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, 1997.
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 February 28, 1998 was $31,470,760.
As of March 12, 1998, the number of Shares of the Registrant's Common
Stock, $.001 par value, issued was 37,035,673 and 36,317,596 was
outstanding, with 718,077 treasury shares.
<PAGE 1>
DAUPHIN TECHNOLOGY, INC.
Table of Contents
PART I 3
Item 1. Description of Business 3
Introduction 3
Dauphin Technology, Inc. (Mobile Group) 3
R.M. Schultz & Associates, Inc. 5
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to Vote of Security Holders 7
PART II 8
Item 5. Market for the Registrant's Common Stock and
Related Security Holders Matters 8
Market Price of Common Stock 8
Holders 8
Dividend Policy 8
Common Stock 8
Preferred Stock 9
Transfer Agent and Registrar 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Results of Operations 1997 Compared to 1996 and 1995 10
Liquidity and Capital Resources 10
Other 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants
on Accounting or Financial Disclosure 11
PART III 12
Item 10. Directors, Executive Officers and Officers of the
Registrant 12
Directors and Officers 12
Family Relationship 13
Other: Involvement in Certain Legal Proceedings 13
Involvement by Management in Public Companies 13
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Party Transactions 14
PART IV 15
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 15
SIGNATURES 15
<PAGE 2>
Note: This Form 10-K contains certain statements that may be deemed to
be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Statements in this Form 10-K
which address activities, events or developments that the Company
expects or anticipates will or may occur in the future, including such
things as future acquisitions (including the amount and the nature
thereof), business strategy, expansion and growth of the Company's
business and operations and other such matters are forward looking
statements. Although the Company believes the expectations expressed in
such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors
could cause actual results to differ materially from those expressed in
any forward-looking statements, whether oral or written, made by or on
behalf of the Company. Many of these factors have previously been
identified in filings or statements made by or on behalf of the Company.
PART I
Item 1. Description of Business
Introduction
Dauphin Technology, Inc. an Illinois corporation ("Dauphin" or the
"Company") was formed in 1988 and became a public entity in 1991. The
Company provides mobile pen-based computer hardware solutions and
electronics contract manufacturing services to its clients.
In early 1993, the Company introduced the Desk-Top Replacement ("DTR"),
a pen-based hand-held computer with fax/modem features that was
considered a leading edge product for commercial applications. Sales of
the DTR did not meet the Company's expectations and financial problems
developed. On January 3, 1995, the Company filed a petition for relief
under Chapter 11 of the Federal Bankruptcy Code in the United States
Court for the Northern District of Illinois, Eastern Division. The
Company operated under Chapter 11 until July 23, 1996, when it was
discharged as Debtor-in-Possession and bankruptcy proceedings were
closed.
Before the Company emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with
strong engineering and manufacturing backgrounds as well as finance,
accounting, sales and marketing skills were hired. The new management
formulated a strategic business plan to diversify the Company's
operations to eliminate dependence on a single product line or industry.
The plan incorporated a focus on hand-held mobile computer products,
coupled with targeted acquisitions in the technology sector, to create a
technology company with synergistic, self-managed wholly owned
subsidiaries. The subsidiaries are intended to share resources and
cross-market products and engineering, contract manufacturing and
product development services.
As part of management's plan, the Company re-introduced DTR and in the
process devised the new Orasis hand-held computer, which management
expects to supersede that DTR. On June 6, 1997 the Company acquired all
outstanding shares of stock in R.M. Schultz & Associates ("RMS"), an
electronic contract manufacturing firm located in McHenry, Illinois. On
September 8, 1997 the Company executed a letter of understanding to
acquire CADserv Corporation ("CADserv"), an electronic design services
firm located in Schaumburg, Illinois. The acquisition is conditioned
upon Board of Directors' approval and procurement of necessary
financing. As of the date hereof, no valuation or price has been
determined and no definitive agreement have been entered.
Dauphin Technology, Inc. ("Mobile Group")
Headquartered in Palatine, Illinois, Dauphin has 13 full-time and 2
temporary employees that dedicate their collective powers to
development, production and marketing of mobile computers. Management
plans to expand the size of the group to support all necessary functions
of the Company. Eventually this group will be segregated into general
administrative personnel and Mobile Group personnel.
<PAGE 3>
Products
Orasis, introduced at the November, 1997 COMDEX in Las Vegas, is the
new, market-driven hand-held computer developed by the Company with
features to meet the expressed desires of many potential customers. The
basic unit, weighing approximately 3 pounds with a battery life from 2
to 8 or more hours, is equipped with 133 MHz Pentium MMX processor,
upgradable to 233 MHz Pentium MMX. In addition, the basic unit includes
Infra Red keyboard, electro-magnetic pen, standard two type II or a
single type III PCMCIA slot, 1.6 GB expandable to 2.1 GB hard drive,
five screen options, built in speaker and microphone (including sound
blaster for voice recognition and multimedia), video conferencing port,
modular expansion bay with docking connector and many other standard
features.
Even though the basic unit carries a number of advanced features, the
main advantages of Orasis are its upgradable features such as its
processor, screens and modular expansion bay. The expansion bay allows
for the use of CDROM, floppy drive, wireless radio, extended battery
pack or any other device through the PCI expansion bus. Unlike
competitor models, Orasis does not lock the customer into a single
format or a costly catchall unit. Orasis affords a customer complete
flexibility and versatility offered by no other hand-held computer
presently on the market. It is a time, labor, and money-saving device
that can be custom configured with the variety of options to meet the
end-user's needs today, as well as tomorrow. Much more flexible and
powerful than a Personal Digital Assistant ("PDA"), the Orasis is an
MS-DOS/Windows 95/Windows NT compatible machine.
Orasis is now in the pre-production stage of the development process.
Several working prototypes have been demonstrated to potential clients
since its introduction in November. Since lead times for some of the
components range from six to twelve weeks, management plans to build
more pre-production models for marketing purposes only.
