<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 January 31, 2000
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 1, 2000 there were 9,424,680 shares of the registrant's
common stock outstanding.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
1999 2000
<S> <C> <C>
Net revenues $11,711,620 $7,128,063
Cost of revenue 9,684,993 5,646,745
------------------ -----------------
Gross profit 2,026,627 1,481,318
Selling and marketing 750,887 299,810
General and administrative 1,646,914 1,519,265
Amortization of goodwill 190,329 87,466
------------------ -----------------
Loss from operations (561,503) (425,223)
Interest expense (211,170) (160,919)
Other expense -- (3,156)
------------------ ---- -----------------
Net loss from operations before
extraordinary item (772,673) (589,298)
Extraordinary gain - early
extinguishment of debt -- 750,000
------------------ -----------------
Net income (loss) before income
taxes (772,673) 160,702
Provision for (benefit from) income
taxes (225,000)
------------------ -----------------
Net income (loss) $ (547,673) $ 160,702
================== =================
Basic earnings (loss) per share (.06) 0.02
Diluted earnings (loss) per share (.06) 0.02
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JANAURY 31,
1999 2000
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 655,450 $ 987,127
Accounts receivable, net 5,063,041 3,629,922
Inventory, net 5,497,634 5,751,061
Deferred tax asset 1,282,695 1,330,262
Income tax receivable 585,769 585,769
Prepaid expenses and other current assets 118,594 223,999
-------------------- -------------------
Total current assets 13,203,183 12,508,140
Property and equipment, net 1,323,696 1,165,076
Equipment on lease, net 3,906,011 3,583,513
Goodwill and other intangible assets, net 3,559,005 3,471,539
Investments 150,000 150,000
Other assets 145,121 170,096
-------------------- -------------------
Total assets $ 22,287,016 $ 21,048,364
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,822,979 $ 3,397,113
Accrued expenses 2,515,653 4,924,542
Accrued litigation costs 2,000,000 2,000,000
Line of credit 3,790,705 --
Notes payable, current 324,933 443,471
Unearned revenue 1,170,417 2,586,910
-------------------- -------------------
Total current liabilities 14,624,687 13,352,036
Notes payable, long-term portion 545,250 403,234
Line of credit - long-term 2,300,000 2,300,000
Stockholders' equity
Preferred stock $.001 par value; 2,000,000 shares authorized, no -- --
shares issued and outstanding
Common stock, $.001 par value: 20,000,000 shares authorized, 9,420 9,425
9,419,509 and 9,424,680 shares issued and outstanding at
October 31, 1999 and January 31, 2000, respectively;
Additional paid in capital 37,721,749 37,737,057
Treasury stock, 400,000 shares; (3,432,500) (3,432,500)
Retained earnings (29,481,590) (29,320,888)
-------------------- -------------------
Total stockholders' equity 4,817,079 4,993,094
-------------------- -------------------
Total liabilities and stockholders' equity $ 22,287,016 $ 21,048,364
==================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
1999 2000
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (547,673) $ 160,702
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 604,531 728,534
Amortization of goodwill and other intangibles 190,329 87,466
Changes in operating assets and liabilities:
Accounts receivable 7,675,082 1,433,119
Investment in sales-type leases 552,248 --
Inventory 1,032,364 (253,427)
Prepaid expenses and other assets 80,090 (130,380)
Accounts payable (8,474,232) (1,425,866)
Accrued expenses (2,213,506) 2,408,889
Deferred tax asset - (47,567)
Unearned revenue and other liabilities (1,031,270) 1,416,493
-----------------------------------------
Net cash provided by (used in) operating activities (2,132,037) 4,377,963
INVESTING ACTIVITIES
Purchases of property and equipment (20,451) (247,416)
-----------------------------------------
Net cash used in investing activities (20,451) (247,416)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 15,313
Payments on notes payable (957,031) (23,478)
Purchase of treasury stock (2,125) --
Proceeds from (repayments on) lines of credit, net 5,740,886 (3,790,705)
-----------------------------------------
Net cash provided by (used in) financing activities 4,781,730 (3,798,870)
Net increase in cash and cash equivalents 2,629,242 331,677
Cash and cash equivalents at beginning of year -- 655,450
-----------------------------------------
Cash and cash equivalents at end of year $ 2,629,242 $ 987,127
=========================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 216,507 $ 165,365
Income taxes paid -- --
</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 months ended January 31,
2000 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, 1999 and 1998.
