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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 33-21537-D
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DAUPHIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
87-0455038
Illinois (IRS Employer Identification Number)
(State or other jurisdiction of
incorporation or organization)
800 E. Northwest Hwy, Suite 950, 60067
Palatine, Illinois (Zip Code)
(Address of principal executive
offices)
(847) 358-4406
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all 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. (1) Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [_]
The aggregate market value of the voting Common Stock held by non-
affiliates of the Registrant as of March 30, 2001 is $82,308,472.
As of March 30, 2001, the number of Shares of the Registrant's Common
Stock, $.001 par value, is 61,886,069 issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2001 Annual Meeting of
Shareholders to be held June 13, 2001, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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DAUPHIN TECHNOLOGY, INC.
Table of Contents
PART I
Item 1. Description of Business............................................ 3
Overview................................................................. 3
Strategic Plan........................................................... 3
Item 2. Properties......................................................... 9
Item 3. Legal Proceedings.................................................. 9
Item 4. Submission of Matters to Vote of Security Holders.................. 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holders Matters........................................................... 9
Market Price of Common Stock............................................. 9
Holders.................................................................. 10
Dividend Policy.......................................................... 10
Common Stock............................................................. 10
Preferred Stock.......................................................... 10
Warrants and Options..................................................... 10
Transfer Agent and Registrar............................................. 11
Item 6. Selected Financial Data............................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11
Results of Operations 2000 Compared to 1999.............................. 11
Fourth Quarter 2000 Compared to Fourth Quarter 1999...................... 12
Results of Operations 1999 Compared to 1998.............................. 12
Liquidity and Capital Resources.......................................... 12
Risk Factors............................................................. 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 18
Item 8. Financial Statements and Supplementary Data........................ 18
Item 9. Changes in and Disagreements with Accountants on Accounting or
Financial Disclosure...................................................... 18
PART III
Item 10. Directors, Executive Officers and Officers of the Registrant...... 19
Directors and Officers...................................................
Family Relationship......................................................
Other: Involvement in Certain Legal Proceedings..........................
Involvement by Management in Public Companies............................
Item 11. Executive Compensation............................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 19
Item 13. Certain Relationships and Related Party Transactions.............. 19
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. 19
Signatures................................................................. 20
2
Note: This Form 10-K contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates
will or may occur in the future, including such things as future acquisitions
(including the amount and the nature thereof), business strategy, expansion
and growth of the Company's business and operations and other such matters are
forward looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business, a number of
factors could cause actual results to differ materially from those expressed
in any forward-looking statements, whether oral or written, made by or on
behalf of the Company. Many of these factors have previously been identified
in filings or statements made by or on behalf of the Company.
PART I
Item 1. Business
General
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiaries
design, manufacture and market 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. The Company employs approximately 35 people consisting of engineering,
sales and marketing, administrative, and other personnel. The Company's stock
is traded on the over-the-counter market electronic bulletin board operated by
NASD, under the symbol DNTK.
In 1993 and 1994 the Company encountered severe financial problems. On
January 3, 1995, the Company filed a petition for relief under Chapter 11 of
the Federal Bankruptcy Code in the United States Court for the Northern
District of Illinois, Eastern Division. The Company operated under Chapter 11
until July 23, 1996, when it was discharged as Debtor-in-Possession and
bankruptcy proceedings were closed.
Strategic Plan
Before the Company emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with strong
engineering and manufacturing backgrounds as well as finance, accounting,
sales and marketing skills were hired. The new management formulated a
strategic business plan to diversify the Company's operations to eliminate
dependence on a single product line or industry.
The plan incorporated an initial focus on the hand-held mobile computer
market. In particular, it focused on development of miniaturized mobile
computers that would be incorporated in electronic solutions for vertical
markets. In addition to mobile computing markets, management is focused on
producing and marketing other electronic devices, namely set top boxes,
coupled with targeted acquisitions in the technology sector.
As part of management's plan, on June 6, 1997 the Company acquired all of
the outstanding shares of stock in R.M. Schultz & Associates, Inc. ("RMS"), an
electronic contract-manufacturing firm located in McHenry, Illinois. On August
28, 2000 the Company acquired all of the assets of T & B Design, Inc. (f/k/a
Advanced Digital Designs, Inc.) ("ADD"), Advanced Technologies, Inc. ("ATI"),
and 937 Plum Grove Road Partnership ("937") pursuant to an Asset Purchase
Agreement. ADD and ATI specialize in telecommunications, especially wireless
and cable-based product development, as well as multimedia development,
including digital video decoding and processing.
Products and Services
Orasis(R) is a hand-held computer developed by the Company with features to
meet the expressed desires of many potential customers. The unit was developed
with the multi-sector mobile user in mind. As such, it
3
incorporated 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 233 MHz Pentium MMX processor, which can be
upgraded to 266 MHz Pentium MMX
. The standard unit is equipped with 64 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 18 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
. CDROM drive, floppy drive, DVD drive, credit card readers, smart-card
readers, radio modems, wireless receivers, port replicators, USB hubs,
audio source I/O, heads-up goggles, GPS module and other attachable
devices
Much more flexible and powerful than a Personal Digital Assistant ("PDA"),
the Orasis(R) 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(R) is its upgradability. The expansion
bay allows for the use of CDROM, floppy drive, wireless radio, extended
battery pack or any other device through the PCI expansion bus. Unlike
competitor models Orasis(R) does not lock the customer into a single format.
Orasis(R) 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. The Company has not recognized significant sales of
the product to date and will adjust its product as the market further develops
new technologies.
During the later part of 1999 the Company was engaged in negotiations and
eventually on February 17, 2000 signed a contract to develop and produce set-
top boxes. In conjunction with continued development of Orasis(R) and the
decision to terminate its contract manufacturing, the Company began design and
development of such boxes. 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. The Company is rewriting
its marketing and sales plan to incorporate the European contract for its set-
top box and to include a strategy for domestic operations for both the
Orasis(R) and OraLynx(TM).
The OraLynx(TM) Broadband set-top box processes high-speed video, provides
storage and works with coaxial cable, ADSL and fiber. The OraLynx(TM) set-top
box offers considerable advantages for service providers and end users. For
service providers, the OraLynx(TM) set-top box enables integration of data,
voice, and video over one unified network using one termination device. For
end users, the OraLynx(TM) set-top box serves as a simple yet sophisticated
gateway and access device that can be controlled with a remote control,
keyboard or other mobile handheld device. The OraLynx(TM) set-top box can be
networked to PC's, Internet appliances, and more. The OraLynx(TM) can provide
direct access to interactive TV, video-on-demand and ATM or IP voiceover phone
service. Basic unit features are as follows:
. High quality/high speed user interface (2D graphics)
. Seamless Video-on-Demand Service
. Instant Telephone Access
. IP or ATM voiceover
4
. Supports up to 4 telephone lines
. Supports standard Internet protocols and various Internet connections
(xDSL, SONET, ATM25, Ethernet)
. Networking and Smart Appliance Interface
. Provides wireless or conventional networking
The Company performs design services, process methodology consulting and
intellectual property development for a variety of technology companies. The
Company's engineers specialize in telecommunications, especially wireless and
cable-based product development, as well as multimedia development, including
digital video decoding and processing. The Company has received a contract for
the production and sale of set-top boxes, but has not yet begun significant
production. It has also amended the contract and extended the delivery dates
on two occasions.
