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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
FORM S-1
Registration Statement under the Securities Act of 1933
DAUPHIN TECHNOLOGY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 3570 87-0455038
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(State or Other Jurisdiction (Primary Standard (I.R.S. Employer Number)
of Incorporation or Industrial Classification
Organization) Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Andrew J. Kandalepas, President 800 E. Northwest Hwy., Suite 950,
Palatine, IL 60067 847-358-4406
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(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement as determined by
the selling stockholders.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
-----
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following.
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Balance of Page Intentionally Left Blank
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Each Class Amount to be Proposed Maximum Proposed Maximum
of Securities to be Registered Offering Aggregate Offering Amount of
Registered Price Per Share (2) Price(2)(3) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock
$0.001 Par Value(1)(4) 33,291,523 $5.00 $166,457,615 $82,563
Warrants to purchase
5,832,963 Shares of
Common Stock 5,832,963
Underwriter Warrants 250,000
Options to purchase
5,876,000 Shares of
Common Stock 5,876,000
</TABLE>
(1) Includes 15,332,560 outstanding shares to be registered for sale by certain
selling stockholders; 6,000,000 shares issuable to Techrich International
Limited, and 11,958,963 shares issuable upon exercise of warrants and options.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457, based on the average of the high and low reported sales on June 14,
2000. The price per common share will vary based on the volume-weighted average
daily price of Dauphin's common stock during the drawdown periods provided for
in the common stock purchase agreement described in this registration statement.
The purchase price will be equal to 93% of the volume-weighted average daily
price for each trading day within such drawdown pricing periods. The agreement
allows for up to 18 draws over a period of 18 months for amounts up to
$10,000,000 per draw for a maximum of $100 million.
(3) Includes 6,000,000 shares at $5.00 per share under the common stock purchase
agreement between Techrich and Dauphin. The maximum purchase price that Techrich
is obligated to pay and the maximum net proceeds Dauphin can receive is
$100,000,000 less a 3% cash placement fee payable to its placement agent,
Ladenburg Thalmann & Co. Inc. and $1,500 in escrow fees and expenses per
drawdown, plus the amount, if any, received upon exercise of warrants issued
under the common stock purchase agreement.
(4) The remainder of the shares to be registered may be offered for sale and
sold from time to time during the period the registration statement remains
effective, by, or for the accounts of, the selling stockholders. These shares
include 250,000 shares issuable upon the exercise of a warrant issued to
Ladenburg Thalmann as a placement fee. The exercise price of these warrants is
$5.481. These warrants may be exercised until April 26, 2003.
In accordance with Rule 416 under the Securities Act of 1933, this registration
statement also covers such indeterminate number of additional shares as may
become issuable to prevent dilution resulting from stock splits, stock dividends
or similar transactions as set forth in the warrants referred to above. We will
not rely on Rule 416 with respect to increased numbers of shares issuable under
the common stock purchase agreement resulting from decreases in the market price
of our common stock.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
DAUPHIN TECHNOLOGY, INC.
33,291,523 Shares of Common Stock
(including 5,832,963 warrants, 250,000 underwriters warrants
and 5,876,000 options)
$5.00 Bid Price as of June 14, 2000
THE COMPANY
1. We design and sell hand-held, pen-based computers and related electronic
equipment.
2. Our offices are located at:
800 East Northwest Highway
Suite 950
Palatine, Illinois 60067
(847) 358-4406
3. Our shares trade on the over-the-counter market in the National
Quotation Bureau's electronic bulletin board.
THE OFFERING
1. We are registering 15,332,560 shares of common stock owned by certain
selling stockholders. The shares were issued to the stockholders in
private transactions.
2. We are registering an additional 11,958,963 shares of common stock for
issuance upon exercise of 5,832,963 warrants issued to certain selling
stockholders, 250,000 underwriters warrants and 5,876,000 options
issued to employees and consultants, in private transactions. The
shares underlying the warrants and options are being registered only
for resale by the respective warrant and option holder.
3. We are registering an additional 6,000,000 shares for issuance under a
common stock purchase agreement with Techrich International Limited
described in this prospectus.
Techrich and Ladenburg Thalmann are both deemed an "underwriter" within the
meaning of the Securities Act of 1933. The selling stockholders, employees, and
consultants also may be deemed an "underwriter" in connection with any of their
sales. If they use any broker-dealers, commissions or profits received by the
broker-dealers may be deemed underwriting discounts or commissions. Any profits
realized by them may be considered underwriting commissions. We will pay all
costs of the registration of the shares, warrants and options. The selling
stockholders, employees, consultants, Techrich and Ladenburg Thalmann will pay
all brokerage commissions relating to any of their sales.
Investing in our shares involves a high degree of risk. You should invest
only if you can afford a complete loss. See "Risk Factors" beginning on page 8.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has determined whether this prospectus is truthful or
complete. Nor have they made, nor will they make, any determination as to
whether anyone should buy these securities. Any representation to the contrary
is a criminal offense.
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The Date of this Prospectus is June 16, 2000
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TABLE OF CONTENTS
Prospectus Summary 4
Risk Factors 8
Forward Looking Statements 13
Where You Can Find More Information 13
Use of Proceeds 14
Dilution 14
Market Price of Common Stock and Dividend Policy 15
Selected Financial Data 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Business 18
Description of Property 22
Management 23
Executive Compensation 24
Principal Stockholders 25
Description of Capital Stock 25
Common Stock Purchase Agreement 26
Plan of Distribution 31
Selling Stockholders 35
Legal Matters 40
Experts 40
Index to Consolidated Financial Statements F-1
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC, utilizing a "shelf" registration process. Under this process, we may from
time to time issue up to $10,000,000 of common stock, at prices to be determined
at the time of issuance. The shares may be issued in a series of draws, not to
exceed eighteen, but the aggregate dollar amount of these draws may not exceed
$100,000,000. At the time of each draw, we will also issue warrants without
additional consideration and in number to be determined at the time of the draw.
Each time we offer shares or warrants we will provide a prospectus
supplement that will contain specific information about that offer.
You should read this prospectus together with the additional information
described under the heading, "Where You Can Find More Information."
No person has been authorized to give any information or to make any
representations in connection with this offering except those contained in this
prospectus. Neither Dauphin nor any of the selling stockholders has authorized
anyone else to provide you with different information.
You should not assume that any information contained in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus. Neither Dauphin nor any selling stockholder is making an offer of
shares in any state where the offer is not permitted.
In this prospectus, reference to "we", "us" and "our" refer to Dauphin
Technology, Inc.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements, including the notes to the financial
statements, appearing elsewhere in this prospectus.
OUR BUSINESS
We design and sell hand-held, pen-based computers and related electronic
equipment. We encountered severe financial problems in 1993 and 1994 relating to
a prior product line. On January 3, 1995, we filed a petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code. We operated under Chapter 11
until July 23, 1996, when we were discharged and proceedings ended. Since July
1996 we have been engaged primarily in the following activities:
- contract manufacturing for third parties;
- development of the Orasis(TM) computer; and
- acquiring personnel, capital and resources for these activities.
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We substantially terminated contract manufacturing during the middle of
1999. We did this for two reasons. First, we sought to focus on production and
marketing of Orasis(TM). Second, we sought to identify additional products for
development. We believe these activities present greater opportunity for growth
and profitability than contract manufacturing.
We completed development and production tooling for Orasis(TM) during 1998
and 1999. Orasis(TM) is a hand-held, pen-based computer that incorporates
features which we believe provide greater power and flexibility to address
performance requirements in a variety of industrial and commercial uses. We have
produced a limited number of Orasis(TM) units which have been used for marketing
and limited sales. Orasis(TM) has been favorably received by industry
publications and potential users.
Toward the end of 1999, we identified set-top boxes as a focus for product
development. A set-top box is an electronic device that converts digital signals
into a user acceptable format via other electronic devices such as television
sets, telephones and computers. It is a routing device that enables you to
access and transmit information to take advantage of services offered by
television, telephone, Internet and other providers of communication,
information or entertainment content or media. For example, you may connect a
set-top box to your television to receive cable television programming and music
broadcasts through your television and home sound system. You may also connect a
set-top box to a computer or various office equipment to serve a variety of
commercial uses.
At the end of 1999, we began negotiations with a European
telecommunications firm seeking to develop an ultra-high speed information
technology network. The firm intends to construct, install and operate a fiber
optic cable network system offering telephone, television, Internet and other
services in a European country. It expects to develop the system with a group of
European and several U.S. based Fortune 500 companies. Our negotiations
culminated in February 2000 when we signed an agreement to provide the set-top
box that will be used in that network.
OUR OPPORTUNITY
Orasis(TM) features high-end performance while weighing less than 4 pounds.
Standard unit features provide electro-magnetic pen convenience with a wide
variety of audio-visual capabilities. We believe that Orasis(TM) represents the
lightest, most versatile hand-held computer presently available. We also believe
that our current pricing will be attractive to niche markets such as medical,
government, sales field automation, transportation, utilities and educational
uses.
The set-top box agreement names us as exclusive supplier for a minimum of
2.5 million set-top boxes for the proposed fiber optic network. We must develop
a set-top box with digital decoding capabilities to access video on demand,
telephone, video-telephone and Internet services. We must begin shipments in the
fourth quarter of 2000, with 200,000 units to be shipped by the end of the year.
Shipments of 125,000 units per quarter are required during 2001 through the
beginning of 2005. Based on these scheduled deliveries, and current pricing
under the agreement, total revenues generated under the agreement will exceed
$500 million if we provide all 2.5 million units. We believe that we can develop
and supply these units at a favorable gross margin, inclusive of shipping and
exporting expenses.
The Orasis(TM) and set-top box products provide us the opportunity to
expand production, marketing and distribution and to attain profitability.
However, the opportunity will be lost if we fail to respond quickly. Our
industry is characterized by swift change and our products may become obsolete
if competitors offer new technologies or features that we do not possess. In
addition, the set-top box agreement requires us to develop and produce ten
prototype units within 120 days. Consequently, we must act swiftly.
OUR STRATEGY
Our goals are to capture the opportunity presented by the Orasis(TM) and
set-top box products and to become a leading provider of electronic products. We
intend to focus on hand-held computer products and related accessories. We
expect to develop or acquire a variety of products and services that complement
each other or offer production and operating economies. In this way, we seek to
minimize the risk presented by reliance upon any given product that may become
obsolete through technological change.
We expect to increase our development, production and marketing
capabilities by increasing staff and coordinating relationships with outside
manufacturers and sales representatives. Our immediate focus will involve
collection of additional market information to refine Orasis(TM) capabilities so
we may aggressively market that product to satisfy customer needs. We will then
establish a responsive level of production and distribution. At the same time,
we
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will increase engineering staff to develop and deliver ten set-top box
prototypes within the 120 days provided under our agreement. Once a prototype is
approved, we will begin production to meet shipment requirements.
RECENT DEVELOPMENTS
Since January 1, 2000, we raised approximately $7.8 million in a private
placement of shares of common stock to accredited investors that ended on March
20, 2000. Proceeds of the placement were used in part to pay outstanding
operating expenses. Approximately $5 million in placement proceeds is available
for marketing Orasis(TM) and developing the set-top box. The 4,945,301 shares
and an additional 1,506,858 shares underlying warrants issued in the private
placement are included in this registration to permit secondary trading by the
holders of such shares and warrants.
On April 12, 2000, we entered into a common stock purchase agreement with
Techrich International Limited, an institutional investor. The agreement
provides for the future purchase of shares and issuance of warrants to Techrich.
The common stock purchase agreement establishes what is sometimes termed an
equity line of credit or an equity drawdown facility.
In general, the equity line operates like this: Techrich has committed to
provide us up to $100 million as we request it over a 18 month period, in return
for common stock and warrants that we issue to Techrich. Once every 22 trading
days, we may request a draw of up to $10,000,000, subject to a maximum of 18
draws. The maximum amount we actually can draw down upon each request will be
determined by the volume-weighted average daily price of our common stock for
the 22 trading days prior to our request and the average trading volume for the
45 trading days prior to our request. Each draw down must be for at least
$250,000. At the end of a 22 day trading period following the drawdown request,
the final drawdown amount is determined based on the volume-weighted average
stock price during that 22 day period. We then use the formulas in the common
stock purchase agreement to determine the number of shares and warrants that we
will issue to Techrich in return for the money drawn down.
The formulas are described in detail beginning on page 26. We are under no
obligation to request any draw down under the common stock purchase agreement at
anytime.
The per share dollar amount Techrich pays for our common stock for each
drawdown includes a 7% discount to the average daily market price of our common
stock for the 22 day period after our drawdown request, weighted by trading
volume. We will receive the amount of the drawdown less an escrow agent fee of
$1,500 and a 3% placement fee payable to the placement agent, Ladenburg Thalmann
& Co. Inc., which introduced Techrich to us. Ladenburg Thalmann is a registered
broker dealer. It is not obligated to purchase any of our shares, but as an
additional placement fee, we have issued to Ladenburg Thalmann warrants to
purchase 250,000 shares of our common stock at an exercise price of $5.481. The
common stock issuable upon the exercise of those warrants is included in the
registration statement of which this prospectus is a part.
THE REGISTRATION
Shares to be registered 33,291,523 shares
Including:
Warrants to be registered (1) 6,082,963 shares
Options to be registered 5,876,000 shares
Total number of shares outstanding
immediately after the registration 75,591,446 shares
Use of proceeds Net proceeds from this
registration are estimated
to be $77,252,367. We will
use the net proceeds to:
- fund production and
marketing of Orasis(TM);
- fund development and
production of the set-top
box; and
- increase working capital
generally to develop
additional products.
(1) Includes 250,000 underwriter warrants.
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SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for
our business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
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(unaudited)
INCOME STATEMENT DATA: 1995 1996 1997 1998 1999 2000 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 183 $ 94 $ 2,730 $ 5,368 $ 2,279 $ 5 $ 1,246
Cost of Sales 94 279 4,345 5,758 4,834 (234) 1,420
------ ------ ------- ------- ------- ------ -------
Gross Profit (Loss) 89 (185) (1,615) (390) (2,555) 239 (174)
Net Loss, before extraordinary item (795) (1,397) (3,988) (6,132) (9,306) (2,732) (2,049)
EARNINGS PER COMMON SHARE(1):
Loss Before Extraordinary Item (0.06) (0.06) (0.13) (0.16) (0.20) (0.05) (0.05)
Extraordinary Item - 1.58 - - - - -
Net Income (Loss) (1) (0.06) 1.52 (0.13) (0.16) (0.20) (0.05) (0.05)
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
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(unaudited)
1995 1996 1997 1998 1999 2000 1999
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<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets 426 3,402 7,629 6,719 3,372 7,538 4,229
Long Term Debt - 43 430 303 185 159 274
Working Capital (Deficit) (50,980) 3,020 4,511 (260) (917) 5,495 341
Stockholders Equity (Deficit) (50,910) 3,093 5,676 2,885 552 6,892 2,740
</TABLE>
(1) Income (Loss) per common share is calculated based on the weighted
average number of shares for the respective period.
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RISK FACTORS
Investment in our shares is risky and should be considered speculative. In
addition to the information contained in this prospectus, you should consider
carefully the following risk factors before investing in shares offered under
this prospectus:
RISKS RELATED TO OUR FINANCIAL RESULTS
We have had a history of losses and may experience losses in the future
that could result in a decrease in the market price for our shares.
We operated under Chapter 11 of the Federal Bankruptcy Code from January 3,
1995 until July 23, 1996. We cannot determine the effect of such operations on
potential customers, vendors or employees. In addition, we have had significant
operating losses since our inception. For the years ended December 31, 1997,
1998 and 1999, we had losses of $3,988,017; $6,131,557; and $9,306,304. We had
an accumulated deficit of $38,826,736 as of December 31, 1999. There can be no
assurance that we will ever operate at a profit or that an investment in our
shares will result in any gain to stockholders.
We have had a limited operating history.
Since July 1996 we have operated without substantial sales or revenue. Our
limited financial performance may make it difficult for you to evaluate the
viability of our business to date and to assess its future viability.
We have terminated one line of business that will result in reduced
revenue.
We substantially terminated contract-manufacturing services at the end of
the second quarter of 1999 as part of our current operating strategy. For years
ending December 31, 1997, 1998 and 1999, contract manufacturing services
conducted through our subsidiary accounted for $2,658,201, $5,637,574, and
$2,134,563 in revenue. We will no longer offer such services to third parties
but will instead apply such activities to develop and manufacture our own
products.
RISKS RELATED TO OUR STRATEGY
We may be unable to identify or acquire additional technologies or products
to diversify our product offering.
We expect to avoid reliance upon any given product through acquisition of
additional technologies and products. However, we may be unable to identify or
acquire technologies or products. In that case, we may have to rely upon our own
resources to develop such technologies and products internally. We may not have
sufficient resources to do this. In addition, acquisitions involve a number of
special risks, such as diversion of management's attention and financing issues,
which may have a negative impact on operations and financial performance.
We may not be able to efficiently integrate any acquired technologies,
products or businesses.
We expect to acquire technologies, products and other businesses to
compliment our operations. For example, we may acquire an existing engineering
business if we require additional staff to develop products and cannot otherwise
retain qualified personnel. There can be no assurance that we will be able to
integrate the operations of any other business successfully. Acquisitions we do
undertake will subject us to a number of risks, including the following:
- inability to institute the necessary systems and procedures, such as
accounting and financial reporting systems;
- failure to retain key personnel;
- assumption of unanticipated legal liabilities and other problems; and
- amortization of acquired intangible assets.
In addition, we may acquire technologies or products that prove
incompatible to other products following further development.
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Even if we successfully integrate acquired technologies, products or
businesses, we may be unable to effectively manage growth.
We seek to become profitable by expanding sales of Orasis(TM), the set-top
box and any new products that we may develop or acquire. To manage growth, we
may be required to:
- improve existing and implement new operational, production and
personnel systems;
- hire, train and manage additional qualified personnel; and
- establish relationships with additional suppliers and strategic
partners while maintaining existing relationships.
Focus on set-top box development under the set-top box agreement subjects
us to risks associated with international operations.
If we successfully develop a set-top box and begin sales under the set-top
box agreement, we risk exposure to international risks, including:
- greater difficulty in accounts receivable collection and longer
collection periods;
- unexpected changes in regulatory requirements;
- reduced protection of intellectual property rights;
- potentially adverse tax consequences; and
- political instability.
Focus on set-top box development under the set-top box agreement subjects
us to risks associated with other participants' operations.
We have no control over operations of other businesses involved in
constructing, installing and operating the fiber optic cable network system for
which we expect to provide the set-top box. Decisions regarding construction,
installation and operation of the system will be made without our input. Such
decisions may have a material impact on the system and may delay shipment of our
set-top boxes or otherwise negatively affect our operations.
RISKS RELATED TO DEVELOPMENT, PRODUCTION AND MARKETING OF OUR PRODUCTS
Product development involves substantial expense and resource allocation
that may exceed our capabilities.
We incurred substantial expense in developing the Orasis(TM) computer. We
expect to continue to develop enhancements and accessory equipment to meet
customer and market demands. The set-top box is in the early stage of
development and although it relies in part upon technology developed for the
Orasis(TM), we expect to incur substantial additional expense to fully develop
this product. Delays in development arising from insufficient cash or personnel
resources will hinder our ability to bring these products to market before
competitors introduce comparable products. In that case, we will miss the
opportunity to capitalize on the technological advances, which we believe such
products may offer.
We depend on outside sources for components and may be harmed by
unavailability of components, excessive prices for components or unexpected
delays in component deliveries.
The Orasis(TM) and set-top box use or will use various component parts,
such as PCBs, microchips and fabricated metal parts. We must obtain these
components from manufacturers and third-party vendors. Our reliance on those
manufacturers and vendors, as well as industry component supply, creates many
risks including the following:
- the possibility of a shortage of components;
- increases in component costs;
- variable component quality;
- reduced control over delivery schedules; and
- potential manufacturer/vendor reluctance to extend credit to us.
If there is a shortage of component parts or if the cost of these parts
substantially increases, our operations and our success in the marketplace could
be materially and adversely affected.
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Errors or defects in our products could result in customer refund or
product liability claims.
Because our products are complex, they could contain errors or bugs that
can be detected at any point in a product's life cycle. While we continually
test our products for errors and will work with customers to identify and
correct bugs, errors may be found in the future. Although many of these errors
may prove to be immaterial, any of these errors could be significant. Detection
of any significant errors may result in:
- loss of or delay in market acceptance and sales of our products;
- diversion of development resources;
- injury to our reputation; or
- increased maintenance and warranty costs.
Errors or defects could harm our business and future operating results.
