10-Q/A 1 d10qa.txt 09/30/2001 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (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, 2001 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 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 October 30, 2001, 63,000,095 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, 2001 and December 31, 2000 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months and Three Months Ended September 30, 2001 and 2000 4 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Year Ended December 31, 2000 and Nine Months Ended September 30, 2001 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2001 and 2000 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations 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 September 30, 2001 and December 31, 2000 (Unaudited)
----------------------------------------------------------------------------------------------------------- September 30, 2001 December 31, 2000 ------------------ ----------------- RESTATED RESTATED CURRENT ASSETS: Cash $ 307,847 $ 2,683,480 Accounts receivable- Trade, net of allowance for bad debt of $50,621 at September 30, 2001 and December 31, 2000 265,229 321,377 Employee receivables 18,248 21,590 Inventory, net of reserve for obsolescence of $2,491,216 at September 30, 2001 and December 31, 2000 634,400 505,749 Prepaid expenses 71,024 20,794 ------------ ------------ Total current assets 1,296,748 3,552,990 INVESTMENT IN RELATED PARTY 290,000 290,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,451,225 at September 30, 2001 and $1,127,040 at December 31, 2000 2,203,821 1,477,787 ESCROW DEPOSIT 462,998 752,500 INSTALLATION CONTRACTS 320,000 -- GOODWILL, net of accumulated amortization of $1,237,500 at September 30, 2001 and $412,500 at December 31, 2000 4,262,500 5,087,500 ------------ ------------ Total assets $ 8,836,067 $ 11,160,777 ============ ============ CURRENT LIABILITIES: Accounts payable $ 521,203 $ 290,474 Accrued expenses 86,962 80,433 Current portion of long-term debt 104,298 113,629 Customer Deposits 47,741 53,244 ------------ ------------ Total current liabilities 760,204 537,780 LONG-TERM DEBT 50,611 102,133 ------------ ------------ Total liabilities 810,815 639,913 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value, 10,000,000 shares authorized but unissued -- -- Common stock, $0.001 par value, 100,000,000 shares authorized; 64,032,213 and 61,652,069 issued and outstanding at September 30, 2001 and at December 31, 2000 64,033 61,653 Warrants 3,381,474 3,321,810 Paid-in capital 56,412,591 53,479,116 Accumulated deficit (51,832,846) (46,341,715) ------------ ------------ Total shareholders' equity 8,025,252 10,520,864 ------------ ------------ Total liabilities and shareholders' equity $ 8,836,067 $ 11,160,777 ============ ============
The accompanying notes are an integral part of these statements 3 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine months and three months ended September 30, 2001 and 2000 (Unaudited)
------------------------------------------------------------------------------------------------------ Nine Months Three Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ------------ ------------- ----------- ----------- RESTATED RESTATED NET REVENUE $ 1,248,785 $ 361,016 $ 421,544 $ 344,975 COST OF REVENUE 1,014,207 440,639 370,807 317,228 ------------ ------------ ----------- ----------- Gross Profit (Loss) 234,578 (79,623) 50,737 27,747 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 4,157,042 2,870,164 1,026,432 1,009,115 RESEARCH AND DEVELOPMENT EXPENSE 1,760,140 473,113 519,244 222,255 ------------ ------------ ----------- ----------- Loss from Operations (5,682,604) (3,422,900) (1,494,939) (1,203,623) INTEREST EXPENSE 16,744 63,583 4,964 9,381 INTEREST INCOME 208,217 53,025 94,524 39,215 ------------ ------------ ----------- ----------- Loss before Income Taxes (5,491,131) (3,433,458) (1,405,379) (1,173,789) INCOME TAXES - - - - ------------ ------------ ----------- ----------- NET LOSS $ (5,491,131) $ (3,433,458) $(1,405,379) $(1,173,789) ============ ============ =========== =========== BASIC AND DILUTED LOSS PER SHARE $ (0.09) $ (0.06) $ (0.02) $ (0.02) ============ ============ =========== =========== Weighted Average number of Common Shares outstanding $ 62,849,497 57,725,768 63,819,568 59,166,582 ============ ============ =========== ===========
