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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Illinois 87-0455038
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes X No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 19, 1999,
50,954,114 shares of the registrant's common stock, $.001 par value, was
issued and 50,953,695 was outstanding, with 419 treasury shares.
<PAGE 1>
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months and Three Months Ended
September 30, 1999 and 1998 4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Year Ended December 31, 1998 and
Nine Months Ended September 30, 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2.
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
PART II OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Company's Security Holders
Item 3. Default by the Company on its Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K
SIGNATURE 14
<PAGE 2>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash $ 85,867 $ 55,701
Accounts receivable-
Trade, net of allowance for bad
debt of $11,238 at September 30, 1999
and December 31, 1998 526,274 689,713
Employee receivables - 45,987
Inventory, net of reserve for obsolescence
of $11,945,296 at September 30, 1999 and
$152,000 December 31, 1998 1,521,184 2,953,686
Prepaid expenses 63,022 46,596
------------ -------------
Total current assets 2,196,347 3,791,683
INVESTMENT IN RELATED PARTY 290,000 300,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $649,564 at September 30,
1999 and $378,051 at December 31, 1998 1,428,559 1,673,901
DEFERRED FINANCING COST, net of accumulated
amortization of $29,128 at December 31, 1998 259,710 186,576
GOODWILL, net of accumulated amortization
of $107,971 at December 31, 1998 - 767,475
------------ -------------
Total assets $ 4,174,617 $ 6,719,635
============ =============
CURRENT LIABILITIES:
Accounts payable $ 1,952,247 $ 2,103,572
Accrued expenses 59,973 215,305
Current portion of long-term debt 110,779 113,436
Short-term borrowings, net of discount
of $3,845 at December 31, 1998 366,375 246,155
Unearned revenue 300,000 -
Convertible debentures, net of discount
of $47,012 at December 31, 1998 - 852,988
------------ -------------
Total current liabilities 2,789,374 3,531,456
LONG-TERM DEBT 208,366 302,951
COMMITMENTS AND CONTINGENCIES - -
------------ -------------
Total liabilities $ 2,997,740 $ 3,834,407
------------ -------------
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;
49,660,704 shares issued and
49,660,285 outstanding at September
30,1999 and 40,000,000 shares issued
and 39,861,818 outstanding at
December 31, 1998 49,661 40,000
Treasury stock, at cost, 419 at
September 30, 1999 and 138,182 shares
at December 31, 1998 (147) (33,306)
Warrants 1,189,402 55,181
Paid-in capital 37,514,764 32,343,785
Accumulated deficit (37,576,804) (29,520,432)
--------------- -------------
Total shareholders' equity 1,176,877 2,885,228
--------------- -------------
Total liabilities and
shareholders' equity $ 4,174,617 $ 6,719,635
=============== =============
<PAGE 3>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS AND TREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
Nine Months Three Months
Ended September 30 Ended September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
----------- ---------- ---------- ----------
NET SALES $ 2,185,623 $ 3,904,916 $ 157,680 $ 1,281,214
COST OF SALE 4,657,302 3,918,136 2,105,016 1,628,528
----------- ---------- ---------- ----------
Gross (Loss)/Profit (2,471,679) (13,220) (1,947,336) (374,314)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 3,172,411 2,205,207 1,532,179 818,398
RESEARCH AND DEVELOPMENT
EXPENSE 454,918 1,186,723 18,889 347,206
----------- ---------- ---------- ----------
(Loss) from Operations (6,089,008) (3,405,150) (3,498,404) (1,512,918)
INTEREST EXPENSE 1,975,573 84,163 92,702 40,343
INTEREST INCOME 18,210 100,230 6,628 29,612
----------- ---------- ---------- ----------
(Loss) before Income Taxes (8,056,371) (3,389,083) (3,584,478) (1,523,649)
INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET (LOSS) $(8,056,371) $(3,389,083) $(3,584,478) $(1,523,649)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTED (LOSS) PER SHARE $ (0.18) $ (0.09) $ (0.07) $ (0.04)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 44,823,498 36,709,418 48,419,719 37,316,960
</TABLE>
<PAGE 4>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
Common Stock Warrants Treasury Stock Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ------ ------ ------ ------- ------- --------
BALANCE, December 31, 1997 37,035,673 $37,036 - $ (730,577) $(255,702) $29,283,136 $(23,388,875) $5,675,595
