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 June 30, 1996
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. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Illinois
(State or other jurisdiction of incorporation or organization)
87-0455038
(I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois
(Address of principal executive offices)
60062
(Zip Code)
(847) 358-4406
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed 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 _____.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes _______ No ________.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the
latest practicable date: August 12, 1996; 29,577,111.
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page FINANCIAL INFORMATION
1. PART I - Financial Statements
3 BALANCE SHEETS
June 30, 1996 and December 31, 1995
4 STATEMENTS OF OPERATIONS
Six Months and Three Month Ended June 30, 1996 and 1995
5 STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Fiscal Year Ended December 31, 1995 and
Six Months Ended June 30, 1996
6 STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
7 NOTES TO FINANCIAL STATEMENTS
13 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
15 PART II - OTHER INFORMATION
1. Item 1. Legal Proceedings
2. Item 2. Changes in the Rights of the Company's Security Holders
3. Item 3. Default by the Company on its Senior Securities
4. Item 4. Submission of Matters to a Vote of Securities Holders
5. Item 5. Other Information
6. Item 6(a). Exhibits
7. Item 6(b). Reports on Form 8-K
16 SIGNATURE
<TABLE>
DAUPHIN TECHNOLOGY, INC.
DEBTOR - IN - POSSESSION
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash $ 374,260 $ 92,604
Accounts Receivable
Trade 9,336 5,791
Other 312 167,266
Prepaid Expenses 9,189 -----
Inventory, net 2,665,072 91,142
__________ _______
Total Current Assets 3,058,169 356,803
PROPERTY AND EQUIPMENT,
net of Accumulated Depreciation
of $92,583 at June 30, 1996 and
$78,516 at December 31, 1995 93,169 69,690
___________ _________
Total Assets $ 3,151,338 $ 426,493
=========== =========
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 142,214 $ 252,228
Short Term Borrowing ----- 759,947
Total Liabilities not Subject
to Compromise _________ _________
- Current Liabilities 142,214 1,012,175
LIABILITIES SUBJECT TO COMPROMISE:
Accounts Payable ----- 11,186,395
Short Term Borrowing ----- 46,500
Accrued Purchase Commitment ----- 32,977,790
Accrued Liabilities ----- 617,898
Debenture Payable ----- 317,500
Advances from Related Parties ----- 208,422
Claim Payable ----- 4,970,000
________ __________
Total Liabilities Subject to Compromise ----- 50,324,505
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 Par Value,
10,000,000 Shares Authorized but
Unissued ----- -----
Common Stock $.001 Par Value,
100,000,000 Shares Authorized
29,015,496 Shares Issued and
Outstanding at June 30, 1996
and 14,408,354 at December 31, 1995 29,015 14,408
Paid in Capital 21,490,325 5,144,932
Accumulated Deficit (18,510,216) (56,069,527)
___________ ___________
Total Shareholders' Equity (Deficit) 3,009,124 (50,910,187)
Total Liabilities and ___________ ____________
Shareholders' Equity (Deficit) $ 3,151,338 $ 426,493
=========== ============
</TABLE>
<TABLE>
DAUPHIN TECHNOLOGY, INC.
DEBTOR - IN - POSSESSION
STATEMENTS OF OPERATIONS
SIX MONTHS and THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended June 30, Three Months Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES $23,154 $147,913 $1,670 $19,064
COST OF SALES 12,655 74,853 4,795 13,117
________ _______ _______ _______
Gross Profit 10,499 73,060 (3,125) 5,947
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 320,533 231,848 228,935 35,941
_________ ________ ________ ________
Loss before
Reorganization Items,
Income Taxes and
Extraordinary Item (310,034) (158,788) (232,060) (29,994)
REORGANIZATION ITEMS
Professional Fees 196,028 79,751 101,290 29,751
________ ________ ________ _______
Loss before Income Taxes
and Extraordinary Item (506,062) (238,593) (333,350) (59,745)
INCOME TAXES ----- ----- ----- -----
________ ________ ________ ______
Loss before Extraordinary
Item (506,062) (238,593) (333,350) (59,745)
EXTRAORDINARY ITEM,
Net of Income
Taxes of $0 38,065,373 ----- 38,065,373 -----
__________ ________ __________ _______
Net Income (Loss) 37,559,311 (238,539) 37,732,023 (59,745)
========== ======== ========== =======
INCOME/(LOSS) PER COMMON SHARE:
Before Extraordinary Item (0.03) (0.01) (0.02) (0.01)
Extraordinary Item 1.98 ----- 1.76 -----
Net Income (Loss) $ 1.95 $(0.01) $ 1.74 $ (0.01)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,277,401 14,408,354 21,711,925 14,408,354
</TABLE>
<TABLE>
DAUPHIN TECHNOLOGY, INC.