The accompanying notes are an integral part of these statements. 4 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Year ended December 31, 2000 and nine months ended September 30, 2001 (Unaudited)
Common Stock Treasury Stock -------------------- Paid-in --------------- Accumulated Shares Amount Capital Warrants Shares Amount Deficit Total ---------- ------- ----------- ---------- ------ ------ ------------ ------------ BALANCE, December 31, 1999 51,671,582 $51,671 $38,089,320 $1,238,089 -- $ -- $(38,826,736) $ 552,344 Issuance of common stock in connection with: Private placement 4,654,613 4,656 6,877,639 419,556 -- -- -- 7,301,851 Stock purchase agreement 2,136,616 2,137 5,854,991 1,142,872 -- -- -- 7,000,000 Warrant exercise 1,999,602 1,999 1,234,715 (620,641) -- -- -- 616,073 Consulting fees 500,000 500 312,000 1,103,669 -- -- -- 1,416,169 Employee stock compensation -- -- 70,622 -- -- -- -- 70,622 Settlement of trade payables 480,000 480 299,520 -- -- -- -- 300,000 Stock options exercised 2,000 2 998 -- -- -- -- 1,000 Vendor payments 207,656 208 739,311 38,265 -- -- -- 777,784 Net loss -- -- -- -- -- -- (7,514,979) (7,514,979) ---------- ------- ----------- ---------- ------ ------ ------------ ------------ BALANCE, December 31, 2000, restated 61,652,069 61,653 53,479,116 3,321,810 -- -- (46,341,715) 10,520,864 Issuance of common stock in connection with: Warrant exercise 285,000 285 242,025 (65,010) -- -- -- 177,300 Stock options exercised 8,000 8 3,992 -- -- -- -- 4,000 Vendor payments 30,000 30 40,770 105,573 -- -- -- 146,373 Stock purchase agreement 258,968 259 280,640 19,101 -- -- -- 300,000 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 Net loss -- -- -- -- -- -- (5,491,131) (5,491,131) ---------- ------- ----------- ---------- ------ ------ ------------ ------------ BALANCE, September 30, 2001, restated 64,032,213 $64,033 $56,412,591 $3,381,474 -- $ -- $(51,832,846) $ 8,025,252 ========== ======= =========== ========== ====== ====== ============ ============
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, 2001 and 2000 (Unaudited)
------------------------------------------------------------------------------------- 2001 2000 ------------ ------------ RESTATED RESTATED ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES - Net loss $ (5,491,131) $ (3,433,458) Non-cash items included in net loss: Depreciation and amortization 324,185 304,848 Amortization of goodwill 825,000 137,500 Warrants issued in lieu of consulting fees 105,573 556,542 Common stock issued to vendors 40,800 -- Common stock issued pursuant to personal guarantee 1,241,741 -- Employee stock compensation -- 70,622 Settlement of trade payables -- (431,776) Changes in: Accounts receivable - trade 70,817 (337,657) Accounts receivable from employees 3,342 (560) Inventory (15,597) (286,063) Prepaid expenses (25,904) 4,628 Escrow deposits 289,502 -- Accounts payable 90,615 (1,144,124) Accrued expenses 6,529 47,024 Customer deposits (5,503) 49,644 ------------ ------------ Net cash used in operating activities (2,540,031) (4,462,830) CASH FLOWS FROM INVESTING ACTIVITIES - Acquisition of business -- (6,025,000) Purchase of equipment (256,049) (2,195) ------------ ------------ Net cash used in investing activities (256,049) (6,027,195) CASH FLOWS FROM FINANCING ACTIVITIES - Proceeds from issuance of shares 300,000 12,200,671 Proceeds from exercise of warrants and options 181,300 858,307 Repayment of long-term leases and other obligations (60,853) (53,127) (Decrease) increase in short-term borrowing -- (286,000) ------------ ------------ Net cash provided by financing activities 420,447 12,719,851 ------------ ------------ Net (decrease) increase in cash (2,375,633) 2,229,826 CASH BEGINNING OF PERIOD 2,683,480 31,087 ------------ ------------ CASH END OF PERIOD $ 307,847 $ 2,260,913 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 11,780 $ 54,202 NON-CASH TRANSACTIONS: Common stock issued in connection with: Acquisition of business $ 1,126,105 $ -- Settlement of customer deposits and payables -- 300,000
