UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 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 87-0455038
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60067
(Address of principal executive offices) (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 X 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: November 14, 1996; 29,547,111.
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
3 BALANCE SHEETS September 30, 1996 and December 31, 1995
4 STATEMENTS OF OPERATIONS Nine Months and Three Months Ended
September 30, 1996 and 1995
5 STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) Fiscal Year
Ended December 31, 1995 and Nine Months Ended September 30,
1996
6 STATEMENTS OF CASH FLOWS Nine Months Ended September 30,
1996 and 1995
7 NOTES TO FINANCIAL STATEMENTS
13 Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
15 PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Company's Security Holders
Item 3. Default by the Company on its Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K
16 SIGNATURE
DAUPHIN TECHNOLOGY, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, December 31,
1996 1995
CURRENT ASSETS: [C] [C]
Cash $ 581,398 $ 92,604
Accounts Receivable
Trade 3,537 5,791
Other ----- 167,266
Prepaid Expenses 12,459 -----
Inventory, net 2,684,117 91,142
---------- ----------
Total Current Assets 3,281,511 356,803
PROPERTY AND EQUIPMENT, net of
Accumulated Depreciation of
$91,707 at September 30, 1996
and $78,516 at December 31, 1995 120,442 69,690
---------- ----------
TOTAL ASSETS $ 3,401,953 $ 426,493
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 81,079 $ 252,228
Short Term Borrowing ----- 759,947
Current Portion of Long-Term Debt 14,570 -----
---------- ----------
Total Liabilities not Subject to Compromise
- Current Liabilities 95,649 1,012,175
LIABILITIES SUBJECT TO COMPROMISE:
Accounts Payable ----- 1,186,395
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
LONG TERM LEASES AND COMMITMENTS PAYABLE:
Net of Current Portion 30,240 -----
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 September 30, 1996
and 14,408,354 at December 31, 1995 29,547 14,408
Paid in Capital 22,085,202 5,144,932
Accumulated Deficit (18,838,685) (56,069,527)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 3,276,064 (50,910,187)
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 3,401,953 $ 426,493
========== ==========
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS and THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Nine Months Three Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
[C] [C] [C] [C]
NET SALES $ 39,792 $160,484 $ 18,489 $ 12,571
COST OF SALES 14,472 83,453 156 8,600
-------- -------- -------- --------
Gross Profit 25,320 77,031 18,333 3,971
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 584,888 466,963 267,866 235,115
RESEARCH AND DEVELOPMENT
EXPENSE 43,229 ----- 43,229 -----
-------- -------- -------- --------
(Loss) before Reorganization
Items, Income Taxes and
Extraordinary Item (602,797) (389,932) (292,762) (231,144)
REORGANIZATION ITEMS:
Professional Fees 236,530 140,074 40,503 60,323
(Loss) before Income Taxes
and Extraordinary Item (839,327) (530,006) (333,265) (291,467)
-------- -------- -------- --------
INCOME TAXES ----- ----- ----- -----
(Loss) before Extraordinary
Item (839,327) (530,006) (333,265) (291,467)
-------- -------- -------- --------
EXTRAORDINARY ITEM,
Net of Income Taxes of$0 38,065,373 ----- ----- -----
INTEREST INCOME 4,796 ----- 4,796 -----
----------- -------- -------- --------
NET INCOME (LOSS) $37,230,842 $(530,006) $(328,469) $(291,467)
=========== ======== ======== ========
INCOME/(LOSS) PER COMMON SHARE:
Before Extraordinary Item (0.04) (0.04) (0.01) (0.02)
Extraordinary Item 1.81 ----- ----- -----
----------- -------- -------- --------
NET INCOME (LOSS) $ 1.77 $ (0.04) $ (0.01) $ (0.02)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,018,554 14,408,354 29,369,906 14,408,354
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FISCAL YEAR ENDED DECEMBER 31, 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Common Stock Paid-in Accumulated
BALANCE Shares Amount Capital Deficit Total
- ----------------- ---------- ------- ---------- ------------ ------------
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 ------ ------ ------ (530,006) (530,006)
---------- ------- ---------- ------------ ------------
September 30, 1995 14,408,354 14,408 5,144,932 (55,804,721) (50,645,381)
Net (Loss) ------ ------ ------ (264,806) (264,806)
---------- ------- ---------- ------------ ------------
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 888,757 889 994,520 ------ 995,409
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 ------ ------ ------ 37,230,842 37,230,842
---------- ------- ---------- ----------- -----------
September 30, 1996 29,547,111 $ 29,547 $22,085,202 (18,838,685) $ 3,276,064
