UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ---------- SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 incorporation or organization) (I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60074
(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 CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 15, 2002,
68,631,680 shares of the registrant's common stock, $.001 par value, were issued
and outstanding.
DAUPHIN TECHNOLOGY, INC.
Table of Contents
-----------------
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months and Three Months Ended September 30, 2002 and 2001 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 and
Nine Months Ended September 30, 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION 17
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 17
2
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(Unaudited)
-------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
------------------ -----------------
CURRENT ASSETS:
Cash $ 48,251 $ 725,364
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at September
30, 2002 and December 31, 2001 58,947 67,201
Employee receivables 3,248 3,248
Inventory, net of reserve for obsolescence of $2,981,623 at
December 31, 2001 192,308 518,452
Prepaid expenses 76,631 37,883
------------- -------------
Total current assets 379,385 1,352,148
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $659,008 at September 30, 2002 and $475,899
at December 31, 2001 1,548,490 1,824,935
ESCROW DEPOSIT
- 368,181
ASSETS NOT USED IN BUSINESS - 75,017
INSTALLATION CONTRACTS, net of accumulated amortization
of $57,143 and $22,857 at September 30, 2002 and December
31, 2001, respectively 262,857 297,143
------------- -------------
Total assets $ 2,190,732 $ 3,917,424
============= =============
CURRENT LIABILITIES:
Accounts payable $ 720,772 $ 477,716
Accrued expenses 153,276 103,792
Short-term borrowings 179,395 -
Current portion of long-term debt 9,896 82,507
Customer Deposits 433 7,741
------------- -------------
Total current liabilities 1,063,772 671,756
LONG-TERM DEBT 7,693 43,580
CONVERTIBLE DEBENTURES 2,024,285 1,153,197
------------- -------------
Total liabilities 3,095,750 1,868,533
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' (DEFICIT) 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;
68,127,313 and 64,059,813 issued and outstanding at
September 30, 2002 and at December 31, 2001, respectively 68,128 64,061
Warrants 3,438,494 4,227,499
Paid-in capital 59,958,520 57,351,406
Accumulated deficit (64,370,160) (59,594,075)
------------- -------------
Total shareholders' (deficit) equity (905,018) 2,048,891
------------- -------------
Total liabilities and shareholders'(deficit) equity $ 2,190,732 $ 3,917,424
============= =============
The accompanying notes are an integral part of these balance sheets.
3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months and three months ended September 30, 2002 and 2001
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 375,636 $ 79,074 $ 177,054 $ 68,639
DESIGN SERVICE REVENUE 76,875 1,169,711 - 352,905
------------ ----------- ----------- -----------
TOTAL REVENUE 452,511 1,248,785 177,054 421,544
COST OF SALES 178,740 74,113 62,338 70,072
COST OF SERVICES 494,679 940,094 - 300,735
------------ ----------- ----------- ------------
Gross (loss) profit (220,908) 234,578 114,716 50,737
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,389,635 3,332,042 1,128,208 751,432
RESEARCH AND DEVELOPMENT EXPENSE 473,873 1,760,140 109,398 519,244
AMORTIZATION OF GOODWILL - 825,000 - 275,000
------------ ----------- ----------- -----------
Loss from operations (4,084,416) (5,682,604) (1,122,890) (1,494,939)
INTEREST EXPENSE 698,605 16,744 221,659 4,964
INTEREST INCOME 6,936 208,217 518 94,524
------------ ----------- ----------- -----------
Loss before income taxes (4,776,085) (5,491,131) (1,344,031) (1,405,379)
INCOME TAXES - - - -
------------ ----------- ----------- -----------
NET LOSS $ (4,776,085) $(5,491,131) $(1,344,031) $(1,405,379)
============ =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.07) $ (0.09) $ (0.02) $ (0.02)
============ =========== =========== ===========
Weighted average number of shares of common stock
outstanding 65,848,720 62,849,497 67,291,757 63,819,568
The accompanying notes are an integral part of these statements.
