UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Illinois 87-0455038
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 E. Northwest Hwy., Suite 950,
Palatine, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 14, 2002, 65,050,646
shares of the registrant's common stock, $.001 par value, was issued and
outstanding.
1
DAUPHIN TECHNOLOGY, INC.
Table of Contents
-----------------
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2002 and 2001 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 and
Three Months Ended March 31, 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II OTHER INFORMATION 14
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Company's Security Holders
Item 3. Default by the Company on its Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K
SIGNATURE 14
2
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(Unaudited)
- --------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
-------------- -----------------
CURRENT ASSETS:
Cash $ 236,383 $ 725,364
Accounts receivable-
Trade, net of allowance for bad debt of
$50,621 at March 31, 2002 and December 31, 2001 36,650 67,201
Employee receivables 3,248 3,248
Inventory, net of reserve for obsolescence of
$2,981,623 at March 31, 2002 and December 31, 2001 303,151 518,452
Prepaid expenses 56,759 37,883
------------ ------------
Total current assets 636,191 1,352,148
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $565,494 at March 31, 2002
and $475,899 at December 31, 2001
2,050,147 1,824,935
ESCROW DEPOSIT
76,220 368,181
ASSETS NOT USED IN BUSINESS 75,017 75,017
INSTALLATION CONTRACTS, net of accumulated
amortization of $34,286 and $22,857 at March 31,
2002 and December 31, 2001, respectively 285,714 297,143
------------ ------------
Total assets $ 3,123,289 $ 3,917,424
============ ============
CURRENT LIABILITIES:
Accounts payable $ 588,421 $ 477,716
Accrued expenses 71,121 103,792
Short-term borrowings 100,000 -
Current portion of long-term debt 81,055 82,507
Customer Deposits 7,741 7,741
------------ ------------
Total current liabilities 848,338 671,756
LONG-TERM DEBT 37,630 43,580
CONVERTIBLE DEBENTURES 1,383,666 1,153,197
MORTGAGE NOTE PAYABLE 250,000 -
------------ ------------
Total liabilities 2,519,634 1,868,533
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; 65,050,646 and 64,059,813
issued and outstanding at March 31, 2002
and at December 31, 2001, respectively 65,051 64,061
Warrants 3,989,394 4,227,499
Paid-in capital 58,075,353 57,351,406
Accumulated deficit (61,526,143) (59,594,075)
------------ ------------
Total shareholders' equity 603,655 2,048,891
------------ ------------
Total liabilities and shareholders' equity $ 3,123,289 $ 3,917,424
============ ============
3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2002 and 2001
(Unaudited)
Three Months
Ended March 31,
------------------------------
2002 2001
------------ -------------
NET SALES $ 93,094 $ 4,566
DESIGN SERVICE REVENUE 59,375 440,588
------------ -------------
TOTAL REVENUE 152,469 445,154
COST OF SALES 55,916 2,222
COST OF SERVICES 448,493 326,363
------------ -------------
Gross (loss) profit (351,940) 116,569
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,110,915 475,984
RESEARCH AND DEVELOPMENT EXPENSE 240,533 462,522
AMORTIZATION OF GOODWILL - 275,000
------------ -------------
Loss from operations (1,703,388) (1,096,937)
INTEREST EXPENSE 233,015 6,885
INTEREST INCOME 4,335 88,660
------------ -------------
Loss before income taxes (1,932,068) (1,015,162)
INCOME TAXES - -
------------ -------------
NET LOSS $(1,932,068) $ (1,015,162)
=========== ============
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.02)
=========== ============
Weighted average number of shares of common stock
outstanding 64,510,424 61,798,069
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year ended December 31, 2001 and three months ended March 31, 2002
(Unaudited)
Common Stock Treasury Stock
------------------- Paid-in -------------- Accumulated
Shares Amount Capital Warrants Shares Amount Deficit Total
---------- ------- ----------- ---------- ------ ------ ------------ -----------
BALANCE, December 31, 2000 61,652,069 $61,653 $53,479,116 $3,321,810 - $ - $(46,341,715) $10,520,864
Issuance of common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101 - - - 300,000
Beneficial conversion feature and
warrants - - 914,279 684,600 - - - 1,598,879
Stock Options exercised 35,600 36 28,528 - - - - 28,564
Warrants exercised 285,000 285 242,025 (71,236) - - - 171,074
Acquisition of business 766,058 766 1,125,339 - - - - 1,126,105
Personal guarantee 1,032,118 1,032 1,240,709 - - - - 1,241,741
Vendor payments 30,000 30 40,770 273,224 - - - 314,024
Net loss - - - - - - (13,252,360) (13,252,360)
---------- ------- ----------- ---------- ------ ------ ------------ -----------
BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499 - - (59,594,075) 2,048,891
Issuance of common stock in connection with:
Stock Options exercised 57,500 57 49,557 - - - - 49,614
