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 March 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 May 14, 1999,
42,665,800 shares of the registrants common stock, $.001 par value, was
issued and 42,659,800 was outstanding, with 6,000 treasury shares.
<Page 1>
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998 4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Year Ended December 31, 1998 and
Three Months Ended March 31, 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 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 12
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 12
<Page 2>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Unaudited)
March 31, 1999 December 31, 1998
-------------- ---------------
CURRENT ASSETS:
Cash $ 144,865 $ 55,701
Accounts receivable-
Trade, net of allowance for
bad debt of $11,238 at March 31,
1999 and December 31, 1998 571,768 689,713
Employee receivables 45,496 45,987
Inventory, net of reserve for
obsolescence of $152,000 at March
31, 1999 and December 31, 1998 3,491,920 2,953,686
Prepaid expenses 42,385 46,596
-------------- ---------------
Total current assets 4,296,434 3,791,683
INVESTMENT IN RELATED PARTY 290,000 300,000
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of
$461,822 at March 31, 1999 and
$378,051 at December 31, 1998 1,601,549 1,673,901
DEFERRED FINANCING COST, net of
accumulated amortization of $180,431
at March 31, 1999 and $29,128 at
December 31, 1998 35,273 186,576
GOODWILL, net of accumulated
amortization of $129,858 at March 31,
1999 and $107,971 at December 31, 1998 745,589 767,475
-------------- ---------------
Total assets $ 6,968,845 $ 6,719,635
============== ===============
CURRENT LIABILITIES:
Accounts payable $ 2,673,444 $ 2,103,572
Accrued expenses 196,007 215,305
Current portion of long-term debt 113,436 113,436
Short-term borrowings, net of discount
of $3,845 at December 31, 1998 446,416 246,155
Unearned revenue 300,000 -
Convertible debentures, net of
discount of $14,104 at March 31,
1999 and $47,012 at December 31, 1998 225,896 852,988
-------------- ---------------
Total current liabilities 3,955,199 3,531,456
LONG-TERM DEBT 273,572 302,951
COMMITMENTS AND CONTINGENCIES
-------------- ---------------
Total liabilities $ 4,228,771 $ 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;
42,505,754 shares issued and
42,474,952 outstanding at March 31,
1999 and 40,000,000 shares issued
and 39,861,818 outstanding at
December 31, 1998 42,506 40,000
Treasury stock, at cost, 30,802 at
March 31, 1999 and 138,182 shares at
December 31, 1998 (10,781) (33,306)
Warrants 132,633 55,181
Paid-in capital 34,144,701 32,343,785
Accumulated deficit (31,568,985) (29,520,432)
-------------- ---------------
Total shareholders equity 2,740,074 2,885,228
-------------- ---------------
Total liabilities and
shareholders equity $ 6,968,845 $ 6,719,635
============== ===============
<Page 3>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------- -------------
NET SALES $ 1,246,061 $ 1,456,522
COST OF SALES 1,420,237 1,235,709
------------- -------------
Gross profit (174,176) 220,843
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 926,863 563,684
RESEARCH AND DEVELOPMENT
EXPENSE 291,249 555,027
------------- -------------
(Loss) before interest and income taxes (1,392,288) (897,868)
INTEREST EXPENSE 660,557 20,543
INTEREST INCOME 4,292 43,241
------------- -------------
(Loss) before income taxes (2,048,553) (875,170)
INCOME TAXES - -
------------- -------------
NET (LOSS) $ (2,048,553) $ (875,170)
------------- -------------
BASIC AND DILUTED (LOSS) PER SHARE $ (0.05) $ (0.03)
------------- -------------
Weighted Average number of
Common Shares outstanding 41,043,203 36,339,137
<Page 4>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1998
AND THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
Common Stock Treasury Stock Paid-in Accumulated
Shares Amount Warrants Shares Amount Capital Deficit Total
<S> <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 - - 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 $ 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 1,998,594 1,999 - 87,380 15,525 1,451,410 - 1,468,934
Private placement 507,160 507 - - - 344,006 - 344,513
Issuance of warrants - - 77,452 - - - - 77,452
Stock bonuses paid - - - 20,000 7,000 5,500 - 12,500
Net loss - - - - - - (2,048,553) (2,048,553)
---------- --------- -------- ------- ---------- ----------- ------------ -----------
BALANCE, March 31, 1999 42,505,754 $ 42,506 $132,633 (30,802) $ (10,781) $34,144,701 $(31,568,985) $ 2,740,074
========== ========= ======== ======= ========== =========== ============ ===========
<TABLE\>
<Page 5>
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net (loss) $ (2,048,553) $ (875,170)
Non-cash items included in net (loss):
Depreciation and amortization 256,961 49,148
Warrants issued in lieu of consulting fees 18,473 -
Stock bonuses 12,500 -
Interest expense on convertible debt 591,843 -
Decrease in accounts receivable - trade 117,945 143,802
Decrease in accounts receivable from employees 491 16,695
(Increase) in inventory (538,234) (265,900)
Decrease/(increase) in prepaid expenses 4,211 (35,681)
Increase/(decrease) in accounts payable 569,872 (145,738)
(Decrease) in accrued expenses (19,298) (165,954)
(Decrease) in short term notes - (14,001)
Increase in unearned revenue 300,000 -
------------- ------------
Net cash (used for) operating activities (733,780) (1,292,799)
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in related party 10,000 -
Purchase of property and equipment (11,419) (383,707)
------------- ------------
Net cash (used for) investing activities (1,419) (383,707)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 344,513 58,595
Proceeds from issuance of warrants 58,979 -
Long-term leases and other obligations (29,379) -
Increase/(decrease) in short term borrowing 450,250 (84,787)
------------- ------------
Net cash provided by financing activities 824,363 (26,192)
------------- ------------
Net increase (decrease) in cash 89,164 (1,702,698)
CASH BEGINNING OF PERIOD 55,701 3,620,880
------------- ------------
CASH END OF PERIOD $ 144,865 $ 1,918,182
============= ============
Cash Paid During The Period For -
Interest $ 45,150 $ 20,543
Income Taxes - -
============= ============
NON-CASH ACTIVITY:
Stock issued in conversion of debt $ 1,468,934 $ -
Capital Lease Obligations - 53,405
============= ============
<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 the 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 41,043,203 for the three month period March 31,
1999 and 36,339,137 for the three month period March 31, 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 1.3 million
additional shares would be outstanding if all convertible debentures were
converted into common shares and stock options and warrants were exercised as
of March 31, 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.
