As Filed with the Securities and Exchange Commission on February 8, 2002.
Registration No. 333-73654
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
FORM S-1
Registration Statement under the Securities Act of 1933
DAUPHIN TECHNOLOGY, INC.
------------------------
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 3570 87-0455038
--------------------------------- --------------------------- --------------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer Number)
of Incorporation or Organization) Industrial Classification
Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Andrew J. Kandalepas, President 800 E. Northwest Hwy., Suite 950, Palatine,
IL 60067 847-358-4406
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(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement as determined by
the selling shareholders.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Title of Each Class Amount to be Proposed Maximum Proposed Maximum Amount of
of Securities to be Registered Offering Aggregate Offering Registration
Registered (1)(2) Price Per Share (2) Price(2) Fee
- -------------------------------------------------------------------------------------------------------------------------
Common Stock
$0.001 Par Value 4,000,000 $0.89 $3,560,000 $890
(1) In the event of a stock split, stock dividend, or similar transaction
involving the Company's common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) In accordance with a registration rights agreement with a shareholder, the
Company is required to register for resale an aggregate of 4,000,000 shares
of common stock to cover the common stock issuable or to be issued upon
conversion of the Convertible Note and the exercise of the warrants. The
Convertible Note is convertible into shares of common stock on a formula of
the lower of (i)110% of the average of the Bid Prices during the ten
Trading Days prior to September 28, 2001 and (ii) the average of the lowest
three consecutive Bid prices during the 22-day period immediately preceding
the conversion date. If converted as of February 5, 2002, such shares would
convert into 2,742,131 of common stock assuming a conversion price of
$0.9117 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
DAUPHIN TECHNOLOGY, INC.
4,000,000 Shares of Common Stock
$0.88 Bid Price as of February 5, 2002
THE COMPANY
We design and sell mobile hand-held, pen-based computers and broadband
set-top boxes, as well as other electronic devices for home and business use and
perform design services, process methodology consulting and intellectual
property development.
Our corporate offices are located at:
800 East Northwest Highway
Suite 950
Palatine, Illinois 60067
(847) 358-4406
Our shares trade on the over-the-counter market electronic bulletin
board operated by the NASD under the symbol "DNTK.OB".
THE OFFERING
We are registering 4,000,000 shares of common stock which may be
acquired by Crescent International Ltd. ("institutional investor"), an
investment company managed by GreenLight (Switzerland) SA through the exercise
of warrants or the conversion of Convertible Notes. These shares may be offered
and sold from time to time. We will not receive any of the proceeds from the
sale other than from the possible exercise of warrants to purchase 700,000
shares of common stock at $1.3064 per share.
Had Crescent exercised its warrants and converted the convertible note
on February 5, 2002, Crescent would have received 3,442,131 shares of our common
stock. As of the same date, the Company would have received an aggregate amount
of $914,480 from Crescent in connection with its exercise of the warrants. Under
the terms of our securities purchase agreement with Crescent, the number of
shares to be purchased by Crescent or to be obtained upon the exercise of
warrants or conversion of the convertible note held by Crescent cannot exceed
the number of shares that, when combined with all other shares of common stock
and securities then owned by Crescent, would result in Crescent owning more than
9.9% of our outstanding common stock at any given point of time. See "Recent
Developments" on page 6.
Investing in our shares involves a high degree of risk. You should
invest only if you can afford a complete loss of your investment. See "Risk
----
Factors" beginning on page 7.
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Unless the context indicates otherwise, all references to "we", "our",
"us", and the "Company" refer to Dauphin Technology, Inc. and its subsidiaries.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has determined whether this prospectus is truthful or
complete. Nor have they made, nor will they make, any determination as to
whether anyone should buy these securities. Any representation to the contrary
is a criminal offense.
- --------------------------------------------------------------------------------
The Date of this Prospectus is February 7, 2002
TABLE OF CONTENTS
Prospectus Summary ............................................................ 5
Risk Factors .................................................................. 7
Forward Looking Statements .................................................... 14
Where You Can Find More Information ........................................... 15
Use of Proceeds ............................................................... 15
Recently Issued Securities .................................................... 15
Market Price of Common Stock and Dividend Policy .............................. 18
Selected Financial Data ....................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 20
Business ...................................................................... 22
Description of Property ....................................................... 26
Management .................................................................... 27
Executive Compensation ........................................................ 29
Certain Relationships and Related Transactions ................................ 30
Principal Stockholders ........................................................ 30
Description of Capital Stock .................................................. 31
Plan of Distribution .......................................................... 32
Selling Stockholder ........................................................... 33
Legal Matters ................................................................. 34
Experts ....................................................................... 34
Index to Consolidated Financial Statements .................................... F-1
4
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the SEC, utilizing a "shelf" registration process. In accordance with a
registration rights agreement with Crescent International Ltd., the Company is
required to initially register for resale an aggregate of 4,000,000 shares of
common stock to cover the common stock to be issued upon conversion of the
Convertible Note and the exercise of the warrants. The Convertible Note is
convertible into shares of common stock by a formula of the lower of (i)
$1.1561, which represents 110% of the average of the Bid Prices during the ten
Trading Days prior to September 28, 2001 and (ii)the average of the lowest three
consecutive Bid prices during the 22-day period immediately preceding the
conversion date.
You should read this prospectus together with the additional
information described under the heading, "Where You Can Find More Information."
No person has been authorized to give any information or to make any
representations in connection with this offering except those contained in this
prospectus. Neither Dauphin nor the selling shareholders has authorized anyone
else to provide you with different information.
You should not assume that any information contained in this prospectus
is accurate as of any date other than the date on the front page of this
prospectus. Neither Dauphin nor the selling shareholder is making an offer of
shares in any state where the offer is not permitted.
In this prospectus, reference to "we", "us" and "our" refer to Dauphin
Technology, Inc.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements, including the notes to the financial
statements, appearing elsewhere in this prospectus.
Our Business
We design and sell mobile hand-held, pen-based computers and broadband
set-top boxes, and other related electronic devices for home and business use.
We also provide private, interactive cable systems to the extended stay
hospitality industry and perform design services, process methodology consulting
and intellectual property development. Orasis(R) is a mobile hand-held,
pen-based computer that incorporates features, which we believe provide greater
power and flexibility to address performance requirements in a variety of
industrial and commercial uses. We have produced a limited number of Orasis(R)
units that have been used for marketing and limited sales. We are currently
redesigning the Orasis(R) and plan to introduce a new version in 2002. In
addition, the Company introduced a prototype of a Vehicle Mountable Docking
Station (VMDS), which can be used as an accessory product for the Orasis/R/.
Toward the end of 1999, we identified set-top boxes as a focus for
product development. The OraLynx(TM) set-top box is an electronic device that
converts digital signals into a user acceptable format via other electronic
devices such as television sets, telephones and computers. It is a routing
device that enables you to access and transmit information to take advantage of
services offered by television, telephone, Internet and other providers of
communication, information or entertainment content or media. For example, you
may connect a set-top box to your television to receive cable television
programming and music broadcasts through your television and home sound system.
You may also connect a set-top box to a computer or various office equipment to
serve a variety of commercial uses. Throughout 2000 and 2001, the Company has
successfully developed multiple versions of its OraLynx(TM) set-top box and is
continuing its further development. The Company has received a contract from the
Hellenic Telecommunications Organization, S.A. (OTE) for the production and sale
of set-top boxes and as of the writing of this registration statement has
shipped 1,100 set-top boxes to them.
In August 2000, the Company acquired the net assets of T & B Design,
Inc. (f/k/a Advanced Digital Designs, Inc.) ("ADD"). ADD 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.
5
In July 2001, the Company purchased the net assets of Suncoast
Automation, Inc. ("Suncoast") from ProtoSource Corporation. Suncoast is a
provider of private, interactive cable systems providing bundled services of
basic cable TV, premium programming, video games and high-speed Internet access
to the extended stay hospitality industry. The Company currently has contracts
for the installation of over 3,200 units in the time share resort industry.
Completion of these installations is contingent upon receiving adequate funding
for the purchase of the equipment.
Recent Developments
On September 28, 2001, the Company entered into a Securities Purchase
Agreement with Crescent International Ltd., an institutional investor managed by
GreenLight (Switzerland) SA, that allows us to issue and sell to Crescent and
requires Crescent to purchase, at our sole discretion, equity and debt
securities for consideration of up to $10 million (minus applicable fees and
expenses). Under the Securities Purchase Agreement, we received $2.5 million in
exchange for a Convertible Note and may receive up to $7.5 million in exchange
for additional securities. In addition, the Company issued warrants
exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per
share for a five-year term. See "Recently Issued Securities" on page 15.
Our Strategy
Our goals are to capture the opportunity presented by the Orasis(R) and
OraLynx(TM) products and to become a leading provider of niche electronic
products. In addition, we intend to successfully compete for additional
contracts for the installation of private, interactive cable systems. Our
strategy is to develop or acquire a variety of products and services that
complement each other or offer us production and operating economies. In this
way, we seek to minimize the risk presented by reliance upon any given product
that may become obsolete through technological change.
We expect to increase our development, production and marketing
capabilities by increasing staff and coordinating relationships with outside
manufacturers and sales representatives. We will then establish a responsive
level of production and distribution. At the same time, we have begun an
aggressive marketing campaign to seize opportunities in the growing set-top box
and hand-held computer markets.
General
Our principal executive offices are located at 800 East Northwest
Highway, Suite 950, Palatine, Illinois 60074, and our telephone number is (847)
358-4406. Our website is located at www.dauphintech.com. Information contained
-------------------
on our website is not a part of this prospectus.
THE REGISTRATION
Shares to be registered 4,000,000 shares
Total number of shares outstanding
immediately after the registration 68,032,213 shares
Use of proceeds The Company will not receive any
proceeds from this registration,
other than from the possible
exercise of warrants to purchase
700,000 shares of common stock
at $1.3064 per share. Any
proceeds received from the
exercise of warrants will be
used for general corporate
purposes.
6
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
Nine
months ended
Year ended December 31, September 30,
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(amounts in thousands, except per share amounts) (unaudited)
INCOME STATEMENT DATA: 1996 1997 1998 1999 2000 2001 2000
---- ---- ---- ---- ---- ---- ----
Revenues $ 94 $ 2,730 $ 5,368 $ 2,279 $ 860 $ 1,249 $ 361
Cost of Sales 279 4,345 5,758 4,834 2,876 1,014 441
------- -------- -------- --------- -------- --------- ---------
Gross Profit (Loss) (185) (1,615) (390) (2,555) (2,016) 235 (80)
Net Loss, before extraordinary item (1,397) (3,988) (6,132) (9,306) (7,515) (5,491) (3,433)
Extraordinary Item 38,065 - - - - - -
Net 36,669 (3,988) (6,132) (9,306) (7,515) (5,491) (3,433)
EARNINGS PER COMMON SHARE(1):
Loss Before Extraordinary Item (0.06) (0.13) (0.16) (0.20) (0.13) (0.09) (0.06)
Extraordinary Item 1.58 - - - - - -
Net Income (Loss) (1) 1.52 (0.13) (0.16) (0.20) (0.13) (0.09) (0.06)
As of
-----
As of December 31, September 30,
------------------ -------------
(unaudited)
BALANCE SHEET DATA: 1996 1997 1998 1999 2000 2001 2000
---- ---- ---- ---- ---- ---- ----
Total Assets 3,402 7,269 6,719 3,372 11,161 8,836 11,806
Long Term Debt 43 346 303 185 102 51 149
Working Capital (Deficit) 3,020 4,427 261 (917) 3,015 537 4,013
Stockholders Equity 3,093 5,676 2,885 552 10,521 8,025 11,105
(1) Income (Loss) per common share is calculated based on the weighted average
number of shares for the respective period.