Issuance of common stock
in connection with:
Conversions of debt 2,705,391 2,705 - - 542,272 205,903 2,743,811 - 2,952,419
Commissions to placement
agent 172,700 173 - - - - 178,745 - 178,918
Purchase of fixed assets 60,000 60 - - - - 67,440 - 67,500
Issuance of warrants in
connection with debt issuance - - 200,000 55,181 - - - - 55,181
Stock bonuses paid 26,236 26 - - 50,123 16,493 70,653 - 87,172
Net loss - - - - - - - (6,131,557) (6,131,557)
--------- -------- -------- -------- --------- --------- --------- ----------- ----------
BALANCE, December 31, 1998 40,000,000 $ 40,000 200,000 $55,181 (138,182) $(33,306) $32,343,785 $(29,520,432) $ 2,885,228
Issuance of common stock
in connection with:
Conversions of debt 4,985,358 4,985 - - 116,158 25,598 3,841,039 - 3,871,622
Private placement 3,992,651 3,993 - - - - 980,055 - 984,048
Accounts payable settlements 656,322 656 - - 1,605 561 325,053 - 326,270
Issuance of warrants - - 3,499,100 1,134,221 - - - - 1,134,221
Stock bonuses paid 26,373 26 - - 20,000 7,000 24,832 - 31,858
Net loss - - - - - - - 8,056,371) (8,056,371)
------------- -------- --------- --------- ------- ------- ---------- ----------- -----------
BALANCE, September 30, 1999 49,660,704 $ 49,661 3,699,100 $1,189,402 (419) $ (147) $37,514,764 (37,576,803) $ 1,176,877
------------ -------- --------- ---------- ------ ------- ---------- ----------- ----------
------------ -------- --------- ---------- ------ -------- ---------- ----------- ----------
</TABLE>
<PAGE 5>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
1999 1998
<S> <C> <C>
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net (loss) $ (8,056,372) $ (3,389,083)
Non-cash items included in net (loss):
Depreciation and amortization 1,225,564 205,571
Stock bonuses 31,858 -
Interest expense on convertible debt 1,940,458 -
Write down of Inventory 1,793,296 -
Decrease in accounts receivable - trade 163,439 (182,304)
Decrease in accounts receivable from employees 45,987 (14,380)
(Increase) in inventory (360,793) (1,154,452)
(increase) in prepaid expenses (16,426) (206,914)
(Increase) in deferred financing cost (315,439) -
Increase/(Decrease) in accounts payable (151,325) 537,332
(Decrease) in accrued expenses and
short term liabilities (37,769) (180,964)
Increase in unearned revenue 300,000 -
------------ ------------
Net cash (used for) operating activities (3,437,523) (4,385,194)
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in related party 10,000 -
Purchase of property and equipment, Net (10,547) (942,118)
----------- -----------
Net cash (used for) investing activities (547) (942,118)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 2,062,224 152,805
Proceeds from issuance of warrants 1,134,221 -
Proceeds from convertibles debentures - 2,527,270
Long-term leases and other obligations (94,585) -
Increase/(decrease) in short term borrowing 366,375 (87,394)
Repayment of Debt - (27,878)
---------- -----------
Net cash provided by financing activities 3,468,236 2,616,138
---------- -----------
Net increase (decrease) in cash 30,166 (2,711,174)
CASH BEGINNING OF PERIOD 55,701 3,620,880
--------- ----------
CASH END OF PERIOD $ 85,867 $ 909,706
--------- ----------
--------- ----------
CASH PAID DURING THE PERIOD FOR -
Interest $ 90,064 $ 84,164
Income Taxes - -
--------- ----------
--------- ----------
NON-CASH ACTIVITY:
Stock issued in conversion of debt $ 3,871,622 $ -
Capital Lease Obligations - 59,982
Issuance of Stock for Services Rendered 326,270 85,305
Issuance of Stocks for Tooling Orasis - 67,500
---------- ----------
---------- ----------
</TABLE>
<PAGE 6>
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Description of Business
- -----------------------
Dauphin Technology, Inc. ("Dauphin" or the "Company") designs, manufactures
and markets mobile hand-held and pen-based computers, components and
accessories. Dauphin markets its products through a network of value added
resellers and software integrators to commercial and government market
segments.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiary, R.M. Schultz & Associates, Inc. ("RMS"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
------------------------------------
Earnings (Loss) Per Common Share
- --------------------------------
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding
during the period, which were 44,823,498 for the nine month period ended
September 30, 1999 and 36,709,418 for the nine month period ended September
30, 1998. Diluted earnings per common share are adjusted for the assumed
conversion of convertible debentures and exercise of stock options and
warrants unless such adjustment would have an anti-dilutive effect.
