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 June 30, 1998
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: As of August 13, 1998, the number of shares of
the registrant's common stock, $.001 par value, 37,865,034 was issued
and 37,181,580 was outstanding, with 683,454 treasury shares.
<PAGE 1>
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
June 30, 1998 and December 31, 1997 3
STATEMENTS OF OPERATIONS
Six Months and Three Months Ended June 30,
1998 and 1997 4
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 30, 1997,
December 31, 1997 and June 30, 1998 5
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II OTHER INFORMATION 13
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
SIGNATURE 13
<PAGE 2>
DAUPHIN TECHNOLOGY, INC.
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
June 30, December 31,
1998 1997
------------ ------------
CURRENT ASSETS:
Cash $ 653,581 $ 3,620,880
Accounts receivable
Trade, net of allowance for bad
debt of $7,500 484,596 462,821
Other receivables 49,410 20,195
Inventory, net of reserve for obsolescence
of $2,130,041 at June 30, 1998 and
$2,143,934 at December 31, 1997 2,478,075 1,531,464
Prepaid Expenses 66,253 39,201
------------ ------------
Total Current Assets 3,731,915 5,674,561
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $267,589 at June 30, 1998
and $176,318 at December 31, 1997 1,442,836 739,556
GOODWILL, net of amortization of $47,420
at June 30, 1998 and $20,427 at
December 31, 1997 828,026 855,019
OTHER ASSETS 54,411 ---
------------ ------------
TOTAL ASSETS $ 6,057,188 $ 7,269,136
============ ============
CURRENT LIABILITIES:
Accounts payable $ 865,471 $ 790,784
Accrued expenses 69,583 285,837
Current portion of long-term debt 83,782 83,782
Short-term borrowing --- 87,394
------------ ------------
Total Current Liabilities 1,018,836 1,247,797
CONVERTIBLE DEBENTURES, net of debt
discount of $24,640 (Note 5) 480,360 ---
LONG-TERM DEBT 388,031 345,744
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000
shares authorized but none issued --- ---
Common stock $0.001 par value, 100,000,000
shares authorized: 37,335,491 shares issued
at June 30, 1998 and 37,035,673 at December
31, 1997, and 36,652,037 outstanding at
June 30, 1998 and 36,305,096 outstanding
at December 31, 1997 37,335 37,036
Warrants (Note 5) 24,855 ---
Paid in capital 29,601,289 29,283,136
Treasury shares (239,209) (255,702)
Accumulated deficit (25,254,309) (23,388,875)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,169,961 5,675,595
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,057,188 $ 7,269,136
============ ============
<PAGE 3>
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
Six Months Three Months
Ended June 30 Ended June 30
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ----------- ----------- ----------
NET SALES $ 2,623,702 $ 359,464 $ 1,167,180 $ 337,147
COST OF SALES 2,289,608 388,698 1,053,899 375,493
------------ ----------- ----------- ----------
Gross Profit 334,094 (29,234) 113,281 (38,346)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 1,386,809 652,428 823,125 316,694
RESEARCH AND DEVELOPMENT
EXPENSE 839,517 19,789 284,490 15,937
------------ ----------- ----------- ----------
(Loss) from Operations (1,892,232) (701,451) (994,334) (370,977)
INTEREST EXPENSE 43,820 --- 23,277 ---
INTEREST INCOME 70,618 58,384 27,377 54,541
------------ ----------- ----------- ----------
(Loss) before Income Taxes (1,865,434) (643,067) (990,234) (316,436)
INCOME TAXES --- --- --- ---
------------ ----------- ----------- ----------
NET (LOSS) $ (1,865,434) $ (643,067) $ (990,234) $ (316,436)
============ =========== =========== ==========
BASIC AND DILUTED
(LOSS) PER SHARE $ (0.06) $ (0.03) $ (0.03) $ (0.01)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 36,405,648 29,773,199 36,472,158 29,968,314
<TABLE/>
<PAGE 4>
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 1997, TWELVE MONTHS ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
</TABLE>
<TABLE>
Common Stock Paid-in Treasury Stock Accumulated
BALANCE Shares Amount Capital Shares Amount Warrants Deficit Total