Orasis was preceded by the Company's previous version of mobile
computer, the DTR. The basic DTR unit has a 486 central processor with
50 megahertz processing speed. Upon emergence from bankruptcy, the
Company refined the DTR prior to manufacturing limited quantities of the
unit. The Company reintroduced DTR at the Fall 1996 COMDEX in Las Vegas.
In so doing, it received valuable information and market feedback that
led to the development of Orasis, which management expects to supersede
the DTR. Consequently, the Company at this time does not expect to
actively market or produce the DTR product line.
Markets
Unlike several years ago, the hand-held computer market is more defined
and is ready for a product such as Orasis. Orasis is a significant
technological and marketing step forward among mobile computing devices.
New developments in battery technology allow the device to be portable
and useful to customers who need computing capacity at remote locations.
Moreover, the advent of PCMCIA options, sound capabilities, pen
recognition improvements, mobile wireless communications, and explosion
of the Internet started a new wave of interest in hand-held computers.
According to the latest estimates published in industry magazines, the
total market for the mobile hand-held computing devices exceeds $2.5
billion. This market does not include notebook or laptop computers.
Mobile hand-held pen computers represent about $500 million of the total
mobile computing devices market. The remainder of the market consists
of PDA's, that are communication devices only. Management believes that
the actual market for the mobile computers is much larger then the
latest estimates. Management also believes that available mobile hand-
held devices do not offer as much of a challenge to notebook computers.
The introduction of Orasis may expand the customer base to companies
that are currently using notebooks in their business. The power,
modularity and upgradability of Orasis can be equated in to the most
sophisticated notebook computers today. Added features and flexibility
of the unit may also attract public attention, therefore growing the
overall category. The Company believes that today's mobile computer and
wireless communication market provides an opportunity to further develop
the mobile 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.
Competition
The Company is currently marketing its Orasis product. This product
competes in the mobile pen-based computer market. Worldwide, there are
less then 30 companies competing in this market. However, notebook
computer manufacturers and PDA manufacturers could be considered
competition to Orasis. 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 or market
driven products. When new products are introduced, there is a small
window of opportunity before clones are developed. However, being a
small company, Dauphin's strength is in its flexibility to meet industry
demands and to partner with solution providers to jointly offer unique
solutions for certain problems that customers encounter.
Sales and Marketing
Orasis is a niche product. The Company's plan is to sell Orasis
through software integrators and value-added resellers to commercial
buyers. As of the date of this report, the Company has successfully
recruited several sales channel managers, whose sole responsibility is
to manage distribution chains within targeted markets. Presently, the
Company targets four main vertical markets: Medical Automation, Sales
and Field Force Automation, Utilities, and Financial Automation. The
Company also plans to pursue other markets such as Government or
Inventory and Plant Maintenance.
<PAGE 4>
Customer Dependence
The Company is not dependent on any one customer.
Research and Development
Due to a relatively small size of the Mobile Group, most of the Orasis
development was done in cooperation with three contract engineering
firms. Approximately $825,000 was spent on research and development
fees in 1997 and approximately $750,000 more will be expanded by the end
of April 1998. Dauphin retained all rights and intellectual property
acquired during the development of Orasis. Management plans to recruit
several electronic and mechanical engineers for future research and
development as well as growth of the Mobile Group.
Source and Availability of Raw Materials
The Company subcontracts the assembly of the finished product from
component parts, which are obtained from the suppliers around the world.
Since the development of Orasis took place late in 1997, all components
used in the design are state of the art. Components such as the latest
Intel processors (200 and 233 MHz), color video controllers and CACHE
memory chips are in high demand. Such components are available in short
supply. However, management does not anticipate that Orasis product mix
would include a large portion of such high end product at the outset.
Due to the nature of the product line, the Company plans to subcontract
with the same company that produced the DTR to assemble the electronics
for Orasis. RMS will perform the final assembly, testing, quality
control, shipping and customer support, thus lowering the overall
production cost of the unit and maintaining quality control under the
Dauphin umbrella.
Software Licensing Agreements
The Company has purchased BIOS (basic input/output software) for Orasis
from Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops,
markets and licenses proprietary compatibility software products for
original equipment manufacturers and related system software for
personal computers. A Master License Agreement was signed for the right
of distribution of Phoenix software with Orasis.
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
interests. 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 duplication
and sale could therefore adversely affect the Company. However, the
Company believes that the time spent by competitors on reverse
engineering the product would be too long for the rapidly changing
computer industry.
The Company did, however, trademark the name "Orasis." At the present
time all appropriate filings have been completed and the Company is
awaiting confirmation of the trademark.
R.M. Schultz & Associates, Inc.
As part of its diversification plan, on June 6, 1997 the Company
acquired all issued and outstanding shares of R.M. Schultz & Associates,
Inc. ("RMS"), an Illinois corporation. RMS is involved in contract
engineering and manufacturing services. In total RMS employs sixty
people. Seven of the employees are electronic engineers, ten
administrative staff and operational management, and the remainder is
production personnel.
<PAGE 5>
RMS was started as a one-man consulting and design firm in 1979. Since
then it grew in personnel, customer base, revenues and facility space.
For the past fifteen years, RMS has taken on projects that range from
highly intense to exceedingly simple, including products from baby toys
to communication devices. Some of the more visible products that RMS
has built include scoreboards at Soldier Field and The United Center in
Chicago, 3Com Park in San Francisco and Dallas Stadium for a large
Chicago sign company. RMS has also designed and built a credit card
validation system for a large debit card provider, water softener
controllers for a bottled water company and process data acquisition
system for a large chemical company.
Services
The capabilities of the engineering staff at RMS encompass a wide range
of microprocessor, analog, digital, and control disciplines. Each RMS
engineer has a specific product that he/she is responsible for. By
having a key person on the engineering staff assigned to each production
project, an effective liaison with the client is created. Engineers are
responsible for helping to develop the product as well as production
process and all workstation tools and fixtures. RMS also provides
consulting services on many product development and improvement
projects.