Markets
Every day on TV, radio and in the newspapers we hear and read about
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. The increased use of the internet as a means of
commerce and communication drives us forward every day to reach for the things
that only a few years ago we read about in science fiction books. We also read
about constant improvements in digital and cellular technology in order to
allow anyone to constantly "stay connected".
Based on the latest statistics, the mobile computing devices market is
approximately $110 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(R) competes, is several billion dollars and is growing at approximately
twenty five percent per year. Dauphin's management estimates 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(R). The total mobile market includes
more than sixty products that fall within the Personal Digital Assistant
("PDA") 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 to
PDA's, there are approximately twenty devices that would qualify as computers
or pen tablets. Orasis(R) belongs in the latter category.
Until the introduction of Orasis(R), pen based devices were no match for
the laptops. The processor speed, limited expandability and memory limitations
of hand-held computers made notebooks and laptops much more popular with the
mobile workforce. Orasis(R) bridges the gap between notebook or laptop
computers and pen-based computers. Added features and flexibility of the unit
may also attract public attention, thereby growing the overall category.
The set-top box market is a relatively new phenomenon. According to the
research firm, Strategy Analytics, the worldwide installed base of set-top
boxes was a mere 2.2 million in 1998 and was 27.4 million boxes in the year
2000, and is expected to grow by 35% in 2002. Currently with the market in the
early developing stages, the "set-top box" has not been perfected. Existing
designs do not offer the flexibility or future capacity that Dauphin's
customers seek.
Sales and Marketing
During the year 2000, the scope of the marketing effort for set top boxes
was somewhat narrow. As a result of the contract with Estel Telecommunications
S.A. to supply set-top boxes, the Company has not acted aggressively to market
them to other potential buyers. The Company did, however, demonstrate the
OraLynx(TM)
5
at the Comdex Fall 2000 show in Las Vegas and as a result generated more than
one thousand leads. Without any proactive effort, the Company has numerous
ongoing negotiations with companies interested in purchasing the set-top
boxes.
Dauphin's design services and process methodology consulting are focused on
high technology companies, especially in the telecommunications and multimedia
industries. The Company markets these services to customers through
advertising, the Company's web site and through direct contact with the
customer.
Competition
Many competitors exist in the market segments where Dauphin competes. In
the hand held computer market, companies such as Epson, Fujitsu, IBM, and
Mitsubishi are market segment leaders. The companies manufacturing set-top
boxes are equally as impressive, including Motorola and Scientific Atlanta.
However, Dauphin management believes some advantages exist over the
competition including flexibility, adaptability and unique solutions driven
designs. Most of the Company's competitors are large corporations or
conglomerates, which may have greater resources to withstand downturns in the
hand held computer and set-top box markets, invest in new technology and
capitalize on growth opportunities. These competitors, like the Company,
aggressively seek to improve their yields by way of increased market share and
cost reduction.
The Company's design services experience intense competition from a number
of companies. Most of these companies are small "boutique" engineering
services firms, offering the services of their engineers on a time and
material basis. Like the Company, these competitors are aggressively marketing
their expertise and past successes.
Customer Dependence
The Company is not dependent on any one customer. However, one individual
design service customer accounted for approximately 53% of total revenues for
the year 2000.
Research and Development
Substantially all of the Company's research and development efforts relate
to the development of handheld computers and set-top boxes. To compete in the
highly competitive hardware markets, the Company must continue to develop
technologically advanced products. The Company's total research and
development expenditures were approximately $1,427,000, $510,000 and
$1,576,000 in 2000, 1999 and 1998, respectively. The Company has retained all
rights and intellectual property acquired during the development of their
handheld products and peripheral devices, and anticipates protecting all
intellectual property developed as a result of work being done on the
Company's set-top boxes.
Production
Because the main components of the Company's products are complex, the
assembly of the motherboards is outsourced to SMT Unlimited, which supplies
RMS with the ready assembled and tested motherboards for final assembly. SMT
Unlimited, located in Fremont, California, is capable of producing hundreds of
motherboards per day.
RMS assembles, tests and ships final products to Dauphin customers. All
manufacturing support for the Company's products is performed by RMS. With
additional staffing, RMS is capable of assembling hundreds of units per day.
Source and Availability of Raw Materials
Component parts are obtained from suppliers around the world. Components
used in all designs are state of the art and are Year 2000 compliant.
Components such as the latest mobile Intel processors, color video
6
controllers and CACHE memory chips are in high demand and are, thus, available
in short supply. However, once production has begun, management does not
anticipate delays in the production schedule.
Software Licensing Agreements
The Company is leasing BIOS (basic input/output software) for Orasis(R)
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. The
Company pays $4 per unit sold for this license.
The Company has entered into 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. Under the terms of these
agreements, the Company is authorized to install DOS, Windows 95, 98, 2000 and
NT, and Windows for Pen, among others, on the computers it sells. For this
right, the Company must pay Annabooks royalties for each unit sold, although
quantity discounts are available. The Company pays approximately $78 per
license for each computer it sells.
Patents, Copyrights and Trademarks
In view of rapid technological and design changes inherent to the computer
industry, the Company does not believe that, in general, patents and/or
copyrights are an effective means of protecting its interests. However, due to
the unique configuration of the Orasis(R), the Company did patent its
mechanical design and processor upgradability concepts. It also expects to
patent its set-top box design following development. The Company also attempts
to maintain its proprietary rights by trade secret protection and by the use
of non-disclosure agreements. It is possible that the Company's products could
be duplicated by competitors and duplication and sale could therefore
adversely affect the Company. However, management believes 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."
Employees
As of December 31, 2000, the Company had approximately 35 full-time
employees. Many of the Company's employees are highly skilled and the
Company's success depends in part upon its ability to attract and retain such
employees. The loss of key Company personnel could have an adverse effect on
the Company's results of operations.
Directors and Officers
The following table sets forth the name, age, date elected or appointed as
Director, Executive Officer or Officer position with the Company, present
principal occupation and employment history for the past five years of each
person who is a Director, Executive Officer or Officer.
Name Age Date Present Office
---- --- ---- --------------
Andrew J. Kandalepas 49 1995 Chairman of the Board of Directors
Chief Executive Officer
Mr. Kandalepas joined Dauphin as Chairman of the Board in February 1995. He
was named CEO and President of Dauphin in November of 1995. In addition, Mr.
Kandalepas is the founder and President of CADserv, engineering services firm.
Mr. Kandalepas 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.
7
Name Age Date Present Office
---- --- ---- --------------
Christopher L. Geier 38 1999 Executive Vice President
Mr. Geier is Executive Vice President reporting directly to Dauphin's CEO.
Mr. Geier leads Dauphin's overall organization, including its subsidiaries.
Prior to joining Dauphin, Mr. Geier founded and managed several multimillion-
dollar private corporations, as well as a $100 million region of a large
retail distribution company. Mr. Geier earned an MBA from the University of
Chicago Graduate School of Business and a Bachelor of Arts in Criminal
Justice/Pre Law from Washington State University.
Harry L. Lukens, Jr. 50 2000 Chief Financial Officer
Mr. Lukens was appointed Chief Financial Officer in May 2000 and named
Assistant Secretary in March 2001. 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 LLP, serving as a partner from 1986 until
1993.
