UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934.
For fiscal year ended December 31, 2000
___ Transaction Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Illinois 87-0455038
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant as of March 30, 2001 is $82,308,472.
As of March 30, 2001, the number of Shares of the Registrant's Common Stock,
$.001 par value, is 61,886,069 issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2001 Annual Meeting of
Shareholders to be held June 13, 2001, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
DAUPHIN TECHNOLOGY, INC.
Table of Contents
-----------------
PART I 3
Item 1. Description of Business 3
Overview 3
Strategic Plan 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to Vote of Security Holders 11
PART II 12
Item 5. Market for the Registrant's Common Stock and Related Security Holders Matters 12
Market Price of Common Stock 12
Holders 12
Dividend Policy 12
Common Stock 12
Preferred Stock 12
Warrants and Options 13
Transfer Agent and Registrar 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Results of Operations 2000 Compared to 1999 14
Fourth Quarter 2000 Compared to Fourth Quarter 1999 15
Results of Operations 1999 Compared to 1998 15
Liquidity and Capital Resources 16
Risk Factors 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting or Financial Disclosure 22
PART III 23
Item 10. Directors, Executive Officers and Officers of the Registrant 23
Directors and Officers 9
Family Relationship 10
Other: Involvement in Certain Legal Proceedings 10
Involvement by Management in Public Companies 10
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Party Transactions 23
PART IV 24
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 24
SIGNATURES 24
2
Note: This Form 10-K contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and the nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company.
PART I
Item 1. Business
General
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiaries
design, manufacture and market mobile hand-held, pen-based computers, as well as
other electronic devices for home and business use and performs design services,
process methodology consulting and intellectual property development, out of its
three locations in northern Illinois. The Company, an Illinois corporation, was
formed on June 6, 1988 and became a public entity in 1991. The Company employs
approximately 35 people consisting of engineering, sales and marketing,
administrative, and other personnel. The Company's stock is traded on the
over-the-counter market electronic bulletin board operated by NASD, under the
symbol DNTK.
In 1993 and 1994 the Company encountered severe financial problems. On January
3, 1995, the Company filed a petition for relief under Chapter 11 of the Federal
Bankruptcy Code in the United States Court for the Northern District of
Illinois, Eastern Division. The Company operated under Chapter 11 until July 23,
1996, when it was discharged as Debtor-in-Possession and bankruptcy proceedings
were closed.
Strategic Plan
Before the Company emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with strong
engineering and manufacturing backgrounds as well as finance, accounting, sales
and marketing skills were hired. The new management formulated a strategic
business plan to diversify the Company's operations to eliminate dependence on a
single product line or industry.
The plan incorporated an initial focus on the hand-held mobile computer market.
In particular, it focused on development of miniaturized mobile computers that
would be incorporated in electronic solutions for vertical markets. In addition
to mobile computing markets, management is focused on producing and marketing
other electronic devices, namely set top boxes, coupled with targeted
acquisitions in the technology sector.
As part of management's plan, on June 6, 1997 the Company acquired all of the
outstanding shares of stock in R.M. Schultz & Associates, Inc. ("RMS"), an
electronic contract-manufacturing firm located in McHenry, Illinois. On August
28, 2000 the Company, through a newly formed subsidiary named ADD Acquisitions
Corp., acquired all of the assets of T & B Design, Inc. (f/k/a Advanced Digital
Designs, Inc.) , Advanced Technologies, Inc. , and 937 Plum Grove Road
Partnership pursuant to an Asset Purchase Agreement. The subsidiary then changed
its name to Advanced Digital Designs, Inc. ("ADD"). ADD specializes in
telecommunications, especially wireless and cable-based product development, as
well as multimedia development, including digital video decoding and processing.
3
Products and Services
The Company has two primary products, the Orasis(R) and the OraLynx(TM) . The
Orasis(R) has been completed and several thousand units have been produced and
sold. However, revisions are currently planned. Therefore, all production has
been halted until the new revisions can be made. The Company is currently
focusing its development activities on the OraLynx(TM) set-top box. It is
unknown as to when the revised version of the Orasis(R) will be available. The
OraLynx(TM) set-top box is in the development stage. Prototypes have been made
and were demonstrated at the Comdex2000 trade show in Las Vegas, Nevada in
November 2000. Since revisions are currently being made, production will not
begin until third or fourth quarter of 2001. The Company is also exploring the
possibility of outsourcing the production to a contract manufacturer and is also
investigating the possibility of seeking production overseas in Asia and the Far
East.
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. Unlike competitor models
Orasis(R) does not lock the customer into a single format. Orasis(R) affords a
customer complete flexibility and versatility offered by no other mobile
computer presently on the market. It is a time, labor, and money-saving device
that can be custom-configured with a variety of options to meet the end-user's
needs. The Company has not recognized significant sales of the product to date
and will adjust its product as the market further develops new technologies.
During the later part of 1999 the Company was engaged in negotiations and
eventually on February 17, 2000 signed a contract with Estel Telecommunications
S.A.("Estel") to develop and produce set-top boxes. In conjunction with
continued development of Orasis(R) and the decision to terminate its contract
manufacturing, the Company began design and development of such boxes. A set-top
box is an electronic device that converts digital signals into a user acceptable
format via other electronic devices such as television sets, telephones and
computers. The Company is rewriting its marketing and sales plan to incorporate
the contract with Estel for its set-top box and to include a strategy for
domestic operations for both the Orasis(R) and OraLynx(TM).
4
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, specializing in hardware and software
development. In addition, the Company's engineers consulted with and assisted
customers in the development of intellectual property. 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. Currently, one-third of the Company's employees are involved in
the design service segment of the business. Design services currently represents
over 90% of the Company's overall revenues.
The Company has received a contract from Estel 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.
During 1998 and the first half of 1999, the Company was involved in contract
manufacturing at its subsidiary, RMS in McHenry, Illinois. Revenues in 1998 and
1999 amounted to approximately $5,638,000 and $2,135,000, respectively. During
the third quarter of 1999, management of the Company decided to terminate the
contract manufacturing operations because they were not profitable. RMS used,
rather than provided, cash in its operations and was an overall drain on the
Company's cash flow.
Markets
Every day on TV, radio and in the newspapers we hear and read about people's
ability to contact the farthest reaches of our planet in seconds. We hear about
business meetings that take place over the wires, on a large TV screen instead
of in person. The increased use of the internet as a means of commerce and
communication drives us forward every day to reach for the things that only a
few years ago we read about in science fiction books. We also read about
constant improvements in digital and cellular technology in order to allow
anyone to constantly "stay connected".
Based on the latest statistics, the mobile computing devices market is
approximately $110 billion in annual revenue. Sales of laptop and notebook
computers represent a large portion of this market. However, the growth rate of
hand-held pen-based devices exceeds that of laptops and notebooks. Based on the
latest Frost and Sullivan studies, the total pen-tablets market, in which
Orasis(R) competes, is several billion dollars and is growing at approximately
twenty five percent per year. Dauphin's management estimates that market may be
growing even faster than latest predictions.