Moreover, because our products will be used in critical computing functions, we
may receive significant liability claims if our products do not work properly.
Our agreements with customers typically do and will contain provisions intended
to limit our exposure to product liability claims. However, these provisions may
not preclude all potential claims. Liability claims could require us to spend
significant time, money and effort in litigation. They also may result in
substantial damage awards. Any such claim, whether or not successful, could
materially damage our reputation and results of operation.
We will be unable to develop, produce and market our products without
qualified professionals and seasoned management.
Our success depends in large part on our ability to recruit and retain
professionals, key management and operating personnel. We need to complete
development of the set-top box and coordinate production of Orasis(TM) computers
and the set-top box. We also need to develop marketing channels to increase
market awareness and sales of our products. Qualified professionals, management
and operating personnel are essential for these purposes. Such individuals are
in great demand and are likely to remain a limited resource in the foreseeable
future. Competition for them is intense and turnover is high. If we cannot
attract and retain needed personnel, we will not succeed.
We believe that our future success will depend on our ability to retain the
services of our executive officers. These officers have developed industry
relationships that are critical to our growth and development. They also will be
essential in dealing with the significant challenges that we expect to arise
from anticipated growth in our operations.
We have an ongoing need to expand management personnel and support staff.
The loss of one or more members of management or key employees, or the inability
to hire additional personnel as needed, could have a material adverse effect on
our operations.
RISKS RELATED TO COMPETITION WITHIN OUR INDUSTRY
None of our products has achieved widespread distribution or customer
acceptance.
Although the Orasis(TM) computer has passed the development stage, we have
not established a market for it. The Orasis(TM) is a solution oriented,
pen-based, mobile computer system, which has been produced and marketed only on
a limited basis. As the market and applications for the Orasis(TM) increase, we
anticipate its market will increase; however, there is no assurance that this
will happen.
The set-top box is in the early stage of development. We believe we will
successfully develop a set-top box that will conform to specifications under the
set-top box agreement that will address a broad market demand. There can be no
assurance that we will successfully develop the set-top box or that a market
demand will exist if development is completed to set-top box agreement
specifications. In addition, if a market demand exists, it may be met with
alternative products offered by competitors or with pricing that we cannot
match.
Competition in our industry is intense and we may not be able to compete
successfully due to our limited resources.
Our industry is highly competitive and dominated by competitors with
substantial resources. Continuous improvement in product pricing and performance
is the key to future success. At all levels of competition, pricing has become
very aggressive. We expect pricing pressure to continue to be intense. Many of
our competitors are larger and have significantly greater financial, technical,
marketing and manufacturing resources. They also have broader
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product lines, greater brand name recognition and larger existing customer
bases. As a result, our competitors may be better able to finance acquisitions
or internal growth or respond to technological changes or customer needs.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. There can be no assurance that we will
be able to compete successfully in developing, manufacturing or marketing our
products. An inability to do so would adversely affect our business, financial
condition and market price of our shares.
Our industry is subject to rapid technological change and we may not be
able to keep up.
Rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles and changes in customer demands and
evolving industry standards, characterize the computer industry. Our products
could become obsolete if products based on new technologies are introduced or if
new industry standards emerge.
Computer equipment is inherently complex. As a result, we cannot accurately
estimate the life cycles of our products. New products and product enhancements
can require long development and testing periods, which requires retention of
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products can seriously damage our business. In the past, we have experienced
delays in scheduled product introductions and cannot be certain that we will
avoid similar delays in the future. We must produce products that are
technologically advanced and comparable to and competitive with those made by
others. Otherwise, our products may become obsolete or we will fail to achieve
market acceptance.
Our future success depends on our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.
We may sell fewer products if other vendors' products are no longer
compatible with ours or other vendors bundle their products with those of our
competitors and sell them at lower prices.
Our ability to sell our products depends in part on the compatibility of
our products with other vendors' software and hardware products. For example,
Orasis(TM) will not sell if it cannot run software, or access resources such as
Internet or telephone services, provided by others. The same is true for the
set-top box. Other vendors may change their products so that they will no longer
be compatible with our products. These vendors also may decide to bundle their
products with products of our competitors for promotional purposes and to
discount the sales price of the bundled products. If this were to occur, our
business and future operating results could suffer.
We have limited intellectual property protection and our competitors may be
able to appropriate our technology or assert infringement claims.
Our products are differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
fail to protect our intellectual property, others may appropriate our technology
and sell products with features similar to ours. This could reduce demand for
our products. We rely on a combination of trade secrets, copyright and trademark
laws, non-disclosure and other contractual provisions with employees and third
parties, and technical measures to protect our proprietary rights in our
products. There can be no assurance that these protections will be adequate or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to ours.
We believe that our products do not infringe upon the proprietary rights of
third parties. However, there can be no assurance that third parties will not
assert infringement claims against us in the future or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. In addition, any such claim may require us to commit
substantial time and effort, and to incur substantial litigation expenses, and
may subject us to significant liabilities that could have a material adverse
effect on our financial condition and results of operations.
Our business and operations may be affected by government regulations.
Our products may be subject to various federal, state and other government
regulations. For example, we are required to obtain CE approval and
certification for the set-top box under the set-top box agreement. If we do not
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<PAGE> 12
receive such approval and certification within thirty days of application,
production will be postponed. In addition, if we do not receive such approval
and certification within sixty days of application, the buyer may terminate the
agreement. The buyer also may terminate the agreement if permits to install
fiber optic and other infrastructure equipment are not issued. Even if such
permits are issued, delays in issuance will delay set-top box orders and
shipments. Consequently, government regulations may interfere with our business
plans and could have an adverse effect on our ability to develop and market our
products.
RISKS RELATING TO OUR SHARES AND THIS REGISTRATION
It is likely that our shares will be subject to substantial price and
volume fluctuations due to a number of factors, many of which will be beyond our
control.
The securities markets have recently experienced significant price and
volume fluctuations. The market prices and volume of securities of technology
and development-stage companies have been especially volatile. Market volatility
and other market conditions could reduce the market price for our shares despite
operating performance. In addition, if our operating performance falls below
expectations the market price of our shares could decrease significantly. You
may be unable to resell shares at or above the registration price. In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we were the
subject of such litigation we could experience substantial litigation costs and
diversion of management's attention and resources.
We have not paid any dividends and have no expectation of paying dividends
in the foreseeable future.
We have not declared, paid, or distributed any cash dividends on our shares
in the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.
Our shares are not widely traded.
There is only a limited market for our shares. If a large portion of the
shares eligible for immediate resale after registration were to be offered for
public resale within a short period of time, the current public market would
likely be unable to absorb such shares. This could result in a significant
reduction in current market prices. There can be no assurance that investors
will be able to resell shares at the price they paid for the shares or at any
price.
Our shares are subject to special trading rules relating to "penny stocks"
which restrict trading.
Our shares are covered by an SEC rule that imposes additional sales
practice requirements on broker-dealers who sell "penny stock" to persons other
than certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.
We have broad discretion in how we use any proceeds of this registration,
and we may not use these proceeds effectively.
We could spend any proceeds received from this registration in ways, which
you may not agree or that do not yield a favorable return. Our primary goals in
conducting this registration are to broaden the public market for our shares and
to access funds necessary to develop, produce and market our products. Proceeds
also may be applied to future strategic acquisitions that may help us to
accomplish these goals. We have had preliminary discussions regarding an
acquisition, but have not made any final determination whether to proceed or
not.
There is an inverse relationship between the average trading price and the
amount of securities to be issued under the equity line, which may result in
substantial dilution and reduction in share price.
Because the amount of securities to be issued under our equity line is
based on a formula that is tied to the market price of our shares just prior to
the time of a drawdown, issuance of some or all of the securities allowed under
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<PAGE> 13
the equity line could result in significant dilution of the per share value of
our shares held by current investors. The inverse relationship between the price
and amount of securities to be issued may have the following results:
- the lower the average trading price of our shares at the time of a
drawdown, the greater the number of securities that can be issued,
and the greater the risk of dilution caused by these securities;
- the perceived risk of dilution may cause Techrich or other
shareholders to sell their shares, which could contribute to a
downward movement in stock price of shares; and
- any significant downward pressure on the trading price of our
shares could encourage Techrich and other shareholders to engage
in short sales, which could further contribute to a price decline
of our shares.
Our placement agreement with Ladenburg Thalmann restricts us from raising
investment capital during the term of the common stock purchase agreement except
through the common stock purchase agreement.
If we need capital but are unable to drawdown under the common stock
purchase agreement for any reason, we will need to separately negotiate with
Ladenburg Thalmann and Techrich to lift those restrictions so we can obtain the
capital from other sources. Our common stock purchase agreement with Techrich
also limits our ability to sell our securities for cash at a discount to the
market price for 18 months from the effective date of the registration statement
of which this prospectus is a part.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. Any statement that is not a statement of
historical fact constitutes a forward-looking statement. You can identify these
statements by forward-looking words such as "may", "will", "intend", "believe",
"anticipate", "estimate", "expect", "project" and similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operation and of our
financial condition or state other forward looking information. This prospectus
also includes third party estimates regarding the size and growth of markets and
mobile computer equipment usage in general.
You should not place undue reliance on these forward-looking statements.
The sections captioned "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from our expectations.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward looking statements after the date of this prospectus or to conform these
statements to actual results or to changes in our expectations, except with
respect to material developments related to previously disclosed information.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read and copy these reports, proxy statements
and other information at the SEC's public reference rooms at 450 Fifth Street,
N.W., Judiciary Plaza, Washington D.C.; 500 West Madison Street, Chicago,
Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such materials can be obtained from the public reference rooms at
prescribed rates. You can obtain information regarding operation of the public
reference rooms by calling the SEC at 1-800-SEC-0330. Such material can also be
inspected and printed from the SEC's Internet site located at
http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 with
respect to the shares. This prospectus constitutes a part of the registration
statement but does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to the shares and us, you should
refer to the registration statement and the exhibits and schedules filed as
apart of the registration statement. Statements contained in this prospectus as
to the contents of any contracts or other documents are not necessarily
complete; reference is made to the copy of such contract or document filed as an
exhibit to the registration statement. Each statement is qualified in all
respects by such reference. Copies of the registration
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<PAGE> 14
statement, including all exhibits and schedules, may be obtained from the SEC's
public reference rooms upon payment of the prescribed fees. You can also examine
them without charge at the public reference rooms or the SEC's Internet site.
USE OF PROCEEDS
If all shares underlying warrants and options are issued and we draw the
$30,000,000 available under the equity line, assuming a current share price of
$5.00 and 420,000 warrants arising from that draw are exercised, net proceeds of
this registration are estimated to be $77,252,367 assuming a current share price
of $5.00.
The primary purposes of this registration are to:
- broaden the market for our shares;
- fund production and marketing of Orasis(TM);
- fund development and production of the set-top box; and
- increase working capital generally to develop additional products.
We expect to use a portion of net proceeds to retain qualified marketing
and other personnel to effectively promote the Orasis(TM) computer. This will
include advertising and other promotional expenses, as well as assembly costs to
produce an adequate supply of this product.
We expect to use a portion of net proceeds to retain engineering and
production personnel to complete set-top box design and production of units
sufficient to meet set-top box delivery requirements. We intend to conduct
assembly at the facility we previously used for contract manufacturing, but may
need to purchase additional production equipment.
Finally, we will use proceeds to develop new products so that we are not
dependent on any given product and to remain competitive. We may buy new
technologies or products. In addition, if we determine that qualified personnel
or equipment is not generally available, we may use proceeds to acquire
businesses that can satisfy our requirements. The Company has had preliminary
discussions with an acquisition candidate. However, the Company has not
determined whether the preliminary discussions will result in an acquisition.
DILUTION
As and to the extent that we issue any shares in future transactions,
current stockholders' ownership percentages will be diluted.
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<PAGE> 15
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Our shares trade on the over-the-counter market in the National Quotation
Bureau's electronic bulletin board. The following table shows the range of
representative bid prices for our shares. The prices represent quotations
between dealers and do not include retail mark-up, markdown, or commission, and
do not necessarily represent actual transactions. The number of stockholders on
record as of June 2, 2000 is approximately 5,500. Some of the stockholders on
record are brokerage firms that hold shares in the "street name". Therefore, we
believe the total number of stockholders may be greater than 5,500.
<TABLE>
<CAPTION>
1997 1998 1999 2000
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $1.625 $1.187 $1.625 $1.016 $1.219 $0.453 $12.375 $0.2656
Second Quarter 1.219 0.750 1.391 0.875 0.938 0.391 - -
Third Quarter 1.172 0.875 2.031 0.875 0.750 0.266 - -
Fourth Quarter 2.590 1.063 0.906 0.500 0.703 0.219 - -
</TABLE>
The closing bid price of a share on June 14, 2000 was $5.00. We have never
paid dividends and do not anticipate paying any dividends in the foreseeable
future. We currently intend to retain earnings, if any, for product development,
production and marketing, strategic acquisitions and for general working capital
requirements.
SELECTED FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
Three months
Year Ended December 31, ended March 31,
----------------------- ---------------
(unaudited)
1995 1996 1997 1998 1999 2000 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 183 $ 94 $ 2,730 $ 5,368 $ 2,279 $ 5 $ 1,246
Cost of Sales 94 279 4,345 5,758 4,834 (234) 1,420
------ ------ -------- -------- -------- -------- --------
Gross Profit (Loss) 89 (185) (1,615) (390) (2,555) 239 (174)
Net Loss before extraordinary item (795) (1,397) (3,988) (6,132) (9,306) (2,732) (2,049)
EARNINGS PER COMMON SHARE:
Loss Before Extraordinary Item (0.06) (0.06) (0.13) (0.16) (0.20) (0.05) (0.05)
Extraordinary Item - 1.58 - - - - -
Net Income (Loss) (0.06) 1.52 (0.13) (0.16) (0.20) (0.05) (0.05)
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
As December 31, As of March 31,
--------------- ---------------
(unaudited)
1995 1996 1997 1998 1999 2000 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets 426 3,402 7,629 6,719 3,372 7,538 4,229
Long Term Debt - 43 430 303 185 159 274
Working Capital (Deficit) (50,980) 3,020 4,511 (260) (917) 5,495 341
Stockholders Equity (Deficit) (50,910) 3,093 5,676 2,885 552 6,892 2,740
</TABLE>
(1) Income (Loss) per common share is calculated based on the weighted average
number of shares for the respective period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are engaged in electronic product engineering, development and sales.
Contract manufacturing services were conducted through the second quarter of
1999 through our wholly owned subsidiary, R. M. Schultz & Associates, Inc. All
of our activities are highly competitive and sensitive to many factors outside
of our control, including general economic conditions affecting our customers
and availability of components.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1999
Dauphin Technology, Inc.
Revenue for Dauphin decreased from $89,000 in the first quarter of 1999 to
$5,000 in 2000. The revenue decreased as a result of financial constraints on
the Company and management's focus on the development of a set-top box. The
gross profit margins are not comparable for the periods due to fluctuation in
sales.
Selling, general and administrative expenses increased to approximately
$1,040,000 in 2000 from $927,000 in 1999. The increase from 1999 to 2000 was due
to increased professional fees and financial service expenses related to the
private placement, offset by certain settlements of trade payables.
R.M. Schultz & Associates, Inc. (RMS)
Revenue for RMS decreased from $1.25 million in 1999 to $0 in 2000 due in fact
to our shift away from contract manufacturing. The gross profit margins are not
comparable for the periods due to fluctuation in sales.
Selling, general and administrative expenses decreased in 2000 to approximately
$53,000 from $176,000 in 1999. The decrease from 1999 to 2000 was primarily due
to staff reductions and cost cutting that the management implemented throughout
the latter part of 1999 and the first quarter of 2000.
Net (loss)
The loss after tax increased for the first quarter of 2000 to ($2.73) million or
($0.05) per share from ($2.05) or ($0.05) per share in 1999 spread over a larger
number of shares outstanding. The net loss increase was due to a major increase
in interest expense, professional fees and financial services fees related to
the private placement. Loss per common share is calculated based on the monthly
weighted average number of common shares outstanding, which were 56,276,124 for
the three month period March 31, 2000 and 41,043,203 for the three month period
March 31, 1999.
Balance Sheet
During the first quarter of 2000, total assets increased to $7,538,000 from
$3,372,000 at December 31, 1999. The increase was primarily due to an increase
in cash as a result of the completion of the private placement. Accounts
receivable decreases were primarily due to a slowdown in customer orders. Trade
accounts payable decreased during the quarter mostly due to payments and
settlements of vendor inventories. Short-term borrowings and unearned revenue
decreased during the quarter due to their conversions into equity.
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RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31,
1998 AND 1997
Dauphin Technology, Inc.
Revenue for Dauphin increased from $72,000 in 1997 to $386,000 in 1998 and
then decreased to $274,000 in 1999. The revenue decrease from 1998 to 1999 was a
result of financial constraints, which prohibited the purchase of components
necessary to complete the production of Orasis(TM) units.
The gross profit margins are not comparable for the periods due to the
inventory write downs and fluctuation in sales. During 1997 and 1998, we wrote
down all obsolete inventory. Originally, such inventory was to be used in the
design of Orasis(TM), but the introduction of new components and newer design
methods rendered such inventory obsolete.
Selling, general and administrative expenses increased to approximately
$2.63 million in 1999 from $2.55 million in 1998 and $1.25 million in 1997. The
increase from 1998 to 1999 was due to increase in professional and consulting
fees incurred in our efforts to raise additional capital. During the third and
fourth quarters of 1999, we began cost reduction measures managing to reduce
certain expenses by as much as fifty percent. The increase from 1997 to 1998 was
due to additional staffing in sales and marketing departments and expense
related to product demonstrations. We supplied our sales force with 200
Orasis(TM) demonstration units, at an average cost of $2,500 per unit, to
present the product at trade shows and sales opportunities. We also advertised
Orasis(TM) in several trade magazines. Further, internal operations were
enhanced with additional personnel.
R.M. Schultz & Associates, Inc. (RMS)
Revenue for RMS increased from $2.7 million in 1997 to $5.6 million in
1998, but decreased to $2.13 million in 1999 due to our decision to move away
from contract manufacturing and towards new product design and development.
The gross profit from 1998 to 1999 is not comparable due to the inventory
write down and the decrease in revenue. The gross profit margin for RMS
decreased from 9% in 1997 to 6% in 1998 due to an increase in reserve for
obsolescence and startup inefficiencies in manufacturing of Orasis(TM).
Selling, general and administrative expenses increased in 1999 to
approximately $1.5 million from $712,000 in 1998 and $233,000 in 1997. The
increase in 1999 from 1998 was primarily due to impairment of goodwill and
expenses associated with cost reductions. The increase from 1997 to 1998 was
primarily due to full year of operations under the Dauphin umbrella.
Other Expenses and Net Loss
Our net operating loss increased to approximately $9.3 million in 1999 from
$6.1 million in 1998 and $4.0 million in 1997. The increase in net loss from
1998 to 1999 was due to all items mentioned in the RMS sections above. The
increase in the net loss from 1997 to 1998 was due to an increase in research
and development expense from $827,000 to $1.6 million, an increase in sales and
marketing expense, an increase of interest expense from $76,000 to $1 million in
1998 and additional inventory write-downs. We spent in excess of $2.4 million on
the development and an additional $676,000 on production tooling for Orasis(TM).
LIQUIDITY AND CAPITAL RESOURCES
Absence of Operating Profit
We have incurred a net operating loss in each year since our founding. As
of March 31, 2000 our accumulated deficit was $41,558,713. We expect to incur
operating losses over the near term. Our ability to achieve profitability will
depend on many factors including our ability to manufacture and market
commercially acceptable products. There can be no assurance that we will ever
achieve a profitable level of operations or if profitability is achieved that it
can be sustained.
Early Stage of Development of Our Products
From June of 1997 through June of 1999, we were principally engaged in
research and development activities involving Orasis(TM). Since then, we have
been working on new technologies, in particular the design and
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<PAGE> 18
development of the set-top box. Our products have been sold in limited
quantities and there can be no assurance that a significant market will develop
for such products in the future. Therefore, our inability to develop,
manufacture and market our products on a timely basis may have a material
adverse effect on our financial results.
Financing Considerations
We raised approximately $7.8 million in a private placement of shares of
common stock to accredited investors that ended on March 20, 2000. Proceeds of
the placement were used in part to pay outstanding operating expenses of $1.2
million. Approximately $5 million in placement proceeds is available for
marketing and manufacturing Orasis(TM) and developing the set-top box.
On April 12, 2000, we entered into a common stock purchase agreement with
Techrich. Under this agreement we may make up to eighteen draws of up to
$10,000,000 per draw, with a $100,000,000 aggregate draw limit. Upon each draw,
we must issue shares and warrants to Techrich based upon formulas described in
detail beginning on page 26.