Warrants exercised 933,333 933 674,390 (265,323) - - - 410,000
Consulting fees - - - 27,218 - - - 27,218
Net loss - - - - - - (1,932,068) (1,932,068)
---------- ------- ----------- ---------- ------ ------ ------------ -----------
BALANCE, March 31, 2002 65,050,646 $65,051 $58,075,353 $3,989,394 - $ - $(61,526,143) $ 603,655
========== ======= =========== ========== ====== ====== ============ ===========
5
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2002 and 2001
(Unaudited)
- --------------------------------------------------------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $ (1,932,068) $ (1,015,162)
Non-cash items included in net loss:
Depreciation and amortization 101,024 98,645
Amortization of goodwill - 275,000
Interest expense on convertible note 230,469 -
Warrants issued in lieu of consulting fees 27,218 -
Decrease (increase) in accounts receivable - trade 30,551 (23,348)
Decrease in accounts receivable from employees - 3,342
Increase in inventory - (23,311)
Increase in prepaid expenses (18,876) (100,920)
Decrease in escrow deposits 291,961 46,336
Increase (decrease) in accounts payable 110,705 (65,084)
Decrease in accrued expenses (32,671) (5,345)
Increase in customer deposits - 344
------------ ------------
Net cash used in operating activities (1,191,687) (809,503)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of equipment (99,506) (26,613)
------------ ------------
Net cash used in investing activities (99,506) (26,613)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 49,614 104,300
Proceeds from issuance of warrants 410,000 -
Repayment of long-term leases and other obligations (7,402) (21,842)
Increase in mortgage note payables 250,000 -
Increase in short-term borrowing 100,000 -
------------ ------------
Net cash provided by financing activities 802,212 82,458
------------ ------------
Net (decrease) increase in cash (488,981) (753,658)
CASH BEGINNING OF PERIOD 725,364 2,683,480
------------ ------------
CASH END OF PERIOD $ 236,383 $ 1,929,822
============ ============
CASH PAID DURING THE PERIOD FOR -
Interest $ 2,546 $ 6,885
6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top
boxes; provide interactive cable systems to the extended stay hospitality
industry; and perform design services, specializing in hardware and software
development, out of its three locations in northern Illinois, one in central
Florida and its branch office in Piraeus, Greece. The Company, an Illinois
corporation, was formed on June 6, 1988 and became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 64,510,424 for the three-month period March 31, 2002 and
61,798,069 for the three-month period March 31, 2001. Diluted loss per common
share is adjusted for the assumed conversion exercise of stock options and
warrants unless such adjustment would have an anti-dilutive effect.
Approximately 12.5 million additional shares would be outstanding if all
warrants and all stock options were exercised as of March 31, 2002.
Unaudited Financial Statements
The accompanying statements are unaudited, but have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of results have been included. The interim
financial statements contained herein do not include all of the footnotes and
other information required by accounting principles generally accepted in the
United States of America for complete financial statements as provided at
year-end. For further information, refer to the consolidated financial
statements and footnotes thereto included in the registrant's annual report on
Form 10-K for the year ended December 31, 2001.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
7
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. RISKS AND UNCERTAINTIES
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 2002 has an accumulated deficit of $61,526,143. The Company
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
ability to design and develop and market commercially acceptable products
including its set-top box. 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.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the company as a going concern. However, the company
has sustained substantial losses from operations in recent years, and such
losses have continued through the unaudited quarter ended March 31, 2002.
Revenues from the Company's design services have declined. In addition, the
company has used, rather than provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence: The Company has concentrated its efforts on
marketing its set-top boxes, halted all further development of the next
generation Orasis and are exploring alternative mobile hand-held computer
products through original equipment manufacturers. In January 2002 the
management of the Company began terminating employees who were not a critical
part of the marketing efforts. The facilities in McHenry, which housed the RMS
operations, has been closed, the majority of the personnel have been terminated
and the remaining inventory and equipment will be auctioned in the second
quarter of 2002.
