SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. (Fee Required) For fiscal year ended December 31, 1996
Transaction Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. (No Fee Required)
DAUPHIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Illinois 87-0455038
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
800 E. Northwest Hwy, Suite 950, Palatine, IL 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406
Registrant's telephone number, including area code
Securities registered pursuant to Section 15(d) of the Act:
Common Stock $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (1) Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant as of March 28, 1997 was $12,051,960.
As of March 28, 1997, the number of Shares of the Registrant's Common Stock,
$.001 par value, 31,866,897 was issued and 29,547,111 was outstanding, with
2,319,786 treasury shares.
1
DAUPHIN TECHNOLOGY, INC.
Table of Content
PART I 3
Item 1. Description of Business 3
Introduction 3
Products 4
Diversification 4
Markets 5
Sales and Marketing 5
Source and Availability of Raw Materials 5
Software Licensing Agreements 5
Patents, Copyrights and Trademarks 5
Customer Dependence 5
Competition 6
Research and Development 6
Employees 6
Risk Factors 6
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to Vote of Security Holders 8
PART II 9
Item 5. Market for the Registrant's Common Stock and
Related Security Holders Matters 9
Market Price of Common Stock 9
Holders 9
Dividend Policy 9
Item 6. Description of Registrant's Securities 9
Common Stock 9
Preferred Stock 9
Warrants and Options 10
Transfer Agent and Registrar 10
Item 7. Selected Financial Data 10
Item 8. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Results of Operations 1996 Compared to 1995 10
Results of Operations 1995 Compared to 1994 10
Liquidity and Capital Resources 11
Item 9. Financial Statements and Supplementary Data 12
PART III 13
ITEM 10. Directors, Executive Officers and
Officers of the Registrant 13
Directors and Officers 13
Family Relationship 14
Other: Involvement in Certain Legal Proceedings 14
Involvement by Management in Public Companies 14
Item 11. Executive Compensation 15
Stock Option Plan 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Party Transactions 17
PART IV 17
Item 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K 17
SIGNATURES 18
2
NOTE: The discussions in this Form 10-K contain forward looking statements
that involve risks and uncertainties. The actual results of the Company could
differ significantly from those set forth herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Description of Business," particularly "Business-Risk Factors," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Form 10-K. Statements
contained in this Form 10-K that are not historical facts are forward looking
statements that are subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. A number of important factors could cause the
Company's actual results for fiscal 1997 and beyond to differ materially from
those expressed in any forward looking statements made by, or on behalf of, the
Company. These factors include, without limitation, those listed in "Business-
Risk Factors."
PART I
Item 1. Description of Business
Introduction
Dauphin Technology, Inc. (the "Company") was founded to design, manufacture, and
market mobile computing systems, including laptop, notebook, hand-held and pen-
based computers, components and accessories. Historically, the Company marketed
directly and through other distribution channels to the commercial and
government market segments.
In early 1993, the Company introduced the Desk-Top Replacement, first generation
("DTR-1"), a pen-based hand-held computer with fax/modem features that was
considered a leading edge product for commercial applications. Sales of the
DTR-1 did not meet the Company's expectations and financial problems developed.
During the fourth quarter of 1994, the Company sold the majority of its finished
goods inventory but was unable to meet its operating expenses.
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 and the first six
months of 1996, the Company operated under Chapter 11 as a Debtor-in-Possession
and was in a dormant state for all practical purposes. On May 9, 1996, the
Company's Third Amended Plan of Reorganization was approved by the overwhelming
majority of the creditors and shareholders and confirmed by the Court. On July
23, 1996, the Court discharged Dauphin as Debtor-in-Possession and the
bankruptcy case was closed.
On February 6, 1996, the Company entered into an agreement with Victor I. Baron,
Savely Burd and Interactive Controls, Inc. an Illinois Corporation ("Intercon").
Intercon has developed and was 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 Mr. Baron to act as the Company's Chief
Operating Officer and President of the Company's new "Intercon Division." It
also hired Mr. 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 which will be paid to Mssrs. Baron and Burd, Intercon will be entitled
to receive, if certain sales and profit objectives are met, 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.
On June 19, 1996, the Company placed a purchase order with a manufacturing
facility to start the production of the main product Desk Top Replacement,
second generation (DTR-2). In total, 155 units were ordered to be delivered in
three stages; five test units which were delivered in September; following with
fifty and then one hundred additional units which were delivered in October and
November respectively. In conjunction with this purchase order, the Company
signed an Irrevocable Letter of Credit in the amount of $232,000. In addition,
all non-recurring costs related to manufacturing and testing a product, have
been paid for during current production period.
3
As part of the diversification plan, on February 12, 1997 the Company signed a
letter of intent to acquire Richard M. Schultz and Associates, Inc. ("RMS"), an
Illinois corporation that is involved in contract engineering and manufacturing
services. The letter of intent calls for an exchange of 205,000 Company shares
for all outstanding shares of RMS, with 105,000 of such Company shares set aside
in an escrow account to be released over the following three years based on
certain performance criteria. Currently RMS occupies a 53,000 square foot
facility in McHenry, Illinois and has sales of approximately $5,000,000 per
year.
Products
The main product of the Company is a hand-held computer - Desk Top Replacement,
second generation ("DTR-2"). The basic unit has a 486 central processor with 50
megahertz processing speed. The unit also has eight to sixteen megabytes of
random access memory, a flat liquid crystal display, a 240 to 520 megabytes hard
drive, voice and pen recognition, and wireless communications capability. The
units measure 7 inches in length, 5.5 inches width, 2.5 inches thick and weigh
2.7 pounds. The Company also offers various options and accessories to support
customer configuration requirements.
Unlike two years ago, the market is wide open and ready for products such as
DTR-2. The DTR-2 is a significant technological step forward among mobile
computing devices. It is a time, labor, and money-saving device that was
designed to free users from their desks. Much more flexible and powerful than a
Personal Digital Assistants (PDA), the DTR-2 is an MS-DOS/Windows/Windows 95
compatible machine. New developments in battery technology allow the device to
be portable and useful to customers who need computing capacity at remote
locations. In addition to a small keyboard, the DTR-2 allows "pen input", ideal
for note taking, record keeping, organization and on-the-road fax
communications. The DTR-2, also allows for "voice input", permitting the user
to operate the unit virtually hands free. By using modern PCMCIA accessories,
DTR-2 can also communicate wirelessly, using either radio frequency or cellular
technology. This allows users to send and receive "e-mail" and facsimiles from
nearly anywhere in the world. Future generations of the DTR series will
incorporate color screen, faster processor, global positioning systems and other
innovations that will service particular vertical market needs.
The management of the Company believes that today's mobile computer and wireless
communication market provides an opportunity to further develop the DTR line of
products. Production schedules and further product developments will be
correlated with market requirements and sales performance. Accordingly,
adjustments in product configurations will be made to satisfy the price and
functionality requirements of the targeted OEM markets. As an example, the
Company, in cooperation with a final electronic solution provider, developed and
is in the process of marketing DTR-2/CD, which has a manufacturers installed CD
ROM. Also, the Company began preliminary development of the next generation of
DTR product.
Upon availability of funds, management intends to launch the first phase of
development of Intercon products. The primary market for Intercon's control
systems and software will be industrial and commercial manufacturing enterprises
in need of high-efficiency low-cost process/machine control and touch-screen
graphics interface solutions. Revenues will be generated through the sales and
support of "EX-Panel" and "FLEX-Control" parts of "Interactive Solution" systems
and "FLEX-Design" software.
Diversification
The Company's diversification plan is intended to strengthen its short, mid and
long term business and sales. Management has developed a strategy to emerge from
a single product or single product-line dependency to a technology holding
company with subsidiaries in electronic services and products. Engagements are
and will continue to be selected based on synergistic alliances of both services
and products.
The combination of the DTR and Intercon industrial control products is intended
to serve as core products for the Company. Management is in the process of
actively searching for a prospective addition(s) to supplement its core products
and, hopefully, achieve greater diversification.