Jeffrey L. Goldberg 48 1995 Secretary, Director
Mr. Goldberg has served as Secretary and a Director since June of 1995. He
is also a member of the Audit Committee. Mr. Goldberg is a principal with
Essex LLC., a financial planning firm and is currently Chief Executive Officer
and Chairman of the Board of Stamford International, a Canadian company. He is
a former principal at FERS Personal Financial LLC, an accounting and financial
planning firm. Mr. Goldberg 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. He is
an attorney, CPA and certified financial planner.
Gary E. Soiney 60 1995 Director
Mr. Soiney has served as a Director since November of 1995. He is also a
member of the Audit Committee. Mr. Soiney 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 business primarily in the Mid-West.
Andrew Prokos 38 1995 Director
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.
Mary Ellen Conti, MD 2000 Director
Dr. Conti was appointed to the Board of Directors and to the Audit
Committee in September, 2000. Dr. Conti is a Radiation Oncologist and owns and
operates four Radiation Therapy Clinics in the St. Louis, MO. area. She has
practiced in the medical field since 1974 and has been a member of the
Planning and Budget Committee of Memorial Hospital in Belleville, Illinois.
Dr. Conti currently serves as a member of the Board of Directors of Creighton
University, FirstStar Bank Health Care Board, Association of Freestanding
Radiation Oncology Centers and the Accreditation Association for Ambulatory
Health Care.
All Directors are elected annually and hold office until the next annual
meeting of the shareholders of the Company or until their successors have been
elected and qualified.
Family Relationship
Andrew Prokos, a Director, is a cousin of Andrew Kandalepas, Chairman of
the Board of Directors.
Other: 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.
8
Involvement by Management in Public Companies
Mr. Goldberg is Chief Executive Officer and Chairman of the Board of
Stamford International, Inc., which trades on the Canadian Dealer Network. Mr.
Goldberg also served as a Director of Econometrics, Inc. that is traded on the
over the counter market until October, 2000. None of the other Directors,
Executive Officers or Officers has had, or presently has, any involvement with
a public company, other than the Company.
Item 2. Properties
The Company's executive offices consist of 7,300 square feet of office
space located at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067.
The Company pays approximately $10,000 per month to rent the facilities. In
December 1998, in conjunction with upgrading the facilities, Dauphin signed a
five-year lease extension. The lease called for increased rent, but provided
for reconstruction of facilities to better suit the Company's needs. The
Company believes the space will be adequate for the foreseeable future.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050.
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. The
Company believes the space will be adequate for RMS operations for the
foreseeable future.
ADD facilities are located at 937 N. Plum Grove Road, Schaumburg, Illinois
60173. The approximately 5,500 square feet of office space is owned by the
Company.
Item 3. Legal Proceedings
During 2000, the Company was engaged in various legal proceedings of which
all such proceedings were finalized and fully accounted for in the financial
statements. As of the date of this report, the Company is not aware of any
legal proceedings or litigation involving the Company.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holders
Matters
Market Price of Common Stock
The Company's common stock is traded on the over-the-counter market and is
quoted in the National Quotation Bureau's Pink Sheets. The following table
shows the range of representative bid prices for the common stock. The prices
represent quotations between dealers and do not include retail mark-up,
markdown, or commission, and do not necessarily represent actual transactions:
Bid Prices
1998 1999 2000
------------- ------------- --------------
High Low High Low High Low
------ ------ ------ ------ ------- ------
First Quarter........................ $1.625 $1.016 $1.219 $0.453 $12.563 $0.266
Second Quarter....................... 1.391 0.875 0.938 0.391 8.000 2.656
Third Quarter........................ 2.031 0.875 0.750 0.266 6.750 3.094
Fourth Quarter....................... 0.906 0.500 0.703 0.219 4.438 0.719
9
Holders
The number of shareholders on record of the Company's common stock as of
March 28, 2001 as reported by the Company's transfer agent is approximately
22,500. A number of the Company's shareholders on record are brokerage firms
or stock clearing agencies. Therefore, the Company believes the total number
of beneficial shareholders is greater than 22,500.
Dividend Policy
The Company has not paid any cash dividends to date and does not anticipate
or contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business.
Common Stock
The authorized capital stock of the Company consists of 100,000,000 shares
of common stock, $0.001 par value. As of March 28, 2001 there were 61,866,069
shares of common stock issued and outstanding held by approximately 22,500
shareholders of record. 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
shareholders. 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.
Preferred Stock
No preferred shares have been issued to date. The Company is authorized to
issue up to 10,000,000 shares of preferred stock, $0.01 par value. 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 shareholders, 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. No
preferred stock is currently outstanding and the Company has no present plans
for the issuance thereof. However, the issuance of any such preferred stock
could affect the rights of the holders of common stock, and, therefore, reduce
the value of the common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict the Company's
ability to merge with or sell its assets to a third party, thereby preserving
control of the Company by present owners.
Warrants and Options
As of March 28, 2001 there are a total of 8,331,504 Warrants issued and
outstanding in the hands of approximately 60 investors and consultants,
resulting from fund raising. These Warrants are convertible at any time into
Company's $0.001 par value common stock. The per share strike prices of these
Warrants range from $0.20 to $5.481. These Warrants expire three years from
the date of issuance. The Warrants include a change of form provision in them,
whereby 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. At the time such Warrants are
exercised, the common shareholders ownership percentage of the Company will be
diluted. In December 2000, the Company re-priced approximately 3,012,000
warrants it had previously issued to
10
outside consultants. The warrants were originally issued with an exercise
price ranging from $10.00 to $5.00, and were re-priced with exercise prices
ranging from $5.00 to $2.00 per share. The re-pricing created a charge to
earnings of approximately $234,000.
As of March 28, 2001 there are a total of 4,178,123 Options issued and
outstanding in the hands of more than thirty employees and former employees.
These Options are exercisable at any time into the Company's $0.001 par value
common stock. The per share strike prices of these Options range from $0.50 to
$3.875. These Options expire three years from the date of issuance. At the
time such Options are exercised, the common shareholders ownership percentage
of the Company will be diluted.
Transfer Agent and Registrar
American Stock Transfer and Trust Company, 6201 15th Avenue, Brooklyn, New
York 11219.
Item 6. Selected Financial Data
Year Ended December 31
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Net Sales............... $ 859,837 $ 2,279,058 $ 5,367,514 $ 2,730,035 $ 93,946
Extraordinary Item...... -- -- -- -- 38,065,373
Net Income (Loss)....... (8,817,362) (9,306,304) (6,131,557) (3,988,017) 36,668,669
Net Income (Loss) Per
Share.................. (0.15) (0.20) (0.16) (0.13) 1.52
Total Assets............ 11,160,777 3,372,155 6,719,635 7,269,136 3,402,860
Long-Term Debt.......... 102,133 185,179 302,951 429,526 43,196
Working Capital
(Deficit).............. 3,015,210 (917,917) 260,227 4,510,546 3,020,558
Shareholders' Equity
(Deficit).............. 10,520,864 552,344 2,885,228 5,675,595 3,092,900
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
The following discussion should be read in conjunction with the
consolidated financial statements. Certain statements contained herein may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to
differ materially, as discussed more fully herein.
Results of Operations 2000 Compared to 1999
Revenue for the Company decreased from approximately $2,279,000 in 1999 to
$860,000 in 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. Revenue for 2000 was also aided by the design services and
consulting of the Company's subsidiary, Advanced Digital Designs ("ADD").
