10-Q 1 c58585e10-q.txt QUARTERLY REPORT 1 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, 2000 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 November 9, 2000, 62,129,768 shares of the registrant's common stock, $.001 par value, was issued and outstanding. 2 DAUPHIN TECHNOLOGY, INC. Table of Contents Page PART I FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2000 and December 31, 1999 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months and Three Months Ended September 30, 2000 and 1999 4 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Year Ended December 31, 1999 and Nine Months Ended September 30, 2000 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 and 1999 6 NOTES TO 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 3 DAUPHIN TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (Unaudited) --------------------------------------------------------------------------------
September 30, 2000 December 31, 1999 ------------------ ----------------- CURRENT ASSETS: Cash $ 2,260,913 $ 31,087 Accounts receivable- Trade, net of allowance for bad debt of $428,599 at September 30, 2000 and December 31, 1999 462,501 124,844 Employee receivables 678 118 Inventory, net of reserve for obsolescence of $1,945,296 at September 30, 2000 and December 31, 1999 1,807,949 1,521,886 Prepaid expenses 34,151 38,779 ------------ ------------ Total current assets 4,566,192 1,716,714 INVESTMENT IN RELATED PARTY 290,000 290,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,017,040 at September 30, 2000 and $712,192 at December 31, 1999 1,587,787 1,365,440 GOODWILL, net of accumulated amortization of $137,500 at September 30, 2000 5,362,500 - ------------ ------------ Total assets $ 11,806,479 $ 3,372,154 ============ ============ CURRENT LIABILITIES: Accounts payable $ 325,171 $ 1,894,663 Accrued expenses 73,743 26,719 Current portion of long-term debt 104,031 127,249 Customer Deposits 49,644 - Short-term borrowings - 286,000 Other payables - 300,000 ------------ ------------ Total current liabilities 552,589 2,634,631 LONG-TERM DEBT 148,862 185,179 COMMITMENTS AND CONTINGENCIES - - ------------ ------------ Total liabilities 701,451 2,819,810 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; 60,140,454 and 51,671,582 issued and outstanding at September 30, 2000 and at December 31, 1999 60,141 51,671 Warrants 3,045,447 1,238,089 Pain-in capital 53,627,372 38,089,320 Accumulated deficit (45,627,932) (38,826,736) ------------ ------------ Total shareholders' equity 11,105,028 552,334 ------------ ------------ Total liabilities and shareholders' equity $ 11,806,479 $ 3,372,154 ============ ============
3 4 DAUPHIN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited) ------------------------------------------------------------------------------
Nine Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- NET REVENUE $ 361,016 $ 2,185,623 $ 344,975 $ 157,680 COST OF REVENUE 440,639 4,657,302 317,228 2,105,016 ------------- ------------- ------------- ------------- Gross Profit (Loss) (79,623) (2,471,679) 27,747 (1,947,336) SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 4,474,963 3,172,411 2,654,914 1,532,179 RESEARCH AND DEVELOPMENT EXPENSE 473,113 454,918 222,255 18,889 ------------- ------------- ------------- ------------- Loss from Operations (5,027,699) (6,099,008) (2,849,422) (3,498,404) INTEREST EXPENSE 1,826,522 1,975,573 9,381 92,702 INTEREST INCOME 53,025 18,210 39,215 6,628 ------------- ------------- ------------- ------------- Loss before Income Taxes (6,801,196) (8,056,371) (2,819,588) (3,584,478) INCOME TAXES - - - - ------------- ------------- ------------- ------------- NET LOSS $ (6,801,196) $ (8,056,371) $ (2,819,588) $ (3,584,478) ============= ============= ============= ============= BASIC AND DILUTED LOSS PER SHARE $ (0.12) $ (0.18) $ (0.05) $ (0.07) ============= ============= ============= ============= Weighted Average number of Common Shares outstanding 57,725,768 44,823,498 59,166,582 48,419,719 ============= ============= ============= =============
4 5 DAUPHIN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) YEAR ENDED DECEMBER 31, AND NINE MONTHS ENDED SEPTEMBER 30, 2000 (Unaudited)