As part of the vertical integration of Dauphin, RMS will enhance Dauphin's
revenues and profits and will provide added value and capability with
engineering and manufacturing capacity that Dauphin currently lacks. Further
expansions into technology service related businesses would play on management's
strength and would promote stability of the enterprise as a whole.
4
Markets
Currently, the Company participates in a mobile computing market with the only
available product it has. Based on a Frost and Sullivan 1995 study, published
in January of 1996, the world sales of mobile computing devices will double from
$30 billion to nearly $80 billion by the year 2001, growing at an 18 percent
compound annual rate. The same study concludes that portable computers will
grow twice as fast as desktops with some companies replacing desktop computers
with portables.
A different Frost and Sullivan report, released in November 1995, estimates that
contract manufacturing market will more then triple to over $35 billion by the
year 2001, growing at 19 percent per year. Since electronic contract
manufacturing represents over 40% of contract manufacturing market, an
acquisition of RMS creates a sound business platform for Dauphin.
Sales and Marketing
Since the Company has not had a product to sell during 1995 and most of 1996,
many of the distribution channels that were used in the past are no longer
viable. The DTR-2 is a niche or vertical market product which has a long sales
cycle. The market is very application specific with potential in the defense,
utilities, medical, inspection and numerous other industries. Sales effort has
been very fruitful in as much as identifying the potential sales opportunities,
but as of the date of this report, only limited number of units have been sold.
The Company anticipates a substantial increase in sales in the second and third
quarters of 1997.
With the acquisition of RMS, the Company will be able to record revenues
immediately after closing of the transaction and will improve the name
recognition necessary to further promote growth and corporate stability.
Source and Availability of Raw Materials
The Company subcontracts the assembly of the finished product from component
parts which are obtained from suppliers throughout the world. The Company
presently own a sufficient inventory of parts to continue the production of the
DTR-2.
Software Licensing Agreements
The Company is in the process of reviewing and possibly renewing its existing
strategic partnership agreement with Phoenix Technologies Ltd. ("Phoenix").
Phoenix designs, develops, markets and licenses proprietary compatibility
software products for original equipment manufacturers, including BIOS (basic
input output system) and related system software for personal computers.
The Company has entered into a Pen Products Original Equipment Manufacturing
Distribution License Agreement and Sub-license Agreement for Dedicated Systems
with Annabooks Software LLC ("Annabooks"), the supplier of products offered by
Microsoft Corporation ("Microsoft"). Microsoft is the third-party beneficiary
under these agreements. Under the terms of these agreements, the Company is
authorized to install Microsoft's DOS, Windows 3.11, Windows 95, and Windows for
Pen, amongst others, on computers it sells. For this right, the Company must pay
Microsoft, through Annabooks, royalties for each unit sold, with quantity
discounts available.
Patents, Copyrights and Trademarks
In view of the rapid technological and design changes incident to the computer
industry, the Company does not believe that, in general, patents and/or
copyrights are an effective means of protecting its interest. The computers
offered by the Company are the result of engineering design by its employees and
strategic partners. The Company attempts to maintain its proprietary rights by
trade secret protection and by the use of non-disclosure agreements. It is
possible that the Company's products could be duplicated by competitors and the
Company could therefore be adversely affected by duplication and sale. However,
the Company believes that the time spent by competitors on reverse engineering
the product, would be too long for the rapidly moving computer industry.
Customer Dependence
Since the Company has not had product to sell during most of 1995 and 1996, it
is not dependent on any one customer for the bulk of its sales.
5
Competition
The Company's only product currently marketed is the DTR-2 which is a small
hand-held computer. This product competes in the mobile computer market. The
remaining window of opportunity for the DTR-2 cannot be precisely determined,
but it is expected to be approximately one year for first time sales and an
additional three years for replacement units and/or upgrades. Worldwide, there
are over 40 companies competing in this market, including the companies that
produce PDA's, which are considered communication devices rather then computing
devices. Some of these competitors are large, well financed entities, such as
Fujitsu or IBM. In order for the Company to have a competitive edge, it must
have leading technology and cost effective products. When new products are
introduced, there is a small window of opportunity before clones are developed.
However, being a small company, the Company's strength will be in its
flexibility to meet industry demands and to partner with other solution
providers that jointly will offer unique solutions for certain applications that
lead to long term relationships with these types of clients.
Research and Development
In order to compete in the mobile computer market, the Company must have a
product line that includes leading technology products. The Company has a
history of developing and bringing to market leading technology products. Due
to the financial problem the Company experienced during the last several years,
it no longer has a large engineering and technician staff engaged in research
and development. Several engineers and technicians were rehired in order to
restore the previous strength of the Company. The addition of RMS, that
currently employs seven engineers, would further enhance the process of
restoring the engineering capability that the Company needs.
Employees
As of March 28, 1997, the Company has twelve employees. These employees are
executive, sales, production, engineering and technical support and
administrative personnel.
Risk Factors
BANKRUPTCY PROCEEDING 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. On
May 9, 1996, the Company's Third Amended Plan of Reorganization was approved by
the creditors and shareholders and confirmed by the Court. On July 23, 1996,
the provisions of the Plan having been implements, the Company was discharged as
Debtor-in-Possession and the bankruptcy case was closed. The effect of this
bankruptcy proceeding on past or potential future customers, vendors or
employees cannot be determined. Though the Company is no longer a Debtor-in-
Possession in any bankruptcy proceeding, there can be no assurance that the
Company will ever operate at a profit or that an investment in the Company will
result in any gain to shareholders.
SIGNIFICANT HISTORICAL LOSSES The Company ha significant operating losses since
its inception. For the year ended December 31, 1994 and 1995, the Company had
losses of $49,173,000 and $795,000, respectively. Recent emergence from
bankruptcy resulted in a one time addition to income, due to debt forgiveness,
recorded on books as an Extraordinary Gain of $38,065,373 and resulting in net
income of $36,668,669 as of December 31, 1996.
ADDITIONAL CAPITAL REQUIRED In order to succeed with its business plan, the
Company must obtain additional capital. Possible sources of capital could come
from operating revenue, from bank borrowing, or from the sale of the Company's
debt or equity securities. On February 17, 1997 the Company signed an agreement
with an investment banker in order to raise certain capital for he continuing
operations of the company. There can be no assurance that the Company will be
able to obtain the capital necessary to carry out its business plan or sustain
its operations in the future.
DEPENDENCE UPON LIMITED CUSTOMERS During 1995 and the first six months of 1996,
the Company operated under Chapter 11 as a Debtor-in-Possession and was in a
dormant state for all practical purposes. For this reason, the Company has to
rebuild its entire customer base. The effect of this bankruptcy proceeding on
past or potential future customers cannot be determined.
COMPETITION The Company's primary business is the design, manufacture, and sale
of handheld personal computers and industrial control panels. Both industries
are highly competitive and are affected by frequent introduction of new or
improved products. Continuous improvement in product price/performance
characteristics is the key to future success in both industries. At all levels
of competition, pricing has become very aggressive, and the Company expects
pricing pressures to continue to be intense. Many of the Company's competitors
have significantly greater financial, marketing, manufacturing resources,
broader product lines, brand name recognition and larger existing customer bases
than the Company. There can be no assurance that the Company will be able to
compete in any new market in which it enters.
6
OBSOLESCENT OF TECHNOLOGY In the computer industry, hardware and software
products and technology are subject to rapid change, and the Company's future
success will depend on its ability to successfully introduce enhancements to its
present products and to develop new products. The Company must produce products
that are technologically advanced and are comparable to and competitive with
those made by others. Otherwise, the Company's products may become obsolete.
There can be no assurance that the Company's products will not be rendered
obsolete by changing technology or that it will be able to continue to respond
to such advances in technology in a manner as to be commercially successful.
