This document was originally filed on November 13, 1998. This is a second
transmission.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 (I.R.S. Employer
incorporation or organization) 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 November 12, 1998, the number of Shares of the Registrant's
Common Stock, $.001 par value, 38,742,214 was issued and 38,058,760 was
outstanding, with 683,454 treasury shares.
<PAGE 1>
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months and Three Months Ended September, 1998 and 1997 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Twelve Months Ended December 31, 1997 and
Nine Months Ended September 30, 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II
OTHER INFORMATION 14
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 14
<PAGE 2>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
September 30, December 31,
1998 1997
<S> <C> <C>
------------- ------------
CURRENT ASSETS:
Cash $ 909,706 $ 3,620,880
Accounts Receivable
Trade, net of bad debt reserve of $7,500 645,125 462,821
Other 34,575 20,195
Inventory, net of reserve for obsolescence
of $2,663,209 at September 30, 1998 and
$2,143,934 at December 31, 1997 2,685,917 1,531,464
Prepaid Expenses 246,115 39,201
----------- -----------
Total Current Assets 4,521,438 5,674,561
PROPERTY AND EQUIPMENT, net of Accumulated
Depreciation of $343,954 at September 30,
1998 and $103,074 at December 31, 1997 1,574,020 739,556
INTANGIBLE ASSETS, net of Accumulated Amortization
of $58,363 and $20,427 at September 30, 1998
and December 31, 1997, respectively 817,083 855,019
----------- -----------
TOTAL ASSETS $ 6,912,541 $ 7,269,136
=========== ===========
CURRENT LIABILITIES:
Accounts Payable $ 1,365,503 $ 790,784
Accrued Expenses 83,460 285,837
Current Portion of long-term debt 83,782 83,782
Short Term Notes Payable --- 87,394
----------- -----------
Total Current Liabilities 1,532,745 1,247,797
CONVERTIBLE DEBENTURES, net of debt discount of
$49,067 (Note 6) 1,478,933 ---
LONG-TERM DEBT 360,785 345,744
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value, 10,000,000
Shares Authorized but None Issued --- ---
Common Stock $.001 Par Value, 100,000,000 Shares
Authorized: 38,216,090 Shares and 32,407,065
Issued at September 30, 1998 and December 31,
1997, and 37,532,636 and 30,612,021 Outstanding
at September 30, 1998 and December 31, 1997 38,216 37,036
Treasury Shares (239,209) (255,702)
Paid in Capital 30,467,694 29,283,136
Warrants 51,335 ---
Accumulated Deficit (26,777,958) (23,388,875)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,540,078 5,675,595
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,912,541 $ 7,269,136
=========== ===========
<TABLE/>
<PAGE 3>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
</TABLE>
<TABLE>
Nine Months Three Months
Ended September 30 Ended September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
------------ ------------ ------------ ------------
NET SALES $ 3,904,916 $ 1,466,436 $ 1,281,214 $ 1,106,972
COST OF SALES 3,918,136 1,415,843 1,628,528 1,027,145
------------ ------------ ------------ ------------
Gross Profit (Loss) (13,220) 50,593 (347,314) 79,827
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 2,205,207 1,007,120 818,398 354,692
RESEARCH AND DEVELOPMENT
EXPENSE 1,186,723 298,288 347,206 278,499
------------ ------------ ------------ ------------
(Loss) from Operations (3,405,150) (1,254,815) (1,512,918) (553,364)
INTEREST EXPENSE 84,163 --- 40,343 ---
INTEREST INCOME 100,230 65,453 29,612 7,070
------------ ------------ ------------ ------------
(Loss) before Income Taxes (3,389,083) (1,189,362) (1,523,649) (546,294)
INCOME TAXES --- --- --- ---
------------ ------------ ------------ ------------
NET (LOSS) $ (3,389,083) $ (1,189,362) $ (1,523,649) $ (546,294)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
BASIC AND DILUTED (LOSS)
PER SHARE $ (0.09) $ (0.04) $ (0.04) $ (0.02)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 36,709,418 30,183,296 37,316,960 30,040,387
<TABLE/>
<PAGE 4>
DAUPHIN TECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND NINE MONTHS