With the aid from automatic assembly equipment, RMS is capable of
assembling large quantities of various electronic products. The
majority of the work done by RMS since its inception has been in a
through-hole or large component electronic assembly. Even though this
is an older technique, it still represents a good portion of the
electronic products assembly. Since the RMS acquisition, more then
$400,000 was expended by the Company to build a 5,000 square foot class
B plus environmentally controlled room inside RMS facility and to
acquire surface mount equipment. Surface mount assembly equipment
allows for high-speed/high-tech component placement on a printed circuit
board, a newer method of product assembly. In the past, RMS had to
employ services of other firms to incorporate surface mount portions in
the final product. In combination with the through-hole, surface mount
capability would allow RMS to target over ninety percent of electronic
products manufactured today.
Markets
The contract manufacturing market exploded in the early 1990s when large
companies began to shed their captive manufacturing plants and
engineering staffs. That trend became even more evident in the
electronic manufacturing industry. Technological advancements were too
frequent and too dramatic for an individual company to absorb. Instead,
many companies saw the opportunity to cut the cost of capital
expenditures and labor by outsourcing the work to specialty shops like
RMS. In the latest Frost & Sullivan studies, released in 1997, the
electronic contract manufacturing industry is expected to grow from $22
billion in 1997 to an estimated $110 billion in 2004. Management
believes that the growth rate, estimated at 26% per year, will actually
exceed that.
Sales and Marketing
In October 1997, RMS retained the services of an industrial marketing
firm, which performed a study of the local electronic market. The study
has established the main Midwestern states that represent a high
percentage of the contract manufacturing dollars spent in the Midwest
over the last several years. In January 1998, RMS hired a sales manager
who, in conjunction with its existing sales force, will concentrate his
efforts on direct sales contact with the firms in need of electronic
manufacturing in those states.
Competition
RMS has a number of competitors in the Midwest and around the country.
Some of these firms, like Morey Corporation or Solectron Corporation,
are well established and well capitalized. However the majority of
these firms are located outside of the Midwest. In addition, most of
RMS' competitors do not have engineering capability on staff to offer to
their clients. Management believes that with the growth rate of the
electronics industry as well as fragmentation of competitors in the
Midwest and the engineering capacity of RMS, pose an opportunity to
capture a leadership position in this market.
Customer Dependence
To date, three customers represent over seventy percent of revenue for
RMS. On January 5, 1998 RMS, recruited a sales manager whose sole
responsibility is to bring additional clients and to diversify the
present customer dependence (See Sales and Marketing above).
Patents, Copyrights and Trademarks
RMS regularly assists its customer's registration of patents on designs
created by its staff. In such cases, RMS's engineers are the inventors
or co-inventors with rights assigned to the customer. The RMS logo is
both a registered trade and service mark.
<PAGE 6>
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
signed in May 1996 has a three-year term with a five-year renewal
option. The Company believes the space will be adequate for the
foreseeable future.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois
60050. The facilities are leased from Enclave Corporation, a company
that is owned by Richard M. Schultz, President of RMS. RMS occupies
53,000 square feet of space, of which 7,000 are office space and 5,000
square feet of clean room facility, built for the surface mount portion
of production. The lease is for five-year term starting on June 6, 1997
with an optional extension for an additional five years. The rent is
approximately $14,000 per month. The Company believes the space will be
adequate for RMS operations 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 1997.
<PAGE 7>
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, markdown, or commission, and
do not necessarily represent actual transactions:
<TABLE>
Bid Prices 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
High Low High Low High Low
First Quarter $1.812 $0.250 $1.625 $0.875 $1.625 $1.187
Second Quarter 1.250 0.250 1.719 1.125 1.219 0.750
Third Quarter 1.067 0.625 1.625 1.125 1.172 0.875
Fourth Quarter 1.000 0.567 2.000 0.938 2.590 1.063
</TABLE>
Holders
The number of record holders of the Company's common stock as of
March 12, 1998 as reported by the Company's transfer agent is
approximately 3,000. 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
3,000.
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.
Common Stock
The authorized capital stock of the Company consists of 100,000,000
shares of common stock, $.001 par value. As of March 12, 1998 there
were 37,035,673 shares of common stock issued and 36,317,596 shares
outstanding held by approximately 3,000 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.
On February 6, 1996 the Company entered into an agreement with Victor
Baron, Savely Burd and Interactive Controls, Inc., an Illinois
corporation ("Intercon"). Under the terms of the agreement, the Company
acquired a business plan devised by Intercon for the design and
manufacturing of industrial control systems and software. The Company
also agreed to employ Messrs. Baron and Burd and provided Intercon the
opportunity to receive (a) 1,000,000 shares of common stock the first
fiscal year the Company realizes aggregate gross revenue of $5,000,000;
(b) an additional 200,000 shares of common stock for each additional
$1,000,000 in gross sales revenues exceeding $5,000,000 and up to
$10,000,000; and (c) additional .25 shares of common stock for each
dollar in net earnings before taxes. The aggregate number of shares
issued under the Intercon agreement may not in any event exceed 25% of
the Company's shares outstanding as of the effective date of its Plan of
Reorganization. To date, no Intercon products have been developed or
produced under the business plan and no shares have been issued to
Intercon. Mr. Burd continues to serve as an employee and Chief
Financial Officer of the Company. Mr. Baron's employment with the
Company terminated on February 24, 1998.
<PAGE 8>
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.