UNCERTAINTY OF MARKET ACCEPTANCE The DTR-2 is a solutions oriented, pen-based,
mobile computer system. The market for the DTR-2 is, to a large degree,
dependent upon software applications developed for specific users or type of
users, such as insurance adjuster, marketing companies and other users requiring
powerful, yet extremely mobile, pen-based computer systems. As the availability
of software applications geared to pen-based computer systems has increased, the
Company anticipates its market will increase. Although the current trend for
pen-based computers in on the rise and third-party software developers are
expected to increase developing software for pen-based applications, there is no
assurance that such trend will continue in the future. The Company believes
that its DTR-2 product may offer advantages over competition, no assurance can
be given that the DTR-2 product will attain any degree of market acceptance or
that it will generate revenues sufficient for profitable operations.
Due to the nature of the product line, industrial control panels are less
technology driven. The Company believes that its industrial control panels will
be superior in design to the current state in technology of the industrial
market. On the other hand there is no assurance that such panels, when
developed, will achieve any market acceptance.
AVAILABILITY OF COMPONENTS The Company's products are manufactured and/or
fabricated from various component parts, such as printed circuit boards,
microchips and fabricated metal parts. The Company must obtain such components
from third-party vendors. The Company's reliance on those manufacturers and
vendors, as well as industry component supply, yields many risks. Identifiable
risks include the possibility of a shortage of components, increases in
component costs, component quality, reduced control over deliver schedules and
potential manufacturer/vendor reluctance to extend credit with the Company due
to its recent bankruptcy. In the event that there is a shortage of component
parts or that the costs of these parts substantially increases, the operations
of the Company and its success in the marketplace could be adversely affected.
DEPENDENCE ON KEY PERSONNEL The success of the Company and of its business
strategy is dependent in large part on its key management and operating
personnel. The Company believes that its future success will also depend on its
ability to retain the services of its executive officers. The Company will also
have an ongoing need to expand its management personnel and support staff. The
loss of the services of one or more members of management or key employees or
the inability to hire additional personnel as needed may have a material adverse
effect on the Company.
DEPENDENCE OF PROPRIETARY TECHNOLOGY The Company relies on a combination of
trade secrets, copyright and trademark laws, nondisclosure and other contractual
provisions, and technical measures to protect its proprietary rights in its
products. There can be no assurance that these protections will be adequate or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to its technology. Although the
Company believes that its products do not infringe upon the proprietary rights
of third-parties, there can be no assurance that third-parties will not assert
infringement claims against the Company in the future or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim. In addition, any such claim may require
the Company to incur substantial litigation expenses or subject it to
significant liabilities that could have a material adverse effect on its
business.
GENERAL ECONOMIC CONDITIONS General economic climate and conditions impact the
operations of the Company. Adverse economic conditions could have the effect of
reduced demand for Company products, increasing customer defaults and increasing
overall credit risks. The availability of alternative financing from banks,
finance companies, insurance companies and other sources may affect the
availability of funds necessary for operations. There can be no assurance that
general economic conditions will be such that the Company will be able to
generate significant revenues or operate at a profit.
7
SUBJECT TO GOVERNMENT REGULATION To a great extend, the business of the Company
is dependent upon federal, state and local government regulations. Government
regulations which interfere with the Company's business plan cold have an
adverse effect on the future business of the Company.
LIQUIDITY Management believes that the funds it currently has on hand, coupled
with anticipated operating revenues and additional funds it may raise in the
future, will provide sufficient funds for the Company to continue pursuing
diversification as planned. Should these events not occur, management feels it
can reduce its operating costs to commensurate with its revenues. There can be
no assurance that any of the events mentioned herein will occur and therefore,
no assurance can be made that the Company will be able to pursue diversification
as planned.
RISK ASSOCIATED WITH ACQUISITIONS As part of the Company's strategy to enhance
and maintain is competitive position, it has entered into a letter of intent
with RMS and continues to evaluate potential acquisitions of businesses,
products and technologies. In considering an acquisition, the Company may
compete with other potential acquirers, many of which may have greater financial
and operations resources. Further, the evaluation, negotiation, and integration
of such acquisitions may divert significant time and resources of the Company,
particularly of management. There can be no assurance that suitable acquisition
candidates will be identified, that any acquisitions can be consummated or that
any acquired business or products can be successfully integrated into the
Company's operations. In addition, there can be no assurance that the RMS
acquisition or any future acquisitions will not have a material adverse effect
upon the Company, particularly in the fiscal quarters immediately following the
consummation of such transactions due to operational disruptions, unexpected
expenses and accounting charges which may be associated with the integration of
such acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 2. Properties
The Company's executive offices consist of 7,300 square feet of office space and
2,700 square feet of warehouse space located at 800 E. Northwest Hwy., Suite
950, Palatine, Illinois 60067. The Company pays approximately $10,000 per month
to rent the facilities. The lease has a three year term with a five year
renewal option. The Company believes the space will be adequate for the
foreseeable future.
Item 3. Legal Proceedings
The Company's management is not aware of any pending or threatened litigation as
of the date hereof.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
8
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holders
Matters
Market Price of Common Stock
The Company's common stock is traded on limited basis in the over-the-counter
market and is quoted in the National Quotation Bureau's Pink Sheets. The
following table shows the range of representative bid prices for the common
stock. The prices represent quotations between dealers and do not include retail
mark-up, mark-down, or commission, and do not necessarily represent actual
transactions:
Bid Prices 1994 1995 1996
High Low High Low High Low
------ -------- ------- ------- ------- -------
First Quarter $ 4.00 $ 0.750 $ 2.313 $ 0.250 $1.625 $0.875
Second Quarter 1.75 0.500 1.750 0.250 1.719 1.125
Third Quarter 1.00 0.125 1.250 0.625 1.625 1.125
Fourth Quarter 1.75 0.125 1.188 0.563 2.000 1.125
Holders
The number of record holders of the Company's common stock as of March 28, 1997
as reported by the Company's transfer agent is approximately 2,500. A number of
the Company's shareholders of record are brokerage firms or stock clearing
agencies. Therefore, the Company believes the total number of beneficial
shareholders is greater than 2,500.
Dividend Policy
The Company has not paid any cash dividends to date and does not anticipate or
contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business.
Item 6. Description of Registrant's Securities
The authorized capital stock of the Company consists of 100,000,000 shares of
common stock, $.001 par value, and 10,000,000 shares of preferred stock, $.01
par value.
Common Stock
As of March 28, 1997 there were 31,866,897 shares of common stock issued and
29,547,111 shares outstanding held by approximately 2,500 stockholders of
record. The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor (see
"Market Price of Common Stock and Dividend Policy"). In the event of a
liquidation, dissolution or winding up of the Company, holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no right to convert their common stock into
any other securities and have no cumulative voting rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.
Under the terms of the Intercon Agreement, Intercon could receive up to 25% of
the total of the Company's outstanding shares of common stock as of the
Effective Date on a fully diluted basis if certain performance goals are
achieved.
Preferred Stock
No preferred shares have been issued to date. The Company is authorized to
issue up to 10,000,000 shares of preferred stock, $.01 par value. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions. No preferred
stock is currently outstanding and the Company has no present plans for the
issuance thereof. However, the issuance of any such preferred stock could
affect the rights of the holders of common stock, and, therefore, reduce the
value of the common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by present owners.
9
Warrants and Options
As of March 28, 1997, the Company had no outstanding warrants or options.
Transfer Agent and Registrar
American Stock Transfer and Trust Company, 40 Wall Street, New York, New York,
10005
Item 7. Selected Financial Data
Year Ended December 31
1996 1995 1994 1993 1992
------- -------- ---------- ----------- -----------
Net Sales And Fees $ 93,946 $ 183,083 $9,603,021 $23,560,986 $23,539,927
Extraordinary Item 38,065,373 - - - -
Net Income (Loss) 36,668,669 (794,812)(49,172,584) (3,398,155) (415,531)
Net Income (Loss)
Per Share 1.52 (0.06) (3.41) (0.24) (0.03)
Total Assets 3,402,860 426,493 298,094 15,838,326 6,670,151
Long-Term Debt 43,196 - - - -
Working Capital 3,020,558 (50,167,342)
(Deficit) (50,979,877) (2,123,006) 160,138
Shareholders Equity 3,092,900 (50,027,710)
(Deficit) (50,910,187) (850,149) 622,367
Item 8. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 1996 Compared to 1995
During 1995 and first half of 1996 the Company was operating under Chapter 11 of
the Federal Bankruptcy Law and was in a dormant state for all practical
purposes. Total sales revenues decreased in 1996 to $94,000 from $183,000 in
1995 primarily due to dormancy and the lack of product available for sale after
emergence from bankruptcy.