Approximately 3.7 million additional shares would be outstanding if all
warrants were exercised as of September 30, 1999.
Unaudited Financial Statements
- ------------------------------
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. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the registrant's annual report on Form 10-K for the year
ended December 31, 1998.
The reader is reminded that the results of operations for the interim period
are not necessarily indicative of the results for the complete year.
<PAGE 7>
Use of Estimates
- ----------------
The presentation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
3. RISKS AND UNCERTAINTIES
-----------------------
The Company has incurred a net operating loss in each year since its founding
and as of September 30, 1999 has an accumulated deficit of $37,576,803. The
Company expects to incur operating losses over the near term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to manufacture and market commercially acceptable products.
There can be no assurance that the Company will ever achieve a profitable
level of operations or if profitability is achieved, that it can be sustained.
Due to ramp up in manufacturing and marketing of Orasis(TM), the Company has
substantial cash requirements. Operations are severely constrained due to
limited cash on hand and the scarcity of trade credit due to the inability
of the Company to meet its payables within terms. Management is seeking
additional financing and is negotiating terms and conditions with several
current investors. Also, it has retained the services of an investment
banking firm. There can be no assurance that the Company will be able to
obtain the necessary capital to sustain future operations, however,
management believes that the combination of financing (yet to be negotiated)
and sales of Orasis(TM) will generate enough cash to sustain future
operations.
4. LIABILITIES
-----------
In February 1999, the Company factored certain receivables with a factoring
company and pledged approximately $350,000 of its receivables. In exchange,
the factoring company receives 1% for every 10 days a receivable is
outstanding and an exit fee of $40,000.
In addition to factoring, the Company borrowed $253,000 from its affiliates.
These loans are uncollateralized demand notes that carry a 1% monthly rate of
interest.
Company received a deposit for future deliveries of product from BulFon SA
in the amount of $300,000, recorded as unearned revenue.
All inventory and receivables of R.M. Schultz & Associates, Inc. have been
used as collateral for certain vendors with trade payables of approximately
$600,000 included in accounts payable balances at September 30, 1999.
5. FUNDING AGREEMENT
-----------------
On March 30, 1999, the Company signed an agreement with an accredited
<PAGE 8>
investor ("Investor") for financing as follows: The Investor agreed to commit
up to $6 million according to the following conditions. A) The first closing
for $1 million will occur upon execution of agreed upon documentation as well
as a deposit of 2 million common shares (which shall be pledged
by current shareholders) in escrow. This tranche will take the form of an 8%
promissory note convertible into stock beginning sixty days after closing.
The conversions will be at a 15% discount from the closing bid price of the
Company's common stock. Alternatively, the Company has the right to redeem
the note at a premium ranging from a minimum of 8% to a maximum of 15% that
fluctuates based on the number of days after closing ranging from 15 to 60
days. If the Company's stock value is below the 5/8 bid for two consecutive
days the Company must replenish the escrow account with additional pledged
shares until the escrow value is greater than $1.5 million. B) At the earlier
of 90 days after closing or liquidation of the first tranche, the Investor may
fund additional $500,000 increments for a period of up to twelve months
thereafter with terms identical to the first tranche (including additional
warrants and pledged common shares) with each subsequent tranche callable upon
the liquidation of the previous tranche or earlier with mutual consent. The
Investor will receive warrants to purchase 100,000 shares of common stock at
an exercise price of $1.00 per share for the commitment. The warrants were
valued at $52,200 using the standard Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield,
5 year life and 120% annualized volatility. In addition the Investor will
receive warrants to purchase 50,000 shares of common stock for every $1
million increment funded. The exercise price is 125% of the closing bid the
day previous to closing of each tranche.