ENDED SEPTEMBER 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 4,872,520 4,873 4,362,229 --- --- --- --- 4,367,102
Purchase of a subsidiary 325,000 325 232,875 --- --- --- --- 233,200
Commissions to broker/dealer 131,756 132 (132) --- --- --- --- ---
Purchase of treasury shares --- --- --- (891,626) (341,369) --- --- (341,369)
Issuance of treasury shares --- --- 812,084 2,307,835 1,486,570 --- --- 2,298,654
Stock bonuses paid --- --- 6,251 12,500 6,874 --- --- 13,125
Net (loss) --- --- --- --- --- --- (3,988,017) (3,988,017)
- ------------------------- ----------- -------- ------------ ----------- ----------- ---------- ------------- -----------
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 1,000,054 1,000 936,326 --- --- --- --- 937,326
Brokerage fee 91,127 91 112,009 --- --- --- --- 112,100
Tooling for Orasis 60,000 60 67,440 --- --- --- --- 67,500
Warrants --- --- --- --- --- 51,335 --- 51,335
Stock bonuses paid 29,236 29 68,783 47,123 16,493 --- --- 85,305
Net (loss) --- --- --- --- --- --- (3,389,083) (3,389,083)
- ------------------------- ----------- -------- ------------ ----------- ----------- ---------- ------------- -----------
September 30, 1998 38,216,090 $ 38,216 $ 30,467,694 (683,454) $ (239,209) $ 51,335 $ (26,777,958) $ 3,540,078
=========== ======== ============ =========== =========== ========== ============= ===========
<TABLE/>
<PAGE 5>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
</TABLE>
<TABLE>
1998 1997
<S> <C> <C>
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net (Loss) $ (3,389,083) $ (1,189,362)
Non-Cash Items Included in Net (Loss):
Depreciation 167,636 49,569
Amortization of Goodwill 37,935 11,323
Change in - Prior to purchase of
Richard M. Schultz and Associates, Inc.:
(Increase)/Decrease in Accounts Receivable - Trade (182,304) 301,669
(Increase) in Accounts Receivable - Other (14,380) (45,200)
(Increase)/Decrease in Inventory (1,154,452) 3,153
(Increase)/Decrease in Prepaid Expenses (206,914) 6,156
Increase/(Decrease) in Accounts Payable 537,332 (518,563)
(Decrease) Accrued Expenses and Short-Term Notes (180,964) (23,870)
------------- -------------
Net Cash (Used For) Operating Activities (4,385,194) (1,405,125)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of Equipment and Furniture, Net (942,118) (321,342)
Purchase of a Subsidiary --- (168,717)
------------- -------------
Net Cash (Used For) Investing Activity (942,118) (490,059)
CASH FLOWS FROM FINANCING ACTIVITIES -
McHenry County Economic Development Loan --- 150,000
Equipment Leasing --- 155,000
Repayment of Debt (27,878) ---
Proceeds from Convertible Debentures 2,527,270 ---
Proceeds from Issuance of Warrants 51,335 ---
Proceeds from Issuance of Common Stock 152,805 1,615,128
(Decrease) in Short Term Borrowing (87,394) (470,696)
------------- -------------
Net Cash Provided by Financing Activities 2,616,138 1,449,432
------------- -------------
Net (Decrease) Increase in Cash (2,711,174) (445,752)
CASH BEGINNING OF PERIOD 3,620,880 620,600
------------- -------------
CASH END OF PERIOD $ 909,706 $ 174,848
============= =============
CASH PAID DURING THE PERIOD FOR -
Interest $ 84,164 $ 53,919
Income Taxes --- ---
============= =============
SUPPLEMENTAL NON-CASH ACTIVITY -
Capital Leases $ 59,982 $ ---
Issuance of Stock for Tooling of Orasis $ 67,500 $ ---
Issuance of Stock for Services Rendered $ 85,305 $ 12,500
Purchase of Richard M. Schultz and Associates, Inc.
Liabilities Assumed $ --- $ 2,041,531
Stock Issued $ --- $ 233,200
============= =============
<TABLE/>
<PAGE 6>
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED 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
36,709,418 for the nine month period ending September 30, 1998 and 30,183,296
for the nine month period ending September 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 September 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 Company 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
Company 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
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 September 30,
1998, RMS had not reached its financial goals and no shares have been issued
under the purchase agreement.