The gross profit margins are not comparable for the period due to the extreme
fluctuations in sales and cost of sales.
Selling, general and administrative expenses increased in 1996 to $1,007,000
from $681,000 in 1995. The increase was attributable to an increased activity
and addition of personnel post-bankruptcy to facilitate resurrection of the
production and sales efforts. During 1996 and 1995, over $135,000 and $180,000
was spent on professional services relating to the bankruptcy in respective
years. During 1996 and 1995, $77,000 and $22,000 were spent on research and
development expenses, respectively.
In 1996, due to debt forgiveness related to corporate restructuring and closing
of the bankruptcy proceedings, the Company has recognized a one time
extraordinary income of over $38,000,000.
Results of Operations 1995 Compared to 1994
Total sales revenues decreased in 1995 to $183,000 from $9,603,000 in 1994.
During 1995, the Company was operating under Chapter 11 of the Federal
Bankruptcy Law and was in a dormant stage for all practical purposes.
10
The gross profit margins are not comparable for the period due to the extreme
fluctuations in sales and cost of sales, due to a purchase commitment to a
contract manufacturer in 1994.
Selling, general and administrative expenses decreased in 1995 to $681,000 from
$4,954,000 in 1994 and research and development expenses decreased in 1995 to
$22,000 from $937,000 in 1994. The decreases resulted from the Company operating
under Chapter 11 of the Federal Bankruptcy Law. During 1995, over $180,000 was
spent on professional services relating to the Bankruptcy.
Net loss in 1995 was $795,000 or $0.06 per share compared to $49,173,000 or
$3.41 per share in 1994. During 1994, the Company expensed a purchase
commitment to a contract manufacturer in the amount of $32,978,000 and a
litigation settlement in the amount of $4,935,000. For these reasons and the
other items discussed above, the loss was smaller in 1995 then 1994.
Liquidity and Capital Resources
As of July 23, 1996, bankruptcy proceedings were concluded and all material
conditions precedent to the Plan were satisfied. The financial statements
contained herein reflect the cumulative effect of the culmination of the
bankruptcy proceedings. As such, all debt, subject to and not subject to
compromise, with exception of Federal Priority Tax Liens and ongoing operating
expenses, was converted into equity.
The increase in net inventory is attributable to an agreement with Technology
Partners, L.L.C. ("TPL") to purchase inventory in its possession which it
received when it purchased the secured claim from IBM on May 31, 1995. The
inventory ($2,583,000) was recorded at fair market value in conformity with
generally accepted accounting principles. TPL received 2,600,000 common shares
at a price of $1.12 per share. The inventory consisted of raw materials for
future use in production of DTR-2 and other raw materials.
Stockholders equity (deficit) increased from ($50,910,000) at December 31, 1995
to $3,092,900 at December 31, 1996 due to culmination of the bankruptcy
proceedings, capital infusion from the private placement and repurchase of
shares (as hereinafter discussed).
During the second quarter of 1996, TPL conducted a private placement of
unsecured promissory notes convertible into Company shares. As a result of the
private placement and conversion of notes, the Company received $995,409, in
exchange for 888,757 Reserve Shares valued at $1.12 per share.
On October 22, 1996 the Company issued a convertible note to Tiedemann/Economos
Global Emerging Growth Fund (a shareholder of the Company) in the principal
amount of $770,000. The note, at the election of the holder, was converted into
1,100,000 common shares. Simultaneously, the Company conducted a private
placement of 1,059,286 common shares for $796,616 or $0.75 per share to
qualified investors. The common shares issued in connection with these
transaction were unissued shares that were previously registered by the Company.
The funds obtained from these transactions were used to repurchase 2,159,286
common shares for $1,187,607 or $0.55 per common share that were issued as part
of the bankruptcy settlement to a former officer and director of the Company.
These shares are currently being held as treasury shares. As a result of the
transaction, Dauphin generated $379,009 for operating capital.
On January 27, 1997, the Company, conducted a private placement of 160,500
common shares for $161,300 or $1.01 per share to a qualified investor. The
common shares issued in connection with these transaction were unissued shares
that were previously registered by the Company. Funds obtained from these
transactions were used to repurchase 160,500 common shares for $88,275 or $0.55
per common share that were issued as part of the bankruptcy settlement to an
affiliate. These shares are currently being held as treasury shares. As a net
result of the transaction, the Company obtained $73,025 for operating capital.
On February 17, 1997, the Company signed an agreement with Ewing & Company, an
investment banking firm, to provide financial advice and assist in raising
capital for the benefit of the Company. The agreement calls for structuring of
current and future acquisitions, capital raise and other financial services.
Management anticipates that production of the DTR line and development and
production of the Intercon product lines will be the primary business focus of
the Company. It is estimated that both product lines will require between $2.5
to $3 million of combined capital investment for research and development.
11
Cash flow from the sales of DTR-2 is expected to provide sufficient capital for
ongoing operations and anticipated growth. Due to relatively small overhead, the
Company will need to sell approximately 2,500 DTR-2's at current margin levels
to meet operating requirements. The market demand for the competitive product
suggests that these sales levels are attainable.
Management believes that the funds it currently has on hand, coupled with
anticipated operating revenues and additional funds it may raise in the future,
will provide sufficient funds for the Company to continue pursuing
diversification as planned. Should these events not occur, management feels it
can reduce its operating costs to commensurate with its revenues. There can be
no assurance that any of the events mentioned herein will occur and therefore,
no assurance can be made that the Company will be able to pursue diversification
as planned.
Item 9. Financial Statements and Supplementary Data
The Company's financial statements are included in Item 14 (a).
12
PART III
ITEM 10. Directors, Executive Officers and Officers of the Registrant
Directors and Officers
The following table sets forth the name, age, date appointed a director,
executive officer or officer position with Company or present principal
occupation and employment history for the past five years of each person who is
a director, executive officer or officer.
Name Age Date Appointed Present Office
Andrew J. Kandalepas 45 1995 Chairman of the Board of Directors
Chief Executive Officer, President
Mr. Kandalepas joined Dauphin Technology, Inc. as Chairman of the Board in
February, 1995. He was named CEO and President of Dauphin in November of 1995.
In addition, Mr. Kandalepas is the founder and President of CADServ Corporation,
an engineering services company based in Schuamburg, Illinois. Mr. Kandalepas
graduated from DeVry Institute in 1974 with a Bachelor's Degree in Electronics
Engineering Technology. He then served as a product engineer at GTE for two
years. Mr. Kandalepas left GTE to serve ten years as a supervisor of PCB design
for Motorola just prior to founding CADServ Corporation in 1986.
Victor I. Baron 41 1996 Chief Operating Officer
Mr. Baron was appointed Chief Operating Officer of Dauphin Technology, Inc. and
as President of the Intercon Division in 1996. He has extensive experience in
strategic planning, design and technical sales of industrial controls. An
engineering graduate of Riga Poly Technical Institute, (Riga, Latvia), in 1977,
Mr. Baron has worked for over nineteen years in the high-tech design field
during which he has developed a wide range of long-term relationships within the
manufacturing industry. Before his appointment with Dauphin, Mr. Baron worked
for Total Control Products, an operator interface manufacturer.