8
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. BUSINESS SEGMENTS
-----------------
The Company has two reportable segments: Dauphin Technology, Inc. and RMS
(Dauphin) and Advanced Digital Designs, Inc. (ADD). Dauphin is involved in
design, manufacturing and distribution of hand-held pen-based computer systems
and accessories and smartbox set-top boxes. ADD performs design services,
process methodology consulting and intellectual property development.
March 31, 2002 March 31, 2001
-------------- --------------
Revenue
Dauphin $ 15,132 $ 4,566
ADD 268,750 638,275
Suncoast 77,962 -
Inter-company elimination (209,375) (197,687)
------------ -----------
Total $ 152,469 $ 445,154
============ ============
Operating (Loss)
Dauphin $ (1,117,988) $ (1,037,747)
ADD (288,667) (59,190)
Suncoast (296,733) -
Inter-company elimination - -
------------ ------------
Total $ (1,703,388) $ (1,096,937)
============ ============
March 31, 2002 December 31, 2001
-------------- -----------------
Assets
Dauphin $ 18,039,736 $ 17,461,145
ADD 2,678,197 2,699,250
Suncoast 1,747,311 1,702,791
Inter-company elimination (19,341,955) (17,945,762)
------------ ------------
Total $ 3,123,289 $ 3,917,424
============ ============
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is an operating entity and in the normal course of business, from
time to time, may be involved in litigation. In management's opinion, any
current or pending litigation is not material to the overall financial position
of the Company.
6. CONVERTIBLE DEBT AND WARRANTS
-----------------------------
In connection with a Securities Purchase Agreement entered into with Crescent
International Ltd., an institutional investor, on September 28, 2001, a
Convertible Note was funded on October 2, 2001 and is due September 28, 2004.
The Company shall not be required to pay interest on the Convertible Note unless
the Company fails to deliver shares upon conversion. In such event, the Note
will bear an interest rate of 8.0% per annum, payable in quarterly installments.
The Company has recorded a beneficial conversion feature on the Convertible Note
and Warrants based on the fair value of the common stock of $0.99 per share as
of the date of commitment. The Warrants with an exercise price of $1.3064 per
share, are valued using the Black-Scholes valuation method, and are recorded at
$684,600. The beneficial conversion feature is calculated to be $914,279 and has
been recorded as Additional Paid in Capital and a discount to the Convertible
Note. The beneficial conversion feature is being amortized over three years, the
life of the Note. For the three month period ended March 31, 2002, the Company
recognized $230,469 as interest expense on the amortization of the beneficial
conversion feature. At conversion, the Company may record an additional
beneficial conversion based on the market price of the stock at the conversion
date.
9
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. MORTGAGE NOTE PAYABLE
---------------------
On March 28, 2002, the Company entered into a one-year mortgage note payable
with a current shareholder, Clifford F. Klose and Marjorie J. Klose Trust. The
interest rate is Prime plus 7.25%. The current interest rate is 12% per annum.
Interest is payable on a monthly basis. The Company's building in Schaumburg,
Illinois serves as collateral for the mortgage.
8. EQUITY TRANSACTIONS
-------------------
2002 Events
During the first quarter of 2002, the Company received proceeds in the amount of
$410,000 for the exercise of 933,333 warrants. Additionally, employees exercised
57,500 stock options at prices ranging from $0.50 to $0.89 per share.
