<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--------- SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--------- SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
COMMISSION FILE NO. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
ILLINOIS 87-0455038
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 E. NORTHWEST HWY., SUITE 950, PALATINE, ILLINOIS 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 9, 2000,
62,129,768 shares of the registrant's common stock, $.001 par value, was issued
and outstanding.
<PAGE> 2
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months and Three Months Ended
September 30, 2000 and 1999 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS'
EQUITY (DEFICIT)
Year Ended December 31, 1999 and
Nine Months Ended September 30, 2000 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II OTHER INFORMATION 14
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Company's Security Holders
Item 3. Default by the Company on its Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K
SIGNATURE 14
2
<PAGE> 3
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,260,913 $ 31,087
Accounts receivable-
Trade, net of allowance for bad debt of $428,599 at September 30,
2000 and December 31, 1999 462,501 124,844
Employee receivables 678 118
Inventory, net of reserve for obsolescence of $1,945,296 at
September 30, 2000 and December 31, 1999 1,807,949 1,521,886
Prepaid expenses 34,151 38,779
------------ ------------
Total current assets 4,566,192 1,716,714
INVESTMENT IN RELATED PARTY 290,000 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,017,040 at September 30, 2000 and $712,192 at December 31, 1999 1,587,787 1,365,440
GOODWILL, net of accumulated amortization of $137,500 at
September 30, 2000 5,362,500 -
------------ ------------
Total assets $ 11,806,479 $ 3,372,154
============ ============
CURRENT LIABILITIES:
Accounts payable $ 325,171 $ 1,894,663
Accrued expenses 73,743 26,719
Current portion of long-term debt 104,031 127,249
Customer Deposits 49,644 -
Short-term borrowings - 286,000
Other payables - 300,000
------------ ------------
Total current liabilities 552,589 2,634,631
LONG-TERM DEBT 148,862 185,179
COMMITMENTS AND CONTINGENCIES - -
------------ ------------
Total liabilities 701,451 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;
60,140,454 and 51,671,582 issued and outstanding at September
30, 2000 and at December 31, 1999 60,141 51,671
Warrants 3,045,447 1,238,089
Pain-in capital 53,627,372 38,089,320
Accumulated deficit (45,627,932) (38,826,736)
------------ ------------
Total shareholders' equity 11,105,028 552,334
------------ ------------
Total liabilities and shareholders' equity $ 11,806,479 $ 3,372,154
============ ============
</TABLE>
3
<PAGE> 4
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUE $ 361,016 $ 2,185,623 $ 344,975 $ 157,680
COST OF REVENUE 440,639 4,657,302 317,228 2,105,016
------------- ------------- ------------- -------------
Gross Profit (Loss) (79,623) (2,471,679) 27,747 (1,947,336)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 4,474,963 3,172,411 2,654,914 1,532,179
RESEARCH AND DEVELOPMENT
EXPENSE 473,113 454,918 222,255 18,889
------------- ------------- ------------- -------------
Loss from Operations (5,027,699) (6,099,008) (2,849,422) (3,498,404)
INTEREST EXPENSE 1,826,522 1,975,573 9,381 92,702
INTEREST INCOME 53,025 18,210 39,215 6,628
------------- ------------- ------------- -------------
Loss before Income Taxes (6,801,196) (8,056,371) (2,819,588) (3,584,478)
INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET LOSS $ (6,801,196) $ (8,056,371) $ (2,819,588) $ (3,584,478)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.12) $ (0.18) $ (0.05) $ (0.07)
============= ============= ============= =============
Weighted Average number of
Common Shares outstanding 57,725,768 44,823,498 59,166,582 48,419,719
============= ============= ============= =============
</TABLE>
4
<PAGE> 5
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, AND NINE MONTHS ENDED SEPTEMBER 30, 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 4,654,653 4,655 8,599,578 419,556
Stock purchase agreement 1,354,617 1,355 4,998,645 1,061,176
Warrant exercise 1,479,602 1,480 1,257,687 (461,041)
Consulting fees 500,000 500 312,000 787,667
Employee stock compensation - - 70,622 -
Settlement of trade payables 480,000 480 299,520 -
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, September 30, 2000 60,140,454 $ 60,141 $ 53,627,372 $ 3,045,447
============ ============ ============ ============
<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 3,591 - 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 - - - 9,023,789
Stock purchase agreement - - - 6,061,176
Warrant exercise - - - 798,126
Consulting fees - - - 1,100,167
Employee stock compensation - - - 70,622
Settlement of trade payables - - - 300,000
Net loss - - (6,801,196) (6,801,196)
------------ ------------ ------------ ------------
BALANCE, September 30, 2000 - $ - $(45,627,932) $ 11,105,028