RISK FACTORS
Investment in our shares is risky and should be considered speculative. In
addition to the information contained in this prospectus, you should consider
carefully the following risk factors before investing in shares offered under
this prospectus. 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
7
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
prospectus.
Risks Related to Our Financial Results and/or Condition
We have an accumulated deficit due to substantial losses incurred over the last
six years.
Since July 1996 we have operated without substantial sales or revenue and have
an accumulated deficit of $51,833,000 as of September 30, 2001. 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. 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. Our 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.
None of our products have achieved widespread distribution or customer
acceptance nor are there any assurances that the Company will be able to
profitably sell its products.
Although the Orasis(R) computer has passed the initial development stage, we
have not actively marketed it and the Company has not recognized significant
sales of the product to date. The Orasis(R) is a solution oriented, pen-based,
mobile computer system, which has been produced and marketed only on a limited
basis. A new version of the Orasis(R) is scheduled for release in 2002.
We began shipping the OraLynx(TM) set-top box late in the fourth quarter of
2001. We believe the OraLynx(TM) set-top box will address a broad market demand.
There can be no assurance that a market demand will exist or the sales of the
OraLynx(TM) will continue after first being introduced. If a market demand
exists, it may be met with alternative products offered by competitors or with
pricing that we cannot match.
Availability of additional funding under our Securities Purchase Agreement
requires the Company to meet certain conditions and financial criteria, which
the Company may be unable to meet.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to sell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its existing common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
Even though Crescent has no investment discretion with respect to shares of
common stock that the Company may require it to purchase under the Securities
Purchase Agreement, the Company may not be able to satisfy one or more of these
conditions at any time that it desires to raise funds from Crescent.
8
The initial funding of $2.5 million combined with the $308,000 cash on hand at
September 30, 2001 will allow the Company to pay the subcontractors for the OTE
order, complete two installations at time-share resorts, complete the opening of
the branch office in Piraeus, Greece and fund operations through February, 2002.
Risks Relating to Our Shares
Shareholders may suffer dilution from this offering and from the exercise of
existing options, warrants and convertible notes; the terms upon which we will
be able to obtain additional equity capital could be adversely affected.
Our common stock may become diluted if warrants and options to purchase our
common stock are exercised and if Crescent converts our outstanding $2,500,000
convertible note into shares of our common stock. The conversion price of
Crescent's convertible note is the lower of $1.1561 and a price based on a
formula determined at the time of conversion. We have limited rights to delay
conversion for up to 180 days from the date triggering those rights if the
conversion price determined by the formula is below $0.75 per share. At this
price, conversion by Crescent of its convertible note would result in the
issuance of 3,333,333 shares. We are required to register for resale shares
issued upon conversion of the convertible note to the extent they are not
registered under the registration statement of which this prospectus is a part.
As of February 5, 2002, the conversion price of the convertible note was
$0.9117. Crescent has informed us that it has no current intent to convert our
convertible note into shares of our common stock and that any decision as to
whether to convert in full or in part will be based on relevant facts,
circumstances and market conditions existing at the time of the decision.
In addition to the dilution resulting from a conversion of our convertible note,
we could be subject to further dilution upon exercise of a Protective Warrant,
if and when issued to Crescent. The number of shares of our common stock that
can be purchased upon exercise of the protective warrant is equal to the number
of shares of our common stock that is determined by subtracting the amount paid
by Crescent for its initial purchase of the Company's common stock, i.e.
$500,000, divided by the purchase price, from an amount which is equal to
$500,000 divided by the price of the common stock for the Company as computed on
the effective date of the Company's registration statement. Under the terms of
the Protective Warrant, if the price for the Company's common stock as computed
on the effective date of the registration statement filed on behalf of Crescent
is higher than the purchase price for the Company's common stock, as computed on
the date Crescent purchased such shares, the Protective Warrant does not become
exercisable.
Irrespective of whether Crescent exercises its warrants or converts its
convertible note, our common stock is subject to further dilution upon the
issuance of shares of our common stock to Crescent that could occur if we
require Crescent to purchase additional shares of our common stock for up to
$7,500,000. These additional shares would be at a discount to the then current
market price. The purchase price, with respect to the sale of common stock by us
to Crescent, is determined by taking the lower of $1.1561 and 92% of the average
of the lowest three consecutive bid prices during the 22 trading day period
immediately preceding the applicable sale date. Dilution resulting from issuance
of said shares will depend on the trading price at the time the common stock is
sold. Illustrations of such effect can be found on page 18. Under the terms of
our securities purchase agreement with Crescent, the number of shares to be
purchased by Crescent or to be obtained upon exercise of warrants or conversion
of the convertible note held by Crescent cannot exceed the number of shares
that, when combined with all other shares of common stock and securities then
owned by Crescent, would result in Crescent owning more than 9.9% of our
outstanding common stock at any given point of time. Our agreements with
Crescent obligate us to register any shares of our common stock that we require
Crescent to purchase. See "Recently Issued Securities" on page 14 for a more
complete description of our agreements with Crescent.
These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrations under the Securities
Act of 1933, as amended, or an exemption such as Rule 144 under the Securities
Act of 1933, as amended, may have a dilutive effect on the market for the price
of our common stock. The terms upon which we will be able to obtain additional
equity capital could also be adversely affected. In addition, the sale of common
stock offered by this prospectus, or merely the possibility that these sales
could occur, could have an adverse effect on the market price of our common
stock.
9
It is likely that our shares will be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control.
The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of technology and
development-stage companies have been especially volatile. Market volatility and
other market conditions could reduce the market price for our shares despite
operating performance. In addition, if our operating performance falls below
expectations, the market price of our shares could decrease significantly. You
may be unable to resell shares at or above the registration price. In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we were the
subject of such litigation we could experience substantial litigation costs and
diversion of management's attention and resources.
We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future.
We have not declared, paid, or distributed any cash dividends on our shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.
Our shares are not widely traded.
There is only a limited market for our shares. If a large portion of the shares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such shares. This could result in a significant reduction in
current market prices. There can be no assurance that investors will be able to
resell shares at the price they paid for the shares or at any price.
Our shares are subject to special trading rules relating to "penny stocks" which
restrict trading.
Our shares are covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.
We have broad discretion in how we use any proceeds of this registration, and we
may not use these proceeds effectively.
We could spend any proceeds received from the sale of the shares underlying the
warrants that are included in this registration in ways that you may not agree
or that do not yield a favorable return. Our primary purpose for conducting this
registration is to register the shares issued by the Company in connection with
the securities purchase agreement signed with Crescent International Ltd.
Risks Related to Our Strategy
We may be unable to identify or acquire additional technologies or products to
diversify our product offering which could reduce our ability to generate
revenues.
One of our goals is to become a leading provider of niche electronic products.
We expect to avoid reliance upon any one 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.
10
We may not be able to efficiently integrate any acquired technologies, products
or businesses which may require additional time by senior management and disrupt
our current business.
We will actively look to acquire technologies, products and other businesses to
complement 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;
. assumption of debt;
. issuance of additional common stock, thereby diluting current
shareholders ownership;
. reallocation of managements time away from its current activities;
. failure to retain key personnel; and
. assumption of unanticipated legal liabilities and other problems.
In addition, we may acquire technologies or products that prove incompatible to
other products following further development.
Even if we successfully integrate acquired technologies, products or businesses,
the additional strain on management and current resources may prevent us from
effectively managing the 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 existing purchase orders received from international companies subjects us
to risks associated with international operation, such as collection of accounts
receivable, foreign currency fluctuations and regulatory requirements.
As we begin shipping under the purchase orders and 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;
. foreign currency fluctuations;
. reduced protection of intellectual property rights;
. potentially adverse tax consequences; and
. political instability.
At the present time, the Company is only currently operating in one foreign
country, Greece. However, as the Company continues to grow and develop,
expansion may very well occur in other countries, primarily in Europe.
Risks Related to Development, Production and Marketing of Our Products
The Company has developed two products in five years and the future of the
Company will be affected by the success of these 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
11
material adverse effect on the Company's financial results.
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 the final development stage.
Although we anticipate further expense associated with the final stage of
development, it will not be substantial. However, 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. While we do not
anticipate any possible delays or problems in securing parts, our reliance on
those manufacturers and vendors, as well as industry component supply, may
create risks including the following:
. the possibility of a shortage of components;
. increases in component costs;
. variable component quality;
. reduced control over delivery schedules; and
. potential manufacturer/vendor reluctance to extend credit to us.
Additionally, we are currently utilizing the services of a subcontractor for the
manufacture of our OraLynx set-top box. If this subcontractor is unable to meet
our requests for product, or 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. The Company has
secured alternative subcontractors and vendors, should our current sources be
unavailable. However, similar risks are present with these alternative sources.
Errors or defects in our products could result in customer refund or product
liability claims causing an impact on market penetration, acceptance of our
products, profitability and on the cash flow of the Company.
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. With
defective products, our market share would be negatively impacted and the
Company would lose substantial future revenue. 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, cause a strain on our results of operation with the lack of revenue
and additional expenses, and burden management resources by focusing efforts on
the errors or defects as opposed to product development and growth.
12
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, continue to develop and modify the
Orasis(R) 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
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.
13
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 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.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. Any statement that is not a statement of
historical fact constitutes a forward-looking statement. You can identify these
statements by forward-looking words such as "may", "will", "intend", "believe",
"anticipate", "estimate", "expect", "project" and similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operation and of our
financial condition or state other forward looking information. This prospectus
also includes third party estimates regarding the size and growth of markets and
mobile computer equipment usage in general.
You should not place undue reliance on these forward-looking
statements. The sections captioned "Risk Factors" and "The Company" as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from our expectations.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any
14
of the forward looking statements after the date of this prospectus or to
conform these statements to actual results or to changes in our expectations,
except with respect to material developments related to previously disclosed
information.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You can read and copy these reports, proxy
statements and other information at the SEC's public reference room at 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. Copies of such materials can be
obtained from the public reference room at prescribed rates. You can obtain
information regarding operation of the public reference room by calling the SEC
at 1-800-SEC-0330. Such material can also be inspected and printed from the
SEC's Internet site located at http://www.sec.gov.
------------------
USE OF PROCEEDS
All net proceeds from the sale of the common stock covered by this
prospectus will be received by the selling shareholders. We will not receive any
proceeds from the sale of the common stock by the selling shareholder other than
from the possible exercise of warrants to purchase 700,000 shares of common
stock at $1.3064 per share. Any proceeds received from the exercise of warrants
will be used for general corporate purposes.
RECENTLY ISSUED SECURITIES
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Securities Purchase
Agreement further permits the Company to sell up to $7.5 million of common stock
to Crescent over a 24-month period. Additionally, the Company has agreed with
Crescent not to exercise any drawdowns against its common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to
Crescent and requires Crescent to purchase from the Company, at the Company's
sole discretion, common stock of the Company for up to $7.5 million over a
24-month period. Individual sales are limited to $1.5 million, or a higher
amount if agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, the Company shall
issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000
shares of common stock at a price equal to the bid price on the date of the
transaction.