3. RISKS AND UNCERTAINTIES
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 1999 has an accumulated deficit of $31,568,984. 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.
<Page 7>
Due to ramp up in manufacturing and marketing of Orasis, the Company has
substantial cash requirements. Currently, the Company has limited cash on
hand (approximately $220,000 as of May 14, 1999). Management is working on
obtaining financing to fund operations. On March 30, 1999 management signed a
term sheet with a current investor, which offers to assist the Company in
accordance with the proposal described in Note 4. As part of the arrangement,
on April 15, 1999 the Company received the first $1,000,000 of the funding.
Management is seeking additional financing and is negotiating terms and
conditions with several current investors. 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 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 $205,000 from its affiliates. These loans are for a period of six
months, they are uncollateralized and carry a 2% 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
$430,000 included in accounts payable balances at March 31, 1999.
Funding Agreement
On March 30, 1999, the Company signed an agreement with an accredited
investor ("Investor") for financing as follows: 1. 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 free trading 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 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 in 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. 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.
5. BUSINESS SEGMENTS:
March 31, 1999 March 31, 1998
-------------- --------------
Revenue
Mobile Group $ 89,481 $ 4,781
RMS 1,243,652 1,451,741
Inter-company elimination (87,072) -
-------------- --------------
Total 1,246,061 1,456,522
Operating (Loss)
Mobile Group (990,865) (968,513)
RMS (393,222) 70,645
Inter-company elimination (10,451) -
-------------- --------------
Total (1,394,538) (897,868)
March 31, 1999 December 31, 1998
-------------- --------------
Assets
Mobile Group $ 5,119,444 $ 4,991,346
RMS 5,571,589 5,078,453
Inter-company elimination (3,722,188) (3,350,164)
-------------- --------------
Total 6,968,845 6,719,635
<Page 8>
6. 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
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.
7. EQUITY TRANSACTIONS
1999 Events
In January and April 1999, the Company issued a total of 36,327 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 $18,473 using
the Black-Scholes securities valuation model, assuming among other things, a
7% risk free interest rate, $0 dividend yield, 1 and 2 year life respectively
and 29% 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 $58,979 using the Black-Scholes securities valuation model,
assuming among other things, a 7% risk free interest rate, $0 dividend yield,
5 year life and 30% volatility.
Subsequent Events
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.
<Page 9>
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 1998 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.
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS
Dauphin Technology, Inc. ("Mobile Group")
Revenue for Dauphin Technology, Inc. increased from $4,800 in the first
quarter of 1998 to $89,000 in 1999. The revenue increased as a result of
shipping of the Orasis 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
$751,000 in 1999 from $414,000 in 1998. The increase from 1998 to 1999 was
due to additional staffing in sales and marketing departments and expense
related to product demonstrations. The Company advertised its flagship
product Orasis in several trade magazines. Further, the Company added two
Senior Vice-Presidents in Sales and Marketing and in Operations.
R.M. Schultz & Associates, Inc.
Revenue for RMS decreased from $1.46 million in 1998 to $1.25 million in
1999, including intercompany transactions, primarily due to slowdown in
customer orders. The gross profit margin for RMS decreased from 6% in 1998 to
0% in the first quarter of 1999 due to startup inefficiencies in
manufacturing of Orasis.
Selling, general and administrative expenses increased in 1999 to
approximately $176,000 from $150,000 in 1998. The increase from 1998 to 1998
was primarily due to additional administrative personnel. Starting late in
April 1999, senior management and staff of RMS has gone through a
restructuring. As of May 13, 1999 Kostas H. Arhos has been appointed as a
new President of RMS.
Net (loss)
The loss after tax increased for the first quarter of 1999 to ($2.05) million
or ($0.05) per share from ($875,000) or ($0.03) per share in 1998. The
dramatic increase in the net loss was due partially to convertible debentures
with a guaranteed return resulting in interest expense and manufacturing
inefficiencies related to production of Orasis. Loss per common share is
calculated based on the monthly weighted average number of common shares
outstanding which were 41,043,203 for the three month period March 31, 1999,
and 36,339,137 for the period March 31, 1998.
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.
Balance Sheet
During the first quarter of 1999, total assets for the Company increased to
$6,969,000 from $6,720,000 at December 31, 1998. The increase was primarily
due to increase in inventory of Dauphin's Orasis. Accounts receivable
decreases primarily due to slowdown in customer orders. Accounts receivable
represent certain funds due to the Company as part of the normal operations
of the Company. Trade accounts payable increased proportionally with the
increase in inventories. Convertible debentures decreased during the quarter
due to conversions 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 March 31, 1999 has an accumulated deficit of $31,568,984. 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.
<Page 10>
Due to ramp up in manufacturing and marketing of Orasis, the Company has
substantial cash requirements. Currently, the Company has limited cash on
hand (approximately $220,000 as of May 14, 1999). Management is working on
obtaining financing to fund operations. On March 30, 1999 management signed a
term sheet with a current investor, which offers to assist the Company in
accordance with the proposal described in Note 4. As part of the arrangement,
on April 15, 1999 the Company received the first $1,000,000 of the funding.
Management is seeking additional financing and is negotiating terms and
conditions with several current investors. 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 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. The
Company expects to have contingency plans developed for business critical
systems by July 31, 1999.
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 in June
through August 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 11>
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.