Gross revenue from ADD from the date of acquisition of August 18, 2000, amount
to approximately $985,000. Gross profit margins are not comparable for the
period due to the fluctuations in revenue.
Selling, general and administrative expenses decreased to approximately
$4,043,000 for 2000 as compared to $4,173,000 for 1999. The increase in
professional fees and financial service expenses related to the private
placement, common stock purchase agreement and cost associated with exercising
the drawdown were offset by staff reductions and other cost cutting measures
implemented by management.
Research and Development costs increased to approximately $1,472,000 for
2000 as compared to $510,000 for 1999. Research and Development in 2000
consisted of costs associated with the development of the OraLynx(TM) set-top
box, whereas in 1999, these costs were for the continued development of the
Orasis(R).
11
Interest expense decreased to approximately $1,370,000 for the year ended
December 31, 2000 from $2,099,000 for the year ended December 31, 1999.
Interest expense in 2000 was primarily generated from the issuance of common
stock at a price below market value. 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.
Fourth-Quarter 2000 Compared with Fourth-Quarter 1999
Revenue for the fourth-quarter 2000 was approximately $499,000 as compared
to fourth-quarter revenue in 1999 of approximately $93,000. The revenue
increased as a result of the design services and consulting of the Company's
subsidiary, Advanced Digital Designs. Gross profit margins are not comparable
for the period due to the fluctuations in revenue. However, the fourth-quarter
gross margins were affected in 2000 by the write down of obsolete and slow
moving inventory. In 2000, the Company wrote down approximately $1,440,000 of
inventory, consisting primarily of raw materials, and disposed of excess and
obsolete inventory, which will not be used in the production of the Orasis(R).
In addition, the Company established an inventory reserve of approximately
$515,000 to adjust for the net realizable value of the remaining inventory
associated with the Orasis(R).
Selling, general and administrative expenses are comparable between the
fourth-quarter of 2000 and 1999. Research and Development costs increased by
approximately $944,000 from approximately $55,000 in the fourth-quarter 1999
to approximately $999,000 in the fourth-quarter 2000. This is attributable to
the concentrated efforts of developing the OraLynx(TM) set-top box.
Interest expense decreased from $124,000 in the fourth-quarter 1999 to
approximately $4,000 in the fourth-quarter of 2000. This decrease is
attributable to the fact that the Company paid off substantially all of its
debt during the first quarter of 2000.
Results of Operations 1999 Compared to 1998
Revenue decreased from approximately $5,368,000 in 1998 to approximately
$2,279,000 in 1999. The decrease is a direct result of management's change in
corporate strategy moving away from contract manufacturing and towards new
product design and development. Gross profits are not comparable between 1999
and 1998 due to the decrease in revenue and the write down of inventory of
approximately $1,793,000.
Selling, general and administrative expenses increased in 1999 to
approximately $4,173,000 from $3,273,000 in 1998. The increase was due to the
increase in professional and consulting fees associated with capital raising
efforts, the impairment of goodwill and costs associated with the reduction of
overhead and staffing.
Research and Development expenses decreased from approximately $1,576,000
in 1998 to approximately $510,000 in 1999. During 1998, substantially all the
efforts were for the development of the Orasis. During 1999, the Orasis was in
production and only minor modification and development work was necessary.
Interest expense increased from $968,000 in 1998 to approximately
$2,099,000 in 1999. The increase in interest expense is directly related to
the financial constraints on the Company during 1999. Interest expense in 1999
was mainly the 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.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since it's
founding and as of December 31, 2000, has an accumulated deficit of
approximately $47,644,000. 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
12
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 also requested an additional drawdown of
$2,000,000. The Company has available up to $93,000,000 under the equity line
of credit.
Risk Factors
We operate in a highly competitive and volatile industry. We are faced with
aggressive pricing by competitors; competition for necessary parts, components
and supplies; continually changing customer demands and rapid technological
developments; and risks that buyers may encounter difficulties in obtaining
governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessary to use our products or to offer them
to end users. The following cautionary statements discuss certain important
factors that could cause actual results to differ materially from the
projected results contained in the forward-looking statements contained in
this Annual Report.
Risks Related to Our Financial Results and/or Condition
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 potential sources of
capital 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, 1998 and 1999, contract manufacturing services
conducted through our subsidiary accounted for $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.
Availability of funding under our equity line is affected by our share price
and general market conditions.
In April 2000, we entered into a common stock purchase agreement with
Techrich International establishing an equity line whereby we may request
draws of up to $100,000,000 over an 18-month period in return for common stock
and warrants that we issue to Techrich. The amount of securities to be issued
under the equity line is based on a formula that is tied to the market price
for our shares. 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 conditions could reduce the market price of our shares
despite operating performance and the market price of our shares could
decrease significantly if our operating performance falls below expectations.
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 the equity line could result in significant dilution of the per share
value of our shares held by current
13
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 would be issued, and
the greater the dilution caused by these securities;
. the perceived risk of dilution may cause Techrich or other shareholders
to sell their shares, which could contribute to the downward movement in
the stock price of Techrich's shares; and
. the significant downward pressure on the trading price of our shares
could encourage Techrich and other shareholders to engage in short sales,
which would further contribute to the downward spiraling price decline of
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 placement agreement with Ladenburg Thalmann Co. Inc., restricts us from
raising investment capital during the term of the common stock purchase
agreement except through the common stock purchase agreement, unless otherwise
agreed to in writing.
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 filed in connection with establishment of the equity line.
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
and/or development 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. 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.
14
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(R), the
OraLynx(TM) 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.
The current set-top box agreement subjects us to risks associated with
international operations.
As we begin shipping 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 OraLynx(TM) 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(R) computer. We
expect to continue to develop enhancements and accessory equipment to meet
customer and market demands. The OraLynx(TM) set-top box is in development and
although it relies in part upon technology developed for the Orasis(R), 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(R) and OraLynx(TM) 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;
15
. 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.
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 OraLynx(TM) set-top box and coordinate production of
Orasis(R) computers and the OraLynx(TM) 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 will
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(R) computer has passed the development stage, we have
not established a market for it. The Orasis(R) is a solution oriented, pen-
based, mobile computer system, which has been produced and marketed
16
only on a limited basis. As the market and applications for the Orasis(R)
increase, we anticipate its market will increase; however, there is no
assurance that this will happen.
The OraLynx(TM) set-top box is in the early stage of development and
prototypes have completed the alpha stage of testing. We believe we will
successfully develop the OraLynx(TM) 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
OraLynx(TM) 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 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(R) 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
17
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 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 Company may terminate the agreement if permits to install
fiber optic and other infrastructure equipment are not issued to the buyer.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity.
Substantially all of the Company's liquid investments and long-term debt
are at fixed rates; therefore, the fair value of these instruments is affected
by changes in market interest rates. The Company believes that the market risk
arising from its holdings of liquid investments is minimal as substantially
all of the Company's investments mature within one year.
Foreign Currency Exchange Risk.
All of our revenues are denominated in US dollars. Foreign sales and
expenditures are nominal. We do not currently and do not intend in the future
to utilize derivative financial instruments for trading purposes.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements are included in Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting or
Financial Disclosure
Not applicable.
