-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NyITCvUGyAMxf980q3BruZvkjUsDXNNrUyiRt/6meloOuWXor5gPKBOD5seEsALs hcXxOdld0DPyCJwIIDQ/oQ== 0000950131-02-002058.txt : 20020515 0000950131-02-002058.hdr.sgml : 20020515 20020515162528 ACCESSION NUMBER: 0000950131-02-002058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAUPHIN TECHNOLOGY INC CENTRAL INDEX KEY: 0000832489 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 870455038 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-21537-D FILM NUMBER: 02652843 BUSINESS ADDRESS: STREET 1: 800 E NORTHWEST STREET 2: STE 950 CITY: PALATINE STATE: IL ZIP: 60067 BUSINESS PHONE: 8473584406 MAIL ADDRESS: STREET 1: 800 E NORTHWEST HIGHWAY SUITE 950 CITY: PALATINE STATE: IL ZIP: 60067 FORMER COMPANY: FORMER CONFORMED NAME: SUCCESSO INC DATE OF NAME CHANGE: 19910410 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - ---------- EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - --------- EXCHANGE ACT OF 1934. For the transition period from ____________ to ____________. Commission File No. 33-21537-D DAUPHIN TECHNOLOGY, INC. (Exact name of registrant as specified in charter) Illinois 87-0455038 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60067 (Address of principal executive offices) (Zip Code) (847) 358-4406 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 14, 2002, 65,050,646 shares of the registrant's common stock, $.001 par value, was issued and outstanding. 1 DAUPHIN TECHNOLOGY, INC. Table of Contents ----------------- Page PART I FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2002 and December 31, 2001 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2002 and 2001 4 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Year Ended December 31, 2001 and Three Months Ended March 31, 2002 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2002 and 2001 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II OTHER INFORMATION 14 Item 1. Legal Proceedings Item 2. Changes in the Rights of the Company's Security Holders Item 3. Default by the Company on its Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6(a). Exhibits Item 6(b). Reports on Form 8-K SIGNATURE 14 2 Dauphin Technology, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2002 and December 31, 2001 (Unaudited) - --------------------------------------------------------------------------------
March 31, 2002 December 31, 2001 -------------- ----------------- CURRENT ASSETS: Cash $ 236,383 $ 725,364 Accounts receivable- Trade, net of allowance for bad debt of $50,621 at March 31, 2002 and December 31, 2001 36,650 67,201 Employee receivables 3,248 3,248 Inventory, net of reserve for obsolescence of $2,981,623 at March 31, 2002 and December 31, 2001 303,151 518,452 Prepaid expenses 56,759 37,883 ------------ ------------ Total current assets 636,191 1,352,148 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $565,494 at March 31, 2002 and $475,899 at December 31, 2001 2,050,147 1,824,935 ESCROW DEPOSIT 76,220 368,181 ASSETS NOT USED IN BUSINESS 75,017 75,017 INSTALLATION CONTRACTS, net of accumulated amortization of $34,286 and $22,857 at March 31, 2002 and December 31, 2001, respectively 285,714 297,143 ------------ ------------ Total assets $ 3,123,289 $ 3,917,424 ============ ============ CURRENT LIABILITIES: Accounts payable $ 588,421 $ 477,716 Accrued expenses 71,121 103,792 Short-term borrowings 100,000 - Current portion of long-term debt 81,055 82,507 Customer Deposits 7,741 7,741 ------------ ------------ Total current liabilities 848,338 671,756 LONG-TERM DEBT 37,630 43,580 CONVERTIBLE DEBENTURES 1,383,666 1,153,197 MORTGAGE NOTE PAYABLE 250,000 - ------------ ------------ Total liabilities 2,519,634 1,868,533 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value, 10,000,000 shares authorized but unissued - - Common stock, $0.001 par value, 100,000,000 shares authorized; 65,050,646 and 64,059,813 issued and outstanding at March 31, 2002 and at December 31, 2001, respectively 65,051 64,061 Warrants 3,989,394 4,227,499 Paid-in capital 58,075,353 57,351,406 Accumulated deficit (61,526,143) (59,594,075) ------------ ------------ Total shareholders' equity 603,655 2,048,891 ------------ ------------ Total liabilities and shareholders' equity $ 3,123,289 $ 3,917,424 ============ ============