In March 2002, the Company re-priced approximately 1,023,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $2.00 to $5.00, and were re-priced with an
exercise price of $0.60 per share. The re-pricing created a charge to earnings
of approximately $27,218, which was calculated using the Black-Scholes pricing
model assuming 0% dividend yield, risk free interest rate of 5%, volatility
factor of 443% and an expected remaining life of 10 months.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------------
2001
- ----
Revenues for the three months ended March 31, 2002 and 2001 were approximately
$152,000 and $445,000, respectively. Net sales increased from $5,000 in 2001 to
approximately $93,000 in 2002. Sales generated by the Company's interactive
cable system subsidiary, Suncoast, accounted for approximately $78,000 of these
revenues with the balance being parts and accessories for the Orasis(R) and
OraLynx(TM). Design service revenues in the first quarter of 2002 were
approximately $59,000 as compared to revenues of $441,000 in the first quarter
of 2001. This reduction in design service revenue is a continuation of the
decline in engineering projects available in the marketplace which the Company
began experiencing in the fourth quarter of 2001. Cost of sales represents costs
associated with the Suncoast operations for 2002, whereas cost of sales in 2001
related to the costs of parts and accessories. Cost of services increased form
$326,000 in 2001 to $448,000 in 2002. The increase is a result of the
termination and severance benefits paid to the engineering staff which was
reduced during the first quarter of 2002. Because of these additional expenses,
gross profit margins were negatively affected and generated a gross loss of
$352,000 for the first quarter of 2002.
Selling, general and administrative expenses increased to approximately
$1,111,000 in 2002 from $476,000 in 2001. The increase of approximately $635,000
is primarily due to the selling, general and administrative expenses of Suncoast
and the Company's branch office in Piraeus, Greece which are included in the
first quarter of 2002 and not in 2001. These amounted to approximately $319,00
and $238,000, respectively. We acquired the net assets of Suncoast in July 2001
and opened the branch office in August 2001. In addition, approximately $130,000
of additional administrative costs were incurred at the Company's McHenry,
Illinois location related to closing the facility. These costs were offset by a
reduction of $52,000 in sales and marketing expenses, primarily advertising.
Research and Development expenses decreased to approximately $241,000 during the
first quarter ended March 31, 2002 from $463,000 for the corresponding period in
2001. The set-top box design was substantially completed in the fourth quarter
of 2001 which is reflected in the decrease in Research and Development expenses.
In 2002, approximately 66% of Research and Development costs consisted of costs
related to the development of the set-top box, with 34% related to further
development of the Orasis(R). In 2001, the majority of Research and Development
was costs were for the set-top box.
Interest expense increased to approximately $233,000 for the first quarter of
2002 from $7,000 for the first quarter of 2001. Included in interest expense in
the first quarter of 2002 is three months amortization of the debt discount
associated with the Convertible Note, amounting to $231,000. The remaining
interest is related to capital equipment leases, mortgage note and other
borrowings. Interest expense in the first quarter of 2001 related to capital
equipment leases and short term borrowings. Interest income declined from
$89,000 in 2001 to $4,000 in 2002 due to the reduction of short-term funds held
on deposit.
Net loss
The consolidated loss after tax increased for the first quarter ended March 31,
2002 to approximately ($1,932,000) or ($0.03) per share from ($1,015,000) or
($0.02) per share in 2001. The loss for 2002 was primarily attributed to the
decrease in revenues from design services, the increase in cost of services
related to the termination of the hardware design engineering staff, the
increase in selling, general and administrative costs generated by Suncoast and
the branch office and the increase in interest expense. The loss for 2001 was
primarily attributed to the amortization of goodwill associated with the
acquisition of Advanced Digital Designs, Inc., research and development costs
regarding the set-top box and general administrative expenses. Loss per common
share is calculated based on the monthly weighted average number of common
shares outstanding, which were 64,510,424 for the three-month period ended March
31, 2002, and 61,798,069 for the three-month period ended March 31, 2001.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
---------------------------------
Balance Sheet
Total assets for the Company at March 31, 2002 were approximately $3,123,000, a
decrease of approximately $800,000 from December 31, 2001. The decrease was
primarily attributable to the net cash used in operations of approximately
$1,192,000, the purchase of equipment of $100,000, offset by the proceeds from
the exercise of stock warrants and stock options of $460,000 and the increase in
borrowings of $350,000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 2002 has an accumulated deficit of approximately
$61,526,000. The Company expects to incur operating losses over the near term.
The Company's ability to achieve profitability will depend on many factors
including the Company's ability to manufacture and market commercially
acceptable products including its set-top box. There can be no assurance that
the Company will ever achieve a profitable level of operations or if
profitability is achieved, that it can be sustained.