Convertible Note Issued to Crescent International
On October 2, 2001, in accordance with the Securities Purchase
Agreement, the Company issued a Convertible Note to Crescent in the amount of
$2,500,000, due September 28, 2004. The Company is not required to pay interest
on the Note unless the Company fails for a period of 10 trading days to issue
shares upon conversion or pay the remaining principal of the Note upon maturity
or redemption. If the Company fails to issue shares or pay the remaining
principal upon maturity or redemption, interest shall be payable at a fixed rate
of 8% per annum, payable in quarterly installments, on the outstanding principal
balance immediately prior to the date of conversion, until the Note is fully
converted or redeemed.
The Company retains the right to redeem the Convertible Note upon 30 days notice
at a price of 110% during the first year of its issuance, 120% during the second
year and 130% thereafter. Additionally, the Company can require the conversion
of the note into shares of our common stock if we satisfy each of the following
requirements:
15
. The shares of our common stock issuable upon conversion of the
Convertible Note may be sold by Crescent without registration and
without any time, volume or manner limitations pursuant to Rule 144 (or
any similar provision then in effect) under the Securities Act of 1933;
. The bid price for each of the 22 trading days immediately preceding the
date of notice of a required conversion is delivered by the Company to
Crescent is at least $1.881 (190% of Bid Price on Subscription Date);
. Unless otherwise agreed to in writing by Crescent, the number of shares
of our common stock issuable upon such required conversion of the
Convertible Note is less than twice the average of the daily trading
volume during the 22 trading day period immediately preceding the date
of notice of a required conversion is delivered by the Company to
Crescent;
. At least 22 trading days have elapsed since a conversion date relating
to a prior conversion required by the Company or Crescent; and
. No shares are subject to any shareholder agreements, lock-up provisions
or restrictions on transfer of any kind whatsoever.
The holder of the Note may convert the Note in whole or in part to common stock
of the Company at any time at the lower of $1.1561 or the average of the lowest
three consecutive bid prices during the 22 days preceding the date of
conversion. The conversion price and the number of note conversion shares is
subject to certain standard anti-dilution adjustments including
reclassification, consolidation, merger or mandatory share exchange; subdivision
or combination of shares; stock dividends; and the issuance of additional
capital shares by us at prices less than the conversion price.
We have the right to reject any conversion if the average bid price of our
common stock during the seven trading days preceding the delivery date of
Crescent's conversion notice is less than $0.75 per share. This right expires
120 days after it is first exercised by us. Based upon this provision, the
maximum number of shares of our common stock that we may be required to issue
upon the conversion of the Convertible Note would be 3,333,333 shares assuming
the conversion price is $0.75 per share.
In furtherance of this transaction, the Company entered into a registration
rights agreement, whereby it is required to file a registration statement, of
which this prospectus is a part, on behalf of Crescent with respect to the note
conversion shares and warrant shares issuable pursuant to the warrants issued to
Crescent. Similar registration statements are to be filed for each subsequent
sale of securities to Crescent. The failure of the Company to obtain the
effectiveness of its registration statements as required under the registration
rights agreement may subject it to certain financial penalties.
Securities issuable to Crescent International
Under the Securities Purchase Agreement with Crescent International Ltd., we can
obtain, subject to applicable fees and expenses and the terms and conditions of
the agreement, an additional $7.5 million by selling shares of our common stock
to Crescent at various points in time, beginning 22 days after the registration
statement of which this prospectus is a part becomes effective. Additionally,
Crescent had the right to assign its obligation to purchase shares of our common
stock to affiliates of Crescent; however, Crescent has informed us that it has
no current or future plans to assign its obligations.
Specifically, with regard to the sale of shares of our common stock to Crescent,
we can from time to time at our option and subject to the limitations described
in this prospectus, issue and sell shares of our common stock with an aggregate
purchase price of up to twice the average daily trading value during the 22
trading day period immediately preceding the date of the notice by us requiring
Crescent to purchase, but no more than $1.5 million at one time. The purchase
price is determined by taking the lower of $1.1561 and 92% of the average of the
lowest three consecutive bid prices during the 22 trading day period immediately
preceding the applicable sale date.
Under the agreement we are required to register the shares issuable to Crescent
through the registration statement of which this prospectus is a part and
subsequent registration statements.
Warrants Issued to Crescent International
Incentive Warrant
In further consideration for Crescent entering into the Securities Purchase
Agreement, the Company issued an Incentive Warrant to Crescent exercisable to
purchase 700,000 shares of common stock at a price of $1.3064 per share. The
Incentive Warrant is exercisable for a five-year period commencing September 28,
2001, and provides for adjustment in the price and number of warrant shares:
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, consummates a reclassification,
consolidation, merger or mandatory share exchange, sale, transfer or
lease of substantially all of the assets of the Company;
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, shall subdivide its common stock, combine
its common stock, pay a dividend in its capital shares, or make any
other distribution of its capital shares; and
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, makes a distribution of its assets or
evidences of indebtedness to the holders of its capital shares as a
dividend in liquidation or by way of return of capital or other than as
a dividend payable out of earnings or surplus legally available for
dividends under applicable law or any distribution to such holders made
in respect of the sale of
16
all or substantially all of the Company's assets, or any spin-off of any of
the Company's lines of business, divisions or subsidiaries.
Upon each adjustment of the exercise price, the number of shares of our common
stock issuable in connection with the Incentive Warrant at the option of
Crescent shall be calculated, to the nerarest one hundredth of a whole share,
multiplying the number of shares of our common stock issuable prior to an
adjustment by a fraction:
. The numerator of which shall be the exercise price before any
adjustment; and
. The denominator of which shall be the exercise price after such
adjustment.
In addition, Crescent may not exercise its warrant if, at the time of exercise,
the number of shares that it would receive, together with all other shares of
the Company's common stock which it beneficially owns, would result in Crescent
owning more than 9.9% of the Company's common stock as would be outstanding on
the exercise date.
Protective Warrant
In further consideration for Crescent entering into the Securities Purchase
Agreement, if the Company elects to exercise its right with respect to any
subsequent sale to require Crescent to purchase shares of our common stock that
have not been previously registered and are not covered by an effective
registration statement, then on each closing date related to each subsequent
sale, the Company shall issue to Crescent a Protective Warrant with an exercise
price of $0.01 per share of common stock, for the purchase of such number of
shares which shall be determined by subtracting (x) the investment amount with
respect to the applicable subsequent sale divided by the purchase price on the
sale date from (y) the investment amount with respect to the applicable
subsequent sale divided by the purchase price on the effective date applicable
to the sale date.
Liquidated Damages
Pursuant to our registration rights agreement with Crescent, we are required to
pay Crescent liquidated damages if we fail to obtain the effectiveness of any
registration statement, including any future registration statement, required
under our registration rights agreement, or to maintain its effectiveness for
the period required under our registration rights agreement. If we fail to
obtain the effectiveness of any registration statement for which effectiveness
is required under our registration rights agreement, we are required under the
registration rights agreement to pay to Crescent an amount equal to 2% of the
aggregate purchase price paid by Crescent for securities that are registered for
resale, or required to be registered for resale, by Crescent as described in
this prospectus, for each calendar month and for each portion of a calendar
month, pro rata, during the period from the effective date of the applicable
registration statement to the effective date of the applicable deficit shares
registration statement.
We will also be liable for liquidated damages similarly computed if we fail to
keep any required registration statement effective for a period of time ending
180 days after the termination of Crescent's obligation to purchase shares of
our common stock, plus one day for each day that we have failed to obtain or
maintain effectiveness of the registration statement.
Right of First Refusal
Crescent has been granted a right of first refusal for any or all shares in a
proposed sale by us of our securities in a private placement transaction exempt
from registration under the Securities Act of 1933, as amended, until 60 days
after the date the Securities Purchase Agreement between Crescent and us is
terminated. Such right of first refusal shall be held open to Crescent for five
trading days from the date of the proposed offer to sell the securities.
10% Limitation With Respect to Crescent
Under the terms of our Securities Purchase Agreement with Crescent, the number
of shares to be purchased by Crescent or to be obtained upon exercise of
warrants or conversion of the Convertible Note held by Crescent cannot exceed
the number of shares that, when combined with all other shares of common stock
and securities then owned by Crescent, would result in Crescent owning more than
9.9% of our outstanding common stock at any given point of time.
17
The following table is for illustrative purposes only and sets forth the number
of shares of our common stock issuable to Crescent assuming Crescent were to
purchase the maximum amount of securities allowable under the Securities
Purchase Agreement at the prices stated below. Such number of shares is,
however, subject to the 9.9% limitation whereby Crescent may not own more than
9.9% of the Company's common stock as would be outstanding on any given date.
Purchase Number %
Price of Shares of shares (e)
------------ --------- -------------
$0.8800 (a) 11,363,636 15.1%
0.6600 (b) 15,151,515 19.1%
0.4400 (c) 22,727,273 26.2%
0.2200 (d) 45,454,545 41.5%
(a) Represents bid price at close of business on February 5, 2002.
(b) Represents a 25% decrease from the bid price at close of business
on February 5, 2002.
(c) Represents a 50% decrease from the bid price at close of business
on February 5, 2002.
(d) Represents a 75% decrease from the bid price at close of business
on February 5, 2002.
(e) Securities purchase agreement limits Crescent's ownership to 9.9% of
outstanding shares.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Our shares trade on the over-the-counter electronic bulletin board
operated by the NASD. The following table shows the range of representative bid
prices for our shares. The prices represent quotations between dealers and do
not include retail mark-up, markdown, or commission, and do not necessarily
represent actual transactions. The number of stockholders on record as of
December 31, 2001 is approximately 20,000. Some of the stockholders on record
are brokerage firms that hold shares in the "street name". Therefore, we believe
the total number of stockholders may be greater than 20,000.
1998 1999 2000 2001
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter $1.625 $1.016 $1.219 $0.453 $12.3750 $0.2660 $2.8125 $1.0625
Second Quarter 1.391 0.875 0.938 0.391 6.2190 2.7500 1.9900 1.1250
Third Quarter 2.031 0.875 0.750 0.266 6.5625 3.2344 1.9700 0.9000
Fourth Quarter 0.906 0.500 0.703 0.219 4.3125 0.7812 1.5500 0.6600
The closing bid price of a share on February 5, 2002 was $0.88. We have
never paid dividends and do not anticipate paying any dividends in the
foreseeable future. We currently intend to retain earnings, if any, for product
development, production and marketing, strategic acquisitions and for general
working capital requirements.