2. EARLY EXTINGUISHMENT OF DEBT
In conjunction with the purchase of IDP, the Company assumed a credit facility
of $25,000,000 secured by inventory and accounts receivable of IDP. The
outstanding balance on this line of credit at October 31, 1999 was approximately
$4,622,000. The interest rate applicable to this line of credit at that date was
8.05%.
On November 8, 1999, the Company executed an agreement with the financial
institution to terminate this facility. Under the terms of the agreement, the
Company repaid approximately $3.0 million of the outstanding principal balance
prior to December 31, 1999. In conjunction with the agreement, approximately
$750,000 ($.08 per share) was forgiven by the financial institution and the
remaining principal balance of approximately $832,000 was converted into a two
year note maturing in January 2002 bearing interest at the prime rate. The
Company has properly reflected the $750,000 as an extraordinary gain for the
quarter ended January 31, 2000.
3. LEASE TRANSACTION
In December 1999, the Company assigned payments from one of its operating
leases to a financing company in exchange for the present value of the
minimum lease payments. The Company has recorded this amount as unearned
revenue and will recognize the revenue over the lease term. The lease term
expires on September 30, 2000.
4. RESTRUCTURE OF LOAN
On February 11, 2000, the Company amended its primary line of credit facility
whereby the maximum availability was reduced from $15 million to $5 million and
the interest rate was increased to the prime rate plus 1%. The amended line of
credit expires Novmeber 30, 2000.
5
<PAGE>
5. CONTINGENCIES
EMPLOYEE TERMINATION
In November 1998, a former employee of the Company filed a demand for
arbitration with the American Arbitration Association, 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 claimant's
allegations and stating a counterclaim against the former officer for breach of
the employment agreement and for conversion of certain of the Company's
property. In a Final Arbitration Award dated August 27, 1999, the arbitrator
found in favor of the former employee on certain of the issues presented at the
arbitration and awarded the former employee in excess of $1.6 million in damages
and attorneys' fees. On December 10, 1999, the Fairfax County Circuit Court
denied the Company's motion to vacate the award and confirmed the award. The
Company has filed a writ with the Virginia Supreme Court seeking an appeal of
the Circuit Court's ruling.
MICROSOFT LICENSING AGREEMENT
IDP entered into a Government Integrator Agreement, as amended, with Microsoft
Corporation (Microsoft) in 1998 for the licensing of certain Microsoft software.
During 1999, Microsoft asserted that the Company owed approximately $800,000
under this agreement due primarily to amended billings by Microsoft concerning
sales by the Company. The Company has accrued for amounts due Microsoft based on
the original billing terms. The Company believes that it has meritorious
defenses to Microsoft's allegations and intends to vigorously defend itself if a
suit is filed. The Company cannot estimate at this time the amount of the
liability to be incurred, if any, but does not believe that this matter will
have a material adverse effect upon the Company's financial position or results
of operations and as such, the Company has not recorded any amount relating to
this matter, beyond amounts accrued as noted above, in the accompanying
financial statements.
MONARCH TECHNOLOGY, INC.
In July 1999, Monarch Technology, Inc. ("Monarch") named the Company as a
cross-claim defendant in a legal action pending in Orange County, California in
which Worldnet Computers, Inc. had filed suit against Monarch. Monarch's cross
claims are that the Company is liable for actions of a former employee who
allegedly engaged in a scheme that resulted in Monarch paying $130,000 to the
employee and not receiving products which the employee allegedly stated that the
Company would sell to Monarch or its agent. Monarch claims that the Company is
liable for the $130,000 plus interest, attorneys fees and other consequential
damages totaling an approximately $60,000. The Company cannot estimate at this
time the amount of the liability to be incurred, if any, but does not believe
that this matter will have a material adverse effect upon the Company's
financial position or results of operations and as such, the Company has not
recorded any amount relating to this matter in the accompanying financial
statements.
6
<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 following
an acquisition, comptetitors 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.
OVERVIEW
Dunn Computer Corporation (together with its wholly-owned subsidiaries, the
"Company" or "Dunn") manufactures custom computer systems and provides
related services to departments, agencies and offices of the federal
government (the "Government") and selected businesses. The Company provides
its customers with single-source solutions by manufacturing its own brand of
desktop and portable computers and high performance network client servers
and offering services, which include network consulting, project
implementation, and technical support. The Company currently derives revenues
from hardware sales to the Government and to medium and large businesses. The
Company sells its products and services to more than 300 customers, including
entities within the Department of Defense, Administrative Office of the U.S.
Courts, Lockheed Martin Corporation, Blue Cross and Blue Shield Association
and the District of Columbia Government.