The accompanying notes are an integral part of these statements. 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, manufacture and market mobile hand-held, pen-based computers, broadband set-top boxes, as well as other electronic devices for home and business use; provide private, interactive cable systems to the extended stay hospitality industry; and perform design services, process methodology consulting and intellectual property development, out of three locations in northern Illinois, one in central Florida and its branch office in Piraeus, Greece. The Company, an Illinois corporation, was formed on June 6, 1988 and became a public entity in 1991. Basis of Presentation The consolidated financial statements include the accounts of Dauphin and its wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All significant intercompany transactions and balances have been eliminated in consolidation. 2. SUMMARY OF MAJOR ACCOUNTING POLICIES ----------------------------------------- Earnings (Loss) Per Common Share Basic earnings per common share are calculated on income available to common stockholders divided by the weighted-average number of shares outstanding during the period, which were 62,849,497 for the nine-month period September 30, 2001 and 57,725,768 for the nine-month period September 30, 2000. Diluted earnings per common share are adjusted for the assumed conversion exercise of stock options and warrants unless such adjustment would have an anti-dilutive effect. Approximately 12.5 million additional shares would be outstanding if all warrants and all stock options were exercised as of September 30, 2001. Unaudited Financial Statements The accompanying statements are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of results have been included. The interim financial statements contained herein do not include all of the footnotes and other information required by accounting principles generally accepted in the United States of America for complete financial statements as provided at year-end. For further information, refer to the consolidated financial statements and footnotes thereto included in the registrant's annual report on Form 10-K for the year ended December 31, 2000. The reader is reminded that the results of operations for the interim period are not necessarily indicative of the results for the complete year. Use of Estimates The presentation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent 7 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 2. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued ------------------------------------------------ Use of Estimates - continued assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Restatement of prior period Selling, general and administrative expenses, interest expense, net loss and per share amounts have been adjusted from previously reported amounts to offset the difference between the quoted market price and the proceeds from stock sales under the private placement against additional paid in capital rather than interest expense amounting to $2,065,355 ($0.04 per share) for the nine-months ended September 30, 2000. 3. RISKS AND UNCERTAINTIES ----------------------- The Company has incurred a net operating loss in each year since its founding and as of September 30, 2001 has an accumulated deficit of $51,832,846. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to design and develop and market commercially acceptable products, including its set-top box. Financial success will also depend on amending contract terms to result in net revenue in excess of costs of manufacture and selling, general and administrative costs. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. 4. BUSINESS SEGMENTS ----------------- The Company has two reportable segments: Dauphin Technology, Inc., Suncoast Automation, Inc. and RMS (Dauphin); and Advanced Digital Designs, Inc. (ADD). Dauphin is involved in design, manufacturing and distribution of hand-held pen-based computer systems and accessories and smartbox set-top boxes and providing private, interactive cable systems to the hospitality industry. ADD performs design services, process methodology consulting and intellectual property development.