18
SELECTED FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for
our business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
Nine months
Year Ended December 31, ended September 30,
----------------------- -------------------
(amounts in thousands, except per share amounts) (unaudited)
1996 1997 1998 1999 2000 2001 2000
---- ---- ---- ---- ---- ---- ----
RESTATED RESTATED
-------- --------
INCOME STATEMENT DATA:
Revenues $ 94 $ 2,730 $ 5,368 $ 2,279 $ 860 $ 1,249 $ 361
Cost of Sales 279 4,345 5,758 4,834 2,876 1,014 441
------ -------- ------- -------- -------- -------- --------
Gross Profit (Loss) (185) (1,615) (390) (2,555) (2,016) 235 (80)
Net Loss before extraordinary item (1,397) (3,988) (6,132) (9,306) (7,515) (5,491) (3,433)
Extraordinary Item 38,065 - - - - - -
Net Income (Loss) 36,669 (3,988) (6,132) (9,306) (7,515) (5,491) (3,433)
EARNINGS PER COMMON SHARE:
Loss Before Extraordinary Item (0.06) (0.13) (0.16) (0.20) (0.13) (0.09) (0.06)
Extraordinary Item 1.58 - - - - - -
Net Income (Loss) 1.52 (0.13) (0.16) (0.20) (0.13) (0.09) (0.06)
As of December 31, As of September 30,
------------------ -------------------
(amounts in thousands) (unaudited)
BALANCE SHEET DATA: 1996 1997 1998 1999 2000 2001 2000
---- ---- ---- ---- ---- ---- ----
Total Assets 3,402 7,269 6,719 3,372 11,161 8,836 11,806
Long Term Debt 43 346 303 185 102 51 149
Working Capital (Deficit) 3,020 4,427 261 (917) 3,015 537 4,013
Stockholders Equity 3,093 5,676 2,885 552 10,521 8,025 11,105
(1) Income (Loss) per common share is calculated based on the weighted average
number of shares for the respective period.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Nine months ended September 30, 2001 Compared to Nine
months ended September 30, 2000
Revenue for the Company increased from approximately $361,000 in the first nine
months of 2000 to $1,249,000 in the first nine months of 2001. Revenues in the
first nine months of 2001 consisted of $1,170,000 of consulting fees from the
Company's design engineering subsidiary and $79,000 from the sale of the
Orasis(R) hand-held computer and accessories. Revenues in the first nine months
of 2000 were comprised of $327,000 of consulting fees and $34,000 from the sale
of the Orasis(R) hand-held computer and accessories. Consulting fees are
generated by the Company's subsidiary, Advanced Digital Designs, Inc. ("ADD")
and for 2001 are for the full nine months, whereas consulting fees for 2000 are
only included for one and one-half months, since the date of acquisition of
August 18, 2000. Cost of revenues increased to $1,014,000 in the first nine
months of 2001 from $441,000 for the nine months ended September 30, 2000.
Revenues and cost of revenues for the nine months ended September 30, 2001
include the operations of the Company's design engineering subsidiary for the
entire nine-month period, whereas in 2000, the revenues and cost of revenues are
included from August 28, 2000 (the date of acquisition) through September 30,
2000. Therefore, gross profit margins are not comparable for the period.
Selling, general and administrative expenses increased to approximately
$4,157,000 for the nine months ended September 30, 2001 as compared to
$2,870,000 for 2000. Selling, general and administrative expenses during the
nine months ended September 30, 2000 consisted of professional fees and
financial services expenses related to the private placement, common stock
purchase agreement and the costs associated with exercising the drawdown. For
the nine months ended September 30, 2001, these costs were partially offset by
the amortization of goodwill in connection with the acquisition of Advanced
Digital Designs, Inc. for the full nine-month period, increases in expenses for
the design engineering operations, expenses associated with the issuance of
common stock pursuant to a personal guarantee, expenses associated with the
establishment and operations of the Greek branch office and expenses pertaining
to the Suncoast Automation subsidiary.
Research and development costs increased to approximately $1,760,000 for the
first nine months of 2001 as compared to $473,000 for the first nine months of
2000. Research and development costs primarily consist of costs related to the
development of the set-top box, with a small portion related to the further
development of the Orasis(R).
Interest expense decreased to approximately $17,000 for the nine months ended
September 30, 2001 from $64,000 for the nine months ended September 30, 2000.
Interest expense is primarily related to certain capital leases on various
equipment.
Net loss
The consolidated loss after income tax was approximately ($5,491,000) or ($0.09)
per share for the nine months ended September 30, 2001. The consolidated loss
after income tax for the nine months ended September 30, 2000 was ($3,433,000)
or ($0.06) per share. The loss for 2001 was primarily attributed to the
amortization of goodwill associated with the acquisition of Advanced Digital
Designs, Inc., research and development costs regarding the set-top box and
selling, general and administrative expenses. Loss per common share is
calculated based on the monthly weighted average number of shares outstanding
which were 62,849,497 for the nine-month period ended September 30, 2001 and
57,725,768 for the nine-month period ended September 30, 2000.
Balance Sheet
Total assets for the Company were approximately $8,836,000 at September 30,
2001, a decrease of approximately $2,325,000 from December 31, 2000. The
decrease was primarily attributable to the net cash used in operations of
approximately $2,540,000, the purchase of approximately $256,000 of equipment,
payment of capital leases of $61,000, offset by the proceeds from the issuance
of shares under the Techrich common stock purchase agreement and proceeds from
the exercise of stock warrants and options of $181,000.
20
Results of Operations - Year ended December 31, 2000 compared to December 31,
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. The gross profit margin for both years were
effected by the write down of obsolete inventory. For the year ended December
31, 2000 the write down of obsolete invenory and the reserve for potential
obsolete Orasis(R) inventory amounted to $1,950,000 as compared to the writeoff
of obsolete inventory in the year ended December 31, 1999 of $1,793,000.
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).
Interest expense decreased to approximately $68,000 for the year ended December
31, 2000 from $2,099,000 for the year ended December 31, 1999. 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.
Results of Operations - Year ended December 31, 1999 compared to December 31,
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 its founding
and as of September 30, 2001 has an accumulated deficit of approximately
$51,833,000. The Company expects to incur operating losses over the near term.
The Company's ability to achieve profitability will depend on many factors
including the Company's ability to manufacture and market commercially
acceptable products including its set-top box. 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.
For the nine months ended September 30, 2001 the Company used $2,540,000 of cash
in operating activities, used $256,000 in investing activities and generated
$420,000 of cash from financing activities that produced a decrease in cash of
$2,376,000 for the nine months. The net loss of $5,491,000 was partially offset
by the non-cash items of depreciation and amortization and the issuance of
common stock pursuant to a personal guarantee. Investing activities
21
consisted of the purchase of equipment, which is primarily leasehold
improvements in the establishment of the Company's sales and marketing branch
office in Greece. Investing activities consisted primarily of the drawdown
against the equity line and the exercise of warrants and stock options. As of
September 30, 2001 the Company had a current asset to current liabilities ratio
of 1.7 as compared to a ratio of 6.6 at December 31, 2000. The Condensed
Consolidated Statements of Cash Flows, included in this report, detail the other
sources and uses of cash and cash equivalents.
In the second quarter of 2000, the Company entered into a common stock purchase
agreement, escrow agreement and registration rights agreement with Techrich
International Ltd. These agreements provide a $100,000,000 equity line of credit
for use by the Company at its discretion. During the third and fourth quarters
of 2000, the Company received $7,000,000 from the equity line in exchange for
the issuance of 2,136,616 of common stock. In the third quarter of 2001, the
Company received an additional $300,000 from the equity line in exchange for
258,968 shares of common stock.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to sell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its existing common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
The Company expects to rely on the above financing arrangements in order to
continue its development of products and to continue its ongoing operations in
the short-term. The long-term cash needs of the Company will be dependent on the
successful development of the Company's products and their success in the market
place. At the current rate, the Company is not able to internally generate
sufficient funds and will be required to rely on outside sources for continued
funding, until such time as the Company's operations generate a profit and cash
is generated from operations. The Company has historically issued and may
continue, if the circumstances warrant, to issue common stock to vendors and
suppliers in lieu of cash for products and services provided to the Company.
BUSINESS
Overview
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
22
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 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. Orasis(R) does not lock the
customer into a single format, but affords a customer complete flexibility and
versatility. 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
23
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
. 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
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.
24
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)
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 for the sale of its Orasis(R)
or OraLynx(TM). 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 various subcontractors located in the
United States and in Southeast Asia. Additionally, final assembly and the first
level of testing is performed by the subcontractors. The Company's proprietary
software is loaded by the subcontractor. The Company does final testing and
modifications.
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 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.
25
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."
DESCRIPTION OF PROPERTY
Our executive offices consist of 7,300 square feet of office space
located at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067. We pay
approximately $10,000 per month to rent the facilities. In December 1998, in
conjunction with upgrading the facilities, we signed a five-year lease
extension. The lease called for increased rent, but provided for reconstruction
of facilities to better suit our needs. We believe the space will be adequate
for the foreseeable future. In addition, the Company operates a branch office
consisting of 2,800 square feet at II Merarchias 2 Street and Aki Miaouli, 185
35, Piraeus, Greece. The lease is for 2 years and the monthly rent is $2,800.
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 $16,000 per
month.
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.
Suncoast Automation, Inc. facilities are located at 150 Dunbar Avenue,
Oldsmar, Florida 34677. Suncoast occupies 3,000 square feet of space of which
1,500 square feet is for office space and 1,500 square feet is warehouse. The
current lease expires in July 2002 and is renewable for three years. The rent is
approximately $1,800 per month. The Company believes the space will be adequate
for the foreseeable future.
26
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position, present
principal occupation and employment history for the past five years for each of
our directors and executive officers, as of October 31, 2001.
Name Age Present Office
---- --- --------------
Andrew J. Kandalepas 49 Chairman of the Board of Directors
Chief Executive Officer
Christopher L. Geier 39 Executive Vice President
Harry L. Lukens, Jr. 51 Vice President, Chief Financial Officer
and Assistant Secretary
Jeffrey L. Goldberg 48 Secretary, Director
Gary E. Soiney 60 Director
Mary Ellen W. Conti, MD 56 Director
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.
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.
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.
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.
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.
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
27
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 and executive officers are elected annually and hold
office until the next annual meeting of the stockholders or until their
successors have been elected and qualified.
Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
Involvement by Management in Public Companies
None of our directors or executive officers are directors of any other
public companies.
Indemnification of Directors and Officers
We have adopted a by-law provision which stipulates that we shall
indemnify any director or executive officer who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, investigative or administrative, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him/her in connection with such
action, suit or proceeding, if he/she acted in good faith and in a manner he/she
reasonably believed to be in, or not opposed to, our best interest, had no
reasonable cause to believe his/her conduct was unlawful; provided, however, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his/her duty to the company, unless, and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. These
indemnification provisions are not expected to alter the liability of directors
and executive officers under federal securities laws.
28
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth in the format required by applicable
regulations of the Securities and Exchange Commission the compensation for
Executive Officers of the Company who served in such capacities as of December
31, 2000.
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------
FISCAL LONG-TERM ALL OTHER
YEAR ANNUAL COMPENSATION COMPENSATION (1) COMPENSATION
ENDED (2)
NAME AND TITLE DEC. 31
------------------------------------------------------------
SALARY BONUS AWARDS PAYOUTS
-------------------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
OPTIONS (#) PLAN
PAYOUTS($)
- -------------------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas 2000 $195,000 $50,000 -0- -0- $5,000
Chairman, CEO and 1999 84,000 -0- -0- -0- 5,000
President 1998 84,000 -0- -0- -0- 5,000
Christopher L. Geier (3) 2000 $185,000 -0- -0- -0- -0-
Executive Vice-President 1999 65,585 -0- -0- -0- -0-
Harry L. Lukens, Jr.(4) 2000 106,000 -0- -0- -0- -0-
Chief Financial
Officer, Assistant
Secretary
- -------------------------------------------------------------------------------------------------------------------------
(1) The Company presently has no long-term compensation arrangements and
had no such plans during fiscal years 1998 through 2000.
(2) The amounts disclosed in this column consist of Company discretionary
contributions to the Company's 401(k) Plan and insurance premiums paid
by the Company. The Company made no discretionary contributions to the
410(k) Plan in fiscal years 1998 through 2000.
(3) Mr. Geier commenced employment in March 1999 and therefore, the
compensation shown for him for 1999 is for the period from March 1999
through December 1999.