18
PART III
Item 10. Directors, Executive Officers and Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Certain information concerning the registrant's executive officers is
included under the caption, "Officers and Directors of the Registrant,"
following Part I of this report. Other information required by Items 10, 11,
12, and 13 will be contained in the registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held June 13, 2001 (the "Proxy
Statement"), a copy of which will be filed with the Securities and Exchange
Commission before the meeting date.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth quarter of
the recently completed fiscal year.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunder duly authorized, in the
City of Palatine and State of Illinois, on the 30th day of March, 2000.
Dauphin Technology, Inc.
/s/ Andrew J. Kandalepas
BY: _________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Andrew J. Kandalepas Chairman of the Board of Directors March 30, 2001
____________________________________ Chief Executive Officer, President
Andrew J. Kandalepas
/s/ Christopher L. Geier Executive Vice President March 30, 2001
____________________________________
Christopher L. Geier
/s/ Harry L. Lukens, Jr. Chief Financial Officer and March 30, 2001
____________________________________ Assistant Secretary
Harry L. Lukens, Jr.
/s/ Jeffrey L. Goldberg Secretary and Director March 30, 2001
____________________________________
Jeffrey L. Goldberg
/s/ Gary E. Soiney Director March 30, 2001
____________________________________
Gary E. Soiney
/s/ Andrew Prokos Director March 30, 2001
____________________________________
Andrew Prokos
/s/ Mary Ellen Conti Director March 30, 2001
____________________________________
Mary Ellen Conti, MD
20
DAUPHIN TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants......................... F-2
Report of Independent Public Accountants................................... F-3
Consolidated Balance Sheets--December 31, 2000 and 1999.................... F-4
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998....................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000,
1999 and 1998............................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998....................................................... F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiaries, as of December
31, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the two years ended December 31, 2000
and 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial position
of Dauphin Technology, Inc. and its Subsidiaries as of December 31, 2000 and
1999 and the consolidated results of their operations and cash flows for the
two years ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
Grant Thornton LLP
Chicago, Illinois
March 22, 2001, except for note 19, as to
which the date is April 3, 2001
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of DAUPHIN TECHNOLOGY, INC. (an Illinois
Corporation) and Subsidiary for the year ended December 31, 1998. These
consolidated financial statements of operations, shareholders' equity and cash
flows 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of operations,
shareholders' equity and cash flows referred to above present fairly, in all
material respects, the results of operations and cash flows for Dauphin
Technology, Inc. and Subsidiary for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated l statements of operations, shareholders'
equity and cash flows 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 twentieth paragraph 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 twentieth paragraph
of Note 17, as to which the date is
April 15, 1999)
F-3
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
------------ ------------
Current Assets:
Cash............................................ $ 2,683,480 $ 31,087
Accounts receivable--
Trade, net of allowance for bad debt of
$50,621 and $428,599 at
December 31, 2000 and 1999................... 321,377 124,844
Employee receivables.......................... 21,590 118
Inventory, net of reserves for obsolescence of
$2,491,216 and $1,945,296 at December 31, 2000
and 1999....................................... 505,749 1,521,886
Prepaid expenses................................ 20,794 38,779
------------ ------------
Total current assets........................ 3,552,990 1,716,714
Investment in related party....................... 290,000 290,000
Property and equipment, net of accumulated
depreciation of $1,127,040 and
$712,192at December 31, 2000 and 1999............ 1,477,787 1,365,440
Escrow deposit.................................... 752,500 --
Goodwill, net of accumulated amortization of
$412,500 at December 31, 2000.................... 5,087,500 --
------------ ------------
Total assets................................ $ 11,160,777 $ 3,372,154
============ ============
Current Liabilities:
Accounts payable................................ $ 290,474 $ 1,894,663
Accrued expenses................................ 80,433 26,719
Current portion of long-term debt............... 113,629 127,249
Customer deposits............................... 53,244 300,000
Short-term borrowings........................... -- 286,000
------------ ------------
Total current liabilities................... 537,780 2,634,631
Long-term debt.................................... 102,133 185,179
------------ ------------
Total liabilities........................... 639,913 2,819,810
Commitments and contingencies..................... -- --
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; 61,652,069 shares issued and
outstanding at December 31, 2000 and 51,671,582
shares issued and outstanding at December 31,
1999........................................... 61,653 51,671
Warrants to purchase 8,522,572 and 4,211,958
shares at December 31, 2000and 1999............ 3,321,810 1,238,089
Paid-in capital................................. 54,781,499 38,089,320
Accumulated deficit............................. (47,644,098) (38,826,736)
------------ ------------
Total shareholders' equity.................... 10,520,864 552,344
------------ ------------
Total liabilities and shareholders' equity.. $ 11,160,777 $ 3,372,154
============ ============
The accompanying notes are an integral part of these balance sheets.
F-4
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Revenues................................ $ 859,837 $ 2,279,058 $ 5,367,514
Cost of revenues........................ 2,875,627 4,833,601 5,757,889
----------- ----------- -----------
Gross loss.......................... (2,015,790) (2,554,543) (390,375)
Selling, general and administrative
expenses............................... 4,042,699 4,173,095 3,273,132
Research and development expense........ 1,472,093 510,287 1,576,477
----------- ----------- -----------
Loss from operations................ (7,530,582) (7,237,925) (5,239,984)
Interest expense........................ 1,370,136 2,099,179 968,414
Interest income......................... 83,356 30,800 76,841
----------- ----------- -----------
Loss before income taxes............ (8,817,362) (9,306,304) (6,131,557)
Income taxes............................ -- -- --
----------- ----------- -----------
Net loss............................ $(8,817,362) $(9,306,304) $(6,131,557)
=========== =========== ===========
Loss per share:
Basic................................. $ (0.15) $ (0.20) $ (0.16)
=========== =========== ===========
Diluted............................... $ (0.15) $ (0.20) $ (0.16)
=========== =========== ===========
Weighted average number of shares of
common stock outstanding:
Basic............................... 58,711,286 46,200,408 37,287,432
Diluted............................. 58,711,286 46,200,408 37,287,432
The accompanying notes are an integral part of these statements.