September 30, 2001 September 30, 2000 ------------------ ------------------ Revenue Dauphin $ 79,074 $ 33,952 ADD 1,981,399 327,064 Inter-company elimination (811,688) - ----------- ----------- Total $ 1,248,785 $ 361,016 =========== =========== Operating (Loss) Dauphin $(5,531,043) $(3,449,945) ADD (151,561) 27,045 Inter-company elimination - - ----------- ----------- Total $(5,682,604) $(3,422,900) =========== =========== September 30, 2001 December 31, 2000 ------------------ ----------------- Assets Dauphin $ 18,836,002 $ 18,393,220 ADD 6,777,942 6,735,372 Inter-company elimination (16,777,877) (13,967,815) ------------ ------------ Total $ 8,836,067 $ 11,160,777 ============ ============
8 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 5. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company is an operating entity and in the normal course of business, from time to time, may be involved in litigation. In management's opinion, any current or pending litigation is not material to the overall financial position of the Company. 6. SECURITIES PURCHASE AGREEMENT ----------------------------- On September 28, 2001 the Company entered into a Securities Purchase Agreement in the amount of $10 million with Crescent International Ltd., an investment company managed by GreenLight (Switzerland) SA. The initial funding on October 2, 2001 consisted of a $2.5 million Convertible Note with the option to issue further Convertible Notes (see Note 9). In addition, the Company is required to issue warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share for a five-year term. The Securities Purchase Agreement further permits Crescent to purchase up to $7.5 million in common stock of the Company over a 24-month period provided the Company achieves certain results prior to February 1, 2002. If the Company fails to achieve these certain results by February 1, 2002, then the amounts Crescent could purchase are affected by certain financial criteria. Additionally, the Company has agreed not to exercise any drawdowns against its existing common stock purchase agreement with Techrich International Ltd. The Company may elect to issue subsequent convertible notes up to $1.5 million, subject to achieving certain results prior to February 1, 2001, such as the total sales to its current customer, OTE, equaling or exceeding $2.5 million and valid and documented orders from OTE that equal or exceed 75% of the subsequent convertible note. If after February 1, 2002, the Company can sell to Crescent shares of up to $1.5 million per sale, unless otherwise agreed to by the Company and Crescent; provided, however, that the aggregate amount of all shares sold and convertible notes issued cannot exceed $10 million. The amount of the sale is limited to twice the average of the bid price multiplied by the trading volume during the 22 trading day period immediately preceding the date of sale. When the total amount of securities issued to Crescent equals or exceeds $5 million, then the Company shall issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000 shares of common stock at a price equal to the bid price on the date of sale. 7. EQUITY TRANSACTIONS ------------------- 2001 Events On September 13, 2001 the Company filed with the Securities and Exchange Commission a Form S-3 registration statement relating to 6,964,724 shares of common stock. The shares were issued by the Company in respect of the following: (i) 766,058 shares were issued by the Company in connection with the acquisition of the net assets of Suncoast; (ii) 52,000 shares were issued by the Company as payment for certain advertising and promotional expenses and consulting services; and (iii) 6,146,666 shares issuable by the Company to shareholders upon the exercise by them of issued and outstanding warrants and options. On September 27, 2001, the Securities and Exchange Commission declared the registration statement effective. On August 14, 2001 the Company issued a drawdown notice in connection with the common stock purchase agreement with Techrich International for $300,000. Upon receipt of the funds, the Company issued 258,968 shares of common stock and warrants to purchase 22,006 shares of common stock at an exercise price of $1.14516. During the third quarter of 2001, the Company received proceeds in the amount of $75,000 for the exercise of 75,000 warrants. Effective July 1, 2001, the Company completed the acquisition of substantially all of the assets of Suncoast Automation, Inc., a wholly owned subsidiary of ProtoSource Corporation, pursuant to an Asset Purchase 9 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 7. EQUITY TRANSACTIONS - Continued ------------------------------------ Agreement. The purchase price was 766,058 shares of the Company's common stock valued at $1.1 million based on the closing bid price of $1.47 per share on June 29, 2001. In April 2001, the Company issued to certain consultants 30,000 shares of common stock and warrants to purchase 70,000 shares of common stock at an exercise price of $1.36 per share, as payment for certain promotional and consulting services. In September 2001, the Company issued additional warrants to purchase 16,666 shares of common stock at an exercise price of $1.395 per share to finalize the arrangement with the consultants. During