DEBTOR - IN - POSSESSION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FISCAL YEAR ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 1996
Common Stock Paid-in Accumulated BALANCE
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
December
31, 1994 14,408,354 $14,408 $5,232,597 $(55,274,715) $(50,027,710)
Reverse Accumulated
Compensatory Effect
of Stock Options
Granted ----- ----- (87,665) ----- (87,665)
Net Loss for the
Period ----- ----- ----- (794,812) (794,812)
__________ ______ _________ ___________ ____________
December
31, 1995 14,408,354 14,408 5,144,932 (56,069,527) (50,910,187)
Issuance of Common
Stock in Connection
with:
Private Placement 357,142 357 399,643 ----- 400,000
Purchase of
Inventory 2,600,000 2,600 2,909,400 ----- 2,912,000
Bankruptcy
Conversion 11,650,000 11,650 13,036,350 ----- 13,048,000
Net Income for the
Period ----- ----- ----- 37,559,311 37,559,311
__________ _______ ___________ ____________ __________
June 30, 1996 29,015,496 $29,015 $21,490,325 $(18,510,216) $3,009,124
========== ======= =========== ============ ==========
</TABLE>
<TABLE>
DAUPHIN TECHNOLOGY, INC.
DEBTOR - IN - POSSESSION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES -
Net Income(Loss) $ 37,559,311 $(238,539)
Non-Cash Items Included in Net Income(Loss):
Depreciation 14,067 30,000
Compensatory Effect of Stock Options Earned ----- (87,665)
Extraordinary Item (38,065,373) -----
(Increase)/Decrease in
Accounts Receivable - Trade (3,545) 32,868
Decrease in Accounts Receivable - Other 166,945 -----
(Increase) in Prepaid Expenses (9,189) (1,667)
Decrease in Inventory 10,197 57,511
(Decrease) in Bank Overdraft ----- (1,299)
(Decrease)/Increase in Accounts Payable,
Accrued Expenses (110,015) 206,055
________ _______
Net Cash (Used For) Operating Activities (437,602) (2,736)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of Equipment and Furniture, Net (37,546) -----
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from Issuance of Shares for
Private Placement 400,000 -----
(Decrease)/Increase in Short Term Borrowing 356,804 169,000
________ ________
Net Cash Provided by/(Used For)
Financing Activities 756,804 169,000
________ _______
Net (Decrease)/Increase in Cash 281,656 166,264
CASH BEGINNING OF PERIOD 92,604 -----
CASH END OF PERIOD $ 374,260 $ 166,264
========= =========
CASH PAID DURING THE PERIOD FOR -
Interest $ ----- $ -----
Reorganization Costs 165,670 -----
Income Taxes ----- -----
SUPPLEMENTAL NON-CASH ACTIVITY -
Purchase of Inventory through
Issuance of Stock $ 2,584,127 $ -----
</TABLE>
DAUPHIN TECHNOLOGY, INC.
DEBTOR - IN - POSSESSION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Dauphin Technology, Inc. (the "Company") was founded to design, manufacture
and market mobile computing systems, including laptop, notebook, handheld and
pen-based computers, components and accessories. Historically, the Company
marketed directly and through other distribution channels to both the
commercial and government segments.
The main product of the Company is a handheld computer - Desk Top Replacement,
2nd generation (DTR-2). The basic unit has a 486 central processing unit with
50 megahertz of processing speed. The unit also has eight megabytes of random
access memory, a flat liquid crystal display, a 170 megabytes hard drive,
voice and pen recognition, and wireless communications capability. The units
measure 9 inches in length, 5.5 inches width, 1.25 inches thick and weigh 2.7
pounds. The Company also offers various options and accessories to support
customer configuration requirements.