============ ============ ============ ============
</TABLE>
5
<PAGE> 6
DAUPHIN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $ (6,801,196) $ (8,056,372)
Non-cash items included in net loss:
Depreciation and amortization 304,848 1,225,564
Amortization of goodwill 137,500 -
Inventory reserve - 1,793,296
Warrants issued in lieu of consulting fees 2,161,341 -
Employee stock compensation 70,622 -
Stock bonuses - 31,858
Interest expense on convertible debt - 1,940,458
Interest expense on capital raised 1,762,939 -
Settlement of trade payables (431,776) -
(Increase) decrease in accounts receivable - trade (338,217) 163,439
(Increase) decrease in accounts receivable from employees (560) 45,987
(Increase) in inventory (286,063) (360,794)
Increase (decrease) in prepaid expenses 4,628 (16,426)
Increase in deferred financing cost - (315,439)
(Decrease) in accounts payable (1,144,124) (151,325)
Increase (decrease) in accrued expenses 47,024 (37,769)
Increase in customer deposits 49,644 -
Increase in other payables - 300,000
------------ ------------
Net cash used in operating activities (4,462,830) (3,437,523)
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in related party - 10,000
Acquisition of business (6,025,000) -
Purchase of equipment (2,195) (10,547)
------------ ------------
Net cash used in investing activities (6,027,195) (547)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 12,200,671 2,062,224
Proceeds from issuance of warrants 858,307 1,134,221
Repayment of long-term leases and other obligations (53,127) (94,585)
(Decrease) increase in short term borrowing (286,000) 366,375
------------ ------------
Net cash provided by financing activities 12,719,851 3,468,236
------------ ------------
Net increase in cash 2,229,826 30,166
CASH BEGINNING OF PERIOD 31,087 55,701
------------ ------------
CASH END OF PERIOD $ 2,260,913 $ 85,867
============ ============
Cash Paid During The Period For -
Interest $ 54,202 $ 90,064
Income Taxes - -
============ ============
NON-CASH ACTIVITY:
Common stock issued in connection with:
Conversion of debentures $ 300,000 $ 3,871,622
Settlement of trade payables - 326,270
</TABLE>
6
<PAGE> 7
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiaries
designs, manufactures and markets mobile hand-held, pen-based computers, as well
as other electronic devices for home and business use and performs design
services, process methodology consulting and intellectual property development,
out of its three locations in northern Illinois. The Company, an Illinois
corporation, was formed on June 6, 1988 and became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), and Advanced
Digital Designs, Inc ("ADD"). All significant intercompany transactions and
balances have been eliminated in consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 57,725,768 for the nine-month period September 30, 2000
and 44,823,498 for the nine-month period September 30, 1999. Diluted earnings
per common share are adjusted for the assumed conversion exercise of stock
options and warrants unless such adjustment would have an anti-dilutive effect.
Approximately 11 million additional shares would be outstanding if all warrants
and all stock options were exercised as of September 30, 2000.
Unaudited Financial Statements
The accompanying statements are unaudited, but have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of results have been included. The interim
financial statements contained herein do not include all of the footnotes and
other information required by accounting principles generally accepted in the
United States of America for complete financial statements as provided at
year-end. For further information, refer to the consolidated financial
statements and footnotes thereto included in the registrant's annual report on
Form 10-K for the year ended December 31, 1999.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. RISKS AND UNCERTAINTIES
The Company has incurred a net operating loss in each year since it's founding
and as of September 30, 2000 has an accumulated deficit of $45,627,932. 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
7
<PAGE> 8
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 and second quarter of 2000, the Company used the proceeds from
a private placement to pay down and settle approximately $1,700,000 of trade and
other payables outstanding as of December 31, 1999 with $1,300,000 of cash. The
difference between the 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.
5. BUSINESS SEGMENTS
The Company has three reportable segments: Dauphin Technology, Inc. (Dauphin),
R.M. Schultz & Associates, Inc, (RMS) and Advanced Digital Designs, Inc. (ADD).
Dauphin is involved in design, manufacturing and distribution of hand-held
pen-based computer systems and accessories and smartbox set-top boxes. RMS was
an electronic contract-manufacturing firm. ADD performs design services, process
methodology consulting and intellectual property development. During the third
quarter of 1999, the Company decided to discontinue its contract-manufacturing
business.