3 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 2002 and 2001 (Unaudited)
Three Months Ended March 31, ------------------------------ 2002 2001 ------------ ------------- NET SALES $ 93,094 $ 4,566 DESIGN SERVICE REVENUE 59,375 440,588 ------------ ------------- TOTAL REVENUE 152,469 445,154 COST OF SALES 55,916 2,222 COST OF SERVICES 448,493 326,363 ------------ ------------- Gross (loss) profit (351,940) 116,569 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,110,915 475,984 RESEARCH AND DEVELOPMENT EXPENSE 240,533 462,522 AMORTIZATION OF GOODWILL - 275,000 ------------ ------------- Loss from operations (1,703,388) (1,096,937) INTEREST EXPENSE 233,015 6,885 INTEREST INCOME 4,335 88,660 ------------ ------------- Loss before income taxes (1,932,068) (1,015,162) INCOME TAXES - - ------------ ------------- NET LOSS $(1,932,068) $ (1,015,162) =========== ============ BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.02) =========== ============ Weighted average number of shares of common stock outstanding 64,510,424 61,798,069
4 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Year ended December 31, 2001 and three months ended March 31, 2002 (Unaudited)
Common Stock Treasury Stock ------------------- Paid-in -------------- Accumulated Shares Amount Capital Warrants Shares Amount Deficit Total ---------- ------- ----------- ---------- ------ ------ ------------ ----------- BALANCE, December 31, 2000 61,652,069 $61,653 $53,479,116 $3,321,810 - $ - $(46,341,715) $10,520,864 Issuance of common stock in connection with: Stock purchase agreement 258,968 259 280,640 19,101 - - - 300,000 Beneficial conversion feature and warrants - - 914,279 684,600 - - - 1,598,879 Stock Options exercised 35,600 36 28,528 - - - - 28,564 Warrants exercised 285,000 285 242,025 (71,236) - - - 171,074 Acquisition of business 766,058 766 1,125,339 - - - - 1,126,105 Personal guarantee 1,032,118 1,032 1,240,709 - - - - 1,241,741 Vendor payments 30,000 30 40,770 273,224 - - - 314,024 Net loss - - - - - - (13,252,360) (13,252,360) ---------- ------- ----------- ---------- ------ ------ ------------ ----------- BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499 - - (59,594,075) 2,048,891 Issuance of common stock in connection with: Stock Options exercised 57,500 57 49,557 - - - - 49,614 Warrants exercised 933,333 933 674,390 (265,323) - - - 410,000 Consulting fees - - - 27,218 - - - 27,218 Net loss - - - - - - (1,932,068) (1,932,068) ---------- ------- ----------- ---------- ------ ------ ------------ ----------- BALANCE, March 31, 2002 65,050,646 $65,051 $58,075,353 $3,989,394 - $ - $(61,526,143) $ 603,655 ========== ======= =========== ========== ====== ====== ============ ===========
5 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2002 and 2001 (Unaudited) - --------------------------------------------------------------------------------
2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES - Net loss $ (1,932,068) $ (1,015,162) Non-cash items included in net loss: Depreciation and amortization 101,024 98,645 Amortization of goodwill - 275,000 Interest expense on convertible note 230,469 - Warrants issued in lieu of consulting fees 27,218 - Decrease (increase) in accounts receivable - trade 30,551 (23,348) Decrease in accounts receivable from employees - 3,342 Increase in inventory - (23,311) Increase in prepaid expenses (18,876) (100,920) Decrease in escrow deposits 291,961 46,336 Increase (decrease) in accounts payable 110,705 (65,084) Decrease in accrued expenses (32,671) (5,345) Increase in customer deposits - 344 ------------ ------------ Net cash used in operating activities (1,191,687) (809,503) CASH FLOWS FROM INVESTING ACTIVITIES - Purchase of equipment (99,506) (26,613) ------------ ------------ Net cash used in investing activities (99,506) (26,613) CASH FLOWS FROM FINANCING ACTIVITIES - Proceeds from issuance of shares 49,614 104,300 Proceeds from issuance of warrants 410,000 - Repayment of long-term leases and other obligations (7,402) (21,842) Increase in mortgage note payables 250,000 - Increase in short-term borrowing 100,000 - ------------ ------------ Net cash provided by financing activities 802,212 82,458 ------------ ------------ Net (decrease) increase in cash (488,981) (753,658) CASH BEGINNING OF PERIOD 725,364 2,683,480 ------------ ------------ CASH END OF PERIOD $ 236,383 $ 1,929,822 ============ ============ CASH PAID DURING THE PERIOD FOR - Interest $ 2,546 $ 6,885