Through the acquisition of the Intercon business Plan (See Note 2), the
Company plans to achieved products diversification through development,
production and sale of industrial controls. The development of the Intercon
product is expected to commence in the near future.
Basis of Presentation
On January 3, 1995, the Company filed a petition for relief under Chapter 11
of the Federal Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division. Since that date, the Company
was operating under Chapter 11 as a debtor-in-possession. Under Chapter 11,
and certain claims against the Company in existence prior to the filing of the
petition for relief under the Federal Bankruptcy Code were stayed while the
Company continued business operations as debtor-in-possession. These claims
are reflected in the December 31, 1995 balance sheet as "Liabilities Subject
to Compromise."
On April 9, 1996, the Company's Third Amended Plan and Disclosure Statement
was filed with the Court. Simultaneously, an Order was entered to gather
credit holders' and shareholders' votes for approval or rejection of the Plan.
On May 6, 1996, the votes from all classes of credit holders and shareholders
were tallied. On May 9, 1996, the Plan, having been approved through
affirmative vote of over 90% of all ballots, was approved. The Plan was
confirmed by Court Order entered May 14, 1996. The financial statements
presented reflect the effect of confirmation of the Plan and Debt-for-Equity
exchange as specified in the Plan. On July 23, 1996 the final Court Order was
entered, taking the Company out of bankruptcy and closing the bankruptcy
proceedings.
2. LIQUIDITY
1995 Events
On January 3, 1995, the Company filed a petition for relief under Chapter 11
of the Federal Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division. During 1995, the Company
operated under Chapter 11 and without an approved Plan of Reorganization.
On January 19, 1995, the Court entered an Order authorizing the Company to use
International Business Machines Corporation's ("IBM") cash collateral pursuant
to the terms set forth in the Order. Despite its continued use of 100% of the
cash collateral, the Company did not have sufficient funds to continue
operations or to proceed with reorganization. On March 31, 1995, all
employees were terminated and all remaining assets were put in storage while
the Company pursued potential debtor-in-possession financing. In an attempt
to save the Company, Technology Partners L.L.C. ("TPL"), an Illinois limited
liability company then controlled by Kevin Koy and Andrew J. Kandalepas,
purchased IBM's claim.
On June 20, 1995, the Court entered an Order approving an employment agreement
between the Company, Alan Yong, its then majority shareholder, Kevin Koy and
Andrew J. Kandalepas. The terms of the employment agreement were as follows:
Term - One year with automatic successive one-year renewals unless
either party gives one month prior written notice of an intention not to
renew.
Compensation - Annual rate of $70,000 for the first three months
increasing to an annual rate of $150,000 in the fourth month. The
Company granted Alan Yong options to purchase 700,000 shares of stock at
$0.75 a share. These options were exercisable twelve months from the
time they become registered.
Purchase Inventory from Executive - The Company agreed to purchase
inventory valued at $50,000 over a five-month period at $10,000 per
month.
Executive's Stock - Alan Yong and his family transferred 8,000,000
shares of the Company's stock to the designee of TPL pursuant to certain
transfer provisions.
As of July 15, 1995, all the transfer provisions have been met and the Yong
shares have been transferred. This transaction resulted in a change in
control of the Company.
On July 10, 1995, the Bankruptcy Court entered an Order approving debtor-in-
possession financing between the Company and TPL. The terms of the facility
were as follows:
General Terms - TPL agreed to make available for the Company's use
from time to time during the term, loans not to exceed $400,000, in the
aggregate, to be used by the Company for general working capital
purposes.
Interest - 11% per annum for actual days elapsed on a 360-day year
basis, with interest payable monthly. After a continuing event of
default, the interest rate shall be equal to 14%.
Term - 12 months.
Security - All assets and tangible and intangible property of the
Company.
On October 11, 1995, the Company, TPL, the directors, officers and employees
of both organizations, including but not limited to Kevin Koy and Andrew J.
Kandalepas as guarantors and Alan Yong, entered into a settlement and general
release of the above Alan Yong employment agreement. Alan Yong was in
possession of certain assets of the Company with an approximate cost of
$60,000. As part of the consideration for this agreement, the Company conveyed
ownership of the assets then held by Yong to Yong.