---------- -------- ------------ ---------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 31,706,397 $ 31,706 $ 23,869,829 (2,159,286) $ (1,407,777) $ --- $(19,400,858) $ 3,092,900
Issuance of common stock in connection with:
Private placement 465,714 466 634,033 --- --- --- --- 634,499
Purchase of a subsidiary 325,000 325 232,875 --- --- --- --- 233,200
Purchase of treasury shares --- --- --- (160,500) (80,575) --- --- (80,575)
Issuance of treasury shares --- --- --- 726,314 463,004 --- --- 463,004
Net (loss) --- --- --- --- --- --- (643,067) (643,067)
---------- -------- ------------ ---------- ------------ -------- ------------ -----------
June 30, 1997 32,497,111 32,497 24,736,737 (1,593,472) (1,025,348) --- (20,043,925) 3,699,961
Issuance of common stock in connection with:
Private placement 4,406,806 4,407 3,728,196 --- --- --- --- 3,732,603
Commissions to broker/dealer 131,756 132 (132) --- --- --- --- ---
Purchase of treasury stock --- --- --- (731,126) (260,794) --- --- (260,794)
Issuance of treasury stock --- --- 812,084 1,581,521 1,023,566 --- --- 1,835,650
Stock bonuses paid --- --- 6,251 12,500 6,874 --- --- 13,125
Net (loss) --- --- --- --- --- --- (3,344,950) (3,344,950)
---------- -------- ------------ ---------- ------------ -------- ------------ -----------
December 31, 1997 37,035,673 37,036 29,283,136 (730,577) (255,702) --- (23,388,875) 5,675,595
Issuance of common stock in connection with:
Conversion of debentures 204,918 205 175,251 --- --- --- --- 175,456
Brokerage fee 19,400 19 19,981 --- --- --- --- 20,000
Tooling for Orasis 60,000 60 67,440 --- --- --- --- 67,500
Warrants --- --- --- --- --- 24,855 --- 24,855
Stock bonuses paid 15,500 15 55,481 47,123 16,493 --- --- 71,989
Net (loss) --- --- --- --- --- --- (1,865,434) (1,865,434)
---------- -------- ------------ ---------- ------------ -------- ------------ -----------
June 30, 1998 37,335,491 $ 37,335 $ 29,601,289 (683,454) $ (239,209) $ 24,855 $(25,254,309) $ 4,169,961
========== ======== ============ ========== ============ ======== ============ ===========
<TABLE/>
<PAGE 5>
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net (Loss) $ (1,865,434) $ (643,067)
Non-Cash Items Included in Net (Loss):
Depreciation 91,271 24,948
Amortization of Goodwill 26,993 2,218
Change in - prior to purchase of
Richard M. Schultz and Associates, Inc.:
Accounts Receivable - Trade (21,775) (17,886)
Accounts Receivable - Other (29,215) (2,662)
Inventory (946,611) 4,591
Prepaid Expenses (27,052) (24,000)
Accounts Payable 74,687 (185,019)
Accrued Expenses (221,077) 73,823
Other Assets (54,411) ---
----------- -----------
Net Cash (Used for) Operating Activities (2,972,624) (767,054)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of Equipment and Furniture (667,068) (3,500)
Purchase of Richard M. Schultz
& Associates, Inc. --- (70,361)
----------- -----------
Net Cash (Used For) Investing Activity (667,068) (73,861)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from Long-term Leases and
Other Obligations --- (4,664)
Proceeds from Convertible Debentures 655,145 ---
Proceeds from Issuance of Warrants 24,855 ---
Repayment of Debt (17,696) (699,044)
Proceeds from Issuance of Common Stock 97,269 1,016,928
(Decrease)/Increase in Short Term Borrowing (87,395) 207,500
----------- -----------
Net Cash Provided by Financing Activities 672,178 518,720
------------ -----------
Net (Decrease) in Cash (2,967,299) (322,195)
CASH BEGINNING OF PERIOD 3,620,880 620,600
------------ -----------
CASH END OF PERIOD $ 653,581 $ 298,405
============ ===========
CASH PAID DURING THE PERIOD FOR -
Interest $ 39,976 $ 10,367
Income Taxes --- ---
------------ -----------
SUPPLEMENTAL NON-CASH ACTIVITY -
Capital Leases $ 59,982 $ ---
Issuance of Stock for the Tooling
of Orasis $ 67,500 $ ---
Issuance of Stock for the Services
Rendered $ 71,990 $ 12,500
Purchase of Richard M. Schultz and Associates, Inc.
Liabilities Assumed $ --- $2,041,531
Stock Issued $ --- $ 233,200
------------ -----------
<PAGE 6>
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
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.