6 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries design and market mobile hand-held, pen-based computers, broadband set-top boxes; provide interactive cable systems to the extended stay hospitality industry; and perform design services, specializing in hardware and software development, out of its three locations in northern Illinois, one in central Florida and its branch office in Piraeus, Greece. The Company, an Illinois corporation, was formed on June 6, 1988 and became a public entity in 1991. Basis of Presentation The consolidated financial statements include the accounts of Dauphin and its wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All significant intercompany transactions and balances have been eliminated in consolidation. 2. SUMMARY OF MAJOR ACCOUNTING POLICIES Earnings (Loss) Per Common Share Basic earnings per common share are calculated on income available to common stockholders divided by the weighted-average number of shares outstanding during the period, which were 64,510,424 for the three-month period March 31, 2002 and 61,798,069 for the three-month period March 31, 2001. Diluted loss per common share is adjusted for the assumed conversion exercise of stock options and warrants unless such adjustment would have an anti-dilutive effect. Approximately 12.5 million additional shares would be outstanding if all warrants and all stock options were exercised as of March 31, 2002. Unaudited Financial Statements The accompanying statements are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of results have been included. The interim financial statements contained herein do not include all of the footnotes and other information required by accounting principles generally accepted in the United States of America for complete financial statements as provided at year-end. For further information, refer to the consolidated financial statements and footnotes thereto included in the registrant's annual report on Form 10-K for the year ended December 31, 2001. The reader is reminded that the results of operations for the interim period are not necessarily indicative of the results for the complete year. Use of Estimates The presentation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 7 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 3. RISKS AND UNCERTAINTIES The Company has incurred a net operating loss in each year since its founding and as of March 31, 2002 has an accumulated deficit of $61,526,143. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to design and develop and market commercially acceptable products including its set-top box. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the company as a going concern. However, the company has sustained substantial losses from operations in recent years, and such losses have continued through the unaudited quarter ended March 31, 2002. Revenues from the Company's design services have declined. In addition, the company has used, rather than provided, cash in its operations. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the company's ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence. Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in existence: The Company has concentrated its efforts on marketing its set-top boxes, halted all further development of the next generation Orasis and are exploring alternative mobile hand-held computer products through original equipment manufacturers. In January 2002 the management of the Company began terminating employees who were not a critical part of the marketing efforts. The facilities in McHenry, which housed the RMS operations, has been closed, the majority of the personnel have been terminated and the remaining inventory and equipment will be auctioned in the second quarter of 2002. 8 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 4. BUSINESS SEGMENTS ----------------- The Company has two reportable segments: Dauphin Technology, Inc. and RMS (Dauphin) and Advanced Digital Designs, Inc. (ADD). Dauphin is involved in design, manufacturing and distribution of hand-held pen-based computer systems and accessories and smartbox set-top boxes. ADD performs design services, process methodology consulting and intellectual property development.
