Filed On 5/1/00 5:16pm ET ˇ SEC File 333-36022 ˇ Accession Number 912057-0-20765
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/01/00 Steelcloud Inc S-1 4:96 Merrill Corp/FA
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 93 346K
2: EX-5.1 Opinion re: Legality 1 6K
3: EX-23.1 Consent of Experts or Counsel 1 4K
4: EX-23.2 Consent of Experts or Counsel 1 4K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DUNN COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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COMMONWEALTH OF VIRGINIA 5060 54-1890464
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
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1306 SQUIRE COURT, STERLING VIRGINIA 20166 TEL. (703) 450-0400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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THOMAS P. DUNNE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DUNN COMPUTER CORPORATION
1306 SQUIRE COURT
STERLING, VIRGINIA 20166
(703) 450-0400
(Name, Address Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
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COPIES TO:
JAY M. KAPLOWITZ
GERSTEN, SAVAGE & KAPLOWITZ, LLP
101 EAST 52(ND) STREET, 9(TH) FLOOR
NEW YORK, N.Y. 10022
(212) 752-9700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER SECURITY PRICE FEE
Shares of Common Stock, $.001 par value(1)... 3,777,475 $2.39 $9,028,165.30 $2,383.43
Shares of Common Stock, $.001 par value...... 247,525 $3.64 900,991.00 261.63
Shares of Common Stock, $.001 par value...... 75,000 $4.57 342,750.00 90.49
Total registration fee....................... 4,100,000 $2,735.55
(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee. Based upon the average of the high and low sale prices on
April 27, 2000, as reported on the Nasdaq National Market System, pursuant
to Rule 457(c) of the Securities Action of 1933, as amended.
(1) Estimated solely for purposes of calculating the registration fee and based
upon the average of the high and low sale price of Dunn Computer
Corporation, as reported on the Nasdaq National Market on April 27, 2000.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
4,100,000 SHARES
DUNN COMPUTER CORPORATION
COMMON STOCK
This is an offering of 4,100,000 shares of common stock of Dunn Computer
Corporation, 3,875,000 of which may be sold upon the conversion of Series A
Convertible Preferred Stock and the exercise of 322,525 warrants. All of the
shares are being offered by the selling security holders named in this
prospectus. The proceeds from the sale of common stock will be received directly
by the selling stockholders. No proceeds will be received by the Company from
the sale of common stock offered hereby although we will receive approximately
$1,243,741 if all of the warrants, the underlying shares of which are being
registered herein, are exercised for cash. Our common stock is traded on the
Nasdaq National Market System under the symbol DNCC. On April 27, 2000, the last
reported sale price of our common stock on Nasdaq was $2.38.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 28, 2000
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Special Note Regarding forward-looking Statements........... 6
Use of Proceeds............................................. 6
Price Range of Common Stock................................. 6
Dividend Policy............................................. 7
Capitalization.............................................. 7
Selected Historical Financial and Other Data................ 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Business.................................................... 15
Management.................................................. 22
Principal Stockholders...................................... 27
Certain Relationships and Related Transactions.............. 28
Description of Capital Stock................................ 28
Shares Eligible for Future Sale............................. 32
Selling Security Holders.................................... 33
Plan of Distribution........................................ 34
Legal Matters............................................... 35
Experts..................................................... 35
Index to Financial Statements............................... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
OTHER DOCUMENTS TO WHICH WE REFER YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT
IS LEGAL TO SELL THESE SECURITIES.
ii
SUMMARY
THE SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS, THE FINANCIAL STATEMENTS AND THE NOTES THERETO. THE FOLLOWING
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN CONJUNCTION WITH,
THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO WE, US AND OUR REFER TO DUNN COMPUTER CORPORATION AND ITS
WHOLLY-OWNED SUBSIDIARIES DUNN COMPUTER CORPORATION, A DELAWARE CORPORATION,
DUNN COMPUTER OPERATING COMPANY, A VIRGINIA CORPORATION, STMS, INC., A VIRGINIA
CORPORATION, INTERNATIONAL DATA PRODUCTS INC., A MARYLAND CORPORATION AND PUERTO
RICO INDUSTRIAL MANUFACTURING OPERATIONS ACQUISITION CORP., A PUERTO RICO
CORPORATION, UNLESS OTHERWISE INDICATED.
We manufacture and market build-to-order computer systems and provide
related services to departments, agencies and offices of the federal government
and selected businesses. We provide our customers with single-source solutions
by manufacturing our own brand of desktop and portable computers and high
performance network client servers and by offering services, which include
network consulting, project implementation and technical support. We currently
derive most of our revenue from computer hardware sales to the U.S. Government,
but we also sell computer hardware and services to medium and large businesses.
In September 1997, we acquired STMS, Inc., a Virginia-based network services
company. This acquisition expanded our capabilities to provide a wide variety of
computer services, including network consulting, project implementation and
technical support. Additionally, the STMS acquisition provided us with new
opportunities to sell computer hardware into the commercial marketplace as part
of a total network solution. We believe that the rapid technological change and
increased complexity of the computer industry will result in an increasing
number of entities outsourcing total network solutions to third party providers.
On May 1, 1998, we acquired International Data Products, Corp. ("IDP") and
its affiliate, Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"),
a manufacturer of notebooks, desktops and high performance network servers. At
the date of the acquisition, IDP held a contract with the U.S. Air Force which
had potential revenues of approximately $100 million through fiscal 2003. In
May 1999, the U.S. Air Force determined not to exercise the remaining option
years under the contract and therefore terminated the contract for the
convenience of the government. As a result of the termination, the
recoverability of the Company's goodwill associated with the IDP acquisition was
significantly impaired. Accordingly, management recorded an impairment charge of
approximately $21 million during 1999. During fiscal 2000, PRIMO was awarded a
$16 million contract with the Puerto Rican Government which will require the
assembly of notebooks in our ISO 9000 certified facility in Puerto Rico. In
addition, we are currently proposing on phase II of the contract with the Puerto
Rican Government which will be awarded in fiscal 2000.