For the three months ended March 31, 2002, the Company used $1,192,000 of cash
in operating activities, used $100,000 in investing activities and generated
$802,000 of cash from financing activities that produced a decrease in cash of
$489,000 for the three months. The net loss of $1,932,000 was partially offset
by the non-cash items of depreciation and amortization and amortization of the
debt discount associated with the Convertible Note. Investing activities
consisted of the purchase of equipment for installations associated with the
interactive cable systems. Financing activities consisted of the exercise of
warrants and the increase in mortgage note payable and short-term borrowings. As
of March 31, 2002, the Company had current liabilities in excess of current
assets, whereas at December 31, 2001, the Company had a current asset to current
liabilities ratio of 2.0. The Condensed Consolidated Statements of Cash Flows,
included in this report, detail the other sources and uses of cash and cash
equivalents.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., ("Crescent") an institutional
investor. Under the Securities Purchase Agreement, the Company issued a
Convertible Note for $2.5 million. Although the Company had the option to issue
further convertible notes to Crescent subject to certain conditions precedent,
such option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The Stock
Purchase Agreement further permits the Company to sell to Crescent up to $7.5
million in common stock of the Company over a 24-month period. Additionally, the
Company agreed not to exercise any drawdowns against its existing common stock
purchase agreement with Techrich International Ltd. ("Techrich"), which expired
on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more currently effective
registration statements covering the resale by Crescent of all shares issued in
prior sales to Crescent and issuable upon the conversion of the Convertible
Note, (3) there must be no dispute as to the adequacy of disclosures made in any
such registration statement, (4) such registration statements must not be
subject to any stop order, suspension or withdrawal, (5) the Company must have
performed its covenants and obligations under the Securities Purchase Agreement,
(6) no statute, rule, regulation, executive order, decree, ruling or injunction
may have been enacted, entered, promulgated or adopted by any court of
governmental authority that would prohibit the Company's performance under the
Securities Purchase Agreement, (7) the company's common stock must not have been
delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
-------------------------------------------
Company's principal trading market. The aggregate amount of all sale shares and
convertible notes issued cannot exceed $10 million. The amount of the sale is
limited to twice the average of the bid price multiplied by the trading volume
during the 22 trading day period immediately preceding the date of sale. When
the total amount of securities issued to Crescent equals or exceeds $5 million,
the Company shall issue to Crescent a subsequent incentive warrant exercisable
to purchase 400,000 shares of common stock at a price equal to the bid price on
the date the incentive warrant is issued.
The Company elected to pursue the above financing arrangements with Crescent
International because the Company's previous financing arrangements with
Techrich contained certain limitations as it related to the market price of our
common stock, the average volume of shares traded on a daily basis and other
such factors which would not generate the greatest benefit to the Company's
shareholders. In addition, the financing arrangement with Techrich expired at
the end of January 2002. Because of the changes in circumstances and the current
economic conditions of the Company, management decided to explore alternative
financing arrangements. Several alternatives were reviewed, including private
placement transactions, various long-term debt arrangements with different
investment bankers and other equity line arrangements similar to the one with
Techrich. Management felt that the arrangement with Crescent was the best
alternative and was in the best interest of the Company and its shareholders.
The Company expects to rely on the above financing arrangements in order to
continue its development of products and to continue its ongoing operations in
the short-term. The long-term cash needs of the Company will be dependent on the
successful development of the Company's products and their success in the market
place. At the current rate, the Company is not able to internally generate
sufficient funds for operations and will be required to rely on outside sources
for continued funding until such time as the Company's operations generate a
profit and cash is generated from operations. The Company has historically
issued and may continue, if the circumstances warrant, to issue common stock to
vendors and suppliers in lieu of cash for products and services provided to the
Company.
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. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ significantly
from those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those discussed in the Company's fiscal year 2001 Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings None
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Item 2. Changes in the Rights of the Company's Security Holders. None
--------------------------------------------------------
Item 3. Default by the Company on its Senior Securities. None
------------------------------------------------
Item 4. Submission of Matters to a Vote of Securities Holders. None
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Item 5. Other Information. None
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Item 6(a). Exhibits. None
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Item 6(b). Reports on Form 8-K. None
--------------------
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
(Registrant)
Date: May 14, 2002 By: /s/ Andrew J. Kandalepas
---------------------------------------
Andrew J. Kandalepas
Chief Executive Officer
Date: May 14, 2002 By: /s/ Harry L. Lukens, Jr.
---------------------------------------
Harry L. Lukens, Jr.
Chief Financial Officer
14