A - Promissory Note
B - Form of a Warrant
C - Security Agreement
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: May 14, 1999
DAUPHIN TECHNOLOGY, INC.
(Registrant)
By: /SAVELY BURD/
Savely Burd
(Chief Financial Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 144,865
<SECURITIES> 290,000
<RECEIVABLES> 583,006
<ALLOWANCES> 11,238
<INVENTORY> 3,491,920
<CURRENT-ASSETS> 4,296,434
<PP&E> 2,063,371
<DEPRECIATION> 461,822
<TOTAL-ASSETS> 6,968,845
<CURRENT-LIABILITIES> 3,955,199
<BONDS> 0
0
0
<COMMON> 42,506
<OTHER-SE> 2,697,569
<TOTAL-LIABILITY-AND-EQUITY> 6,968,845
<SALES> 1,246,061
<TOTAL-REVENUES> 1,246,061
<CGS> 1,420,237
<TOTAL-COSTS> 1,420,237
<OTHER-EXPENSES> 1,218,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 660,557
<INCOME-PRETAX> (2,048,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,048,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,048,553)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
Exhibit A
PROMISSORY NOTE
Chicago, Illinois U.S.A
U.S.$1,000,000.00
April 13, 1999
Amount; Interest Rate
FOR VALUE RECEIVED, the undersigned, Dauphin Technology, Inc., an Illinois
corporation with its principal offices at 800 East Northwest Highway, Suite
950, Palatine, Illinois 60067, promises to pay to the order of The Augustine
Fund, L.P., an Illinois Limited Partnership ("Augustine"), with offices at
141 West Jackson Street, Suite 2182, Chicago, Illinois 60604 the principal
sum of One Million and no/100 United States dollars (U.S.$1,000,000.00),
along with the premium stated below. Interest shall accrue on the said
principal sum as stated below.
Payment Schedule
The principal amount of this note shall be payable on or before the date
which is sixty (60) days from the date of this note (the "Due Date"). Along
with and in addition to the principal due hereunder, the Company shall pay a
premium over the principal amount due hereunder, equal to (i) if the
principal is repaid in whole or in part within fifteen (15) days after the
date of issuance of this Note, eight percent (8%) of the principal amount
being repaid; (ii) if the principal is repaid in whole or in part more than
fifteen (15) days but less than thirty-one (31) days after the date of
issuance of this Note, ten percent (10%) of the principal amount being
repaid; (iv) if the principal is repaid in whole or in part more than thirty
(30) days but less than forty-six (46) days after the date of issuance of
this Note, twelve percent (12%) of the principal amount being repaid; and (v)
if the principal is repaid in whole or in part more than forty-five (45) days
after the date of issuance of this Note, fifteen percent (15%) of the
principal amount being repaid.
From and after the date of this note until the principal amount of this note
is paid in full, in addition to the above, interest on the outstanding
principal amount shall be paid in cash, in the amount of eight percent (8%)
per annum. All accrued interest under this note shall be payable with each
repayment of principal.
Default
If any of the following events shall occur, the outstanding principal balance
of this note together with accrued interest thereon shall, on demand by the
holder of this note, be due and payable: any amount owing under this note is
not paid when due; a default under any other provision of this note or under
any guarantee or other agreement providing security for the payment of this
note; a breach of any representation or warranty under this note or under any
such guarantee or other agreement; the liquidation, dissolution, death or
incompetency of the undersigned or any individual, corporation, partnership
or other entity guaranteeing or providing security for the payment of this
note; the sale of a material portion of the business and assets of the
undersigned or any corporation, partnership or other entity guaranteeing or
providing security for the payment of this note; the filing of a petition
under any bankruptcy, insolvency or similar law by the undersigned or by any
individual, corporation, partnership or other entity guaranteeing or
providing security for the payment of this note; the making of any assignment
for the benefit of creditors by the undersigned or by any individual,
corporation, partnership or other entity guaranteeing or providing security
for the payment of this note; the filing of a petition under any bankruptcy,
insolvency or similar law against the undersigned or against any individual,
corporation, partnership or other entity guaranteeing or providing security
for the payment of this note and such petition not being dismissed within a
period of thirty (30) days of the filing.
Default Interest
Except as otherwise stated herein, the outstanding balance of any amount
owing under this note which is not paid when due shall bear interest at the
maximum rate permitted by law.
Usury Clause
Notwithstanding any other provision of this note, interest under this note
shall not exceed the maximum rate permitted by law; and if any amount is paid
under this note as interest in excess of such maximum rate, then the amount
so paid will not constitute interest but will constitute a prepayment on
account of the principal amount of this note. If at any time the interest
rate under this note would, but for the provision of the preceding sentence,
exceed the maximum rate permitted by law, then the outstanding principal
balance of this note shall, on demand by the holder of this note, become and
be due and payable. The parties acknowledge that this is a commercial loan,
made for bona fide business purposes.
Where to Make Payments
All payments of principal and interest shall be made in lawful currency of
the United States of America in immediately available funds before 5:00 p.m.
Chicago time on the due date thereof at the offices of Augustine as stated in
the first paragraph of this instrument, or in such other manner or at such
other place as the holder of this note designates in writing.
Tax Gross Up
All payments under this note shall be made without defense, set-off or
counterclaim, free and clear of and without deduction for any taxes of any
nature now or hereafter imposed. Should any such payment be subject to any
tax, the undersigned shall pay to the holder of this note such additional
amounts as may be necessary to enable the holder to receive a net amount
equal to the full amount payable hereunder. As used in this paragraph, the
term "tax" means any tax, levy, impost, duty, charge, fee, deduction,
withholding, turnover tax, stamp tax and any restriction or condition
resulting in a charge imposed in any jurisdiction upon the payment or receipt
of any amount under this note other than taxes on the overall net income of
the holder under the laws of Illinois and of the United States of America.