We sell our products and services to more than 950 customers, including
customers from agencies within the Department of Defense, Department of Justice,
Administrative Office of the U.S. Courts, Social Security Administration,
Lockheed Martin Corporation, Blue Cross and Blue Shield Association and Inova
Health Care Systems, Inc. In addition, we have been expanding our commercial
sales to Fortune 1000 companies.
We intend to continue our strategy of increasing revenues and profits by
providing the Government market and selected businesses with single-source
computer network solutions. We plan to achieve this objective by:
- leveraging our Government customer base to increase sales of products and
network services;
1
- targeting the commercial market to expand the sales of our brand name
computer hardware as part of a total network solution; and
- focusing on product quality.
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Our principal executive offices are located at 1306 Squire Court, Sterling,
Virginia 20166 and our telephone number is (703) 450-0400.
THE OFFERING
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Common stock offered......................... 4,100,000 shares
Common stock outstanding..................... 9,424,680 shares
Use of proceeds.............................. We will not receive any proceeds from the
sale of the shares of common stock by the
selling security holders, although we will
receive approximately $1,243,741 if all of
the warrants, the underlying shares of which
are being registered herein, are exercised
for cash.
Nasdaq National Market Symbol................ DNCC
The number of shares of common stock outstanding is 9,424,680 as of
April 27, 2000. This does not include 2,222,575 shares issuable upon the
exercise of currently outstanding stock options and warrants.
2
DUNN SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial information set forth below is qualified
by and should be read in conjunction with the consolidated financial statements
and the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
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THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
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1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................... 21,766 66,888 34,475 11,712 7,128
Gross profit................................... 4,217 11,919 6,494 2,027 1,481
Income (loss) from operations.................. 2,019 1,936 (31,255) (562) (425)
Net income (loss).............................. 1,322 980 (33,607) (548) 161
Earnings (loss) per share (1).................. $ 0.29 $ 0.14 $ (3.57) $ (0.06) $ 0.02
Earnings (loss) per share assuming dilution
(1).......................................... $ 0.28 $ 0.13 $ (3.57) $ (0.06) $ 0.02
Weighted average shares outstanding............ 4,552 7,231 9,404 9,391 9,423
Weighted average shares assuming dilution...... 4,679 7,492 9,404 9,391 9,423
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JANUARY 31, 2000
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(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working Capital............................................. 844
Total assets................................................ 21,048
Long-term debt.............................................. 2,703
Total liabilities........................................... 16,055
Stockholders' equity........................................ 4,993
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(1) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE. For further discussion of earnings per share
and the impact of Statement No. 128, see Note 2 of the notes to Dunn's
consolidated financial statements included herein.
3
RISK FACTORS
PURCHASING SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
DOING SO, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS.
IF WE CONTINUE TO EXPERIENCE SIGNIFICANT LOSSES OUR OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED.
We incurred a loss of approximately $33,600,000 during the fiscal year ended
October 31, 1999 and may incur losses in the future. Any future losses that are
significant could materially adversely affect our operations.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The market for our products and services is highly competitive. Many of our
competitors offer broader product lines and have substantially greater
financial, technical, marketing and other resources than us, which could
seriously harm our net sales and results of operation. Additionally, our
competitors may receive beneficial prices from purchasing component parts in
large quantities and may be party to product and process technology license
arrangement that are more favorable in terms of pricing and availability than
our arrangements. As a result, we may have difficulty increasing our market
share.
RAPID CHANGE IN TECHNOLOGY MAY CAUSE A PORTION OF OUR INVENTORY TO BECOME
OBSOLETE.
The computer products market is characterized by rapid technological change
and the frequent introduction of new products and enhancements. While we strive
to maintain a just-in-time inventory systems, there are certain computer
products held in our inventory can become obsolete at any given time, which
could materially adversely affect our financial condition and results of
operation.
IF WE ARE UNABLE TO ATTRACT, ASSIMILATE AND RETAIN TECHNICAL PERSONNEL, OUR
BUSINESS COULD BE SERIOUSLY HARMED.
Our future success is largely dependent upon our ability to identify,
attract, hire, train, retain and motivate highly skilled technical personnel.
Competition in this market is intense, and we cannot be certain that we will be
able to attract, assimilate or retain sufficiently qualified personnel. Our
inability to do so could have a material adverse effect on our business, results
of operations and financial condition.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FLUCTUATE.
Our operating results have in the past fluctuated widely and we expect this
trend to continue in the future. As a result the market price of our common
stock could be volatile. In the past, following periods of volatility in the
market price of stock, many companies have been the object of securities class
action litigation. If we were to be sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources which could adversely effect our results of operations.
WE ARE DEPENDENT ON THE GOVERNMENT MARKET.
For the three months ended January 31, 2000 and for the fiscal years ended
October 31, 1999 and 1998 approximately 62%, 65% and 75%, respectively, of our
revenues were derived from government contract programs. If we are unable to
continue to participate in government contract programs or if government
contracting policies are changed our business and results of operations could be
materially harmed. Additionally, most government contracts are subject to
modification or termination in the
4
event of changes in funding and our contractual costs and revenues are subject
to adjustment as a result of governmental audits.
A significant amount of our revenues are derived from sales made through
major procurement programs awarded by the government, which include contracts
with General Services Administration, Department of Defense and the
Administration Office of the U.S. Courts. If we are unable to renew or replace
those contracts our results of operations could be materially adversely
affected.