Savely Burd 33 1996 Chief Financial Officer
Mr. Burd was appointed Chief Financial Officer of Dauphin Technology, Inc. in
1996. After graduation from the University of Illinois in 1987, Mr. Burd began
his career as a staff auditor at Arthur Andersen LLP. After several promotions
and a career move, Mr. Burd was hired as a Controller for Clarklift of Chicago
North, Inc., a materials handling equipment dealer. Before his appointment with
Dauphin, Mr. Burd was employed by Merrill Lynch. Mr. Burd, a CPA, is also a
graduate of J. L. Kellogg Graduate School of Management.
Jeffrey L. Goldberg 44 1995 Secretary, Director
Mr. Goldberg has served as Secretary and a Director of Dauphin Technology, Inc.
since June of 1995. Mr. Goldberg is President of Financial Consulting Group,
Ltd., a Northfield, Illinois financial planning firm he founded in 1983. Mr.
Goldberg was formerly with a Chicago law firm, Goldberg and Goodman, and prior
to that, was a tax senior with Arthur Andersen LLP. He is an attorney, CPA and
certified financial planner.
Alan S. K. Yong 50 1988 Director
Mr. Yong served as President, Chief Executive Officer and a Director of Dauphin
Technology, Inc., from June 1988 when he founded the Company to June 1995.
Since June 1995, he has served as a Director of the Company. From 1981 through
the present, he has been serving as President of Manufacturing and Maintenance
Systems, (MMS) Inc. a privately held company based in Lombard, Illinois that he
founded in 1981. MMS designs, manufactures and markets industrial computers
for the alignment of rotating equipment. He is a graduate of George Williams
College and received his MBA from Northern Illinois University.
Wm. Paul Bunnell 38 1995 Director
Mr. Bunnell has served as a Director of Dauphin Technology, Inc. since June of
1995. Mr. Bunnell is Vice President of Financial Consulting Group, Ltd. a
Northfield, Illinois financial planning firm he founded in 1983. He was
previously a corporate accounting and financial manager with expertise in
business planning and long range strategic planning.
Gary E. Soiney 56 1995 Director
Mr. Soiney has served as a Director of Dauphin Technology, Inc. since November
of 1995. He graduate from the University of Wisconsin in Milwaukee as a
marketing major with a degree in Business Administration. He is currently a 75%
owner in Pension Design & Services, Inc., a Wisconsin corporation which performs
administrative services for qualified pension plans to business primarily in the
Mid-West.
Douglas P. Morris 40 1995 Director
Mr. Morris has been a Director of Dauphin Technology since November of 1995. He
is also the owner of H & M Capital Investments, Inc., a privately-held business
consulting firm which is engaged in consulting with privately-held and publicly-
held companies relating to management, debt financing and equity financing. Mr.
Morris received his Masters Degree in Public Administration at the University of
Southern California in 1982 and his Bachelor of Arts Degree in Judicial
Administration from Brigham Young University in 1978.
Andrew Prokos 34 1995 Director
Mr. Prokos has served as a Director of Dauphin Technology, Inc. since February
1995. He is also vice-president of CADServ Corporation in Schaumburg, Illinois.
Mr. Prokos is a graduate of DeVry Institute with an Associate Degree in
Electronics.
Dean F. Prokos 32 1995 Director
Mr. Prokos has served as a Director of Dauphin Technology, Inc. since August
1995. He is the Regional Manager for the Secretary of State Drivers Services
Department. He attended Loyola University in Business Management and has been
previously involved with management of various food establishments.
All Directors are elected annually and hold office until the next annual meeting
of the stockholders of the Company or until their successors have been elected
and qualified.
14
Family Relationship
Both Andrew Prokos and Dean F. Prokos are cousins of Andrew Kandalepas, Chairman
of the Board of Directors. Andrew Prokos and Dean F. Prokos are siblings.
Other: Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any Director or Executive Officer during the past five years.
Involvement by Management in Public Companies
With the exception of Douglas P. Morris, none of the other Directors, Executive
Officers or Officers has had, or presently has, any involvement with a public
company, other than the Company. Mr. Morris is currently an Officer and
Director of Celtic Investment Inc., an Officer and Director of Emerald Capital
Investments, Inc., and a Director of Beacon Capital Investment, Inc.
15
Item 11. Executive Compensation
Although the Company does not have a formal Compensation Committee, the Board of
Directors performs the equivalent functions of a Compensation Committee, and
seeks to align compensation with business strategy, Company value, management
initiatives and Company performance. Securities and Exchange Commission
regulations mandate disclosure of all compensation, including salary, bonus and
stock options, paid to executive officers and directors, that exceeds $100,000.
No executive officer or director was paid compensation exceeding $100,000 during
1994, 1995 or 1996.
During 1995 and first half of 1996, Andrew J. Kandalepas worked full time for
the Company in various management positions and was not compensated for these
services.
Stock Option Plan
At the Company's 1992 Annual Meeting of Stockholders, the stockholders approved
the 1992 Stock Option Plan pursuant to which stock options to purchase up to
1,500,000 shares of the Company's common stock may be granted to employees of
the Company. In 1995, all options granted under the Plan expired due to the
termination of these employees and their failure to exercise their options in a
timely manner within the time period established under the Plan.
16
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding shares of commons
stock of the Company owned beneficially as of March 28, 1997, by (i) each
Officer and Director of the Company, (ii) all Officers and Directors as a group,
and (iii) each person known by the Company to beneficially own more than 5% of
the common stock of the Company:
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Position Shares Owned of Class
- ------------------------ ------------------- -------------------- ----------
Alan S.K. Yong Director 765,126(1) 2.6%
Andrew J. Kandalepas Chairman, Chief 5,362,007(2) 18.2%
Executive Officer & President
Victor I. Baron Chief Operating Officer 10,000 0.0%
Savely Burd Chief Financial Officer 60,000 0.2%
Jeffrey L. Goldberg Secretary, Director 3,613,980(3) 12.2%
Wm. Paul Bunnell Director 3,863,980(3) 13.1%
Gary E. Soiney Director 0 0.0%
Douglas P. Morris Director 301,167(5) 1.0%
Andrew Prokos Director 204,000 0.7%
Dean F. Prokos Director 0 0.0%
Northfield Technology
Group ------ 1,248,388(3) 4.2%
H & M Capital Investment ------ 11,167(5) 0.0%
Technology Partners LLC ------ 0(6) 0.0%
K & L Trust ------ 235,800(7) 0.8%
Hyacinth Resources, Inc. ------ 290,000(5) 1.0%
Marinis Loukas Trust ------ 2,032,500(2) 6.9%
FOX Investment Co. ------ 250,000(4) 0.9%
Tiedemann/Economos Global
Emerging Growth L.F. ------ 5,300,000 17.9%
DNS Escrow Trust ------ 2,365,592(3) 8.0%
------------ -----
Officers and Directors and
5% Beneficial Owners (as a group) 15,866,280 53.7%
(1) The 765,126 shares listed for Alan S. K. Yong include shares owned by
members of his family.
(2) The 5,362,007 shares listed for Andrew J. Kandalepas include shares held
individually, 30,650 shares held by CADServ Corporation and 2,032,500 held
by Marinis Loukas Trust for which Kandalepas has voting rights.
(3) Jeffrey L. Goldberg and Wm. Paul Bunnell are partners of Northfield
Technology Group and DNS Escrow Trust and they share voting for such shares.
(4) Wm. Paul Bunnell has voting rights.
(5) Douglas P. Morris is President of H & M Capital Investments, Inc. and
Hyacinth Resources, Inc.
(6) Andrew J. Kandalepas, Jeffrey L. Goldberg and Wm. Paul Bunnell are managing
members of Technology Partners LLC, and share voting.
(7) Andrew J. Kandalepas is the beneficiary of K & L Trust.
16
Item 13. Certain Relationships and Related Party Transactions
CADserv Corporation, an engineering services company based in Schaumburg,
Illinois, controlled by a shareholder, has contributed to the design, packaging
and manufacturing of Dauphin's DTR product line and will likely continue in
this capacity in the future.