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Year ended December 31, 2001 and nine months ended September 30, 2002
(Unaudited)
Common Stock
------------ Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------
BALANCE, December 31, 2000 61,652,069 $ 61,653 $53,479,116 $ 3,321,810
Issuance of common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101
Beneficial conversion feature and
warrants - - 914,279 684,600
Stock Options exercised 35,600 36 28,528 -
Warrants exercised 285,000 285 242,025 (71,236)
Acquisition of business 766,058 766 1,125,339 -
Personal guarantee 1,032,118 1,032 1,240,709 -
Vendor payments 30,000 30 40,770 273,224
Net loss - - - -
------------ --------- ----------- ------------
BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499
Issuance of common stock in connection with:
Stock Options exercised 57,500 57 49,557 -
Beneficial conversion feature - - 66,000 -
Warrants exercised 3,710,000 3,710 2,391,857 (1,077,817)
Conversion of convertible note 300,000 300 99,700 -
Consulting fees - - - 288,812
Net loss - - - -
------------ --------- ----------- ------------
BALANCE, September 30, 2002 68,127,313 $ 68,128 $59,958,520 $ 3,438,494
============ ========= =========== ============
Treasury Stock
-------- ----- Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, December 31, 2000 - $ - $(46,341,715) $ 10,520,864
Issuance of common stock in connection with:
Stock purchase agreement - - - 300,000
Beneficial conversion feature and
warrants - - - 1,598,879
Stock Options exercised - - - 28,564
Warrants exercised - - - 171,074
Acquisition of business - - - 1,126,105
Personal guarantee - - - 1,241,741
Vendor payments - - - 314,024
Net loss - - (13,252,360) (13,252,360)
--------------- -------- ------------ ------------
BALANCE, December 31, 2001 - - (59,594,075) 2,048,891
Issuance of common stock in connection with:
Stock Options exercised - - - 49,614
Beneficial conversion feature - - - 66,000
Warrants exercised - - - 1,317,750
Conversion of convertible note - - - 100,000
Consulting fees - - - 288,812
Net loss - - (4,776,085) (4,776,085)
--------------- -------- ------------ ------------
BALANCE, September 30, 2002 - $ - $(64,370,160) $ (905,018)
=============== ======== ============ ============
The accompanying notes are an integral part of these statements.
5
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
(Unaudited)
- --------------------------------------------------------------------------------
2002 2001
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $ (4,776,085) $ (4,085,752)
Non-cash items included in net loss:
Depreciation and amortization 284,020 197,734
Amortization of goodwill - 550,000
Interest expense on convertible notes 687,088 -
Warrants issued in lieu of consulting fees 288,812 88,550
Gain on sale of building (33,014) -
Common stock issued to vendors - 40,800
Common stock issued pursuant to personal guarantee - 1,241,741
Loss on sale of assets 45,017 -
Write off assets not used in business 60,000 -
Decrease in accounts receivable - trade 8,254 45,690
Decrease in accounts receivable from employees - 3,342
Decrease (increase) in inventory 326,144 (21,492)
Increase in prepaid expenses (38,748) (63,412)
Decrease in escrow deposits 368,181 141,009
Increase (decrease) in accounts payable 243,056 (59,862)
Increase (decrease) in accrued expenses 49,484 (454)
Decrease in customer deposits (7,308) (2,756)
------------- -------------
Net cash used in operating activities (2,495,099) (1,924,862)
CASH FLOWS FROM INVESTING ACTIVITIES -
Proceeds from sale of building 431,389 -
Proceeds from sale of assets 30,000 -
Purchase of equipment (431,664) (61,341)
------------- -------------
Net cash provided by (used in) investing activities 29,725 (61,341)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 49,614 106,300
Proceeds from exercise of warrants 1,317,750 -
Repayment of long-term leases and other obligations (108,498) (46,652)
Issuance of convertible debentures 350,000 -
Increase in short-term borrowing 179,395 -
------------- -------------
Net cash provided by financing activities 1,788,261 59,648
------------- -------------
Decrease in cash (677,113) (1,926,555)
CASH BEGINNING OF PERIOD 725,364 2,683,480
------------- -------------
CASH END OF PERIOD $ 48,251 $ 756,925
============= =============
CASH PAID DURING THE PERIOD FOR -
Interest $ 11,517 $ 11,780
The accompanying notes are an integral part of these statements.