the second quarter of 2001, employees exercised 4,000 stock options at a price of $.50 per share. During the first quarter of 2001, the Company received proceeds in the amount of $102,300 for the exercise of 210,000 warrants. Additionally, employees exercised 4,000 stock options at a price of $.50 per share. Personal Guarantee On April 3, 2001, the Company and Estel Telecommunications S.A. cancelled the performance bond issued on October 26, 2000 and the 1,550,000 shares of restricted stock held by Best S.A. were returned to the Company. In connection with the cancellation of the shares, Best S.A. executed the personal guarantee of Mr. Andrew J. Kandalepas, which he had granted to secure the performance of the Company's obligation to register the 1,550,000 shares issued in connection with the performance bond. The 1,550,000 shares of common stock held in escrow were returned to the Company and cancelled. However, Best S.A. executed the personal guarantee of the Chairman of the Board and CEO and retained the 1,032,118 shares. On December 20, 2001, the Board of Directors approved the issuance of 1,032,118 shares to the Chairman of the Board and CEO of the Company to replace the shares that Best S.A. retained. As a consequence, the Company amended the second and third quarter financial statements filed on Form 10-Q to reflect the expense associated with the execution and reimbursement for the personal guarantee of the Chairman's shares aggregating additional expense and additional contributed capital of $1,271,741. The shares outstanding have been retroactively restated. 8. ACQUISITION\ ---------------- On July 1, 2001, the Company acquired substantially all of the assets of Suncoast Automation, Inc. The purchase price was 766,058 shares of the Company's common stock valued at $1,126,105 based on the closing bid price of $1.47 per share on June 29, 2001. The transaction was accounted for under the purchase method of accounting. The purchase price, plus direct costs of the acquisition, was allocated to accounts receivable, inventory, equipment, installation contracts and accounts payable. 9. SUBSEQUENT EVENTS ---------------------- On October 2, 2001, in accordance with the Securities Purchase Agreement, the Company issued a Convertible Note to Crescent in the amount of $2,500,000, due September 28, 2004 and warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share. The Note is convertible to common stock of the Company at any time at the lower of $1.1561 or the average of the lowest three consecutive bid prices during the 22 days preceding the date of conversion. The Company may redeem the Convertible Note upon 30 days notice at a price of 110% during the first year, 120% during the second year and 130% thereafter. The Company is not required to pay interest on the Note unless the Company fails for a period of 10 trading days to issue shares upon conversion or pay the remaining principal of the Note upon maturity or redemption, in which event interest shall become due at a fixed rate of 8% per annum, payable in quarterly installments, on the outstanding principal balance immediately prior to the date of conversion. 10 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 10. RECENT ACCOUNTING PRONOUNCEMENTS ------------------------------------- On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.141 ("SFAS No. 141"), "Business Combinations", and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of such Statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS No. 142. Major provisions of these Statements and their effective dates for the Company are as follows: 1. All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. 2. Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented, or exchanged, either individually or as part of a related contract, asset, or liability. 3. Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. 4. Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. 5. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. Goodwill is currently being amortized at approximately $1.1 million annually and is projected to have a net carrying value of approximately $2.887 million at the date of adoption of this standard. The Company is currently evaluating the provisions of SFAS No. 142 and has not yet determined the effect that adoption of this standard will have on its financial statements. 11. RESTATEMENT ---------------- The condensed consolidated balance sheet and the condensed consolidated statement of shareholders equity as of and for the year-ended December 31, 2000 have been restated to decrease the net loss and decrease additional paid in capital by $1,302,383 to correctly reflect sales of equity securities in the private placement in the first quarter of 2000 at a discount from the quoted market prices. (See Note 2.) 