach of the employment and for
conversion of certain of the Company's property. In September 1999, an
arbitration was rendered against the Company in the amount of approximetly $1.6
million related to the alleged breach of an employment contract of a former
executive. The Company believes this award is without merit and plans to
agreesively pursue all available avenues to challenge the award.
10
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In May 1999, a former contract teaming partner has filed a demand for
arbitration with the American Arbitration Association, alleging breach of a
certain contract agreement with the Company. The issue relates to disputed
commissions due to the former teaming partner. The former teaming partner is
seeking damages of approximately $186,000. The Company is aggressively defending
this claim. The matter is currently in arbitration. The Company has properly
accrued this potential liability in the consolidated financial statements.
In May 1997, the U.S. Air Force awarded a contract to IDP. Dynamic Decisions,
Inc. (DDI), a competitor for this contract, protested the contract award to the
Small Business Administration (SBA), which protest was denied. DDI filed suit
against the SBA and Air Force seeking review of the award decision. IDP
intervened in the litigation and the litigation was subsequently settled. Based
on the terms of the settlement, IDP agreed to pay DDI 1.8% of the first $250
million of IDP's gross sales under the contract. On June 1, 1998, the Company
filed a Complaint for Declaratory Judgment in U.S. District Court for the
Eastern District of Virginia seeking declaration that DDI is not entitled to
receive payments under the settlement agreement. This filing is based on the
Company's position that DDI breached the settlement agreement. DDI has
counter-claimed against the Company denying it breached the settlement
agreement. The U.S. District Court has ruled in the DDI's favor awarding damages
of $1,500. DDI is currently appealing this decision. The Company is aggressively
pursuing all avenues of defense against this appeal.
In a separate matter, on August 31, 1999, the SBA denied the appeal and ruled
that the U.S. Air Force must terminate-for-convenience the Desktop V contract.
As previously disclosed, on July 31, 1998 the Company received notice from the
SBA that it was denying the request of the U.S. Air Force to waive the
requirement to terminated IDP's Desktop V contract for the convience of the
Government. Under a termination-for-convenience, the government shall reimburse
the Company for all costs incurred in the performance of the contract. The
Company expects to recover form the government a portion or all of unreimbursed
costs. Prior to this ruling, the U.S. Air Force determined not to exercise any
of the remaining option years under the Desktop V contract on May 1, 1999.
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) 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 Septemer 14, 1999 By: /s/ Kevin M. Murphy
---------------------
Kevin M. Murphy
Chief Accounting Officer
(Principal Accounting Officer and
Duly Authorized Officer)
11
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COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net Income (loss) $ 969,303 (22,856,018) 1,790,383 (23,449,278)
Denominator:
Demonimator for basic earnings
Per share-weighted-average shares 5,100,000 8,941,493 5,100,000 8,941,493
Effect of diluted securities:
Employee stock options 693,811 693,811
Warrants 57,143 57,143
----------- ----------- ----------- -----------
Dilutive potental common shares 750,954 750,954
Denominator for diluted earnings
Per share-adjusted,
Weighted-average shares and
Assumed conversions 5,850,954 8,941,493 5,850,954 8,941,493
----------- ----------- ----------- -----------
Basic earnings per share $ 0.19 (2.56) 0.35 (2.62)
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.17 (2.56) 0.31 (2.62)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
12
<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 COMPANY'S FORM 10-QSB FOR THE
PERIOD ENDING JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 686,096
<SECURITIES> 150,000
<RECEIVABLES> 9,276,502
<ALLOWANCES> 100,000
<INVENTORY> 6,873,664
<CURRENT-ASSETS> 19,460,977
<PP&E> 1,482,557
<DEPRECIATION> 585,297
<TOTAL-ASSETS> 28,237,385
<CURRENT-LIABILITIES> 13,335,469
<BONDS> 0
0
0
<COMMON> 9,392
<OTHER-SE> 14,892,524
<TOTAL-LIABILITY-AND-EQUITY> 28,237,385
<SALES> 28,407,906
<TOTAL-REVENUES> 28,407,906
<CGS> 23,381,954
<TOTAL-COSTS> 23,381,954
<OTHER-EXPENSES> 126,735
<LOSS-PROVISION> 1,237,350
<INTEREST-EXPENSE> 555,316
<INCOME-PRETAX> (24,686,628)
<INCOME-TAX> (1,237,350)
<INCOME-CONTINUING> (23,449,278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,449,278)
<EPS-BASIC> (2.62)
<EPS-DILUTED> (2.62)
</TABLE>