Common Stock ------------ Paid-in Shares Amount Capital Warrants ------ ------ ------- -------- BALANCE, December 31, 1998 40,000,000 $ 40,000 $ 32,343,785 $ 55,181 Issuance of common stock in connection with: Conversions of debt 4,985,358 4,985 3,842,235 287,700 Private placement 6,003,529 6,004 1,481,167 895,208 Settlement of trade payables 656,322 656 395,243 - Stock bonuses paid 26,373 26 26,890 - Net loss - - - - ------------ ------------ ------------ ------------ BALANCE, December 31, 1999 51,671,582 51,671 38,089,320 1,238,089 Issuance of common stock in connection with: Private placement 4,654,653 4,655 8,599,578 419,556 Stock purchase agreement 1,354,617 1,355 4,998,645 1,061,176 Warrant exercise 1,479,602 1,480 1,257,687 (461,041) Consulting fees 500,000 500 312,000 787,667 Employee stock compensation - - 70,622 - Settlement of trade payables 480,000 480 299,520 - Net loss - - - - ------------ ------------ ------------ ------------ BALANCE, September 30, 2000 60,140,454 $ 60,141 $ 53,627,372 $ 3,045,447 ============ ============ ============ ============ Treasury Stock -------- ----- Accumulated Shares Amount Deficit Total ------ ------ ------- ----- BALANCE, December 31, 1998 (138,182) $ (33,306) $(29,520,432) $ 2,885,228 Issuance of common stock in connection with: Conversions of debt 101,673 24,402 - 4,159,322 Private placement 14,963 3,591 - 2,385,970 Settlement of trade payables 1,546 371 - 396,270 Stock bonuses paid 20,000 4,942 - 31,858 Net loss - - (9,306,304) (9,306,304) ------------ ------------ ------------ ------------ BALANCE, December 31, 1999 - - (38,826,736) 552,344 Issuance of common stock in connection with: Private placement - - - 9,023,789 Stock purchase agreement - - - 6,061,176 Warrant exercise - - - 798,126 Consulting fees - - - 1,100,167 Employee stock compensation - - - 70,622 Settlement of trade payables - - - 300,000 Net loss - - (6,801,196) (6,801,196) ------------ ------------ ------------ ------------ BALANCE, September 30, 2000 - $ - $(45,627,932) $ 11,105,028 ============ ============ ============ ============
5 6 DAUPHIN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited) ------------------------------------------------------------------------------
2000 1999 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES - Net loss $ (6,801,196) $ (8,056,372) Non-cash items included in net loss: Depreciation and amortization 304,848 1,225,564 Amortization of goodwill 137,500 - Inventory reserve - 1,793,296 Warrants issued in lieu of consulting fees 2,161,341 - Employee stock compensation 70,622 - Stock bonuses - 31,858 Interest expense on convertible debt - 1,940,458 Interest expense on capital raised 1,762,939 - Settlement of trade payables (431,776) - (Increase) decrease in accounts receivable - trade (338,217) 163,439 (Increase) decrease in accounts receivable from employees (560) 45,987 (Increase) in inventory (286,063) (360,794) Increase (decrease) in prepaid expenses 4,628 (16,426) Increase in deferred financing cost - (315,439) (Decrease) in accounts payable (1,144,124) (151,325) Increase (decrease) in accrued expenses 47,024 (37,769) Increase in customer deposits 49,644 - Increase in other payables - 300,000 ------------ ------------ Net cash used in operating activities (4,462,830) (3,437,523) CASH FLOWS FROM INVESTING ACTIVITIES - Investment in related party - 10,000 Acquisition of business (6,025,000) - Purchase of equipment (2,195) (10,547) ------------ ------------ Net cash used in investing activities (6,027,195) (547) CASH FLOWS FROM FINANCING ACTIVITIES - Proceeds from issuance of shares 12,200,671 2,062,224 Proceeds from issuance of warrants 858,307 1,134,221 Repayment of long-term leases and other obligations (53,127) (94,585) (Decrease) increase in short term borrowing (286,000) 366,375 ------------ ------------ Net cash provided by financing activities 12,719,851 3,468,236 ------------ ------------ Net increase in cash 2,229,826 30,166 CASH BEGINNING OF PERIOD 31,087 55,701 ------------ ------------ CASH END OF PERIOD $ 2,260,913 $ 85,867 ============ ============ Cash Paid During The Period For - Interest $ 54,202 $ 90,064 Income Taxes - - ============ ============ NON-CASH ACTIVITY: Common stock issued in connection with: Conversion of debentures $ 300,000 $ 3,871,622 Settlement of trade payables - 326,270
6 7 DAUPHIN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiaries designs, manufactures and markets mobile hand-held, pen-based computers, as well as other electronic devices for home and business use and performs design services, process methodology consulting and intellectual property development, out of its three locations in northern Illinois. The Company, an Illinois corporation, was formed on June 6, 1988 and became a public entity in 1991. Basis of Presentation The consolidated financial statements include the accounts of Dauphin and its wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), and Advanced Digital Designs, Inc ("ADD"). All significant 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 57,725,768 for the nine-month period September 30, 2000 and 44,823,498 for the nine-month period September 30, 1999. 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 11 million additional shares would be outstanding if all warrants and all stock options were exercised as of September 30, 2000. 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, 1999. 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. 