During the first quarter ended January 31, 2000, the Company dervied a
majority of its revenues from Government contracts. Government contracts, by
their terms, generally can be terminated at anytime, without cause for the
convenience of the Government. If a Government contract is so terminated, the
contractor generally is entitled to receive compensation for the services
provided or certain costs incurred at the time of termination and a
reasonable profit on the contract work performed prior to the date of
termination. In addition, all Government contracts require compliance with
various contract provisions and procurement regulations and in certain cases,
accounting and audit requirements. If not cured, certain violations of these
regulations could result in the termination of the contract, imposition of
fines, and suspension or debarment from competing for or receiving awards of
additional Government contracts. Exclusion of the Company from federal
procurements, the termination of any of the Company's significant Government
contracts or the imposition of such penalties could have a material adverse
effect on the Company.
RESULTS OF OPERATIONS
Net revenues for the quarter ended January 31, 2000 were $7,128,063 as compared
to $11,711,620 for the quarter ended January 31, 1999, a decrease of 39%. The
decrease in revenues is primarily due to the May 1999 termination of a
significant contract with the U.S. Air Force. During fiscal 2000, the Company
has executed strategies to develop new markets and continue to diversify its
product mix in order to continue the revenue growth.
7
<PAGE>
Gross margin, as a percentage of sales, increased to 20.8% from 17.3% for the
quarter ended January 31, 1999. The increase in gross margin is a growth in
higher margin sales in the Company's product mix.
For the quarters ended January 31, selling and marketing expenses decreased from
$750,887 in fiscal 1999 to $299,810 in fiscal 2000. The decrease is attributable
to the elimation of expensive marketing programs as well as the utilization of
co-operative marketing arrangements with certain vendors which reduced the
overall marketing costs.
General and administrative expenses decreased from $1,646,914 for the quarter
ended January 31, 1999 to $1,519,265 for the quarter ended January 31, 2000. The
decrease is a result of improved cost controls as well as planned cost
reductions of certain operating expenses that were implemented during the
quarter. The Company will continue to focus on cost controls so that the
projected revenue growth will not be offset by proportionate increases in
operating expenses.
Interest expense, net of interest income, decreased from $211,170 for the
quarter ended January 31, 1999 to $160,919 for the quarter ended January 31,
2000. This decrease is a direct result of the Company's reduction of its
outstanding debt. During the first quarter, the Company utilitized its cash
proceeds provided from operations to extinguish its debt from the line of credit
assumed with the purchase of International Data Products. On December 29, 1999,
the Company paid the financial institution approximately $3.0 million towards
the outstanding principal balance. In conjunction with the payment, the
financial instituition forgave $750,000 of the outstanding debt which the
Company has properly recorded as an extraordinary gain for the quarter ended
January 31, 2000. The remaining outstanding principal balance of approximately
$832,000 was converted to a two year note maturing in January 2002 bearing
interest at the prime rate plus one percent.
The Company reported net income of $160,702 for the quarter ended January 31,
2000 as compared to a net loss of $547,673 for the same period in the prior
year. This is result of the Company's cost controls, improved margins, product
diversification and market focus as mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended January 31, 2000, the Company produced income of
$4,377,963 from its operating activities. The Company generated cash of
$1,433,119 and $1,416,493 from the net collection of accounts receivable and
net receipts for unearned products and services, respectively. The purchase
of inventory of $253,427 and the net payment of accounts payable of
$1,425,866 were the principal use of funds.
Funds used for investing activities consisted of the purchase of property and
equipment of $247,416. Net cash used for financing activities consisted of
repayments on the line of credit of $3,790,705 and payments on notes payable of
$23,478. In February 2000, the Company restructured its existing line of credit
from $15 million to $5 million with an expiration date of November 30, 2000
bearing interest at the prime rate plus 1%. As of January 31, 2000, the
Company's outstanding balance on the line of credit is $2,300,000.
8
<PAGE>
As of January 31, 2000, the Company had a working capital deficit of
approximately $844,000. The Company believes the bank facility, together with
cash on hand, cash generated from operations, sales of certain lease agreements
and significant income tax refunds due will provide sufficient financial
resources to finance the current operations of the Company through fiscal 2000.
The Company also expects to generate liquidity in fiscal 2000 through the
issuance of preferred stock.
From time to time, the Company may pursue strategic acquisitions or mergers
which may require significant additional capital, additional capital may be
required to satisfy unusual or infrequent expenses. In such event, the Company
may seek additional financing of debt and/or equity.