F-5
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
Common Stock Treasury Stock
------------------ Paid-in ------------------- Accumulated
Shares Amount Capital Warrants Shares Amount Deficit Total
---------- ------- ----------- ---------- -------- --------- ------------ -----------
Balance, January 1,
1998................... 37,035,673 $37,036 $29,283,136 $ -- (730,577) $(255,702) $(23,388,875) $ 5,675,595
Issuance of common stock
in connection with:
Conversions of debt.... 2,705,391 2,705 2,743,811 -- 542,272 205,903 -- 2,952,419
Commissions to
placement agent....... 172,700 173 178,745 -- -- -- -- 178,918
Purchase of fixed
assets................ 60,000 60 67,440 -- -- -- -- 67,500
Issuance of warrants in
connection with debt
issuance............... -- -- -- 55,181 -- -- -- 55,181
Stock bonuses paid...... 26,236 26 70,653 -- 50,123 16,493 -- 87,172
Net loss................ -- -- -- -- -- -- (6,131,557) (6,131,557)
---------- ------- ----------- ---------- -------- --------- ------------ -----------
Balance, December 31,
1998................... 40,000,000 $40,000 $32,343,785 $ 55,181 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
Issuance of common stock
in connection with:
Conversions of debt.... 4,985,358 4,985 3,842,235 287,700 101,673 24,402 -- 4,159,322
Private placement...... 6,003,529 6,004 1,481,167 895,208 14,963 3,591 -- 2,385,970
Settlement of Trade
Payables.............. 656,322 656 395,243 -- 1,546 371 -- 396,270
Stock bonuses paid...... 26,373 26 26,890 -- 20,000 4,942 -- 31,858
Net loss................ -- -- -- -- -- -- (9,306,304) (9,306,304)
---------- ------- ----------- ---------- -------- --------- ------------ -----------
Balance, December 31,
1999................... 51,671,582 $51,671 $38,089,320 $1,238,089 -- $ -- $(38,826,736) $ 552,344
Issuance of common stock
in connection with:
Private placement...... 4,654,613 4,656 8,180,022 419,556 -- -- -- 8,604,234
Stock purchase
agreement............. 2,136,616 2,137 5,854,991 1,142,872 -- -- -- 7,000,000
Warrant exercise....... 1,999,602 1,999 1,234,715 (620,641) -- -- -- 616,073
Consulting fees........ 500,000 500 312,000 1,103,669 -- -- -- 1,416,169
Employee stock
compensation.......... -- -- 70,622 -- -- -- -- 70,622
Settlement of trade
payables.............. 480,000 480 299,520 -- -- -- -- 300,000
Stock options
exercised............. 2,000 2 998 -- -- -- -- 1,000
Vendor payments........ 207,656 208 739,311 38,265 -- -- -- 777,784
Net loss................ -- -- -- -- -- -- (8,817,362) (8,817,362)
---------- ------- ----------- ---------- -------- --------- ------------ -----------
Balance, December 31,
2000................... 61,652,069 $61,653 $54,781,499 $3,321,810 -- $ -- $(47,644,098) $10,520,864
========== ======= =========== ========== ======== ========= ============ ===========
The accompanying notes are an integral part of these statements.
F-6
DAUPHIN TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net loss.............................. $(8,817,362) $(9,306,304) $(6,131,557)
Non-cash items included in net loss
Depreciation and amortization....... 827,348 1,101,616 --
Inventory reserve................... 545,920 1,793,296 --
Bad debt reserve.................... (377,978) 417,361 --
Interest expense on convertible
debt............................... -- 2,062,451 814,882
Interest expense on capital raised.. 1,302,383 -- --
Warrants issued in lieu of
consulting fees.................... 680,005 -- --
Common stock issued to vendors...... 1,052,019 -- --
Employee stock compensation......... 70,622 -- --
Settlement of trade payables........ (436,478) -- --
Stock bonus......................... -- 31,858 87,172
Changes in--
Accounts receivable
--trade............................ 181,445 147,508 (226,892)
--employee......................... (21,472) 45,869 (25,792)
Inventory........................... 470,217 (361,495) (1,422,222)
Prepaid expenses.................... 17,985 7,817 (7,395)
Escrow deposits..................... (752,500) -- --
Accounts payable.................... (1,176,470) (208,909) 1,312,788
Accrued expenses.................... 53,714 (188,586) (70,532)
Customer deposits................... 53,244 -- --
----------- ----------- -----------
Net cash used in operating
activities....................... (6,327,358) (4,457,518) (5,351,143)
Cash flows from investing activities:
Purchase of property and equipment.... (2,195) (25,680) (1,068,578)
Acquisition of business............... (6,025,000) -- --
Investment............................ -- 10,000 (300,000)
----------- ----------- -----------
Net cash used in investing
activities....................... (6,027,195) (15,680) (1,368,578)
Cash flows from financing activities:
Proceeds from issuance of shares...... 14,201,671 2,385,970 --
Proceeds from exercise of warrants.... 1,179,182 -- --
Issuance of convertible debentures and
warrants net of financing............ -- 1,776,614 2,991,936
(Decrease) increase in short-term
borrowing............................ (286,000) 286,000 162,606
Repayment of long-term leases and
other obligations.................... (87,907) -- --
----------- ----------- -----------
Net cash provided by financing
activities....................... 15,006,946 4,448,584 3,154,542
----------- ----------- -----------
Net increase (decrease) in cash. 2,652,393 (24,614) (3,565,179)
Cash, beginning of year................. 31,087 55,701 3,620,880
----------- ----------- -----------
Cash, end of year....................... $ 2,683,480 $ 31,087 $ 55,701
=========== =========== ===========
Supplemental cash flow information:
Interest paid......................... $ 36,728 $ 36,728 $ 153,532
Noncash transactions:
Common stock issued in connection with
Purchase of fixed assets............ $ -- $ -- $ 67,500
Settlement of customer deposits and
payables........................... 300,000 396,270 --
Conversion of debentures............ -- 4,159,322 2,952,419
Commissions to placement agent...... -- -- 178,918
The accompanying notes are in integral part of these statements
F-7
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design, manufacture and market mobile hand-held, pen-based computers,
broadband set-top boxes, as well as other electronic devices for home and
business use and performs design services, process methodology consulting and
intellectual property development. Through one of its subsidiaries, the
Company marketed its contract manufacturing services through July 1999. 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 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, 2000 has an accumulated deficit of
$47,644,098. 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 including its set-top box. Financial success will also
depend on amending contract terms to result in net revenue in excess of costs
of manufacture and selling, general and administrative costs. 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.
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-8
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Goodwill is amortized over five 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. The Company recorded
$412,500 of amortization expense during 2000.
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 design services, consulting
and intellectual property development is recognized in the month the services
are performed. 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 58,711,286, 46,200,408 and 37,287,432 for the
years ending December 31, 2000, 1999 and 1998, 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
Concentration of Credit Risk
Financial instruments which potentially subject Dauphin to concentrations
of credit risk consist principally of accounts receivable. Generally, credit
risk with respect to accounts receivable is diversified due to the number of
entities comprising Dauphin's customer base. However, one individual customer
accounts for approximately 53% of total accounts receivable and approximately
53% of total revenues.
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.
F-9
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. INVENTORY
Inventory is comprised of material, labor and overhead and consists of the
following at December 31:
2000 1999
---------- ----------
Finished goods..................................... $ 88,211 $ 93,955
Work in process.................................... 156,040 625,450
Raw materials...................................... 2,752,714 2,747,777
---------- ----------
2,996,965 3,467,182
Less--Reserve for Obsolescence..................... 2,491,216 1,945,296
---------- ----------
$ 505,749 $1,521,886
========== ==========
During the fourth quarter of 2000, the Company wrote down approximately
$1,440,000 of inventory, consisting primarily of raw materials, and disposed
of certain excess and obsolete inventory which will not be used in the
production of the Orasis(R) or the set top box. In addition, the Company also
set up a reserve for obsolescence of approximately $510,000 to adjust for the
net realizable value of the remaining inventory associated with the Orasis(R).
In the third quarter of 1999, as a result of curtailing operations at RMS 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:
2000 1999
---------- ----------
Furniture and fixtures.............................. $ 89,084 $ 89,084
Office equipment.................................... 374,732 247,537
Manufacturing and warehouse equipment............... 624,690 624,690
Leasehold improvements.............................. 407,186 407,186
Plastic molds for the Orasis(R)..................... 696,862 696,862
Building............................................ 400,000 --
Automobile.......................................... 12,273 12,273
---------- ----------
2,604,827 2,077,632
Less--Accumulated depreciation and amortization..... 1,127,040 712,192
---------- ----------
$1,477,787 $1,365,440
========== ==========
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. The Company recorded dividend
income of approximately $26,000 in 2000.