March 31, 2002 March 31, 2001 -------------- -------------- Revenue Dauphin $ 15,132 $ 4,566 ADD 268,750 638,275 Suncoast 77,962 - Inter-company elimination (209,375) (197,687) ------------ ----------- Total $ 152,469 $ 445,154 ============ ============ Operating (Loss) Dauphin $ (1,117,988) $ (1,037,747) ADD (288,667) (59,190) Suncoast (296,733) - Inter-company elimination - - ------------ ------------ Total $ (1,703,388) $ (1,096,937) ============ ============ March 31, 2002 December 31, 2001 -------------- ----------------- Assets Dauphin $ 18,039,736 $ 17,461,145 ADD 2,678,197 2,699,250 Suncoast 1,747,311 1,702,791 Inter-company elimination (19,341,955) (17,945,762) ------------ ------------ Total $ 3,123,289 $ 3,917,424 ============ ============
5. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company is an operating entity and in the normal course of business, from time to time, may be involved in litigation. In management's opinion, any current or pending litigation is not material to the overall financial position of the Company. 6. CONVERTIBLE DEBT AND WARRANTS ----------------------------- In connection with a Securities Purchase Agreement entered into with Crescent International Ltd., an institutional investor, on September 28, 2001, a Convertible Note was funded on October 2, 2001 and is due September 28, 2004. The Company shall not be required to pay interest on the Convertible Note unless the Company fails to deliver shares upon conversion. In such event, the Note will bear an interest rate of 8.0% per annum, payable in quarterly installments. The Company has recorded a beneficial conversion feature on the Convertible Note and Warrants based on the fair value of the common stock of $0.99 per share as of the date of commitment. The Warrants with an exercise price of $1.3064 per share, are valued using the Black-Scholes valuation method, and are recorded at $684,600. The beneficial conversion feature is calculated to be $914,279 and has been recorded as Additional Paid in Capital and a discount to the Convertible Note. The beneficial conversion feature is being amortized over three years, the life of the Note. For the three month period ended March 31, 2002, the Company recognized $230,469 as interest expense on the amortization of the beneficial conversion feature. At conversion, the Company may record an additional beneficial conversion based on the market price of the stock at the conversion date. 9 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 7. MORTGAGE NOTE PAYABLE --------------------- On March 28, 2002, the Company entered into a one-year mortgage note payable with a current shareholder, Clifford F. Klose and Marjorie J. Klose Trust. The interest rate is Prime plus 7.25%. The current interest rate is 12% per annum. Interest is payable on a monthly basis. The Company's building in Schaumburg, Illinois serves as collateral for the mortgage. 8. EQUITY TRANSACTIONS ------------------- 2002 Events During the first quarter of 2002, the Company received proceeds in the amount of $410,000 for the exercise of 933,333 warrants. Additionally, employees exercised 57,500 stock options at prices ranging from $0.50 to $0.89 per share. In March 2002, the Company re-priced approximately 1,023,000 warrants it had previously issued to outside consultants. The warrants were originally issued with an exercise price ranging from $2.00 to $5.00, and were re-priced with an exercise price of $0.60 per share. The re-pricing created a charge to earnings of approximately $27,218, which was calculated using the Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate of 5%, volatility factor of 443% and an expected remaining life of 10 months. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, - ---------------------------------------------------------------------------- 2001 - ---- Revenues for the three months ended March 31, 2002 and 2001 were approximately $152,000 and $445,000, respectively. Net sales increased from $5,000 in 2001 to approximately $93,000 in 2002. Sales generated by the Company's interactive cable system subsidiary, Suncoast, accounted for approximately $78,000 of these revenues with the balance being parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues in the first quarter of 2002 were approximately $59,000 as compared to revenues of $441,000 in the first quarter of 2001. This reduction in design service revenue is a continuation of the decline in engineering projects available in the marketplace which the Company began experiencing in the fourth quarter of 2001. Cost of sales represents costs associated with the Suncoast operations for 2002, whereas cost of sales in 2001 related to the costs of parts and accessories. Cost of services increased form $326,000 in 2001 to $448,000 in 2002. The increase is a result of the termination and severance benefits paid to the engineering staff which was reduced during the first quarter of 2002. Because of these additional expenses, gross profit margins were negatively affected and generated a gross loss of $352,000 for the first quarter of 2002. Selling, general and administrative expenses increased to approximately $1,111,000 in 2002 from $476,000 in 2001. The increase of approximately $635,000 is primarily due to the selling, general and administrative expenses of Suncoast and the Company's branch office in Piraeus, Greece which are included in the first quarter of 2002 and not in 2001. These