On April 15, 1999, the Company received $1 million in connection with the
first tranche as specified under the agreement. On April 22, due to decline
in market price of the stock, the Company deposited an additional 400,000
pledged shares in an escrow account to replenish the $1.5 million
value in the account. On May 24, 1999, $1 million funded, together with
accrued interest, was converted into 2,441,414 shares of common stock of
which 2,400,000 common shares were removed out of the escrow account. As
of the date of this report, the remaining 41,414 shares have not been issued.
On May 28, 1999 the Company signed a Stock Purchase Agreement with another
accredited investor, which allows the Company and obligates the Investor to
purchase shares from the Company based on terms and conditions outlined in
the agreement. In total, the Investor agreed to purchase up to $2,250,000 of
the common stock within the next twenty-four months. The Investor agreed to
purchase from the Company shares based on ninety percent of the average of
the lowest three consecutive bid prices over the twenty two trading day
period prior to the closing. In connection therewith, the Company sold to the
Investor 1,048,951 shares for $450,000 at an average price of $0.43 per share
including $58,000 of closing fees. The Company has the right to sell
additional shares at an interval of 25 business days with a minimum of
$100,000 per sale and a maximum of $500,000 based on the average daily value
as described above.
In addition to the stock, the Investor received an Incentive Warrant to
purchase 750,000 common shares at a price of $0.6435 per share. The Warrants
were valued at $235,500 using the standard Black-Scholes securities valuation
model assuming among other things 6% risk free rate, 0% dividend yield, five
years life and 120% annualized volatility.
On July 16,1999, in connection with the above Stock Purchase Agreement signed
by the Company on May 28, 1999, the Company sold to the Investor 350,000
shares for $148,000, or at an average price of $0.42 per share, including
$2,961 of closing fees.
<PAGE 9>
6. BUSINESS SEGMENTS:
------------------
September 30, 1999 September 30, 1998
------------- -------------
Revenue
Mobile Group $ 267,036 $ 173,105
RMS 2,039,828 3,731,811
Inter-company elimination (121,241) -
------------ -----------
Total 2,185,623 3,904,916
Operating (Loss)
Mobile Group (4,268,829) (3,343,256)
RMS (3,782,543) (45,827)
Inter-company elimination (5,000) -
------------ -----------
Total (8,056,371) (3,389,083)
September 30, 1999 December 31, 1998
------------- -----------------
Assets
Mobile Group 6,697,174 4,991,346
RMS 2,598,590 5,078,453
Inter-company elimination (5,121,147) (3,350,164)
------------ ------------
Total 4,174,617 6,719,635
The Company decided to discontinue the electronic contract manufacturing
portion of the business of RMS, and focus on its core business, handheld
computers. Anticipated future increases in sales of Orasis (TM), trade
credit constraints, quality controls, and the significant cash requirements
necessary to produce products outside the Orasis (TM) family of computers,
have caused the Company to reevaluate and therefore, discontinue the contract
manufacturing business. The net loss for the third quarter, 1999, was
approximately $2.5 million as a result of the discontinuation of those
operations.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is involved in a wrongful discharge lawsuit brought by an
ex-employee/officer. The suit was filed on April 11, 1998 in the Circuit
Court of Cook County, Illinois and as of the date hereof four out of five
claims have been dismissed. Management believes that the Company has several
<PAGE 10>
defenses to the remaining claim and has made adequate provisions in the
financial statements for any potential liability that may result from the
disposition of the lawsuit. Any such unfavorable disposition will not be
material to the Company's results of operations or financial position.
On March 26, 1999 Addison Engineering, Inc. filed a complaint in the Circuit
Court of Cook County, Illinois against R.M. Schultz & Associates, Inc.,
alleging breach of a contract and claiming $51,140 due for outstanding
invoices and additional materials allegedly developed for future production.
Management feels that it has several defenses to this claim and has made
adequate provisions in its financial statements for any potential liability
that may result from the disposition of the lawsuit. Any such unfavorable
disposition will not be material to the Company's results of operations or
financial position.
8. EQUITY TRANSACTIONS
1999 Events
- -----------
In January and April 1999, the Company issued a total of 46,373 shares under
an employment contract with Richard M. Schultz. As of May 14, 1999, the
Company no longer employs Richard M. Schultz.