Expenses
The undersigned agrees to pay on demand (i) all expenses (including, without
limitation, legal fees and disbursements) incurred in connection with the
negotiation and preparation of this note and any documents in connection with
this note, and (ii) all expenses of collecting and enforcing this note and
any guarantee or collateral securing this note, including, without
limitation, expenses and fees of legal counsel, court costs and the cost of
appellate proceedings.
Governing Law; Agent for Service of Process
This note and the obligations of the undersigned shall be governed by and
construed in accordance with the law of the State of Illinois, U.S.A. For
purposes of any proceeding involving this note or any of the obligations of
the undersigned, the undersigned hereby submits to the non-exclusive
jurisdiction of the courts of the State of Illinois and of the United States
having jurisdiction in the County of Cook, State of Illinois, and agrees not
to raise and waives any objection to or defense based upon the venue of any
such court or based upon forum non conveniens. The undersigned agrees not to
bring any action or other proceeding with respect to this note or with
respect to any of its obligations in any other court unless such courts of
the State of Illinois and of the United States determine that they do not
have jurisdiction in the matter. For purposes of any proceeding involving
this note or any of the obligations of the undersigned, the undersigned
hereby irrevocably appoints H. Glenn Bagwell, Jr., Esq., with offices at 3005
Anderson Drive, Suite 204, Raleigh, NC 27609 (the "Escrow Agent"), its agent
to receive service of process for it and on its behalf.
Waiver of Presentment, Etc.
The undersigned waives presentment for payment, demand, protest and notice of
protest and of non-payment.
Delay; Waiver
The failure or delay by the holder of this note in exercising any of its
rights hereunder in any instance shall not constitute a waiver thereof in
that or any other instance. The holder of this note may not waive any of its
rights except by an instrument in writing signed by the holder.
Prepayment
The undersigned may prepay all or any portion of the principal of this note
at any time and from time to time without penalty. The premiums as stated in
the section of this note entitled "Payment Schedule" shall be paid along with
such prepayment as stated in the said section. Any such prepayment shall be
applied against the installments of principal due under this note in the
inverse order of their maturity and shall be accompanied by payment of
accrued but unpaid interest on the amount prepaid to the date of prepayment.
Amendment
This note may not be amended without the written approval of the holder.
Agreement; Guarantee
As additional security for the undertakings of the parties hereto, the
undersigned has caused itself and certain additional third parties to have
executed of even date herewith the Stock Escrow Agreement attached hereto as
Exhibit A (the "Escrow Agreement"), and the Pledge and Security Agreement
attached hereto as Exhibit B. Such documents are incorporated herein by
reference. The undersigned has agreed to deliver to the holder of this note a
warrant (the "Warrant") to purchase common stock of the undersigned
substantially in the form of the warrant attached hereto as Exhibit C. The
Escrow Agreement describes the procedure for the closing of the loan
evidenced by this note.
[SIGNATURE PAGE FOLLOWS]
[SIGNATURE PAGE TO NOTE DATED APRIL 13, 1999]
Maker:
DAUPHIN TECHNOLOGY, INC.
By: /ANDREW J. KANDALEPAS/
(Duly Authorized Officer or Director)
Accepted by:
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc., its
General Partner
By:
(Duly Authorized Officer or Director)
EXHIBIT B - FORM OF A WARRANT
EXHIBIT C
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE
SECURITIES LAWS (COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE
ISSUER IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO
THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE LAWS DUE TO AN
AVAILABLE EXCEPTION TO OR EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
LAWS.
DAUPHIN TECHNOLOGY, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No. Number of Shares: 100,000
Date of Issuance: April 13, 1999
Dauphin Technology, Inc., an Illinois corporation (the "Company"), hereby
certifies that, for value received, The Augustine Fund, L.P., and permitted
assigns, the registered holder hereof ("Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time after the date hereof, but not after 5:00 P.M. New York
time on the Expiration Date (as defined herein) One Hundred Thousand
(100,000) fully paid and nonassessable shares of Common Stock (as defined
herein) of the Company (each a "Warrant Share" and collectively the "Warrant
Shares") at a purchase price of U.S.$1.00 per share (the "Exercise Price") in
lawful money of the United States. The number of Warrant Shares purchasable
hereunder and the Exercise Price are subject to adjustment as provided in
Section 9 below.
Section 1.
(a) Definitions. The following words and terms used in this Warrant shall
have the following meanings:
"Common Stock" means (a) the Company's common stock and (b) any capital stock
into which such Common Stock shall have been changed or any capital stock
resulting from a reclassification of such Common Stock.
"Convertible Securities" mean any securities issued by the Company which are
convertible into or exchangeable for, directly or indirectly, shares of
Common Stock.
"Expiration Date" means the date which is five (5) years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on
which banks are required or authorized to be closed in the City of New York
or the State of New York (a "Holiday"), the next preceding date that is not a
Holiday.
"Market Price" means the closing bid price on the day prior to the date on
which the Exercise Form is delivered to the Company, as quoted on the
National Association of Securities Dealers' OTC Bulletin Board Market or such
other national securities exchange or market on which the Common Stock may
then be listed.
"Securities Act" means the Securities Act of 1933, as amended.
"Loan Agreement" shall mean the loan agreement between the holder hereof (or
its predecessor in interest) and the Company for the issuance of this
Warrant.
"Transfer" shall include any disposition of this Warrant or any Warrant
Shares, or of any interest in either thereof which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended, or
applicable state securities laws.
"Warrant" shall mean this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" shall be U.S.$1.00 per share.
(b) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors; and (B) to
any applicable law defined or referred to herein, shall be deemed references
to such applicable law as the same may have been or may be amended or
supplemented from time to time.