amounted to approximately $319,00 and $238,000, respectively. We acquired the net assets of Suncoast in July 2001 and opened the branch office in August 2001. In addition, approximately $130,000 of additional administrative costs were incurred at the Company's McHenry, Illinois location related to closing the facility. These costs were offset by a reduction of $52,000 in sales and marketing expenses, primarily advertising. Research and Development expenses decreased to approximately $241,000 during the first quarter ended March 31, 2002 from $463,000 for the corresponding period in 2001. The set-top box design was substantially completed in the fourth quarter of 2001 which is reflected in the decrease in Research and Development expenses. In 2002, approximately 66% of Research and Development costs consisted of costs related to the development of the set-top box, with 34% related to further development of the Orasis(R). In 2001, the majority of Research and Development was costs were for the set-top box. Interest expense increased to approximately $233,000 for the first quarter of 2002 from $7,000 for the first quarter of 2001. Included in interest expense in the first quarter of 2002 is three months amortization of the debt discount associated with the Convertible Note, amounting to $231,000. The remaining interest is related to capital equipment leases, mortgage note and other borrowings. Interest expense in the first quarter of 2001 related to capital equipment leases and short term borrowings. Interest income declined from $89,000 in 2001 to $4,000 in 2002 due to the reduction of short-term funds held on deposit. Net loss The consolidated loss after tax increased for the first quarter ended March 31, 2002 to approximately ($1,932,000) or ($0.03) per share from ($1,015,000) or ($0.02) per share in 2001. The loss for 2002 was primarily attributed to the decrease in revenues from design services, the increase in cost of services related to the termination of the hardware design engineering staff, the increase in selling, general and administrative costs generated by Suncoast and the branch office and the increase in interest expense. The loss for 2001 was primarily attributed to the amortization of goodwill associated with the acquisition of Advanced Digital Designs, Inc., research and development costs regarding the set-top box and general administrative expenses. Loss per common share is calculated based on the monthly weighted average number of common shares outstanding, which were 64,510,424 for the three-month period ended March 31, 2002, and 61,798,069 for the three-month period ended March 31, 2001. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) --------------------------------- Balance Sheet Total assets for the Company at March 31, 2002 were approximately $3,123,000, a decrease of approximately $800,000 from December 31, 2001. The decrease was primarily attributable to the net cash used in operations of approximately $1,192,000, the purchase of equipment of $100,000, offset by the proceeds from the exercise of stock warrants and stock options of $460,000 and the increase in borrowings of $350,000. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has incurred a net operating loss in each year since its founding and as of March 31, 2002 has an accumulated deficit of approximately $61,526,000. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to manufacture and market commercially acceptable products including its set-top box. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. For the three months ended March 31, 2002, the Company used $1,192,000 of cash in operating activities, used $100,000 in investing activities and generated $802,000 of cash from financing activities that produced a decrease in cash of $489,000 for the three months. The net loss of $1,932,000 was partially offset by the non-cash items of depreciation and amortization and amortization of the debt discount associated with the Convertible Note. Investing activities consisted of the purchase of equipment for installations associated with the interactive cable systems. Financing activities consisted of the exercise of warrants and the increase in mortgage note payable and short-term borrowings. As of March 31, 2002, the Company had current liabilities in excess of current assets, whereas at December 31, 2001, the Company had a current asset to current liabilities ratio of 2.0. The Condensed Consolidated Statements of Cash Flows, included in this report, detail the other sources and uses of cash and cash equivalents. On September 28, 2001 the Company entered into a $10 million Securities Purchase Agreement with Crescent International Ltd., ("Crescent") an institutional investor. Under the Securities Purchase Agreement, the Company issued a Convertible Note for $2.5 million. Although the Company had the option to issue further convertible notes to Crescent subject to certain conditions precedent, such option expired on February 1, 2002 and no additional notes were issued. In addition, the Company issued warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share for a five-year term. The Stock Purchase Agreement further permits the Company to sell to Crescent up to $7.5 million in common stock of the Company over a 24-month period. Additionally, the Company agreed not to exercise any drawdowns against its existing common stock purchase agreement with Techrich International