In February and March 1999, the Company issued a total of 87,380 treasury
shares and 1,570,927 restricted shares in exchange for $660,000 of principal,
$17,123 of interest and $32,909 of original issue discount amortization on
Convertible Debentures - 2001A. In addition, in March the short-term loan
from an investor in the amount of $250,000 together with $7,500 of interest
was converted into 472,667 restricted shares.
In March 1999, the Company issued warrants to an investment banker to purchase
50,000 shares at an exercise price of $0.60 exercisable after the market bid
price of the Company's stock exceeds $1.00 for 15 consecutive trading days.
Also in March of 1999 the Company issued warrants to the same investment
banker to purchase 50,000 shares at an exercise price of $0.50 exercisable
after the market bid price of the Company's stock exceeds $2.00 for 15
consecutive trading days. The warrants were valued at $48,000 using the
standard Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 3 and 5 year life
respectively and 120% annualized volatility.
In March 1999,the Company issued 507,160 restricted shares to five accredited
investors in exchange for $403,492. In addition to the shares, the Company
issued warrants to purchase 300,000 shares of common stock at an exercise
price of $1.10 per share exercisable immediately. The warrants were valued
at $165,600 using the standard Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield,
5 year life and 120% annualized volatility.
On March 30, 1999, the Company signed an agreement with an accredited
investor ("Investor") for financing as follows: The Investor agreed to commit
up to $6 million according to the following conditions. A) The first closing
for $1 million will occur upon execution of agreed upon documentation as well
as a deposit of 2 million common shares (which shall be pledged
by current shareholders) in escrow. This tranche will take the form of an 8%
promissory note convertible into stock beginning sixty days after closing.
The conversions will be at a 15% discount from the closing bid price of the
<PAGE 11>
Company's common stock. Alternatively, the Company has the right to redeem
the note at a premium ranging from a minimum of 8% to a maximum of 15% that
fluctuates based on the number of days after closing ranging from 15 to 60
days. If the Company's stock value is below the 5/8 bid for two consecutive
days, the Company must replenish the escrow account with additional pledged
shares until the escrow value is greater than $1.5 million. B) At the earlier
of 90 days after closing or liquidation of the first tranche, the Investor
may fund additional $500,000 increments for a period of up to twelve months
thereafter with terms identical to the first tranche (including additional
warrants and free trading common shares) with each subsequent tranche
callable upon the liquidation of the previous tranche or earlier with mutual
consent. The Investor will receive warrants to purchase 100,000 shares of
common stock at an exercise price of $1.00 per share for the commitment. The
warrants were valued at $52,200 using the standard Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate,
0% dividend yield, 5 year life and 120% annualized volatility. In addition,
the Investor will receive warrants to purchase 50,000 shares of common stock
for every $1 million increment funded. In such event, the exercise price is
125% of the closing bid the day previous to closing of each tranche.
On April 15, 1999, the Company received $1 million in connection with the
first tranche as specified under the agreement. On April 22, due to decline
in market price of the stock, the Company deposited an additional 400,000
freely tradable shares in an escrow account to replenish the $1.5 million
value in the account. On May 24, 1999, $1 million funded, together with
accrued interest, was converted into 2,441,414 shares of common stock of
which 2,400,000 common shares were removed out of the escrow account. As
of the date of this report, the remaining 41,414 shares have not been issued.
In May 1999, the Company issued 150,000 restricted shares to two accredited
investors in exchange for $82,500. In addition to the shares the Company
issued warrants to purchase 150,000 shares of common stock at an exercise
price of $0.55 per share. The warrants are exercisable immediately and
expire in three years. The warrants were valued at $53,250 using the
standard Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 3 year life and
120% annualized volatility.
In May 1999, the company issued 586,764 common shares in exchange for
$240,000 of the remaining principal of the Convertible Debentures-2001A.
That closed out all debts the Company had in relation to the Convertible
Debentures.
On May 28, 1999 the Company signed a Stock Purchase Agreement with another
accredited investor, which allows the Company and obligates the Investor to
purchase shares from the Company based on terms and conditions outlined in
the agreement. In total, the Investor agreed to purchase up to $2,250,000 of
the common stock within the next twenty-four months. The Investor agreed to
purchase from the Company shares based on ninety percent of the average of
the lowest three consecutive bid prices over the twenty two trading day
period prior to the closing. In connection therewith, the Company sold to the
Investor 1,048,951 shares for $450,000 at an average price of $0.43 per share
including $58,000 of closing fees. The Company has the right to sell
additional shares at an interval of 25 business days with a minimum of
$100,000 per sale and a maximum of $500,000 based on the average daily value
as described above.