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ---------------------------------------------------------------- ENDED SEPTEMBER 30, 2000 ------------------------ Revenues for the three months ended September 30, 2001 and 2000 were approximately $422,000 and $345,000, respectively. Revenues in the third quarter of 2001 consisted of $353,000 of consulting fees from the Company's design engineering subsidiary and $69,000 from the sale of the Orasis(R) hand-held computer and accessories. Revenues in the third quarter of 2000 were comprised of $327,000 of consulting fees from design services and $18,000 from the sale of the Orasis(R) hand-held computer and accessories. Cost of revenues increased from $317,000 in the third quarter of 2000 to $371,000 for the three months ended September 30, 2001. Cost of revenues consists primarily of design services payroll and related costs. Gross profit margins increased from 8% for the three months ended September 30, 2000 to 12% for the three months ended September 30, 2001. The increase in gross margin percentage is due to lower overhead costs associated with design services. Selling, general and administrative expenses increased to approximately $1,026,000 in 2001 from $1,009,000 in 2000. The increase in selling, general and administrative expenses for the three months from 2000 to 2001 is attributable to costs associated with the establishment and operations of the Greek branch office, the expenses of the Suncoast subsidiary for the three months since its acquisition and the expenses of the design engineering subsidiary for the full three months, whereas in 2000, expenses for the design services subsidiary are only included from August 28, 2000 (the date of acquisition) through September 30, 2000. Additionally, expenses in the third quarter of 2000 included expenses in finalizing the common stock purchase agreement and fees associated with exercising the drawdown under the equity line agreement. Research and development costs increased to approximately $519,000 during the three-month period ended September 30, 2001 from $222,000 over the corresponding period in 2000. Research and development costs primarily consist of costs related to the development of the set-top box, with a small portion related to the further development of the Orasis(R). Interest expense decreased to approximately $5,000 for the third quarter of 2001 from $9,000 for the corresponding period in 2000. Interest is primarily related to certain capital leases on various equipment. Net loss The consolidated loss after tax increased for the three-month period ended September 30, 2001 to approximately ($1,405,000) or ($0.02) per share as compared to ($1,174,000) or ($0.02) per share in 2000. The increase in net loss for 2001 was primarily attributed to the increase in research and development costs for the set-top box. Loss per common share is calculated based on the monthly weighted average number of common shares outstanding, which were 63,819,568 for the three-month period ended September 30, 2001, and 59,166,582 for the three-month period ended September 30, 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED -------------------------------------------------------------------- SEPTEMBER 30, 2000 ------------------ Revenue for the Company increased from approximately $361,000 in the first nine months of 2000 to $1,249,000 in the first nine months of 2001. Revenues in the first nine months of 2001 consisted of $1,170,000 of consulting fees from the Company's design engineering subsidiary and $79,000 from the sale of the Orasis(R) hand-held computer and accessories. Revenues in the first nine months of 2000 were comprised of $327,000 of consulting fees and $34,000 from the sale of the Orasis(R) hand-held computer and accessories. Consulting fees are generated by the Company's subsidiary, Advanced Digital Designs, Inc. ("ADD") and for 2001 are for the full nine months, whereas consulting fees for 2000 are only included for one and one-half months, since the date of acquisition of August 18, 2000. Cost of revenues increased to $1,014,000 in the first nine months of 2001 from $441,000 for the 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) --------------------------------- nine months ended September 30, 2000. Revenues and cost of revenues for the nine months ended September 30, 2001 include the operations of the Company's design engineering subsidiary for the entire nine-month period, whereas in 2000, the revenues and cost of revenues are included from August 28, 2000 (the date of acquisition) through September 30, 2000. Therefore, gross profit margins are not comparable for the period. Selling, general and administrative expenses increased to approximately $4,157,000 for the nine months ended September 30, 2001 as compared to $2,870,000 for 2000. Selling, general and administrative expenses during the nine months ended September 30, 2000 consisted of professional fees and financial services expenses related to the private placement, common stock purchase agreement and the costs associated with exercising the drawdown. For the nine months ended September 30, 2001, these costs were partially offset by the amortization of goodwill in connection with the acquisition of Advanced Digital Designs, Inc. for the full nine-month period, increases in expenses for the design engineering operations, expenses associated with the issuance of common stock for reimbursement pursuant to a personal guarantee, expenses associated with the establishment and operations of the Greek branch office and expenses pertaining to the Suncoast Automation subsidiary. Research and development costs increased to approximately $1,760,000 for the first nine months of 2001 as compared to $473,000 for the first nine months of 2000. Research