3. RISKS AND UNCERTAINTIES The Company has incurred a net operating loss in each year since it's founding and as of September 30, 2000 has an accumulated deficit of $45,627,932. 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 7 8 DAUPHIN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) manufacture and market commercially acceptable products. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. 4. LIABILITIES During the first and second quarter of 2000, the Company used the proceeds from a private placement to pay down and settle approximately $1,700,000 of trade and other payables outstanding as of December 31, 1999 with $1,300,000 of cash. The difference between the carrying value of payables at the end of the year and cash settlement has been recorded as an adjustment to cost of goods sold and selling, general and administrative expenses on the income statement above. 5. BUSINESS SEGMENTS The Company has three reportable segments: Dauphin Technology, Inc. (Dauphin), R.M. Schultz & Associates, Inc, (RMS) 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. RMS was an electronic contract-manufacturing firm. ADD performs design services, process methodology consulting and intellectual property development. During the third quarter of 1999, the Company decided to discontinue its contract-manufacturing business. September 30, 2000 September 30, 1999 ------------------ ------------------ REVENUE Dauphin $ 33,952 $ 267,036 RMS - 2,039,828 ADD 327,064 - Inter-company elimination - (121,241) Total $ 361,016 $ 2,185,623 =========== =========== OPERATING (LOSS) Dauphin $(5,054,744) $(2,346,580) RMS - (3,757,428) ADD 27,045 - Inter-company elimination - (5,000) ----------- ------------ Total $(5,027,699) $ (6,099,008) =========== ============ September 30, 2000 December 31, 1999 ------------------ ----------------- ASSETS Dauphin $16,718,022 $ 6,443,079 RMS 1,961,468 2,156,937 ADD 5,900,329 - - Inter-company elimination (12,963,096) (5,227,862) ----------- ------------ Total $11,616,723 $ 3,372,154 =========== ============ 6. COMMITMENTS AND CONTINGENCIES The Company is an operating entity and in the normal course of business, from time to time, is involved in litigation. In management's opinion, any and all known lawsuits, if settled unfavorably, would not be material to the overall financial position of the Company. 8 9 DAUPHIN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) 7. EQUITY TRANSACTIONS 2000 Events During the first and second quarter of 2000, the Company conducted a private placement of 4,654,653 common shares and approximately 1,300,000 warrants to a group of accredited investors in exchange for approximately $8,600,000. The proceeds were used to settle the majority of trade payables, for day-to-day operations and to start the development of the set-top box. In January, the Company issued 480,000 shares to a customer in exchange for $300,000 of customer deposits. In January 2000, the Company issued warrants to an investment banker to purchase 350,000 shares at an exercise price of $1.00. In January, the Company issued 500,000 shares to a consulting firm for services rendered in relation to a European contract. In April, the Company completed its private placement and issued 3,630,000 options to an investment banker in lieu of consulting fees. On April 26, 2000, the Company completed a common stock purchase agreement, escrow agreement and registration rights agreement with an institutional investor. These agreements provide a $100,000,000 equity line of credit as the Company requests over an 18 month period, in return for common stock and warrants to be issued to the investor. Once every 22 days, the Company may request a draw of up to $10,000,000 of that money, subject to a maximum of 18 draws. The maximum amount the Company actually can draw down upon each request will be determined by the volume-weighted average daily price of the Company's common stock for the 22 trading days prior to its request and the average trading volume for the 45 trading days prior to the request. Each draw down must be for at least $250,000. Use of a 22 day trading average was negotiated to reduce the impact of market price fluctuations over any calendar month, which generally includes 22 trading days. At the end of a 22-day trading period following the drawdown request, the amount of shares is determined based on the volume-weighted average stock price during that 22-day period in accordance with the formulas in the common stock purchase agreement. On April 28, 2000, the Company filed with the Securities and Exchange Commission a Form S-1 registration statement relating to 15,332,560 shares of common stock issued to stockholders in private transactions, 11,958,963 shares for other stockholders, and 6,000,000 shares to be issued when the Company requests a drawdown under the common stock purchase agreement referred to above. On July 