In addition to the stock, the Investor received an Incentive Warrant to
purchase 750,000 common shares at a price of $0.6435 per share. The Warrants
were valued at $235,500 using the standard Black-Scholes securities valuation
model assuming among other things 6% risk free rate, 0% dividend yield, five
<PAGE 12>
years life and 120% annualized volatility.
On July 16,1999, in connection with the above Stock Purchase Agreement signed
by the Company on May 28, 1999, the Company sold to the Investor 350,000
shares for $148,000, or at an average price of $0.42 per share, including
$2,961 of closing fees.
In the third quarter of 1999, the Company issued 2,286,540 restricted shares
to a group of accredited investors in exchange for $733,589 or an
average of $0.32 per share. In addition to the shares the Company issued
warrants to purchase 1,599,000 shares of common stock at an average exercise
price of $0.48 per share. The warrants are exercisable immediately and
expire in three to five years. The warrants were valued at $431,922 using
the standard Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, and 120% annualized volatility.
In the third quarter of 1999, the Company issued a total of 656,322 shares
to satisfy certain payables in the cummulative amount of $326,270 or
approximately $0.50 per share. Also, the Company agreed to issue warrants
to purhase 500,000 shares of common stock within a 4 year period, at an
exercise price of $1 per share for financial consulting services rendered.
The warrants were valued at $147,750 using the standard Black-Scholes
securities valuation model assuming among other things 6% risk free rate,
0% dividend yield, and 120% annualized volatility.
Subsequent Events
- -----------------
In November, 1999, in connection with the Stock Purchase Agreement signed
by the Company on May 28, 1999, the Company issued sold to the Investor
540,370 freely tradable shares for $175,080, including $3,502 of closing
fees. The Company issued 810,555 restricted shares in exchange for
the above freely tradable shares.
On October 1999, The Company agreed to issue warrants to purchase 250,000
shares of common stock within 3.5 years, at an exercise price of $2 per
share for financial consulting services rendered. The warrants were valued
at $32,250 using the standard Black-Scholes securities valuation model
assuming among other things 6%risk free rate, 0% dividend yield, and 120%
annualized volatility.
On October 21, 1999, Sjoberg Tool & Manufacturing Co. filed a complaint in
the Circuit Court of the 19th judicial Circuit County of McHenry, Illinois
against R.M. Schultz & Associates, Inc. and Dauphin Technology, Inc.
alleging breach of a contract and claiming $40,699 due for outstanding
invoices.
<PAGE 13
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 previous
filings with the Securities and Exchange Commission. 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.
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------
Dauphin Technology, Inc. ("Mobile Group")
- -----------------------------------------
Revenue for Dauphin Technology, Inc. increased from $173,105 for the nine
month period ended September 30, 1998, to $267,036 in 1999. The revenue
increased as a result of shipping of the Orasis(TM) product beginning in the
third and the fourth quarter of 1998. The gross profit margins are not
comparable for the periods due to fluctuation in sales.
Selling, general and administrative expenses increased to approximately
$2,082,000 in 1999 from $1,710,000 in 1998. The increase from 1998 to 1999
was due to additional staffing and higher professional fees. The Company
advertised its flagship product Orasis(TM) in several trade magazines.
Further, the Company added two Senior Vice-Presidents in Sales and Marketing
and in Operations.
Research and Development costs decreased to $454,918 during the nine month
period ended September 30, 1999 from $1,186,723 over the corresponding period
in 1998. The decrease was due to less spending related to development of
Orasis(TM).
Interest expense increased to $1,975,573 as of the third quarter of 1999
from $84,163 as of the corresponding period in 1998. This dramatic increase
was due to a non-cash interest expense incurred based on the conversion of
convertible debentures.
Mr. Savely Burd, the Company's CFO resigned effective July 16, 1999.
Dr. Peter Evangelou has been appointed as his replacement.
R.M. Schultz & Associates, Inc.