Inflation and Seasonality
Due to the nature of our products and current market trends, an increase in
the volume of production should generally result in a reduction of cost per
unit. We do not anticipate any major shifts in this trend in a foreseeable
future. Also, since we target industrial customer and not retail outlets, we
should not be affected by the seasonal nature of consumer purchasing.
BUSINESS
OVERVIEW
We design and sell hand-held, pen-based computers and related electronic
equipment for home and business use from facilities in Palatine and McHenry,
Illinois. We currently employ approximately 15 people. Our employees consist of
engineering, sales and marketing, administrative and other personnel. For the
past several years, we have functioned as a development-stage company engaged
primarily in the following activities:
- contract manufacturing for third parties;
- development of the Orasis(TM) computer; and
- acquiring personnel, capital and resources for these activities.
We conducted contract manufacturing from June 1997 to June 1999. We
terminated contract manufacturing to focus on production and marketing of
Orasis(TM) and to identify additional products for development. We believe these
activities present greater opportunity for growth and profitability than
contract manufacturing.
We began development of Orasis(TM) in the fall of 1997. We continued
development through 1998. During that year, we began production tooling to
produce a sufficient number of prototype units to begin promotion. We completed
development and production tooling during 1999. We produced a limited number of
units and used them for marketing and limited sales. To date, however, we have
not had sufficient funds to aggressively promote Orasis(TM).
Toward the end of 1999, we identified the set-top box as a focus for
product development. At the end of 1999, we began negotiations with a European
telecommunications firm seeking to construct, install and operate a fiber optic
cable network system offering telephone, television, Internet and other services
in a European country with a group of European and several U.S. based Fortune
500 companies. On February 11, 2000 we signed an agreement to develop and supply
the set-top box that will be used in that network.
STRATEGY
We seek to capture the opportunity presented by the Orasis(TM) and set-top
box products and to become a leading provider of electronic products. We intend
to focus on hand-held computer products and related accessories, and will avoid
dependency on any given product. We expect to develop or acquire a variety of
products and services that complement each other or offer production and
operating economies. In this way, we seek to minimize the risk presented by
reliance upon any given product which may become obsolete through technological
change.
We expect to increase our development, production and marketing
capabilities by increasing staff and coordinating relationships with outside
manufacturers and sales representatives. Our immediate focus will be collection
of additional market information to refine Orasis(TM) capabilities so we may
aggressively market that product
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<PAGE> 19
to satisfy customer demands. We will then establish a responsive level of
production and distribution. At the same time, we will increase engineering
staff to develop and deliver ten set-top box prototypes within the 120 days
provided under the set-top box agreement. Once a prototype is approved, we
expect to ramp-up production at our assembly facility which was used previously
for contract manufacturing. We also may use outside manufacturers for this
purpose.
PRODUCTS
Orasis(TM) is a hand-held computer developed with features to meet the
expressed desires of many potential customers. It was developed with the
multi-sector mobile user in mind. It incorporates an upgradable processor, user
upgradable memory and hard disc, various modules and mobile devices to satisfy
the needs of various industries. Basic unit features are as follows:
- The unit weight is approximately 3 pounds;
- The battery operating life is from 2 to 8 hours;
- The unit is equipped with 166 MHz Pentium MMX processor, which can be
upgraded to 266 MHz Pentium MMX;
- The standard unit is equipped with 32 MEG of memory upgradable to
128 MEG of RAM;
- Standard two type II or a single type III PCMCIA slot;
- 2.1 GB expandable to 6.4 GB hard drive;
- Built in speaker and microphone, including sound blaster for voice
recognition and multimedia;
- Video conferencing port;
- Modular expansion bay with docking connector;
- Electro-magnetic pen, voice activation, and an Infra Red keyboard for
data input; and
- CDROM drive, floppy drive, DVD drive, heads-up goggles, GPS module and
other attachable devices.
Much more flexible and powerful than a personal digital assistant,
Orasis(TM) is an MS-DOS/Windows 95/98/2000, Windows NT and Linux compatible
machine. Although the basic unit carries a number of advanced features, the most
significant advantage of Orasis(TM) is its upgradability. The expansion bay
allows for the use of CDROM, floppy drive, wireless radio, extended battery pack
or any other device through its PCI expansion bus. Unlike competitor models,
Orasis(TM) does not lock the customer into a single format. Orasis(TM) affords a
customer complete flexibility and versatility offered by no other mobile
computer presently on the market. It is a time, labor, and money-saving device
that can be custom-configured with a variety of options to meet the end-user's
needs.
We recently started to design our set-top box. Pursuant to the set-top box
agreement, we will incorporate an integrated modular design to address present
and future technologies. Our set-top box will be an ADSL/VDSL access unit with
he capability to provide video on demand/TV, video-telephone services, voice
telephony and Internet access using a computer. The set-top box will connect to
a gigabit fiber optic infrastructure to provide ultra high-speed communication
services to residential, commercial, civil, educational, governmental and other
users.
Our set-top box will include the following features:
- ADSL/VDSL modem, which will connect to the client's infrastructure;
- antenna connector for external interfacing;
- TV-out connector for TV hook-up;
- Ethernet option for a PC connection;
- one set of RCA audio connectors;
- universal power supply for 110/230V operation; and
- a set of batteries providing up to 6 hours of telephone operation in
case of a power failure.
The initial version of the set-top box will use Windows CE as its operating
system. It will connect to the proposed fiber optic network with routing
capabilities to direct and re-direct data, voice, and video traffic. Certain
dedicated gateways will connect the network with the other telephone systems and
access the client's state- of- the- art video on demand service to provide a
first class library of movies, as well as live local and international TV
channels, public interest programs and entertainment.
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MARKETS
TV, radio and newspapers remind us daily of people's ability to contact the
farthest reaches of our planet in seconds. We hear about business meetings that
take place over the wires, on a large TV screen instead of in person. Increased
Internet use for commerce and communication drives us to reach for the things
that only a few years ago we read about in science fiction books. Constant
improvements in digital and cellular technology allow anyone to constantly "stay
connected." The mobile computer plays a significant role in this "brave new
world".
Based on recent statistics, the mobile computing devices market is
approximately $95 billion in annual revenue. Sales of laptop and notebook
computers represent a large portion of this market. However, the growth rate of
hand-held pen-based devices exceeds that of laptops and notebooks. Based on the
latest Frost and Sullivan studies, the total pen-tablets market, in which
Orasis(TM) competes, is several billion dollars and is growing at approximately
twenty five percent per year. We estimate that market may be growing even faster
than latest predictions.
Unlike several years ago, the pen-based computer market is more defined and
is ready for a product such as Orasis(TM). The total mobile market includes more
than sixty products that fall within the personal digital assistant category of
the pen-based market. These devices include electronic organizers, mobile fax
machines and electronic notepads. Most of these devices are palm-top size,
requiring either pen or keyboard input. In addition, there are approximately
twenty devices that would qualify as computers or pen tablets. Orasis(TM)
belongs in the latter category.
Until the introduction of Orasis(TM), pen-based devices were no match for
laptops. Processor speed, limited expandability and memory limitations of
hand-held computers made notebooks and laptops much more popular with the mobile
workforce. Orasis(TM) bridges the gap between notebook or laptop computers and
pen-based computers. Orasis(TM) added features and flexibility of also might
attract public attention, thereby expanding the overall category.
The set-top box is another device that will serve the desire to "stay
connected". The set-top box market is relatively new. According to International
Data Corporation, the worldwide installed base of set-top boxes was a mere 2.2
million units in 1998. It is expected to exceed 14.8 million units during 2000
and to grow to over 35.5 million units during 2002. We believe the market will
continue to expand as set-top box capabilities are refined and people increase
their desire to access television, telephone, Internet services for
communication, information and entertainment purposes.
SALES AND MARKETING
Orasis(TM) is a niche product. We target vertical markets to distribute
Orasis(TM). Initially, we hired six mobile industry experts, or channel
managers, to target various industries. Each channel manager was to find a
number of software solution providers for a particular industry and to partner
with them to offer a final electronic solution to the end user. They targeted
medical, government, sales field automation, transportation, utilities and
education industries. During 1998, approximately 60 VAR's signed Orasis(TM)
distribution agreements. During 1999, we changed our marketing strategy and
terminated all channel managers. Currently, all VAR relationships and sales
inquiries are handled internally by our sales and customer service personnel.
We are still defining our sales and marketing strategy for the set-top box.
Our immediate focus is to design a product meeting specifications under the
set-top box agreement signed in February. If we design a unit that satisfies
specifications under the agreement, we may capture sales of a minimum of 2.5
million set-top boxes for the proposed cable network. Unit shipments would begin
in the fourth quarter of 2000, with 200,000 units to be shipped by the end of
the year. Shipments of 125,000 units per quarter are required during 2001
through the beginning of 2005. After delivery of the first 1.2 million units,
the buyer may seek market pricing from sources other than us, but we have a
right of first refusal to continue production at any bona-fide market price
obtained. Based on these scheduled deliveries, and current pricing under the
agreement, total revenues generated under the agreement will exceed $500 million
if we provide all 2.5 million units.
COMPETITION
A dozen manufacturers including Epson, Fujitsu, IBM, Mitsubishi and Kalidor
produce "pen tablets". The list of competitors may be imposing, but we feel that
Orasis(TM) has advantages over the competition including flexibility,
adaptability and compactness. Based on the opinions of industry experts such as
Pen Computing magazine, units produced by these firms are less capable than
Orasis(TM). Such units are generally designed with a single processor and become
obsolete as soon as new processors or faster software is introduced. Also, due
to the fact that
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major components of Orasis(TM) are upgradable, the life expectancy of the
product is estimated to be 5 years. Over time, consumers' return on investment
of Orasis(TM) should be much higher than any existing computer.
Scientific Atlanta and General Instruments are among the companies
presently manufacturing set-top boxes. If we satisfy specifications under the
set-top box agreement, our set-top box will meet or exceed features available
from exiting units. Our multi-purpose set-top box, in conjunction with the wide
bandwidth infrastructure, will provide advanced Internet capabilities, as well
as a wide span of conveniences, including cost savings and many other benefits.
It will adapt to any of the existing communication standards and offer the
allocated bandwidth to users. Users will have access to more bandwidth than any
time in the past. They will be able to connect directly to the set-top box and
with the available bandwidth will be able to accommodate Web hosting, Web
browsing, email, eCommerce, voice/video conferencing and video on demand, very
economically. In addition, our unit will support both U.S. and European TV
viewing standards.
Our products, including Orasis(TM) and the set-top box, will gain market
acceptance only as long as they offer leading technology and features. Any time
a new product is introduced, there is a small window of opportunity before
clones are developed. Being a small company, we feel our strength is in our
flexibility to meet industry demands and to partner with solution providers to
jointly offer unique solutions for problems that customers encounter.
CUSTOMER DEPENDENCE
Our products have not yet achieved market acceptance and Orasis(TM) has
been sold only on a limited basis. Consequently, we are not presently dependent
on any one customer. If our set-top box satisfies set-top box agreement
specifications, we will be dependent upon the buyer for substantially all of our
sales, unless we achieve success in promoting Orasis(TM). In any event, we will
not receive any revenue under the set-top box agreement until 360 days following
delivery of acceptable units.
RESEARCH AND DEVELOPMENT
Due to our relatively small size, most of our product development was done
in cooperation with three contract engineering firms. Approximately $1,576,000
was spent on research and development in 1998 and approximately $510,000 more
was spent in 1999. We retained all rights and intellectual property acquired
during the development of Orasis(TM).
We are planning to continue research and development of electronic products
to complement Orasis(TM). In addition to peripheral devices such as office and
mobile docking station, we are planning to work on various scaled down,
higher-tech devices besides Orasis(TM).
We began research and development of set-top boxes during the third quarter
of 1999, in connection with negotiating the set-top box agreement. Costs
incurred at that time were not material.
PRODUCTION
Because the main components of Orasis(TM) are complex, the assembly of the
motherboard is out-sourced. SMT Unlimited, LLC supplies us with the ready
assembled and tested motherboards for final assembly. SMT Unlimited, LLC is
capable of producing hundreds of motherboards per day.
RMS assembles, tests and ships the final product to our customers. RMS
performs all manufacturing support for the product. With additional staffing,
RMS is capable of assembling 200 Orasis(TM) units per day.
We currently expect to assemble set-top boxes at our RMS facility. However,
we may decide later to use an outside manufacturer.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Component parts are obtained from suppliers around the world. Since the
development of Orasis(TM) commenced late in 1997 and throughout 1998, all
components used in the design are state of the art and are Year 2000 compliant.
Components such as the latest mobile Intel processors, color video controllers
and CACHE memory chips are in high demand. Such components are available in
short supply. However, management does not anticipate any delays in production.
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SOFTWARE LICENSING AGREEMENTS
We lease BIOS (basic input/output software) for Orasis(TM) from Phoenix
Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and licenses
proprietary software products for original equipment manufacturers and related
software for personal computers. A Master License Agreement was signed for the
right of distribution of Phoenix software. We pay $4 per unit sold under this
license.
We are a party to a Pen Products Original Equipment Manufacturing
Distribution License Agreement and Sub-license Agreement for Dedicated Systems
with Annabooks Software LLC ("Annabooks"), the supplier of products offered by
Microsoft Corporation ("Microsoft"). Microsoft is the third-party beneficiary
under these agreements. These agreements authorize us to install DOS, Windows
95, 98, 2000 and NT, and Windows for Pen, among others, on the computers that we
sell. We must pay Annabooks royalties for each unit sold, although quantity
discounts are available. We pay approximately $78 per license for each computer
we sell.
PATENTS, COPYRIGHTS AND TRADEMARKS
Because of rapid technological and design changes inherent to the computer
industry, we do not believe that, in general, patents and/or copyrights are an
effective means of protecting our interests. However, due to the unique
configuration of the Orasis(TM), we did patent its mechanical design and
processor upgradability concepts. We also expect to patent our set-top box
design following development. We attempt to maintain our proprietary rights by
trade secret protection and by the use of non-disclosure agreements. It is
possible that our products could be duplicated by competitors and duplication
and sale could therefore adversely affect our business. However, we believe that
the time spent by competitors engineering the product would be too long for the
rapidly changing computer industry.
In 1997, the Company applied for and received a trademark on the name
"Orasis."
ASSEMBLY CAPABILITY
Using automatic assembly equipment, we are capable of assembling large
quantities of electronic products through our subsidiary, RMS. The majority of
the work performed by RMS since its inception has been in a through-hole or
large component electronic assembly. Since June, 1997 we have spent more than
$750,000 to build a 5,000 square foot environmentally controlled room inside the
RMS facility and to acquire surface mount equipment. Surface mount assembly
equipment allows for high-speed/high-tech component placement on a printed
circuit board, a newer method of product assembly. Under our current strategy,
we expect to apply these contract-manufacturing capabilities our own products,
including assembly of Orasis(TM) units, set-top boxes and other products, which
we may develop in the future.
DESCRIPTION OF PROPERTY
Our executive offices consist of 7,300 square feet of office space and
2,700 square feet of warehouse space located at 800 E. Northwest Hwy, Suite 950,
Palatine, Illinois 60067. We pay approximately $12,000 per month to rent the
facilities. In December 1998, in conjunction with upgrading the facilities, we
signed a five-year lease extension. The lease called for increased rent, but
provided for reconstruction of facilities to better suit our needs. We believe
the space will be adequate for the foreseeable future.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050.
The facilities are leased from Enclave Corporation, a company that is owned by
Richard M. Schultz, past President of RMS. RMS occupies 53,000 square feet of
space, of which 7,000 square feet is for office space and 5,000 square feet is
surface mount portion of production. The lease has a five-year term starting on
June 6, 1997 with an optional extension for an additional five years. The rent
is approximately $14,000 per month. We believe the space will be adequate for
the foreseeable future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, present
principal occupation and employment history for the past five years for each of
our directors and executive officers, as of March 31, 2000.
Name Age Present Office
---- --- --------------
Andrew J. Kandalepas 48 Chairman of the Board of Directors
Chief Executive Officer
Christopher L. Geier 37 Executive Vice President
Harry L. Lukens, Jr. 49 Vice President and Chief Financial Officer
Jeffrey L. Goldberg 47 Secretary, Director
Gary E. Soiney 59 Director
Andrew Prokos 37 Director
Mr. Kandalepas became Chairman of the Board in February 1995. He was named CEO
and President in November of 1995. Mr. Kandalepas is the founder and President
of CADserv, an engineering services firm. He graduated from DeVry Institute in
1974 with a Bachelor's Degree in Electronics Engineering Technology. He then
served as a product engineer at GTE for two years. Mr. Kandalepas left GTE to
serve ten years as a supervisor of PCB design for Motorola prior to founding
CADserv in 1986.
Mr. Geier is Executive Vice President. He leads our overall organization,
including its subsidiary business. Prior to his appointment in April 1999, Mr.
Geier founded and managed several multimillion-dollar private corporations, as
well as a $100 million region of a large retail distribution company. He earned
an MBA from the University of Chicago Graduate School of Business and received a
Bachelor of Arts in Criminal Justice/Pre Law from Washington State University.
Mr. Lukens was appointed Vice President and Chief Financial Officer in May
2000. From 1998 until his appointment, he served as a personal asset manager for
an individual investor. From 1993 until 1998, Mr. Lukens was Vice President,
Treasurer and Chief Financial Officer of Deublin Company, a privately owned
international manufacturer. From 1972 until 1993, he was with Grant Thornton
LLC, serving as a partner from 1986 until 1993.
Mr. Goldberg has served as Secretary and as a Director since June of 1995.
He is a partner at FERS, an international accounting firm. He formerly served as
the President of Financial Consulting Group, LTD., a lawyer at the Chicago law
firm of Goldberg and Goodman, and prior to that, was a tax senior with Arthur
Andersen LLP. Mr. Goldberg is an attorney, CPA and certified financial planner.
Mr. Soiney has served as a Director since November of 1995. He graduated
from the University of Wisconsin in Milwaukee with a degree in Business
Administration. He is currently a 75% owner in Pension Design & Services, Inc.,
a Wisconsin corporation, which performs administrative services for qualified
pension plans to businesses primarily in the Mid-West.
Mr. Prokos has served as a Director since February 1995. He is also
Vice-President of CADserv and has served in this capacity since 1995. Mr. Prokos
is a graduate of DeVry Institute with an Associate Degree in Electronics.
All directors and executive officers are elected annually and hold office
until the next annual meeting of the stockholders or until their successors have
been elected and qualified.
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FAMILY RELATIONSHIP
Andrew Prokos is a cousin of Andrew Kandalepas.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any director or executive officer during the past five years.
INVOLVEMENT BY MANAGEMENT IN PUBLIC COMPANIES
None of our directors or executive officers are directors of any other
public companies.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have adopted a by-law provision which stipulates that we shall indemnify
any director or executive officer who was or is a party, or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, investigative or administrative, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him/her in connection with such action, suit or
proceeding, if he/she acted in good faith and in a manner he/she reasonably
believed to be in, or not opposed to, our best interest, had no reasonable cause
to believe his/her conduct was unlawful; provided, however, no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his/her duty to the company, unless, and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. These
indemnification provisions are not expected to alter the liability of directors
and executive officers under federal securities laws.
EXECUTIVE COMPENSATION
At the Board of Directors meeting held on December 29, 1998, the Board
established two committees, Audit and Compensation. SEC regulations mandate
disclosure of all compensation including salary, bonus and stock options, paid
to executive officers and directors that exceeds $100,000. No director or
executive officer was paid compensation exceeding $100,000 during 1997, 1998 or
1999. The table below sets forth the cash compensation paid to or accrued for
Andrew J. Kandalepas, Chairman of the Board, Chief Executive Officer and
President, for 1999, for services rendered in all capacities during the fiscal
years ended December 31, 1999, 1998 and 1997.
Annual Compensation
---------------------------------------
Other
Name and Annual
Principal Position Year Salary Bonus Compensation
---------------------------- ---- ------ ----- ------------
$ $ $
Andrew J. Kandalepas 1999 84,000 - 5,000
Chairman of the Board, Chief 1998 84,000 - 5,000
Executive Officer and 1997 84,000 - -
President
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CADserv, an engineering services company based in Schaumburg, Illinois, is
controlled by Andrew Kandalepas. It has contributed to the design, packaging and
manufacturing of our product lines and will likely continue in this capacity in
the future. We paid CADserv $140,192 in 1998.
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In 1999 we borrowed $286,000 from related entities including two members of
the Board of Directors. The loans accrued interest at 1% per month until
maturity. As of the date of this prospectus, all loans including interest have
been paid off.