and development costs primarily consist of costs related to the development of the set-top box, with a small portion related to the further development of the Orasis(R). Interest expense decreased to approximately $17,000 for the nine months ended September 30, 2001 from $64,000 for the nine months ended September 30, 2000. Interest expense is primarily related to certain capital leases on various equipment. Net loss The consolidated loss after income tax was approximately ($5,491,000) or ($0.09) per share for the nine months ended September 30, 2001. The consolidated loss after income tax for the nine months ended September 30, 2000 was ($3,433,000) or ($0.06) per share. The loss for 2001 was primarily attributed to the amortization of goodwill associated with the acquisition of Advanced Digital Designs, Inc., research and development costs regarding the set-top box and selling, general and administrative expenses. Loss per common share is calculated based on the monthly weighted average number of shares outstanding which were 62,849,497 for the nine-month period ended September 30, 2001 and 57,725,768 for the nine-month period ended September 30, 2000. Balance Sheet ------------- Total assets for the Company were approximately $8,836,000 at September 30, 2001, a decrease of approximately $2,325,000 from December 31, 2000. The decrease was primarily attributable to the net cash used in operations of approximately $2,540,000, the purchase of approximately $256,000 of equipment, payment of capital leases of $61,000, offset by the proceeds from the issuance of shares under the Techrich common stock purchase agreement and proceeds from the exercise of stock warrants and options of $181,000. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has incurred a net operating loss in each year since its founding and as of September 30, 2001 has an accumulated deficit of approximately $51,833,000. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to manufacture and market commercially acceptable products including its set-top box. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) ------------------------------------------- For the nine months ended September 30, 2001 the Company used $2,540,000 of cash in operating activities, used $256,000 in investing activities and generated $420,000 of cash from financing activities that produced a decrease in cash of $2,376,000 for the nine months. The net loss of $5,491,000 was partially offset by the non-cash items of depreciation and amortization and the issuance of common stock pursuant to a personal guarantee. Investing activities consisted of the purchase of equipment, which is primarily leasehold improvements in the establishment of the Company's sales and marketing branch office in Greece. Financing activities consisted primarily of the drawdown against the equity line and the exercise of warrants and stock options. As of September 30, 2001 the Company had a current asset to current liabilities ratio of 1.7 as compared to a ratio of 6.6 at December 31, 2000. The Condensed Consolidated Statements of Cash Flows, included in this report, detail the other sources and uses of cash and cash equivalents. In the second quarter of 2000, the Company entered into a common stock purchase agreement, escrow agreement and registration rights agreement with Techrich International Ltd. These agreements provide a $100,000,000 equity line of credit for use by the Company at its discretion. During the third and fourth quarters of 2000, the Company received $7,000,000 from the equity line in exchange for the issuance of 2,136,616 of common stock. In the third quarter of 2001, the Company received an additional $300,000 from the equity line in exchange for 258,968 shares of common stock. On September 28, 2001 the Company entered into a $10 million Securities Purchase Agreement with Crescent International Ltd., an institutional investor. Under the Securities Purchase Agreement, the Company issued a Convertible Note on October 2, 2001 for $2.5 million. Although the Company had the option to issue further convertible notes to Crescent subject to certain conditions precedent, such option expired on February 1, 2002 and no additional notes were issued. In addition, the Company issued warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share for a five-year term. The Securities Purchase Agreement further permits the Company to sell to Crescent up to $7.5 million in common stock of the Company over a 24-month period. Additionally, the Company agreed not to exercise any drawdowns against its existing common stock purchase agreement with Techrich International Ltd., which expired on January 28, 2002. The Securities Purchase Agreement permits the Company to sell to Crescent and requires Crescent to purchase from the Company, at the Company's sole discretion, common stock of the Company for up to $7.5 million over a 24-month period. Individual sales are limited to $1.5 million, or a higher amount if agreed to by the Company and Crescent, and each sale is subject to our satisfaction of the following conditions precedent (none of which are within the control of Crescent): (1) the Company's representations and warranties must be true and complete, (2) the Company must have one or more then currently effective registration