(ii) When used in this Warrant, unless the otherwise specified in a
particular instance, the words "herein," "hereof," and "hereunder," and words
of similar import, shall refer to this Warrant as a whole and not to any
provision of this Warrant, and the words "Section," "Schedule," and
"Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this
Warrant unless otherwise specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the Holder, as a whole or in part, at any time prior to 5:00
P.M. New York Time on the Expiration Date. The rights represented by this
Warrant may be exercised by the Holder, as a whole or from time to time in
part (except that this Warrant shall not be exercisable as to a fractional
share) by (i) delivery of a written notice, in the form of the exercise form
attached as Exhibit I hereto (an "Exercise Form"), of the Holder's election
to exercise this Warrant, which notice shall specify the number of Warrant
Shares to be purchased, (ii) payment to the Company of an amount equal to the
Warrant Exercise Price multiplied by the number of Warrant Shares as to which
the Warrant is being exercised (plus any applicable issue or transfer taxes)
in immediately available funds (either by wire transfer or a certified or
cashier's check drawn on a United States bank), for the number of Warrant
Shares as to which this Warrant shall have been exercised, and (iii) the
surrender of this Warrant, properly endorsed, at the principal office of the
Company (or at such other agency or office of the Company as the Company may
designate by notice to the Holder).
In addition, and notwithstanding anything to the contrary contained in this
Warrant, this Warrant may be exercised by presentation and surrender of this
Warrant to the Company in a cashless exercise, including a written
calculation of the number of Warrant Shares to be issued upon such exercise
in accordance with the terms hereof (a "Cashless Exercise"). In the event of
a Cashless Exercise, in lieu of paying the Exercise Price, the Holder shall
surrender this Warrant for, and the Company shall issue in respect thereof,
the number of Warrant Shares determined by multiplying the number of Warrant
Shares to which the Holder would otherwise be entitled by a fraction, the
numerator of which shall be the difference between the then current Market
Price per share of the Common Stock and the Exercise Price, and the
denominator of which shall be the then current Market Price per share of
Common Stock.
The Warrant Shares so purchased shall be deemed to be issued to the Holder or
Holder's designees, as the record owner of such Warrant Shares, as of the
date on which this Warrant shall have been surrendered, the completed
Exercise Agreement shall have been delivered, and payment (or notice of an
election to effect a Cashless Exercise) shall have been made for such Warrant
Shares as set forth above.
In the event of any exercise of the rights represented by this Warrant in
compliance with this Section 2(a), a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by,
the Holder, shall be delivered to, or as directed by, the Holder within three
(3) business days after such rights shall have been so exercised.
(b) Unless this Warrant shall have expired or shall have been fully
exercised, the Company shall issue a new Warrant identical in all respects to
the Warrant exercised except (i) it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
the Warrant exercised, less the number of Warrant Shares with respect to
which such Warrant is exercised, and (ii) the holder thereof shall be deemed
to have become the holder of record of such Warrant Shares immediately prior
to the close of business on the date on which the Warrant is surrendered and
payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of such share
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Company are properly closed, such person
shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open.
(c) In the case of any dispute with respect to an exercise, the Company
shall promptly issue such number of Warrant Shares as are not disputed in
accordance with this Section. If such dispute only involves the number of
Warrant Shares receivable by the Holder under a Cashless Exercise, the
Company shall submit the disputed calculations to an independent accounting
firm of national standing via facsimile within two (2) business days of
receipt of the Exercise Form. The accountant shall audit the calculations and
notify the Company and the Holder of the results no later than two (2)
business days from the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive absent manifest error.
The Company shall then issue the appropriate number of shares of Common Stock
in accordance with this Section.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable. The Company further covenants and agrees that during
the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock to provide for the exercise of
the rights then represented by this Warrant and that the par value of said
shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
Section 4. Taxes. The Company shall not be required to pay any tax or taxes
attributable to the initial issuance of the Warrant Shares or any permitted
transfer involved in the issue or delivery of any certificates for Warrant
Shares in a name other than that of the registered holder hereof or upon any
permitted transfer of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. No holder, as such, of
this Warrant shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose, nor shall anything contained
in this Warrant be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote, give or
withhold consent to any corporate action (whether any reorganization, issue
of stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the holder of this Warrant of
the Warrant Shares which he or she is then entitled to receive upon the due
exercise of this Warrant. Notwithstanding the foregoing, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
Section 6. No Limitation on Corporate Action. No provisions of this Warrant
and no right or option granted or conferred hereunder shall in any way limit,
affect or abridge the exercise by the Company of any of its corporate rights
or powers to recapitalize, amend its Certificate of Incorporation,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any
other of its corporate rights and powers.
Section 7. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment and not with a view to, or
for sale in connection with, any distribution hereof or of any of the shares
of Common Stock or other securities issuable upon the exercise thereof, and
not with any present intention of distributing any of the same. Upon
exercise of this Warrant, the holder shall, if requested by the Company,
confirm in writing, in a form satisfactory to the Company, that the Warrant
Shares so purchased are being acquired solely for the holder's own account
and not as a nominee for any other party, for investment, and not with a view
toward distribution or resale. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of the Warrant that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of the
Warrant shall not violate any United States or state securities laws.
Section 8. Transfer; Opinions of Counsel; Restrictive Legends.
(a) The holder of this Warrant understands that (i) this Warrant and the
Warrant Shares have not been and are not being registered under the
Securities Act or any state securities laws (other than as specified herein),
and may not be offered for sale, sold, assigned or transferred unless (a)
subsequently registered thereunder, or (b) pursuant to an exemption from such
registration; (ii) any sale of such securities made in reliance on Rule 144
promulgated under the Securities Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that
term is defined in the Securities Act) may require compliance with some other
exemption under the Securities Act or the rules and regulations of the
Securities and Exchange Commission thereunder; and (iii) neither the Company
nor any other person is under any obligation to register such securities
(other than as described herein) under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.
Section 9. Adjustments.