On November 16, 1995, the Bankruptcy Court entered an Interim Order approving
additional debtor-in-possession financing between the Company and TPL. The
terms of the facility were as follows:
General Terms - TPL agreed to make available for the Company's use
from time to time during the term, loans not to exceed $150,000, in the
aggregate, to be used by the Company for general working capital
purposes.
Interest - 11% per annum for actual days elapsed on a 360-day year
basis, with interest payable monthly. After a continuing event of
default, the interest rate shall be equal to 14%.
Term - 12 months.
Security - All assets and tangible and intangible property of the
Company.
During November 1995, certain disagreements arose between the members of the
Board of Directors and Kevin Koy and Russ Felker, concerning the management of
the Company. Because of such disagreements, Kevin Koy and Russ Felker were
removed from their positions as Chief Executive Officer and President of the
Company, respectively, on November 20, 1995. Andrew J. Kandalepas was then
appointed to serve as Chief Executive Officer and President of the Company.
On November 30, 1995, the Bankruptcy Court entered an Interim Order approving
debtor-in-possession financing between the Company and Kandila Investments,
Ltd. ("Kandila"), an Illinois limited liability company controlled by Andrew
J. Kandalepas. The terms of the facility were as follows:
General Terms - Kandila agreed to make available for the Company's use
from time to time during the term, loans not to exceed $500,000, in the
aggregate, to be used by the Company for general working capital
purposes.
Interest - 11% per annum for actual days elapsed on a 360-day year
basis, with interest payable monthly. After a continuing event of
default, the interest rate shall be equal to 14%.
Term - All loans together with interest accrued thereon under the
facility shall be due and payable upon the earlier of (i) the date upon
which any TPL's or Kandila's debtor-in-possession loans to the Company
become due, (ii) upon the occurrence of an event of default under the
debtor-in-possession loan agreement, or (iii) an entry of an order of
the Bankruptcy Court that confirms a plan of reorganization in the
Company's Chapter 11 proceedings.
Security - All assets and tangible and intangible property of the
Company subject to the prior claims of TPL.
1996 Events
On January 16, 1996, the Company's counsel filed motions with the Bankruptcy
Court to retrieve all funds mistakenly paid to professional advisors of TPL,
Kevin Koy and Russ Felker, and to terminate the employment agreements with
Messrs. Koy and Felker. In addition, the motions sought to terminate a letter
of intent and related employment and stock incentive agreements related to a
proposed purchase of Cormark, Inc., an Illinois corporation engaged in the
manufacture and sale of point of purchase displays and controlled by John
Prinz. Return of a $60,000 deposit made to Cormark in anticipation of the
proposed purchase was also requested. Pursuant to the motions, all employment
and incentive agreements, as well as the letter of intent to purchase Cormark,
Inc., were terminated. The $60,000 deposit was returned to the Company and an
additional $107,000 in mistaken payments was recovered, and Messrs. Koy,
Felker and Prinz resigned from the Company as Directors. Mr. Koy terminated
all capacities with TPL and released all ownership interests in TPL.
On February 6, 1996, the Company entered into an agreement with Victor Baron,
Savely Burd and Interactive Controls, Inc., an Illinois corporation
("Intercon"). Intercon has developed and is the owner of a business plan (the
"Intercon Business Plan") for the development, production, sale and
installation of miniature computers for industrial control and operation.
Under the terms of the agreement (the "Intercon Agreement"), the Company
acquired the rights to the Intercon Business Plan, and hired Baron to act as
the Company's Chief Operating Officer and President of the Company's new
"Intercon Division." It also hired Burd to act as its Chief Financial
Officer. Messrs. Baron and Burd joined Mr. Kandalepas to comprise a three
person Executive Committee.
Under the terms of the Intercon Agreement, and in addition to an annual salary
and bonus payable to Baron and Burd, Intercon will be entitled to receive
certain shares of the reorganized Company's stock as payment for the transfer
to the Company of the Intercon Business Plan and Intercon's other assets. The
Intercon Agreement provides that commencing upon the effective date of the
Plan and thereafter during the balance of the term of the Agreement, Intercon
(or its successors) will be issued certain shares of the Company's common
stock (the "Asset Acquisition Shares") determined as follows:
Subject to the adjustment procedures set forth below, during the term,
Intercon will receive:
(a) 1 million Asset Acquisition Shares the first fiscal year in which
the Company realizes aggregate gross revenue of $5 million (determined
by reference to the Company's year end financial statement which shall
be prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis).