RMS facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, former President of RMS. We paid $179,684 of rent and
$24,150 of real estate taxes for the property lease in 1999 and $165,660 of rent
and $22,500 of real estate taxes for the property lease for 1998.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding shares owned
beneficially as of June 2, 2000, by (i) each of our directors and executive
officers, (ii) all directors and executive officers as a group, and (iii) each
person that beneficially own more than 5% of our shares:
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Position Beneficial
Shares Owned Percent of Class
<S> <C> <C> <C>
Andrew J. Kandalepas Chairman, Chief 3,826,837(1) 6.6%
Executive Officer & President
Christopher L. Geier Executive Vice President 500,000(1) 0.9%
Harry L. Lukens, Jr. Chief Financial Officer 80,000(2) 0.1%
Jeffrey L. Goldberg Secretary, Director 497,800(3) 0.9%
Gary E. Soiney Director 50,000(3) 0.1%
Andrew Prokos Director 314,000(3) 0.5%
Officers and Directors and
5% Beneficial Owners (as a group) 5,268,637(4) 9.1%
</TABLE>
(1) Includes options to purchase 500,000 shares under immediately exercisable
options.
(2) Includes options to purchase 80,000 shares under immediately exercisable
options.
(3) Includes options to purchase 50,000 shares under immediately exercisable
options.
(4) Includes options to purchase 1,230,000 shares under immediately
exercisable options.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.01 par value preferred stock. As
of June 2, 2000 there were 57,604,853 shares of common stock outstanding and
beneficially owned by approximately 5,500 beneficial stockholders, and no shares
of preferred stock were outstanding. The following summary is qualified in its
entirety by reference to our certificate of incorporation, which is available
upon request.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefore (see
"Market Price of Common Stock" and "Dividend Policy"). In the event of a
liquidation, dissolution or winding up of the company, holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no right to convert their common stock into
any other securities and have no cumulative voting rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.
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PREFERRED STOCK
The preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.
We have no present plans to issue preferred stock. However, the issuance of any
such preferred stock could affect the rights of the holders of common stock and
reduce the value of the common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge
with or sell our assets to a third party, thereby preserving control of the
company by present owners.
WARRANTS AND OPTIONS
As of June 2, 2000 warrants to purchase 6,082,963 shares of common stock
were issued and outstanding in the hands of approximately 30 investors. The
warrants are convertible at any time. The strike prices of these warrants range
from $0.20 to $2.00. The warrants expire between three and five years from the
date of issuance. The warrants include a change of form provision in them so
that if a change in the form of the common stock occurs due to stock splits,
stock dividends, or mergers, the holders are entitled to receive a pro-rata
increase of shares at a discounted price. However, the holders of the warrants
do not have any voting rights and are not entitled to receive any cash or
property dividends declared by the Board of Directors until they convert the
warrants into common shares. If warrants are exercised, the common stockholders'
proportionate share of the company will be diluted. If such warrants are not
exercised within the allotted time, they expire.
As of June 2, 2000 options to purchase 3,960,500 shares of common stock
were issued and outstanding in the hands of certain consultants resulting from
funding raised by such consultants. These options are exercisable at any time.
Options for 18,000 shares are exercisable at $1.00 per share and the remainder
is exercisable at $10.00 per share. These options expire between three and five
years from the date of issuance. Additionally, there are 2,321,000 options
issued and outstanding in the hands of more than twenty employees and former
employees. These options are exercisable at any time for common stock at prices
ranging from $0.50 to $1.00 per share. These options expire between three and
five years from the date of issuance. If such options are exercised, the common
stockholders' proportionate share of the company will be diluted. If such
options are not exercised within the allotted time, they expire.
On April 12, 2000, we issued to Ladenburg Thalmann warrants to purchase
250,000 shares at an exercise price of $5.481. The warrants were issued in
connection with the Techrich common stock purchase agreement. Upon each draw,
under the common stock purchase agreement, we also must issue to Techrich
warrants to purchase additional common shares in an amount equal to 7% of the
shares issued. Each warrant shall have a three-year term and an exercise price
equal to 120% of the daily volume-weighted average of our shares on the trading
day preceding the draw.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar is American Stock Transfer and Trust
Company, 40 Wall Street, New York, NY 10005 (212) 936-5100.
COMMON STOCK PURCHASE AGREEMENT
OVERVIEW
We signed a common stock purchase agreement with Techrich International
Limited, a British Virgin Islands corporation, on April 12, 2000, for the future
issuance and purchase of shares of our common stock and warrants. The
transaction closed on April 26, 2000.
Techrich has committed to provide us up to $100 million as we request it
over a 18 month period, in return for common stock and warrants that we issue to
Techrich. Once every 22 trading days, we may request a draw of up to $10,000,000
of that money, subject to a maximum of 18 draws. The maximum amount we actually
can draw down upon each request will be determined by the volume-weighted
average daily price of our common stock for the 22 trading days prior to our
request and the average trading volume for the 45 trading days prior to our
request. Each
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draw down must be for at least $250,000. Use of a 22 day trading day average was
negotiated to reduce the impact of market price fluctuations over any calendar
month, which generally includes 22 trading days.
At the end of a 22 day trading period following the drawdown request, the
actual drawdown amount is determined based on the volume-weighted average stock
price during that 22 day period. We then use the formulas in the common stock
purchase agreement to determine the number of shares we will issue as described
in detail in the following pages. We are under no obligation to request a draw
for any period.
The per share dollar amount Techrich pays for our common stock for each
drawdown includes a 7% discount to the average daily market price of our common
stock for the 22-day period after our drawdown request, weighted by trading
volume. We will receive the amount of the drawdown less an escrow agent fee of
$1,500 and a 3% placement fee payable to the placement agent, Ladenburg
Thalmann, which introduced Techrich to us. Ladenburg Thalmann is not obligated
to purchase any of our shares, but as an additional placement fee, we have
issued to Ladenburg Thalmann warrants to purchase 250,000 shares of our common
stock at an exercise price of $5.481. The common stock issuable upon exercise of
those warrants is included in the registration statement of which this
prospectus is a part.
Based on a review of our trading volume and stock price history and the
number of drawdowns we estimate making, we are registering 6,000,000 shares of
common stock for possible issuance under the common stock purchase agreement and
250,000 shares underlying the warrants for common shares delivered to Techrich
and Ladenburg Thalmann.
In addition, the common stock purchase agreement does not permit us to draw
down funds if the issuance of shares of common stock to Techrich pursuant to the
drawdown would result in Techrich owning more than 9.9% of our outstanding
common stock on the drawdown exercise date.
THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES
We may request a drawdown by faxing a drawdown notice to Techrich, stating
the amount of the drawdown we wish to exercise and the minimum threshold price,
if any, at which we are willing to sell the shares. A pricing committee
consisting of two of our directors sets the threshold price by determining the
price below which we are unwilling to sell our shares.
AMOUNT OF THE DRAW
No draw can exceed the lesser of $10,000,000 and the capped amount that is
derived from the following formula:
- Average daily trading volume for the 45 trading days immediately
prior to the date we give notice of the drawdown, multiplied
by 22;
multiplied by
- The average of the volume-weighted average daily prices for the
22 trading days immediately prior to the date we give notice
of the drawdown;
multiplied by
- 20%.
The lesser of our draw request and the capped amount is reduced by 1/22 for
every day in the 22 trading days after our drawdown request that the
volume-weighted average daily price for a trading day is below the threshold
price set by us in the request. Thus, if the daily price for a day is below the
threshold price we will not issue any shares and Techrich will not purchase any
shares for that day. We cannot make another drawdown request until expiration of
the 22 trading days that follow a drawdown request we have already made.
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<PAGE> 28
NUMBER OF SHARES
The 22 trading days immediately following the drawdown notice are also used
to determine the number of shares we will issue in return for the money provided
by Techrich, and thus the price per share Techrich will pay for our shares.
To determine the number of shares of common stock we must issue in
connection with a drawdown, take 1/22 of the drawdown amount determined by the
formulas above, and for each of the 22 trading days immediately following the
date we give notice of the drawdown, divide it by 93% of the average daily
trading price of our common stock for that day. The 93% accounts for Techrich's
7% discount. The sum of these 22 daily calculations produces the number of
common shares we will issue, unless the volume-weighted average daily price for
any given trading day is below the threshold amount, in which case that day is
ignored in the calculation. The price per share Techrich ultimately pays is
determined by dividing the final drawdown amount by the number of shares we
issue to Techrich.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of the drawdown amount and
the number of shares we would issue to Techrich in connection with that drawdown
based on hypothetical assumptions.
Sample drawdown amount calculation.
We provide a drawdown notice to Techrich that we wish to make a drawdown.
Assume that our pricing committee of the board of directors has specified in the
notice a threshold price of $3.75, below which we will not sell any shares to
Techrich during this drawdown period.
Assume the average daily trading volume for the 45 trading days prior to
our drawdown notice is 400,000 and that the average of the volume-weighted
average daily prices of our common stock for the 22 trading days prior to the
notice is $4.00. You can apply the formula to these hypothetical numbers as
follows:
- the average trading volume for the 45 trading days prior to
our drawdown notice (400,000) multiplied by 22, equals 8,800,000
multiplied by
- the average of the volume-weighted average daily prices of our
common stock for the 22 trading days prior to the notice ($4.00)
multiplied by
- 20%
The maximum amount we can draw down under the formula is therefore capped
at $7,040,000, subject to further adjustments if the average daily price of our
common stock for any of the 22 trading days following the drawdown notice is
below the threshold price we set of $3.75. For example, if the average daily
price of our common stock is below $3.75 on four of those 22 days, the
$7,040,000 would be reduced by 1/22 for each of those days and our draw down
amount would be 18/22 of $7,040,000, or $5,760,000.
Sample Calculation of Number of Shares
Assume that we have made a drawdown request with a threshold price of
$3.75. Assume the maximum amount we can draw down is capped at $7,040,000 based
on the formula above. Also, assume that the volume-weighted average daily price
for our common stock is as set forth in the table on the next page.
The number of shares to be issued based on any trading day during the
drawdown period is calculated from the formula:
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- 1/22 of the drawdown amount of $7,040,000
divided by
- 93% of the volume weighted average daily price.
For example, for the first trading day in the example in the table below,
the calculation is as follows: 1/22 of $7,040,000 is $320,000. Divide $320,000
by 93% of the average daily price for that day of $4.375 per share, to get
78,648 shares. Perform this calculation for each of the 22 measuring days,
excluding any days on which the average daily price is below the $3.75 threshold
price, and add the results to determine the number of shares to be issued. In
the table below, there are four days, which must be excluded: days 19, 20, 21
and 22.
After excluding the days that are below the threshold price, the amount of
our drawdown in this example would be $5,760,000 and the total number of shares
we would issue to Techrich for this drawdown request would be 1,345,214, so long
as those shares would not cause Techrich to beneficially own more than 9.9% of
our then outstanding common stock. Techrich would thus pay $4.28 per share for
these shares.
<TABLE>
<CAPTION>
Number of Shares of Common
Volume-Weighted Average 1/22 of Requested Draw Stock to be Issued for the
Trading Day Daily Stock Price* Down Amount Trading Day
----------- ----------------------- ---------------------- --------------------------
<S> <C> <C> <C>
1 $4.3750 $320,000.00 78,648
2 4.3750 320,000.00 78,648
3 4.5000 320,000.00 76,464
4 4.6250 320,000.00 74,397
5 5.0000 320,000.00 68,817
6 4.6250 320,000.00 74,397
7 4.7500 320,000.00 72,439
8 4.7500 320,000.00 72,439
9 3.9375 320,000.00 87,387
10 4.0000 320,000.00 86,022
11 4.0156 320,000.00 85,687
12 4.6875 320,000.00 73,405
13 4.8750 320,000.00 70,582
14 4.5625 320,000.00 75,416
15 4.6250 320,000.00 74,397
16 5.2500 320,000.00 65,540
17 5.5000 320,000.00 62,561
18 5.0625 320,000.00 67,968
19 3.6875 ** **
20 2.7500 ** **
21 2.9062 ** **
22 3.1875 ** **
------------- ---------
Total $5,760,000.00 1,345,214
============= =========
</TABLE>
* The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the share
prices of our common stock.
** Excluded because the average daily price is below the threshold specified
in our hypothetical draw down notice.
We would receive the amount of our drawdown ($5,760,000.00) less a 3% cash
fee paid to the placement agent of $172,800.00, less a $1,500.00 escrow fee, for
net proceeds to us of $5,585,700.00. The delivery of the requisite
29
<PAGE> 30
number of shares and payment of the draw will take place through an escrow
agent, Epstein, Becker & Green, P.C. of New York.
NECESSARY CONDITIONS BEFORE TECHRICH IS OBLIGATED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Techrich is obligated to
purchase the common shares that we wish to sell from time to time:
- A registration statement for the shares must be declared effective by the
Securities and Exchange Commission and must remain effective and available
as of the draw down settlement date for making resales of the common shares
purchased by Techrich;
- There can be no material adverse change in our business, operations,
properties, prospects or financial condition;
- We must not have merged or consolidated with or into another company or
transferred all or substantially all of our assets to another company,
unless the acquiring company has agreed to honor the common stock purchase
agreement;
- No statute, rule, regulation, executive order, decree, ruling or injunction
may be in effect which prohibits consummation of the transactions
contemplated by the stock purchase agreement; and
- No litigation or proceeding nor any investigation by any governmental
authority can be pending or threatened against us or Techrich seeking to
restrain, prevent or change the transactions contemplated by the stock
purchase agreement or seeking damages in connection with such transactions.
On each drawdown settlement date for the sale of common shares, we must
deliver an opinion from our counsel about these matters.
RESTRICTIONS ON FUTURE FINANCINGS
The common stock purchase agreement limits our ability to raise money by
selling our securities for cash at a discount to the market price until the
earlier of 18 months from the effective date of the registration statement of
which this prospectus is a part or the date which is 60 days after Techrich has
purchased the maximum of $100,000,000 worth of common stock from us under the
common stock purchase agreement.
There are exceptions to this limitation for securities sold in the
following situations:
- in a registered public offering which is underwritten by one or more
established investment banks;
- in one or more private placements where the purchasers do not have
registration rights;
- pursuant to any presently existing or future employee benefit plan which
plan has been or is approved by the our stockholders;
- pursuant to any compensatory plan for a full-time employee or key
consultant;
- in connection with a strategic partnership or other business transaction,
the principal purpose of which is not simply to raise money; and
- a transaction to which Techrich gives its written approval.
COSTS OF CLOSING THE TRANSACTION
At the closing of the transaction on April 26, 2000, we delivered the
requisite opinion of counsel to Techrich and paid the escrow agent, Epstein
Becker & Green P.C., $20,000 for non-accountable expenses of Ladenburg Thalmann.
Ladenburg Thalmann also received warrants for a total of 250,000 shares of our
common stock with an exercise price equal to the volume-weighted average price
of our common stock as reported on April 26, 2000 or
30
<PAGE> 31
$5.481 per share. Ladenburg Thalmann is not obligated to purchase any of our
shares pursuant to the warrant.
TERMINATION OF THE COMMON STOCK PURCHASE AGREEMENT
Techrich may terminate the equity draw down facility under the common stock
purchase agreement if any of the following events occur:
- We suffer a material adverse change in our business, operations,
properties, or financial condition;
- Our common shares are delisted from any market or exchange unless such
delisting is in connection with the listing of such shares on a comparable
stock exchange in the United States;
- We file for protection from creditors;
- We complete a financing that violates the limitations on financings
contained in the common stock purchase agreement; or
- Our registration statement is not effective by September 30, 2000.
INDEMNIFICATION OF TECHRICH
Techrich is entitled to customary indemnification from us for any losses or
liabilities suffered by it based upon material misstatements or omissions from
the registration statement and the prospectus, except as they relate to
information supplied by Techrich to us for inclusion in the registration
statement and prospectus.
AGREEMENT WITH LADENBURG THALMANN
Our placement agreement with Ladenburg Thalmann restricts us from raising
investment capital during the term of the common stock purchase agreement except
pursuant to the common stock purchase agreement. If we need capital but are
unable to drawdown under the common stock purchase agreement for any reason, we
are required to separately negotiate with Ladenburg Thalmann and Techrich to
lift those restrictions so we can obtain the capital from other sources. Our
common stock purchase agreement with Techrich also limits our ability to sell
our securities for cash at a discount to the market price for 18 months from the
effective date of the registration statement of which this prospectus is a part.
PLAN OF DISTRIBUTION
We are registering the following securities:
- 15,332,560 shares of common stock owned by certain selling stockholders.
The shares were issued to the stockholders in private transactions.
- An additional 11,958,963 shares of common stock for issuance upon
exercise of 6,082,963 warrants issued to certain selling stockholders
(including 250,000 warrants issued to Ladenburg Thalmann), and
5,876,000 options issued to employees and consultants, in private
transactions.
- An additional 6,000,000 shares of common stock for issuance under a
$100,000,000 equity line with an institutional investor.
The selling stockholders' may sell their 15,332,560 shares from time to
time at prices and at terms prevailing at the time of sale.
The selling stockholders may exercise their 6,082,963 warrants and the
employees and consultants may exercise their 5,876,000 options from time to time
prior to expiration. We will receive $44,732,367 from the exercise of such
warrants and options if all are exercised prior to expiration. We will receive
none of the proceeds of any subsequent sale of shares issued under the warrants
or options.
31
<PAGE> 32
We are registering 6,000,000 shares and 420,000 shares underlying warrants
to be issued under the $100,000,000, assuming a share price of $5.00. We will
receive $30,000,000 (less 7% discount), from the issuance of 6,000,000 shares
under the line and $2,520,000 from shares underlying the warrants if they are
all exercised prior to expiration, assuming a current share price of $5.00.
Techrich and Ladenburg Thalmann are offering the common shares for their
respective account as statutory underwriter, and not for our account. We will
not receive any proceeds from the sale of common shares by either Techrich or
Ladenburg Thalmann. Techrich may be offering for sale up to 6,000,000 common
shares acquired by it pursuant to the terms of the common stock purchase
agreement. Techrich and Ladenburg Thalmann have agreed to be named as a
statutory underwriter within the meaning of the Securities Act of 1933 in
connection with such sales of common shares and will be acting as an underwriter
in their restrictive resales of the common shares under this prospectus. Neither
Techrich nor Ladenburg Thalmann have, prior to any sales, agreed not to effect
any offers or sales of the common shares in any manner other than as specified
in the prospectus and not to purchase or induce others to purchase common shares
in violation of any applicable state and federal securities laws, rules and
regulations.
On June 2, 2000, we had 57,604,853 shares of common stock outstanding. The
following table shows the number of shares we would issue to Techrich, the price
it would pay for those shares and the percentage of shares owned by Techrich,
assuming that Techrich purchases the maximum amount of securities allowable
under the common stock purchase agreement, based on the current trading price of
$5.00 per share.
Purchase Number %
Price of Shares of shares(e)
-------- ---------- ------------
$5.00(a) 20,000,000 25.8%
3.75(b) 26,666,666 31.0%
2.50(c) 40,000,000 41.0%
1.25(d) 80,000,000 58.1%
(a) Represents trading price at close of business on June 14, 2000.
(b) Represents a 25% discount from the trading price at close of
business on June 2, 2000.
(c) Represents a 50% discount from the trading price at close of
business on June 2, 2000.
(d) Represents a 75% discount from the trading price at close of
business on June 2, 2000.
(e) Common stock purchase agreement limits Techrich's ownership to
9.9% of outstanding shares.
To permit Techrich to resell the common shares issued to it under the stock
purchase agreement, we agreed to register those shares and to maintain that
registration. To that end, we have agreed with Techrich that we will prepare and
file such amendments and supplements to the registration statement and the
prospectus as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated thereunder, to keep it effective until the
earliest of any of the following dates:
- the date after which all of the common shares held by Techrich or its
transferees that are covered by the registration statement of which this
prospectus is a part have been sold under the provisions of Rule 144 under
the Securities Act of 1933;
- the date after which all of the common shares held by Techrich or its
transferees that are covered by the registration statement have been
transferred to persons who may trade such shares without restriction under
the Securities Act of 1933 and we have delivered new certificates or other
evidences of ownership of such common shares without any restrictive
legend;
- the date after which all of the common shares held by Techrich or its
transferees that are covered by the registration statement have been sold
by Techrich or its transferees pursuant to such registration statement;
32
<PAGE> 33
- the date after which all of the common shares held by Techrich or its
transferees that are covered by the registration statement may be sold, in
the opinion of our counsel, under Rule 144 under the Securities Act of 1933
irrespective of any applicable volume limitations;
- the date after which all of the common shares held by Techrich or its
transferees that are covered by the registration statement may be sold, in
the opinion of our counsel, without any time, volume or manner limitations
under Rule 144(k) or similar provision then in effect under the Securities
Act of 1933; or
- the date after which none of the common shares held by Techrich that are
covered by the registration statement are or may become issued and
outstanding.