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
and provide interactive cable systems to the extended stay hospitality industry,
out of its main facility in northern Illinois, an office 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 65,848,720 for the nine-month period September 30, 2002,
62,849,497 for the nine-month period September 30, 2001, 67,291,757 for the
three-month period ended September 30, 2002 and 63,819,568 for the three-month
period ended September 30, 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 11 million
additional shares would be outstanding if all warrants and all stock options
were exercised as of September 30, 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. No interim review, in accordance
with Statement on Auditing Standards No. 71, of these interim financial
statements was performed by an independent certified public accountant.
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 September 30, 2002 has an accumulated deficit of $64,370,160. 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. 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 September 30, 2002.
Revenues from the Company's design services have ceased. 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: The Company has concentrated its efforts on marketing its set-top
boxes, halted all further development of the next generation Orasis and is
exploring alternative mobile hand-held computers and other peripheral 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 facility in McHenry, which housed the RMS operations, has
been closed, all personnel have been terminated and the remaining inventory and
equipment were auctioned and sold. The building used by ADD to perform design
services has been sold and all engineers have been terminated.
The Company has also changed its primary focus and has begun concentrating its
efforts on becoming a reseller and distributor of mobile hand-held computer
products, pc monitors and TV displays, vehicle multimedia systems and various
accessories and peripherals. The Company has been working with several original
equipment manufactures in the Far East to provide the various products.
8
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. BUSINESS SEGMENTS
The Company has three reportable segments: Dauphin Technology, Inc. and RMS
("Dauphin"), Advanced Digital Designs, Inc. ("ADD") and Suncoast Automation,
Inc. ("Suncoast"). Dauphin is involved in the design and distribution of
hand-held pen-based computer systems and accessories and smartbox set-top boxes.
ADD performed design services, process methodology consulting and intellectual
property development. Suncoast provides private, interactive cable systems to
the hospitality industry.
September 30, 2002 September 30, 2001
------------------ ------------------
Revenue
Dauphin $ 24,330 $ 10,435
ADD 286,250 1,265,743
Suncoast 351,306 -
Inter-company elimination (209,375) (448,937)
------------ -------------
Total $ 452,511 $ 827,241
============ =============
Operating (Loss)
Dauphin $ (3,056,469) $ (4,049,983)
ADD (353,283) (137,682)
Suncoast (674,664) -
Inter-company elimination - -
------------ -------------
Total $( 4,084,416) $ (4,187,665)
============ =============
September 30, 2002 December 31, 2001
------------------ -----------------
Assets
Dauphin $ 18,614,459 $ 17,461,145
ADD 2,264,616 2,699,250
Suncoast 1,835,576 1,702,791
Inter-company elimination (20,524,119) (17,945,762)
------------ -------------
Total $ 2,190,732 $ 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 is not 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 nine month period ended September 30, 2002, the
Dauphin Technology, Inc.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. CONVERTIBLE DEBT AND WARRANTS - Continued
Company recognized $626,588 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. During the third quarter of 2002, Crescent converted $100,000
of the convertible note in exchange for 300,000 shares of common stock of the
Company.
In April 2002, the Company entered into convertible note agreements with three
individuals for $350,000. These Convertible Notes are due in October 2002 and
bear an interest rate of 10.0% per annum, payable at the termination of the
Note. At the option of the holder, at any time until the Convertible Note is
paid in full, the Note may be converted, either in whole or in part, up to the
principal amount of the Note, into shares of Common Stock of the Company at a
conversion price of $0.50 per share. The beneficial conversion feature is
calculated to be $66,000 and has been recorded as Additional Paid in Capital and
a discount to the Convertible Note. The beneficial conversion feature is being
amortized over six months, the life of the Note. For the nine month period ended
September 30, 2002, the Company recognized $60,500 as interest expense on the
amortization of the beneficial conversion feature. The Company is currently
exploring alternative financing arrangements in order to repay these notes.
7. 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.
During the second quarter of 2002, the Company received proceeds in the amount
of $416,000 for the exercise of 1,040,000 warrants.
In May 2002, the Company re-priced approximately 2,245,667 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 $0.40 per share. The re-pricing created a charge to earnings
of approximately $139,900, 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 7 months.
In August and September 2002, the Company re-priced approximately 1,854,667
warrants it had previously issued to outside consultants. The warrants were
originally issued with an exercise price ranging from $1.50 to $0.50, and were
re-priced with an exercise price of $0.25 per share. The re-pricing created a
charge to earnings of approximately $121,700, 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 ranging from 1
to 5 months.