7. SHORT-TERM BORROWINGS:
During 1999, the Company borrowed $286,000 from related affiliates with
interest accrued at 1% per month. In April, 2000, all such borrowings,
including interest, were paid in full.
F-10
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT
As of December 31, 2000, the fair value of long-term debt approximates its
book value. At December 31, long-term liabilities consist of:
2000 1999
-------- --------
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.................... $ 89,508 $113,149
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....................................... 92,575 111,881
PACJETS Financial Ltd. furniture lease payable in equal
monthly installments over 36 months. The lease carries a
23% annual interest rate and was due on 11/15/2000. The
lease is collateralized by the furniture and has a one-
dollar buy-out option................................... 23,269 27,176
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
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%................... 10,410 49,206
-------- --------
Total long-term liabilities............................ 215,762 312,428
Less short-term........................................ 113,629 127,249
-------- --------
Total long-term...................................... $102,133 $185,179
======== ========
Future minimum debt payments are as follows:
Year Amount Due
---- ----------
2001........................................................... $113,629
2002........................................................... 56,726
2003........................................................... 24,343
2004........................................................... 21,064
--------
Total long-term debt....................................... $215,762
========
9. CONVERTIBLE DEBT AND WARRANTS
On March 30, 1999, the Company signed an agreement with an accredited
investor ("Investor"). 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. B) If the Company's stock value
is below the 5/8
F-11
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1999, the Company received the funds and subsequently deposited an
additional 400,000 shares into an escrow account to compensate for the decline
in share price. In May 1999, the note was converted into common stock and the
escrow account was disbursed to the Investor.
10. STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
the Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". During 2000, the Company issued non-qualified stock options to
purchase 3,921,832 shares of common stock to certain key employees at exercise
prices ranging from $0.50 to $3.875 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, 2000
and 1999 pro forma earnings per share would have been:
December 31, 2000 December 31, 1999
----------------- -----------------
Net loss as reported (000's)......... $ (8,817) $(9,232)
Pro forma net loss for Statement 123
(000's)............................. (12,622) (9,245)
Basic loss per common share as
reported............................ (0.15) (0.21)
Pro forma basic loss per common
share............................... (0.21) (0.21)
Diluted loss per common share as
reported............................ (0.15) (0.21)
Pro forma diluted loss per common
share............................... (0.21) (0.21)
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, 2000 December 31, 1999
----------------- -----------------
Dividend yield........................ 0.0% 0.0%
Risk-free interest rate............... 6.0% 6.0%
Volatility factor..................... 224% 120%
Expected life in years................ 2.60 1.95
Information regarding these options for 2000 and 1999 is as follows:
2000 1999
-------------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- -------- -------- --------
Options outstanding beginning
of year...................... 50,000 $0.6563 233,000 $0.7748
Options exercised............. (2,000) 0.5000 0 0.0000
Options granted............... 3,921,832 1.1644 0 0.0000
Options forfeited............. (56,500) 0.6604 (183,000) 0.8073
---------------- ------- -------- -------
Options outstanding at year
end.......................... 3,913,332 $1.1658 50,000 $0.6563
Weighted average fair value of
options granted during the
year......................... $ 1.0316 $ --
Options exercisable at year
end.......................... 3,913,332 50,000
Option price range at year
end.......................... $0.50 to $4.3125 $ 0.6563
F-12
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the options outstanding at
December 31, 2000 and 1999:
Options Outstanding Options Exercisable
- -------------------------------------------------------- -----------------------
Range of Weighted Avg. Weighted Avg.
Exercise Number of Weighted Avg. Exercise Number of Exercise
Prices Shares Contractual Life Price Shares Price
-------- --------- ---------------- ------------- --------- -------------
$0.5000 1,092,500 2.02 $0.5000 1,092,500 $0.5000
$0.7812 1,810,000 2.97 $0.7812 1,810,000 $0.7812
$0.9531 25,000 2.99 $0.9531 25,000 $0.9531
$1.0000 400,000 2.02 $1.0000 400,000 $1.0000
$2.7500 47,500 2.80 $2.7500 47,500 $2.7500
$3.5938 180,000 2.61 $3.5938 180,000 $3.5938
$3.8750 333,332 2.76 $3.8750 333,332 $3.8750
$4.3125 25,000 2.74 $4.3125 25,000 $4.3125
--------- ---- ------- --------- -------
Total for 2000 3,913,332 2.60 $1.1658 3,913,332 $1.1658
$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
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 years 2000, 1999 and 1998, 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 associated with the acquisition of RMS was 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 the goodwill associated with the acquisition of
RMS, when an estimated cash flow from the operating unit dramatically
decreased. The Company recorded $767,475 as an amortization expense during
1999.
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:
2000 1999 1998
----------- ----------- -----------
U.S. federal statutory rate
applied to pretax loss.......... $(2,822,666) $(2,143,858) $(2,084,729)
Permanent differences and
adjustments..................... 33,112 785,739 120,802
Net operating losses not
recognized...................... 2,789,554 1,358,119 1,963,927
----------- ----------- -----------
Income tax provision........... $ -- $ -- $ --
=========== =========== ===========
F-13
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000 and 1999, the Company had generated deferred tax
assets as follows:
December 31,
------------------------
2000 1999
----------- -----------
Gross deferred tax assets--
Net operating loss (NOL) carryforward......... $34,597,636 $24,680,762
Reserves for inventory obsolescence........... 2,491,216 1,945,296
Bad debt reserve.............................. 50,621 428,599
Depreciation.................................. 39,349 5,567
Goodwill...................................... 275,000 --
Other timing differences...................... 10,200 10,200
----------- -----------
37,464,022 27,070,424
Current federal statutory rate................ 34% 34%
----------- -----------
Deferred tax assets......................... 12,737,767 9,203,944
Less valuation allowance...................... 12,737,767 9,203,944
----------- -----------
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. A valuation
allowance of $12,737,767 and $9,203,944 at December 31, 2000 and 1999,
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". During 2000, the Company has two
reportable segments: Dauphin Technology, Inc. and Advanced Digital Designs,
Inc. ("ADD"). During 1999 and 1998, the Company had 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. ADD is a design engineering company
performing design services, process methodology consulting and intellectual
property development. RMS was an electronic contract manufacturing firm.
F-14
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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).
2000 1999 1998
------------ ----------- -----------
Revenue
Dauphin......................... $ 63,913 $ 273,544 $ 385,739
RMS............................. -- 2,134,563 5,637,574
ADD............................. 984,674 -- --
Inter-company elimination....... (188,750) (129,049) (655,799)
------------ ----------- -----------
Total......................... 859,837 2,279,058 2,730,035
Operating (Loss)
Dauphin......................... (7,523,421) (2,947,396) (4,707,321)
RMS............................. -- (4,286,231) (499,885)
ADD............................. (195,911) -- --
Inter-company elimination....... 188,750 (4,298) (32,778)
------------ ----------- -----------
Total......................... (7,530,582) (7,237,925) (5,239,984)
Assets
Dauphin......................... 17,794,438 6,443,079 4,991,346
RMS............................. 598,782 2,156,937 5,078,453
ADD............................. 6,735,372 -- --
Inter-company elimination....... (13,967,815) (5,227,862) (3,350,164)
------------ ----------- -----------
Total......................... 11,160,777 3,372,154 6,719,635
Capital Expenditures
Dauphin......................... 2,195 18,544 748,131
RMS............................. -- 7,136 387,947
ADD............................. -- -- --
------------ ----------- -----------
Total......................... 2,195 25,680 1,136,078
15. COMMITMENTS AND CONTINGENCIES:
Minimum annual rental commitments at December 31, 2000 under non-cancelable
operating leases, principally for real estate, are payable as follows:
Dauphin RMS
--------- --------
2001................. $ 120,438 $190,660
2002................. 51,190 81,025
--------- --------
$ 171,628 $271,685
========= ========
Total rental expense was approximately $294,000, $300,000 and $276,000 for
2000, 1999 and 1998 respectively. The leases contain renewal options and
escalation clauses.