On June 6, 1997, Dauphin acquired all issued and outstanding shares of
R.M. Schultz & Associates, Inc. ("RMS"), an electronics contract
manufacturing firm located in McHenry, Illinois. RMS is involved in
electronics design, development and production of products for
manufacturers located in Illinois and Wisconsin (see Note 3).
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin
Technology, Inc. and its wholly owned subsidiary, RMS (the "Company").
All significant intercompany transactions and accounts have been
eliminated in consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES:
Accounting Pronouncements
Earnings per share are calculated under guidelines of FASB No. 128
"Earnings per Share" wherein earnings per share are presented for basic
and diluted shares on income from operations and net income. Basic
earnings per share are calculated on income available to common
stockholders divided by the weighted-average number of shares
outstanding during the period, which were 36,405,648 for the six month
period ending June 30, 1998 and 29,773,199 for the six month period
ending June 30, 1997. Diluted earnings per share are calculated using
earnings available to each share of common stock outstanding during the
period and to each share that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. The outstanding warrants and
convertible securities are not included in diluted earnings per share,
as the effect would be antidilutive given the Company's net loss
position. Accordingly, diluted earnings per shares equal to basic
earnings per share.
The Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income", establishing standards for reporting and displaying
comprehensive income in a full set of general-purpose financial
statements. There is no difference between the net income reported and
comprehensive net income for the three months ending June 30, 1998 and
1997.
The Company also adopted a Statements of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". The SOP requires that
all start-up related costs, including organizational costs, be expensed
as incurred and all previous capitalization costs be written off. The
adoption of the SOP did not have a material impact on the financial
statements.
The Financial Accounting Standards Board (FASB) has issued two
accounting pronouncements, which the Corporation will adopt in the
fourth quarter of 1998. FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" and Statement No.
132 "Employer's Disclosure about Pension and Post Retirement Benefits".
FASB has also issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Corporation is currently
evaluating the impact of these pronouncements; however it does not
anticipate that the adoption of these statements will have a material
impact on results of operations or financial position.
<PAGE 7>
Unaudited Financial Statements
This Form 10-Q updates the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, in accordance with the instructions on
the Form 10-Q. It is presumed that the reader has read the Annual
Report on Form 10-K.
The accompanying statements are unaudited, but have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of results have been
included. The interim financial statements contained herein do not
include all of the footnotes and other information required by
generally accepted accounting principles for complete financial
statements as provided at year-end.
The reader is reminded that the results of operations for the interim
period are not necessarily indicative of the results for the complete
year.
3. BUSINESS DEVELOPMENT
R. M. Schultz & Associates, Inc.
On June 6, 1997, the Company acquired all outstanding common stock of
RMS for $2,430,258, consisting of issuance of common stock for $233,200
and an assumption of $2,197,058 of liabilities. The transaction was
accounted for as a purchase. The price was allocated to accounts
receivable ($590,330), inventories ($772,658), other current assets
($43,716), property and equipment ($148,108), with the remaining amount
($875,446) being allocated to goodwill. The goodwill is being
amortized over 20 years.
Under the terms of the acquisition, RMS shareholders received 220,000
shares of Dauphin common stock, with an additional 105,000 of such
shares deposited into an escrow to be released equally over the next
three years if certain financial goals of RMS are achieved. Upon
issuance of the shares, there will be an additional element of cost
related to the transaction that will be recorded as goodwill and
amortized over the remaining life. At June 30, 1998, RMS had not
reached its financial goals and no shares have been issued under the
purchase agreement.
Results of the operations of RMS are included within the consolidated
financial statements commencing June 6, 1997. Unaudited pro forma
results as if the transaction occurred on January 1, 1997 are as
follows (unaudited):
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
----------------- ----------------
Revenues $ 889,523 $ 2,223,162
Net (loss) $ (842,214) $ (1,203,144)
Basic and diluted earnings
(loss) income per share $ (0.03) $ (0.04)
Weighted average shares
outstanding 30,188,314 29,993,199
Such pro forma information is not necessarily indicative of the results
of future operations.
4. COMMITMENTS AND CONTINGENCIES
The Company has contracted with Family Tools, Inc. for the
manufacturing of the industrial molds for the Orasis(. The total
commitment was $521,250 before final modifications, of which $494,537
was paid through the end of the second quarter, including payment of
$67,500 through issuance of 60,000 $.001 par value common shares at
$1.125 per share (see Note 6).
The Company is involved in a lawsuit with an ex-employee/officer that
has claimed that the Company wrongfully discharged him. The suit was
filed on April 11, 1998. Management believes that the Company has
several defenses to the claim and made adequate provisions in the
financial statements for any expected liability that may result from
the disposition of the lawsuit. It is the opinion of management that
the ultimate liability, if any, will not be material to the Company's
results of operations or financial position.