During the third quarter of 2002, the Company received proceeds in the amount of
$491,750 for the exercise of 1,736,667 warrants.
During the third quarter of 2002, Crescent International Ltd. exercised $100,000
of the convertible note in exchange for 300,000 shares of common stock of the
Company.
10
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
8. SUBSEQUENT EVENT
During October 2002, the Company began discussions with UniversalGR, a company
offering applied software and hardware solutions around the world, including the
United States and Greece. It specializes in project management, consulting,
design, development, support services and installation of complete technological
solutions. These discussions resulted in a letter of intent being signed on
November 7, 2002 whereby the Company would acquire controlling interest of the
outstanding common stock of UniversalGR in exchange for approximately eight
million shares of common stock of the Company at the closing of the transaction,
an additional 3,500,000 shares of common stock of the Company upon UniversalGR
achieving revenues of $10,000,000 and an additional 3,500,000 shares of common
stock of the Company upon UniversalGR achieving another $10,000,000 in revenue
within the first fifteen months after closing the transaction. Preliminary due
diligence has begun and the potential closing is scheduled for early December,
2002.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2001
Total revenues for the three months ended September 30, 2002 and 2001 were
approximately $177,000 and $422,000, respectively. Net sales increased from
$69,000 in 2001 to approximately $177,000 in 2002. Net sales generated by the
Company's interactive cable system subsidiary, Suncoast, accounted for
approximately $170,000 of these revenues in the third quarter of 2002 and
approximately $65,000 in the third quarter of 2001. The balance of sales is
parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues
in the third quarter of 2002 were $0 as compared to revenues of $353,000 in the
second quarter of 2001. This reduction in design service revenue is a cessation
in engineering projects available in the marketplace which the Company began
experiencing in 2001. The Company does not anticipate any further revenues from
design services for the remainder of fiscal year 2002. Cost of sales represents
costs associated with the Suncoast operations, which decreased from $70,000 in
2001 to approximately $62,000 in 2002. Cost of services decreased from $301,000
in 2001 to $0 in 2002. The decrease is a result of reduction in engineering
staff which began during the first quarter of 2002. Gross profit of $115,000 in
2002 is primarily attributable to the Suncoast operations. Gross profit of
$51,000 for the third quarter of 2001 was negatively affected by the decline in
engineering projects available to the Company.
Selling, general and administrative expenses increased to approximately
$1,128,000 in 2002 from $751,000 in 2001. The increase of approximately $377,000
is due to the increase in expenses of the Company's branch office in Piraeus,
Greece in the amount of $190,000, the increase in expenses of the interactive
cable system subsidiary, Suncoast, amounting to approximately $73,000, increase
in the corporate office expenses of $141,000 and offset by the decrease in
expenses of the design engineering subsidiary amounting to approximately
$27,000. The Company operated its branch office in Piraeus, Greece for the full
three month period in 2002, whereas in 2001, expenses were only for one month.
The Suncoast subsidiary incurred higher marketing, advertising and general
administrative expenses in 2002. Included in the Corporate office selling,
general and administrative expenses in 2002 is approximately $121,700 expense
associated with the repricing of warrants which had previously been issued to
outside consultants, travel costs of approximately $50,000, offset by a general
reduction in office expenses of approximately $30,000.
Amortization of goodwill in 2001 amounted to $275,000 in the third quarter. This
goodwill was a result of the acquisition of the net assets of Advanced Digital
Designs, Inc. in 2000. The remaining balance of the goodwill was written off in
the fourth quarter of 2001.
Research and Development expenses decreased to approximately $109,000 during the
third quarter ended September 30, 2002 from $519,000 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 55% of Research and Development costs consisted
of costs related to the development of software for the set-top box, with 45%
related to further development of alternative mobile hand-held computer devices.
In 2001, the majority of Research and Development costs were for the set-top
box.