(b) 200,000 Asset Acquisition Shares for each additional $1 million in
gross sales realized by the Company in excess of $5 million and less
than the aggregate of $10 million in a single fiscal year (determined by
reference to the Company's year end financial statement, which shall be
prepared in accordance with GAAP, applied on a consistent basis).
Intercon's right to receive Asset Acquisition Shares under the
provisions of this paragraph (b) shall terminate when the aggregate
number of Asset Acquisition Shares issued to Intercon under the
provisions of this paragraph (b) equals 1 million.
(c) After Intercon has received the Asset Acquisition Shares called
for in paragraph (a) and (b) above, but not prior thereto, it should
also be entitled to 0.25 Asset Acquisition Shares for each dollar in net
earnings before taxes which the Company realizes (determined by
reference to the Company's year end financial statement which shall be
prepared in accordance with GAAP applied on a consistent basis.)
Notwithstanding the forgoing, Intercon will not receive Asset Acquisition
Shares which would result in Intercon and/or its employees holding, in the
aggregate, in excess of 25% of the total of the Company's outstanding shares
of common stock, on a fully diluted basis, as of the effective date of the
Plan.
On July 31, 1995, the Company filed a Preliminary Plan of Reorganization and
Related Disclosure Statement. On October 3, 1995, the Company filed its First
Amended Plan of Reorganization. On February 14, 1996, the Company filed its
Second Amended Plan of Reorganization. On April 1, 1996, the Company filed
the Third Amended Plan of Reorganization.
On May 9, 1996, the Third Amended Plan of Reorganization was approved by the
shareholders and creditors and confirmed by the Court. Under this Plan, the
creditors/equity holders were assigned to one of nine classes. Satisfaction
of claims of each class under this approved Plan is as follows:
Class 1 - Post-Petition Administrative Claims
- To be paid in full on the effective date of the Plan (the
"Effective Date") or soon thereafter.
Class 2 - Priority Tax Claims
- To be paid in full with 9% interest in monthly payments.
Class 3 - Non-Tax Priority Claims
- To be paid in full on the Effective Date or soon
thereafter.
Class 4 - Pre-Petition Claims of TPL and IBM
- To receive 6,400,000 shares of the Company's Stock on the
Effective Date or soon thereafter.
Class 5 - Post-Petition Claims of TPL and Kandila
- To receive 4,200,000 shares of the Company's Stock on the
Effective Date or soon thereafter.
Class 6 - Claims of Wong's Electronics
- To receive, along with Class 8 creditors, a prorated
share of 1,000,000 shares of the Company's Stock on the
Effective Date for their unsecured portion of the claims.
- Will also receive 50,000 shares in settlement of their
secured portion of the claims on the Effective Date or
soon thereafter.
Class 7 - Claims Under Expressed or Implied Warranties
- To receive 10% product discount certificates on the
Effective Date or soon thereafter.
Class 8 - Claims Unsecured Creditors Not Otherwise Classified Under
the Plan
- To receive, along with Class 6 creditors, a prorated
shares of 1,000,000 shares of the Company's Stock on the
Effective Date or soon thereafter.
Class 9 - Equity Interest of Debtor's Shareholders
- To retain their shares of the Company's Stock.
On July 23, 1996 the District Court approved the implementation of the Third
Amended Plan of Reorganization and discharged Dauphin as Debtor-in-Possession.
This closed Dauphin's bankruptcy proceedings.
Prior to discharge, the Company issued the 11,650,000 shares of its common
stock pursuant to the Plan. This has effectively converted all pre-petition
credit holders to equity holders. Each present equity holder's position has
been diluted since additional shares of stock have been issued. Shareholders
Equity Common Stock and Paid-in-Capital reflect the consequence of issuance of
additional shares in exchange for the debt at $1.12 per share. That price
corresponds to the share price of a private placement described below, which
was completed at approximately the same time as approval and implementation of
the Third Amended Plan of Reorganization. The difference between increase in
shareholders equity and total debt forgiveness is reflected as an
Extraordinary Gain for the quarter. Shares issued under the Plan have a
holding period, during which the shares cannot be traded. The holding period
continues through the earlier of nine months from the effective date of the
Plan or the date the shares are registered by the Company.