Transfer Agent and Registrar
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York, 10005
Item 6. Selected Financial Data
<TABLE>
Year Ended December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales $ 2,730,035 $ 93,946 $ 183,083 $ 9,603,021 $23,560,986
Extraordinary Item ---- 38,065,373 ---- ---- ----
Net Income (Loss) (3,988,017) 36,668,669 (794,812) (49,172,584) (3,398,155)
Net Income (Loss)
Per Share (0.13) 1.52 (0.06) (3.41) (0.24)
Total Assets 7,269,136 3,402,860 426,493 298,094 15,838,326
Long -Term Debt 429,526 43,196 ---- ---- ----
Working Capital(Deficit) 4,510,546 3,020,558 (50,979,877) (50,167,342) (2,123,006)
Shareholders Equity
(Deficit) 5,675,595 3,092,900 (50,910,187) (50,027,710) (850,149)
</TABLE>
<PAGE 9>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations 1997 Compared to 1996 and 1995
The Company and its subsidiary are primarily engaged in electronic
product engineering, development and sales, and contract manufacturing
services. All of these activities are highly competitive and sensitive
to many factors outside of the control of the Company, including general
economic conditions effecting Company's clients and availability of
components.
The total revenue for Dauphin increased from $94,000 in 1996 and
$183,000 in 1995 to over $2.7 million in 1997, increasing sales almost
29 times from 1996. This growth was due to the acquisition of RMS.
Additionally, in 1995 and in the first half of 1996, the Company was
operating under Chapter 11 of the Federal Bankruptcy Code and was in a
dormant state for all practical purposes.
The gross profit margins are not comparable for the period, due to the
addition of RMS, inventory write down and the extreme fluctuations in
sales.
In the fourth quarter of 1997, in conjunction with the final stages of
development of Orasis and introduction of the product at the fall 1997
COMDEX show, some of the inventory previously acquired for the
production of DTR product line became obsolete. Originally, the Company
intended to use all parts of the DTR line in the design and production
of Orasis. The Company wrote down approximately $1.7 million of raw
materials inventory comprised primarily of DTR line batteries, power
cords, digitizer panels and LCD screens. These items have been
redesigned or upgraded for Orasis. Also, the cost of DTR product line
was devalued to reflect the change in focus from DTR to Orasis and the
expected sales price of the DTR product.
Selling, general and administrative expenses increased in 1997 to
approximately $1.5 million from $1.0 million in 1996 and $681,000 in
1995. The increase from 1996 to 1997 was attributed to the addition of
RMS, which accounted for over $300,000 of such expenses, an increase in
trade show and advertising expenses, annual incorporation fees, and
interest expense. The increase from 1995 to 1996 was attributed to the
addition of personnel and professional services relating to the
bankruptcy.
The net operating loss, before extraordinary item, increased to
approximately $4 million in 1997 from $1.4 million in 1996 and $795,000
in 1995. The increase in net loss was due to $1.8 million write down of
inventory, increased research and development activity, and the
introduction of the new Orasis product late in the fourth quarter of
1997. In total the Company spent in excess of $825,000 for the
research, development and introduction of Orasis in 1997 in comparison
to $77,000 spent in 1996 and $22,000 spent in 1995.
In 1996, due to debt forgiveness related to corporate restructuring and
closing of the bankruptcy proceedings, the Company recognized a one time
extraordinary income item of over $38 million.
Liquidity and Capital Resources
Almost half of the corporate assets are in liquid securities or cash,
due to a conclusion of a private placement that raised approximately
$4.4 million in the fourth quarter of 1997. After paying broker/dealer
fees and placement costs, the Company retained approximately $4 million
for its operations. Approximately $280,000 of proceeds of the private
placement were used for settlement of short-term notes and approximately
$800,000 for ongoing research and development needs.
With the purchase of RMS, the Company received an accounts receivable
asset that has averaged $400,000 over the six-month period since the
acquisition. With additional growth in sales and profitability of RMS,
that asset should grow and provide a stable capital resource for
Dauphin. During the year, RMS negotiated a capital lease to purchase
certain surface mount equipment for a total of $155,000 and a $150,000
unsecured loan from McHenry Economic Development Board for expansion of
the facilities and creation of jobs.
Total working capital for the Company increased from just over $3
million in 1996 to approximately $4.8 million in 1997 or an increase of
more then 50%. Also, almost two thirds of the working capital total for
1997 is in liquid securities or cash versus only 20% in 1996.
<PAGE 10>
The cash raised in the private placement should provide the operating
cash needed for the current year as well as the starting capital for
pre-production and initial inventory buildup. The introduction of
Orasis and its anticipated sales should provide a source of capital
needed for further growth of the Company. Management is reviewing its
current banking relationship to include a credit facility for the
future.
Inflation and Seasonality
Due to the nature of the Company's products and current market trends,
increase in volume of production should generally result in a reduction
of cost per unit produced. Management does not anticipate any major
shifts in this trend in a foreseeable future. Also, due to the fact
that the Company targets industrial customer and not a retail outlet,
the Company should not be effected by the seasonal nature of consumer
purchasing.
Accounting Matters
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (effective for financial statements issued for
periods ending after December 15, 1997). SFAS No. 128 replaces primary
earnings per share with basic earnings per share, which excludes
dilution, and requires presentation of both basic and diluted earnings
per share on the face of the income statement. SFAS No. 128 requires
restatement of all prior earnings per share data presented. The
adoption is not expected to have a material impact on the Company's
earnings per share computations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (effective for fiscal years beginning after
December 15, 1995) encourages, but does not require, employers to adopt
a fair value method of accounting for employee stock-based compensation,
and requires increased stock-based if the fair value method is not
adopted. The Company does not have any stock-based compensation
arrangements covered by this Statement. Future implementation will have
an immaterial effect on the Company's operating results or financial
condition.
Other
Based on a preliminary study, the Company expects to spend approximately
$75,000 to $100,000 from March 1998 through 1999 to modify its 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 systems 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.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements are included in Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting or
Financial Disclosure
There were no changes in or disagreement with accountants on accounting
or financial disclosure.
<PAGE 11>
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 as
Director, Executive Officer or Officer position with the Company,
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 46 1995 Chairman of the Board of Directors
Chief Executive Officer, President
Mr. Kandalepas joined Dauphin 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. 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 in 1986.