(4) Mr. Lukens commenced employment in May 2000 and therefore, the
compensation shown for him for 2000 is for the period from May 2000
through December 2000.
29
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by Andrew J. Kandalepas, Chief Executive 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. The
Company paid $72,879 through September 30, 2001 for these services.
In 1999 the Company borrowed $286,000 from related affiliates,
including two members of the Board of Directors. The loans accrued 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 2000 and $179,684 of rent
and $24,150 of real estate taxes for 1999. The Company has paid $139,747 of rent
and $32,378 of real estate taxes for the nine months ended September 30, 2001.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 30, 2001, the number and
percentage of outstanding shares of the Company's common stock beneficially
owned by (i) each Executive Officer and Director, (ii) all Executive Officers
and Directors as a group, (iii) all persons known by the Company to own
beneficially more than 5% of the Company's common stock. Beneficial ownership
has been determined in accordance with Rule 13d-3 under the Exchange Act. Under
this rule, certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power to
dispose of the shares). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire the shares (for example, upon
exercise of an option or warrant) within 60 days of the date as of which the
information is provided; in computing the percentage ownership of any person,
the amount of shares is deemed to include the amount of shares beneficially
owned by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of any person as shown
in the following table does not necessarily reflect the person's actual voting
power at any particular date.
Amount and Nature Percent of
of Beneficial Shares of
Name Title Ownership Common Stock
- --------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas Chairman, Chief
Executive Officer
& President 4,511,837 (1) 7.0%
Harry L. Lukens, Jr. Chief Financial
Officer, Asst. Secretary 480,000 (2) *
Jeffrey L. Goldberg Secretary, Director 80,000 (3) *
Christopher L. Geier Executive Vice-
President 1,000,000 (4) 1.5%
Gary E. Soiney Director 80,000 (5) *
Mary Ellen Conti, M.D. Director 154,700 (6) *
Crescent International, Ltd. 4,000,000 (7) 5.9%
------------ -------
Executive Officers, Directors and 5%
Beneficial Owners as a group (7 persons) 10,306,537 (8) 15.1%
============ =======
_____________________
* Less than 1%
30
(1) Includes options to purchase 1,150,000 shares under options immediately
exercisable.
(2) Includes options to purchase 480,000 shares under options immediately
exercisable.
(3) Includes options to purchase 80,000 shares under options immediately
exercisable.
(4) Includes options to purchase 1,000,000 shares under options immediately
exercisable.
(5) Includes options to purchase 80,000 shares under options immediately
exercisable.
(6) Includes options to purchase 40,000 shares under options immediately
exercisable.
(7) Assumes exercise of all shares being registered under the Convertible
Note and Incentive Warrant.
(8) Includes options to purchase 2,840,000 shares under options immediately
exercisable.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.01 par value preferred stock. As
of December 31, 2001 there were 64,032,213 shares of common stock outstanding
and beneficially owned by approximately 20,000 beneficial shareholders, and no
shares of preferred stock were outstanding. The following summary is qualified
in its entirety by reference to our certificate of incorporation, which is
available upon request.
Common Stock
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the 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. 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
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. We have no present plans to issue preferred stock. However, the
issuance of any such preferred stock could affect the rights of the holders of
common stock and reduce the value of the common stock. In particular, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with or sell our assets to a third party, thereby
preserving control of the company by present owners.
Warrants and Options
As of December 31, 2001 warrants to purchase 8,498,744 shares of common
stock were issued and outstanding in the hands of approximately 60 investors.
These warrants are convertible at any time. The strike prices of these warrants
range from $0.20 to $5.481. The warrants expire between three and five years
from the date of issuance. The warrants include a change of form provision in
them so that if a change in the form of the common stock occurs due to stock
splits, stock dividends, or mergers, the holders are entitled to receive a
pro-rata increase of shares at a discounted price. However, the holders of the
warrants do not have any voting rights and are not entitled to receive any cash
or property dividends declared by the Board of Directors until they convert the
warrants into common shares. 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 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 December 31, 2001 there are a total of 5,348,896 options issued and
outstanding in the hands of more
31
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
Our transfer agent and registrar is American Stock Transfer and Trust
Company, 6201 15/th/ Avenue, Brooklyn, New York 11219 (212) 936-5100.
PLAN OF DISTRIBUTION
We are registering 4,000,000 shares of common stock on behalf of Crescent
International Ltd. The shares are shares that may be acquired by it through the
exercise of warrants and the conversion of a convertible note.
The selling shareholder may sell its shares from time to time at prices
and at terms prevailing at the time of sale. The selling shareholders may
exercise its 700,000 warrants from time to time prior to expiration. As of
February 5, 2002, we would have received $914,480 from the exercise of such
warrants if all are exercised prior to expiration. We will receive none of the
proceeds of any subsequent sale of shares issued under the warrants or
conversion of the Convertible Note.
Crescent International Ltd. is contractually restricted from engaging in
short sales of our common stock and has informed us that it does not intend to
engage in short sales or other stabilization activities.
Sales may be made on the over-the-counter market or otherwise at prices
and at terms then prevailing or at prices related to the then current market
price, or in negotiated private transactions, or in a combination of these
methods. The selling shareholder will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. We
have been informed by the selling shareholder that there are no existing
arrangements between the selling shareholder and any other person, broker,
dealer, underwriter or agent relating to the sale or distribution of shares of
common stock which may be sold by selling shareholder through this prospectus.
The Selling shareholder may be deemed an underwriter in connection with resales
of their shares.
The common shares may be sold in one or more of the following manners:
. a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
. purchases by a broker or dealer for its account under this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchases; or
. privately negotiated transactions.
In effecting sales, brokers or dealers engaged by the selling shareholder
may arrange for other brokers or dealers to participate. Except as disclosed in
a supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares.
Brokers or dealers may receive commissions, discounts or other concessions from
the selling shareholder in amounts to be negotiated immediately prior to the
sale. The compensation to a particular broker-dealer may be in excess of
customary commissions. Profits on any resale of the common shares as a principal
by such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933. Any broker-dealer participating in such transactions as agent may
receive commissions from the selling shareholder (and, if they act as agent for
the purchaser of such common shares, from such purchaser).
Broker-dealers may agree with the selling shareholder to sell a specified
number of common shares at a stipulated price per share, and, to the extent a
broker dealer is unable to do so acting as agent, to purchase as principal any
unsold common shares at a price required to fulfill the broker-dealer commitment
to the selling shareholder. Broker-dealers who acquire common shares as
principal may thereafter resell such common shares from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with
32
such resales may pay to or receive from the purchasers of such common shares
commissions computed as described above. Brokers or dealers who acquire common
shares as principal and any other participating brokers or dealers may be deemed
to be underwriters in connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part.
The selling shareholder will pay all commissions and its own expenses, if
any, associated with the sale of their common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
SELLING SHAREHOLDER
The following table provides certain information with respect to the
common stock beneficially owned by Crescent International Ltd., who is
classified as a selling shareholder and is entitled to use this prospectus. The
information in the table is as of the date of this prospectus. Although the
selling shareholder has not advised us of its intent to sell shares pursuant to
this registration and after conversion of the note to shares, it may choose to
sell all or a portion of the shares from time to time in the over-the-counter
market or otherwise at prices and terms then prevailing or at prices related to
the current market price, or negotiated transactions. The selling shareholder is
not nor has been an affiliate of the Company or holds more than 5% of the
outstanding shares.
Beneficially
Beneficially Owned Owned Registered Shares
Shares Beneficially Shares to be Shares Benefically Owned
Owned Registered to be Sold After Registration
Name Number % Number % Number Number %
- ---- ------ - ------ - ------ ------ -
Crescent International Ltd. 0 0.0% 4,000,000 6.4% 0 4,000,000 6.4%
We completed a securities purchase agreement for $10 million with
Crescent International Ltd., ("Crescent") an investment company managed by
Greenlight (Switzerland) SA. The initial funding was a $2.5 million Convertible
Note and warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Convertible Note is
convertible into common stock at the lower of (i)$1.1561, which represents 110%
of the average of the Bid Prices during the ten Trading Days prior to September
28, 2001 and (ii)the average of the lowest three consecutive Bid prices during
the 22-day period immediately preceding the conversion date. If converted as of
February 5, 2002, such shares would convert into 2,742,131 of common stock
assuming a conversion price of $0.9117 per share.
The Company and Crescent International Ltd. had signed a Stock Purchase
Agreement on May 28, 1999. Under that agreement, the Company sold to Crescent
1,398,951 shares of common stock for $598,050 and issued warrants to purchase
750,000 shares of common stock at a price of $.6435 per share. Crescent
exercised their warrants during 2000. By July 31, 2001, Crescent had sold all of
its shares of the Company in the over-the- counter market or through negotiated
transactions.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of
common stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
Except as previously discussed, the selling shareholder has not held any
positions or offices or had material relationships with us or any of our
affiliates within the past three years. We may amend or supplement this
33
prospectus from time to time to update the disclosure.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares being
registered have been passed upon for the company by Rieck and Crotty, P.C., 55
West Monroe Street, Suite 3390, Chicago, Illinois 60603.
EXPERTS
The audited consolidated financial statements as of and for the two years
ended December 31, 2000, which are included in this prospectus and appear in the
registration statement have been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their report thereon which appears
elsewhere in the prospectus and in the registration statement, and is included
in reliance upon the authority of such firm as experts in accounting and
auditing.
The consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1998 included in this prospectus and
elsewhere in this registration statement, to the extent and for the periods
indicated in their report, have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in giving said report. Reference is made to said report,
which includes an explanatory paragraph with respect to the uncertainty
regarding the Company's ability to continue as a going concern as discussed in
note 2 to the consolidated financial statements.
34
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
---------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Unaudited Condensed Consolidated Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS--SEPTEMBER 30, 2001 AND
DECEMBER 31, 2000 .......................................................... F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 ........... F-3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND NINE MONTHS ENDED
SEPTEMBER 30, 2001
DECMEBER 31, 2000 ........................................................ F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 ............................ F-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ......................... F-6
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants .......................... F-11
Report of Independent Public Accountants .................................... F-12
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2000 AND 1999 ..................... F-13
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
ENDED DECEMBER 31, 2000, 1999 AND 1998 ..................................... F-14
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 ....................... F-15
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ............................... F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................. F-17
F-1
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
(Unaudited)
-------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
------------------ -----------------
RESTATED RESTATED
-------- --------
CURRENT ASSETS:
Cash $ 307,847 $ 2,683,480
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at September 30,
2001 and December 31, 2000 265,229 321,377
Employee receivables 18,248 21,590
Inventory, net of reserve for obsolescence of $2,491,216 at
September 30, 2001 and December 31, 2000 634,400 505,749
Prepaid expenses 71,024 20,794
------------- ------------
Total current assets 1,296,748 3,552,990
INVESTMENT IN RELATED PARTY 290,000 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,451,225 at September 30, 2001 and $1,127,040 at December 31, 2000 2,203,821 1,477,787
ESCROW DEPOSIT 462,998 752,500
INSTALLATION CONTRACTS 320,000 -
GOODWILL, net of accumulated amortization of $1,237,500 at
September 30, 2001 and $412,500 at December 31, 2000 4,262,500 5,087,500
------------- ------------
Total assets $ 8,836,067 $ 11,160,777
============= ============
CURRENT LIABILITIES:
Accounts payable $ 521,203 $ 290,474
Accrued expenses 86,962 80,433
Current portion of long-term debt 104,298 113,629
Customer Deposits 47,741 53,244
------------- ------------
Total current liabilities 760,204 537,780
LONG-TERM DEBT 50,611 102,133
------------- ------------
Total liabilities 810,815 639,913
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;
64,032,213 and 61,652,069 issued and outstanding at September
30, 2001 and at December 31, 2000 64,033 61,653
Warrants 3,381,474 3,321,810
Paid-in capital 56,412,591 53,479,116
Accumulated deficit (51,832,846) (46,341,715)
------------- ------------
Total shareholders' equity 8,025,252 10,520,864
------------- ------------
Total liabilities and shareholders' equity $ 8,836,067 $ 11,160,777
============= ============
The accompanying notes are an integral part of these statements.