Ltd. ("Techrich"), which expired on January 28, 2002. The Securities Purchase Agreement permits the Company to sell to Crescent and requires Crescent to purchase from the Company, at the Company's sole discretion, common stock of the Company for up to $7.5 million over a 24-month period. Individual sales are limited to $1.5 million, or a higher amount if agreed to by the Company and Crescent, and each sale is subject to our satisfaction of the following conditions precedent (none of which are within the control of Crescent): (1) the Company's representations and warranties must be true and complete, (2) the Company must have one or more currently effective registration statements covering the resale by Crescent of all shares issued in prior sales to Crescent and issuable upon the conversion of the Convertible Note, (3) there must be no dispute as to the adequacy of disclosures made in any such registration statement, (4) such registration statements must not be subject to any stop order, suspension or withdrawal, (5) the Company must have performed its covenants and obligations under the Securities Purchase Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or injunction may have been enacted, entered, promulgated or adopted by any court of governmental authority that would prohibit the Company's performance under the Securities Purchase Agreement, (7) the company's common stock must not have been delisted from its principal trading market and there must be no trading suspension of its common stock in effect, and (8) the issuance of the designated number of shares of common stock with respect to the applicable sale must not violate the shareholder approval requirements of the 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) ------------------------------------------- Company's principal trading market. The aggregate amount of all sale shares and convertible notes issued cannot exceed $10 million. The amount of the sale is limited to twice the average of the bid price multiplied by the trading volume during the 22 trading day period immediately preceding the date of sale. When the total amount of securities issued to Crescent equals or exceeds $5 million, the Company shall issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000 shares of common stock at a price equal to the bid price on the date the incentive warrant is issued. The Company elected to pursue the above financing arrangements with Crescent International because the Company's previous financing arrangements with Techrich contained certain limitations as it related to the market price of our common stock, the average volume of shares traded on a daily basis and other such factors which would not generate the greatest benefit to the Company's shareholders. In addition, the financing arrangement with Techrich expired at the end of January 2002. Because of the changes in circumstances and the current economic conditions of the Company, management decided to explore alternative financing arrangements. Several alternatives were reviewed, including private placement transactions, various long-term debt arrangements with different investment bankers and other equity line arrangements similar to the one with Techrich. Management felt that the arrangement with Crescent was the best alternative and was in the best interest of the Company and its shareholders. The Company expects to rely on the above financing arrangements in order to continue its development of products and to continue its ongoing operations in the short-term. The long-term cash needs of the Company will be dependent on the successful development of the Company's products and their success in the market place. At the current rate, the Company is not able to internally generate sufficient funds for operations and will be required to rely on outside sources for continued funding until such time as the Company's operations generate a profit and cash is generated from operations. The Company has historically issued and may continue, if the circumstances warrant, to issue common stock to vendors and suppliers in lieu of cash for products and services provided to the Company. RISK FACTORS ------------ We operate in a highly competitive and volatile industry. We are faced with aggressive pricing by competitors; competition for necessary parts, components and supplies; continually changing customer demands and rapid technological developments; and risks that buyers may encounter difficulties in obtaining governmental licenses or approvals, or in completing installation and construction of infrastructure, necessary to use our products or to offer them to end users. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those set forth herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein, as well as those discussed in the Company's fiscal year 2001 Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 13 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings None ----------------- 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. None -------------------- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAUPHIN TECHNOLOGY, INC. (Registrant) Date: May 14, 2002 By: /s/ Andrew J. Kandalepas --------------------------------------- Andrew J. Kandalepas Chief Executive Officer Date: May 14, 2002 By: /s/ Harry L. Lukens, Jr. --------------------------------------- Harry L. Lukens, Jr. Chief Financial Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----