Savely Burd 34 1996 Chief Financial Officer
Mr. Burd was appointed Chief Financial Officer 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 45 1995 Secretary, Director
Mr. Goldberg has served as Secretary and a Director since June of 1995.
Mr. Goldberg is a partner at FERS, an international accounting firm.
Mr. Goldberg was formerly the President of Financial Consulting Group,
LTD., a consulting company, 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.
Wm. Paul Bunnell 38 1995 Director of Acquisitions, Director
Mr. Bunnell has served as a Director since June of 1995. Mr. Bunnell is
also a Director of Acquisitions and an active member of the management
team. He was previously a corporate accounting and financial manager
with expertise in business planning and long range strategic planning.
Gary E. Soiney 57 1995 Director
Mr. Soiney has served as a Director since November of 1995. He graduated
from the University of Wisconsin in Milwaukee as 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 41 1995 Director
Mr. Morris has been a Director 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.
<PAGE 12>
Andrew Prokos 35 1995 Director
Mr. Prokos has served as a Director since February 1995. He is also
vice-president of CADserv. Mr. Prokos is a graduate of DeVry Institute
with an Associate Degree in Electronics.
Dean F. Prokos 33 1995 Director
Mr. Prokos has served as a Director 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 and Executive Officers 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.
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.
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. The
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
1995, 1996 or 1997.
<PAGE 13>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding shares of
common stock of the Company owned beneficially as of March 12, 1998,
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:
<TABLE>
Amount and Nature of Percent of
Name of Beneficial Owner Position Beneficial Shares Owned the Class
<S> <C> <C> <C>
Andrew J. Kandalepas Chairman, Chief 5,309,337 (1) 14.3%
Executive Officer & President
Savely Burd Chief Financial Officer 58,000 0.2%
Jeffrey L. Goldberg Secretary, Director 1,248,388 (2) 3.4%
Wm. Paul Bunnell Director 1,248,388 (2) 3.4%
Gary E. Soiney Director 0 0.0%
Douglas P. Morris Director 301,167 (3) 0.8%
Andrew Prokos Director 204,000 0.6%
Dean F. Prokos Director 0 0.0%
Northfield Technology Group ------ 1,248,388 (2) 3.4%
H & M Capital Investments, Inc.------ 11,167 (3) 0.0%
Hyacinth Resources, Inc. ------ 290,000 (3) 0.8%
Marinis Loukas Trust ------ 1,982,500 (1) 5.4%
Morgan Stanley, Dean Witter & Co.
As trustees ------ 7,133,500 19.3%
---------- -----
Officers and Directors and
5% Beneficial Owners (as a group) 14,555,559 39.3%
</TABLE>
(1) The 5,362,007 shares listed for Andrew J. Kandalepas include shares
held individually, 30,650 shares held by CADServ and 1,982,500 held by
Marinis Loukas Trust for which Kandalepas has voting rights.
(2) Jeffrey L. Goldberg and Wm. Paul Bunnell are partners of Northfield
Technology Group and share voting for such shares.
(3) Douglas P. Morris is President of H & M Capital Investments, Inc.
and Hyacinth Resources, Inc.
Item 13. Certain Relationships and Related Party Transactions
On September 4, 1997 the Company signed a letter of understanding to
acquire CADserv is wholly owned by an officer and a major shareholder of
Dauphin. As of the date hereof, the letter of understanding has been
verbally extended and the acquisition of CADserv is pending the approval
of the Board of Directors and procurement of necessary financing. No
valuation has been determined and no definitive agreements have been
entered.
On July 17, 1997 Alan S.K. Yong, founder and former member of the Board
of Directors, resigned his directorship so he can pursue other
opportunities. The Company acquired all Dauphin shares beneficially
owned by Mr. Yong as treasury shares.
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.
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 12th
day of March, 1998.
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 12, 1998
Andrew J. Kandalepas Chief Executive Officer, President
Secretary March 12, 1998
Jeffrey L. Goldberg
Chief Financial Officer March 12, 1998
Savely Burd
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
<PAGE F-1>
Report of Independent Public Accountants
To the Board of Directors and
Shareholders of
Dauphin Technology, Inc.:
We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, consolidated shareholders' equity (deficit) and consolidated
cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Dauphin Technology, Inc. as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 20, 1998
<PAGE 2>
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,620,880 $ 388,600
Restricted cash - 232,000
Accounts receivable-
Trade, net of allowance for bad
debt of $7,500 and $0 in 1997 and 1996 462,821 2,010
Other 20,195 -
Inventory, net of reserve for obsolescence
of $2,143,934 and $185,783 in 1997 and 1996 1,531,464 2,652,461
Prepaid expenses 39,201 12,251
------------ ------------
Total current assets 5,674,561 3,287,322
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $176,318 and $103,074 at
December 31, 1997 and 1996, respectively 739,556 115,538
GOODWILL, net of amortization of $20,427 for 1997 855,019 -
------------ ------------
Total assets $ 7,269,136 $ 3,402,860
============ ============
CURRENT LIABILITIES:
Accounts payable $ 790,784 $ 204,450
Accrued expenses 285,837 62,314
Current portion of long-term debt 83,782 -
Short-term borrowings 87,394 -
------------ ------------
Total current liabilities 1,247,797 266,764
LONG-TERM DEBT 345,744 43,196
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000
shares authorized but unissued - -
Common stock, $0.001 par value, 100,000,000
shares authorized; 37,035,673 shares issued
and 36,305,096 shares outstanding at December
31, 1997 and 31,706,397 shares issued and
29,547,111 outstanding at December 31, 1996 37,036 31,706
Treasury stock, 730,577 and 2,159,286 shares
at December 31, 1997 and 1996 (255,702) (1,187,607)
Paid-in capital 29,283,136 23,649,659
Accumulated deficit (23,388,875) (19,400,858)
------------ ------------
Total shareholders' equity 5,675,595 3,092,900