F-2
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months and three months ended September 30, 2001 and 2000
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
RESTATED RESTATED
-------- --------
NET REVENUE $ 1,248,785 $ 361,016 $ 421,544 $ 344,975
COST OF REVENUE 1,014,207 440,639 370,807 317,228
------------- ------------- ------------- -------------
Gross Profit (Loss) 234,578 (79,623) 50,737 27,747
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE 4,157,042 2,870,164 1,026,432 1,009,115
RESEARCH AND DEVELOPMENT
EXPENSE 1,760,140 473,113 519,244 222,255
------------- ------------- ------------- -------------
Loss from Operations (5,682,604) (3,422,900) (1,494,939) (1,203,623)
INTEREST EXPENSE 16,744 63,583 4,964 9,381
INTEREST INCOME 208,217 53,025 94,524 39,215
------------- ------------- ------------- -------------
Loss before Income Taxes (5,491,131) (3,433,458) (1,405,379) (1,173,789)
INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET LOSS $ (5,491,131) $ (3,433,458) $ (1,405,379) $ (1,173,789)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.09) $ (0.06) $ (0.02) $ (0.02)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 62,849,497 57,725,768 63,819,568 59,166,582
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
F-3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year ended December 31, 2000 and nine months ended September 30, 2001
(Unaudited)
Common Stock Paid-in Treasury Stock
------------ --------------
Shares Amount Capital Warrants Shares Amount
------ ------ ------- -------- ------ ------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $38,089,320 $ 1,238,089 - $ -
Issuance of common stock in connection with:
Private placement 4,654,613 4,656 6,377,639 419,556 - -
Stock purchase agreement 2,136,616 2,137 5,854,991 1,142,872 - -
Warrant exercise 1,999,602 1,999 1,234,715 (620,641) - -
Consulting fees 500,000 500 312,000 1,103,669 - -
Employee stock compensation - - 70,622 - - -
Settlement of trade payables 480,000 480 299,520 - - -
Stock options exercised 2,000 2 998 - - -
Vendor payments 207,656 208 739,311 38,265 - -
Net loss - - - - - -
----------- ---------- ----------- ----------- ---------- ----------
BALANCE, December 31, 2000, restated 61,652,069 61,653 53,479,116 3,321,810 -
-
Issuance of common stock in connection with:
Warrant exercise 285,000 285 242,025 (65,010) - -
Stock options exercised 8,000 8 3,992 - - -
Vendor payments 30,000 30 40,770 105,573 - -
Stock purchase agreement 258,968 259 280,640 19,101 - -
Acquisition of business 766,058 766 1,125,339 - - -
Personal Guarantee 1,032,118 1,032 1,240,709 - - -
Net loss - - - - - -
----------- ---------- ----------- ----------- ---------- ----------
BALANCE September 30, 2001, restated 64,032,213 $ 64,033 $56,412,591 $ 3,381,474 -
=========== ========== =========== =========== ========== ==========
Accumulated
Deficit Total
------- -----
BALANCE, December 31, 1999 $(38,826,736) $ 552,344
Issuance of common stock in connection with:
Private placement - 7,301,851
Stock purchase agreement - 7,000,000
Warrant exercise - 616,073
Consulting fees - 1,416,169
Employee stock compensation - 70,622
Settlement of trade payables - 300,000
Stock options exercised - 1,000
Vendor payments - 777,784
Net loss (7,514,979) (7,514,979)
------------ -----------
BALANCE, December 31, 2000, restated (46,341,715) 10,520,864
Issuance of common stock in connection with:
Warrant exercise - 177,300
Stock options exercised - 4,000
Vendor payments - 146,373
Stock purchase agreement - 300,000
Acquisition of business - 1,126,105
Personal Guarantee - 1,241,741
Net loss (5,491,131) (5,491,131)
------------ -----------
BALANCE September 30, 2001, restated $(51,832,846) $ 8,025,252
============ ===========
The accompanying notes are an integral part of these statements.
F-4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2000
(Unaudited)
-------------------------------------------------------------------------------
2001 2000
------------ ------------
RESTATED RESTATED
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $ (5,491,131) $ (3,433,458)
Non-cash items included in net loss:
Depreciation and amortization 324,185 304,848
Amortization of goodwill 825,000 137,500
Warrants issued in lieu of consulting fees 105,573 556,542
Common stock issued to vendors 40,800 -
Common stock issued pursuant to personal guarantee 1,241,741 -
Employee stock compensation - 70,622
Settlement of trade payables - (431,776)
Changes in:
Accounts receivable - trade 70,817 (337,657)
Accounts receivable from employees 3,342 (560)
Inventory (15,597) (286,063)
Prepaid expenses (25,904) 4,628
Escrow deposits 289,502 -
Accounts payable 90,615 (1,144,124)
Accrued expenses 6,529 47,024
Customer deposits (5,503) 49,644
------------ ------------
Net cash used in operating activities (2,540,031) (4,462,830)
CASH FLOWS FROM INVESTING ACTIVITIES -
Acquisition of business - (6,025,000)
Purchase of equipment (256,049) (2,195)
------------ ------------
Net cash used in investing activities (256,049) (6,027,195)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 300,000 12,200,671
Proceeds from exercise of warrants and options 181,300 858,307
Repayment of long-term leases and other obligations (60,853) (53,127)
(Decrease) increase in short-term borrowing - (286,000)
------------ ------------
Net cash provided by financing activities 420,447 12,719,851
------------ ------------
Net (decrease) increase in cash (2,375,633) 2,229,826
CASH BEGINNING OF PERIOD 2,683,480 31,087
------------ ------------
CASH END OF PERIOD $ 307,847 $ 2,260,913
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 11,780 $ 54,202
NON-CASH TRANSACTIONS:
Common stock issued in connection with:
Acquisition of business $ 1,126,105 $ -
Settlement of customer deposits and payables - 300,000
The accompanying notes are an integral part of these statements.
F-5
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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;
provide private, interactive cable systems to the extended stay hospitality
industry; and perform design services, process methodology consulting and
intellectual property development, out of three locations in northern Illinois,
one in central Florida and its branch office in Piraeus, Greece. 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"), Advanced
Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
------------------------------------
Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 62,849,497 for the nine-month period September 30, 2001
and 57,725,768 for the nine-month period September 30, 2000. Diluted earnings
per common share are adjusted for the assumed conversion exercise of stock
options and warrants unless such adjustment would have an anti-dilutive effect.
Approximately 12.5 million additional shares would be outstanding if all
warrants and all stock options were exercised as of September 30, 2001.
Unaudited Financial Statements
The accompanying statements are unaudited, but have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of results have been included. The interim
financial statements contained herein do not include all of the footnotes and
other information required by accounting principles generally accepted in the
United States of America for complete financial statements as provided at
year-end. For further information, refer to the consolidated financial
statements and footnotes thereto included in the registrant's annual report on
Form 10-K for the year ended December 31, 2000.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent
F-6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
2. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
------------------------------------------------
Use of Estimates - continued
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.
Restatement of prior period
Selling, general and administrative expenses, interest expense, 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 $3,367,738 ($0.06 per share) for the
nine-months ended September 30, 2000.
3. RISKS AND UNCERTAINTIES
-----------------------
The Company has incurred a net operating loss in each year since its founding
and as of September 30, 2001 has an accumulated deficit of $51,832,846. 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 design and develop 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.
4. BUSINESS SEGMENTS
-----------------
The Company has two reportable segments: Dauphin Technology, Inc., Suncoast
Automation, Inc. and RMS (Dauphin); and Advanced Digital Designs, Inc. (ADD).
Dauphin is involved in design, manufacturing and distribution of hand-held
pen-based computer systems and accessories and smartbox set-top boxes and
providing private, interactive cable systems to the hospitality industry. ADD
performs design services, process methodology consulting and intellectual
property development.
September 30, 2001 September 30, 2000
------------------ ------------------
Revenue
Dauphin $ 79,074 $ 33,952
ADD 1,981,399 327,064
Inter-company elimination (811,688) -
------------ ------------
Total $ 1,248,785 $ 361,016
============ ============
Operating (Loss)
Dauphin $ (5,531,043) $ (3,449,945)
ADD (151,561) 27,045
Inter-company elimination - -
------------ ------------
Total $ (5,682,604) $ (3,422,900)
============ ============
September 30, 2001 December 31, 2000
------------------ -----------------
Assets
Dauphin $ 18,836,002 $ 18,393,220
ADD 6,777,942 6,735,372
Inter-company elimination (16,777,877) (13,967,815)
------------ ------------
Total $ 8,836,067 $ 11,160,777
============ ============
F-7
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is an operating entity and in the normal course of business, from
time to time, may be involved in litigation. In management's opinion, any
current or pending litigation is not material to the overall financial position
of the Company.
6. SECURITIES PURCHASE AGREEMENT
-----------------------------
On September 28, 2001 the Company entered into a Securities Purchase Agreement
in the amount of $10 million with Crescent International Ltd., an investment
company managed by GreenLight (Switzerland) SA. The initial funding consisted of
a $2.5 million Convertible Note with the option to issue further Convertible
Notes. In addition, the Company is required to issue warrants exercisable to
purchase 700,000 shares of common stock at a price of $1.3064 per share for a
five-year term. The Stock Purchase Agreement further permits Crescent to
purchase up to $7.5 million in common stock of the Company over a 24-month
period provided the Company achieves certain results prior to February 1, 2002.
If the Company fails to achieve these certain results by February 1, 2002, then
the amounts Crescent could purchase are affected by certain financial criteria.
Additionally, the Company has agreed not to exercise any drawdowns against its
existing common stock purchase agreement with Techrich International Ltd.
The Company may elect to issue subsequent convertible notes up to $1.5 million,
subject to achieving certain results prior to February 1, 2001, such as the
total sales to its current customer, OTE, equaling or exceeding $2.5 million and
valid and documented orders from OTE that equal or exceed 75% of the subsequent
convertible note. If after February 1, 2002, the Company can sell to Crescent
shares of up to $1.5 million per sale, unless otherwise agreed to by the Company
and Crescent; provided, however, that the aggregate amount of all shares sold
and convertible notes issued cannot exceed $10 million. The amount of the sale
is limited to twice the average of the bid price multiplied by the trading
volume during the 22 trading day period immediately preceding the date of sale.
When the total amount of securities issued to Crescent equals or exceeds $5
million, then the Company shall issue to Crescent a subsequent incentive warrant
exercisable to purchase 400,000 shares of common stock at a price equal to the
bid price on the date of sale.