- -------------------------------
Revenue for RMS decreased from $3,731,811 in 1998 to $2,039,828 in 1999,
including intercompany transactions, primarily due to slowdown in customer
orders. The gross profit margin for RMS decreased from 13% in 1998 to
negative 130% for the nine month period ended September 30, 1998, to
$267,036 in 1999, due to start up inefficiencies in manufacturing Orasis(TM)
and writedown of RMS's inventory related to contract manufacturing.
<PAGE 14>
Selling, general and administrative expenses increased in 1999 to $1,090,188
from $495,323 in 1998. The increase from 1998 to 1999 was primarily due to
the elimination of RMS's good will.
Starting late in April 1999, senior management and staff of RMS has gone
through a restructuring. As of May 13, 1999 Kostas H. Arhos was appointed
as a new President of RMS. Due to personal issues,he subsequently tendered
his resignation, effective October 1, 1999. As of the date of this report,
the Company did not name his replacement.
The Company laid off 15 employees of RMS, effective August 13, 1999 and 2
more RMS employees, effective September 2, 1999. Anticipated future increases
in sales of Orasis (TM), trade credit constraints, quality controls, and the
significant cash requirements necessary to produce products outside the
Orasis (TM) family of computers, have caused the Company to reevaluate and
discontinue the contract manufacturing business. As a result,the Company will
concentrate its efforts on its core business, hendheld computers.
Net (loss)
- ----------
The consolidated loss after tax increased for the nine months of 1999 to
($8) million or ($0.18) per share from ($3.4)million or ($0.09) per share in
1998. The dramatic increase in the net loss was due partially to non-cash
interest expense incurred based on conversion of convertible debentures,
slowdown in RMS production, manufacturing inefficiencies related to production
of Orasis(TM), and writedown of RMS's inventory and good will. Loss per common
share is calculated based on the monthly weighted average number of common
shares outstanding which were 44,823,498 for the nine month period ended
September 30, 1999, and 36,709,418 for the nine month period ended September
30, 1998.
Balance Sheet
- -------------
During the third quarter of 1999, total assets for the Company decreased
to $4.2 million from $6.7 million at December 31, 1998. The decrease was
primarily due to writedown of RMS's inventory and good will. Accounts
receivable decreases primarily due to slowdown in customer orders.Due to
discontinuation of contract manufacturing portion of the business of RMS,
collecting outstanding receivables has become harder. Trade accounts
payable remained essentially unchanged. All convertible debentures have
converted into equity. Also, the Company received a deposit for future
deliveries of product from BulFon SA in the amount of $300,000, recorded
as unearned revenue.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has incurred a net operating loss in each year since its founding
and as of September 30, 1999 has an accumulated deficit of $37.6 million. The
Company expects to incur operating losses over the near term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to manufacture and market commercially acceptable product.
There can be no assurance that the Company will ever achieve a profitable
level of operations or if profitability is achieved, that it can be sustained.
<PAGE 15>
Due to ramp up in manufacturing and marketing of Orasis(TM), the Company has
substantial cash requirements. Operations are severely constrained due to
limited cash in hand and the scarcity of trade credit due to the inability
of the Company to meet its payables within terms. Management is seeking
additional financing and is negotiating terms and conditions with several
current investors. Also, it has retained the services of an Investment
Banking Firm. There can be no assurance that the Company will be able to
obtain the necessary capital to sustain future operations, however,
management believes that the combination of financing (yet to be negotiated)
and sales of Orasis(TM) will generate enough cash to sustain future
operations.
OTHER
- -----
The Company has been and continues to address the universal situation
commonly referred to as the "Year 2000 Problem". The "Year 2000 Problem" is
related to the inability of certain computer systems, software and embedded
technologies to properly recognize and process date-related information
surrounding the Year 2000.
In 1998, the Company initiated a comprehensive review of its computerized
Information Technology (IT) and non-information technology systems to
identify systems that could be affected by the Year 2000 problems and has
implemented a plan to resolve the identified issues. The Year 2000 issues
were analyzed by identifying and assessing all systems, software and embedded
technologies and business partners with internal business critical systems
given a higher priority. The Company defines a system as business critical if
a failure would cause a significant service disruption or could cause a
material adverse effect on the Company's operations or financial results.