------------ ------------
Total liabilities and
shareholders' equity $ 7,269,136 $ 3,402,860
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE F-3>
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
REVENUES $ 2,730,035 $ 93,947 $ 183,083
COST OF SALES 4,345,315 279,232 93,852
------------ ----------- -----------
Gross profit (loss) (1,615,280) (185,285) 89,231
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,484,979 1,007,309 681,335
RESEARCH AND DEVELOPMENT
EXPENSE 827,843 76,711 22,388
------------ ----------- -----------
Loss from operations (3,928,102) (1,269,305) (614,492)
INTEREST EXPENSE 75,988 2,310 -
INTEREST INCOME 16,073 9,997 -
------------ ----------- -----------
Loss before reorganizational
items, income taxes and
extraordinary item (3,988,017) (1,261,618) (614,492)
REORGANIZATIONAL ITEMS:
Professional fees - 135,086 180,320
------------ ----------- -----------
Loss before income taxes and
extraordinary item (3,988,017) (1,396,704) (794,812)
INCOME TAXES - - -
------------ ----------- -----------
Loss before extraordinary item (3,988,017) (1,396,704) (794,812)
------------ ----------- -----------
EXTRAORDINARY ITEM, forgiveness of
debt net of income taxes of $0 - 38,065,373 -
------------ ----------- -----------
Net income (loss) $ (3,988,017) $ 36,668,669 $ (794,812)
============ =========== ===========
BASIC and DILUTED EARNINGS (LOSS) PER SHARE:
Before extraordinary item $ (0.13) $ (0.06) $ (0.06)
Extraordinary item - 1.58 -
------------ ----------- -----------
Net income (loss) per share $ (0.13) $ 1.52 $ (0.06)
============ =========== ===========
Weighted average number of shares
of common stock outstanding 30,734,045 24,076,301 14,408,354
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE F-4>
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Capital Shares Amount Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - (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 conversion 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, 1996 31,706,397 31,706 23,649,659 (2,159,286) (1,187,607) (19,400,858) 3,092,900
Issuance of common stock in connection with:
Private placement 4,872,520 4,873 4,582,294 - - - 4,587,167
Commissions to broker/dealer 131,756 132 (132) - - - -
Purchase of a subsidiary 220,000 220 232,980 - - - 233,200
Escrow shares 105,000 105 - - - - 105
Purchase of treasury stock - - - (891,626) (341,369) - (341,369)
Issuance of treasury stock - - 812,084 2,307,835 1,266,400 - 2,078,484
Stock bonuses paid - - 6,250 12,500 6,875 - 13,125
Net income - - - - - (3,988,017) (3,988,017)
----------- -------- ----------- --------- ---------- ------------ ------------
BALANCE, December 31, 1997 37,035,673 $ 37,036 $ 29,283,136 (730,577) $ (255,702) $ (23,388,875) $ 5,675,595
=========== ======== =========== ========= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE F-5>
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,988,017) $ 36,668,669 $ (794,812)
Non-cash items included in net income (loss)-
Loss on disposition of property and equipment - 1,850 41,053
Depreciation and amortization 93,671 33,459 39,698
Compensatory effect of stock options earned - - (87,665)
Extraordinary item - (38,065,373) -
Stock bonus 13,125 - -
Changes in-
Accounts receivable
- trade 129,519 3,781 (128,381)
- other (20,195) 167,266 -
Inventory 1,893,655 22,807 22,644
Prepaid software and other current assets (14,396) (12,251) -
Bank overdraft - - (1,299)
Accounts payable, accrued expenses and
claims payable (554,276) 14,536 252,228
------------ ------------ -----------
Net cash (used for) operating activities (2,446,914) (1,165,256) (656,534)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (201,965) (81,210) (10,809)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in acquisition 31,162 - -
Short-term borrowing and DIP financing (706,390) 375,000 759,947
Purchase of treasury stock (341,369) (1,187,607) -
Issuance of debt - 795,044 -
Proceeds from issuance of common stock 6,665,756 1,792,025 -
------------ ------------ -----------
Net cash provided by financing activities 5,649,159 1,774,462 759,947
------------ ------------ -----------
Net change in cash 3,000,280 527,996 92,604
CASH, beginning of year 620,600 92,604 -
------------ ------------ -----------
CASH, end of year $ 3,620,880 $ 620,600 $ 92,604
============ ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 75,988 $ 2,310 $ -
Reorganization item - 135,086 1,80,320
============ ============ ===========
NONCASH TRANSACTIONS:
Common stock issued in connection with -
Bankruptcy settlement $ - $ 13,048,000 $ -
Purchase of inventory - 2,912,000 -
Settlement of notes payable - 770,000 -
Acquisition of R.M. Schultz & Associates -
Assumption of liabilities 2,197,058 - -
Issuance of stock 233,200 - -
Capital equipment leased 347,189 - -
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE F-6>
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. 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.
On January 3, 1995, the Company filed a petition for relief under
Chapter 11 of the Federal Bankruptcy Code. During 1995 and the first six
months of 1996, the Company operated under Chapter 11. 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. 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, accessories and
fulfillment of certain manufacturing contracts. Revenues from sales of
products are recognized upon delivery. Revenue from the fulfillment of
manufacturing contracts is recognized upon shipment of the product.
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:
1997 1996
[S] [C] [C]
Finished goods $ 22,343 $ -
Work in process 191,872 -
Semi-finished units 168,420 144,327
Raw materials 651,990 -
Computer accessories, components
and supplies 2,640,773 2,693,917
------------ ------------
3,675,398 2,838,244
Less- Reserve for obsolescence (2,143,934) (185,783)
------------ ------------
$ 1,531,464 $ 2,652,461
============ ============
<PAGE F-7>
In the fourth quarter of 1997, in conjunction with the final stages of
development of Orasis( and its introduction at the fall 1997 COMDEX
show, some of the inventory previously acquired for the production of
DTR product line became obsolete. Originally the Company intended to
use all parts of the DTR line in the design and production of Orasis(.