According to the Plan, in addition to the stock issued to satisfy creditors
claims, the Company is authorized to issue and register up to 16 million
additional shares (the "Reserve Shares") which can be used by the Company for
future business operations and growth. It is contemplated by the Plan that
Reserve Shares may be offered to the public both before and after the Company
completes a registration of all of the Company's presently outstanding
shares, which the Company anticipates may take up to nine months to complete.
According to the Plan, any portion of the Reserve Shares issued prior to
registration will be issued pursuant to appropriate provisions of state and
federal securities law permitting such issuance without the prior registration
of such shares.
On April 19, 1996, TPL commenced a private placement of certain 9% unsecured
promissory notes convertible to certain Dauphin shares received by it in
connection with debtor-in-possession financing provided by TPL to Dauphin. As
a result of the private placement and conversion of notes as specified in the
Offering Memorandum, Dauphin received $995,408, or sixty percent of the
proceeds of the private placement, in exchange for 888,757 Reserve Shares. As
of the date of this filing, the Company has received all of its private
placement proceeds and is in the process of issuing all required Reserve
Shares to satisfy the conditions of the private placement.
As and to the extent needed, the Company may enter into additional borrowings
with TPL and Kandila, on terms substantially similar to the Company's prior
borrowings from them. The Company believes that the funds it currently has on
hand, when coupled with its anticipated operating profits, any additional
funds it may borrow from TPL and/or Kandila in the future, and the funds that
were raised through the private palcement of the above described Reserve
Shares, provide sufficient funds for the Company to finance its operations and
complete its reorganization.
3. LITIGATION SETTLEMENT
Due to the Company's filing for protection under Chapter 11 of the Federal
Bankruptcy Code, all legal proceedings and claims were subject to the
automatic stay. By entry of the Bankruptcy Court Order confirming the
Company's Plan, all such proceedings and claims have been satisfied and
discharged pursuant to the provisions of the Plan. The management is not
aware of any existing or threatened litigation.
4. SUMMARY OF MAJOR ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue on the sale of computers and accessories upon
delivery and the expiration of certain return provisions, if applicable.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) basis. Inventory received as part of the
Reorganization plan was recorded at fair market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
straight-line methods over the estimated lives of the related assets, which
range between two and seven years.
Income Taxes
Effective January 1, 1991, the Company elected to adopt Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Short-Term Liabilities
On June 18, 1996 the Company established a $232,000 Irrevocable Letter of
Credit with the First of America Bank to enable commencement of production of
its DTR-2 product. This facility is not reflected in the financial statements
since no borrowings have been made under this Letter of Credit.
Income(Loss) Per Common Share
Income(Loss) per common share is calculated based on the monthly weighted
average number of common shares outstanding which were 19,277,401 for the six
month period June 30, 1996, and 14,408,354 for the period June 30, 1995.
Unaudited Financial Statements
The accompanying statements are unaudited. However, such information reflects
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the management, necessary for a fair statement of results for the
interim periods. The results of operations for the six months ended June 30,
1996, are not necessarily indicative of the results to be expected for the
full year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CHANGES IN FINANCIAL POSITION
JUNE 30,1996 COMPARED TO DECEMBER 31, 1995
Total assets increased during the quarter to $3,151,000 at June 30, 1996, from
$426,000 at December 31, 1995. Increase in cash from $92,604 on December 31,
1995 to $374,260 on June 30, 1996, was primarily due to a receipt of proceeds
of the private placement of 888,757 Reserve Shares. The financial statements
reflect only partial distribution of cash from the proceeds for the private
placement. Accounts Receivable-other were collected, and the proceeds were
added to existing cash and used to fund current operations, purchase property
and equipment and reduced accounts payable and accrued expenses. Increase in
inventory was due to acquisition of certain inventory from TPL, as part of the
bankruptcy proceedings, and was recorded based on the current fair market
value of such inventory.