28, 2000, the Securities and Exchange Commission declared the registration statement effective. Pursuant to the common stock purchase agreement, the Company issued as a placement fee warrants to purchase 250,000 shares of common stock at an exercise price of $5.481. On July 31, 2000, the Company issued a drawdown notice in connection with the common stock purchase agreement for $5,000,000. Upon receipt of the funds, the Company issued 1,354,617 shares of common stock and warrants to purchase 101,463 shares of common stock at exercise prices ranging from $4.06 to $4.22. In September, the Company issued 73,750 stock options to certain employees under employment agreements. At the time of issuance, the option price was below the market price and the Company recorded $70,622 as additional compensation expense. 9 10 DAUPHIN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) Subsequent Event On October 20, 2000 the Company entered into an agreement with Best S.A. to act as its distributor/agent in Greece. On October 26, 2000 the Company issued 1,550,000 shares of restricted stock to Best S.A. as a performance bond to assure the Company's compliance with the Set-Top Box Agreement by and between the Company and Estel S.A. The agreement requires the Company to register these shares with the Securities and Exchange Commission during the fourth quarter 2000. To secure performance of the Company's obligation to register these shares, Andrew J. Kandalepas, Chairman of the Board and CEO of the Company, granted to Best S.A. a security interest in 1,032,118 shares of Company stock owned by him. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenues for the three months ended September 30, 2000 and 1999 were approximately $345,000 and $158,000, respectively. Revenues in the third quarter of 2000 were $327,000 of consulting fees from the Company's design engineering subsidiary and $34,000 from the sale of the Orasis(R) hand-held computer and accessories. Revenues in the third quarter of 1999 were comprised of $100,000 from the sale of the Orasis(R) and $58,000 in contract manufacturing. Cost of revenues decreased from $2,105,000 in the third quarter of 1999 to $317,000 for the three months ended September 30, 2000. Included in the cost of revenue for 1999 are charges related to the write down of inventory due to the decision of the Company to discontinue performing contract-manufacturing services. Gross profit margins are not comparable for the period due to the mix in revenues and the charges related to the discontinuance of contract manufacturing. Selling, general and administrative expenses increased to approximately $2,655,000 in 2000 from $1,532,000 in 1999. The increase from 1999 to 2000 was due to the expenses incurred in finalizing the common stock purchase agreement, the issuance of warrants as a placement fee and the fees associated with exercising the drawdown. Research and Development costs increased to approximately $222,000 during the three-month period ended September 30, 2000 from $19,000 over the corresponding period in 1999. Research and Development costs during 2000 were primarily related to the development of the set-top box, whereas costs incurred in 1999 were primarily related to the Orasis(R). Interest expense decreased to approximately $9,000 for the third quarter of 2000 from $93,000 as of the corresponding period in 1999. This decrease is primarily attributed to the fact that the Company has paid off substantially all of its debt during the first quarter of 2000. Net loss The consolidated loss after tax decreased for the three-month period ended September 30, 2000 to approximately ($2,820,000) or ($0.05) per share from ($3,584,000) or ($0.07) per share in 1999. The loss for 2000 was primarily attributed to the expenses associated with the common stock purchase agreement and the drawdown, whereas the loss for 1999 consisted primarily of the charges related to discontinuing the contract manufacturing business. Loss per common share is calculated based on the monthly weighted average number of common shares outstanding which were 59,166,582 for the three-month period ended September 30, 2000, and 48,419,719 for the three-month period ended September 30, 1999. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenue for the Company decreased from approximately $2,186,000 in the first nine months of 1999 to $361,000 in the first nine months of 2000. The revenue decreased as a result of the Company shifting away from contract manufacturing and focusing its efforts on the development of the set-top box. Gross profit margins are not comparable for the period due to the fluctuation in revenues. Selling, general and administrative expenses increased to approximately $4,475,000 for the nine months ended September 30, 2000 as compared to $3,172,000 for 1999. The increase in professional fees and financial service expenses related to the private placement, common stock purchase agreement and the costs associated with exercising the drawdown were partially offset by staff reductions and other cost cutting measures implemented by management. Research and Development costs increased to approximately $473,000 for the first nine months of 2000 as compared to $455,000 for the first nine months of 1999. Research and Development in 2000 consisted of costs 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) associated with the development of the set-top box, whereas in 1999, these costs were for the continued development of the Orasis(R). Interest expense decreased to approximately $1,827,000 for the nine months ended September 30, 2000 from $1,976,000 for the nine months ended September 30, 1999. Interest expense in 2000 was primarily generated from the issuance of common stock at a price below market value and the issuance of warrants during the private placement. Interest expense in 1999 was mainly a result of the financing activities associated with the conversion of debt to common stock as well as the issuance of warrants associated with the debt. Net loss The consolidated loss after income tax was approximately ($6,801,000) or ($0.12) per share for the nine months ended September 30, 2000. The consolidated loss after income tax for the nine months ended September 30, 1999 was ($8,056,000) or ($0.18) per share. The decrease in net loss is a direct result of the decision to discontinue contract manufacturing and lower interest expense, however the magnitude of the decrease was offset by the increase in professional fees and other costs associated with the private placement and the common stock purchase agreement. Balance Sheet Total assets for the Company increased to approximately $11,806,000 at September 30, 2000 from $3,372,000 at December 31, 1999. The increase was the result of the completion of the private placement and exercising the drawdown on the common stock purchase agreement. The proceeds were used to acquire the engineering firm, Advanced Digital Designs, Inc. The results of the acquisition added $625,000 to property and equipment and $5,500,000 as goodwill. Trade accounts payable decreased during the first nine months mostly due to payments and settlements with various vendors. Short-term borrowings and other payables decreased during the nine months due to their conversion into equity. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred a net operating loss in each year since it's founding and as of September 30, 2000 has an accumulated deficit of approximately $45,628,000. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to manufacture and market commercially acceptable products. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. During the first and second quarters of 2000, the Company conducted a private placement, which raised approximately $8,600,000, of which $1,300,000 was used to settle certain trade payables. In the second quarter of 2000, the Company entered into a common stock purchase agreement, escrow agreement and registration rights agreement with an institutional investor. These agreements provide a $100,000,000 equity line of credit for use by the Company at its discretion. During the third quarter, the Company received $5,000,000 from the equity line in exchange for the issuance of 1,354,617 shares of common stock. In October, 2000, the Company has also requested and additional drawdown of $2,000,000. The Company has available up to $93,000,000 under the equity line of credit. RISK FACTORS 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 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RISK FACTORS (CONTINUED) year 1999 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 14 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 August 28, 2000, the Company filed Form 8-K to report the acquisition of substantially all of the assets of T & B Designs, Inc. (f/k/a Advanced Digital Designs, Inc.), Advanced Technologies, Inc, and 937 Plum Grove Road Partnership, pursuant to an Asset Purchase Agreement by and among the Company, its subsidiaries, the acquired companies and their shareholders and partners. The purchase price was $3 million in cash and $3 million to be held in escrow and disbursed in accordance with the terms and conditions of an Escrow Agreement. On September 25, 2000, the Company filed Form 8-K/A to report the financial statements of the business acquired and the pro forma financial information of the combined companies. 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 10, 2000 By: /s/ Andrew J. Kandalepas ----------------------------- Andrew J. Kandalepas Chief Executive Officer Date: November 10, 2000 By: /s/ Harry L. Lukens, Jr. ----------------------------- Harry L. Lukens, Jr. Chief Financial Officer 14