statements covering the resale by Crescent of all shares issued in prior sales to Crescent and issuable upon the conversion of the Convertible Note, (3) there must be no dispute as to the adequacy of disclosures made in any such registration statement, (4) such registration statements must not be subject to any stop order, suspension or withdrawal, (5) the Company must have performed its covenants and obligations under the Securities Purchase Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or injunction may have been enacted, entered, promulgated or adopted by any court of governmental authority that would prohibit the Company's performance under the Securities Purchase Agreement, (7) the company's common stock must not have been delisted from its principal trading market and there must be no trading suspension of its common stock in effect, and (8) the issuance of the designated number of shares of common stock with respect to the applicable sale must not violate the shareholder approval requirements of the Company's principal trading market. The aggregate amount of all sale shares and convertible notes issued cannot exceed $10 million. The amount of the sale is limited to twice the average of the bid price multiplied by the trading volume during the 22 trading day period immediately preceding the date of sale. When the total amount of securities issued to Crescent equals or exceeds $5 million, then the Company shall issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000 shares of common stock at a price equal to the bid price on the date the incentive warrant is issued. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) ------------------------------------------- The Company expects to rely on the above financing arrangements in order to continue its development of products and to continue its ongoing operations in the short-term. The long-term cash needs of the Company will be dependent on the successful development of the Company's products and their success in the market place. At the current rate, the Company is not able to internally generate sufficient funds and will be required to rely on outside sources for continued funding, until such time as the Company's operations generate a profit and cash is generated from operations. The Company has historically issued and may continue, if the circumstances warrant, to issue common stock to vendors and suppliers in lieu of cash for products and services provided to the Company. The Company has incurred a net operating loss in each year since its founding and as of September 30, 2001 has an accumulated deficit of approximately $51,893,000. 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. 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. 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 Management's Discussion and Analysis and other sections of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. These statements reflect management's expectations, estimates and assumptions, based on information available at the time the document was prepared. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause the Company's actual results to be materially different 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 2000 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. 15 .. 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. None --------- Item 6(b). Reports on Form 8-K. -------------------- On July 16, 2001, the Company filed Form 8-K to report the acquisition of substantially all of the assets of Suncoast Automation, Inc., a wholly owned subsidiary of ProtoSource Corporation, pursuant to an Asset Purchase Agreement by and among the Company, its subsidiaries, ProtoSource Corporation and Suncoast Automation, Inc. The purchase price was 766,058 shares of the Company's $0.001 par value common stock and valued at $1.1 million based on the closing bid price of the Company's shares of $1.47 per share on June 29, 2001. On September 13, 2001 the Company filed with the Securities and Exchange Commission a Form S-3 registration statement relating to these shares. On September 27, 2001 the Securities and Exchange Commission declared the registration statement effective. On October 12, 2001, the Company filed Form 8-K to report the Securities Purchase Agreement in the amount of $10 million by and between the Company and Crescent International Ltd., an investment company managed by GreenLight (Switzerland) SA. The initial funding consisted of a $2.5 million Convertible Note with the option to issue further Convertible Notes. In addition, the Company is required to issue warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share for a five-year term. The Stock Purchase Agreement further permits Crescent to purchase up to $7.5 million in common stock of the Company over a 24-month period. The Company is obligated to register with the Securities and Exchange Commission 4,000,000 shares of common stock issuable to Crescent pursuant to the Stock Purchase Agreement. 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: April 14, 2002 By: /s/ Andrew J. Kandalepas --------------------------------- Andrew J. Kandalepas Chief Executive Officer Date: April 14, 2002 By: /s/ Harry L. Lukens, Jr. --------------------------------- Harry L. Lukens, Jr. Chief Financial Officer 16