5
Unlike several years ago, the pen-based computer market is more defined and is
ready for a product such as Orasis(R). The total mobile market includes more
than sixty products that fall within the Personal Digital Assistant ("PDA")
category of the pen-based market. These devices include electronic organizers,
mobile fax machines and electronic notepads. Most of these devices are palm-top
size, requiring either pen or keyboard input. In addition to PDA's, there are
approximately twenty devices that would qualify as computers or pen tablets.
Orasis(R) belongs in the latter category.
Until the introduction of Orasis(R), pen based devices were no match for the
laptops. The processor speed, limited expandability and memory limitations of
hand-held computers made notebooks and laptops much more popular with the mobile
workforce. Orasis(R) bridges the gap between notebook or laptop computers and
pen-based computers. Added features and flexibility of the unit may also attract
public attention, thereby growing the overall category.
The set-top box market is a relatively new phenomenon. According to the research
firm, Strategy Analytics, the worldwide installed base of set-top boxes was a
mere 2.2 million in 1998 and was 27.4 million boxes in the year 2000, and is
expected to grow by 35% in 2002. Currently with the market in the early
developing stages, the "set-top box" has not been perfected. Existing designs do
not offer the flexibility or future capacity that Dauphin's customers seek.
Sales and Marketing
During the year 2000, the scope of the marketing effort for set top boxes was
somewhat narrow. As a result of the amount of time consumed by Company personnel
associated with 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 because of staffing shortages within the Company. 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
One individual design service customer, Motorola, Inc.,accounted for
approximately 53% of total revenues for the year 2000.
6
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 for the Orasis is outsourced to SMT Unlimited, which
supplies RMS with the ready assembled and tested motherboards for final
assemblyThe Company has not purchased any motherboards from SMT since early
1999. Motherboards that have been purchased have been done with purchase orders
on an as needed basis. There are no long-term contracts between the Company and
SMT. The Company has no current plans to enter into a long-term contract with
SMT at this time. Should the Company consider SMT for the production of
motherboards for use in the set-top box, further arrangements may be made.
Currently, the Company is exploring alternative sources for the manufacture of
motherboards and related products for the set-top box, including the possibility
of going to Asia and the Far East. SMT Unlimited, located in Fremont,
California, is capable of producing hundreds of motherboards per day.
RMS assembles, tests and ships final products to Dauphin customers. All
manufacturing support for the Company's products is performed by RMS. With
additional staffing, RMS is capable of assembling hundreds of units per day.
Source and Availability of Raw Materials
Component parts are obtained from suppliers around the world. Components used in
all designs are state of the art and are Year 2000 compliant. Components such as
the latest mobile Intel processors, color video controllers and CACHE memory
chips are in high demand and are, thus, available in short supply. However, once
production has begun, management does not anticipate delays in the production
schedule.
Software Licensing Agreements
The Company is leasing BIOS (basic input/output software) for Orasis(R) from
Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and
licenses proprietary software products for original equipment manufacturers and
related software for personal computers. A Master License Agreement was signed
for the right of distribution of Phoenix software. The Company pays $4 per unit
sold for this license. The Company is only obligated under this agreement if and
when a product is sold. Since very few products have been sold in 2000, the
expense to the Company was not significant.
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. The Company is only obligated under this agreement if and when a product
is sold. Since very few products were sold in 2000, the expense to the Company
was not significant.
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.
7
However, due to the unique configuration of the Orasis(R), the Company did
patent its mechanical design and processor upgradability concepts. It also
expects to patent its set-top box design following development. The Company also
attempts to maintain its proprietary rights by trade secret protection and by
the use of non-disclosure agreements. It is possible that the Company's products
could be duplicated by competitors and duplication and sale could therefore
adversely affect the Company. However, management believes that the time spent
by competitors engineering the product would be too long for the rapidly
changing computer industry. In 1997 the Company applied for and received a
trademark on the name "Orasis."
Employees
As of December 31, 2000, the Company had approximately 35 full-time employees.
Many of the Company's employees are highly skilled and the Company's success
depends in part upon its ability to attract and retain such employees. The loss
of key Company personnel could have an adverse effect on the Company's results
of operations.
8
Directors and Officers
The following table sets forth the name, age, date elected or appointed as
Director, Executive Officer or Officer position with the Company, present
principal occupation and employment history for the past five years of each
person who is a Director, Executive Officer or Officer.
Name Age Date Present Office
- ---- --- ---- --------------
Andrew J. Kandalepas 49 1995 Chairman of the Board of Directors
Chief Executive Officer
Mr. Kandalepas joined Dauphin as Chairman of the Board in February 1995. He
was named CEO and President of Dauphin in November of 1995. In addition,
Mr. Kandalepas is the founder and President of CADserv, engineering
services firm. Mr. Kandalepas graduated from DeVry Institute in 1974 with a
Bachelor's Degree in Electronics Engineering Technology. He then served as
a product engineer at GTE for two years. Mr. Kandalepas left GTE to serve
ten years as a supervisor of PCB design for Motorola prior to founding
CADserv in 1986.
Christopher L. Geier 38 1999 Executive Vice President
Mr. Geier is Executive Vice President reporting directly to Dauphin's CEO.
Mr. Geier leads Dauphin's overall organization, including its subsidiaries.
Prior to joining Dauphin, Mr. Geier founded and managed several
multimillion-dollar private corporations, as well as a $100 million region
of a large retail distribution company. Mr. Geier earned an MBA from the
University of Chicago Graduate School of Business and a Bachelor of Arts in
Criminal Justice/Pre Law from Washington State University.
Harry L. Lukens, Jr. 50 2000 Chief Financial Officer
Mr. Lukens was appointed Chief Financial Officer in May 2000 and named
Assistant Secretary in March 2001. From 1998 until his appointment, he
served as a personal asset manager for an individual investor. From
1993 until 1998, Mr. Lukens was Vice President, Treasurer and Chief
Financial Officer of Deublin Company, a privately owned international
manufacturer. From 1972 until 1993, he was with Grant Thornton LLP,
serving as a partner from 1986 until 1993.
Jeffrey L. Goldberg 48 1995 Secretary, Director
Mr. Goldberg has served as Secretary and a Director since June of 1995. He
is also a member of the Audit Committee. Mr. Goldberg is a principal with
Essex LLC., a financial planning firm and is currently Chief Executive
Officer and Chairman of the Board of Stamford International, a Canadian
company. He is a former principal at FERS Personal Financial LLC, an
accounting and financial planning firm. Mr. Goldberg formerly served as the
President of Financial Consulting Group, LTD., a lawyer at the Chicago law
firm of Goldberg and Goodman, and prior to that, was a tax senior with
Arthur Andersen LLP. He is an attorney, CPA and certified financial
planner.
Gary E. Soiney 60 1995 Director
Mr. Soiney has served as a Director since November of 1995. He is also a
member of the Audit Committee. Mr. Soiney graduated from the University of
Wisconsin in Milwaukee with a degree in Business Administration. He is
currently a 75% owner in Pension Design & Services, Inc., a Wisconsin
corporation, which performs administrative services for qualified pension
plans to business primarily in the Mid-West.