Shares of common stock offered through this prospectus may be sold from
time to time by Techrich, Ladenburg Thalmann, the selling stockholders,
employees and consultants, or by their pledgees, donees, transferees or other
successors in interest. We will supplement this prospectus to disclose the names
of any pledgees, donees, transferees or other successors in interest that intend
to offer common stock through this prospectus.
Sales may be made on the over-the-counter market or otherwise at prices and
at terms then prevailing or at prices related to the then current market price,
or in negotiated private transactions, or in a combination of these methods. The
selling stockholders, employees and consultants will act independently of us in
making decisions with respect to the form, timing, manner and size of each sale.
We have been informed by the selling stockholders, employees and consultants
that there are no existing arrangements between any selling stockholder,
employee or consultant and any other person, broker, dealer, underwriter or
agent relating to the sale or distribution of shares of common stock which may
be sold by selling stockholders, employees or consultants through this
prospectus. Selling stockholders, employees and consultants may be deemed
underwriters in connection with resales of their shares.
The common shares may be sold in one or more of the following manners:
- a block trade in which the broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer for its account under this prospectus; or
- ordinary brokerage transactions and transactions in which the broker
solicits purchases.
In effecting sales, brokers or dealers engaged by the selling stockholders,
employees and consultants may arrange for other brokers or dealers to
participate. Except as disclosed in a supplement to this prospectus, no
broker-dealer will be paid more than a customary brokerage commission in
connection with any sale of the common shares. Brokers or dealers may receive
commissions, discounts or other concessions from the selling stockholders,
employees or consultants in amounts to be negotiated immediately prior to the
sale. The compensation to a particular broker-dealer may be in excess of
customary commissions. Profits on any resale of the common shares as a principal
by such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933. Any broker-dealer participating in such transactions as agent may
receive commissions from the selling stockholders (and, if they act as agent for
the purchaser of such common shares, from such purchaser).
Broker-dealers may agree with the selling stockholders, employees and
consultants to sell a specified number of common shares at a stipulated price
per share, and, to the extent a broker dealer is unable to do so acting as
agent, to purchase as principal any unsold common shares at a price required to
fulfill the broker-dealer commitment to the selling stockholders, employees or
consultants. Broker-dealers who acquire common shares as principal may
thereafter resell such common shares from time to time in transactions (which
may involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
common shares commissions computed as described above. Brokers or dealers who
acquire common shares as principal and any other participating brokers or
dealers may be deemed to be underwriters in connection with resales of the
common shares.
33
<PAGE> 34
In addition, any common shares covered by this prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part.
Techrich and Ladenburg Thalmann will each be subject to the applicable
provisions of the Exchange Act, including without limitation, Rule 10b-5
thereunder. Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the common shares may not simultaneously
engage in market making activities with respect to such securities for a period
beginning when such person becomes a distribution participant and ending upon
such person's completion of participation in a distribution, including
stabilization activities in the common shares to effect covering transactions,
to impose penalty bids or to effect passive market making bids. In addition, in
connection with the transactions in the common shares, Techrich, Ladenburg
Thalmann and we will be subject to applicable provisions of the Exchange Act and
the rules and regulations under that Act, including, without limitation, the
rules set forth above. These restrictions may affect the marketability of the
common shares.
The selling stockholders, employees and consultants will pay all
commissions and their own expenses, if any, associated with the sale of their
common shares, other than the expenses associated with preparing this prospectus
and the registration statement of which it is a part.
The price at which we will issue the common shares to Techrich under the
stock purchase agreement will be 93% of the volume-weighted average daily price
traded on the over-the-counter market, for each day in the pricing period with
respect to each drawdown request. Assuming we issue all 6,000,000 shares
registered for issuance under the common stock purchase agreement utilizing 10
drawdowns, we will pay underwriting compensation to and expenses for Techrich,
and other offering expenses, as follows:
Underwriting Compensation and Expenses
Per Share Total
--------- -------------
Discount to Techrich (7%) $0.35 $2,100,000.00
Expenses payable on behalf of Techrich:
Escrow Fees 0.00 15,000.00
Estimated offering expenses:
Placement agent fees (a) 0.15 900,000.00
SEC filing fee 0.00 14,700.00
----- -------------
Total $0.65 $3,029,700.00
===== =============
(a) In addition to the placement agent fees, we also issued to the
placement agent a warrant to purchase 250,000 shares of our common
stock at $5.481 per share as consideration for placement services.
The warrant expires on April 26, 2003.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Techrich to enable it to sell the common
stock it purchases under the common stock purchase agreement. In connection with
any such registration, we will have no obligation -
- to assist or cooperate with Techrich in the offering or disposition of
such shares;
34
<PAGE> 35
- to indemnify or hold harmless the holders of any such shares (other than
Techrich) or any underwriter designated by such holders;
- to obtain a commitment from an underwriter relative to the sale of any
such shares; or
- to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so under our registration rights agreement with Techrich, one or
more post-effective amendments to the registration statement of which this
prospectus is a part to describe any material information with respect to the
plan of distribution not previously disclosed in this prospectus or any material
change to such information in this prospectus. This obligation may include, to
the extent required under the Securities Act of 1933, that a supplemental
prospectus be filed, disclosing
- the name of any broker-dealers;
- the number of common shares involved;
- the price at which the common shares are to be sold;
- the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
- any other facts material to the transaction.
Our registration rights agreement with Techrich permits us to restrict the
resale of the shares Techrich has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Techrich for more than 30 consecutive days and our stock price declines during
the restriction period, we are required to pay to Techrich cash to compensate
Techrich for its inability to sell shares during the restriction period. The
amount we would be required to pay would be the difference between our stock
price on the first day of the restriction period and the last day of the
restriction period, for each share held by Techrich during the restriction
period that has been purchased under the common stock purchase agreement.
SELLING STOCKHOLDERS
The selling stockholders', employees' and consultants' shares were issued
in accordance with private placements. The shares are being registered to remove
their restricted status under federal securities law. Although the selling
stockholders, employees and consultants have not advised us that they currently
intend to sell shares pursuant to this registration, they may choose to sell all
or a portion of the shares from time to time in the over-the-counter market or
otherwise at prices and terms then prevailing or at prices related to the
current market price, or negotiated transactions. The selling stockholders
consist of 139 investors, each of whom was represented as an accredited investor
at the time of subscription for shares, and none of whom who are or have been
affiliates of the company or who hold more than 5% of the outstanding shares.
35
<PAGE> 36
<TABLE>
<CAPTION>
Beneficially
Beneficially Owned Owned Registered Shares
Shares Beneficially Shares to be Shares Beneficially Owned
Owned Registered to be Sold After Registration
Name Number % Number % Number Number %
---- -------- ---- ---------- ---- ----------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Techrich International Limited 6,000,000 9.4% 6,000,000 9.4% 0 6,000,000 9.4%
Kandalepas, Andrew / Self
Declaration of Trust 1,335,351 2.1% 1,335,351 2.1% 0 1,335,351 2.1%
Crescent International Limited 1,048,951 1.7% 1,048,951 1.7% 0 1,048,951 1.7%
Marinis Loukas Trust 927,500 1.5% 927,500 1.5% 0 927,500 1.5%
Schlapkpohl, Dan 862,858 1.4% 862,858 1.4% 0 862,858 1.4%
Zeedyk, Paul 664,933 1.0% 664,933 1.0% 0 664,933 1.0%
Senglaub, Jeffrey 549,999 0.9% 549,999 0.9% 0 549,999 0.9%
Miller, Ryan 500,000 0.8% 500,000 0.8% 0 500,000 0.8%
Bulfon S.A. 480,000 0.8% 480,000 0.8% 0 480,000 0.8%
Invictus Trust DTD
3-28-1996/Revocable Living
Trust/Samuel Craig Wilson TTEE
465,493 0.7% 465,493 0.7% 0 465,493 0.7%
Klose, Clifford F. / IRA 400,000 0.6% 400,000 0.6% 0 400,000 0.6%
Loukas, Koula 400,000 0.6% 400,000 0.6% 0 400,000 0.6%
FOX Investments Limited 358,540 0.6% 358,540 0.6% 0 358,540 0.6%
Lekkos, Jim 350,000 0.6% 350,000 0.6% 0 350,000 0.6%
Arthur, Kevin / Arthur, Lonnie
JTWROS 341,625 0.5% 341,625 0.5% 0 341,625 0.5%
Senglaub, Jeffrey W. TR 309,825 0.5% 309,825 0.5% 0 309,825 0.5%
Jones, Rick 308,000 0.5% 308,000 0.5% 0 308,000 0.5%
Fegen, Nick 300,000 0.5% 300,000 0.5% 0 300,000 0.5%
Curry, David 276,000 0.4% 276,000 0.4% 0 276,000 0.4%
DeVito, Mark 250,000 0.4% 250,000 0.4% 0 250,000 0.4%
Dimitropoulos, Angelo 214,600 0.3% 214,600 0.3% 0 214,600 0.3%
Smith, Brian 207,142 0.3% 207,142 0.3% 0 207,142 0.3%
Loukas, Georgia 200,000 0.3% 200,000 0.3% 0 200,000 0.3%
Loukas, Pat 200,000 0.3% 200,000 0.3% 0 200,000 0.3%
Loukas, Tom 200,000 0.3% 200,000 0.3% 0 200,000 0.3%
Prokos, Andrew 200,000 0.3% 200,000 0.3% 0 200,000 0.3%
Lemberger, Joe 170,000 0.3% 170,000 0.3% 0 170,000 0.3%
Executive Pension Design 152,850 0.2% 152,850 0.2% 0 152,850 0.2%
Sigmatron International, Inc. 144,243 0.2% 144,243 0.2% 0 144,243 0.2%
Klose, Clifford F. TTEE/Marjorie
J. Klose TTEE/Clifford F.
Klose & Marjorie J. Klose
Trust DTD10/21/88 142,000 0.2% 142,000 0.2% 0 142,000 0.2%
Bright Star LP 125,000 0.2% 125,000 0.2% 0 125,000 0.2%
Delis, Steve 125,000 0.2% 125,000 0.2% 0 125,000 0.2%
Anderson Living Trust DTD
5/22/98/ Robert W. &
Elizabeth Anderson, TTEE 123,050 0.2% 123,050 0.2% 0 123,050 0.2%
Kolb, Jeffrey D / Kolb, Diana
JTWROS 121,000 0.2% 121,000 0.2% 0 121,000 0.2%
Thomas, George 120,000 0.2% 120,000 0.2% 0 120,000 0.2%
Patriotes Fund 113,000 0.2% 113,000 0.2% 0 113,000 0.2%
Mpitsos, George Karen Mpitsos
JTWROS 105,263 0.2% 105,263 0.2% 0 105,263 0.2%
ASIC/ADI Designs, Inc. 100,000 0.2% 100,000 0.2% 0 100,000 0.2%
Johnson, Vincent L./Johnson,
Megan K. JTWROS 100,000 0.2% 100,000 0.2% 0 100,000 0.2%
Nord, Clint 100,000 0.2% 100,000 0.2% 0 100,000 0.2%
Johnson, Dwayne A. 75,000 0.1% 75,000 0.1% 0 75,000 0.1%
Sillery, Kevin L. 71,428 0.1% 71,428 0.1% 0 71,428 0.1%
Thomas, Terry 63,035 0.1% 63,035 0.1% 0 63,035 0.1%
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Cohen, Shirley W. Living Trust
Dated 7/11/77 62,500 0.1% 62,500 0.1% 0 62,500 0.1%
Jefferson Current Electric Inc. /
Pension Plan 60,000 0.1% 60,000 0.1% 0 60,000 0.1%
Notaro, Stephen 60,000 0.1% 60,000 0.1% 0 60,000 0.1%
Candice, Robert P. / Candice,
Denise JTWROS 57,619 0.1% 57,619 0.1% 0 57,619 0.1%
Cleveland, Todd M. 57,143 0.1% 57,143 0.1% 0 57,143 0.1%
K & L Trust 54,536 0.1% 54,536 0.1% 0 54,536 0.1%
Gornet, Matthew / Ratts, Valerie
JTWROS 53,191 0.1% 53,191 0.1% 0 53,191 0.1%
Lux, Paul S./ Lux, Leslie JTWROS
53,191 0.1% 53,191 0.1% 0 53,191 0.1%
Martin, Dr. Jeffrey / Martin Ann
JTWROS 53,191 0.1% 53,191 0.1% 0 53,191 0.1%
Dietrich, Gary 50,128 0.1% 50,128 0.1% 0 50,128 0.1%
Mpitsos, Flora 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Nord, Curt 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Nothum, J. Glenn 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Senglaub, James 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Ellis, Ronald M. / Ellis, Pamela
L. JTWROS 48,037 0.1% 48,037 0.1% 0 48,037 0.1%
Schubert, Brian 48,000 0.1% 48,000 0.1% 0 48,000 0.1%
Conti, Dr. Mary W. / Salvatore
Conti MD JTWROS 47,750 0.1% 47,750 0.1% 0 47,750 0.1%
Senglaub, Michael L. / Senglaub,
Doris A. JTWROS 45,000 0.1% 45,000 0.1% 0 45,000 0.1%
Shack, Donald 42,983 0.1% 42,983 0.1% 0 42,983 0.1%
Augustine Fund, LP 41,413 0.1% 41,413 0.1% 0 41,413 0.1%
Mahoney, Sharon IRA 41,063 0.1% 41,063 0.1% 0 41,063 0.1%
Mahoney, Richard IRA 41,062 0.1% 41,062 0.1% 0 41,062 0.1%
Furher, Phyllis Living Trust 38,461 0.1% 38,461 0.1% 0 38,461 0.1%
Keltner, Richard / Keltner,
Patricia JTWROS 34,285 0.1% 34,285 0.1% 0 34,285 0.1%
Anderson, Robert IRA 31,250 0.0% 31,250 0.0% 0 31,250 0.0%
Dralle, Gregory / Dralle, Karen
JTWROS 31,000 0.0% 31,000 0.0% 0 31,000 0.0%
Jefferson Current Electric Inc. /
Profit Sharing Plan 30,000 0.0% 30,000 0.0% 0 30,000 0.0%
Sanfilippo, Joseph B. 28,960 0.0% 28,960 0.0% 0 28,960 0.0%
Hoff, Lynn 26,042 0.0% 26,042 0.0% 0 26,042 0.0%
Fitts, John P. 25,000 0.0% 25,000 0.0% 0 25,000 0.0%
Gundaker, Gordon 25,000 0.0% 25,000 0.0% 0 25,000 0.0%
Johnson, Curtis L. / Johnson,
Jacqueline JTWROS 25,000 0.0% 25,000 0.0% 0 25,000 0.0%
Singer, Craig B 25,000 0.0% 25,000 0.0% 0 25,000 0.0%
Watson, John / Gloria Ortiz JTWROS
25,000 0.0% 25,000 0.0% 0 25,000 0.0%
Jenkins, John T. / Jenkins,
Jacquelyn JTWROS 24,776 0.0% 24,776 0.0% 0 24,776 0.0%
McGuire, Daniel R. 23,676 0.0% 23,676 0.0% 0 23,676 0.0%
Amos, Michael G. / Amos, Tracy O.
JTWROS 23,450 0.0% 23,450 0.0% 0 23,450 0.0%
Robertson, Virginia Sue Trust Ltd
9-28-88 23,057 0.0% 23,057 0.0% 0 23,057 0.0%
Draper, Jack / c/o Dynamite
Drywall Inc. 21,428 0.0% 21,428 0.0% 0 21,428 0.0%
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Dimitropoulos, Penny 21,000 0.0% 21,000 0.0% 0 21,000 0.0%
Dralle, David / Dralle, Gregory
JTWROS 21,000 0.0% 21,000 0.0% 0 21,000 0.0%
Candice, Raymond G. / Candice,
Deborah A. JTWROS 20,476 0.0% 20,476 0.0% 0 20,476 0.0%
Reid, Daniel P. 20,000 0.0% 20,000 0.0% 0 20,000 0.0%
Dimitropoulos, Chris 19,715 0.0% 19,715 0.0% 0 19,715 0.0%
Krueger, Lee & Kreuger, Elma TR
19,500 0.0% 19,500 0.0% 0 19,500 0.0%
Kolb, Janet M., Irrevocable Trust
18,000 0.0% 18,000 0.0% 0 18,000 0.0%
Zouras, John / Zouras, Pat JTWROS
16,500 0.0% 16,500 0.0% 0 16,500 0.0%
Frederick, Karl / IRA 16,384 0.0% 16,384 0.0% 0 16,384 0.0%
Gabriele, John 15,000 0.0% 15,000 0.0% 0 15,000 0.0%
Mahoney, Richard L. 13,594 0.0% 13,594 0.0% 0 13,594 0.0%
Geniale, Hank 13,020 0.0% 13,020 0.0% 0 13,020 0.0%
Lilenthal, John F. 12,820 0.0% 12,820 0.0% 0 12,820 0.0%
IS Investments Inc. 12,407 0.0% 12,407 0.0% 0 12,407 0.0%
Podolsky, Mitchell 10,909 0.0% 10,909 0.0% 0 10,909 0.0%
Winkler, Paul 10,294 0.0% 10,294 0.0% 0 10,294 0.0%
Dwyer, Daniel A. 10,274 0.0% 10,274 0.0% 0 10,274 0.0%
Five West Foods, Inc. 10,196 0.0% 10,196 0.0% 0 10,196 0.0%
Panos, Tom 10,000 0.0% 10,000 0.0% 0 10,000 0.0%
Tzortzis, John 10,000 0.0% 10,000 0.0% 0 10,000 0.0%
Frederick, Karl / Helen Frederick
JTWROS 9,297 0.0% 9,297 0.0% 0 9,297 0.0%
Tipton, Thomas L. 7,812 0.0% 7,812 0.0% 0 7,812 0.0%
Frederick, Michael / IRA 6,915 0.0% 6,915 0.0% 0 6,915 0.0%
Kostecki, Ted 6,900 0.0% 6,900 0.0% 0 6,900 0.0%
Davis, Michael A. / Maddock,
Deborah K. JTWROS 6,544 0.0% 6,544 0.0% 0 6,544 0.0%
Dwyer, Patrick A. (TOD:Carolyn
Dwyer) 6,274 0.0% 6,274 0.0% 0 6,274 0.0%
Johnson, Vincent L. / Johnson,
Dwayne JTWROS 6,250 0.0% 6,250 0.0% 0 6,250 0.0%
Podolsky, Marshall / Podolsky,
Sharon JTWROS 6,000 0.0% 6,000 0.0% 0 6,000 0.0%
Solomon, Brent 5,780 0.0% 5,780 0.0% 0 5,780 0.0%
Fitzgerald, John Michael 5,229 0.0% 5,229 0.0% 0 5,229 0.0%
Demos, Demetrios 5,000 0.0% 5,000 0.0% 0 5,000 0.0%
Lesmeister, Jerome M. /
Lesmeister, Judith G. JTWROS
5,000 0.0% 5,000 0.0% 0 5,000 0.0%
Vasilopoulos, Gust 5,000 0.0% 5,000 0.0% 0 5,000 0.0%
Wimsatt, Charles / Mary Wimsatt
JTWROS 4,762 0.0% 4,762 0.0% 0 4,762 0.0%
Goldenhirsch, Steve 4,375 0.0% 4,375 0.0% 0 4,375 0.0%
Grossman, Ree / Pritikin, Renee
Z. JTWROS 3,676 0.0% 3,676 0.0% 0 3,676 0.0%
Frederick, Michael / Stephany
Frederick JTWROS 3,529 0.0% 3,529 0.0% 0 3,529 0.0%
Fitzgerald, John Thomas 3,268 0.0% 3,268 0.0% 0 3,268 0.0%
Francis, Richard L. 3,268 0.0% 3,268 0.0% 0 3,268 0.0%
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Groeper, Steve 3,268 0.0% 3,268 0.0% 0 3,268 0.0%
Gabriele, Carmelo A. 3,145 0.0% 3,145 0.0% 0 3,145 0.0%
Kontos, Dena 3,000 0.0% 3,000 0.0% 0 3,000 0.0%
Kodner, David O. 2,890 0.0% 2,890 0.0% 0 2,890 0.0%
Glazik, Anthony 2,500 0.0% 2,500 0.0% 0 2,500 0.0%
CADserve Company 2,365 0.0% 2,365 0.0% 0 2,365 0.0%
Dralle, David 2,300 0.0% 2,300 0.0% 0 2,300 0.0%
Mineo, John Sr. / John Mineo Jr.