September 30, 2000 September 30, 1999
------------------ ------------------
REVENUE
Dauphin $ 33,952 $ 267,036
RMS - 2,039,828
ADD 327,064 -
Inter-company elimination - (121,241)
Total $ 361,016 $ 2,185,623
=========== ===========
OPERATING (LOSS)
Dauphin $(5,054,744) $(2,346,580)
RMS - (3,757,428)
ADD 27,045 -
Inter-company elimination - (5,000)
----------- ------------
Total $(5,027,699) $ (6,099,008)
=========== ============
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Dauphin $16,718,022 $ 6,443,079
RMS 1,961,468 2,156,937
ADD 5,900,329 -
-
Inter-company elimination (12,963,096) (5,227,862)
----------- ------------
Total $11,616,723 $ 3,372,154
=========== ============
6. COMMITMENTS AND CONTINGENCIES
The Company is an operating entity and in the normal 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.
8
<PAGE> 9
DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. EQUITY TRANSACTIONS
2000 Events
During the first and second quarter of 2000, the Company conducted a private
placement of 4,654,653 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $8,600,000. The
proceeds were used to settle 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.
In April, the Company completed its private placement and issued 3,630,000
options to an investment banker in lieu of consulting fees.
On April 26, 2000, the Company completed 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 as the
Company requests over an 18 month period, in return for common stock and
warrants to be issued to the investor. Once every 22 days, the Company may
request a draw of up to $10,000,000 of that money, subject to a maximum of 18
draws. The maximum amount the Company actually can draw down upon each request
will be determined by the volume-weighted average daily price of the Company's
common stock for the 22 trading days prior to its request and the average
trading volume for the 45 trading days prior to the request. Each draw down must
be for at least $250,000. Use of a 22 day trading 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 amount
of shares is determined based on the volume-weighted average stock price during
that 22-day period in accordance with the formulas in the common stock purchase
agreement.
On April 28, 2000, the Company filed with the Securities and Exchange Commission
a Form S-1 registration statement relating to 15,332,560 shares of common stock
issued to stockholders in private transactions, 11,958,963 shares for other
stockholders, and 6,000,000 shares to be issued when the Company requests a
drawdown under the common stock purchase agreement referred to above.
On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement, the Company issued as a placement fee warrants to purchase 250,000
shares of common stock at an exercise price of $5.481.
On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement for $5,000,000. Upon receipt of the funds, the
Company issued 1,354,617 shares of common stock and warrants to purchase 101,463
shares of common stock at exercise prices ranging from $4.06 to $4.22.
In September, the Company issued 73,750 stock options to certain employees under
employment agreements. At the time of issuance, the option price was below the
market price and the Company recorded $70,622 as additional compensation
expense.
9
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DAUPHIN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Subsequent Event
On October 20, 2000 the Company entered into an agreement with Best S.A. to act
as its distributor/agent in Greece. On October 26, 2000 the Company issued
1,550,000 shares of restricted stock to Best S.A. as a performance bond to
assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. The agreement requires the Company to register these
shares with the Securities and Exchange Commission during the fourth quarter
2000. To secure performance of the Company's obligation to register these
shares, Andrew J. Kandalepas, Chairman of the Board and CEO of the Company,
granted to Best S.A. a security interest in 1,032,118 shares of Company stock
owned by him.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues for the three months ended September 30, 2000 and 1999 were
approximately $345,000 and $158,000, respectively. Revenues in the third quarter
of 2000 were $327,000 of consulting fees from the Company's design engineering
subsidiary and $34,000 from the sale of the Orasis(R) hand-held computer and
accessories. Revenues in the third quarter of 1999 were comprised of $100,000
from the sale of the Orasis(R) and $58,000 in contract manufacturing. Cost of
revenues decreased from $2,105,000 in the third quarter of 1999 to $317,000 for
the three months ended September 30, 2000. Included in the cost of revenue for
1999 are charges related to the write down of inventory due to the decision of
the Company to discontinue performing contract-manufacturing services. Gross
profit margins are not comparable for the period due to the mix in revenues and
the charges related to the discontinuance of contract manufacturing.
Selling, general and administrative expenses increased to approximately
$2,655,000 in 2000 from $1,532,000 in 1999. The increase from 1999 to 2000 was
due to the expenses incurred in finalizing the common stock purchase agreement,
the issuance of warrants as a placement fee and the fees associated with
exercising the drawdown.
Research and Development costs increased to approximately $222,000 during the
three-month period ended September 30, 2000 from $19,000 over the corresponding
period in 1999. Research and Development costs during 2000 were primarily
related to the development of the set-top box, whereas costs incurred in 1999
were primarily related to the Orasis(R).
Interest expense decreased to approximately $9,000 for the third quarter of 2000
from $93,000 as of the corresponding period in 1999. This decrease is primarily
attributed to the fact that the Company has paid off substantially all of its
debt during the first quarter of 2000.