9
Andrew Prokos 38 1995 Director
Mr. Prokos has served as a Director since February 1995. He is also
vice-president of CADserv and has served in this capacity since 1995. Mr.
Prokos is a graduate of DeVry Institute with an Associate Degree in
Electronics.
Mary Ellen Conti, MD 2000 Director
Dr. Conti was appointed to the Board of Directors and to the Audit
Committee in September, 2000. Dr. Conti is a Radiation Oncologist and owns
and operates four Radiation Therapy Clinics in the St. Louis, MO. area. She
has practiced in the medical field since 1974 and has been a member of the
Planning and Budget Committee of Memorial Hospital in Belleville, Illinois.
Dr. Conti currently serves as a member of the Board of Directors of
Creighton University, FirstStar Bank Health Care Board, Association of
Freestanding Radiation Oncology Centers and the Accreditation Association
for Ambulatory Health Care.
All Directors are elected annually and hold office until the next annual meeting
of the shareholders of the Company or until their successors have been elected
and qualified.
Family Relationship
Andrew Prokos, a Director, is a cousin of Andrew Kandalepas, Chairman of the
Board of Directors.
Other: Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any Director or Executive Officer during the past five years.
Involvement by Management in Public Companies
Mr. Goldberg is Chief Executive Officer and Chairman of the Board of Stamford
International, Inc., which trades on the Canadian Dealer Network. Mr. Goldberg
also served as a Director of Econometrics, Inc. that is traded on the over the
counter market until October, 2000. None of the other Directors, Executive
Officers or Officers has had, or presently has, any involvement with a public
company, other than the Company.
Item 2. Properties
The Company's executive offices consist of 7,300 square feet of office space
located at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067. The
Company pays approximately $10,000 per month to rent the facilities. In December
1998, in conjunction with upgrading the facilities, Dauphin signed a five-year
lease extension. The lease called for increased rent, but provided for
reconstruction of facilities to better suit the Company's needs. The Company
believes the space will be adequate for the foreseeable future.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050. RMS
occupies 53,000 square feet of space, of which 7,000 square feet is for office
space and 5,000 square feet is surface mount portion of production. The lease
has a five-year term starting on June 6, 1997 with an optional extension for an
additional five years. The rent is approximately $14,000 per month. The Company
believes the space will be adequate for RMS operations for the foreseeable
future.
10
ADD facilities are located at 937 N. Plum Grove Road, Schaumburg, Illinois
60173. The approximately 5,500 square feet of office space is owned by the
Company.
Item 3. Legal Proceedings
During 2000, the Company was engaged in various legal proceedings of which all
such proceedings were finalized and fully accounted for in the financial
statements. As of the date of this report, the Company is not aware of any legal
proceedings or litigation involving the Company.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holders
Matters
Market Price of Common Stock
The Company's common stock is traded on the over-the-counter market and is
quoted in the National Quotation Bureau's Pink Sheets. The following table shows
the range of representative bid prices for the common stock. The prices
represent quotations between dealers and do not include retail mark-up,
markdown, or commission, and do not necessarily represent actual transactions:
Bid Prices
1998 1999 2000
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter $ 1.625 $ 1.016 $ 1.219 $ 0.453 $ 12.563 $ 0.266
Second Quarter 1.391 0.875 0.938 0.391 8.000 2.656
Third Quarter 2.031 0.875 0.750 0.266 6.750 3.094
Fourth Quarter 0.906 0.500 0.703 0.219 4.438 0.719
Holders
The number of shareholders on record of the Company's common stock as of March
28, 2001 as reported by the Company's transfer agent is approximately 22,500. A
number of the Company's shareholders on record are brokerage firms or stock
clearing agencies. Therefore, the Company believes the total number of
beneficial shareholders is greater than 22,500.
Dividend Policy
The Company has not paid any cash dividends to date and does not anticipate or
contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business.
Common Stock
The authorized capital stock of the Company consists of 100,000,000 shares of
common stock, $0.001 par value. As of March 28, 2001 there were 61,866,069
shares of common stock issued and outstanding held by approximately 22,500
shareholders of record. The holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
shareholders. Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor (see "Market Price of Common Stock" and "Dividend
Policy"). In the event of a liquidation, dissolution or winding up of the
Company, holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no right to
convert their common stock into any other securities and have no cumulative
voting rights. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable.
Preferred Stock
No preferred shares have been issued to date. The Company is authorized to issue
up to 10,000,000 shares of preferred stock, $0.01 par value. The preferred stock
may be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
shareholders, and may include voting rights (including the right to vote as a
series on particular matters),
12
preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently outstanding
and the Company has no present plans for the issuance thereof. However, the
issuance of any such preferred stock could affect the rights of the holders of
common stock, and, therefore, reduce the value of the common stock. In
particular, specific rights granted to future holders of preferred stock could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, thereby preserving control of the Company by present owners.
Warrants and Options
As of March 28, 2001 there are a total of 8,331,504 Warrants issued and
outstanding in the hands of approximately 60 investors and consultants,
resulting from fund raising. These Warrants are convertible at any time into
Company's $0.001 par value common stock. The per share strike prices of these
Warrants range from $0.20 to $5.481. These Warrants expire three years from the
date of issuance. The Warrants include a change of form provision in them,
whereby if a change in the form of the common stock occurs due to stock splits,
stock dividends, or mergers, the holders are entitled to receive a pro-rata
increase of shares at a discounted price. However, the holders of the Warrants
do not have any voting rights and are not entitled to receive any cash or
property dividends declared by the Board of Directors until they convert the
Warrants into common shares. At the time such Warrants are exercised, the common
shareholders ownership percentage of the Company will be diluted. In December
2000, the Company re-priced approximately 3,012,000 warrants it had previously
issued to outside consultants. The warrants were originally issued with an
exercise price ranging from $10.00 to $5.00, and were re-priced with exercise
prices ranging from $5.00 to $2.00 per share. The re-pricing created a charge to
earnings of approximately $234,000.
As of March 28, 2001 there are a total of 4,178,123 Options issued and
outstanding in the hands of more than thirty employees and former employees.
These Options are exercisable at any time into the Company's $0.001 par value
common stock. The per share strike prices of these Options range from $0.50 to
$3.875. These Options expire three years from the date of issuance. At the time
such Options are exercised, the common shareholders ownership percentage of the
Company will be diluted.
Transfer Agent and Registrar
American Stock Transfer and Trust Company, 6201 15th Avenue, Brooklyn, New York
11219.