/ Anna Mineo JTWROS 2,137 0.0% 2,137 0.0% 0 2,137 0.0%
Domagalla, Randy 2,000 0.0% 2,000 0.0% 0 2,000 0.0%
Cannata, Thomas Michael /
Cannata, Beth B. JTWROS 1,961 0.0% 1,961 0.0% 0 1,961 0.0%
Dwyer Patrick a (TOD Mark A.
Dwyer) 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Dwyer Patrick A. (TOD Kathleen A
Dwyer) 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Dwyer Patrick A. (TOD David A.
Dwyer) 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Dwyer Patrick A. (TOD Patrick A.
Dwyer Jr) 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Economou, Dena 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Mandarino, Despina 1,000 0.0% 1,000 0.0% 0 1,000 0.0%
Frederick, Stephany / IRA 848 0.0% 848 0.0% 0 848 0.0%
</TABLE>
Techrich International Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Techrich's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein. Investment
decisions for Techrich are made by its board of directors. Techrich does not
currently own any of our securities as of the date of this prospectus. Other
than its obligation to purchase common shares under the common stock purchase
agreement, it has no other commitments or arrangements to purchase or sell any
of our securities. There are no business relationships between Techrich and us
other than the common stock purchase agreement.
Ladenburg Thalmann acted as placement agent in connection with the common
stock purchase agreement. Ladenburg Thalmann introduced us to Techrich and
assisted us with structuring the equity line of credit with Techrich. Ladenburg
Thalmann's duties as placement agent were undertaken on a reasonable best
efforts basis only. It made no commitment to purchase shares from us and did not
ensure us of the successful placement of any securities.
This prospectus covers 250,000 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Techrich. Those warrants are exercisable at $5.481per share
and expire April 26, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as of
the date of this prospectus. Our agreement with Ladenburg Thalmann provides
Ladenburg Thalmann with a right of first refusal for one year after completion
of the offering under the common stock purchase agreement, as underwriter or
placement agent, all of our financing arrangements at terms no less favorable
than we could obtain in the market.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of
common stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
Except for our officers and directors identified herein, the selling
stockholders have not held any positions or offices or had material
relationships with us or any of our affiliates within the past three years. We
may amend or
39
<PAGE> 40
supplement this prospectus from time to time to update the disclosure.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares being
registered have been passed upon for the company by Rieck and Crotty, P.C., 55
West Monroe Street, Suite 3390, Chicago, Illinois 60603.
EXPERTS
The financial statements included in this prospectus and elsewhere in this
registration statement, to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said report. Reference is made to said report, which
includes an explanatory paragraph with respect to the uncertainty regarding the
Company's ability to continue as a going concern as discussed in note 2 to the
consolidated financial statements.
The audited consolidated financial statement as of and for the year ended
December 31, 1999, which is included in this prospectus and appears in the
registration statement has been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their report thereon which appears
elsewhere in the prospectus and in the registration statement, and is included
in reliance upon the authority of such firm as experts in accounting and
auditing.
40
<PAGE> 41
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS--MARCH 31, 2000 AND
DECEMBER 31, 1999 ........................................ F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 ............... F-3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 YEAR ENDED
DECEMBER 31, 1999 ........................................ F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 ............... F-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ......... F-6
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants ........... F-9
Report of Independent Public Accountants ..................... F-10
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998 ...... F-11
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ............. F-12
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ..... F-13
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ............. F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................... F-15
F-1
<PAGE> 42
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,227,963 $ 31,087
Accounts receivable-
Trade, net of allowance for bad debt of $428,599 at March 31,
2000 and December 31, 1999 112,034 124,844
Employee receivables 118 118
Inventory, net of reserve for obsolescence of $1,945,296 at March
31, 2000 and December 31, 1999 1,521,886 1,521,886
Prepaid expenses 119,094 38,779
------------ ------------
Total current assets 5,981,095 1,716,714
INVESTMENT IN RELATED PARTY 290,000 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $812,461
at March 31, 2000 and $712,192 at December 31, 1999
1,267,366 1,365,440
------------- -------------
Total assets $ 7,538,461 $ 3,372,154
============= =============
CURRENT LIABILITIES:
Accounts payable 243,739 $ 1,894,663
Accrued expenses 15,513 26,719
Current portion of long-term debt 127,249 127,249
Short-term borrowings 100,000 286,000
Unearned revenue - 300,000
------------- -------------
Total current liabilities 486,501 2,634,631
LONG-TERM DEBT 159,444 185,179
COMMITMENTS AND CONTINGENCIES - -
------------- -------------
Total liabilities 645,945 2,819,810
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;
57,604,853 and 51,671,582 shares issued and outstanding at March
31, 2000 and at December 31, 1999 respectively 57,605 51,671
Warrants 1,751,041 1,238,089
Paid-in capital 46,642,583 38,089,320
Accumulated deficit (41,558,713) (38,826,736)
------------- -------------
Total shareholders' equity 6,892,516 552,344
------------- -------------
Total liabilities and shareholders' equity $ 7,538,461 $ 3,372,154
============= =============
</TABLE>
Footnotes attached are an integral part of these financial statements.
F-2
<PAGE> 43
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
NET SALES $ 4,736 $ 1,246,061
COST OF SALES (234,150) 1,420,237
------------ ------------
Gross loss 238,886 (174,176)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 1,093,184 926,863
RESEARCH AND DEVELOPMENT
EXPENSE 84,714 291,249
----------- -----------
Loss before interest and income taxes (939,012) (1,392,288)
INTEREST EXPENSE 1,792,965 660,557
INTEREST INCOME - 4,292
----------- -----------
Loss before income taxes (2,731,977) (2,048,553)
INCOME TAXES - -
----------- -----------
Net loss $(2,731,977) $(2,048,553)
=========== ===========
BASIC AND DILUTED (LOSS) PER SHARE $ (0.05) $ (0.05)
=========== ===========
Weighted Average number of
Common Shares outstanding 56,276,124 41,043,203
Footnotes attached are an integral part of these financial statements.
F-3
<PAGE> 44
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1999
AND THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 40,000,000 $ 40,000 $ 32,343,785 $ 55,181
Issuance of common stock in connection with:
Conversions of debt 4,985,358 4,985 3,842,235 287,700
Private placement 6,003,529 6,004 1,481,167 895,208
Settlement of trade payables 656,322 656 395,243 -
Stock bonuses paid 26,373 26 26,890 -
Net loss - - - -
---------- --------- ------------ -----------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $ 1,238,089
Issuance of common stock in connection with:
Private placement 4,560,169 4,560 7,843,806 419,556
Warrant exercise 393,102 393 97,937 (97,937)
Consulting fees 500,000 500 312,000 191,333
Settlement of trade payables 480,000 480 299,520 -
Net loss - - - -
---------- --------- ------------ -----------
BALANCE, March 31, 2000 57,604,853 $ 57,605 $ 46,642,583 $ 1,751,041
========== ========= ============ ===========
<CAPTION>
Treasury Stock Accumulated
Shares Amount Deficit Total
------ ------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
Issuance of common stock in connection with:
Conversions of debt 101,673 24,402 - 4,159,322
Private placement 14,963 3591 - 2,385,970
Settlement of trade payables 1,546 371 - 396,270
Stock bonuses paid 20,000 4,942 - 31,858
Net loss - - (9,306,304) (9,306,304)
---------- ---------- ------------ -----------
BALANCE, December 31, 1999 - $ - $(38,826,736) $ 552,344
Issuance of common stock in connection with:
Private placement - - - 8,267,922
Warrant exercise - - - 393
Consulting fees - - - 503,833
Settlement of trade payables - - - 300,000
Net loss - - (2,731,977) (2,731,977)
---------- ---------- ------------ -----------
BALANCE, March 31, 2000 - $ - $(41,558,713) $ 6,892,515
========== ========== ============ ===========
</TABLE>
Footnotes attached are an integral part of these financial statements.
F-4
<PAGE> 45
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES -
Net (loss) $(2,731,977) $(2,048,553)
Non-cash items included in net (loss):
Depreciation and amortization 100,269 256,961
Warrants issued in lieu of consulting fees 462,833 18,473
Stock bonuses - 12,500
Interest expense on convertible debt - 591,843
Interest expense on capital raised 1,762,939 -
Settlement of trade payables (418,960) -
Decrease in accounts receivable - trade 12,810 117,945
Decrease in accounts receivable from employees - 491
(Increase) in inventory - (538,234)
(Increase)/decrease in prepaid expenses (80,315) 4,211
Increase/(decrease) in accounts payable (1,650,924) 569,872
(Decrease) in accrued expenses (11,206) (19,298)
(Decrease)/increase in unearned revenue (300,000) 300,000
----------- -----------
Net cash (used for) operating activities (3,040,531) (733,780)
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in related party - 10,000
Purchase of property and equipment (2,195) (11,419)
----------- -----------
Net cash (used for) investing activities (2,195) (1,419)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 6,906,650 344,513
Proceeds from issuance of warrants 512,952 58,979
Long-term leases and other obligations - (29,379)
Increase/(decrease) in short term borrowing (180,000) 450,250
----------- -----------
Net cash provided by financing activities 7,239,602 824,363
----------- -----------
Net increase (decrease) in cash 4,196,876 89,164
CASH BEGINNING OF PERIOD 31,087 55,701
----------- -----------
CASH END OF PERIOD $ 4,227,963 $ 144,865
=========== ===========
Cash Paid During The Period For -
Interest $ 30,026 $ 45,150
Income Taxes - -
=========== ===========
NON-CASH ACTIVITY:
Stock issued in conversion of debt $ 300,000 $ 1,468,934
=========== ===========
</TABLE>
Footnotes attached are an integral part of these financial statements.
F-5
<PAGE> 46
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The condensed 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. These statements are unaudited, and in the opinion of management
include all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the Company's consolidated financial
position and the consolidated results of its operations and cash flows at March
31, 2000 and 1999 and for the periods then ended. Certain information and
footnote disclosures made in the Company's annual audited consolidated financial
statements have been condensed or omitted from these interim statements.
Accordingly, these condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements appearing
elsewhere in this prospectus. Operating results for the three months ended March
31, 2000 are not indicative of the results to be expected during the remainder
of 2000.
2. EARNINGS PER 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 56,276,124 for the three-month period March 31, 2000 and
41,043,203 for the three-month period March 31, 1999. Diluted earnings per
common share are adjusted for the assumed exercise of stock options and warrants
unless such adjustment would have an anti-dilutive effect. Approximately 10
million additional shares would be outstanding if all options and warrants were
exercised as of March 31, 2000.
3. RISKS AND UNCERTAINTIES
-----------------------
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 2000 has an accumulated deficit of $41,558,713. 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.
4. LIABILITIES
-----------
During the first quarter of 2000, the Company used the proceeds from the private
placement to pay down and settle approximately $1.4 million of trade and other
payables outstanding as of December 31, 1999 with $1 million of cash. The
difference between carrying value of payables at the end of the year and cash
settlement has been recorded as an adjustment to cost of goods sold and selling,
general and administrative expenses on the income statement above.
On March 15, 2000 the Company established an irrevocable letter of credit in the
amount of $56,200 for the benefit of a vendor. The letter of credit is
collateralized by cash, which has been segregated into a separate account.
F-6
<PAGE> 47
5. BUSINESS SEGMENTS:
------------------
March 31, 2000 March 31, 1999
-------------- --------------
REVENUE
-------
Dauphin $ 4,736 $ 89,481
RMS - 1,243,652
Inter-company elimination - (87,072)
----------- -----------
Total 4,736 1,246,061
OPERATING (LOSS)
----------------
Dauphin (1,120,265) (990,865)
RMS 181,253 (393,222)
Inter-company elimination - (10,451)
----------- -----------
Total (939,012) (1,394,538)
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS
------
Dauphin 11,930,548 6,443,079
RMS 2,231,833 2,156,937
Inter-company elimination (6,623,920) (5,227,862)
----------- -----------
Total 7,538,461 3,372,154
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is an operating entity and in the course of business, from time to
time, is involved in litigation. In management's opinion, any and all known
lawsuits, if settled unfavorably, would not be material to the overall financial
position of the Company, and are fully reflected in the financial statements
above.
7. EQUITY TRANSACTIONS
-------------------
2000 Events
-----------
During the first quarter of 2000, the Company conducted a private placement of
4,560,169 common shares and approximately 1.2 million warrants to a group of
accredited investors in exchange for approximately $7.8 million. The proceeds
were used for settling the majority of trade payables, for day-to-day operations
and to start the development of the set-top box.
In January, the Company issued 480,000 shares to a customer in exchange for
$300,000 of customer deposits.
In January 2000, the Company issued warrants to an investment banker to purchase
350,000 shares at an exercise price of $1.00.
In January, the Company issued 500,000 shares to a consulting firm for services
rendered in relation to a European contract.
Subsequent Events
-----------------
In April, the Company concluded its private placement and agreed to issue
3,630,000 options to an investment banker in lieu of consulting fees.
On April 12, 2000, the Company entered into a common stock purchase agreement,
escrow agreement and registration rights agreement with an institutional
investor. These agreements provide a $100,000,000 equity line of credit
conditioned on registration of the underlying shares and warrants. The Company
may make up to eighteen draws of up to $10,000,000 per draw, with a $100,000,000
aggregate draw limit. Upon each draw, we must issue shares to the investor based
upon the amount of the draw and a price determined by reference to the 22-day
average trading price and 45-day average volume of our shares. Upon each draw,
the Company also must issue to the investor warrants to purchase additional
common shares in an amount
F-7
<PAGE> 48
equal to 7% of the shares issued. Each warrant shall have a three-year term and
an exercise price equal to 120% of the daily volume weighted average of our
shares on the trading day preceding the draw.
F-8
<PAGE> 49
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of December 31,
1999, and the related consolidated statements of operations, consolidated
shareholders' equity and consolidated cash flows for the year ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dauphin Technology,
Inc. and its Subsidiary as of December 31, 1999 and the results of their
operations and their cash flows for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
GRANT THORNTON LLP
Chicago, Illinois
March 26, 2000
F-9
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of December 31,
1998, and the related consolidated statements of operations, consolidated
shareholders' equity and consolidated cash flows for each of the two years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dauphin Technology,
Inc. and Subsidiary as of December 31, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has insufficient cash on hand to sustain future operations that raises
substantial doubt about the entity's ability to continue as a going concern. The
Company has received certain funding subject to the terms and conditions
outlined in the first five sentences of paragraph five of Note 17. Management's
plans in regards to these matters are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 31, 1999 (except with respect to the matters
discussed in the first five sentences of paragraph five of Note 17, as to
which the date is April 15, 1999)
F-10
<PAGE> 51
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 31,087 $ 55,701
Accounts receivable-
Trade, net of allowance for bad debt of $428,599 and
$11,238 at December 31, 1999 and 1998 124,844 689,713
Employee receivables 118 45,987
Inventory, net of reserve for obsolescence of $1,945,296 and
$152,000 at December 31, 1999 and 1998 1,521,886 2,953,686
Prepaid expenses 38,779 46,596
------------ ------------
Total current assets 1,716,714 3,791,683
INVESTMENT 290,000 300,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$712,192 and $378,051 at December 31, 1999 and 1998
1,365,440 1,673,901
DEFERRED FINANCING COST, net of accumulated amortization
of $29,128 at December 31, 1998 - 186,576
GOODWILL, net of accumulated amortization of $107,971 at
December 31, 1998 - 767,475
------------ ------------
Total assets $ 3,372,154 6,719,635
============ ============
CURRENT LIABILITIES
Accounts payable $ 1,894,663 $ 2,103,572
Accrued expenses 26,719 215,305
Current portion of long-term debt 127,249 113,436
Customer deposits 300,000 -
Short-term borrowings, net of discount of $3,845 at December
31, 1998 286,000 246,155
Convertible debentures, net of discount of $47,012 - 852,988
------------ ------------
Total current liabilities 2,634,631 3,531,456
LONG-TERM DEBT 185,179 302,951
COMMITMENTS AND CONTINGENCIES
------------ ------------
Total liabilities 2,819,810 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; 51,671,582 shares issued and outstanding at
December 31, 1999 and 40,000,000 shares issued and
39,861,818 outstanding at December 31, 1998 51,671 40,000
Treasury stock, at cost, 138,182 shares at December 31, 1998 - (33,306)
Warrants to purchase 4,211,958 and 200,000 shares at December
31, 1999 and 1998 1,238,089 55,181
Paid-in capital 38,089,320 32,343,785
Accumulated deficit (38,826,736) (29,520,432)
------------ ------------
Total shareholders' equity 552,344 2,885,228
------------ ------------
Total liabilities and shareholders' equity $ 3,372,154 $ 6,719,635
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-11
<PAGE> 52
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 2,279,058 $ 5,367,514 $ 2,730,035
COST OF SALES 4,833,601 5,757,889 4,345,315
------------- ------------ -----------
Gross loss (2,554,543) (390,375) (1,615,280)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
4,173,095 3,273,132 1,484,979
RESEARCH AND DEVELOPMENT EXPENSE 510,287 1,576,477 827,843
------------- ------------ -----------
Loss from operations (7,237,925) (5,239,984) (3,928,102)
INTEREST EXPENSE 2,099,179 968,414 75,988
INTEREST INCOME 30,800 76,841 16,073
------------- ------------ -----------
Loss before income taxes (9,306,304) (6,131,557) (3,988,017)
INCOME TAXES - - -
------------- ------------- -----------
Net loss $ (9,306,304) $ (6,131,557) $(3,988,017)
============= ============ ===========
BASIC and DILUTED LOSS PER SHARE:
Loss per share $ (0.20) $ (0.16) $ (0.13)
============= ============ ===========
Weighted average number of shares of common
stock outstanding 46,200,408 37,287,432 30,734,045
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 53
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 31,706,397 $ 31,706 $ 23,649,659 $ -
Issuance of common stock in connection with:
Private placement 4,872,520 4,873 4,582,294 -
Commissions to broker/dealer 131,756 132 (132) -
Purchase of a subsidiary 220,000 220 232,980 -
Escrow shares 105,000 105 - -
Purchase of treasury stock - - - -
Issuance of treasury stock - - 812,085 -
Stock bonuses paid - - 6,250 -
Net loss - - - -
----------- --------- ------------ ----------
BALANCE, December 31, 1997 37,035,673 $ 37,036 $ 29,283,136 $ -
Issuance of common stock in connection with:
Conversions of debt 2,705,391 2,705 2,743,811 -
Commissions to placement agent 172,700 173 178,745 -
Purchase of fixed assets 60,000 60 67,440 -
Issuance of warrants in connection with
debt issuance - - - 55,181
Stock bonuses paid 26,236 26 70,653 -
Net loss - - - -
----------- --------- ------------ ----------
BALANCE, December 31, 1998 40,000,000 $ 40,000 $ 32,343,785 $ 55,181
Issuance of common stock in connection with:
Conversions of debt 4,985,358 4,985 3,842,235 287,700
Private placement 6,003,529 6,004 1,481,167 895,208
Settlement of Trade Payables 656,322 656 395,243 -
Stock bonuses paid 26,373 26 26,890 -
Net loss - - - -
----------- --------- ------------ ----------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $1,238,089
========= ========= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 (2,159,286) $ (1,187,607) $(19,400,858) $ 3,092,900
Issuance of common stock in connection with:
Private placement - - - 4,587,167
Commissions to broker/dealer - - - -
Purchase of a subsidiary - - - 233,200
Escrow shares - - - 105
Purchase of treasury stock (891,626) (341,369) - (341,369)
Issuance of treasury stock 2,307,835 1,266,399 - 2,078,484
Stock bonuses paid 12,500 6,875 - 13,125
Net loss - - (3,988,017) (3,988,017)
---------- ------------ ------------ -------------
BALANCE, December 31, 1997 (730,577) $ (255,702) $(23,388,875) $ 5,675,595
Issuance of common stock in connection with:
Conversions of debt 542,272 205,903 - 2,952,419
Commissions to placement agent - - - 178,918
Purchase of fixed assets - - - 67,500
Issuance of warrants in connection with
debt issuance - - - 55,181
Stock bonuses paid 50,123 16,493 - 87,172
Net loss - - (6,131,557) (6,131,557)
---------- ------------ ------------ -------------
BALANCE, December 31, 1998 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
Issuance of common stock in connection with:
Conversions of debt 101,673 24,402 - 4,159,322
Private placement 14,963 3591 - 2,385,970
Settlement of Trade Payables 1,546 371 - 396,270
Stock bonuses paid 20,000 4,942 - 31,858
Net loss - - (9,306,304) (9,306,304)
---------- ------------ ------------ -------------
BALANCE, December 31, 1999 - $ - $(38,826,736) $ 552,344
========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE> 54
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,306,304) $ (6,131,557) $(3,988,017)
Non-cash items included in net loss
Depreciation and amortization 1,101,616 318,405 93,671
Inventory reserve 1,793,296 - -
Bad debt reserve 417,361 - -
Interest expense on convertible debt 2,062,451 814,882 -
Stock bonus 31,858 87,172 13,125
Changes in-
Accounts receivable
- trade 147,508 (226,892) 129,519
- employee 45,869 (25,792) (20,195)
Inventory (361,495) (1,422,222) 1,893,655
Prepaid expenses 7,817 (7,395) (14,396)
Accounts payable (208,909) 1,312,788 (532,866)
Accrued expenses (188,586) (70,532) (21,410)
------------- ------------ -----------
Net cash used in operating activities (4,457,518) (5,351,143) (2,446,914)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,680) (1,068,578) (201,965)
Investment 10,000 (300,000) -
------------- ------------ -----------
Net cash used in investing activities (15,680) (1,368,578) (201,965)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in acquisition - - 31,162
Short-term borrowings (payments) 286,000 162,606 (706,390)
Purchase of treasury stock - - (341,369)
Issuance of convertible debentures and warrants
net of financing costs 1,776,614 2,991,936 -
Proceeds from issuance of common stock 2,385,970 6,665,756
------------- ------------ -----------
-
Net cash provided by financing activities 4,448,584 3,154,542 5,649,159
------------- ------------ -----------
Net increase (decrease) in cash (24,614) (3,565,179) 3,000,280
CASH, beginning of year 55,701 3,620,880 620,600
------------- ------------ -----------
CASH, end of year $ 31,087 $ 55,701 $ 3,620,880
============= ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 36,728 $ 153,532 $ 75,988
------------- ------------ -----------
NONCASH TRANSACTIONS:
Common stock issued in connection with
Purchase of fixed assets $ - $ 67,500 $ -
Settlement of trade payables 396,270 - -
Conversion of debentures 4,159,322 2,952,419 -
Commissions to placement agent - 178,918 -
Acquisition of R.M. Schultz & Associates -
Assumption of liabilities - - 2,197,058
Issuance of stock - - 233,200
Capital equipment leased 347,189
------------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements
F-14
<PAGE> 55
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. ("Dauphin") and its Subsidiary designs, manufactures
and markets mobile hand-held, pen-based computers as well as other electronic
devices for home and business use. Dauphin markets its products through a
network of value-added resellers and software integrators to the commercial and
government market segments throughout the United States. Through its subsidiary,
the Company marketed its contract manufacturing services through July 1999.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiary, R.M. Schultz & Associates, Inc. (the "Company"). All
significant inter-company transactions and balances have been eliminated in
consolidation.