ANY ACQUISITION THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE.
We have in the past acquired or invested in complementary businesses,
technologies, services and products. At present time, we do not anticipate that
we will execute additional acquisitions. Should the opportunity for a
acquisition present itself in the future, we will make every effort to handle
such acquisitions and investments in an efficient manner. However, they could
disrupt our ongoing business, distract our management and employees and increase
our expenses. For example, if we acquire a company, we could have difficulty in
assimilating that company's personnel, operations, technology and software, and
the target company's key personnel may decide not to work for us. Additionally,
we may decide to pay for future acquisitions, if any, by issuing shares of
common stock or debt or equity securities convertible into shares of common
stock. This would result in dilution of your investment.
THE LOSS OF THE SERVICES OF THOMAS P. DUNNE, COULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends, to a significant extent, on the continued
services of our senior management and our ability to retain and motivate our
other key employees. Specifically the loss of the services of Mr. Dunne, would
have a material adverse effect on our business, results of operations and
financial condition. We do not currently maintain key-man life insurance on any
of our senior management or other key employees.
OUR PRESIDENT CONTROLS A SIGNIFICANT PORTION OF OUR COMMON STOCK, THEREFORE YOU
MAY HAVE NO EFFECTIVE VOICE IN OUR MANAGEMENT.
Our President, Mr. Dunne, owns approximately 25% of our common stock.
Accordingly, our President will be able to exercise significant influence over
all matters requiring stockholder approval, including the election of all
directors and approval of significant corporate transactions. If you purchase
shares of our common stock, you may have no effective voice in our management.
IF OUR COMPETITORS COMMENCE PROTEST PROCEEDINGS OF OUR GOVERNMENT CONTRACTS OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED.
In the past some of our competitors have commenced proceedings protesting
our Government contracts. We have in the past either settled or defended these
actions based on our assessment of the proceedings. In the past one or more of
these proceedings or settlement agreements have had a material impact on the
operations of IDP, our wholly-owned subsidiary. If protest proceedings are
brought against us or any of our subsidiaries in the future our business could
be materially harmed.
5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information included in this prospectus may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. This information may be subject to factors that
may cause our actual results to be materially different from future results
expressed or implied by any forward-looking statements. These factors include
the risks described in Risk Factors. Forward-looking statements involve
assumptions and describe our future plans, strategies and expectations, and you
can generally identify them by their use of the words may, will, should, expect,
anticipate, estimate, believe, intent or project or the negative of these words
or other variations on these words or similar terminology.
USE OF PROCEEDS
We will receive no proceeds from the sale of shares of common stock owned by
the selling security holders, although we would receive approximately $1,243,741
if all the warrants, the underlying shares of which are being registered herein,
are exercised for cash. All proceeds from the sale of shares of common stock
owned by the selling security holders will be for their own accounts. See
"Selling Security Holders."
PRICE RANGE OF DUNN'S COMMON STOCK
Prior to the quotation of the Company's Common Stock beginning on April 22,
1997, there was no established trading market for the Company's common stock.
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on The Nasdaq National Market under the symbol DNCC. The following
table sets forth the high and low selling prices as reported by The Nasdaq
National Market for the fiscal quarter indicated. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.
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FISCAL 1998 HIGH LOW
----------- -------- --------
First Quarter............................................... $10.500 $6.625
Second Quarter.............................................. $10.375 $8.188
Third Quarter............................................... $ 9.938 $7.483
Fourth Quarter.............................................. $ 4.750 $1.938
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FISCAL 1999 HIGH LOW
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First Quarter............................................... $ 6.281 $2.781
Second Quarter.............................................. $ 4.938 $2.031
Third Quarter............................................... $ 2.750 $1.969
Fourth Quarter.............................................. $ 2.406 $1.031
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FISCAL 2000 HIGH LOW
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First Quarter............................................... $ 4.844 $1.000
Second Quarter (through April 27, 2000)..................... $ 4.281 $2.000
On April 27, 2000 the closing price of our common stock as reported by The
Nasdaq National Market was $2.37 per share. There were approximately 1,500
shareholders of record of our common stock as of such date.
6
DIVIDEND POLICY
We have never paid or declared a dividend. The payment of cash dividends, if
any, in the future is within the discretion of our Board of Directors and will
depend upon our earnings, capital requirements, financial condition and other
relevant factors. We intend, for the foreseeable future, to retain future
earnings for use in our business.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 2000: (i) on an actual basis; and (ii) on a pro forma basis to
reflect the sale of $3.0 million of Series A Convertible Preferred Stock and the
immediate conversion to 1,382,818 shares of Common Stock. This table should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
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JANUARY 31, 2000
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ACTUAL PRO FORMA
----------- -----------
(UNAUDITED)
Long-term debt:
Notes payable............................................. 403,234 403,234
Line of credit............................................ 2,300,000 2,300,000
----------- -----------
Total long-term debt.................................... 2,703,234 2,703,234
Stockholders' equity:
Series A Convertible Preferred Stock, $0.001 par value per
share; 3,000 shares authorized; no shares issued and
outstanding -- --
Common Stock, $0.001 par value per share;
20,000,000 shares authorized; 9,424,680 and
10,807,498 shares issued and outstanding for Actual and
Pro Forma, respectively (2)............................. 9,425 10,808
Additional paid-in capital (1)............................ 37,737,057 41,568,408
Treasury stock, 400,000 shares............................ (3,432,500) (3,432,500)
Accumulated deficit (1)................................... (29,320,888) (30,253,622)
----------- -----------
Total stockholders' equity.............................. 4,993,094 7,893,094
----------- -----------
Total capitalization.................................. 7,696,328 10,596,328
=========== ===========
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(1) The Series A Convertible Preferred Stock is convertible into Common Stock at
a price equal to the lesser of 85% of the average of the three lowest
closing bid prices of the Common Stock for the 25 days preceding the
conversion date or $3.64. In addition, the conversion price cannot drop
below $1.60 for the 90-day period following the closing date. The intrinsic
value of this feature is reflected as an addition to accumulated deficit and
an increase to additional paid-in capital based on the assumed conversion to
Common Stock.