13
Item 6. Selected Financial Data
Year Ended December 31
- ----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Sales $ 859,837 $ 2,279,058 $ 5,367,514 $ 2,730,035 $ 93,946
Extraordinary Item - - - 38,065,373
Net Income (Loss) (8,817,362) (9,306,304) (6,131,557) (3,988,017) 36,668,669
Net Income (Loss)
Per Share (0.15) (0.20) (0.16) (0.13) 1.52
Total Assets 11,160,777 3,372,155 6,719,635 7,269,136 3,402,860
Long -Term Debt 102,133 185,179 302,951 429,526 43,196
Working Capital(Deficit) 3,015,210 (917,917) 260,227 4,510,546 3,020,558
Shareholders Equity(Deficit) 10,520,864 552,344 2,885,228 5,675,595 3,092,900
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
- --------------------------
The following discussion should be read in conjunction with the consolidated
financial statements. Certain statements contained herein may constitute
forward- looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
Results of Operations 2000 Compared to 1999
- -------------------------------------------
Revenue for the Company decreased from approximately $2,279,000 in 1999 to
$860,000 in 2000The revenue decreased as a result of the Company's decision to
eliminate contract manufacturing and focus its efforts on the development of the
set-top box. The Company determined that contract manufacturing was no longer
profitable and did not fit in to the overall business plan of the Company.
Contract manufacturing revenues approximated $2,000,000 in 1999. 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 was effected by the write down
of obsolete inventory. For the year ended December 31, 2000 the write down of
obsolete inventory and the reserve for potential obsolete Orasis(R) inventory
amounted to $1,950,000 as compared to the write-off 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. The Company decided to eliminate contract
manufacturing in the third-quarter. The employee count at RMS was reduced from
185 employees during the beginning of 1999 to six employees
at December 31, 2000. In
14
addition, certain related expenses were also reduced, such as health insurance,
telephone, travel and entertainment, utilities, office supplies and other
administrative expenses.
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 $1,370,000 for the year ended
December 31, 2000 from $2,099,000 for the year ended December 31, 1999. Interest
expense in 2000 was primarily generated from the issuance of common stock at a
price below market value. Interest expense in 1999 was mainly a result of the
financing activities associated with the conversion of debt to common stock as
well as the issuance of warrants associated with the debt.
Fourth-Quarter 2000 Compared with Fourth-Quarter 1999
- -----------------------------------------------------
Revenue for the fourth-quarter 2000 was approximately $499,000 as compared to
fourth-quarter revenue in 1999 of approximately $93,000. The revenue increased
as a result of the design services and consulting of the Company's subsidiary,
Advanced Digital Designs. Gross profit margins are not comparable for the period
due to the fluctuations in revenue. However, the fourth-quarter gross margins
were affected in 2000 by the write down of obsolete and slow moving inventory.
In 2000, the Company wrote down approximately $1,440,000 of inventory,
consisting primarily of raw materials, and disposed of excess and obsolete
inventory, which will not be used in the production of the Orasis(R). In
addition, the Company established an inventory reserve of approximately $515,000
to adjust for the net realizable value of the remaining inventory associated
with the Orasis(R).
Selling, general and administrative expenses are comparable between the
fourth-quarter of 2000 and 1999. Research and Development costs increased by
approximately $900,000 from approximately $55,000 in the fourth-quarter 1999 to
approximately $957,000 in the fourth-quarter 2000. This is attributable to the
concentrated efforts of developing the OraLynx(TM) set-top box.
Interest expense decreased from $124,000 in the fourth-quarter 1999 to
approximately $4,000 in the fourth-quarter of 2000. This decrease is
attributable to the fact that the Company paid off substantially all of its debt
during the first quarter of 2000.
Results of Operations 1999 Compared to 1998
- -------------------------------------------
Revenue decreased from approximately $5,368,000 in 1998 to approximately
$2,279,000 in 1999. The decrease is a direct result of management's change in
corporate strategy moving away from contract manufacturing and towards new
product design and development. Gross profits are not comparable between 1999
and 1998 due to the decrease in revenue and the write down of inventory of
approximately $1,793,000.
Selling, general and administrative expenses increased in 1999 to approximately
$4,173,000 from $3,273,000 in 1998. The increase was due to the increase in
professional and consulting fees associated with capital raising efforts, the
impairment of goodwill and costs associated with the reduction of overhead and
staffing.
Research and Development expenses decreased from approximately $1,576,000 in
1998 to approximately $510,000 in 1999. During 1998, substantially all the
efforts were for the development of the Orasis. During 1999, the Orasis was in
production and only minor modification and development work was necessary.
15
Interest expense increased from $968,000 in 1998 to approximately $2,099,000 in
1999. The increase in interest expense is directly related to the financial
constraints on the Company during 1999. Interest expense in 1999 was mainly the
result of the financing activities associated with the conversion of debt to
common stock as well as the issuance of warrants associated with the debt.
Liquidity and Capital Resources
- -------------------------------
The Company has incurred a net operating loss in each year since it's founding
and as of December 31, 2000, has an accumulated deficit of approximately
$47,644,000. The Company expects to incur operating losses over the near term.
The Company's ability to achieve profitability will depend on many factors
including the Company's ability to manufacture and market commercially
acceptable products. There can be no assurance that the Company will ever
achieve a profitable level of operations or if profitability is achieved, that
it can be sustained.
During the first and second quarters of 2000, the Company conducted a private
placement, which raised approximately $8,600,000, of which $1,300,000 was used
to settle certain trade payables. In the second quarter of 2000, the Company
entered into a common stock purchase agreement, escrow agreement and
registration rights agreement with an institutional investor. These agreements
provide a $100,000,000 equity line of credit for use by the Company at its
discretion. During the third quarter, the Company received $5,000,000 from the
equity line in exchange for the issuance of 1,354,617 shares of common stock. In
October, 2000, the Company also requested an additional drawdown of $2,000,000.
The Company has available up to $93,000,000 under the equity line of credit.
Risk Factors
- ------------
We operate in a highly competitive and volatile industry. We are faced with
aggressive pricing by competitors; competition for necessary parts, components
and supplies; continually changing customer demands and rapid technological
developments; and risks that buyers may encounter difficulties in obtaining
governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessary to use our products or to offer them
to end users. The following cautionary statements discuss certain important
factors that could cause actual results to differ materially from the projected
results contained in the forward-looking statements contained in this Annual
Report.
Risks Related to Our Financial Results and/or Condition
We have had a limited operating history.
Since July 1996 we have operated without substantial sales or revenue. Our
limited financial performance may make it difficult for potential sources of
capital to evaluate the viability of our business to date and to assess its
future viability.
We have terminated one line of business that will result in reduced revenue.
We substantially terminated contract-manufacturing services at the end of the
second quarter of 1999 as part of our current operating strategy. For years
ending December 31, 1998 and 1999, contract manufacturing services conducted
through our subsidiary accounted for $5,637,574 and $2,134,563 in revenue. We
will no longer offer such services to third parties but will instead apply such
activities to develop and manufacture our own products.
Availability of funding under our equity line is affected by our share price and
general market conditions.
16
In April 2000, we entered into a common stock purchase agreement with Techrich
International establishing an equity line whereby we may request draws of up to
$100,000,000 over an 18-month period in return for common stock and warrants
that we issue to Techrich. The amount of securities to be issued under the
equity line is based on a formula that is tied to the market price for our
shares. The securities markets have recently experienced significant price and
volume fluctuations. The market prices and volume of securities of technology
and development-stage companies have been especially volatile. Market volatility
and conditions could reduce the market price of our shares despite operating
performance and the market price of our shares could decrease significantly if
our operating performance falls below expectations.