========== ======= ========== ============ ===========
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net Income(Loss) $37,230,842 $(530,006)
Non-Cash Items Included in Net Income(Loss):
Depreciation 22,083 30,000
Compensatory Effect of Stock Options Earned ------ (87,665)
Extraordinary Item (38,065,373) ------
Decrease in Accounts Receivable - Trade 2,254 32,743
(Increase)/Decrease in Accounts Receivable -
Other 167,266 (99,663)
(Increase) in Prepaid Expenses (12,459) (1,667)
(Increase)/Decrease in Inventory (2,592,975) 19,006
(Decrease) in Bank Overdraft ------ (1,299)
(Decrease)/Increase in Accounts Payable,
Accrued Expenses, and Claims Payable (156,579) 298,418
--------- --------
Net Cash (Used For) Operating Activities (3,404,941) (340,133)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of Equipment and Furniture, Net (72,845) (8,888)
CASH FLOWS FROM FINANCING ACTIVITIES -
Long-Term Leases and Other Obligations 30,240 ------
Non-Cash Effect of Inventory Purchase with Equity 2,584,127 ------
Proceeds from Issuance of Shares for
Private Placement 995,409 ------
Increase in Short Term Borrowing 356,804 399,949
--------- --------
Net Cash Provided by Financing Activities 3,966,580 399,949
Net Increase in Cash 488,794 50,928
CASH BEGINNING OF PERIOD 92,604 ------
CASH END OF PERIOD $ 581,398 $ 50,928
CASH PAID DURING THE PERIOD FOR -
Interest $ 793 $ ------
Reorganization Costs 238,280 53,259
Income Taxes ------ ------
SUPPLEMENTAL NON-CASH ACTIVITY -
Purchase of Inventory through Issuance of Stock $ 2,584,127 $ ------
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
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. From 1988 to 1992, it
functioned primarily as a development stage company which focused most of its
efforts on developing mobile computers that would meet the specifications of
certain government contracts. Historically, the Company marketed directly and
through computer solution providers to both the commercial and government
markets.
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 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
the mobility and versatility of the units. Random access memory, hard drive,
software and attachments could be expanded or added to match customer
configuration requirements.
Through the acquisition of the Intercon Business Plan (See 1996 Events below),
the Company plans to achieve product diversification through development,
production and sale of industrial control panels which are similar in design
and manufacturability to its main product. The development of the Intercon
products is expected to commence in the near future.
2. BASIS OF PRESENTATION
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 in April 1995. At the same time,
approximately, Andrew J. Kandalepas assumed Chairmanship of the Board of
Directors and Messrs. Kevin Koy and Russ Felker were appointed Company's Chief
Executive Officer and President respectively.
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 had been met and the Yong
shares were 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 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 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 value 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, on November 20, 1995, Kevin Koy
and Russ Felker were removed from their positions as Chief Executive Officer
and President of the Company, respectively. 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. Messrs. Koy, Felker
and Prinz resigned from the Company as Directors and 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 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 Bankruptcy 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. Shareholder's
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 in the financial
statements as an Extraordinary Gain. 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. At the present
time, the Company is cooperating with Securities and Exchange Commission in
order to register all shares issued as part of bankruptcy proceedings and in
the private placement.
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. The Company is in the process of
registering 3 million shares on Form S-1 for "shelf issuance". 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. As a result of the
private placement and conversion of notes as specified in the Private
Placement Memorandum, Dauphin received $995,408, or sixty percent of the
proceeds of the private placement, in exchange for 888,757 Reserve Shares at
$1.12 per share. As of the date of this filing, the Company has received all
of its private placement proceeds and has issued all required Reserve Shares
to satisfy the conditions of the private placement.
3. 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. No obsolescence
reserve were established for the inventory.