YEAR 2000 DISCLOSURE
To date, the Company has experienced no failures or disruptions in its internal
operating systems, its products or in its third party vendors or suppliers
caused by any computer applications used by the Company being unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date after December 31, 1999 (the "Year 2000 Problem"). The
Company believes that there will be no compliance issues related to the Year
2000 Problem that could have a material effect on its financial condition or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By letter dated April 15, 1998, DDI, a competitor of IDP, asserted that IDP is
bound by a settlement agreement entered into in connection with certain
litigation, calling for payments to the competitor of 1.8% of the first $250
million of IDP's gross sales under the Desktop V contract. IDP and the Company
dispute this claim. On June 1, 1998, the Company filed a Complaint for
Declaratory Judgment in the U.S. District Court of the Eastern District of
Virginia seeking a declaration that DDI is not entitled to receive payments
under the settlement agreement. The defendant counter-claimed against the
Company claiming it did not breach the settlement agreement and is entitled to
the payments. These matters were litigated and on February 26, 1999, DDI was
awarded $1,500 in satisfaction of its claim. DDI has filed an appeal of the
judgment. While the Company believes that it has a meritorious claim for
declaratory judgment and meritorious defenses to the counter-claim, there can be
no assurance that the Company will be successful in this litigation and, if the
appeals court rules against the Company, it may be required to pay a percentage
of its past revenue under the Desktop V contract to the defendant.
9
<PAGE>
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 terminate IDP's
Desktop V contract for the convenience of the Government upon the change in
control of IDP to the Company. The Company appealed the denial of the SBA to the
SBA's Office of Hearings and Appeals. 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. Under a termination-for-convenience, the government is
required generally to reimburse a contractor for all costs incurred in the
performance of the contract. The Company is in the process of attempting to
recover from the government a portion or all of unreimbursed costs associated
with the Desktop V Contract. Prior to this ruling by the SBA, the U.S. Air Force
determined not to exercise any of the remaining option years under the Desktop V
contract on May 1, 1999.
In November 1998, a former employee of the Company filed a demand for
arbitration with the American Arbitration Association, 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 claimant's
allegations and stating a counterclaim against the former officer for breach of
the employment agreement and for conversion of certain of the Company's
property. In a Final Arbitration Award dated August 27, 1999, the arbitrator
found in favor of the former employee on certain of the issues presented at the
arbitration and awarded the former employee in excess of $1.6 million in damages
and attorneys' fees. On December 10, 1999, the Fairfax County Circuit Court
denied the Company's motion to vacate the award and confirmed the award. The
Company has filed a writ with the Virginia Supreme Court seeking an appeal of
the Circuit Court's ruling.
There are routine legal claims pending against the Company, but in the opinion
of management, liabilities, if any, arising from such claims will not have a
material adverse effect on the financial condition and results of operation of
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: Financial Data Schedule.
(b) Reports on Form 8-K
None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dunn Computer Corporation
(Registrant)
Date: March 16, 2000 By: /s/ Thomas P. Dunne
- --------------------------------------------------------------------------------
Thomas P. Dunne
President,
Chief Executive Officer
11
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANAURY 31,
1999 2000
<S> <C> <C>
Numerator:
Net income (loss) $ (547,673) $ 160,702
Denominator:
Denominator for basic earnings per share- 8,941,493 9,424,680
weighted-average shares
Effect of dilutive securities:
Employee stock options --
Warrants --
Dilutive potential common shares --
Denominator for diluted earnings per share adjusted 8,941,493 $9,424,680
weighted-average shares and assumed conversions
Basic earnings per share $(.06) $.02
Diluted earnings per share $(.06) $.02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 987,127
<SECURITIES> 150,000
<RECEIVABLES> 3,629,922
<ALLOWANCES> 100,000
<INVENTORY> 5,751,061
<CURRENT-ASSETS> 12,508,140
<PP&E> 4,748,589
<DEPRECIATION> 728,534
<TOTAL-ASSETS> 21,048,364
<CURRENT-LIABILITIES> 13,352,036
<BONDS> 0
0
0
<COMMON> 9,425
<OTHER-SE> 4,983,669
<TOTAL-LIABILITY-AND-EQUITY> 21,048,364
<SALES> 7,128,063
<TOTAL-REVENUES> 7,128,063
<CGS> 5,646,745
<TOTAL-COSTS> 5,646,745
<OTHER-EXPENSES> 3,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,919
<INCOME-PRETAX> 160,702
<INCOME-TAX> 0
<INCOME-CONTINUING> (589,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 750,000
<CHANGES> 0
<NET-INCOME> 160,702
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