(2) Excludes (i) 2,500,000 shares reserved for issuance under the 1997 Stock
Option Plan (see Management--Incentive Stock Option Plan), (ii) 100,000
shares reserved for issuance upon the exercise of outstanding stock purchase
warrants and (iii) 322,525 shares reserved for issuance upon the exercise of
a stock purchase warrant granted in connection with the Series A Convertible
Preferred Stock offering.
7
DUNN SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Dunn should be read in
conjunction with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The consolidated statement of operations
data set forth below with respect to the fiscal years ended October 31, 1997,
1998 and 1999 and the consolidated balance sheet data as of October 31, 1998 and
1999 is derived from and is referenced to the audited consolidated financial
statements of Dunn included elsewhere in this Prospectus. The consolidated
balance sheet data as of October 31, 1995, 1996 and 1997 and the consolidated
statement of operations for the years ended October 31, 1995 and 1996 are
derived from audited consolidated financial statements of Dunn not included in
this Prospectus.
In the opinion of Dunn's management, the interim financial data reflect all
adjustments necessary to present fairly the results of operations for the three
months ended January 31, 1999 and 2000 and Dunn's financial position at
January 31, 2000. These adjustments are of a normal, recurring nature. The
results of operations of the interim periods are not necessarily indicative of
results that may be expected for a year.
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THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------------------------- --------------------
1995 1996 1997 (2) 1998 (3) 1999 1999 2000
-------- -------- -------- -------- -------- -------- ---------
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net Revenues......................... $7,491 $18,099 $21,766 66,888 34,475 11,712 7,128
Costs of revenues.................... 6,046 14,103 17,549 54,969 27,981 9,685 5,647
Gross profit......................... 1,445 3,996 4,217 11,919 6,494 2,027 1,481
Selling, general and
administrative..................... 966 1,972 2,198 9,983 37,749 2,589 1,906
Income (loss) from operations........ 479 2,024 2,019 1,936 (31,255) (562) (425)
Other income (expense)............... 8 (9) 98 (270) (2,911) (211) (164)
Net income (loss) from operations
before extraordinary item.......... 487 2,015 2,117 1,666 (34,166) (773) (589)
Extraordinary Gain--early
extinguishments of debt............ 0 0 0 0 0 0 750
Net income (loss) before income
taxes.............................. 487 2,015 2,117 1,666 (34,166) (773) 161
Provision for (benefit from) income
taxes.............................. 244 776 795 686 (559) (225) 0
Net income (loss).................... $ 243 $ 1,239 $ 1,322 980 (33,607) (548) 161
Earnings (loss) per share (1)........ $ 0.06 $ 0.31 $ 0.29 $ 0.14 $ (3.57) (0.06) 0.02
Earning (loss) per share(1) assuming
dilution........................... $ 0.06 $ 0.31 $ 0.28 $ 0.13 $ (3.57) (0.06) 0.02
Weighted average shares
outstanding(1)..................... 4,000 4,000 4,552 7,231 9,404 9,391 9,423
Weighted average shares
outstanding(1) assuming
dilution(1)........................ 4,000 4,000 4,679 7,492 9,404 9,391 9,423
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OCTOBER 31, JANUARY 31,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working Capital................................. $ 512 $1,722 $ 4,339 5,773 (1,422) (844)
Total assets.................................... 3,647 5,275 18,703 62,965 22,287 21,048
Long-term debt.................................. -- -- 75 51 2,845 2,703
Total liabilities............................... 3,047 3,335 10,465 24,592 17,470 16,055
Stockholders' equity............................ 600 1,939 8,238 38,373 4,817 4,993
------------------------
(1) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE. For further discussion of earnings per share
and the impact of Statement No. 128, see Note 2 of the notes to Dunn's
consolidated financial statements included herein.
(2) Includes the activity of STMS from September 12, 1997 (date of acquisition).
(3) Includes the activity of IDP and PRIMO from May 1, 1998 (date of
acquisition).
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We manufacture custom computer systems and provide related service to
departments, agencies and offices of the federal government and selected
businesses. We provide our customers with single-source solutions by
manufacturing our 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. We currently derive
revenues from hardware sales to the government and to medium and large
businesses. We sell our 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.
We derive a majority of our 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. If we were excluded from federal procurements,
or if any of our significant government contracts or the imposition of penalties
could have a material adverse effect on our business.
OVERVIEW OF FISCAL 1999
In fiscal year 1999, we experienced a significant change in our financial
results as compared to fiscal year 1998 as discussed below.
TERMINATION OF A SIGNIFICANT CONTRACT
In May 1999, the U.S. Air Force determined not to exercise the remaining
option years under the "Desktop V" (DTV) contract and therefore terminated the
contract for all participating vendors. Initially awarded to IDP, the DTV
contract was our largest contract. Management believed at the date of the IDP
acquisition, the contract would be renewed by the government through fiscal year
2003 and would generate over $100 million in revenues during that time. As a
result of the termination of this contract, the recoverability of Dunn's
goodwill associated with the IDP acquisition was significantly impaired.
Accordingly, management recorded an impairment charge of approximately
$21 million during 1999.
Additionally, the Small Business Administration (SBA) ruled that the U.S.
Air Force must terminate the contract for the convenience of the government.