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.
Change in control of the Company, which happened during 1995, resulted in
limitation of Net Operating Loss Carryforward that Company accumulated while
in bankruptcy.
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 21,018,554 for the nine
month period September 30, 1996, and 14,408,354 for the period September 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 presentation of results for
the interim periods. The results of operations for the nine months ended
September 30, 1996, are not necessarily indicative of the results to be
expected for the full year.
4. 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.
5. LIABILITIES
On September 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 and the Company
is using cash in the bank as collateral for the loan.
Certain first priority government tax leans, which existed prior to bankruptcy
petition filing, have not been discharged in bankruptcy. The Company is
obligated to repay approximately $21,000 of such leans on a monthly basis over
the next six years.
During the third quarter, the Company financed a purchase of certain operating
equipment. The Company financed approximately $23,000 of such purchases over
the next three years.
6. EMPLOYEE BENEFIT PLAN
Effective August 16, 1996 the Company adopted the Dauphin Technology 401(k)
Employee Savings Plan covering substantially all employees of the Company.
Participants may elect to defer up to 15% of their eligible compensation. The
Company, when profitable, at its sole discretion, may contribute certain
amount to the Plan. The Company did not contribute any funds to the Plan
during the third quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
CHANGES IN FINANCIAL POSITION
September 30,1996 Compared to December 31, 1995
Total assets increased during the quarter to $3,400,000 at September 30, 1996,
from $426,000 at December 31, 1995. Increase in cash from $92,604 on December
31, 1995 to $581,398 on September 30, 1996, was primarily due to a receipt of
proceeds of the private placement of 888,757 Reserve Shares. 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. 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. Total Shareholders Equity increased to
$3,276,000 on September 30, from ($50,910,000) on December 31.
RESULTS OF OPERATIONS
September 30, 1996 Compared to September 30, 1995
Revenues
Total sales revenue in the third quarter increased to $18,000 in 1996 from
$12,000 in 1995. The increase was primarily due to increase in sales of
accessories. First fifty DTR-2 computers were assembled by the beginning of
October 1996, so none were available for sales in the third quarter. 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
Salaries and employment taxes for current employees represent a major part of
expenses for the quarter. Other large expense were research and development,
tooling for the production of DTR-2, and professional fees related to SEC
filings.
Net Income(Loss)
Due to debt forgiveness, the Company recognized income, including the
Extraordinary Gain, in the amount of $37,230,842 or $1.77 per share for the
third quarter. The (loss) after tax but before Extraordinary Gain increased
for the third quarter to ($328,000) or ($0.01) per share from ($291,000) or
($0.01) per share in 1995 on a fully diluted basis, due primarily to salaries
paid to employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial requirements were met through cash generated from
private placement.
Sales of DTR-2 should begin in the near future. Cash flow generated from the
sales of DTR-2, will 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. As and to the extent needed, the Company
may enter into additional borrowings with TPL or 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 placement of the above described Reserve Shares, provide
sufficient funds for the Company to finance its operations and complete its
reorganization.
The Company had signed a Convertible Unsecured Promissory Note with
Tiedemann/Economos Emerging Growth Fund for the amount of $770,000 in order
to secure funding for future operations. As of the date of this filing the
Note has not been drawn upon.
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.
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: November 15, 1996
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: ___________________________________
Savely Burd
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary of financial information extracted from
form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 581,398
<SECURITIES> 0
<RECEIVABLES> 3,537
<ALLOWANCES> 0
<INVENTORY> 2,684,117
<CURRENT-ASSETS> 3,281,511
<PP&E> 212,149
<DEPRECIATION> 91,707
<TOTAL-ASSETS> 3,401,953
<CURRENT-LIABILITIES> 95,649
<BONDS> 0
0
0
<COMMON> 29,547
<OTHER-SE> 3,246,517
<TOTAL-LIABILITY-AND-EQUITY> 3,401,953
<SALES> 18,489
<TOTAL-REVENUES> 18,489
<CGS> 156
<TOTAL-COSTS> 156
<OTHER-EXPENSES> 350,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 793
<INCOME-PRETAX> (333,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (333,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 4,796
<NET-INCOME> (328,469)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
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