Because the amount of securities to be issued under our equity line is based on
a formula that is tied to the market price of our shares just prior to the time
of a drawdown, issuance of some or all of the securities allowed under the
equity line could result in significant dilution of the per share value of our
shares held by current investors. The inverse relationship between the price and
amount of securities to be issued may have the following results:
. the lower the average trading price of our shares at the time of a
drawdown, the greater the number of securities that would be issued,
and the greater the dilution caused by these securities;
. the perceived risk of dilution may cause Techrich or other
shareholders to sell their shares, which could contribute to the
downward movement in the stock price of Techrich's shares; and
. the significant downward pressure on the trading price of our shares
could encourage Techrich and other shareholders to engage in short
sales, which would further contribute to the downward spiraling price
decline of our shares.
If a large portion of the shares eligible for immediate resale after
registration were to be offered for public resale within a short period of time,
the current public market would likely be unable to absorb such shares. This
could result in a significant reduction in current market prices. There can be
no assurance that investors will be able to resell shares at the price they paid
for the shares or at any price.
Our placement agreement with Ladenburg Thalmann Co. Inc., restricts us from
raising investment capital during the term of the common stock purchase
agreement except through the common stock purchase agreement, unless otherwise
agreed to in writing.
If we need capital but are unable to drawdown under the common stock purchase
agreement for any reason, we will need to separately negotiate with Ladenburg
Thalmann and Techrich to lift those restrictions so we can obtain the capital
from other sources. Our common stock purchase agreement with Techrich also
limits our ability to sell our securities for cash at a discount to the market
price for 18 months from the effective date of the registration statement filed
in connection with establishment of the equity line.
Risks Related to Our Strategy
We may be unable to identify or acquire additional technologies or products to
diversify our product offering.
We expect to avoid reliance upon any given product through acquisition and/or
development of additional technologies and products. However, we may be unable
to identify or acquire technologies or products. In that case, we may have to
rely upon our own resources to develop such technologies and products
internally. We may not have sufficient resources to do this. In addition,
acquisitions involve a number of
17
special risks, such as diversion of management's attention and
financing issues, which may have a negative impact on operations and financial
performance.
We may not be able to efficiently integrate any acquired technologies, products
or businesses.
We expect to acquire technologies, products and other businesses to compliment
our operations. There can be no assurance that we will be able to integrate the
operations of any other business successfully. Acquisitions we do undertake will
subject us to a number of risks, including the following:
. inability to institute the necessary systems and procedures, such as
accounting and financial reporting systems;
. failure to retain key personnel;
. assumption of unanticipated legal liabilities and other problems; and
. amortization of acquired intangible assets.
In addition, we may acquire technologies or products that prove incompatible to
other products following further development.
Even if we successfully integrate acquired technologies, products or businesses,
we may be unable to effectively manage growth.
We seek to become profitable by expanding sales of Orasis(R), the OraLynx(TM)
set-top box and any new products that we may develop or acquire. To manage
growth, we may be required to:
. improve existing and implement new operational, production and
personnel systems;
. hire, train and manage additional qualified personnel; and
. establish relationships with additional suppliers and strategic
partners while maintaining existing relationships.
The current set-top box agreement with Estel Telecommunications S.A. subjects us
to risks associated with international operations.
As we begin shipping under the set-top box agreement with Estel, we risk
exposure to international risks, including:
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. reduced protection of intellectual property rights;
. potentially adverse tax consequences; and
. political instability.
Focus on set-top box development under the set-top box agreement with Estel
Telecommunications S.A. subjects us to risks associated with other participants'
operations.
We have no control over operations of other businesses involved in constructing,
installing and operating the fiber optic cable network system for which we
expect to provide the OraLynx(TM) set-top box. Decisions regarding construction,
installation and operation of the system will be made without our input. Such
decisions may have a material impact on the system and may delay shipment of our
set-top boxes or otherwise negatively affect our operations.
18
Risks Related to Development, Production and Marketing of Our Products
Product development involves substantial expense and resource allocation that
may exceed our capabilities.
We incurred substantial expense in developing the Orasis(R) computer. We expect
to continue to develop enhancements and accessory equipment to meet customer and
market demands. The OraLynx(TM) set-top box is in development and although it
relies in part upon technology developed for the Orasis(R), we expect to incur
substantial additional expense to fully develop this product. Delays in
development arising from insufficient cash or personnel resources will hinder
our ability to bring these products to market before competitors introduce
comparable products. In that case, we will miss the opportunity to capitalize on
the technological advances, which we believe such products may offer.
We depend on outside sources for components and may be harmed by unavailability
of components, excessive prices for components or unexpected delays in component
deliveries.
The Orasis(R) and OraLynx(TM) set-top box use or will use various component
parts, such as PCBs, microchips and fabricated metal parts. We must obtain these
components from manufacturers and third-party vendors. Our reliance on those
manufacturers and vendors, as well as industry component supply, creates many
risks including the following:
. the possibility of a shortage of components;
. increases in component costs;
. variable component quality;
. reduced control over delivery schedules; and
. potential manufacturer/vendor reluctance to extend credit to us.
If there is a shortage of component parts or if the cost of these parts
substantially increases, our operations and our success in the marketplace could
be materially and adversely affected.
Errors or defects in our products could result in customer refund or product
liability claims.
Because our products are complex, they could contain errors or bugs that can be
detected at any point in a product's life cycle. While we continually test our
products for errors and will work with customers to identify and correct bugs,
errors may be found in the future. Although many of these errors may prove to be
immaterial, any of these errors could be significant. Detection of any
significant errors may result in:
. loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
Errors or defects could harm our business and future operating results.
Moreover, because our products will be used in critical computing functions, we
may receive significant liability claims if our products do not work properly.
Our agreements with customers typically do and will contain provisions intended
to limit our exposure to product liability claims. However, these provisions may
not preclude all potential claims. Liability claims could require us to spend
significant time, money and effort in litigation. They also may result in
substantial damage awards. Any such claim, whether or not successful, could
materially damage our reputation and results of operation.
19
We will be unable to develop, produce and market our products without qualified
professionals and seasoned management.
Our success depends in large part on our ability to recruit and retain
professionals, key management and operating personnel. We need to complete
development of the OraLynx(TM) set-top box and coordinate production of
Orasis(R) computers and the OraLynx(TM) set-top box. We also need to develop
marketing channels to increase market awareness and sales of our products.
Qualified professionals, management and operating personnel are essential for
these purposes. Such individuals are in great demand and are likely to remain a
limited resource in the foreseeable future. Competition for them is intense and
turnover is high. If we cannot attract and retain needed personnel, we will not
succeed.
We believe that our future success will depend on our ability to retain the
services of our executive officers. These officers have developed industry
relationships that are critical to our growth and development. They also will be
essential in dealing with the significant challenges that we expect will arise
from anticipated growth in our operations.