7. EQUITY TRANSACTIONS
-------------------
2001 Events
On September 13, 2001 the Company filed with the Securities and Exchange
Commission a Form S-3 registration statement relating to 6,964,724 shares of
common stock. The shares were issued by the Company in respect of the following:
(i) 766,058 shares were issued by the Company in connection with the acquisition
of the net assets of Suncoast; (ii) 52,000 shares were issued by the Company as
payment for certain advertising and promotional expenses and consulting
services; and (iii) 6,146,666 shares issuable by the Company to shareholders
upon the exercise by them of issued and outstanding warrants and options. On
September 27, 2001, the Securities and Exchange Commission declared the
registration statement effective.
On August 14, 2001 the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich International for $300,000. Upon
receipt of the funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.
During the third quarter of 2001, the Company received proceeds in the amount of
$75,000 for the exercise of 75,000 warrants.
Effective July 1, 2001, the Company completed the acquisition of substantially
all of the assets of Suncoast Automation, Inc., a wholly owned subsidiary of
ProtoSource Corporation, pursuant to an Asset Purchase
F-8
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. EQUITY TRANSACTIONS - Continued
-------------------------------
Agreement. The purchase price was 766,058 shares of the Company's common stock
valued at $1.1 million based on the closing bid price of $1.47 per share on June
29, 2001.
In April 2001, the Company issued to certain consultants 30,000 shares of common
stock and warrants to purchase 70,000 shares of common stock at an exercise
price of $1.36 per share, as payment for certain promotional and consulting
services. In September 2001, the Company issued additional warrants to purchase
16,666 shares of common stock at an exercise price of $1.395 per share to
finalize the arrangement with the consultants.
During the second quarter of 2001, employees exercised 4,000 stock options at a
price of $.50 per share.
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. In connection
with the cancellation of the shares, 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.
The 1,550,000 shares of common stock held in escrow were returned to the Company
and cancelled. However, Best S.A. executed the personal guarantee of the
Chairman of the Board and CEO and retained the 1,032,118 shares. On December 20,
2001, the Board of Directors approved the issuance of 1,032,118 shares to the
Chairman of the Board and CEO of the Company to replace the shares that Best
S.A. retained. As a consequence, the Company amended the second and third
quarter financial statements filed on Form 10-Q to reflect the expense
associated with the retention of the Chairman's shares . The shares outstanding
have been retroactively restated.
During the first quarter of 2001, the Company received proceeds in the amount of
$102,300 for the exercise of 210,000 warrants. Additionally, employees exercised
4,000 stock options at a price of $.50 per share.
8. ACQUISITION
-----------
On July 1, 2001, the Company acquired substantially all of the assets of
Suncoast Automation, Inc. The purchase price was 766,058 shares of the Company's
common stock valued at $1,126,105 based on the closing bid price of $1.47 per
share on June 29, 2001. The transaction was accounted for under the purchase
method of accounting. The purchase price, plus direct costs of the acquisition,
was allocated to accounts receivable, inventory, equipment, installation
contracts and accounts payable.
9. SUBSEQUENT EVENTS
-----------------
On October 2, 2001, in accordance with the Securities Purchase Agreement, the
Company issued a Convertible Note to Crescent in the amount of $2,500,000, due
September 28, 2004 and warrants exercisable to purchase 700,000 shares of common
stock at a price of $1.3064 per share. The Note is convertible to common stock
of the Company at any time at the lower of $1.1561 or the average of the lowest
three consecutive bid prices during the 22 days preceding the date of
conversion. The Company may redeem the Convertible Note upon 30 days notice at a
price of 110% during the first year, 120% during the second year and 130%
thereafter. The Company is not required to pay interest on the Note unless the
Company fails for a period of 10 trading days to issue shares upon conversion or
pay the remaining principal of the Note upon maturity or redemption, in which
event interest shall become due at a fixed rate of 8% per annum, payable in
quarterly installments, on the outstanding principal balance immediately prior
to the date of conversion.
F-9
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.141 ("SFAS No. 141"), "Business
Combinations", and Statement of Financial Accounting Standards No. 142 ("SFAS
No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of such Statement apply to goodwill and other intangible assets acquired between
July 1, 2001, and the effective date of SFAS No. 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
1. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001.
2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented, or exchanged, either individually or as
part of a related contract, asset, or liability.
3. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization.
4. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
5. All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
Goodwill is currently being amortized at approximately $1.1million
annually and is projected to have a net carrying value of approximately $2.887
million at the date of adoption of this standard. The Company is currently
evaluating the provisions of SFAS No. 142 and has not yet determined the effect
that adoption of this standard will have on its financial statements.
11. RESTATEMENT
-----------
The financial statements as of and for the year-ended December 31, 2000 have
been restated to decrease interest expense and decrease additional paid in
capital by $1,302,383 to correctly reflect sales of equity securities in the
private placement in the first quarter of 2000 at a discount from the quoted
market prices.
F-10
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 and note 20,
as to which the date is December 20, 2001
F-11
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 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-12
Dauphin Technology, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
------------ ------------
RESTATED
------------
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 $712,192 at 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, 2000 and 1999 3,321,810 1,238,089
Paid-in capital 53,479,116 38,089,320
Accumulated deficit (46,341,715) (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-13
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
RESTATED
--------
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 67,753 2,099,179 968,414
INTEREST INCOME 83,356 30,800 76,841
------------ ------------ ------------
Loss before income taxes (7,514,979) (9,306,304) (6,131,557)
INCOME TAXES -- -- --
------------ ------------ ------------
Net loss $ (7,514,979) $ (9,306,304) $ (6,131,557)
============ ============ ============
LOSS PER SHARE:
Basic $ (0.13) $ (0.20) $ (0.16)
============ ============ ============
Diluted $ (0.13) $ (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-14
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
----------------------------------------------------
Common Stock Paid-in Treasury Stock
Shares Amount Capital Warrants Shares Amount
------ ------ ------- -------- ------ ------
BALANCE, January 1, 1998 37,035,673 $ 37,036 $ 29,283,136 $ - (730,577) $ (255,702)
Issuance of common stock in connection with:
Conversions of debt 2,705,391 2,705 2,743,811 - 542,272 205,903
Commissions to placement agent 172,700 173 178,745 - - -
Purchase of fixed assets 60,000 60 67,440 - - -
Issuance of warrants in connection with
debt issuance - - - 55,181 - -
Stock bonuses paid 26,236 26 70,653 - 50,123 16,493
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 40,000,000 $ 40,000 $ 32,343,785 $ 55,181 (138,182) $ (33,306)
Issuance of common stock in connection with:
Conversions of debt 4,985,358 4,985 3,842,235 287,700 101,673 24,402
Private placement 6,003,529 6,004 1,481,167 895,208 14,963 3,591
Settlement of Trade Payables 656,322 656 395,243 - 1,546 371
Stock bonuses paid 26,373 26 26,890 - 20,000 4,942
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $ 1,238,089 - $ -
Issuance of common stock in connection with:
Private placement 4,654,613 4,656 6,877,639 419,556 - -
Stock purchase agreement 2,136,616 2,137 5,854,991 1,142,872 - -
Warrant exercise 1,999,602 1,999 1,234,715 (620,641) - -
Consulting fees 500,000 500 312,000 1,103,669 - -
Employee stock compensation - - 70,622 - - -
Settlement of trade payables 480,000 480 299,520 - - -
Stock options exercised 2,000 2 998 - - -
Vendor payments 207,656 208 739,311 38,265 - -
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2000, Restated 61,652,069 $ 61,653 $ 53,479,116 $ 3,321,810 - $ -
============ ============ ============ ============ ============ ============
Accumulated
Deficit Total
------- -----
BALANCE, January 1, 1998 $(23,388,875) $ 5,675,595
Issuance of common stock in connection with:
Conversions of debt - 2,952,419
Commissions to placement agent - 178,918
Purchase of fixed assets - 67,500
Issuance of warrants in connection with
debt issuance - 55,181
Stock bonuses paid - 87,172
Net loss (6,131,557) (6,131,557)
------------ ------------
BALANCE, December 31, 1998 $(29,520,432) $ 2,885,228
Issuance of common stock in connection with:
Conversions of debt - 4,159,322
Private placement - 2,385,970
Settlement of Trade Payables - 396,270
Stock bonuses paid - 31,858
Net loss (9,306,304) (9,306,304)
------------ ------------
BALANCE, December 31, 1999 $(38,826,736) $ 552,344
Issuance of common stock in connection with:
Private placement - 7,301,851
Stock purchase agreement - 7,000,000
Warrant exercise - 616,073
Consulting fees - 1,416,169
Employee stock compensation - 70,622
Settlement of trade payables - 300,000
Stock options exercised - 1,000
Vendor payments - 777,784
Net loss (7,514,979) (7,514,979)
------------ ------------
BALANCE, December 31, 2000, Restated $(46,341,715) $ 10,520,864
============ ============
The accompanying notes are an integral part of these statements.
F-15
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
----------------------------------------------------
2000 1999 1998
---- ---- ----
RESTATED
--------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,514,979) $ (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
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 an integral part of these statements
F-16
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-17
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - 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.
F-18
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
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.
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
========== ==========
F-19
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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.
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
==========
F-20
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
9. CONVERTIBLE DEBT AND WARRANTS
On March 30, 1999, the Company signed an agreement with an accredited investor
("Investor"). Crescent 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 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. Crescent
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 Crescent.
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) $ (7,515) $ (9,232)
Pro forma net loss for Statement 123 (000's) (11,320) (9,245)
Basic loss per common share as reported (0.13) (0.21)
Pro forma basic loss per common share (0.19) (0.21)
Diluted loss per common share as reported (0.13) (0.21)
Pro forma diluted loss per common share (0.19) (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
F-21
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
10. STOCK-BASED COMPENSATION - Continued
Information regarding these options for 2000 and 1999 is as follows:
2000 1999
---- ----
Weighted Weighted
Average Average
Shares Exercise Shares Exercise Price
------ -------- ------ --------------
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
The following table summarizes information about the options outstanding at
December 31, 2000 and 1999:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- ---------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Prices Shares Contractual Life Exercise Price Shares Exercise 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.
F-22
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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 $(2,405,743) $(2,143,858) $(2,084,729)
Permanent differences and adjustments 33,112 785,739 120,802
Net operating losses not recognized 2,372,631 1,358,119 1,963,927
----------- ----------- -----------
Income tax provision $ - $ - $ -
=========== =========== ===========
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 $33,295,263 $ 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
----------- ------------
36,161,649 27,070,424
Current federal statutory rate 34% 34%
----------- ------------
Deferred tax assets 12,294,961 9,203,944
Less valuation allowance 12,294,961 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 $12,294,961 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.
F-23
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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.
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
F-24
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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.
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 4,654,613 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $7,300,000. 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.
F-25
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
17. EQUITY TRANSACTIONS - Continued
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 Crescent. Once every 22 days, the Company may request a
draw of up to $10,000,000 of that money, subject to a maximum of 18 draws. The
maximum amount the Company actually can draw down upon each request will be
determined by the volume-weighted average daily price of the Company's common
stock for the 22 trading days prior to its request and the average trading
volume for the 45 trading days prior to the request. Each draw down must be for
at least $250,000. Use of a 22 day trading average was negotiated to reduce the
impact of market price fluctuations over any calendar month, which generally
includes 22 trading days. At the end of a 22-day trading period following the
drawdown request, the amount of shares is determined based on the
volume-weighted average stock price during that 22-day period in accordance with
the formulas in the common stock purchase agreement.