During 2000 and through the date of this report, the Company has been
engaged in various legal proceedings. Management believes that any existing
litigation would not be material to the overall financial condition of the
Company.
F-15
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the Orasis(R). The Company paid
$140,192 in 1998 for such services. The Company has resumed using CADserv to
assist in the design of the set-top box in 2001.
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. The loans and interest were repaid in March and April,
2000.
RMS facilities are leased from Enclave Corporation, a company that is owned
by the former President of RMS. The Company paid $179,468 of rent and $30,206
of real estate taxes for the property lease in 1999 and $179,684 of rent and
$24,150 of real estate taxes for 1998.
17. EQUITY TRANSACTIONS:
2000 Transactions
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 2000, the Company issued 480,000 shares to a customer in
exchange for cancellation of $300,000 of customer deposits.
In January 2000, the Company issued warrants to an investment banker, for
services rendered, to purchase 350,000 shares at an exercise price of $1.00.
In January 2000, the Company issued 500,000 shares to a consulting firm for
services rendered in relation to a European contract.
In April 2000, the Company completed its private placement and issued
3,630,000 warrants 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
F-16
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000, 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.
On October 17, 2000, the Company issued a drawdown notice in connection
with the common stock purchase agreement for $2,000,000. Upon receipt of the
funds, the Company issued 781,999 shares of common stock and warrants to
purchase 44,646 shares of common stock at exercise prices ranging from
$3.26676 to $4.4369.
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. These shares have not been included in the issued
and outstanding shares as of December 31, 2000, as Best S.A. has acknowledged
that they would return the shares to the Company upon satisfactory compliance
with the Set-Top Box Agreement. The agreement with Best S.A. requires the
Company to register these shares with the Securities and Exchange Commission
during 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.
In December 2000, the Company issued 22,000 shares of common stock and
warrants to purchase 148,265 shares of common stock at exercise prices ranging
from $1.0312 to $1.25, as payment for certain advertising and promotional
expenses and consulting services related to the establishment of an office in
Europe.
In December 2000, the Company re-priced approximately 3,012,000 warrants it
had previously issued to outside consultants. The warrants were originally
issued with an exercise price ranging from $10.00 to $5.00, and were re-priced
with exercise prices ranging from $5.00 to $2.00 per share. The re-pricing
created a charge to earnings of approximately $234,000.
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.
F-17
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-18
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-19
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 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).
18. ACQUISITION:
On August 28, 2000, the Company acquired T & B Designs, Inc. (formerly
known as Advanced Digital Designs, Inc.), Advanced Technologies, Inc. and 937
Plum Grove Road Partnership in exchange for $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. The transaction was accounted for under the purchase
method of accounting. Goodwill was recorded and is to be amortized under the
straight-line method over a 5-year period.
The purchase price, plus direct costs of the acquisition, were allocated as
follows:
Building...................................................... $ 400,000
Computer equipment............................................ 110,000
Other equipment............................................... 15,000
Excess of Cost over Net Assets Acquired....................... 5,500,000
----------
Total..................................................... $6,025,000
==========
Pro Forma operating results for the years ended December 31, 2000 and 1999,
as required under APB 16 (Accounting Principles Board Opinion number 16,
regarding Business Combinations), are as follows:
2000 1999
----------- -----------
Revenue......................................... $ 3,548,801 $ 5,513,493
Operating loss.................................. (7,023,058) (6,594,083)
Net loss........................................ (8,253,941) (8,650,289)
Net loss per share
Basic......................................... $ (0.14) $ (0.19)
Diluted....................................... $ (0.14) $ (0.19)
F-20
DAUPHIN TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SUBSEQUENT EVENTS:
On March 30, 2001, Best S.A. executed the personal guarantee of Mr. Andrew
J. Kandalepas, which he had granted to secure the performance of the Company's
obligation to register the 1,550,000 shares issued in connection with the
performance bond.
On April 3, 2001, the Company and Estel Telecommunications S.A. cancelled
the performance bond issued on October 26, 2000 and the 1,550,000 shares of
restricted stock held by Best S.A. were returned to the Company.
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
A summary of selected quarterly information for 2000 and 1999 is as
follows:
2000 Quarter Ended
----------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------- ----------- ----------- -----------
Revenues................ $ 4,736 $ 11,305 $ 344,975 $ 498,821
Gross Profit (Loss)..... 238,886 (346,256) 27,747 (1,936,167)
Net Loss................ (2,312,421)* (1,249,631) (1,173,789)* (4,081,521)
Net Loss per share
Basic................. $ (0.04)* $ (0.02) $ (0.02)* $ (0.07)
Diluted............... $ (0.04) $ (0.02) $ (0.02) $ (0.07)
1999 Quarter Ended
----------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------- ----------- ----------- -----------
Revenues................ $ 1,246,061 $ 781,882 $ 157,680 $ 93,435
Gross Profit (Loss)..... (174,176) (350,167) (1,947,336) (82,864)
Net Loss................ (2,048,553) (2,423,339) (3,584,478) (1,249,934)
Net Loss per share
Basic................. $ (0.05) $ (0.05) $ (0.07) $ (0.03)
Diluted............... $ (0.05) $ (0.05) $ (0.07) $ (0.03)
- --------
*Net loss and per share amounts have been adjusted from previously reported
amounts to offset certain beneficial interest expense against additional
paid in capital rather than interest expense amounting to $419,556 (0.01
per share) and $1,645,799 (0.03 per share) for the quarters ending March
31, 2000 and September 30, 2000, respectively.
F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
Board of Directors
Dauphin Technology, Inc.
In connection with our audit of the consolidated financial statements of
Dauphin Technology, Inc., and its Subsidiaries referred to in our report dated
March 22, 2001, which is included on page F-2 of this Form 10-K, we have also
audited Schedule II for the years ended December 31, 2000, 1999 and 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Grant Thornton LLP
Chicago, Illinois
March 22, 2001 (except for
note 19, as to which the date
is April 3, 2001)
F-22
SCHEDULE II
DAUPHIN TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs & End of
Description Of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
Year ended December 31, 2000
Allowance for doubtful accounts... $ 428,599 $ 74,342 $ 452,320 $ 50,621
Reserve for obsolete inventory.... 1,945,296 1,950,000 1,404,080 2,491,216
Year ended December 31, 1999
Allowance for doubtful accounts... $ 11,238 $ 417,361 $ -- $ 428,599
Reserve for obsolete inventory.... 152,000 1,793,296 -- 1,945,296
Year ended December 31, 1998
Allowance for doubtful accounts... $ 7,500 $ 3,738 $ -- $ 11,238
Reserve for obsolete inventory.... 2,143,934 648,000 2,639,934 152,000
Notes:
(a) Deductions for the allowance for doubtful accounts consists of accounts
written off, net of recoveries.
F-23