The Company wrote down approximately $1.7 million of raw materials
inventory comprised primarily of DTR line batteries, power cords,
digitizer panels and LCD screens. These items have been redesigned or
upgraded for Orasis(. Also, with the introduction of Orasis(, the semi-
finished DTR units inventory was written down to net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using straight-line methods over the estimated lives of the related
assets, which range between three and seven years. The estimated lives
of certain leasehold improvements are amortized over the remaining term
of the facilities leased. Fixed assets consist of the following:
1997 1996
[S] [C] [C]
Furniture and fixtures $ 40,950 $ 30,776
Office equipment 174,659 169,015
Manufacturing and warehouse equipment 427,791 6,111
Leasehold improvements 260,201 12,710
Automobile 12,273 -
------------ -------------
915,874 218,612
Less - Accumulated depreciation (176,318) (103,074)
------------ -------------
$ 739,556 $ 115,538
============ =============
Research and Development
Costs incurred in connection with research and development are expensed
as incurred. All salaries paid to employees associated with the
research and development are included as part of the expense.
Earnings (Loss) Per Common Share
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 30,734,045, 24,076,301 and
14,408,354 at December 31, 1997, 1996 and 1995, respectively. 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. There is no difference between basic and diluted earnings per
share as there are no potential dilutive common shares.
To date, three customers represent over seventy percent of revenue for
RMS.
<PAGE F-8>
3. BUSINESS DEVELOPMENT
R. M. Schultz & Associates, Inc.
On June 6, 1997, the Company acquired all outstanding common stock of
Richard M. Schultz and Associates, Inc., 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 and the
amortization expense for 1997 was $20,427.
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.
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, 1996 are as follows
(unaudited):
Twelve Months Ended December 31,
<TABLE>
1997 1996
<S> <C> <C>
Revenues $ 4,614,121 $ 5,290,490
(Loss) before extraordinary item (4,418,852) (1,556,273)
Net income (4,418,852) 36,509,100
Basic and diluted earnings (loss)
per share before extraordinary item $ (0.14) $ (0.07)
Basic and diluted earnings (loss)
income per share (0.14) 1.52
Weighted average shares outstanding 30,734,045 24,076,301
</TABLE>
Such pro forma information is not necessarily indicative of the results
of future operations.
CADserv Corporation
On September 4, 1997, the Company signed a letter of understanding to
acquire CADserv Corporation ("CADserv"). CADserv is wholly owned by an
officer and a major shareholder of the Company. As of the date hereof,
the letter of understanding has been verbally extended and the
acquisition of CADserv is pending the approval of the Company's Board of
Directors and procurement of the necessary financing. No valuation or
price has been determined and no definitive agreements have been
entered.
Other
In 1996 the Company established a 401(k) retirement and pension plan.
The plan provides for discretionary contributions by the Company. There
were no contributions in 1997 or 1996.
<PAGE F-9>
4. SHORT-TERM BORROWINGS:
Short-term borrowings consist of the following at December 31:
<TABLE>
1997 1996
<S> <C> <C>
LaSalle Bank Cash Collateral Account $ 71,421 $ -
DCCA Loan 5,634 -
Advacom/Adler & Associates 10,339 -
-------- --------
Total short-term notes payable $ 87,394 $ -
======== ========
</TABLE>
LaSalle Bank Cash Collateral Account is a revolving line of credit with
accounts receivable, inventory and unencumbered fixed assets as
collateral. The loan carried 16% annual interest rate. As of February
1, 1998, LaSalle Bank Cash Collateral Account has been paid. All assets
and Dauphin corporate guarantee that were posted as collateral for this
loan have been released.
Two other short-term borrowings represent amounts due to vendors of RMS
that were converted from trade credits to short-term loans prior to
acquisition. Both loans are uncollateralized and are due in June 1998.
These loans carry 7% annual rate of interest.
5. LONG-TERM DEBT:
At December 31, long-term liabilities consist of:
<TABLE>
1997 1996
<S> <C> <C>
McHenry County Department of Planning and
Development loan for expansion of RMS,
payable in equal monthly installments over
84 months with 6% interest. This loan has
no collateral and is due on 10/1/2004 $ 145,655 $ -
PACJETS Financial Ltd. surface mount equipment
lease, payable in equal monthly installments
over 60 months. The lease is collateralized
by the equipment and has a one dollar buy-out
option. The lease carries 12% interest and
is due on 10/15/2003 148,501 -
PACJETS Financial Ltd. Furniture leases,
payable in equal installments over 36 months.
The lease carries a 23% annual interest rate
and is due on 11/15/2000 is collateralized
by the equipment and has a one dollar
buy-out option 54,262 -
Other represents capital lease for certain
vehicles, machinery and equipment and certain
priority tax claims due and payable on an
equal monthly installments over 36 to 72
months. All debts are due from starting in
June 2000 through October 2002, carry interest
rate ranging from 9% to 18% 81,108 43,196
---------- ---------
Total long-term liabilities $ 429,526 $ 43,196
========== =========
</TABLE>
Future minimum debt payments are as follows:
Year Amount Due
1998 $ 83,782
1999 89,378
2000 90,006
2001 63,283
2002 61,470
Thereafter 41,607
----------
Total long-term debt: $ 429,526
==========
<PAGE F-10>
6. INCOME TAXES:
A reconciliation of the income tax expense on income at the U.S. federal
statutory rate to the reported income tax expense follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
U.S. federal statutory rate applied
to pretax income $ (1,355,926) $ (502,395) $ (270,236)
Permanent differences and adjustments 31,906 6,270 (153)
Tax assets and net operating loss
carryforwards not recognized for
financial reporting purposes
(changes in valuation allowances) 1,324,020 496,125 270,389
----------- --------- ---------
Income tax provision $ - $ - $ -
=========== ========= =========
</TABLE>
As of December 31, 1997 and 1996, the Company had generated deferred
tax assets as follows:
<TABLE>
December 31,
1997 1996
<S> <C> <C>
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 7,779,866 $ 4,629,283
Reserves for inventory obsolescence 2,068,734 185,783
Bad debt reserve 7,500 -
Vacation Accrual 58,377 -
Other timing differences 37,053 -
---------- ----------
9,951,530 4,815,066
Current federal statutory rate 34% 34%
---------- ----------
Deferred tax assets 3,383,520 1,637,122
Less- SFAS 109 valuation allowance (3,383,520) (1,637,122)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
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 $(3,383,520)
and $(1,637,122) at December 31, 1997 and 1996, 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.