4. INVENTORY
Due to space limitation, some of the inventory that Dauphin owned were stored
at an outside storage facility. In the third quarter, due to a physical loss
and damage of inventory, sustained while stored at a rented storage facility,
the loss of several surface-mount manufacturing contracts and a rapid
development of pen-based technology, certain inventory that Dauphin had on
its books became unrealizable. The storage facility is no longer utilized.
The cost of goods sold reflects an increase in reserve for obsolete inventory
of $533,168, of which $109,995 represents write-down of magnetic pens and
$423,173 of designated components.
5. COMMITMENTS AND CONTINGENCIES
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 and as of the date hereof, four out of five claims in the
lawsuit have been dismissed. Management believes that the Company has several
defenses to the claim remaining 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.
6. 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
Debentures, and issued 50,000 warrants, as fee a for placement of the
Debentures through a registered broker-dealer. The warrants were valued at
$51,335 using the Black-Scholes securities valuation model and are recorded
as a debt discount. The Company also issued 36,360 common shares in lieu of
placement fees to a placement agent. As of the date hereof, all of the
initial Convertible Subordinated Debentures, including interest, have been
converted into common stock of the Company.
<PAGE 8>
On August 1, 1998 the Company issued 8% Convertible Subordinated Debentures -
2001A to the same four accredited investors in an aggregate principal amount
not to exceed $2,000,000, which is due and payable on or about August 1,
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.
Through October 13, 1998, the Company issued $1,700,000 of Convertible
Subordinated Debentures and paid $101,500 in placement fees for which 54,767
shares were issued in the third quarter.
7. OPTIONS
As an incentive for performance, on July 1, 1998 and subsequently on August
21, 1998, the Company issued a total of 113,000 options to purchase common
shares to several employees. Assuming that the employees remain with the
Company, the options may be exercised over three years. The issuance of such
options does not have any salary impact on the financial statement above
because the options exercisable price is equal to the market price at the
time of issuance.
8. EQUITY TRANSACTIONS
1998 Events
On January 5, March 5, June 5 and September 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 and on
July 6, 1998 the Company issued additional 1,260 shares to Mr. Schultz to
make up for the decrease in price of the stock on the day of issuance.
On March 3, 1998, for 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 for use,
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 services performed, the Company issued 3,000 shares to
Ms. Nina O'Connor an employee of the Company, as a bonus.
Since the date of the original subscription, 1,000,054 shares that were
previously registered as shelf shares were issued in exchange for $892,000 of
principal, $44,326 of interest and 91,127 shares were issued as fees to
brokers from the Convertible Debentures -2001 (Note 6).
<PAGE 9>
Subsequent Event
Through the date of this report all Convertible Debentures - 2001 have been
converted into common shares.
On October 30, 1998 the Company placed additional $250,000 of Convertible
Debenture 2001A with a group of four accredited investors. Also, 526,124
shares that were previously registered as shelf shares were issued in
exchange for $285,000 of principal and $10,500 of interest from the end of
the quarter to the date of this report.
<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 fiscal year 1996 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
September 30, 1998 compared to September 30, 1997
Revenues
The revenues, as compared from third quarter of 1998 to 1997, have increased
from $1,106,000 to $1,286,000. That is an increase of $180,000 or more then
15 percent on a year to year basis. The increase was due to shipments of
Orasis(. Overall revenues for the first nine months of 1998 in comparison to
the first nine months of 1997 have increased from $1,466,000 to $3,905,000.
The increase in 1998 is primarily due to nine months of operations of RMS as
a Dauphin subsidiary in comparison to only four months in 1997. Overall, the
gross profit percentage is approximately sixteen percent. Historically gross
profit on sales from RMS has been approximately thirteen percent. The
increase in gross profit was due to sales of Orasis(.
Due to space limitation, some of the inventory that Dauphin owned were stored
at an outside storage facility. In the third quarter, due to a physical loss
and damage of inventory, sustained while stored at a rented storage facility,
the loss of several surface-mount manufacturing contracts and a rapid
development of pen-based technology, certain inventory that Dauphin had on
its books became unrealizable. The storage facility is no longer utilized.
The cost of goods sold reflects an increase in reserve for obsolete inventory
of $533,168, of which $109,995 represents write-down of magnetic pens and
$423,173 of designated components.