<PAGE 8>
5. CONVERTIBLE DEBT AND WARRANTS
On May 13 1998 the Company issued 8% Convertible Subordinated
Debentures - 2001 to four accredited investors in an aggregate
principal amount not to exceed $1,000,000, which is due and payable on
or about May 13, 2001. Interest is computed at a simple rate and is due
and payable on an annual basis. Both interest and principal can be
paid in either cash or through issuance of the Company's $.001 par
value common stock and is due and payable in full three years after the
issuance. The holders of the Debentures have the right to convert 100%
of principal and interest, at any time, into Company's $.001 par value
common stock, based on a formula. In addition to interest, Debenture
holders are entitled to purchase up to 150,000 shares of $.001 par
value common stock with exercise of detachable warrants. The warrants
are priced at 115% of the closing bid on the day before the exercise
date. In addition, the Company paid 8% of the principal amount of the
Debenture, and issued 50,000 warrants, as fee for placement of the
Debentures through a registered broker-dealer.
Through June 30, 1998, the Company issued $680,000 of convertible
securities, paid $35,475 of issuance costs and issued 102,000 warrants.
The warrants were valued at $24,855 using the Black-Scholes securities
valuation model and are recorded as a debt discount. The Company also
issued 19,400 common shares in lieu of placement fees to a placement
agent.
6. EQUITY TRANSACTIONS
1998 Events
On January 5, March 5, and June 5, 1998, under an employment contract
relating to the RMS acquisition, the Company issued 12,500 shares on
each date to Richard M. Schultz. Under the contract, Mr. Schultz is
entitled to purchase 50,000 common shares per year for the duration of
his employment contract at $1.00 below the market value on the date
immediately preceding the date of exercise. The common shares issued in
connection with this transaction were treasury shares. On March 6,
1998 Mr. Schultz returned 7,877 shares to treasury as repayment of his
obligation to the Company.
On March 3, 1998, for the services performed, the Company issued 30,000
shares to Mr. Mikolai Prociuk, an employee of the Company, as a bonus.
On March 31, 1998 the Company registered with Securities and Exchange
Commission 4,523,608 shares issued to accredited investors in a private
placement that concluded in December 1997. In addition to shares
issued in the private placement, the Company registered 2,964,327 shelf
shares that will be used, if needed, for future acquisitions, to raise
capital, if needed, to fund production of Orasis hand-held computer
and RMS contract manufacturing operations, and to expand the Company's
employee benefits and product and service offerings.
On May 8, 1998 the Company issued 60,000 common shares to Family Tools,
Inc. for the services provided in connection with the manufacturing of
industrial molds for production of the Orasis hand-held computer. The
shares were valued at $1.125, closing bid price on that day. The total
amount of cash expended and shares issued will be capitalized and
amortized over the number of units produced over the life of the molds.
On June 24, 1998, for the services performed, the Company issued 3,000
shares to Ms. Nina O'Connor an employee of the Company, as a bonus.
During the month of June, some of the Convertible Debentures (Note 5)
issued by the Company were converted into common shares. In total
204,918 shares were issued in exchange for $175,000 of principal and
$485 of interest during the month of June.
Subsequent Event
On July 16, 1998 the remaining $320,000 of the 8% Convertible
Debentures were issued to an accredited investor. Along with that, the
Company issued 48,000 warrants to the investor and 50,000 warrants to
the placement agent. The Company also issued 17,067 common shares in
lieu of placement fees to a placement agent.
<PAGE 9>
During the first part of the month of July, some of the Convertible
Debentures (Note 5) issued by the Company were converted into common
shares. In total 531,876 shares were issued in exchange for $510,000
of principal and $11,120 of interest.
<PAGE 10>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Note: This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results 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 herein, as well as those discussed in the Company's
Securities and Exchange Commission filings and reports including, but
not limited to, its fiscal year 1997 Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly release
the results of any revision to these forward-looking statements, which
may be made to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
June 30, 1998 compared to June 30, 1997
Revenues
Total sales revenue in the second quarter of 1998 dramatically
increased from the second quarter of 1997 due to operations of newly
acquired RMS. Substantially all of the revenue for 1998 is
attributable to RMS. Gross profit for the first quarter of 1998 was
approximately 13%, which is consistent with RMS historical operating
profits.