We have an ongoing need to expand management personnel and support staff. The
loss of one or more members of management or key employees, or the inability to
hire additional personnel as needed, could have a material adverse effect on our
operations.
Risks Related to Competition within Our Industry
None of our products has achieved widespread distribution or customer
acceptance.
Although the Orasis(R) computer has passed the development stage, we have not
established a market for it. The Orasis(R) is a solution oriented, pen-based,
mobile computer system, which has been produced and marketed only on a limited
basis. As the market and applications for the Orasis(R) increase, we anticipate
its market will increase; however, there is no assurance that this will happen.
The OraLynx(TM) set-top box is in the early stage of development and prototypes
have completed the alpha stage of testing. We believe we will successfully
develop the OraLynx(TM) set-top box that will conform to specifications under
the set-top box agreement that will address a broad market demand. There can be
no assurance that we will successfully develop the OraLynx(TM) set-top box or
that a market demand will exist if development is completed to specifications
outlined in the agreement with Estel. In addition, if a market demand exists, it
may be met with alternative products offered by competitors or with pricing that
we cannot match.
Competition in our industry is intense and we may not be able to compete
successfully due to our limited resources.
Our industry is highly competitive and dominated by competitors with substantial
resources. Continuous improvement in product pricing and performance is the key
to future success. At all levels of competition, pricing has become very
aggressive. We expect pricing pressure to continue to be intense. Many of our
competitors are larger and have significantly greater financial, technical,
marketing and manufacturing resources. They also have broader product lines,
greater brand name recognition and larger existing customer bases. As a result,
our competitors may be better able to finance acquisitions or internal growth or
respond to technological changes or customer needs.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. There can be no assurance that we will
be able to compete successfully in developing, manufacturing or marketing our
20
products. An inability to do so would adversely affect our business, financial
condition and market price of our shares.
Our industry is subject to rapid technological change and we may not be able to
keep up.
Rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles and changes in customer demands and evolving
industry standards, characterize the computer industry. Our products could
become obsolete if products based on new technologies are introduced or if new
industry standards emerge.
Computer equipment is inherently complex. As a result, we cannot accurately
estimate the life cycles of our products. New products and product enhancements
can require long development and testing periods, which requires retention of
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products can seriously damage our business. In the past, we have experienced
delays in scheduled product introductions and cannot be certain that we will
avoid similar delays in the future. We must produce products that are
technologically advanced and comparable to and competitive with those made by
others. Otherwise, our products may become obsolete or we will fail to achieve
market acceptance.
Our future success depends on our ability to enhance existing products, develop
and introduce new products, satisfy customer requirements and achieve market
acceptance. We cannot be certain that we will successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner.
We may sell fewer products if other vendors' products are no longer compatible
with ours or other vendors bundle their products with those of our competitors
and sell them at lower prices.
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. For example,
Orasis(R) will not sell if it cannot run software, or access resources such as
Internet or telephone services provided by others. The same is true for the
set-top box. Other vendors 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
21
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 with Estel
Telecommunications S.A. 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, Estel Telecommunications S.A. may terminate the agreement. The
Company may terminate the agreement if permits to install fiber optic and other
infrastructure equipment are not issued to the buyer. Even if such permits are
issued, delays in issuance will delay set-top box orders and shipments.
Consequently, government regulations may interfere with our business plans and
could have an adverse effect on our ability to develop and market our products.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Substantially all of the Company's liquid investments and long-term debt are at
fixed rates; therefore, the fair value of these instruments is affected by
changes in market interest rates. The Company believes that the market risk
arising from its holdings of liquid investments is minimal as substantially all
of the Company's investments mature within one year.
Foreign Currency Exchange Risk
All of our revenues are denominated in US dollars. Foreign sales and
expenditures are nominal. We do not currently and do not intend in the future to
utilize derivative financial instruments for trading purposes.
Item 8. Financial Statements and Supplementary Data The Company's financial
statements are included in Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting or Financial
Disclosure
Not applicable.
22
PART III
Item 10. Directors, Executive Officers and Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Certain information concerning the registrant's executive officers is included
under the caption, "Officers and Directors of the Registrant," following Part I
of this report. Other information required by Items 10, 11, 12, and 13 will be
contained in the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 13, 2001 (the "Proxy Statement"), a copy of which
will be filed with the Securities and Exchange Commission before the meeting
date.
23
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth quarter of the
recently completed fiscal year.
Signatures
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, in the City of
Palatine and State of Illinois, on the 30th day of March, 2000.
DAUPHIN TECHNOLOGY, INC.
BY: /s/ Andrew J. Kandalepas
-----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Andrew J. Kandalepas Chairman of the Board of Directors March 30, 2001
---------------------------
Andrew J. Kandalepas Chief Executive Officer, President
/s/ Christopher L. Geier Executive Vice President March 30, 2001
---------------------------
Christopher L. Geier
/s/ Harry L. Lukens, Jr. Chief Financial Officer and March 30, 2001
---------------------------
Harry L. Lukens, Jr. Assistant Secretary
/s/ Jeffrey L. Goldberg Secretary and Director March 30, 2001
---------------------------
Jeffrey L. Goldberg
/s/ Gary E. Soiney Director March 30, 2001
---------------------------
Gary E. Soiney
/s/ Andrew Prokos Director March 30, 2001
---------------------------
Andrew Prokos
/s/ Mary Ellen Conti Director March 30, 2001
---------------------------
Mary Ellen Conti, MD
24
Dauphin Technology, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Report of Independent Certified Public Accountants ..................... F-2
Report of Independent Public Accountants ............................... F-3
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2000 AND 1999 ................ F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ....................... F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ............... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ....................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................. F-8
F-1
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiaries, as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the two years ended December 31, 2000
and 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dauphin
Technology, Inc. and its Subsidiaries as of December 31, 2000 and 1999 and the
consolidated results of their operations and cash flows for the two years ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
As disclosed in Note 20, the accompanying consolidated financial statements for
the year ended December 31, 2000 have been restated.