In order to address year 2000 problem, the Company upgraded its main server,
printing capabilities, telephone system as well as its information management
software. In the event that the system experiences difficulty related to the
"Year 2000 Problem", the Company has the ability to maintain manual journals
for a period of time until year 2000-compliant software is installed. The
Company does not expect the amounts required to be expensed to have a
material effect on its financial position or results of operations.
<PAGE 16>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved in a wrongful discharge lawsuit brought by an
ex-employee/officer. The suit was filed on April 11, 1998 in the Circuit
Court of Cook County, Illinois and as of the date hereof four out of five
claims have been dismissed. Management believes that the Company has several
defenses to the remaining claim and has made adequate provisions in the
financial statements for any potential liability that may result from the
disposition of the lawsuit. Any such unfavorable disposition will not be
material to the Company's results of operations or financial position.
On March 26, 1999 Addison Engineering, Inc. filed a complaint in the Circuit
Court of Cook County, Illinois against R.M. Schultz & Associates, Inc.
alleging breach of a contract and claiming $51,140.53 due for outstanding
invoices and additional materials allegedly developed for future production.
Management feels that it has several defenses to this claim and has made
adequate provisions in its financial statements for any potential liability
that may result from the disposition of the lawsuit. Any such unfavorable
disposition will not be material to the Company's results of operations or
financial position.
Item 2. Changes in the Rights of the Company's Security Holders. None.
--------------------------------------------------------
Item 3. Default by the Company on its Senior Securities. None.
------------------------------------------------
Item 4. Submission of Matters to a Vote of Securities Holders. None.
------------------------------------------------------
Item 5. Other Information. None.
------------------
Item 6(a). Exhibits. None.
---------
Item 6(b). Reports on Form 8-K.
--------------------
On September 10, 1999 the Company filed Form 8-K to report that the Company's
principal auditor, Arthur Andersen LLP ("Arthur Andersen") terminated its
client-auditor relationship with the Company.
During the Company's two most recent fiscal years ended December 31, 1997 and
1998, respectively (the "Prior Fiscal Years"), and the interim period from
January 1, 1999 to July 23, 1999 (the "Interim Period"), Arthur Andersen did
not issue any adverse opinions or disclaimers of opinion or qualify or modify
an opinion as to uncertainty, audit scope, or accounting principles, except
that the reports of Arthur Andersen included a reference to a substantial
doubt about the Company's ability to continue as a going concern.
During the Prior Fiscal Years and the Interim Period, the Company had no
disagreement with Arthur Andersen as to any matter of accounting principles
or practices, financial statements disclosure, or auditing scope or procedure
which, if not resolved to the satisfaction of Arthur Andersen, would have
caused it to make reference to the subject matter of such disagreement in
connection with its reports for the Prior Fiscal Years.
<PAGE 17>
There were no "Reportable Events", as such term is defined in Item 302 of
Regulation S-K, during either (i) the Prior Fiscal Years or (ii) the Interim
Period.
On October 27, 1999, the Company engaged Grant Thornton LLP as its new
independent accountants to audit the Company's financial statements. During
the two most recent fiscal years and through the interim period ended October
27, 1999, the Company has not consulted with Grant Thornton LLP regarding any
matters described in item 304(a)(2) of Regulation S-K.
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 Executive Officer, thereunto duly authorized.
Dated: November 19, 1999
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: /s/Andrew J. Kandalepas/
Andrew J. Kandalepas
(Chief Executive Officer)
<PAGE 18>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 85,867
<SECURITIES> 0
<RECEIVABLES> 537,512
<ALLOWANCES> 11,238
<INVENTORY> 1,521,184
<CURRENT-ASSETS> 2,196,347
<PP&E> 2,078,123
<DEPRECIATION> 646,564
<TOTAL-ASSETS> 4,174,617
<CURRENT-LIABILITIES> 2,789,374
<BONDS> 0
0
0
<COMMON> 49,667
<OTHER-SE> 1,127,216
<TOTAL-LIABILITY-AND-EQUITY> 4,174,617
<SALES> 157,680
<TOTAL-REVENUES> 157,680
<CGS> 2,105,016
<TOTAL-COSTS> 2,105,016
<OTHER-EXPENSES> 1,551,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,702
<INCOME-PRETAX> (3,584,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,584,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,584,478)
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