2. RISK AND UNCERTAINTIES:
Absence of Operating Profit
The Company has incurred a net operating loss in each year since it's founding
and as of December 31, 1999 has an accumulated deficit of $38,826,736. 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.
Early Stage of Development of the Company's Products
From June of 1997 through June of 1999, the Company was principally engaged in
research and development activities involving the hand-held computer. Since
then, the Company has been working on new technologies, in particular the design
and development of the set-top boxes. The Company's products have been sold in
limited quantities and there can be no assurance that a significant market will
develop for such products in the future. Therefore, the Company's inability to
develop, manufacture and market its products on a timely basis may have a
material adverse effect on the Company's financial results.
Financing Considerations
Currently, the Company is working to ensure it has appropriate funding to
finance future operations. During the first quarter of 2000, through private
placements, management raised in excess of $7.5 million. As of the date hereof
the Company has approximately $5 million of cash on deposit in the bank (Refer
to Note 18). Management is seeking additional financing and is negotiating final
terms and conditions with several potential funding sources. With the
combination of existing funds, additional financing and future sales of its
products, Management believes the Company will have sufficient capital to
sustain future operations.
3. SUMMARY OF MAJOR ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of these investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and include material, labor and factory overhead.
F-15
<PAGE> 56
Property and Equipment
Property and equipment are stated at cost. Depreciation is being computed using
the straight-line methods over the estimated useful lives (principally three to
seven years for machinery and equipment) and leasehold improvements over the
lesser of the lease term or their useful life.
Intangible Assets
Debt issue costs are amortized to interest expense over the term of the related
debt. Other intangibles are amortized by the straight-line method over their
respective estimated lives. Goodwill is amortized over ten years.
Long-lived assets including goodwill and other intangible assets are reviewed
for impairment whenever events or change in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the related assets' carrying value is
compared to the undiscounted estimated future cash flows from the related
operations.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements and
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities (excluding non-deductible goodwill) and using enacted tax rates in
effect for the years in which the differences are expected to become recoverable
or payable.
Revenue Recognition
The Company recognizes revenue upon shipment of mobile computers, computer
accessories and assembled products. Revenue from the fulfillment of
manufacturing contracts, generally less then year in length, is recognized upon
shipment of the finished assembly.
Earnings (Loss) Per Common Share
Basic loss per common share is calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 46,200,408, 37,287,432 and 30,734,045 for the years
ending December 31, 1999, 1998 and 1997, respectively. Diluted loss per common
share is adjusted for the assumed exercise of stock options and warrants unless
such adjustment would have an anti-dilutive effect. Approximately 4.2 million
additional shares would be outstanding if all stock options and warrants were
exercised as of December 31, 1999. Refer to Note 18 for dilution subsequent to
December 31, 1999.
Concentration of Credit Risk
The majority of the Company's receivables arise from sales of contract
manufacturing services. The Company maintains reserves for potential losses on
receivables from these customers. Three customers represent $2,281,000 or 43%,
$1,114,000 or 21% and $617,000 or 11% of the Company's revenue during 1998.
These percentages were consistent during 1998 and 1997.
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.
4. INVENTORY
Inventory is comprised of material, labor and overhead and consists of the
following at December 31:
F-16
<PAGE> 57
1999 1998
---- -----
Finished goods $ 93,955 $ 310,766
Work in process 625,450 1,333,147
Raw materials 2,747,777 1,461,773
---------- -----------
3,467,182 3,105,686
Less - Reserve for Obsolescence 1,945,296 152,000
---------- -----------
$1,521,886 $ 2,953,686
========== ===========
In the third quarter of 1999, as a result of curtailing operations at RMS due to
reductions in customer orders the Company wrote down approximately $1,793,000 of
inventory, which consists of $1,168,000 of raw materials and $625,000 of
work-in-process. This inventory was acquired to produce assemblies for RMS
clients only.
5. PROPERTY AND EQUIPMENT
Plastic molds are being amortized over the number of estimated parts to be
produced (approximately 100,000) or three years whichever is less. Property and
equipment consist of the following:
1999 1998
---- ----
Furniture and fixtures $ 89,084 $ 89,084
Office equipment 247,537 228,618
Manufacturing and warehouse equipment 624,690 618,904
Leasehold improvements 407,186 405,836
Plastic molds for the Orasis(TM) 696,862 697,237
Automobile 12,273 12,273
---------- -----------
2,077,632 2,051,952
Less - Accumulated depreciation and amortization 712,192 378,051
---------- -----------
$1,365,440 $ 1,673,901
========== ===========
6. INVESTMENT
During the third quarter of 1998, the Company invested in non marketable
securities of a company that was managed by a former director of Dauphin. The
investment is carried on the books at cost.
7. SHORT-TERM BORROWINGS:
Short-term borrowings consist of the following at December 31:
1999 1998
---- ----
Due to affiliates $ 286,000 $ -
Short-term note, net of discount of $ 3,845 246,155
---------- ------------
-
Total short-term borrowings $ 286,000 $ 246,155
========== ============
On December 17, 1998, the Company borrowed $250,000 from an investor through a
note that matured on January 17, 1999. Interest accrues at 3 % per month. The
note was unsecured and on January 17, 1999 was converted into a Convertible
Subordinated Debenture substantially on the same terms as described in Note 9.
In addition to interest, the holder received a detachable warrant, which allows
the holder to purchase up to 25,000 shares of common stock at an exercise price
of $0.79 per share. The warrant was valued at $3,845 using the Black-Scholes
securities valuation model assuming, among other things, a 7% risk free interest
rate, $0 dividend yield, 3-year life and 28% volatility. The warrant expires in
three years and is exercisable immediately. On March 29, 1999, this note,
including $7,500 of interest, was converted into 427,667 shares of the Company's
common stock.
During 1999, the Company borrowed $286,000 from related affiliates with an
interest accrued at 1% per month till the day of payment. Subsequent to December
31, 1999 all such borrowings including interest have been paid off.
F-17
<PAGE> 58
8. LONG-TERM DEBT
As of December 31, 1999, the fair value of long-term debt approximates its book
value. At December 31, long-term liabilities consist of:
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
McHenry County Department of Planning and Development loan for expansion of RMS,
payable in equal monthly installments over 84 months with 6% interest. This
loan is unsecured and is due on
10/1/2004. $113,149 $127,607
PACJETS Financial Ltd. equipment lease, payable in equal monthly
installments over 60 months. The lease is collateralized by the
equipment and has a one-dollar buy-out option. The lease carries
12% interest and is due on 10/15/2003. 111,881 128,153
PACJETS Financial Ltd. furniture lease payable in equal monthly
installments over 36 months. The lease carries a 23% annual
interest rate and is due on 11/15/2000. The lease is
collateralized by the furniture and has a one-dollar buy-out 27,176 54,214
option.
Forest Financial Corporation computer equipment lease payable in equal monthly
installments over 60 months. The lease carries a 16.38% annual interest
rate and is due on 01/01/2003. The lease is collateralized by the equipment
and has a one-dollar buy-out
option. 11,016 25,417
Other - Capital leases for certain vehicles, machinery and equipment
and certain priority tax claims due and payable in equal monthly
installments over 36 to 72 months. All debts, collateralized by
the equipment, are due starting in June 2000 through October 2002
and carry interest rates ranging from 9% to 18%. 49,206 80,996
-------- --------
Total long-term liabilities 312,428 416,387
Less short-term 127,249 113,436
-------- --------
Total long-term $185,179 $302,951
======== ========
</TABLE>
Future minimum debt payments are as follows:
Year Amount Due
---- ----------
2000 $ 127,249
2001 73,581
2002 65,696
2003 26,664
2004 19,238
---------
Total long-term debt $ 312,428
=========
9. CONVERTIBLE DEBT AND WARRANTS
On May 13, 1998 the Company issued 8% Convertible Subordinated Debentures - 2001
("2001 Debentures") to four accredited investors in an aggregate principal
amount of $1,000,000 which is due and payable on or about May 13, 2001.
Debenture holders also received detachable warrants, allowing them to purchase
up to 150,000 shares of common stock at exercise prices ranging from $1.06 to
$1.73 per share. The warrants are exercisable immediately and expire in three
years. Warrants to purchase 200,000 shares of common stock, including 50,000
warrants issued to the placement agent, were valued at $51,336 using the
Black-Scholes securities valuation model, assuming among other things, a 7% risk
free interest rate, $0 dividend yield, 3 year life and 27% volatility. Through
October 1998, all of the Convertible Subordinated Debentures - 2001, including
$8,016 of interest, have been converted into 1,141,411 common shares.
F-18
<PAGE> 59
On August 1, 1998 the Company issued 8% Convertible Subordinated Debentures -
2001A ("2001A Debentures") to the same four accredited investors in an aggregate
principal amount of $2,000,000, which is due and payable on or about August 1,
2001. Through December 31, 1998 a total of $1.1 million of these debentures,
including $13,054 of interest, were converted into 2,106,252 shares of the
Company's common stock. All of these debentures have been converted into
1,672,600 shares of Company's common stock.
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. 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. The Investor received a warrant to purchase 100,000
shares of common stock at an exercise price of $1.00 per share for the
commitment. In April, the Company received the funds and subsequently deposited
additional 400,000 shares into an escrow account to compensate for the decline
in share price. In May, the note was converted into common stock and the escrow
account was disbursed to the Investor. As of December 31, 1999 the 41,414 shares
still due to the Investor have not been delivered. However, such shares have
been considered outstanding as of the conversion date.
10. STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 provides an alternative to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APBO 25") and requires additional disclosures. During 1998, the Company issued
non-qualified stock options to purchase 233,000 shares of common stock to
certain key employees at exercise prices ranging from $0.56 to $1.22 per share
(approximating the market price at date of grant). The options vest immediately
and expire in three years if the individual is still employed with the Company.
Had the Company accounted for its stock options in accordance with Statement
123, at December 31, 1999 and 1998 pro forma earnings per share would have been:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
<S> <C> <C>
Net loss as reported (000's) $ (9,232) $ (6,132)
Pro forma net loss for Statement 123 (000's) (9,245) (6,232)
Basic and diluted loss per common share as reported (0.21) (0.16)
Pro forma basic and diluted loss per common share (0.21) (0.17)
</TABLE>
Pro forma disclosure is not likely to be indicative of pro forma results which
may be expected in future years because of the fact that options vest over
several years, pro forma compensation expense is recognized as the options vest
and additional awards may be granted.
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes single-option-pricing model:
December 31, 1999 December 31, 1998
Dividend yield 0.0% 0.0%
Risk-free interest rate 6.0% 7.0%
Volatility factor 120% 29%
Expected life in years 1.95 2.67
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<PAGE> 60
Information regarding these options for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Options outstanding beginning of year 233,000 $ 0.7748 0 $ 0.00
Options exercised 0 0.00 0 0.00
Options granted 0 0.00 263,000 0.8076
Options forfeited (183,000) 0.8073 (30,000) 1.0625
---------- -------- --------- --------
Options outstanding at year end 50,000 $ 0.6563 233,000 $ 0.7748
Weighted average fair value of options granted
during the year $ - $ 0.39
Options exercisable at year end 50,000 233,000
Option price range at year end $ 0.6563 $0.5625 to $1.2188
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- -----------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.0625 70,000 2.5 $1.0625 70,000 $1.0625
$1.2188 13,000 2.75 $1.2188 13,000 $1.2188
$0.5625 80,000 2.88 $0.5625 80,000 $0.5625
$0.6250 20,000 2.88 $0.6250 20,000 $0.6250
$0.6563 50,000 2.88 $0.6563 50,000 $0.6563
------- ---- ------- ------- -------
Total for 1998 233,000 2.78 $0.7748 233,000 $0.7748
$0.6563 50,000 1.95 $0.6563 50,000 $0.6563
------- ---- ------- ------- -------
Total for 1999 50,000 1.95 $0.6563 50,000 $0.6563
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company maintains a salary deferral 401(k) plan covering substantially all
employees who meet specified service requirements. Contributions are based upon
participants' salary deferrals and compensation and are made within Internal
Revenue Service limitations. For the fiscal years 1999, 1998 and 1997, the
Company did not make any matching contributions. The Company does not offer
post-employment or post-retirement benefits. The Company does not administer
this plan, and contributions are determined in accordance with provisions of the
plan.
12. IMPAIRMENT OF ASSETS
Goodwill is being amortized on a straight-line basis over 10 years. On an
ongoing basis, the Company estimates the future undiscounted cash flows, before
interest, of the operating unit to which the goodwill relates in order to
evaluate its impairment. If impairment exists, the carrying amount of the
goodwill is reduced by the estimated shortfall of cash flows. During the third
quarter of 1999 the Company experienced an impairment of goodwill, when an
estimated cash flow from the operating unit dramatically decreased. The Company
recorded $767,475 as an amortization expense during 1999.
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<PAGE> 61
13. INCOME TAXES:
A reconciliation of the income tax benefit on losses at the U.S. federal
statutory rate to the reported income tax expense follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate applied to pretax loss $ (2,143,858) $(2,084,729) $(1,355,926)
Permanent differences and adjustments 785,739 120,802 31,906
Tax assets including net operating loss carryforward 1,324,020 1,358,119 1,963,927
------------ ----------- -----------
Income tax provision $ - $ - $ -
============ =========== ===========
</TABLE>
As of December 31, 1999 and 1998, the Company had generated deferred tax assets
as follows:
December 31,
------------
1999 1998
---- ----
Gross deferred tax assets-
Net operating loss (NOL) carryforward 24,680,762 $ 16,962,154
Reserves for inventory obsolescence 1,945,296 152,000
Bad debt reserve 428,599 11,238
Depreciation 5,567 44,260
Other timing differences 9,075 10,200
----------- ------------
27,070,424 17,178,727
Current federal statutory rate 34% 34%
----------- ------------
Deferred tax assets 9,203,944 5,840,767
Less- SFAS 109 valuation allowance 9,203,944 5,840,767
----------- ------------
Net deferred tax asset $ - $ -
=========== ============
Deferred income taxes include the tax impact of net operating loss (NOL)
carryforwards. Realization of these assets, as well as other assets listed
above, is contingent on future taxable earnings by the Company. In accordance
with the provisions of SFAS 109, a valuation allowance of $9,203,944 and
$5,840,767 at December 31, 1999 and 1998, respectively, has been applied to
these assets. During 1995, there was an ownership change in the Company as
defined under Section 382 of the Internal Revenue Code of 1986, which adversely
affects the Company's ability to utilize the NOL carryforward.
14. BUSINESS SEGMENTS:
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company has two reportable segments:
Dauphin Technology, Inc. and R.M. Schultz & Associates, Inc. ("RMS"). Dauphin is
involved in design, manufacturing and distribution of hand-held pen-based
computer systems and accessories. RMS is an electronic contract-manufacturing
firm.
The reportable segments are managed separately because each business has
different customer requirements, either as a result of the regional environment
of the country or differences in products and services offered. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Intangible assets are included in each
segment's reportable assets and the amortization of these intangible assets is
included in the determination of a segment's operating profit or loss. The
Company evaluates performance based on profit or loss from operations before
income taxes, interest, and non-operating income (expenses).
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<PAGE> 62
1999 1998 1997
---- ---- ----
REVENUE
Dauphin $ 273,544 $ 385,739 $ 71,834
RMS 2,134,563 5,637,574 2,658,201
Inter-company elimination (129,049) (655,799) -
------------ ----------- -----------
Total 2,279,058 5,367,514 2,730,035
OPERATING (LOSS)
Dauphin (2,947,396) (4,707,321) (3,929,690)
RMS (4,286,231) (499,885) 1,588
Inter-company elimination (4,298) (32,778) -
------------ ----------- -----------
Total (7,237,925) (5,239,984) (3,928,102)
ASSETS
Dauphin 6,443,079 4,991,346 6,073,910
RMS 2,156,937 5,078,453 2,979,143
Inter-company elimination (5,227,862) (3,350,164) (1,783,917)
------------ ----------- -----------
Total 3,372,154 6,719,635 7,269,136
CAPITAL EXPENDITURES
Dauphin 18,544 748,131 9,145
RMS 7,136 387,947 540,009
------------ ----------- -----------
Total 25,680 1,136,078 549,154
15. COMMITMENTS AND CONTINGENCIES:
Minimum annual rental commitments at December 31, 1999, under non-cancelable
operating leases, principally for real estate, are payable as follows:
Dauphin RMS
2000 114,701 190,660
2001 120,438 190,660
2002 51,190 81,025
----------- -----------
$ 388,803 $ 653,005
=========== ===========
Total rental expense was approximately $300,000, $276,000 and $162,000 for 1999,
1998 and 1997 respectively. The leases contain renewal options and escalation
clauses.
The Company is involved in a lawsuit with an ex-employee/officer that has
claimed that the Company wrongfully discharged him. The lawsuit is seeking
specific performance under the contract and any reasonable relief that Court
deems just. The suit was filed on April 11, 1998 and as of April 13, 1999 four
out of five claims in the lawsuit have been dismissed. It is the opinion of
management that the ultimate liability, if any, will not be material to the
Company's results of operations or financial position.
The Company is involved in a breach of contract lawsuit with the Enclave
Corporation, current landlord of RMS. The suit was filed on January 5, 2000 in
the Nineteenth Judicial Circuit Court, McHenry Illinois. The suit is claiming
$5,200 damages and other non-monetary breaches. The Company feels that it has
several defenses and intends to vigorously defend its position. In any event,
any unfavorable disposition will not be material to the Company's results of
operations or financial position.
During 1999 and through the date of this report, the Company has been engaged in
various legal proceedings. Management believes that all material events have
been fully accounted for in the financial statements attached hereto. Further
resolution of any existing litigation would not be material to the overall
financial condition of the Company.
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<PAGE> 63
16. RELATED-PARTY TRANSACTIONS:
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the design,
packaging and manufacturing of Dauphin's product lines and will likely continue
in this capacity in the future. The Company paid $0 during 1999, $140,192 in
1998 and $75,000 in 1997 for such services.