On April 28, 2000, the Company filed with the Securities and Exchange Commission
a Form S-1 registration statement relating to 15,332,560 shares of common stock
issued to stockholders in private transactions, 11,958,963 shares for other
stockholders, and 6,000,000 shares to be issued when the Company requests a
drawdown under the common stock purchase agreement referred to above.
On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement, the Company issued as a placement fee warrants to purchase 250,000
shares of common stock at an exercise price of $5.481.
On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement for $5,000,000. Upon receipt of the funds, the
Company issued 1,354,617 shares of common stock and warrants to purchase 101,463
shares of common stock at exercise prices ranging from $4.06 to $4.22.
In September 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.
F-26
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
17. EQUITY TRANSACTIONS - Continued
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.
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 Crescent 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, Crescent 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 Crescent. The
agreement with the accredited investor has been cancelled.
F-27
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
17. EQUITY TRANSACTIONS - Continued
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
Crescent to purchase shares from the Company based on terms and conditions
outlined in the agreement. In total Crescent agreed to purchase up to $2,250,000
of the common stock within the next twenty-four months. Crescent 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 Crescent 1,048,951
shares for $450,000 at an average price of $0.43 per share including $58,000 of
closing fees. The Company has the right to sell additional shares with an
interval of 25 business days with a minimum of $100,000 per sale and a maximum
of $500,000 based on the average daily value as described above. In addition to
the stock, Crescent 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 Crescent 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 Crescent 447,012 shares for
$141,935 at an average price of $0.32 per share, including $2,897 of closing
fees.
F-28
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
17. EQUITY TRANSACTIONS - Continued
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 Crescents with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
1998 Transactions
On January 5, March 5, June 5 and September 5, 1998, under an employment
contract relating to the RMS acquisition, the Company issued 12,500 shares on
each date to Richard M. Schultz. Under the contract, Mr. Schultz is entitled to
purchase 50,000 common shares per year for the duration of his employment
contract at $1.00 below the market value on the date immediately preceding the
date of exercise. The common shares issued in connection with this transaction
were treasury shares. On March 6, 1998, Mr. Schultz returned 7,901 shares to
treasury as repayment of his obligation to the Company and on July 6, 1998 the
Company issued additional 1,260 shares to Mr. Schultz to compensate for the
decrease in price of the stock on the day of issuance.
On March 3, 1998, for services performed, the Company issued 30,000 shares to 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).
F-29
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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)
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. RESTATEMENT:
The financial statements as of and for the year-ended December 31, 2000 have
been restated to decrease interest expense and decrease additional paid in
capital by $1,302,383 to correctly reflect sales of equity securities in the
private placement in the first quarter of 2000 at a discount from the quoted
market prices.
F-30
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
21. 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 (1,010,038)* (1,249,631) (1,173,789)* (4,081,521)
Net Loss per share
Basic $ (0.02)* $ (0.02) $ (0.02)* $ (0.07)
Diluted $ (0.02) $ (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
$1,721,939 (0.03 per share) and $1,645,799 (0.03 per share) for the
quarters ending March 31, 2000 and September 30, 2000, respectively.
F-31
PART II
- -------
INFORMATION NOT REQUIRED IN PROSPECTUS
- --------------------------------------
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -----------------------------------------------------
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered hereby. All amounts are
estimated except the Securities and Exchange Commission registration fee.
Amount
------
SEC registration fee $ 890.00
Accounting fees and expenses 14,000.00
Legal fees and expenses 16,000.00
Miscellaneous fees and expenses 6,500.00
----------
Total $37,390.00
==========
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ---------------------------------------------------
Registrant is incorporated in the State of Illinois. Section 8.75 of the
Illinois Business Corporation Act defines the powers of registrant to indemnify
officers, directors, employees and agents.
In additional to the provisions of Illinois Business Corporation Act Section
8.75, and pursuant to the power granted therein, registrant has adapted Article
XII of its Bylaws which provides as follows:
ARTICLE XII
- -----------
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1 The corporation shall indemnify any person who was or is a party, or
- ---------
is threaten to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a directors, officer, employee or agent of the
corporation or fiduciary of any employee benefit plan maintained by the
corporation, or who is or was a director, officer, employee or agent of the
corporation of a fiduciary as aforesaid, or who is or was serving at the request
of the corporation as a director, officer, employee, agent of fiduciary of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation (or, in the case of a fiduciary, the best interests of the plan and
plan participants) and, with respect to any criminal action proceeding, had no
reasonable cause to believe his conduct was unlawful. This termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that this conduct was unlawful.
SECTION 2 The corporation shall indemnify any person who was or is a party, or
- ---------
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation or fiduciary as aforesaid, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the
II-1
corporation (or, in the case of a fiduciary, the best interests of the plan and
plan participants), except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
corporation, unless, and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnify for such expenses as
the court shall deem proper.
SECTION 3 To the extent that a director, officer, employee or agent of a
- ---------
corporation or fiduciary as aforesaid has been successful, on the merits or
otherwise, in the defense of any action, suit or proceeding referred to in
proceeding sections, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
SECTION 4 Any indemnification under section 1 and 2 hereof (unless ordered by a
- ---------
court) shall be made by the corporation only as authorized in the specific case,
upon a determination of the director, officer, employee, agent of fiduciary is
proper on the circumstances because he has met the applicable standard of
conduct set forth in said sections. Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtained, or even if obtainable, a quorum of disinterest directors so
directs, by independent legal counsel in a written opinion, or (3) by the
shareholders.
SECTION 5 Expenses incurred in defending a civil or criminal action, suit or
- ---------
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding, as authorized by the board of directors in the
specific case, upon receipt of an undertaking by or oh behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this Article.
SECTION 6 The indemnification provided by this Article shall not be deemed
- ---------
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
incur to the benefit of the heirs, executors and administrators of such person.
SECTION 7 The corporation may purchase and maintain insurance on behalf of any
- ---------
person who is or was a director, officer, employee or agent of the corporation
of fiduciary, or who is or was serving at the request of the corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 8 In the case of a merger, the term "corporation" shall include, in
- ---------
additional to the surviving corporation, any merging corporation absorbed in a
merger, which if its separate existence had continued, would have had the power
and authority to indemnify its directors, officers and employees or agents, so
that any person who was a director, officer, employee or agent of such merging
corporation, or was serving at the request of another corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this section with respect to the surviving corporation as such
person would have with respect to such merging if its separate existence had
continued.
SECTION 9 For the purpose of this Article, referenced to "other enterprises"
- ---------
shall include employee benefit plans; reference to "fines" shall include any
excise tax assessed on a person with respect to an employee benefit plan; and
references to the phrase "serving at the request of the corporation" shall
include any service as a director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of registrant pursuant
to the foregoing provisions, or otherwise, registrant has been advised that in
the
II-2
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, enforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by registrant of expenses incurred in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the questions whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such an issue.
Except to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of registrant is indemnified in any manner against any liability which
he may incur in his capacity as such.
II-3
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
----------------------------------------------------
Exhibit No. Description of Document
--------------------------------------
*3(1) Certificate of Incorporation filed July 27, 1990, incorporated
herein by reference to exhibit 7(c)(1) of Form 8-K filed May 14,
1991.
*3(2) By-Laws as amended, incorporated herein by reference to exhibit
3(2) of Form 10-K for the fiscal year ended December 31, 1997.
*4(1) Specimen Common Stock Certificate incorporated herein by
reference to exhibit 4(1) of Form S-18 filed June 1, 1990.
*10(1) Agreement and Plan of Reorganization incorporated herein by
reference to exhibit 7(c) of Form 8-K filed April 4, 1991.
*10(2) Plan and Agreement of Merger incorporated herein by reference to
exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*10(3) Computer Technology License Agreement dated November 12, 1997,
between Phoenix Technology, Inc. and Dauphin Technology, Inc.
included as an exhibit to Form S-1 filed March 17, 1998,
incorporated herein by reference.
*10(4) License Agreement dated May 3, 1996, between Microsoft
Corporation and Dauphin Technology, Inc. included as an exhibit
to Form S-1 filed March 17, 1998, incorporated herein by
reference.
*10(5) Equity line of credit agreement by and between Techrich
International Limited and Dauphin Technology, Inc. dated April
12, 2000 including Common Stock Purchase Agreement, Registration
Rights Agreement, Escrow Agreement and Form of a stock Purchase
Warrant included as an exhibit to Form 8-K filed on April 20,
2000 incorporated herein by reference.
*10(6) Amendment No. 1 to Common Stock Purchase Agreement dated July
10, 2000 between Dauphin Technology, Inc. and Techrich
International Limited.
*10(7) Asset Purchase Agreement, by and among the Company, ADD
Acquisition Corp., T & B Design, Inc. (f/k/a Advanced Digital
Designs, Inc.), Advanced Technologies, Inc., 937 Plum Grove Road
Partnership, the Stockholders of T & B Design, Inc. and Advanced
Technologies, Inc. and the partners of 937 Plum Grove Road
Partnership, dated August 18, 2000 included as an exhibit to
Form 8-K/A filed on September 25, 2000 incorporated herein by
reference.
*10(8) Asset Purchase Agreement, by and among the Company, Suncoast
Acquisition Corp., ProtoSource Corporation and Suncoast
Automation, Inc. dated July 1, 2001 included as an exhibit to
Form 8-K filed on July 14, 2001 incorporated herein by
reference.
*10(9) Securities Purchase Agreement, by and between the Company and
Crescent International Ltd. dated September 28, 2001 including
Registration Rights Agreement and Form of stock Purchase Warrant
included as an exhibit to Form 8-K filed on October 12, 2001
incorporated herein by reference.
24(1) Consent of Arthur Andersen LLP., independent public accountants.
24(2) Consent of Grant Thornton LLP., independent public accountants.
24(3) Consent of Rieck and Crotty, P.C.
* Previously filed or incorporated by reference.
II-4
Item 17. UNDERTAKINGS
- ----------------------
(A) Subject to the terms and conditions of Section 15(d) of the Securities
----------------------------------------------------------------------
Exchange Act of 1934, the undersigned Company hereby undertakes to file
-------------------------------------
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant
to authority conferred in the section.
(B) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, post-effective amendment to this registration
statement:
(i) To include any Prospectus required by Section 10(a) of
the Securities Act of 1993;
(ii) To disclose in the Prospectus any change in the
offering price at which any registering shareholders subject
to the requirement of a Pricing Amendment are offering their
registered securities for sale;
(iii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement;
(iv) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Company pursuant to the forgoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjustment of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palatine
and State of Illinois, on the 7th day of February, 2002.
DAUPHIN TECHNOLOGY, INC.
By: /s/ Andrew J. Kandalepas
-------------------------
Andrew J. Kandalepas, President
Pursuant to the requirement of the Securities Act of 1933, as amended,
this registration statement has been duly signed by the following persons in the
capacity and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Andrew J. Kandalepas Chairman of the Board/President/ February 7, 2002
- ------------------------
Andrew J. Kandalepas Chief Executive Officer
/s/ Harry L. Lukens, Jr. Chief Financial Officer/ February 7, 2002
- ------------------------
Harry L. Lukens, Jr. Assistant Secretary
/s/ Christopher L. Geier Executive Vice President February 7, 2002
- ------------------------
Christopher L. Geier
/s/ Jeffrey Goldberg Secretary/Director February 7, 2002
- --------------------
Jeffrey Goldberg
/s/ Gary E. Soiney Director February 7, 2002
- ------------------
Gary E. Soiney
/s/ Mary Ellen W. Conti Director February 7, 2002
- -----------------------
Mary Ellen W. Conti