Total liabilities decreased by approximately $51,197,000 as a result of a
conversion of debt to equity under the Third Amended Plan of Reorganization.
The remaining debt represents normal obligations incurred in a day-to-day
operations of the Company, some estimated professional fees incurred in
connection with bankruptcy settlement, and certain pre-petition first priority
IRS debt that the Company is scheduled to repay over six years. Shareholders
Equity - Common Stock and Paid-in-Capital reflect the issuance of additional
shares in exchange for the debt at $1.12 per share. That price corresponds to
the share price of the private placement, which was completed at approximately
the same time as approval and implementation of the Third Amended Plan of
Reorganization. The difference between increase in Shareholder's Equity and
total debt forgiveness is reflected as an Extraordinary Gain for the quarter.
Total Shareholders Equity increased to $3,009,000 on June 30, from
($50,910,000) on December 31.
RESULTS OF OPERATIONS
JUNE 30, 1996 COMPARED TO JUNE 30, 1995
Revenues
Total sales revenue in the second quarter decreased to $1,700 in 1996 from
$19,000 in 1995. During both, second quarters of 1996 and 1995, the Company
was operating under Chapter 11 of the Federal Bankruptcy Code and was in a
dormant stage for all practical purposes. Due to the small dollar value of
sales the change in the gross profit margin cannot be compared to historical
margins and is not indicative of future margins.
Expenses
During the quarter, the Company was in a dormant stage and expenses were
minimal. Salaries of current employees were the major expenses. The other
large expense was for professional fees related to the Chapter 11 proceedings.
Since the Company was extremely short of cash, no money was spent on research
and development.
Net Income(Loss)
Due to debt forgiveness, the Company recognized income, including the
Extraordinary Gain, in the amount of $37,732,000 or $1.76 per share for the
second quarter. The income(loss) after tax but before Extraordinary Gain
increased for the second quarter to ($333,000) or ($0.02) per share from
($60,000) or ($0.01) per share in 1995 on a fully diluted basis, due primarily
to salaries paid to employees and bankruptcy costs.
CURRENT OPERATIONS
On June 18, 1996, the Company placed a purchase order with SMT Unlimited LLC
to restart the production of Desk-Top Replacement 2nd Generation (DTR-2)
handheld computer. In total, 155 units were ordered to be delivered in three
stages; five test units which were delivered in June; with fifty and then one
hundred additional units to be delivered when Company-received orders warrant
the production of such additional units. In conjunction with this purchase
order, Dauphin signed an Irrevocable Letter of Credit in the amount of
$232,000. As of the date of this filings, no funds have been released under
the Letter of Credit to SMT.
Capital Lease
On May 25, 1996 the Company moved into its new headquarters on 800 E.
Northwest Highway in Palatine. The Company has leased a 7,700 square feet
office and a separate 2,700 square feet storage space for inventory. The
operating lease is for the term of three years at rental rate of approximately
$9,800 per month.
Liquidity and Capital Resources
Shareholder's Equity increased in the second quarter from ($50,910,000) to
$3,009,000 at June 30, 1996. This is due to culmination of the bankruptcy
proceedings and capital infusion from private placement. Sales of DTR-2
should begin in the third quarter of 1996. Cash flow generated from the sales
of DTR-2, should be applied to current and future working capital needs. The
Company will be pursuing avenues to raise additional operating capital,
possibly through a credit facility.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Due to the Company's filing for protection under Chapter 11 of the
Federal Bankruptcy Code, all legal proceeding and claims were subject
to the automatic stay. By entry of the Bankruptcy Court Order
confirming the Company's Plan, all such proceedings and claims have
been satisfied and discharged pursuant to the provisions of the Plan.
All bankruptcy proceedings have concluded and presently no legal
matters are pending.
Item 2. Changes in the Rights of the Company's Security Holders. None.
Item 3. Default by the Company on its Senior Securities. None
Item 4. Submission of Matters to a Vote of Securities Holders. None.
Item 5. Other Information. None.
Item 6(a). Exhibits. None.
Item 6(b). Reports on Form 8-K. None.
SIGNATURE
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, Registrant's Chief Financial Officer, thereunto duly authorized.
Dated: August 12, 1996
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: Sal Burd___________________________________
Savely Burd
(Chief Financial Officer)
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