Interest expense increased to approximately $222,000 for the third quarter of
2002 from $5,000 for the third quarter of 2001. Included in interest expense in
the third quarter of 2002 is three months amortization of the debt discount
associated with the Convertible Notes, amounting to $220,000. The remaining
interest is related to other borrowings. Interest expense in the third quarter
of 2001 related to capital equipment leases and short term borrowings. Interest
income declined from $95,000 in 2001 to $500 in 2002 due to the reduction of
short-term funds held on deposit.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Net loss
The consolidated loss after tax decreased for the third quarter ended September
30, 2002 to approximately ($1,344,000) or ($0.02) per share from ($1,405,000) 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 selling, general and
administrative costs generated by Suncoast and the branch office, the repricing
of warrants, 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., and research and development
costs regarding the set-top box. Loss per common share is calculated based on
the monthly weighted average number of common shares outstanding, which were
67,291,757 for the three-month period ended September 30, 2002, and 63,819,568
for the three-month period ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
Total revenues for the Company decreased from approximately $1,249,000 in the
first nine months of 2001 to $453,000 in the first nine months of 2002. Net
sales increased from $79,000 in 2001 to approximately $376,000 in 2002. Net
sales generated by the Company's interactive cable system subsidiary, Suncoast,
accounted for approximately $351,000 of these revenues with the balance being
parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues
in the first nine months of 2002 were approximately $77,000 as compared to
revenues of $1,170,000 in the first nine months 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 2001. The
Company does not anticipate any further revenues from design services for the
remainder of fiscal year 2002. 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 decreased from $940,000 in 2001
to $495,000 in 2002. The decrease is a result of reduction in engineering staff
which began during the first quarter of 2002. Included in the costs for 2002 are
termination and severance benefits paid to the engineering staff. Because of the
reduction in design services revenue and the additional termination and
severance benefits, gross profit margins were negatively affected and generated
a gross loss of $221,000 for the third quarter of 2002 compared to a gross
profit of $235,000 for the same period in 2001.
Selling, general and administrative expenses increased to approximately
$3,390,000 for the first nine months ended September 30, 2002 as compared to
$3,332,000 for 2001. Included in selling, general and administrative expenses in
2001 is approximately $1,242,000 attributable to the issuance of common stock
for reimbursement pursuant to a personal guarantee. Selling, general and
administrative expenses of the design engineering subsidiary for the nine months
ended September 30, 2001, were approximately $124,000 as compared to $8,000 in
2002. This reduction is offset by the expenses of the Company's interactive
cable system subsidiary, Suncoast, amounting to approximately $847,000, and the
Company's branch office in Piraeus, Greece which amounted to approximately
$767,000. The Company acquired the net assets of Suncoast in July 2001 and
opened the branch office in August 2001. In the nine months ended September 30,
2002, approximately $289,000 of additional costs were incurred in connection
with the repricing of warrants which had previously been issued to outside
consultants.
Amortization of goodwill in 2001 amounted to $825,000 for the nine months ended
September 30, 2001. This goodwill was a result of the acquisition of the net
assets of Advanced Digital Designs, Inc. in 2000. The remaining balance of the
goodwill was written off in the fourth quarter of 2001.
Research and Development expenses decreased to approximately $474,000 for the
nine months ended September 30, 2002 from $1,760,000 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 68% of Research and Development costs consisted
of costs related to the development of software
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
for the set-top box, with 32% related to further development of alternative
mobile hand-held computer devices. In 2001, the majority of Research and
Development costs were for the set-top box.
Interest expense for the nine months ended September 30, 2002 increased to
approximately $699,000 as compared to $17,000 for the same period in 2001.
Included in interest expense for 2002 is nine months amortization of the debt
discount associated with the Convertible Notes, amounting to $687,000. The
remaining interest is related to capital equipment leases, mortgage note and
other borrowings. Interest expense for the nine months ended September 30, 2001
related to capital equipment leases and short term borrowings. Interest income
declined from $208,000 for the nine months ended September 30, 2001 to $7,000
for the nine months ended September 30, 2002 due to the reduction of short-term
funds held on deposit.
Balance Sheet
Total assets for the Company at September 30, 2002 were approximately
$2,191,000, a decrease of approximately $1,726,000 from December 31, 2001. The
decrease was primarily attributable to the net cash used in operations of
approximately $2,495,000, the purchase of equipment of $432,000, offset by the
proceeds from the sale of the building and other assets of $460,000, exercise of
stock warrants and stock options of $1,368,000 and the increase in borrowings of
$529,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred a net operating loss in each year since it's founding
and as of September 30, 2002 has an accumulated deficit of approximately
$64,370,000 and a deficit in shareholders equity of approximately $905,000. 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 procure 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.