Manufacturing and Maintenance Systems, Inc., an Illinois corporation controlled
by a director of the Company ("MMS"), made advances to, and payments on behalf
of the Company from time to time; however, all claims of MMS were released in
connection with the settlement and general release entered into on October 11,
1995. The Company had no transactions with MMS since then.
On April 19, 1996, TPL, controlled by several directors of the Company,
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 Offering Memorandum, Dauphin received
$995,408, in exchange for 888,757 Reserve Shares at $1.12 per share.
On October 22, 1996 the Company issued a convertible note to a shareholder in
the principal amount of $770,000. At the election of the holder, the note was
converted into 1,100,000 Company shares.
On or about January 27, 1997 the Company conducted a private placement during
which, certain shares, issued to a shareholder of the Company as part of the
bankruptcy proceedings, were used to raise $73,025 for the Company's operating
cash needs.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth quarter of the
recently completed fiscal year.
17
Signatures
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, in the City of
Palatine and State of Illinois, on the 29th day of March, 1997.
DAUPHIN TECHNOLOGY, INC.
BY:
Savely Burd, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
Chairman of the Board of Directors March 28, 1997
Andrew J. Kandalepas Chief Executive Officer, President
Victor I. Baron Chief Operating Officer March 28, 1997
Jeffrey L. Goldberg Secretary March 28, 1997
Savely Burd Chief Financial Officer March 28, 1997
DAUPHIN TECHNOLOGY, INC.
INDEX TO FINACIAL STATEMENTS
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994 F-4
Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 F-6
Notes to Financial Statements F-7
Report of Independent Public Accountants
To the Board of Directors and
Shareholders of
Dauphin Technology, Inc.:
We have audited the accompanying balance sheets of DAUPHIN TECHNOLOGY, INC.
(an Illinois corporation) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dauphin Technology, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 14, 1997
F-2
DAUPHIN TECHNOLOGY, INC.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
1996 1995
CURRENT ASSETS:
Cash $ 388,600 $ 92,604
Restricted cash 232,000 -
Accounts receivable-
Trade 2,010 5,791
Other - 167,266
Inventory 2,652,461 91,142
Prepaid expenses 12,251 -
------------ -----------
Total current assets 3,287,322 356,803
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $103,074
and $78,516 at December 31, 1996 and
1995, respectively 115,538 69,690
------------ -----------
Total assets $ 3,402,860 $ 426,493
============ ===========
LIABILITIES NOT SUBJECT TO COMPROMISE-CURRENT LIABILITIES:
Accounts payable $ 204,450 $ 180,115
Accrued expenses 62,314 72,113
Short-term borrowings - 759,947
------------ -----------
Total liabilities not subject to
compromise-current liabilities 266,764 1,012,175
------------ -----------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable - 11,186,395
Short-term borrowings - 46,500
Accrued purchase commitment - 32,977,790
Accrued liabilities - 617,898
Debentures payable - 317,500
Advances from related parties - 208,422
Claim payable - 4,970,000
------------ -----------
Total liabilities subject to compromise - 50,324,505
------------ -----------
LONG-TERM LIABILITIES 43,196 -
COMMITMENTS AND CONTINGENCIES (Note 9)
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; 31,706,397 shares issued
and 29,547,111 shares outstanding at
December 31, 1996 and 14,408,354 shares
issued and outstanding at December 31, 1995, 31,706 14,408
Treasury shares, 2,159,286 shares at
December 31, 1996 (1,187,607) -
Paid-in capital 23,649,659 5,144,932
Accumulated deficit (19,400,858) (56,069,527)
------------ ----------
Total shareholders' equity (deficit) 3,092,900 (50,910,187)
------------ ----------
Total liabilities and shareholders'
equity (deficit) $ 3,402,860 $ 426,493
============ ==========
The accompanying notes are an integral part of these balance sheets.
F-3
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
REVENUES--sales of computers and
accessories, net $ 93,947 $ 183,083 $ 9,603,021
COST OF SALES 279,232 93,852 47,867,060
----------- --------- -----------
Gross profit (loss) (185,285) 89,231 (38,264,039)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,007,309 681,335 4,953,588
RESEARCH AND DEVELOPMENT EXPENSE 76,711 22,388 937,029
----------- --------- -----------
Loss from operations (1,269,305) (614,492) (44,154,656)
LITIGATION SETTLEMENT - - 4,934,985
INTEREST EXPENSE 2,310 - 82,943
INTEREST INCOME 9,997 - -
----------- --------- -----------
Loss before reorganization items,
income taxes and extraordinary item (1,261,618) (614,492) (49,172,584)
REORGANIZATIONAL ITEMS:
Professional fees 135,086 180,320 -
----------- --------- -----------
Loss before income taxes and
extraordinary item (1,396,704) (794,812) (49,172,584)
INCOME TAXES - - -
----------- --------- -----------
Loss before extraordinary item (1,396,704) (794,812) (49,172,584)
----------- --------- -----------
EXTRAORDINARY ITEM, net of income
taxes of $0 38,065,373 - -
----------- --------- -----------
Net income (loss) $ 36,668,669 $(794,812) $(49,172,584)
=========== ========= ===========
INCOME/(LOSS) PER COMMON SHARE:
Before extraordinary item $(0.06) $(0.06) $(3.41)
Extraordinary item 1.58 - -
----------- --------- -----------
Net income (loss) per share $1.52 $(0.06) $(3.41)
=========== ========= ===========
Weighted average number of shares
of common stock outstanding 24,076,301 14,408,354 14,408,354
The accompanying notes are an integral part of these statements.
F-4
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock Paid in Treasury Stock Accum
Shares Amount Capital Shares Amount Deficit Total
-------- ------- ---------- -------- ------- ---------- ----------
BALANCE,
December 31,
1993 14,408,354 $14,408 $5,237,574 - $ - $(6,102,131) $(850,149)
Contribution of capital
by shareholder - - 93,132 - - - 93,132
Reverse accumulated
compensatory effect of
stock options granted,
net - - (98,109) - - - (98,109)
Net loss - - - - - (49,172,584)(49,172,584)
-------- ------- ---------- -------- ------- ---------- -----------
BALANCE,
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,
net - - (87,665) - - - (87,665)
Net loss - - - - - (794,812) (794,812)
-------- ------- ---------- -------- ------- ---------- -----------
BALANCE,
December 31,
1995 14,408,354 14,408 5,144,932 - - (56,069,527)(50,910,187)
Issuance of common stock in connection with:
Bankruptcy
conver 11,650,000 11,650 13,036,350 - - - 13,048,000
Purchase of
inventory 2,600,000 2,600 2,909,400 - - - 2,912,000
Private
placement 1,948,043 1,948 1,790,077 - - - 1,792,025
Settlement
of note
payable 1,100,000 1,100 768,900 - - - 770,000
Purchase
of treasury
stock - - - (2,159,286)(1,187,607) - (1,187,607)
Net income - - - - - 36,668,669 36,668,669
-------- ------- ---------- -------- ------- ---------- -----------
BALANCE,
December 31, $31,706 (2,159,286) $(19,400,858)
1996 31,706,397 $23,649,659 $(1,187,607) $3,092,900
========== ====== ========= ========== ======== ========= =========
The accompanying notes are an integral part of these statements.