(a) Reclassification and Reorganization. In case of any reclassification,
capital reorganization or other change of outstanding shares of the Common
Stock, or in case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock), the Company shall cause effective provision to be
made so that the Holder shall have the right thereafter, by exercising this
Warrant, to purchase the kind and number of shares of stock or other
securities or property (including cash) receivable upon such
reclassification, capital reorganization or other change, consolidation or
merger by a holder of the number of shares of Common Stock that could have
been purchased upon exercise of the Warrant immediately prior to such
reclassification, capital reorganization or other change, consolidation or
merger. Any such provision shall include provision for adjustments that shall
be as nearly equivalent as may be practicable to the adjustments provided for
in this Section 9. The foregoing provisions shall similarly apply to
successive reclassifications, capital reorganizations and other changes of
outstanding shares of Common Stock and to successive consolidations or
mergers. If the consideration received by the holders of Common Stock is
other than cash, the value shall be as determined by the Board of Directors
of the Company acting in good faith.
(b) Dividends and Stock Splits. If and whenever the Company shall effect a
stock dividend, a stock split, a stock combination, or a reverse stock split
of the Common Stock, the number of Warrant Shares purchasable hereunder and
the Warrant Exercise Price shall be proportionately adjusted in the manner
determined by the Company's Board of Directors acting in good faith. The
number of shares, as so adjusted, shall be rounded down to the nearest whole
number and the Warrant Exercise Price shall be rounded to the nearest cent.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen or destroyed, the Company shall, on receipt of an
indemnification undertaking reasonably satisfactory to the Company, issue a
new Warrant of like denomination and tenor as the Warrant so lost, stolen or
destroyed. In the event the holder hereof asserts such loss, theft or
destruction of this Warrant, the Company may require such holder to post a
bond issued by a surety reasonably satisfactory to the Company with respect
to the issuance of such new Warrant.
Section 11. Notice. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt,
if delivered personally or by courier or by facsimile, in each case properly
addressed to the party to receive the same. The addresses for such
communications shall be:
If to the Company: Dauphin Technology, Inc.
800 East Northwest Highway, Suite 950
Palatine, Illinois 60067
Telephone: 847.358.4406
Facsimile: 847.358.4407
Attention: Mr. Andrew Kandalepas,
President & CEO
If to Holder, to it at the address set forth below Holder's signature on the
first page of the Loan Agreement. Each party shall provide notice to the
other party of any change in address.
Section 12. Registration. Notwithstanding anything herein to the contrary,
upon the earlier of (x) the filing of its next registration statement with
the SEC or (y) the date which is six months after the date of this Warrant,
the Company will register with the SEC under the Securities Exchange Act of
1934, as amended, the resales of the Warrant Shares into which the Warrant is
exercisable. This provision is not applicable to a registration statement
filed on Form S-4 or Form S-8.
Section 13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by
the party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Warrant are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Warrant shall be governed by and interpreted under the
laws of the State of Delaware. Headings are for convenience only and shall
not affect the meaning or construction of any of the provisions hereof. This
Warrant shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of the Holder and its successors and assigns. The
Holder may not assign this Warrant except in accordance with applicable
federal and state securities laws. The Holder shall immediately notify the
Company with respect to any permitted assignment of this Warrant.
Section 14. Date. The date of this Warrant is ________. This Warrant, in
all events, shall be wholly void and of no effect after the close of business
on the Expiration Date, except that notwithstanding any other provisions
hereof, the provisions of Section 8 shall continue in full force and effect
after such date as to any Warrant Shares or other securities issued upon the
exercise of this Warrant.
[SIGNATURE PAGE TO WARRANT # ___ DATED ________________]
DAUPHIN TECHNOLOGY, INC.
By:
Mr.
EXHIBIT I TO WARRANT
EXERCISE FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT
DAUPHIN TECHNOLOGY, INC.
The undersigned hereby exercises the right to purchase the number of Warrant
Shares covered by the Warrant attached hereto as specified below according to
the conditions thereof and herewith makes payment of U.S. $
(unless effected by a Cashless Exercise in accordance with the terms of the
Warrant), the aggregate Warrant Exercise Price of such Warrant Shares in full
pursuant to the terms and conditions of the Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any Common Stock obtained upon exercise of the Warrant, except under
circumstances that will not result in a violation of the 1933 Act or
applicable state securities laws.
(ii) The undersigned requests that the stock certificates for the Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof
be issued, pursuant to the terms of the Warrant in the name of the Holder (or
such other person(s) indicated below) and delivered to the undersigned (or
designee(s)) at the address or addresses set forth below.
Dated: , _____.
HOLDER:
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
Address: ___________________________________
___________________________________
___________________________________
Number of Warrant Shares
Being Purchased: ________________________
EXHIBIT C
EXHIBIT B
PLEDGE AND SECURITY AGREEMENT
by and between [NAME OF PLEDGOR], as Obligor
and
THE AUGUSTINE FUND, L.P.
as Secured Party
Dated as of April 13, 1999
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") dated as of April 13,
1999, is entered into by and between __________________ (the "Obligor"), and
THE AUGUSTINE FUND, L.P. (the "Secured Party").
W I T N E S S E T H:
WHEREAS, Dauphin Technology, Inc., an Illinois corporation (the "Company")
and the Secured Party are parties to that certain Promissory Note dated as of
the date hereof (including also all Exhibits and Addenda executed by the
parties, the "Note");
WHEREAS, it is a condition precedent to Secured Party's willingness to
execute the Note and to lend the sum of $1,000,000.00 to the Company (the
"Obligations") be secured by certain free-tradingcommon stock (the "Common
Stock") of the Company owned by the Obligor, which has been registered
pursuant to an S-1 Registration Statement filed with the United States
Securities and Exchange Commission, resales of which Common Stock are not
restricted under applicable securities law.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties executing this Agreement, the parties hereto
agree as follows:
SECTION 1. Grant of Security Interest. The Obligor hereby conveys,
transfers, grants, assigns and pledges to the Secured Party a security
interest in and security title to (together with a right of setoff) the
Obligor's right, title and interest in 2,000,000 free-trading shares of
Common Stock of the Company owned by the Obligor (the "Collateral").