Under a termination for convenience, the government shall reimburse Dunn for all
costs incurred in the performance of the contract. We are currently negotiating
a settlement with the government and have submitted our reimbursement proposal.
As of January 31, 2000, no settlement agreement has been reached. We cannot
anticipate the amount of the settlement, if any, at this time.
Under the terms of the DTV contract, we were required to maintain certain
inventory spares for warranty purposes. Due to the termination of the contract,
a considerable amount of these spares became obsolete. Accordingly, we recorded
an inventory charge during fiscal 1999 of approximately
10
$2 million relating to these items. We are seeking reimbursement of these items
in the settlement with the government.
DELAY OF A CONTRACT AWARD
In January 1999, we were one of several vendors to be awarded a contract to
supply laptops to the Puerto Rican government. The contract was protested and
hence delayed due to negotiations between the government and vendors in order to
resolve the protest issues. The protest was ultimately resolved and we were
re-awarded the contract in January 2000. During that 12-month delay period,
management determined to continue operations at our Puerto Rican facility in
anticipation of the contract. Accordingly, we incurred significant costs to
maintain the facility which resulted in an operating loss for our Puerto Rican
subsidiary for fiscal 1999.
CHANGES IN FEDERAL CONTRACTS
In fiscal year 1999, our revenues from computer sales to the federal
government were adversely affected due to changes in procurement policies. The
changes in the policies included: (a) decentralization of purchasing decisions
outside of the Washington DC area, where Dunn has its most significant sales
coverage; (b) the ability of computer manufacturers (i.e. Dell, Compaq) to sell
directly to the federal government; (c) a continual decline in PC prices
throughout 1999 which resulted Dunn's not participating in certain government
proposals for which adequate margins could not be achieved. Management believes
that this trend will continue in future periods. As such, we intend to focus our
efforts on repeat federal government business as well as maintaining
relationships with our current government customers which may provide additional
opportunities within the federal market.
INCREASES IN MEMORY PRICES
Memory chip prices increased dramatically in late 1999. As a result we
decided to hold and/or delay shipments until memory prices subsided and each
transaction remained profitable. However, in certain circumstances, we reduced
our gross profit margin on certain sales in order to meet contractual
requirements and accommodate the increasing price of memory. It should be noted
that the increase in memory prices have significantly subsided subsequent to
October 31, 1999.
Management believes it has taken the appropriate actions to avoid and/or
mitigate Dunn's exposure to these types of factors in future years. These
actions include greater saturation in the commercial markets, diversification of
our product mix and developing partnerships with key commercial organizations
within the industry. While we are confident that approach will mitigate our
exposure, there can be no assurance that we will be successful with the
implementation of these actions or that the profit levels from these actions
will increase.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED
JANUARY 31,1999.
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.
Gross margin, as a percentage of sales, increased to 20.8% from 17.3% for
the quarter ended January 31, 2000 and 1999, respectively. The increase in gross
margin is due to a growth in higher margin sales in our product mix.
11
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. We 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 reduction of our outstanding debt.
During the first quarter, we utilitized cash proceeds provided from operations
to extinguish debt from the line of credit assumed with our purchase of
International Data Products. On December 29, 1999, we 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 was 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.
We 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 the result of our cost controls, improved margins, product diversification
and market focus as mentioned above.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
Net revenues for fiscal year ended October 31, 1999 decreased approximately
48% to $34.5 million from $66.9 million for fiscal year ended October 31, 1998.
This decrease was primarily due to loss of the DTV contract with the U.S. Air
Force. We anticipated that this contract would generate revenues of
approximately $65 million for fiscal years 1999, 2000 and 2001. Fiscal year 1998
and 1999 revenues under this contract were approximately $18 million and
$3 million, respectively.
Gross profit for fiscal 1999 decreased by approximately 46% to $6.5 million
from $11.9 million. This decrease is in proportion with the decrease in net
revenues. Gross profit as a percentage of net revenues during the same periods
slightly increased to 18.8% from 17.8%. The gross profit percentage increase is
a direct result of greater proportion of higher-margin sales of services.
Selling and marketing expense decreased for fiscal 1999 by 37% to
$2.3 million from $3.7 million for fiscal 1998. During fiscal 1999, we
consolidated our sales and marketing departments with that of IDP which resulted
in an overall decrease of expenses.
General and administrative expense for fiscal 1999 increased 171% to
$14.1 million from $5.2 million for fiscal 1998. As a percentage of net
revenues, general and administrative expense increased to 41% for fiscal 1999
from 7.8% for fiscal 1998. We incurred significant general and administrative
costs during fiscal 1999. These costs were associated with the termination of
the DTV contract, the consolidation and integration of the IDP facilities and
resources, termination of certain benefit plans, and legal expenses associated
with all of these factors. Although we consider a majority of the 1999 general
and administrative expenses to be nonrecurring, appropriate actions have been
taken to significantly reduce general and administrative expenses in future
periods.
Other expense including interest for fiscal 1999 increased to approximately
$2,911,000 from approximately $271,000 for fiscal 1998. The increase was
primarily due to the accrual of $2 million for an employee arbitration award. In
addition, overall interest expense increased as a result of interest
12
expenses required to support the debt assumed with the acquisition of IDP,
interest expenses associated with the new debt obtained in 1999, and interest
expense associated with certain operating leases. In fiscal 1999, we recorded
gains on the sale of certain leased assets which reduced the overall other
expense. In addition, we recorded an income tax benefit of approximately
$559,000 in fiscal 1999.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
Net revenues for fiscal year ended October 31, 1998 increased 206% to
$66.9 million from $21.8 million for fiscal year ended October 31, 1997. This
increase was primarily due to additional revenue resulting from the third
quarter acquisition of International Data Products, Inc. Net revenues derived
from IDP's operations for fiscal 1998 amounted to approximately $40.5 million.