F-5
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- --------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 36,668,669 $(794,812) $(49,172,584)
Non-cash items included in
net income (loss)-
Loss on disposition of property
and equipment 1,850 41,053 434,874
Depreciation and amortization 33,459 39,698 710,516
Compensatory effect of stock
options earned - (87,665) (98,109)
Extraordinary item (38,065,373) - -
Changes in-
Accounts receivable
- trade 3,781 (128,381) 4,590,050
- other 167,266 - -
Inventory 22,807 22,644 8,527,314
Prepaid software and other
current assets (12,251) - 1,255,499
Other assets - - 40,951
Bank overdraft - (1,299) 1,299
Accounts payable,
accrued expenses and claims payable 14,536 252,228 34,416,231
---------- --------- ------------
Net cash provided by (used for)
operating activities (1,165,256) (656,534) 706,041
---------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (81,210) (10,809) (53,116)
---------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
borrowing and DIP financing 375,000 759,947 (615,941)
Purchase of treasury stock (1,187,607) - -
Issuance of debt 770,000 - -
Contribution of capital by shareholders - - 93,132
Long-term lease and other obligations 25,044 - -
Proceeds from issuance of common shares 1,792,025 - -
Advances from (payments to)
related parties, net - - (164,260)
---------- --------- ------------
Net cash provided by (used in)
financing activities 1,774,462 759,947 (687,069)
---------- --------- ------------
Net change in cash 527,996 92,604 (34,144)
CASH, beginning of year 92,604 - 34,144
---------- --------- ------------
CASH, end of year $ 620,600 $ 92,604 $ -
========== ========= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ - $ 82,943
Income taxes paid - - -
Reorganization costs paid 135,086 180,320 -
========== ========= ============
NONCASH TRANSACTIONS:
Common stock issued in connection with -
Bankruptcy settlement $ 13,048,000 $ - $ -
Purchase of inventory 2,912,000 - -
Settlement of note payable 770,000 - -
========== ========= ============
The accompanying notes are an integral part of these statements.
F-6
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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, hand-held and pen-
based computers, components and accessories. Historically, the Company marketed
directly and through other distribution channels to both the commercial and
government market segments.
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. During 1995 and the first six
months of 1996, the Company operated under Chapter 11 as a Debtor-in-Possession
and was in a dormant state for all practical purposes. On May 9, 1996, the
Company's Third Amended Plan of Reorganization was approved by the majority of
creditors and shareholders and confirmed by the Court. On July 23, 1996, the
Court discharged the Company as a Debtor-in-Possession and the bankruptcy case
was closed.
2. BANKRUPTCY PROCEEDINGS AND EQUITY TRANSACTIONS:
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 its 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") purchased IBM's claim.
On June 20, 1995, the Court entered an order approving an employment agreement
between the Company, Alan Yong, its majority shareholder, Kevin Koy and Andy
Kandalepas. The terms of the employment agreement are 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 Yong
options to purchase 700,000 shares of stock at $0.75 a share.
Purchase Inventory from Executive--The Company purchased inventory valued at
$50,000.
Executive's Stock--Mr. 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 shares have been transferred. After this transaction, there is a
change in control of the Company.
F-7
On October 11, 1995, the Company, TPL, the directors, officers and employees of
both organizations, including but not limited to Kevin Koy and Andrew Kandalepas
as guarantors and Alan Yong entered into a settlement and general release of the
above 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 granted title to and conveyed ownership of the
equipment held by Yong to Yong.
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 are
as follows:
General Terms--TPL made 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.
Interest to be paid monthly. After a continuing event of default, the
interest rate would be equal to 14%.
Term--12 months.
Security--All assets and tangible and intangible property of the Company.
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 are as follows:
General Terms--TPL made 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.
Interest would be paid 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 November 30, 1995, the Bankruptcy Court entered an Interim Order approving
debtor-in-possession financing between the Company and Kandila Investments Ltd.
The terms of the facility are as follows:
General Terms--Kandila Investments Ltd. made 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.
Interest would be paid 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
were due and payable upon the earlier of (a) the date upon which any the
LLC's debtor-in-possession loans to the debtor become due, (b) upon the
occurrence of an event of default hereunder or (c) an entry of an order of
the Bankruptcy Court that confirms a Plan of Reorganization in the debtor's
Chapter 11 case.
F-8
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, in
the amount of $107,266, and to terminate the employment agreements with Kevin
Koy and Russ Felker, as well as the letter of intent and related employment and
stock incentive agreements related to the proposed purchase of Cormark, Inc. In
addition to the $60,000 advance to Cormark, Inc. was returned. Kevin Koy, Russ
Felker and John Prinz resigned as officers and directors of the Company.
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. Under the Intercon Agreement, the Company hired Baron
to act as the Company's chief operating officer and president of the Company's
new "Intercon Division" and it hired Burd to act as its chief financial officer.
Under the terms of the Intercon Agreement, in addition to an annual salary and
bonus which will be paid 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 plan effective date 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. One 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 statements which shall be
prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis).
b. Two hundred thousand 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 statements 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
one million.
c. After Intercon has received the Asset Acquisition Shares called for in
Paragraphs a. and b. above, but not prior thereto, .25 Asset Acquisition
Shares for each dollar in net earnings before taxes which the Company
realized (determined by reference to the Company's year-end financial
statements 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 as of the plan effective date on a fully diluted basis.
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.
F-9
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. 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 as an Extraordinary
Gain for the year.
F-10
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 $995,409, or sixty percent of the proceeds
of the private placement, in exchange for 888,757 Reserve Shares at $1.12 per
share.
On October 22, 1996 the Company issued a convertible note to Tiedemann/Economos
Global Emerging Growth Fund (a shareholder of the Company) in the principal
amount of $770,000. The note, at the election of the holder, was converted into
1,100,000 common shares. Simultaneously, the Company conducted a private
placement of 1,059,286 common shares for $796,616 or $0.75 per share to
qualified investors. The common shares issued in connection with these
transaction were unissued shares that were previously registered by the Company.
The funds obtained from these transactions were used to repurchase 2,159,286
common shares for $1,187,607 or $0.55 per common share that were issued as part
of the bankruptcy settlement to a former officer and director of the Company.
These shares are currently being held as treasury shares. As a result of the
transaction, Dauphin generated $379,009 for operating capital.
On November 12, 1996, the Company successfully registered with the Securities
and Exchange Commission all corporate unregistered stocks issued in private
transactions prior to bankruptcy and as a result of bankruptcy settlement.
Also, 2,950,000 reserve shares were registered for future capital or expansion
needs of which 2,159,286 shares were reissued in connection with above described
share repurchase transaction.
Subsequent Events
On January 27, 1997, the Company, conducted a private placement of 160,500
common shares for $161,300 or $1.01 per share to a qualified investor. The
common shares issued in connection with these transaction were unissued shares
that were previously registered by the Company. Funds obtained from these
transactions were used to repurchase 160,500 common shares for $88,275 or $0.55
per common share that were issued as part of the bankruptcy settlement to an
affiliate. These shares are currently being held as treasury shares. As a net
result of the transaction, the Company obtained $73,025 for operating capital.
On February 12, 1997 the Company signed a letter of intent to acquire Richard M.
Schultz and Associates, Inc. ("RMS"), an Illinois corporation engaged in
contract engineering and manufacturing services. The letter of intent requires
the Company to exchange 205,000 shares for all outstanding shares of RMS, with
105,000 of the Company shares set aside in an escrow account to be released over
the following three years based on satisfaction of certain performance criteria.
On February 17, 1997, the Company signed an agreement with Ewing & Company, an
investment banking firm, to provide financial advice and assist in raising
capital for the benefit of the Company. The agreement calls for structuring of
current and future acquisitions, capital raise and other financial services.
Management anticipates that production of the DTR line and development and
production of the Intercon product lines will be the primary business focus of
the Company. It is estimated that both product lines will require between $2.5
to $3 million of combined capital investment for research and development.
F-11
Cash flow from the sales of DTR-2 is expected to provide sufficient capital for
ongoing operations and anticipated growth. Due to relatively small overhead, the
Company will need to sell approximately 2,500 DTR-2's at current margin levels
to meet operating requirements. The market demand for the competitive product
suggests that these sales levels are attainable.
Management believes that the funds it currently has on hand, coupled with
anticipated operating revenues and additional funds it may raise in the future,
will provide sufficient funds for the Company to continue pursuing
diversification as planned. Should these events not occur, management feels it
can reduce its operating costs to commensurate with its revenues. There can be
no assurance that any of the events mentioned herein will occur and therefore,
no assurance can be made that the Company will be able to pursue diversification
as planned.