SECTION 2. Security for Obligations. This Agreement secures the performance
of the obligations of the Company under the Note (the "Company's
Obligations"), whether now or hereafter existing. Without limiting the
generality of the foregoing, this Agreement secures the performance of the
Company's Obligations and all amounts which would be owed by the Obligor to
the Secured Party but for the fact that they are unenforceable or not
allowable due to the existence of a bankruptcy, reorganization or similar
proceeding involving the Obligor.
SECTION 3. Representations and Warranties. The Obligor represents and
warrants as follows:
(a) This Agreement creates a valid security interest in the Collateral,
securing the performance of the Company's Obligations.
(b) The Collateral is not subject to any lien, security interest or
encumbrance senior to that created by this Agreement.
(c) The Collateral is not-restricted from transfer under applicable
securities law, including those transfers contemplated by Section 9 of this
Agreement. The Obligor has on or before the date hereof caused a copy of its
(or the Company's) legal counsel to deliver to the Secured Party a copy of
said counsel's legal opinion to the effect that the Collateral is not so
restricted.
SECTION 4. Further Assurances. The Obligor agrees that from time to time it
will promptly execute and deliver all further instruments and documents and
take all further action that may be necessary or that the Secured Party may
reasonably request in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Secured Party to
exercise and enforce its rights and remedies hereunder with respect to the
Collateral.
SECTION 5. Transfers of Collateral. Except as stated herein, the Obligor
shall not sell, assign (by operation of law or otherwise) or otherwise
dispose of, or grant any option with respect to, the Collateral. The Obligor
shall upon request of the Secured Party provide trade confirmations with
respect to any Common Stock sold.
SECTION 6. Secured Party Appointed Attorney-in-Fact. The Obligor hereby
irrevocably appoints the Secured Party its attorney-in-fact, with full
authority in the place and stead of the Obligor and in the name of the
Obligor or otherwise, at such time as any default has occurred in the
Company's Obligations (a "Default"), to take any action and to execute any
instrument which the Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:
(a) to ask, demand, collect, sue for, recover, compromise, receive and give
acquittance and receipts for moneys due and to become due under or in
connection with the Collateral;
(b) to receive, endorse and collect any instruments or documents in
connection therewith; and
(c) to file any claims or take any action or institute any proceedings which
the Secured Party may deem necessary or desirable for the collection of the
Collateral or otherwise to enforce the rights of the Secured Party with
respect to the Collateral.
SECTION 7. Secured Party May Perform. If the Obligor fails to perform any
agreement contained herein, the Secured Party may itself perform or cause the
performance of such agreement, and the expenses of the Secured Party incurred
in connection therewith shall be payable by the Obligor.
SECTION 8. Secured Party's Duties. The powers conferred on the Secured
Party hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers.
SECTION 9. Remedies. If any Default shall have occurred and until such
Default is waived by the Secured Party in writing in accordance with the
Note:
(a) The Secured Party may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party under the
Uniform Commercial Code in effect in the State of Illinois at that time or
any other applicable jurisdiction, and also may (i) without notice, except as
specified below, sell the Collateral or any part thereof at public or private
sale, at any of the Secured Party's offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as are commercially
reasonable. The Obligor agrees that, to the extent notice of sale shall be
required by law, at least ten (10) calendar days' notice to the Obligor of
the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Secured
Party shall not be obligated to make any sale of Collateral, regardless of
notice of sale having been given. The Secured Party may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.
(b) All cash proceeds received by the Secured Party in respect of any sale
of, collection from or other realization upon all or any part of the
Collateral may, in the discretion of the Secured Party, be held by the
Secured Party as collateral for, and/or then or at any time thereafter be
applied in whole or in part by the Secured Party against, all or any part of
the Company's Obligations. Any surplus of such cash or cash proceeds held by
the Secured Party and remaining after satisfaction in full of all the
Company's Obligations shall be paid over to the Obligor or to whomsoever may
be lawfully entitled to receive such surplus.
SECTION 10. Remedies Cumulative. Each right, power and remedy of the Secured
Party as provided for in this Agreement or now or hereafter existing at law
or in equity or by statute or otherwise shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for
in this Agreement or now or hereafter existing at law or in equity or by
statute or otherwise, and the exercise or beginning of the exercise by the
Secured Party of any one or more of such rights, powers, or remedies shall
not preclude the simultaneous or later exercise by the Secured Party of any
or all such other rights, powers, or remedies.
SECTION 11. Expenses. The Obligor will upon demand pay to the Secured Party
the amount of any and all reasonable expenses, including the reasonable fees
and expenses of its legal counsel which the Secured Party may incur in
connection with the exercise or enforcement of any of the rights of the
Secured Party hereunder or the failure by the Obligor to perform or observe
any of the provisions hereof.
SECTION 12. Possession Until Default. Until a Default shall occur the
Collateral shall be held in escrow by the Escrow Agent (as defined in the
Note), subject to and upon the terms hereof, the Note and its related escrow
agreement. The Obligor shall deliver the Collateral to the Escrow Agent at or
prior to the closing of the transactions contemplated in the Note. The Escrow
Agent shall hold the Collateral in escrow and shall release the Collateral to
a party other than the Obligor only upon the following conditions. If (x) the
Note is not repaid in full in a timely manner as described in the Note, or
(y) if the closing bid price for the Common Stock falls below $.625 for more
than two (2) consecutive trading days and the Obligor (collectively with
other obligors (if any) under agreements of like tenor with this Agreement)
does not within three (3) days thereafter (the "Collateral Deadline") place
additional non-restricted shares of Common Stock with the Escrow Agent as
Collateral hereunder until the value of the Collateral is at least US
$1,500,000.00, the Secured Party shall be entitled, at its option, at any
time commencing the sixty-first day after the date of issuance of the Note
(or one (1) day after the Collateral Deadline), to convert all or a portion
of the original principal face amount of this Note into shares of common
stock in the Company, $.001 par value per share (defined hereinafter as the
"Common Stock"), at a conversion price (the "Conversion Price") for each
share of Common Stock equal to eighty-five percent (85%) of the average of
the closing bid prices for the Common Stock for the five (5) trading days
immediately preceding the Conversion Date (as hereinafter defined), as
reported on the National Association of Securities Dealers OTC Bulletin Board
Market (or on such other national securities exchange or market as the Common
Stock may trade at such time). Such conversion shall be achieved by
submitting to the Company on the Obligor's behalf the fully completed form of
conversion notice attached hereto as Exhibit I (a "Notice of Conversion"),
executed by the Secured Party evidencing the Secured Party's intention to
convert the Note or the specified portion (as herein provided) thereof.