Gross profit for fiscal 1998 increased 183% to $11.9 million from
$4.2 million for fiscal 1997. However, the gross profit as a percentage of net
revenues during the same periods decreased to 17.8% from 19.4%. The decrease in
gross profit margin is a result of an increase in the percentage of lower margin
hardware sales by IDP and excess production capacity. We closed the production
facility located in Gaithersburg, Maryland.
Selling and marketing expense increased for fiscal 1997 by 336% to
$3,672,000 from $842,000 for fiscal 1997. During the same periods, as a
percentage of net revenues, selling and marketing expenses increased to 5.5%
from 3.9%. The increase was primarily attributable to the acquisition of IDP,
increased advertising in selected publications, increased attendance at trade
shows and the development of a marketing campaign aimed at selected businesses.
General and administrative expense for fiscal 1998 increased 365% to
$6.3 million from $1.4 million for fiscal 1997. As a percentage of net revenues,
general and administrative expense increased to 9.4% for fiscal 1998 from 6.2%
for fiscal 1997. We charged $564,776 of IDP acquisition integration costs to G&A
for the fiscal year. We also recognized approximately $545,000 in amortization
expense for fiscal 1998 as compared to $22,000 for fiscal 1997. Our costs
increased in almost all aspects of general and administrative expenses as a
result of the IDP acquisition. We have taken various actions to reduce general
and administrative expenses in future periods.
Other income (expense) including interest for fiscal 1998 decreased to an
expense of $271,000 from an income of $98,000 for fiscal 1997. The decrease was
a result of increased interest expense required to support the additional debt
assumed as a result of the acquisition of IDP, and interest expense associated
with certain operating leases. Our effective tax rate increased to 41% for
fiscal 1998 from 37.5% for fiscal 1997 as a result of the increase in the
amortization of goodwill which is not deductible for tax purposes. Our net
income declined by 26% for fiscal 1998 to $980,000 from $1.3 million for fiscal
1997. Net income as a percentage of net revenues during the same periods
declined to 1.5% from 6.1%.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended January 31, 2000, we produced cash flow of
$4,377,963 from our operating activities. We 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, we restructured our 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, our outstanding
balance on the line of credit was $2,300,000.
13
On March 13, 2000, we received gross proceeds of approximately $3,000,000
for the sale of Series A Convertible Preferred Stock. The Company utilized the
proceeds from this transaction to settle certain litigation and to fund
continuing operations.
As of January 31, 2000, we had a working capital deficit of approximately
$844,000. We believe 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 through fiscal 2000.
From time to time, we may pursue strategic acquisitions or mergers which may
require significant additional capital, and additional capital may be required
to satisfy unusual or infrequent expenses. In such event, we may seek additional
financing through the issuance of debt and/or equity.
14
BUSINESS
GENERAL
We manufacture custom computer systems and provide related services to
departments, agencies and offices of the federal government and selected
businesses. We provide our customers with single-source solutions by
manufacturing our 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. We currently derive
revenues from hardware sales to the government and to medium and large
businesses. We sell our 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.
In September 1997, we completed the acquisition of STMS, Inc. a
Virginia-based network services company which expanded our capabilities to
provide a wide variety of services including network consulting, project
implementation and technical support. The STMS acquisition provided us with new
opportunities to sell computer hardware into the commercial marketplace as part
of a total package of information technology hardware and services tailored to
meet the commercial customers' needs. By manufacturing our own computer systems,
the cost of which represents a significant portion of the cost of a total
project, we believe that we have a sustainable competitive advantage over other
network service providers.
On May 1, 1998, we acquired International Data Products, Corp. and the net
assets of IDP's Puerto Rican affiliate, Puerto Rico Industrial Manufacturing
Operations, Corp. for approximately $21 million, consisting of a combination of
cash and common stock. When we acquired IDP, was a leading supplier of portable
and desktop computers to the government. In May 1998, in connection with the IDP
acquisition, we completed a public offering of 3,491,493 shares of common stock
for net proceeds of $26,287,866.
In fiscal year 1999, we recorded a significant goodwill impairment charge of
approximately $21 million associated with the IDP acquisition. This was the
result of our loss of a significant contract with the U.S. Air Force which was
terminated for the convenience of the government during fiscal 1999. On the date
we acquired IDP we anticipated revenues from this contract to be approximately
$100 million had all option years been exercised. We later determined that the
loss of this contract significantly impaired our ability to recover the goodwill
associated with the purchase. Accordingly, we recorded the goodwill impairment
charge.
We intend to establish ourselves as a leading provider of network solutions
to both the government and commercial markets. One of the key elements of this
strategy is integrating our hardware and network services into a total solution
for our government customers. In the commercial market, management plans to
leverage its customer relationships developed through sales of our network
services to expand sales of our hardware products.
OUR PRODUCTS AND SERVICES
Computer Hardware Products
DESKTOPS: We manufacture a high performance line of Pentium II and Pentium
III based desktop computers that may be used on a standalone basis or as part of
a network. These systems are based on Intel motherboards to guarantee high
reliability and are "wired for management" to allow these desktops, when
connected to the network, to be monitored and controlled, by the network. This
technology helps ensure that desktops connected to a network are properly
configured and consistently operating the same level of software.
15
SERVERS: We market a single, dual or quad processor version of the Intel
Pentium III and Zeon processor based systems. These servers are designed to give
the customer the highest level of performance and reliability available in the
market today. Based on Intel motherboards, these systems when installed in
conjunction with our desktops provide the "wired for management" technology to
ensure high availability and consistently configured systems on the network. We
believe that the server market offers opportunities for higher profit margins
compared to other sectors in the industry. With the ever increasing popularity
of the Internet, the server market represents a significant growth sector for
us. Additionally, server sales complement our services business due to the
complexity of server installation and maintenance.