Net loss
The consolidated loss after tax decreased for the three-month period ended
September 30, 2000 to approximately ($2,820,000) or ($0.05) per share from
($3,584,000) or ($0.07) per share in 1999. The loss for 2000 was primarily
attributed to the expenses associated with the common stock purchase agreement
and the drawdown, whereas the loss for 1999 consisted primarily of the charges
related to discontinuing the contract manufacturing business. Loss per common
share is calculated based on the monthly weighted average number of common
shares outstanding which were 59,166,582 for the three-month period ended
September 30, 2000, and 48,419,719 for the three-month period ended September
30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue for the Company decreased from approximately $2,186,000 in the first
nine months of 1999 to $361,000 in the first nine months of 2000. The revenue
decreased as a result of the Company shifting away from contract manufacturing
and focusing its efforts on the development of the set-top box. Gross profit
margins are not comparable for the period due to the fluctuation in revenues.
Selling, general and administrative expenses increased to approximately
$4,475,000 for the nine months ended September 30, 2000 as compared to
$3,172,000 for 1999. The increase in professional fees and financial service
expenses related to the private placement, common stock purchase agreement and
the costs associated with exercising the drawdown were partially offset by staff
reductions and other cost cutting measures implemented by management.
Research and Development costs increased to approximately $473,000 for the first
nine months of 2000 as compared to $455,000 for the first nine months of 1999.
Research and Development in 2000 consisted of costs
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
associated with the development of the set-top box, whereas in 1999, these costs
were for the continued development of the Orasis(R).
Interest expense decreased to approximately $1,827,000 for the nine months ended
September 30, 2000 from $1,976,000 for the nine months ended September 30, 1999.
Interest expense in 2000 was primarily generated from the issuance of common
stock at a price below market value and the issuance of warrants during the
private placement. Interest expense in 1999 was mainly a result of the financing
activities associated with the conversion of debt to common stock as well as the
issuance of warrants associated with the debt.
Net loss
The consolidated loss after income tax was approximately ($6,801,000) or ($0.12)
per share for the nine months ended September 30, 2000. The consolidated loss
after income tax for the nine months ended September 30, 1999 was ($8,056,000)
or ($0.18) per share. The decrease in net loss is a direct result of the
decision to discontinue contract manufacturing and lower interest expense,
however the magnitude of the decrease was offset by the increase in professional
fees and other costs associated with the private placement and the common stock
purchase agreement.
Balance Sheet
Total assets for the Company increased to approximately $11,806,000 at September
30, 2000 from $3,372,000 at December 31, 1999. The increase was the result of
the completion of the private placement and exercising the drawdown on the
common stock purchase agreement. The proceeds were used to acquire the
engineering firm, Advanced Digital Designs, Inc. The results of the acquisition
added $625,000 to property and equipment and $5,500,000 as goodwill. Trade
accounts payable decreased during the first nine months mostly due to payments
and settlements with various vendors. Short-term borrowings and other payables
decreased during the nine months due to their conversion into equity.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred a net operating loss in each year since it's founding
and as of September 30, 2000 has an accumulated deficit of approximately
$45,628,000. 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.
During the first and second quarters of 2000, the Company conducted a private
placement, which raised approximately $8,600,000, of which $1,300,000 was used
to settle certain trade payables. In the second quarter of 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 for use by the Company at its
discretion. During the third quarter, the Company received $5,000,000 from the
equity line in exchange for the issuance of 1,354,617 shares of common stock. In
October, 2000, the Company has also requested and additional drawdown of
$2,000,000. The Company has available up to $93,000,000 under the equity line of
credit.
RISK FACTORS
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those discussed in the Company's fiscal
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RISK FACTORS (CONTINUED)
year 1999 Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in the Rights of the Company's Security Holders. None
Item 3. Default by the Company on its Senior Securities. None
Item 4. Submission of Matters to a Vote of Securities Holders. None
Item 5. Other Information. None
Item 6(a). Exhibits. None
Item 6(b). Reports on Form 8-K.
On August 28, 2000, the Company filed Form 8-K to report the acquisition of
substantially all of the assets of T & B Designs, Inc. (f/k/a Advanced Digital
Designs, Inc.), Advanced Technologies, Inc, and 937 Plum Grove Road Partnership,
pursuant to an Asset Purchase Agreement by and among the Company, its
subsidiaries, the acquired companies and their shareholders and partners. The
purchase price was $3 million in cash and $3 million to be held in escrow and
disbursed in accordance with the terms and conditions of an Escrow Agreement.
On September 25, 2000, the Company filed Form 8-K/A to report the financial
statements of the business acquired and the pro forma financial information of
the combined companies.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
(Registrant)
Date: November 10, 2000 By: /s/ Andrew J. Kandalepas
-----------------------------
Andrew J. Kandalepas
Chief Executive Officer
Date: November 10, 2000 By: /s/ Harry L. Lukens, Jr.
-----------------------------
Harry L. Lukens, Jr.
Chief Financial Officer
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