As of the date hereof, the development of Orasis has been completed
and the final production has begun. The Company has received several
small purchase orders from the customers and shipped the initial
quantities of the product. Also, Orasis was selected as the hardware
of choice by the Team Leader project, crime scene computer product to
support national, local and international law enforcement agencies, in
conjunction with the National Forensic Science Technology Center.
Expenses
Selling, general and administrative expenses increased from $316,000 in
the second quarter of 1997 to $823,000 in the second quarter of 1998.
The increase is primarily due to additional salaries for new employees
and increased spending on trade shows to introduce Orasis. The Company
now employs approximately one hundred people versus just twelve a year
ago. Research and Development costs increased from $16,000 in the
second quarter of 1997 to $284,000 in the second quarter of 1998. The
increase was due to spending related to development of Orasis.
Net Income(Loss)
The (loss) after tax increased for the second quarter of 1998 to
($990,000) or ($0.03) per share from ($316,000) or ($0.01) per share in
1997. (Loss) per common share is calculated based on the monthly
weighted average number of common shares outstanding which were
36,472,158 for the three month period June 30, 1998, and 29,968,314 for
the period June 30, 1997.
CHANGES IN FINANCIAL POSITION
June 30, 1998 Compared to December 31, 1997
During the second quarter of 1998, total assets decreased to $6,082,000
at June 30 from $7,269,000 at December 31, 1997. The decrease was
primarily due to continued expenditures on R & D, purchase of inventory
and tooling for the production of Dauphin's new flagship product,
Orasis(. In addition to R & D expenditures, the Company repaid
approximately $300,000 of current liabilities and increased its
workforce. Decrease in cash from $3,621,000 on December 31, 1997 to
$653,000 on June 30, 1998, was due to all factors mentioned above as
well as expenditures for industrial molds and pre-production setup
charges. Accounts Receivable represent certain funds due to the
Company as part of the normal operations of the Company, including RMS
operations.
<PAGE 11>
Total liabilities increased by approximately $318,000 as a result of
issuance of Subordinated Convertible Debentures net of repayment of
some short-term liabilities. The remaining debt represents normal
obligations incurred in a day-to-day operation of the Company and long-
term leases. Shareholders Equity - Common Stock, Paid-in-Capital and
Treasury Shares reflect the issuance of additional shares as part of
the employment contract between the Company and Richard M. Schultz and
payment of obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had extensive cash requirements in the first and second
quarters of 1998 due to the latter stages of development and pre-
production phases for the Orasis. Costs associated with the Company's
financial requirements in the first quarter of 1998 were met through
cash generated from private placement of shares to accredited investors
in 1997 and through issuance of Convertible Subordinated Debentures in
the second quarter of 1998. Sales of Orasis started in early August
with single units shipped to customers. Cash flow generated from the
sales of Orasis, will be applied to current and future working capital
needs, future research and development as well day-to-day operating
needs of the Company. The Company will be pursuing avenues to raise
additional operating capital, through issuance of additional
convertible Debentures to fund the production of Orasis.
The Company believes that the funds it currently has on hand, including
funds raised through issuance of Convertible Debentures, when coupled
with its anticipated operating profits, and any additional funds it may
borrow in the future, provide sufficient funds for the Company to
finance its operations.
OTHER
In order to address year 2000 problem, the Company upgraded its Mobile
group server and printing capabilities as well as accounting software.
Based on a preliminary study, the Company expects to spend additional
$50,000 to $70,000 from August 1998 through 1999 to modify its
remaining computer information systems enabling proper processing of
transactions relating to the year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective action,
including replacement of certain software and system integration whose
associated costs would be recorded as assets and amortized.
Accordingly, the Company does not expect the amounts required to be
expensed over the next two years to have a material effect on its
financial position or results of operations.
<PAGE 12>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a lawsuit with an ex-employee/officer that
has claimed that the Company wrongfully discharged him. The suit was
filed on April 11, 1998. Management believes that the Company has
several defenses to the claim and made adequate provisions in the
financial statements for any expected liability that may result from
the disposition of the lawsuit. It is the opinion of management that
the ultimate liability, if any, will not be material to the Company's
results of operations or financial position.
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
On July 10, 1998 the Company filed a report on a Form 8-K, reporting
the status of shelf shares registered as part of the previous filings.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, Registrant's Chief Financial Officer, thereunto
duly authorized.
Dated: August 14, 1998
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: /Savely Burd/
Savely Burd
(Chief Financial Officer)
<PAGE 13>
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