On February 6, 1996 the Company entered into an agreement with Victor Baron,
Savely Burd and Interactive Controls, Inc., an Illinois corporation
("Intercon"). On December 29, 1998 the Board of Directors voted unanimously to
terminate the Intercon agreement. The Company no longer employs Messrs. Baron
and Burd.
In 1999 the Company borrowed $286,000 from related affiliates, including two
members of the Board of Directors. The loans accrue interest at 1% per month
until maturity. As of the date of this report all loans including interest have
been paid off.
RMS facilities are leased from Enclave Corporation, a company that is owned by
Richard M. Schultz, former President of RMS. The Company paid $179,684 of rent
and $24,150 of real estate taxes for the property lease in 1999 and $165,660 of
rent and $25,267 of real estate taxes for the second half of 1998.
17. EQUITY TRANSACTIONS:
1999 Transactions
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 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 427,667 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 Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate, 0%
dividend yield, 1 and 2 year life respectively and 120% volatility.
In March 1999, the Company issued 507,160 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
Black-Scholes securities valuation model, assuming among other things, a 7% risk
free interest rate, 0% dividend yield, 5 year life and 120% volatility.
On March 30, 1999, Dauphin signed an agreement with an accredited investor
("Investor") where the Investor agreed to commit up to $6 million. The first
closing for $1 million occurred on April 15, 1999 when the parties executed
agreed upon documentation and Dauphin deposited 2 million common shares in
escrow. This tranche was in the form of an 8% promissory note convertible into
stock beginning sixty days after closing. The conversion was at 15% discount
from the closing bid price of the Company's common stock. The contract also
called for the adjustment in escrowed shares in case stock value decreases,
under the 5/8 bid for two consecutive days. As specified on the contract, on
April 22 due to decline in market price of the stock, the Company deposited
additional 400,000 shares in an escrow account to replenish the $1.5 million
value in the account. As an incentive, the Investor received a warrant to
purchase 100,000 common shares of stock at an exercise price of $1.00 per share.
The warrant was valued at $52,200 using Black-Scholes securities valuation
model, assuming among other things, a 6% risk free interest rate, 0% dividend
yield, 1 and 2 year life respectively and 120% volatility. On May 24, 1999 $1
million funded under the note, together with accrued interest, was converted
into 2,441,414 shares of common stock of which 2,400,000
F-23
<PAGE> 64
common shares were disbursed to the Investor. As of the date of this report, the
remaining shares have not been issued.
In May 1999, the Company issued 150,000 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 Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield, 5
year life and 120% 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 ("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 daily
average trading value, which is computed by multiplying the closing bid price by
the daily volume of the Company's common stock traded average over the twenty
days prior to 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
with 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 Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility.
In connection with the Stock Purchase Agreement signed by the Company on May 28,
1999, the Company sold to the Investor 350,000 shares for $148,050 at an average
price of $0.423 per share, including $2,961 of closing fees.
In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the Company
issued warrants to purchase 1,651,600 shares of common stock at an average
exercise price of $0.47 per share. The warrants are exercisable immediately and
expire in three to five years. The Warrants were valued at $443,622 using
Black-Scholes securities valuation model assuming among other things 6% risk
free rate, 0% dividend yield, five years life and 120% volatility.
During the third quarter, the Company agreed to issue a total of 407,868 shares
to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.
In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.
On October 26 1999, the Company issued 93,358 shares in exchange for $29,643 or
$0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999.
On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999, the Company sold to the Investor 447,012 shares for
$141,935 at an average price of $0.32 per share, including $2,897 of closing
fees.
In November 1999, the Company issued 457,650 shares to three accredited
investors in exchange for $156,500 or $0.33 per share.
During the third quarter of 1999 a Warrant for 302,858 shares at $0.20 was
exercised. The Company received a total of $60,285 for the shares. As of the
date of this report, these shares have not been issued.
In November 1999, in exchange for services rendered, the Company issued 300,000
shares to a consultant.
In December 1999, the Company converted $70,000 of short-term notes including
$5,000 of interest from an affiliate into 350,000 shares.
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<PAGE> 65
In December 1999, the Company issued 362,858 shares in exchange for $72,572 from
two accredited investors. In addition to shares, the Company issued two Warrants
for the total of 362,858 common shares to the investors with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
1998 Transactions
On January 5, March 5, June 5 and September 5, 1998, under an employment
contract relating to the RMS acquisition, the Company issued 12,500 shares on
each date to Richard M. Schultz. Under the contract, Mr. Schultz is entitled to
purchase 50,000 common shares per year for the duration of his employment
contract at $1.00 below the market value on the date immediately preceding the
date of exercise. The common shares issued in connection with this transaction
were treasury shares. On March 6, 1998, Mr. Schultz returned 7,901 shares to
treasury as repayment of his obligation to the Company and on July 6, 1998 the
Company issued additional 1,260 shares to Mr. Schultz to compensate for the
decrease in price of the stock on the day of issuance.
On March 3, 1998, for services performed, the Company issued 30,000 shares to
Mr. Mikolai Prociuk, an employee of the Company, as a bonus.
On March 31, 1998 the Company registered with Securities and Exchange Commission
4,523,608 shares issued to accredited investors in a private placement that
concluded in December 1997. In addition to the shares issued in the private
placement, the Company registered 2,964,327 shelf shares for use, if needed, for
future acquisitions, to raise capital, to fund production of Orasis(TM)
hand-held computer or RMS contract manufacturing operations.
On May 8, 1998, the Company issued 60,000 common shares to Family Tools, Inc.
for industrial molds used in the production of Orasis(TM) hand-held computer.
The shares were valued at $1.125, closing bid price on that day.
On June 24, 1998, for services performed, the Company issued 3,000 shares to Ms.
Nina O'Connor, an employee of the Company, as a bonus.
Since May of 1998, 2,705,391 shares that were previously registered as shelf
shares and 542,272 treasury shares were issued in exchange for $1 million of
principal of 2001 Debentures and $1.1 million of principal of 2001A Debentures
and $21,070 of interest. $34,400 and 172,700 shares in lieu of $178,918 in fees
were issued to brokers for the 2001 Debentures and 2001A Debentures (Note 7).
1997 Transactions
During 1997, the Company, through several private transactions with accredited
investors, sold approximately 2.8 million of common stock for approximately $2.7
million or approximately $0.98 per share. Of the shares issued, 2.3 million were
issued from treasury shares. As a result of these transactions, the Company
raised in excess of $2.6 million for its working capital, implementation of the
Company's acquisition strategy and research and development.
On July 16, 1997, the Company repurchased 745,126 shares held by Alan S.K. Yong,
former founder and President of Dauphin, for $260,794 or $0.35 per share.
Simultaneously, Dauphin accepted Mr. Yong's resignation from the Board of
Directors.
On September 5, 1997, under the employment contract, the Company issued 12,500
shares to Richard M. Schultz. Under the contract, Mr. Schultz is entitled to
purchase 50,000 common shares per year for the duration of his employment
contract at $1.00 below the market value on the date immediately preceding the
date of exercise. The common shares issued in connection with this transaction
were treasury shares.
In the fourth quarter, the Company conducted a private placement of 4,391,852
shares of common stock at $1.00 per share. In total, $4,391,852 was raised. As
of December 31, 1997, the Company closed this private placement. As part of the
transaction, a lead broker/dealer received $439,185 or ten (10%) percent cash
compensation and 131,756 common shares or three (3) shares for each 100 shares
placed as commission for the amount raised. The broker also has an option to
purchase additional 175,674 shares or four (4) shares for each 100 shares placed
at a $1.00 each within one year from the close of this transaction.
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<PAGE> 66
18. SUBSEQUENT EVENTS:
During the first quarter of 2000, the Company has sold 4,943,252 shares in
exchange for $7,524,235, or $1.52 per share to two groups of accredited
investors. Along with the shares some of the investors received Warrants to
purchase 624,520 shares at $0.25. The placement agents shall receive 3,630,000
options convertible into the Company's common stock of which 18,000 options
shall be converted at a $1 strike price and the remainder shall be converted at
a $10.00 strike price per share.
In January 2000, the Company granted 1,941,000 options to purchase common stock
at prices equal to or greater than the market price on the date of the grant to
directors, employees and former employees. These options expire between three
and five years from the date of issuance. The compensation expense associated
with the grants to former employees was not significant.
During the first quarter of 2000, with the funds that it raised in the private
placement, the Company settled approximately $1.5 million of outstanding
payables with approximately $875,000.
On February 15, 2000 the Company signed a contract with a European Union firm to
provide the high bandwidth xDSL Set-Top Box for its telecommunications project.
Dauphin's Set-Top Box will be an integral part to the firm's Fiber Optics
Infrastructure. The contract is part of a multi-year program that will provide
unprecedented bandwidth and other IT capabilities in that European Union nation.
F-26
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered hereby. All amounts are
estimated except the Securities and Exchange Commission registration fee.
Amount
SEC registration fee $82,563
Blue Sky fees and expenses 3,000.00
Accounting fees and expenses 10,000.00
Legal fees and expenses 15,000.00
Printing 2,000.00
Registrar and transfer agent's fees 1,000.00
Miscellaneous fees and expenses 2,000.00
---------
Total $ 115,563
---------
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Registrant is incorporated in the State of Illinois. Section 8.75 of the
Illinois Business Corporation Act defines the powers of registrant to indemnify
officers, directors, employees and agents.
In additional to the provisions of Illinois Business Corporation Act Section
8.75, and pursuant to the power granted therein, registrant has adapted Article
XII of its Bylaws which provides as follows:
ARTICLE XII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1 The corporation shall indemnify any person who was or is a party, or
is threaten to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a directors, officer, employee or agent of the
corporation or fiduciary of any employee benefit plan maintained by the
corporation, or who is or was a director, officer, employee or agent of the
corporation of a fiduciary as aforesaid, or who is or was serving at the request
of the corporation as a director, officer, employee, agent of fiduciary of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation (or, in the case of a fiduciary, the best interests of the plan and
plan participants) and, with respect to any criminal action proceeding, had no
reasonable cause to believe his conduct was unlawful. This termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that this conduct was unlawful.
SECTION 2 The corporation shall indemnify any person who was or is a party, or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation or fiduciary as aforesaid, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the corporation (or, in the
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<PAGE> 68
case of a fiduciary, the best interests of the plan and plan participants),
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation,
unless, and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses as the court shall
deem proper.
SECTION 3 To the extent that a director, officer, employee or agent of a
corporation or fiduciary as aforesaid has been successful, on the merits or
otherwise, in the defense of any action, suit or proceeding referred to in
proceeding sections, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
SECTION 4 Any indemnification under section 1 and 2 hereof (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case,
upon a determination of the director, officer, employee, agent of fiduciary is
proper on the circumstances because he has met the applicable standard of
conduct set forth in said sections. Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtained, or even if obtainable, a quorum of disinterest directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
SECTION 5 Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding, as authorized by the board of directors in the
specific case, upon receipt of an undertaking by or oh behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this Article.
SECTION 6 The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaws, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
incur to the benefit of the heirs, executors and administrators of such person.
SECTION 7 The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation
of fiduciary, or who is or was serving at the request of the corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 8 In the case of a merger, the term "corporation" shall include, in
additional to the surviving corporation, any merging corporation absorbed in a
merger, which if its separate existence had continued, would have had the power
and authority to indemnify its directors, officers and employees or agents, so
that any person who was a director, officer, employee or agent of such merging
corporation, or was serving at the request of another corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this section with respect to the surviving corporation as such
person would have with respect to such merging if its separate existence had
continued.
SECTION 9 For the purpose of this Article, referenced to "other enterprises"
shall include employee benefit plans; reference to "fines" shall include any
excise tax assessed on a person with respect to an employee benefit plan; and
references to the phrase "serving at the request of the corporation" shall
include any service as a director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of registrant pursuant
to the foregoing provisions, or otherwise, registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and
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is, therefore, enforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such an issue.
Except to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of registrant is indemnified in any manner against any liability which
he may incur in his capacity as such.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
1999 Transactions
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 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 427,667 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 Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate, 0%
dividend yield, 1 and 2 year life respectively and 120% volatility.
In March 1999, the Company issued 507,160 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
Black-Scholes securities valuation model, assuming among other things, a 7% risk
free interest rate, 0% dividend yield, 5 year life and 120% volatility.
On March 30, 1999, Dauphin signed an agreement with an accredited investor
("Investor") where the Investor agreed to commit up to $6 million. The first
closing for $1 million occurred on April 15, 1999 when the parties executed
agreed upon documentation and Dauphin deposited 2 million common shares in
escrow. This tranche was in the form of an 8% promissory note convertible into
stock beginning sixty days after closing. The conversion was at 15% discount
from the closing bid price of the Company's common stock. The contract also
called for the adjustment in escrowed shares in case stock value decreases,
under the 5/8 bid for two consecutive days. As specified on the contract, on
April 22 due to decline in market price of the stock, the Company deposited
additional 400,000 shares in an escrow account to replenish the $1.5 million
value in the account. As an incentive, the Investor received a warrant to
purchase 100,000 common shares of stock at an exercise price of $1.00 per share.
The warrant was valued at $52,200 using Black-Scholes securities valuation
model, assuming among other things, a 6% risk free interest rate, 0% dividend
yield, 1 and 2 year life respectively and 120% volatility. On May 24, 1999 $1
million funded under the note, together with accrued interest, was converted
into 2,441,414 shares of common stock of which 2,400,000 common shares were
disbursed to the Investor. As of the date of this report, the remaining shares
have not been issued.
In May 1999, the Company issued 150,000 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 Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield, 5
year life and 120% volatility.
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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 ("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 daily
average trading value, which is computed by multiplying the closing bid price by
the daily volume of the Company's common stock traded average over the twenty
days prior to 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
with 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 Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility.
In connection with the Stock Purchase Agreement signed by the Company on May 28,
1999, the Company sold to the Investor 350,000 shares for $148,050 at an average
price of $0.423 per share, including $2,961 of closing fees.
In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the Company
issued warrants to purchase 1,651,600 shares of common stock at an average
exercise price of $0.47 per share. The warrants are exercisable immediately and
expire in three to five years. The Warrants were valued at $443,622 using
Black-Scholes securities valuation model assuming among other things 6% risk
free rate, 0% dividend yield, five years life and 120% volatility.
During the third quarter, the Company agreed to issue a total of 407,868 shares
to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.
In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.
On October 26 1999, the Company issued 93,358 shares in exchange for $29,643 or
$0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999.
On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999, the Company sold to the Investor 447,012 shares for
$141,935 at an average price of $0.32 per share, including $2,897 of closing
fees.
In November 1999, the Company issued 457,650 shares to three accredited
investors in exchange for $156,500 or $0.33 per share.
During the third quarter of 1999 a Warrant for 302,858 shares at $0.20 was
exercised. The Company received a total of $60,285 for the shares. As of the
date of this report, these shares have not been issued.
In November 1999, in exchange for services rendered, the Company issued 300,000
shares to a consultant.
In December 1999, the Company converted $70,000 of short-term notes including
$5,000 of interest from an affiliate into 350,000 shares.
In December 1999, the Company issued 362,858 shares in exchange for $72,572 from
two accredited investors. In addition to shares, the Company issued two Warrants
for the total of 362,858 common shares to the investors with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
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2000 Transactions
During the first quarter of 2000, the Company has sold 4,943,252 shares in
exchange for $7,524,235, or $1.52 per share to two groups of accredited
investors. Along with the shares some of the investors received Warrants to
purchase 624,520 shares at $0.25. The placement agents shall receive 3,630,000
options convertible into the Company's common stock of which 18,000 options
shall be converted at a $1 strike price and the remainder shall be converted at
a $10.00 strike price per share.
In January 2000, the Company granted 1,941,000 options to purchase common stock
at prices equal to or greater than the market price on the date of the grant to
directors, employees and former employees. These options expire between three
and five years from the date of issuance. The compensation expense associated
with the grants to former employees was not significant.
During the first quarter of 2000, with the funds that it raised in the private
placement, the Company settled approximately $1.5 million of outstanding
payables with approximately $875,000.
The outstanding shares were offered and sold in private placements with
accredited investors during 1998 and 1999 and are being registered pursuant to
certain registration rights granted to subscribers. The sale and issuance of the
shares were believed to be exempt from registration under the Securities Act by
virtue of Section 4 (2) thereof and Regulation D as transactions not involving
any public offering. The recipients represented their status as accredited
investors at the time of subscription and their intention to acquire securities
for investment purposes only and not with a view to distribution thereof.
Appropriate legends were affixed to stock certificates issued in such
transactions and all recipients had adequate access to information about the
company.
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Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
*3(1) Certificate of Incorporation filed July 27, 1990, incorporated herein
by reference to exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*3(2) By-Laws as amended, incorporated herein by reference to exhibit 3(2) of
Form 10-K for the fiscal year ended December 31, 1991.
*4(1) Specimen Common Stock Certificate incorporated herein by reference to
exhibit 4(1) of Form S-18 filed June 1, 1990.
*10(1) Agreement and Plan of Reorganization incorporated herein by reference
to exhibit 7(c) of Form 8-K filed April 4, 1991.
*10(2) Plan and Agreement of Merger incorporated herein by reference to
exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*10(3) Computer Technology License Agreement dated November 12, 1997, between
Phoenix Technology, Inc. and Dauphin Technology, Inc. included as an
exhibit to Form S-1 filed march 17, 1998, incorporated herein
by reference.
*10(4) License Agreement dated May 3, 1996, between Microsoft Corporation
and Dauphin Technology, Inc. included as an exhibit to Form S-1 filed
March 17, 1998, incorporated herein by reference.
*10(5) Debtor's Motion Seeking Entry of Order Authorizing the Debtor to enter
into Asset Purchase Agreement with Victor Baron, Savely Burd and
Interactive Controls, Inc. filed February 6, 1996 with United States
Bankruptcy Court incorporated herein by reference to exhibit 7(b) of
Form 10-Q filed May 15, 1996.
*10(6) Debtor's Third Amended and Restated Plan of Reorganization filed May 9,
1996 with United States Bankruptcy Court incorporated herein by
reference to exhibit 7(b) of Form 10-Q filed January 26, 1996.
*10(7) Promissory Note, Subscription Agreement, Form of Warrant and Conversion
Notice for Augustine Capital Management dated April 13, 1999 included
as an exhibit to Form 10-Q for the quarter ended March 31, 1999,
incorporated herein by reference.
*10(8) Stock Purchase Agreement by and between Crescent International Limited
and Dauphin Technology, Inc. dated May 28, 1999, including Registration
Rights Agreement, Form of Incentive Warrant, Form of Early Put Warrant,
Form of Opinion of the Company's Independent Counsel and Form of
Transfer Agent Instructions included as an exhibit to Form 10-Q for the
quarter ended June 30, 1999, incorporated herein by reference.
*10(9) Equity line of credit agreement by and between Techrich International
Limited and Dauphin Technology, Inc. dated April 12, 2000 including
Common Stock Purchase Agreement, Registration Rights Agreement, Escrow
Agreement and Form of a stock Purchase Warrant included as an exhibit
to Form 8-K filed on April 20, 2000 incorporated herein by reference.
24(1) Consent of Arthur Andersen LLP., independent public accountants.
24(2) Consent of Grant Thornton LLP., independent public accountants.
24(3) Consent of Rieck and Crotty, P.C.
* Previously filed or incorporated by reference.
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Item 17. UNDERTAKINGS
(A) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Company hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant
to authority conferred in the section.
(B) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendment to this registration statement:
(i) To include any Prospectus required by Section 10(a) of the
Securities Act of 1993;
(ii) To disclose in the Prospectus any change in the offering
price at which any registering shareholders subject to the
requirement of a Pricing Amendment are offering their registered
securities for sale;
(iii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iv) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Company pursuant to the forgoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjustment of such issue.
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<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palatine
and State of Illinois, on the 16th day of June, 2000.
DAUPHIN TECHNOLOGY, INC.
By: /s/Andrew J. Kandalepas
------------------------
Andrew J. Kandalepas, President
Pursuant to the requirement of the Securities Act of 1933, as amended,
this registration statement has been duly signed by the following persons in the
capacity and on the dates indicated.
SIGNATURE/TITLE Date
6/16/00
/s/Andrew J. Kandalepas
-----------------------
Andrew J. Kandalepas, Chairman of the Board of
Directors /President/Chief Executive Officer
6/16/00
/s/Jeffrey Goldberg
-------------------
Jeffrey Goldberg, Secretary/Director
6/16/00
/s/Gary E. Soiney
-----------------
Gary E. Soiney, Director
6/16/00
/s/Andrew Prokos
----------------
Andrew Prokos, Director