3. LITIGATION SETTLEMENT:
In March, 1991, LMC Viktron Limited Partnership ("LMC") filed a complaint
against the Company and Alan Yong in the Circuit Court of DuPage County,
Illinois. The complaint demanded $2,996,646 for a breach of an alleged "cost
plus" manufacturing agreement for several models of the Company's laptop
computers, principally the LapPro and the Dauphin 2000. The Company and Yong
claimed in a counterclaim that they incurred substantial damages as the result
of LMC's breach of the manufacturing agreement and breach of the warranty for
failure to manufacture working, marketable machines.
LMC, the Company and Yong reached an out-of-court settlement on September 21,
1994. The general terms and conditions of the settlement are as follows:
a. Defendant Dauphin agreed to pay plaintiff LMC the negotiated sum of one
million dollars ($1,000,000) in accordance with the terms of this settlement
order.
b. That, plaintiff LMC will take no action to execute or satisfy this debt as
long as payments are being made as aforesaid or unless a bankruptcy or
reorganization petition is filed by or against defendant Dauphin. In the
event of a default in the negotiated sum and failure to cure said default
within seven (7) days after notice to defendant Dauphin, then plaintiff LMC
shall be entitled to entry of a judgment in the amount of five million
dollars ($5,000,000), less credit for payments received.
The Company was unable to make the January 1, 1995, payment and declared Chapter
11 bankruptcy before it could cure this default within seven days. Since the
Company filed for Chapter 11 bankruptcy, the entire $5,000,000 judgment was
recorded in these financial statements. This was subsequently settled in
connection with the Company's emergence from bankruptcy (see Note 2).
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 revenues 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.
F-12
Inventory
Inventory is stated at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) basis. Inventory consists of the following at
December 31:
1996 1995
----------- --------
Finished goods $ - $ -
Semi-finished units 144,327 -
Computer accessories,
components and supplies 2,693,917 111,731
----------- --------
2,838,244 111,731
Less- Reserve for obsolescence (185,783) (20,589)
----------- --------
$ 2,652,461 $ 91,142
=========== ========
The majority of the computer accessories, components and supplies relate to
current products in production as well as to the previous product line that the
Company intends to support. The reserve for obsolescence reflects the components
and accessories that are not required to support the prior product line.
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. The estimated lives of certain equipment
such as tooling and evaluation units depends upon the product life of the
related computers.
Research and Development
Costs incurred in connection with research and development are expensed as
incurred.
Income/Loss Per Common Share
Income or loss per common share is calculated based on the weighted average
number of common shares outstanding, which were 24,076,301, 14,408,354, and
14,408,354 at December 31, 1996, 1995 and 1994, respectively.
5. SHORT-TERM BORROWINGS:
Short-term borrowings consist of the following at December 31:
1996 1995
----------- -------------
Debtor-in-possession per July 10, 1995,
order (Note 2) - $400,000
Debtor-in possession per November 16, 1995,
interim order (Note 2) - 150,000
Debtor-in-possession per November 30, 1995,
interim order (Note 2) - 209,947
Unsecured, non-interest-bearing demand note
payable to individual - 46,500
----------- -------------
Total notes payable - $806,447
=========== =============
The above notes were settled in connection with the Company's emergence from
bankruptcy (see Note 2).
Under the terms of the manufacturing agreement, the Company signed a letter of
credit, secured by $232,000 of cash. Approximately, $198,000 due at December
31, 1996 under such arrangement is included as part of the Accounts Payable.
F-13
6. LONG-TERM BORROWINGS:
At December 31, 1996, long-term borrowings consist of $21,101 of pre-bankruptcy
priority tax claims, payable on equal monthly installments with interest at 7%
over six years, and $22,095 due on a three year lease on certain equipment
purchased by the Company.
7. INCOME TAXES:
A reconciliation of the income tax expense on income per the U.S. federal
statutory rate to the reported income tax expense follows:
1996 1995 1994
--------- --------- -----------
U.S. federal statutory rate applied
to pretax income $ (502,395) $(270,236) $(16,718,679)
Permanent differences and adjustments 6,270 (153) 10,020
Tax assets and net operating loss
carryforwards not recognized for
financial reporting purposes
(changes in valuation allowances) 496,125 270,389 16,708,659
---------- --------- ------------
Income tax provision $ - $ - $ -
========== ========= ============
As of December 31, 1996 and 1995, the Company had generated deferred tax assets
as follows:
December 31,
1996 1995
----------- ------------
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 4,629,283 $17,149,842
Reserves for warranty items and inventory
obsolescence 185,783 20,589
Accrual for officer's salary - 385,414
Commitment payable - 32,977,790
Litigation reserve - 4,970,000
Other timing differences - -
----------- ------------
4,815,066 55,503,635
Current federal statutory rate 34% 34%
----------- ------------
Deferred tax assets 1,637,122 18,871,236
Less- SFAS 109 valuation allowance (1,637,122) (18,871,236)
----------- ------------
Net deferred tax asset $ - $ -
=========== ============
Deferred income taxes include the tax impact of NOL carryforwards. Realization
of these assets, as well as other assets listed above, is contingent on future
taxable earnings by the Company. In accordance with the provisions of SFAS 109,
a valuation allowance of $(1,637,122) and $(18,871,236) at December 31, 1996 and
1995, respectively, has been applied to these assets. During 1995, there was an
ownership change in the Company as defined under Section 382 of the Internal
Revenue Code of 1986, which adversely affects the Company's ability to utilize
the NOL carryforward.
8. OPTIONS:
In March, 1992, the Board of Directors of the Company adopted and the
shareholders of the Company subsequently approved the 1992 Stock Option Plan
(the "Plan"). During 1995, all employees were terminated from the Company.
Options granted to these employees expired due to the termination and related
compensation expense previously recognized was reversed.
F-14
9. COMMITMENTS AND CONTINGENCIES:
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. As of the date of this filing, management of the Company
is not aware of any pending or threatened litigation against the Company.
The Company pays approximately $10,000 per month to rent the facilities. The
lease has a three year term with a five year renewal option. The Company
believes the space will be adequate for the foreseeable future.
10. RELATED-PARTY TRANSACTIONS:
CADserv Corporation, an engineering services company based in Schaumburg,
Illinois, controlled by a shareholder, has contributed to the design, packaging
and manufacturing of Dauphin's DTR product line and will likely continue in
this capacity in the future.
Manufacturing and Maintenance Systems, Inc., an Illinois corporation controlled
by a director of the Company ("MMS"), made advances to, and payments on behalf
of the Company from time to time; however, all claims of MMS were released in
connection with the settlement and general release entered into on October 11,
1995. The Company had no transactions with MMS since then.
On April 19, 1996, TPL, controlled by several directors of the Company,
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 Offering Memorandum, Dauphin received
$995,408, in exchange for 888,757 Reserve Shares at $1.12 per share.
On October 22, 1996 the Company issued a convertible note to Tiedemann/Economos
Global Emerging Growth Fund (a shareholder of the Company) in the principal
amount of $770,000. The note, at the election of the holder, was converted into
1,100,000 common shares. Simultaneously, the Company conducted a private
placement of 1,059,286 common shares for $796,616 or $0.75 per share to
qualified investors. The common shares issued in connection with these
transaction were unissued shares that were previously registered by the Company.
The funds obtained from these transactions were used to repurchase 2,159,286
common shares for $1,187,607 or $0.55 per common share that were issued as part
of the bankruptcy settlement to a former officer and director of the Company.
These shares are currently being held as treasury shares. As a result of the
transaction, Dauphin generated $379,009 for operating capital.
On January 27, 1997, the Company, conducted a private placement of 160,500
common shares for $161,300 or $1.01 per share to a qualified investor. The
common shares issued in connection with these transaction were unissued shares
that were previously registered by the Company. Funds obtained from these
transactions were used to repurchase 160,500 common shares for $88,275 or $0.55
per common share that were issued as part of the bankruptcy settlement to an
affiliate. These shares are currently being held as treasury shares. As a net
result of the transaction, the Company obtained $73,025 for operating capital.
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