|A lot of companies couldn't survive the failure of a
major acquisition, a complete change in business model, and a bad
financing deal more commonly known as a "death spiral" or
It certainly knocked the wind out of SteelCloud, a small, publicly
traded customized server provider in Dulles. But the company, formerly
known as Dunn Computer, has been staging a turnaround in the midst of an
unforgiving economy for tech companies.
SteelCloud has been profitable for eight consecutive quarters, and in
the last five months its stock jumped 300 percent to $3.00 a share. Not
bad, considering the stock languished under $1 a share for six consecutive
months in 2001 - long enough that the company had to plead its case last
summer before the Nasdaq Listing Qualifications Panel to remain listed on
SteelCloud, which remains under the radar screen of Wall Street
analysts and institutional investors, provides a good example of a company
that is starting to realize the benefits of tough choices and major
"The thing we did was totally cut expenses to a minimum to get
them under control, and we changed our business model," says Edward
M. Spear, SteelCloud's president and chief operating officer. "We
fought very hard to clean up those problems and we're proud of that, but I
don't want to dwell on it."
What happened? In 1997, Dunn Computer went public at $5 a share,
raising $5 million. Ten months later, in early 1998, Dunn acquired
International Data Products, a federal information technology contractor
in Gaithersburg, for $23 million.
But 18 months after the deal went through, Dunn wrote down $21 million
of the acquisition value in a restructuring charge after the U.S. Air
Force cancelled a major computer contract it had awarded to IDP.
"We were in business since 1987, and prior to 1999 we were always
profitable," says Spear. "Then we had one bad year based on an
acquisition that went bad."
The company reported a net loss of $33.6 million for fiscal year 1999
and its revenue dropped nearly 50 percent from the prior year to $34.4
million. It also began downsizing from about 250 employees after the
acquisition to just over 90 today
The failure of the acquisition came as the company was shifting its
business model. Until 1997, Dunn had been selling customized desktop
computers to the federal government. When the government changed the way
it bought computer systems to the benefit of larger contractors, Dunn
refocused its business and ultimately changed its name to SteelCloud in
SteelCloud now concentrates on the commercial marketplace, customizing
single purpose servers - such as virus scan servers or virtual private
network servers-for software and technology companies so that their
software products run optimally.
But last year, one remnant of the acquisition was still hurting the
company - a financing deal initiated in March 2000. At that time, the
company sold $3 million of convertible preferred stock in a private
Such investments can be complicated, but in general terms when the
company's stock price declines the investor can convert its preferred
shares to common stock at discounted price. The investor then can sell the
shares at a profit, driving the price down further and often triggering a
SteelCloud's financing deal killed its stock, which dropped from $4.25
a share shortly before the deal was announced to $2 a share three weeks
after the announcement and then to less than $1 a share for much of 2001.
There was only one good way out of the deal - redeeming, or buying back
the preferred shares, which SteelCloud did last July for $2.5 million.
"Rarely are companies in a position to have enough cash to buy the
security back from the investor," says Robert Kyle, executive vice
president of Directplacement, a company that tracks such investments. But
SteelCloud was able to complete the buyback because it had returned to
SteelCloud's stock has risen steadily since the buyout, and the company
expects to grow revenue at a minimum of 25 percent this year, with profits
increasing by even a higher percentage. In late January, it announced
$10.5 million in contracts with a major federal integrator. But company
executives note that the foundation for today's success was laid some time
"It's important to note that the turnaround didn't happen last
summer," says Brian Hajost, SteelCloud's executive vice president of
sales, marketing and investor relations. "The turnaround happened two
years ago when CEO Tom Dunne made the decisive decisions to fix the
The company still faces challenges - three customers accounted for 51
percent of last year's revenue, and its stock does not have a high enough
price or volume to attract institutional investors. Bill Loomis, an equity
analyst at Legg Mason, says it is "pretty difficult" for such
microcap stocks to emerge from the under $5 a share range.
Nevertheless, SteelCloud is starting to get noticed and is optimistic
about its future.
"Stock analysts use filters to look for companies moving in the
right direction," says Hajost. "All of a sudden we've started
appearing on people's screens."
© 2002 The Washington Post Company