LAPTOPS: We assemble, on a brand name basis, a state-of-the-art line of
Laptops. These Laptops are produced in our Puerto Rico facility.
NETWORKING HARDWARE & SOFTWARE: We integrate, install, and maintain major
brand networking hardware and software. We have partnerships with companies like
Network Associates, Inc (NAI), Cisco Systems, Inc (Cisco Systems) and
Marconi, Inc.
ORIGINAL EQUIPMENT MANUFACTURE (OEM): We manufacture, on an OEM basis,
hardware products for major network solutions providers.
TECHNICAL SERVICES: We provide network design, implementation, and support
services for wide-area and local-area networks. These services are provided to
commercial, federal government and state/local government clients in two
methods: Project-based and staffing-based engagements.
PROJECT-BASED ENGAGEMENTS: We provide network analysis, design, and
implementation services primarily in the form of short-term (less than three
months) projects. Specific completion criteria are achieved and deliverables
submitted to signify the end of the project. These network-engineering services
are performed for a fixed-fee upon completion or on an hourly labor basis at the
pre-negotiated price and estimated levels of effort.
Specific project-based services that we perform include network design,
systems implementation, integration, network security, software migrations, and
messaging system implementation. We strive to maintain expertise in specific
areas and technologies rather than be generalists in all IT areas. By
maintaining a focus, we believe we can provide highly skilled professionals and
services that leverage our experience for maximum benefit to the client. Project
management is the key component of our strategy and success in project-based
engagements.
STAFF AUGMENTATION: We provide network support services to our clients in
the form of fixed-rate hourly engineering services. Contracts with commercial
and government clients typically range from one month to one year in length.
Staffing services consist of placing one or more network engineers, user support
technicians, or programmers on-site with a client. These professionals perform
work as a "virtual" employee for the client and typically work under the
direction and changing needs of the client's management. We provide skilled
technical professionals to our customers, along with technical support from our
vendor partners such as Microsoft, Novell, Cisco, and Network Associates.
Our success in this area is achieved largely due to contract renewals and
increasing staffing requirements from existing customers. The market for
staffing is consistently increasing as customers try to focus on their core
business and contract us to handle their IT support requirements.
GOVERNMENT CONTRACTS
In fiscal 1999, we derived approximately 65% of our revenues from sales of
hardware and services to the Government pursuant to contracts with the General
Services Administration (GSA) or other agency-specific contracts. Most of these
contracts are leasing of equipment, blanket purchase agreement
16
or "indefinite delivery, indefinite quantity" ("IDIQ") 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 Dunn from federal procurements,
the termination of any of our significant government contracts or the imposition
of such penalties could have a material adverse effect on our operations and
financial condition.
Substantially all of our government customers purchase equipment and
services from us on a long-term contract basis. By contrast, most of our
commercial customers purchase equipment and services by means of task and open
purchase orders.
DESKTOP V CONTRACT. Initially awarded to IDP, this contract was not renewed
in May 1999 and was officially terminated for the convenience of the government
on October 8, 1999. We are currently negotiating a settlement with the
government for recovery of certain costs incurred to support the contract. A
settlement proposal has been submitted to the government, however, no agreement
has been reached as of January 31, 2000. We cannot estimate any potential
settlement amounts at this time.
Set forth below is a description of some of our more significant contracts
as of April 27, 2000.
GSA CONTRACT. We have a multiple award schedule contract with GSA. Our GSA
contract was awarded in April 1996 and is valid through March 31, 2002. GSA
contracts enable government IT purchasers to acquire all of their requirements
from a particular vendor and largely limits the competition to selected vendors
holding GSA contracts. For fiscal year 1999, our GSA contract had sales of
$5.9 million, which accounted for approximately 8.5% of our revenues.
IT-21 CONTRACT. In January 1998, IDP was awarded a contract by the Fleet &
Industrial Supply Center, Norfolk Philadelphia Detachment for the IT-21 program
at the CINCLANTFLT Norfolk, VA. This contract is a five-year equipment lease
program in which we provide a full spectrum of IT products and services to the
CINCLANTFLT headquarters. A unique aspect of this program is its "Technology
Refresh" feature in which we periodically update the installed equipment to the
latest technology at no incremental cost to the government. The leased equipment
includes servers, workstations, desktops, hubs, switches and printers. On-site
sparing and 4-hour response time are also part of the contract requirements. The
contract to date total revenue is $4.5 million.
PRSTARNET CONTRACT. After several protest delays, we were awarded a
contract with the Puerto Rican Government on January 5, 2000. We were selected
as one of several vendors to supply the Puerto Rican school systems with laptop
computers. The terms of the contract require us to deliver approximately 11,000
computers to the Puerto Rican school system by August 2000. We anticipate that
this contract will generate approximately $16 million in revenues for fiscal
year 2000.
This contract represents Phase I of the Puerto Rican Government's plan to
increase the technological education in their school system. We will bid on
Phase II during fiscal 2000, which will supply the school system with desktop
computers for all students. We cannot predict the outcome of our bid proposal.
COMMERCIAL CONTRACTS
In fiscal year 1999, we derived approximately 30% of our revenues from sales
of hardware and services to the commercial marketplace. Our commercial customer
base consists of several Fortune 500
17
companies as well as certain small local commercial customers. We anticipate
continuing to increase our commercial customer base in the upcoming fiscal year.
We have been successful in developing and maintaining key partnerships with
industry leading companies such as Microsoft, Cisco, Sun and Network Associates.
These partnerships will enable us to further diversify our product mix and
attract high quality customers.