GRANT THORNTON LLP
Chicago, Illinois
March 22, 2001, except for note 19, as to
which the date is April 3, 2001
F-2
Report of Independent Public Accountants
----------------------------------------
To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of DAUPHIN TECHNOLOGY, INC. (an Illinois
Corporation) and Subsidiary for the year ended December 31, 1998. These
consolidated financial statements of operations, shareholders' equity and cash
flows are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of operations,
shareholders' equity and cash flows referred to above present fairly, in all
material respects, the results of operations and cash flows for Dauphin
Technology, Inc. and Subsidiary for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated l statements of operations, shareholders' equity
and cash flows have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 2 to the financial statements, the Company
has suffered recurring losses from operations and has insufficient cash on hand
to sustain future operations that raises substantial doubt about the entity's
ability to continue as a going concern. The Company has received certain funding
subject to the terms and conditions outlined in the twentieth paragraph of Note
17. Management's plans in regards to these matters are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 31, 1999 (except with respect to the matters
discussed in the twentieth paragraph of Note 17,
as to which the date is April 15, 1999)
F-3
Dauphin Technology, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---- ----
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-4
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-5
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Capital Warrants Shares Amount Deficit
------ ------ ------- -------- ------ ------ -------
BALANCE, January 1, 1998 37,035,673 $ 37,036 $ 29,283,136 $ - (730,577) $(255,702) $(23,388,875)
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 - - - - - - (6,131,557)
---------- -------- ------------ ---------- -------- --------- ------------
BALANCE, December 31, 1998 40,000,000 $ 40,000 $ 32,343,785 $ 55,181 (138,182) $ (33,306) $(29,520,432)
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 - - - - - - (9,306,304)
---------- -------- ------------ ---------- -------- --------- ------------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $1,238,089 - $ - $(38,826,736)
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, restated - - - - - - (7,514,979)
---------- -------- ------------ ---------- -------- --------- ------------
BALANCE, December 31, 2000, restated 61,652,069 $ 61,653 $ 53,479,116 $3,321,810 - $ - $(46,341,715
========== ======== ============ ========== ======== ========= ============
Total
-----
BALANCE, January 1, 1998 $ 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)
------------
BALANCE, December 31, 1998 $ 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)
------------
BALANCE, December 31, 1999 $ 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, restated (7,514,979)
------------
BALANCE, December 31, 2000, restated $ 10,520,864
============
The accompanying notes are an integral part of these statements.
F-6
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
- ------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
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-7
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design, manufacture and market mobile hand-held, pen-based computers, broadband
set-top boxes, as well as other electronic devices for home and business use and
performs design services, process methodology consulting and intellectual
property development. Through one of its subsidiaries, the Company marketed its
contract manufacturing services through July 1999. The Company, an Illinois
corporation, was formed on June 6, 1988 and became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS") and Advanced
Digital Designs, Inc. ("ADD"). All significant inter-company transactions and
balances have been eliminated in consolidation.
2. RISK AND UNCERTAINTIES:
----------------------
Absence of Operating Profit
The Company has incurred a net operating loss in each year since it's founding
and as of December 31, 2000 has an accumulated deficit of $47,644,098. The
Company expects to incur operating losses over the near term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to manufacture and market commercially acceptable products
including its set-top box. Financial success will also depend on amending
contract terms to result in net revenue in excess of costs of manufacture and
selling, general and administrative costs. There can be no assurance that the
Company will ever achieve a profitable level of operations or if profitability
is achieved, that it can be sustained.
Early Stage of Development of the Company's Products
From June of 1997 through June of 1999, the Company was principally engaged in
research and development activities involving the hand-held computer. Since
then, the Company has been working on new technologies, in particular the design
and development of the set-top boxes. The Company's products have been sold in
limited quantities and there can be no assurance that a significant market will
develop for such products in the future. Therefore, the Company's inability to
develop, manufacture and market its products on a timely basis may have a
material adverse effect on the Company's financial results.
3. SUMMARY OF MAJOR ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of these investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and include material, labor and factory overhead.
F-8
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
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-9
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-10
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-11
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
9. CONVERTIBLE DEBT AND WARRANTS
On March 30, 1999, the Company signed an agreement with Augustine Funds, LP
("Augustine"),an accredited investor operated by Augustine Capital Management
Augustine 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. Augustine 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 Augustine. The agreement with Augustine was then
cancelled.
10. STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". During 2000, the Company issued non-qualified stock options to
purchase 3,921,832 shares of common stock to certain key employees at exercise
prices ranging from $0.50 to $3.875 per share (approximating the market price at
date of grant). The options vest immediately and expire in three years if the
individual is still employed with the Company. Had the Company accounted for its
stock options in accordance with Statement 123, at December 31, 2000 and 1999
pro forma earnings per share would have been:
December 31, 2000 December 31, 1999
---------------- -----------------
Net loss as reported (000's) $ (8,817) $ (9,232)
Pro forma net loss for Statement 123 (000's) (12,622) (9,245)
Basic loss per common share as reported (0.15) (0.21)
Pro forma basic loss per common share (0.21) (0.21)
Diluted loss per common share as reported (0.15) (0.21)
Pro forma diluted loss per common share (0.21) (0.21)
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes single-option-pricing model:
December 31, 2000 December 31, 1999
----------------- ----------------
Dividend yield 0.0% 0.0%
Risk-free interest rate 6.0% 6.0%
Volatility factor 224% 120%
Expected life in years 2.60 1.95
F-12
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 Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise 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-13
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 $(2,822,666) $(2,143,858) $(2,084,729)
Permanent differences and adjustments 33,112 785,739 120,802
Net operating losses not recognized 2,789,554 1,358,119 1,963,927
----------- ----------- -----------
Income tax provision $ - $ - $ -
=========== =========== ===========
As of December 31, 2000 and 1999, the Company had generated deferred tax assets
as follows:
December 31,
------------
2000 1999
---- ----
Gross deferred tax assets-
Net operating loss (NOL) carryforward $34,597,636 $24,680,762
Reserves for inventory obsolescence 2,491,216 1,945,296
Bad debt reserve 50,621 428,599
Depreciation 39,349 5,567
Goodwill 275,000 -
Other timing differences 10,200 10,200
----------- -----------
37,464,022 27,070,424
Current federal statutory rate 34% 34%
----------- -----------
Deferred tax assets 12,737,767 9,203,944
Less valuation allowance 12,737,767 9,203,944
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
Deferred income taxes include the tax impact of net operating loss (NOL)
carryforwards. Realization of these assets, as well as other assets listed
above, is contingent on future taxable earnings by the Company. A valuation
allowance of $12,737,767 and $9,203,944 at December 31, 2000 and 1999,
respectively, has been applied to these assets. During 1995, there was an
ownership change in the Company as defined under Section 382 of the Internal
Revenue Code of 1986, which adversely affects the Company's ability to utilize
the NOL carryforward.
F-14
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-15
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 4,654,653 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $8,600,000. The
proceeds were used to settle the majority of trade payables, for day-to-day
operations and to start the development of the set-top box.
In January 2000, the Company issued 480,000 shares to a customer in exchange for
cancellation of $300,000 of customer deposits.
In January 2000, the Company issued warrants to an investment banker, for
services rendered, to purchase 350,000 shares at an exercise price of $1.00.
In January 2000, the Company issued 500,000 shares to a consulting firm for
services rendered in relation to a European contract.
F-16
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
17. EQUITY TRANSACTIONS - Continued
In April 2000, the Company completed its private placement and issued 3,630,000
warrants to an investment banker in lieu of consulting fees.
On April 26, 2000, the Company completed a common stock purchase agreement,
escrow agreement and registration rights agreement with Techrich International
Limited ("Techrich"). These agreements provide a $100,000,000 equity line of
credit as the Company requests over an 18 month period, in return for common
stock and warrants to be issued to the investor. Once every 22 days, the Company
may request a draw of up to $10,000,000 of that money, subject to a maximum of
18 draws. The maximum amount the Company actually can draw down upon each
request will be determined by the volume-weighted average daily price of the
Company's common stock for the 22 trading days prior to its request and the
average trading volume for the 45 trading days prior to the request. Each draw
down must be for at least $250,000. Use of a 22 day trading average was
negotiated to reduce the impact of market price fluctuations over any calendar
month, which generally includes 22 trading days. At the end of a 22-day trading
period following the drawdown request, the amount of shares is determined based
on the volume-weighted average stock price during that 22-day period in
accordance with the formulas in the common stock purchase agreement.