Operating Expenses
Sales, General and Administrative expenses for the Company reflects day-to-
day operating expenses of Dauphin Technology, Inc. For the third quarter as
well as for the year to date, salaries, increase in demo merchandise expense,
advertising and employment taxes for current employees represent a major part
of expenses. The Company employs approximately 100 individuals now, compared
to 70 employees at the same time a year ago. Other large expenses were
rents, interest expense and trade shows.
Research and Development expense for the third quarter was increased due to
the development of sub-components of the Orasis system, such as DVD, GPS and
wireless camera modules. Year-to-date the Company spent close to $1.2
million on Research and Development of Orasis, in comparison to $298,000
during the same time last year. As of the date hereof, the development of
Orasis has been completed and the sales have begun.
Interest Expense
The increase in interest expense year-to-date as well as for the quarter is
primarily due to the issuance and conversions of Convertible Debentures. The
interest was paid through issuance of common stock.
Net Income (Loss)
The (loss) after tax increased for the third quarter of 1998 to ($1,524,000)
or ($0.04) per share from ($546,000) or ($0.02) per share in 1997. (Loss)
per common share is calculated based on the monthly weighted average number
of common shares outstanding which were 36,705,841 and 36,405,648 for the
nine month period September 30 1998 and 1997, respectively. Year to date the
loss for 1998 is $3,389,000 in comparison to $1,186,000 in the same time last
year. The increase is due to all factors described above as well as an
increase in borrowing.
<PAGE 11>
CHANGES IN FINANCIAL POSITION
September 30,1998 Compared to December 31, 1997
During the third quarter of 1998, total assets decreased to $6,909,000 at
September 30 from $7,269,000 at December 31, 1997. The Company issued an
additional $1,700,000 of Convertible Subordinated Debentures, which increased
the cash balances from quarter to quarter. However, continued expenditures
on Research and Development, acquisition of the components to produce initial
quantities of product for sale, and write-down of certain obsolete inventory,
caused the overall decrease in total assets. 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 $909,000 on September 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.
Total liabilities increased by approximately $1,741,000 as a result of
issuance of Subordinated Convertible Debentures, increase in payables due to
purchases of inventory, 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, conversion of Debentures into equity and payment of obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had extensive cash requirements throughout 1998 due to the final
stages of development and initial production phases for the Orasis(.
Company's financial requirements in 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 and third
quarters of 1998. Sales of Orasis( started in early August 1998, with single
units shipped to customers. Year-to-date approximately 120 units were sold
and another 100 units were placed in customers' hands for evaluation
purposes. Cash flow generated from the sales of Orasis( is 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( and a possible
credit facility.
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.
<PAGE 12>
OTHER
During the last several months, management tried to assess the full impact of
a potential year 2000 problem. Management had to address two main points -
internal information management and communications system and Company's
products. Based on management knowledge of the year 2000 problem and the
high-tech computer based nature of the Company's business, management does
not anticipate that the impact of the year 2000 problem would be material to
its operations. All operating and application software, used by internal
systems as well as by Orasis(, are third party year 2000 certifiable software
such as Microsoft's Windows 98. Since a majority of the Company's vendors
are in the high-tech electronics arena, management does not anticipate that
they would be materially affected by the year 2000 problem.
In order to address year 2000 problem, the Company upgraded its main server,
printing capabilities, telephone system as well as its information management
software. The Company expects to spend additional $60,000 to $75,000 from
October 1998 through 1999 to modify the remaining information management
system at its subsidiary to enable proper processing of information. In case
the system is not year 2000-compliant, the Company has the ability to
maintain manual journals for a period of time until year 2000-compliant
software is installed. Of this cost estimate, approximately $30,000 would go
towards purchasing replacement software, $20,000 to $30,000 would go towards
consulting fees and the remaining amount would go towards upgrading the
hardware. A consulting firm has been retained in order to facilitate a
smooth transition from the old setup to new configuration of the system. All
cost associated with upgrades of the system would be capitalized and
amortized over three years. 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 13>
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 and as of the date hereof, four out of five claims in the
lawsuit have been dismissed. Management believes that the Company has several
defenses to the claim remaining 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. None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, Registrant's Chief Financial Officer, thereunto duly authorized.
Dated: November 13, 1998
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: /SAVELY BURD/
Savely Burd
Chief Financial Officer
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