MANUFACTURING AND PRODUCTION
Our production capacity is 100,000 units per year in our existing Loudoun
County facility on a three-shift basis. We also lease an approximately 34,000
square-foot facility in Guayama, Puerto Rico, which is used for manufacturing,
technical support, and personal computer board level repair. The Guayama
facility is ISO 9002 certified, and has the capability to manufacture 200,000
systems per year.
COMPETITION AND MARKETING
The markets for our products and services are highly competitive. Many of
our competitors offer broader product lines, have substantially greater
financial, technical, marketing and other resources than us and may benefit from
component volume purchasing and product and process technology license
arrangements that are more favorable in terms of pricing and availability than
our arrangements. We also compete with a large number of computer systems
integrators, resellers and IT services companies. We believe that it is likely
that these competitive conditions will continue in the future. There can be no
assurance that we will continue to compete successfully against existing or new
competitors that may enter markets in which we operate.
FEDERAL GOVERNMENT MARKET. The Information Technology Reform Act (the
"ITRA") which took effect on August 8, 1996 has had a profound effect on the way
the government procures computers and related products and services. The most
sweeping changes were (a) the repeal of the Brooks Act that had granted sole
authority for purchasing IT to the GSA and, (b) the change in the GSA Schedule
from a single-year small purchase contracting program to a multi-year, IDIQ
contract with no limit on the value of purchases. Prior to the new legislation,
the GSA was responsible for overseeing all IT purchases as well as assuring fair
and open competition. The new legislation has expanded our ability to market and
sell our products to government users directly through our GSA contract and
BPA's awarded under the GSA schedule. We continue to make marketing and sales
efforts to take advantage of these changes in the federal market.
Since the passage of the ITRA, the government has increased the amount of
information products acquired through the GSA Schedule. Although we believe we
have benefitted from this reform, the emergence of the GSA Schedule as a
significant procurement vehicle has also enabled traditional mass-market
commercial computer companies to be more responsive to government requirements.
We currently compete with national commercial computer manufacturers such as
Dell Computer Corporation and Gateway 2000, Inc. for a portion of the government
market.
There has been a consolidation in the industry as a result of acquisitions
and the failure of many firms. The competition for computer sales has settled
into a small group of competitors comprised of manufacturers and systems
integrators. We believe that the government's selection criteria for vendor
selection consists of price, quality, familiarity with the vendor, and size and
financial capability of the vendor.
COMMERCIAL MARKET. The microcomputer products industry is highly
competitive. Pricing is very aggressive in the industry and we expect pricing
pressures to continue to intensify. The microcomputer products industry is also
characterized by rapid changes in technology and consumer preferences, short
product life cycles and evolving industry standards.
18
The commercial market for IT services is a highly fragmented market served
by thousands of small value-added resellers. These companies typically service a
small geographic area and resell national brand computer and/or network
hardware. We believe that our technical services can compete effectively in the
local market because provide engineering services in conjunction with products
from our strategic partners; e.g., Network Associates, Inc., Cisco, Microsoft,
Marconi, Sun and Intel. We believe that our ability to integrate the computer
hardware (Dunn brand or any other) and networking products provides our
technical services group a competitive advantage.
Microcomputers are marketed through several distribution channels including
direct marketing, traditional microcomputer retailers, computer superstores,
consumer electronic and office supply superstores and other resellers. There are
many manufacturers of microcomputers; substantially all of which have greater
financial, marketing and technological resources than us. We compete with
manufacturers such as Compaq, Dell, Gateway, IBM and Packard Bell NEC, Inc. The
principal elements of competition are product reliability and quality,
customization, price, customer service, technical support, IT services and
product availability. There can be no assurance that we will in the future be
able to compete effectively against existing competitors, especially companies
who have historically focused their energies on the commercial market.
MARKETING: We market to select commercial accounts and a wide array of
government organizations including agencies within the Department of Defense,
civilian agencies and the judicial branch of the government. We also view the
commercial market as an increasingly important part of our business. We use an
in-house sales force and program managers to market our products and services.
Although we market nationally, our marketing efforts are concentrated in the
Washington, D.C. metropolitan area and in the state of Florida. Sales were made
primarily to target commercial accounts. In light of our pursuit of new
commercial business and the new procurement legislation, which gives different
government users the ability to purchase directly from vendors, we believe that
marketing is becoming increasingly important to our government as well as to our
commercial business.
We strive to build a strong relationship with our customers. We believe that
a key to building customer loyalty is a team of knowledgeable and responsive
account executives and technical and support staff. We assign each customer a
trained account executive, to whom subsequent calls will be directed. We believe
that these strong one-on-one relationships improve the likelihood that the
customer may consider us for future purchases. Product support technicians are
available 24 hours per day, seven days a week. We intend to continue to provide
our customers with products and technical services that offer the customer the
best value.
We use electronic commerce technologies and believe that both the government
and commercial customers will continue to expand the utilization of these
technologies. Internet and on-line computer services are being used by the
government and commercial accounts to advertise opportunities, reference vendor
information and in some cases make actual purchases. We maintain a web site on
the Internet wherein our GSA catalogue and products can be referenced. In
addition, we provide the capability for customers to download updated software
and drivers that become available. We believe that our targeted customer base
will have a greater acceptance of these interactive services because our
customers tend to have a greater familiarity with technology products and
services.
SUPPLIERS
We devote significant resources to establishing and maintaining
relationships with our suppliers. Whenever possible, we purchase directly from
component manufacturers such as Intel, Microsoft, Hitachi-Nissei, Sanyo
America, Ltd., Cisco and Chicony Corp. We also purchase multiple products
directly from large national and regional distributors such as TechData
Corporation, Ingram Micro Incorporated, Decision Support Systems Incorporated,
Wyle Electronics and Bell Micro.
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