For the nine months ended September 30, 2002, the Company used $2,495,000 of
cash in operating activities, and generated $29,000 of cash from investing
activities and $1,788,000 of cash from financing activities that produced a
decrease in cash of $677,000 for the nine months. The net loss of $4,726,000 was
partially offset by the non-cash items of depreciation and amortization,
repricing of warrants issued in lieu of consulting fees, decrease in inventory
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 and proceeds from the sale of a
building and other assets. Financing activities consisted of the exercise of
options and warrants, increase in convertible notes and the increase in
short-term borrowings. As of September 30, 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 2:1. 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 draw downs against its existing common stock
purchase agreement with Techrich International Ltd. ("Techrich"), which expired
on January 28, 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 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 cannot currently access these funds
because it does not have a current effective registration statement with the
Securities and Exchange Commission covering shares available to sell to
Crescent.
The Company elected to pursue the above financing arrangements with Crescent
International because the Company's previous financing arrangement 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
financial conditions of the Company, management decided to explore alternatives.
Several were reviewed, including private placements, various long-term debt
arrangements with different investment bankers and other equity lines similar to
the one with Techrich. Management felt that the financing offered by 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 and procurement 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 and procurement 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, common stock to vendors and suppliers in lieu of cash for
products and services provided to the Company.
In order to provide additional cash for operations, in April 2002, the Company
entered into convertible note agreements with three individuals for $350,000.
These Convertible Notes are due in October 2002 and bear an interest rate of
10.0% per annum, payable at the termination of the Note. At the option of the
holder, at any time until the Convertible Note is paid in full, the Note may be
converted, either in whole or in part, up to the principal amount of the Note,
into shares of Common Stock of the Company at a conversion price of $0.50 per
share. As of November 12, 2002, these notes had not been converted into common
stock of the Company, and the Company had not repaid the loans. The Company is
currently exploring alternative financing arrangements in order to repay these
notes.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
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.
During October 2002, the Company began discussions with UniversalGR, a company
offering applied software and hardware solutions around the world, including the
United States and Greece. It specializes in project management, consulting,
design, development, support services and installation of complete technological
solutions. These discussions resulted in a letter of intent being signed on
November 7, 2002 whereby the Company would acquire controlling interest of the
outstanding common stock of UniversalGR in exchange for approximately eight
million shares of common stock of the Company at the closing of the transaction,
an additional 3,500,000 shares of common stock of the Company upon UniversalGR
achieving revenues of $10,000,000 and an additional 3,500,000 shares of common
stock of the Company upon UniversalGR achieving another $10,000,000 in revenue
within the first fifteen months after closing the transaction. UniversalGR has
recently signed a $43.5 million contract with Tihovatis, AE to provide
technology equipment, consulting, maintenance and support services for a housing
and resort development currently under construction. Preliminary due diligence
has begun and the potential closing is scheduled for early December, 2002. The
pending acquisition will create a vehicle for the Company to sell its products
through. UniversalGR currently has a contract for approximately $43.5 million
for the installation of security equipment, appliances, computers, cameras and
other technology equipment in a housing development and hotel. The successful
completion of the pending acquisition is critical to the Company's future
success.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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.
Dauphin is exposed to foreign exchange risks through its branch operation in
Greece. The Company does not believe that the potential exposure is significant
in light of the current size of its operations in Greece. We do not currently
and do not intend in the future to utilize derivative financial instruments for
trading purposes, unless the operations of the branch facility in Greece become
significant. At that time, the Company will initiate a risk management policy to
monitor interest rate and foreign exchange risks.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q,
the Company's principal executive officer and principal financial
16
officer have concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in the Rights of the Company's Security Holders. None
Item 3. Default by the Company on its Senior Securities. None
Item 4. Submission of Matters to a Vote of Securities Holders. None
Item 5. Other Information. None
Item 6(a). Exhibits.
Exhibit 99.1 Chief Executive Officer Certification
Exhibit 99.2 Chief Financial Officer Certification
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: November 18, 2002 By: /s/ Andrew J. Kandalepas
------------------------------
Andrew J. Kandalepas
Chief Executive Officer
Date: November 18, 2002 By: /s/ Harry L. Lukens, Jr.
------------------------------
Harry L. Lukens, Jr.
Chief Financial Officer
17