On April 28, 2000, the Company filed with the Securities and Exchange Commission
a Form S-1 registration statement relating to 15,332,560 shares of common stock
issued to stockholders in private transactions, 11,958,963 shares for other
stockholders, and 6,000,000 shares to be issued when the Company requests a
drawdown under the common stock purchase agreement referred to above.
On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement, the Company issued as a placement fee warrants to purchase 250,000
shares of common stock at an exercise price of $5.481.
On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich 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 with Techrich 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-17
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 Augustine Funds LP
("Augustine"), an accredited investoroperated by Augustine Capital Management,
where Augustine agreed to commit up to $6 million. The first closing for $1
million occurred on April 15, 1999 when the parties executed agreed upon
documentation and Dauphin deposited 2 million common shares in escrow. This
tranche was in the form of an 8% promissory note convertible into stock
beginning sixty days after closing. The conversion was at 15% discount from the
closing bid price of the Company's common stock. The contract also called for
the adjustment in escrowed shares in case stock value decreases, under the 5/8
bid for two consecutive days. As specified on the contract, on April 22 due to
decline in market price of the stock, the Company deposited additional 400,000
shares in an escrow account to replenish the $1.5 million value in the account.
As an incentive, the Investor received a warrant to purchase 100,000 common
shares of stock at an exercise price of $1.00 per share. The warrant was valued
at $52,200 using Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 1 and 2 year life
respectively and 120% volatility. On May 24, 1999 $1 million funded under the
note, together with accrued interest, was converted into 2,441,414 shares of
common stock of which 2,400,000 common shares were disbursed to Augustine. The
agreement with Augustine has been cancelled.
F-18
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 the
Investor to purchase shares from the Company based on terms and conditions
outlined in the agreement. In total the Investor agreed to purchase up to
$2,250,000 of the common stock within the next twenty-four months. The Investor
agreed to purchase from the Company shares based on ninety percent of the daily
average trading value, which is computed by multiplying the closing bid price by
the daily volume of the Company's common stock traded average over the twenty
days prior to closing. In connection therewith the Company sold to the Investor
1,048,951 shares for $450,000 at an average price of $0.43 per share including
$58,000 of closing fees. The Company has the right to sell additional shares
with an interval of 25 business days with a minimum of $100,000 per sale and a
maximum of $500,000 based on the average daily value as described above. In
addition to the stock, the Investor received an Incentive Warrant to purchase
750,000 common shares at a price of $0.6435 per share. The Warrants were valued
at $235,500 using Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility.
In connection with the Stock Purchase Agreement signed by the Company on May 28,
1999, the Company sold to the Investor 350,000 shares for $148,050 at an average
price of $0.423 per share, including $2,961 of closing fees.
In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the Company
issued warrants to purchase 1,651,600 shares of common stock at an average
exercise price of $0.47 per share. The warrants are exercisable immediately and
expire in three to five years. The Warrants were valued at $443,622 using
Black-Scholes securities valuation model assuming among other things 6% risk
free rate, 0% dividend yield, five years life and 120% volatility.
During the third quarter, the Company agreed to issue a total of 407,868 shares
to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.
In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.
On October 26 1999, the Company issued 93,358 shares in exchange for $29,643 or
$0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999.
On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999, the Company sold to the Investor 447,012 shares for
$141,935 at an average price of $0.32 per share, including $2,897 of closing
fees.
F-19
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 the investors with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
1998 Transactions
On January 5, March 5, June 5 and September 5, 1998, under an employment
contract relating to the RMS acquisition, the Company issued 12,500 shares on
each date to Richard M. Schultz. Under the contract, Mr. Schultz is entitled to
purchase 50,000 common shares per year for the duration of his employment
contract at $1.00 below the market value on the date immediately preceding the
date of exercise. The common shares issued in connection with this transaction
were treasury shares. On March 6, 1998, Mr. Schultz returned 7,901 shares to
treasury as repayment of his obligation to the Company and on July 6, 1998 the
Company issued additional 1,260 shares to Mr. Schultz to compensate for the
decrease in price of the stock on the day of issuance.
On March 3, 1998, for services performed, the Company issued 30,000 shares to 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-20
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:
Selling, general and administrative expenses, interest expense, net loss and per
share amounts have been adjusted from previously reported amounts to offset the
difference between the quoted market price and the proceeds from stock sales
under a private placement in the first quarter of 2000 against additional paid
in capital rather than interest expense amounting to $1,302,383 ($0.02 per
share).
F-21
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 (2,312,421)* (1,249,631) (1,173,789)* (4,081,521)
Net Loss per share
Basic $ (0.04)* $ (0.02) $ (0.02)* $ (0.07)
Diluted $ (0.04) $ (0.02) $ (0.02) $ (0.07)
1999 Quarter Ended
------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
Revenues $ 1,246,061 $ 781,882 $ 157,680 $ 93,435
Gross Profit (Loss) (174,176) (350,167) (1,947,336) (82,864)
Net Loss (2,048,553) (2,423,339) (3,584,478) (1,249,934)
Net Loss per share
Basic $ (0.05) $ (0.05) $ (0.07) $ (0.03)
Diluted $ (0.05) $ (0.05) $ (0.07) $ (0.03)
* Net loss and per share amounts have been adjusted from previously
reported amounts to offset certain beneficial interest expense against
additional paid in capital rather than interest expense amounting to
$419,556 (0.01 per share) and $1,645,799 (0.03 per share) for the
quarters ending March 31, 2000 and September 30, 2000, respectively.
F-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE II
Board of Directors
Dauphin Technology, Inc.
In connection with our audit of the consolidated financial statements of Dauphin
Technology, Inc., and its Subsidiaries referred to in our report dated March 22,
2001, which is included on page F-2 of this Form 10-K, we have also audited
Schedule II for the years ended December 31, 2000, 1999 and 1998. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
Chicago, Illinois
March 22, 2001 (except for note 19, as to
which the date is April 3, 2001)
F-23
SCHEDULE II
DAUPHIN TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs & End of
Description Of Period Expenses Deductions Period
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Allowance for doubtful accounts $ 428,599 $ 74,342 $ 452,320 $ 50,621
Reserve for obsolete inventory 1,945,296 1,950,000 1,404,080 2,491,216
Year ended December 31, 1999
Allowance for doubtful accounts $ 11,238 $ 417,361 $ - $ 428,599
Reserve for obsolete inventory 152,000 1,793,296 - 1,945,296
Year ended December 31, 1998
Allowance for doubtful accounts $ 7,500 $ 3,738 $ - $ 11,238
Reserve for obsolete inventory 2,143,934 648,000 2,639,934 152,000
Notes:
(a) Deductions for the allowance for doubtful accounts consists of
accounts written off, net of recoveries.
F-24