A Notice of Conversion may be submitted via facsimile to the Company on
behalf of the Obligor at the telecopier number for the Company provided in
the Note (or at such other number as requested in advance of such conversion
in writing by the Company or the Obligor), and if so submitted the original
Notice of Conversion shall be delivered to the Company within three (3)
business days thereafter. The Company and the Secured Party shall each keep
records with respect to the portion of the Note then being converted and all
portions previously converted; upon receipt by the Secured Party of the
requisite Conversion Shares, the outstanding principal amount of the Note
shall be reduced by the amount specified in the Notice of Conversion
resulting in such Conversion Shares. No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number
of shares delivered from escrow by the Escrow Agent upon a conversion shall
be rounded to the nearest whole share. Accrued interest on the converted
portion of the Note shall be payable upon conversion thereof, in cash or
Common Stock at the Conversion Price, at the Secured Party's option. The date
on which a notice of conversion is given (the "Conversion Date") shall be
deemed to be either the date on which the Company receives from the Secured
Party an original Notice of Conversion duly executed, or, if earlier, the
date set forth in such Notice of Conversion if the original Notice of
Conversion is received by the Company within three (3) business days
thereafter.
SECTION 13. Amendments; Etc. No waiver of any provision of this Agreement
shall in any event be effective unless the same shall be in writing and
signed by the Secured Party, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for
which given. No amendment of any provision of this Agreement shall be
effective unless the same shall be in writing and signed by the Secured Party
and the Obligor.
SECTION 14. Addresses for Notices. All notices and other communications
provided for hereunder shall be given in the form and manner and delivered
(a) to the Secured Party at 141 West Jackson Street, Suite 2182, Chicago,
Illinois 60604, or (b) to the Obligor at the address set forth on the
signature page hereof or, (c) as to either party, at such other address as
shall be designated by such party in a written notice to the other party.
SECTION 15. Continuing Security Interest; Assignments Under Note. This
Agreement shall create a continuing security interest in the Collateral and
shall (a) remain in full force and effect until the performance in full of
the Company's Obligations, (b) be binding upon the Obligor and its successors
and assigns, and (c) inure to the benefit of and be enforceable by the
Secured Party and its successors, transferees and assigns. Upon the
performance in full of the Company's Obligations and all other amounts
payable under this Agreement, the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to the Obligor. The
Secured Party shall not, by any act, delay, omission or otherwise, be deemed
to have waived any of its rights or remedies hereunder unless such waiver is
in writing and signed by the Secured Party and then only to the extent
therein set forth. A waiver by the Secured Party of any right or remedy on
any occasion shall not be construed as a bar to the exercise of any such
right or remedy which the Secured Party has or would otherwise have had on
any other occasion.
SECTION 16. Governing Law; Terms. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois without
reference to the conflict or choice of law principles thereof, except to the
extent that the validity or perfection of the security interest hereunder, or
the remedies hereunder, in respect of any particular Collateral are governed
by the laws of a jurisdiction other than the State of Illinois. Any terms
used herein which are used in the Uniform Commercial Code of the State of
Illinois shall have the same meanings herein as such terms have in said
Uniform Commercial Code.
SECTION 17. Miscellaneous.
(a) This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all such separate counterparts
shall together constitute but one and the same instrument. A facsimile of the
signature page hereof faxed to the Escrow Agent shall be deemed acceptance of
this Agreement for all purposes, and the other party hereto may rely upon
such facsimile as if this Agreement were executed in the presence of the
party so relying.
(b) Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall be ineffective to the extent of such prohibition or
unenforceability in such jurisdiction without invalidating the remaining
provisions hereof in such jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.
IN WITNESS WHEREOF, the Obligor and the Secured Party have caused this
Agreement to be duly executed and delivered as of the date first above
written.
OBLIGOR
[Print Name of Obligor]
By:
(Duly Authorized Officer/Director)
Address of Obligor: _____________________
_____________________
_____________________
SECURED PARTY
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc., its General Partner
By: ______________________________________
(Duly Authorized Officer or Director)
EXHIBIT I
NOTICE OF CONVERSION
(To Be Executed by the Secured Party in Order to Convert the Note)
The Undersigned hereby irrevocably elects to convert $
of the Eight Percent (8%) Promissory Note Due June 13, 1999, executed by
Dauphin Technology, Inc., into shares of Common Stock of Dauphin Technology,
Inc. (the "Company"), held by the Escrow Agent according to the terms and
conditions set forth in such Note and in the Pledge and Security Agreement
between the Obligor and the Secured Party (the "Undersigned"), as of the date
written below. If securities are to be issued to a person other than the
Undersigned, the Undersigned agrees to pay all applicable transfer taxes with
respect thereto.
The Undersigned represents that it, as of this date, is an "accredited
investor" as such term is defined in Rule 501(a) of Regulation D promulgated
by the SEC under the 1933 Act.
The Undersigned also represents that the Conversion Shares are being acquired
for its own account and not as a nominee for any other party. The Obligor has
represented and warranted that resales by the Undersigned of the Conversion
Shares have been registered under the Securities Act of 1933, as amended (the
"1933 Act").
Conversion Date:*_______________________________
Applicable Conversion Price: _______________________
Holder (Print True Legal Name):
(Signature of Duly Authorized Representative of Holder)
Address of Holder: ___________________________________
___________________________________
___________________________________
___________________________________
* This original Notice of Conversion must be received by the Company by the
second business day following the Conversion Date.