<PAGE F-11>
7. EQUITY TRANSACTIONS:
1997 Transactions
During 1997, the Company, through several private transactions with
accredited investors, sold approximately 2.8 million of common stock for
approximately $2.7 million or approximately $0.98 per share. Of the
shares issued, 2.3 million were issued from treasury shares. As a
result of these transactions, the Company raised in excess of $2.6
million for its working capital, implementation of the Company's
acquisition strategy and research and development.
On July 16, 1997, the Company repurchased 745,126 shares held by Alan
S.K. Yong, former founder and President of Dauphin, for $260,794 or
$0.35 per share. Simultaneously, the Company accepted Mr. Yong's
resignation from the Board of Directors.
On September 5, 1997, under the employment contract, the Company issued
12,500 shares 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.
In the fourth quarter, the Company conducted a private placement of
4,391,852 shares of common stock at $1.00 per share. All shares issued
were previously unissued and unregistered. In total, $4,391,852 was
raised. As of December 31, 1997, the Company closed this private
placement. As part of the transaction, a lead broker/dealer received
$439,185 or ten (10%) percent cash compensation and 131,756 common
shares or three (3) shares for each 100 shares placed as commission for
the amount raised. The broker/dealer also has an option to purchase
additional 175,674 shares or four (4) shares for each 100 shares placed
at a $1.00 each within one year from the close of this transaction.
1996 Transactions
On February 6, 1996 the Company entered into an agreement with Victor
Baron, Savely Burd and Interactive Controls, Inc., an Illinois
corporation ("Intercon"). Under the terms of the agreement, the Company
acquired a business plan devised by Intercon for the design and
manufacturing of industrial control systems and software. The Company
also agreed to employ Messrs. Baron and Burd and provided Intercon the
opportunity to receive (a) 1,000,000 shares of common stock the first
fiscal year the Company realizes aggregate gross revenue of $5,000,000;
(b) an additional 200,000 shares of common stock for each additional
$1,000,000 in gross sales revenues exceeding $5,000,000 and up to
$10,000,000; and (c) additional .25 shares of common stock for each
dollar in net earnings before taxes. The aggregate number of shares
issued under the Intercon agreement may not in any event exceed 25% of
the Company's shares outstanding as of the effective date of its Plan of
Reorganization. To date, no Intercon products have been developed or
produced under the business plan and no shares have been issued to
Intercon. Mr. Burd continues to serve as an employee and Chief
Financial Officer of the Company. Mr. Baron's employment with the
Company terminated on February 24, 1998.
On April 19, 1996, TPL, a related party, commenced a private placement
of certain 9% unsecured promissory notes convertible to certain
Company's shares received by it in connection with debtor-in-possession
financing provided by TPL to the Company. As a result of the private
placement and conversion of notes as specified in the Offering
Memorandum, the Company 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 to qualified
investors of 1,059,286 common shares for $796,616 or $0.75 per share.
The common shares issued in connection with these transactions 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 share. As a result of the
transaction, the Company generated $379,009 for operating capital.
<PAGE F-12>
On November 12, 1996, the Company registered with the SEC all corporate
unregistered shares issued in private transactions 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 5, 1997, under the employment contract, the Company issued
12,500 shares 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.
8. COMMITMENTS AND CONTINGENCIES:
The Company is paying approximately $10,000 per month to rent its
corporate facilities. The lease has a three-year term with a five-year
renewal option. The Company leases RMS facilities for approximately
$14,000 per month. The lease on RMS facility has a five-year term with
an additional five-year optional extension.
9. RELATED-PARTY TRANSACTIONS:
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the
design, packaging and manufacturing of Dauphin's DTR and Orasis( product
lines and will likely continue in this capacity in the future.
In June, July and August 1997, the Company borrowed an aggregate sum of
$492,500 from related parties. As of the date of these financial
statements all funds have been repaid together with $35,220 of accrued
interest.
On July 16, 1997 the Company repurchased 745,126 shares held by Alan
S.K. Yong, former founder and President of the Company for $260,794 or
$0.35 per share. Simultaneously, the Company accepted Mr. Yong's
resignation from the Board of Directors.
On September 4, 1997, the Company signed a letter of understanding to
acquire CADserv. As of the date hereof, the letter of understanding has
been verbally extended and the acquisition of CADserv is pending the
approval of the Company's Board of Directors and obtain the necessary
financing.
RMS facilities are leased from Enclave Corporation that is owned by
Richard M. Schultz, President of RMS.
<PAGE F-13>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,620,880
<SECURITIES> 0
<RECEIVABLES> 470,321
<ALLOWANCES> 7,500
<INVENTORY> 1,531,464
<CURRENT-ASSETS> 5,674,561
<PP&E> 915,874
<DEPRECIATION> 176,318
<TOTAL-ASSETS> 7,269,136
<CURRENT-LIABILITIES> 1,247,797
<BONDS> 0
0
0
<COMMON> 37,036
<OTHER-SE> 5,638,559
<TOTAL-LIABILITY-AND-EQUITY> 7,269,136
<SALES> 2,730,035
<TOTAL-REVENUES> 2,730,035
<CGS> 4,345,315
<TOTAL-COSTS> 4,345,315
<OTHER-EXPENSES> 2,312,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,988
<INCOME-PRETAX> (3,988,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,988,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,988,017)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
