Item 1. Description of Business
Overview Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiary design, manufacture and market mobile hand-held, pen-based computers, as well as other electronic devices for home and business use out of its two locations in northern Illinois. The Company, an Illinois corporation, was formed on June 6, 1988 and became a public entity in 1991. The Company employs approximately 15 people consisting of engineering, sales and marketing, administrative, and other personnel. The Company's stock is traded on the Over the Counter Bulletin Board under the symbol DNTK.
In 1993 and 1994 the Company encountered severe financial problems. On January 3, 1995, the Company filed a petition for relief under Chapter 11 of the Federal Bankruptcy Code in the United States Court for the Northern District of Illinois, Eastern Division. The Company operated under Chapter 11 until July 23, 1996, when it was discharged as Debtor-in-Possession and bankruptcy proceedings were closed.
Strategic Plan Before the Company emerged from bankruptcy, the Board of Directors was reconstituted and a new management team was recruited. Individuals with strong engineering and manufacturing backgrounds as well as finance, accounting, sales and marketing skills were hired. The new management formulated a strategic business plan to diversify the Company's operations to eliminate dependence on a single product line or industry.
The plan incorporated an initial focus on the hand-held mobile computer market. In particular, it focused on development of miniaturized mobile computers that would be incorporated in electronic solutions for vertical markets. In addition to mobile computing markets, management is focused on producing and marketing other electronic devices. Coupled with targeted acquisitions in the technology sector, the Company seeks to become a technology holding company with synergistic, self-managed wholly owned subsidiaries. The subsidiaries are intended to share resources and cross- market products, engineering and product development services.
As part of management's plan, on June 6, 1997 the Company acquired all of the outstanding shares of stock in R.M. Schultz & Associates, Inc. ("RMS"), an electronic contract-manufacturing firm located in McHenry, Illinois.
Dauphin Technology, Inc. Products Orasis( is a hand-held computer developed by the Company with features to meet the expressed desires of many potential customers. The unit was developed with the multi-sector mobile user in mind. As such, it incorporated an upgradable processor, user upgradable memory and hard disc, various modules and mobile devices to satisfy the needs of various industries. Basic unit features are as follows:
* The unit weight is approximately 3 pounds * The battery operating life is from 2 to 8 hours * The unit is equipped with 166 MHz Pentium MMX processor, which can be upgraded to 266 MHz Pentium MMX * The standard unit is equipped with 32 MEG of memory upgradable to 128 MEG of RAM * Standard two type II or a single type III PCMCIA slot * 2.1 GB expandable to 6.4 GB hard drive * Built in speaker and microphone (including sound blaster for voice recognition and multimedia) * Video conferencing port * Modular expansion bay with docking connector * Electro-magnetic pen, voice activation, and an Infra Red keyboard for data input * CDROM drive, floppy drive, DVD drive, heads-up goggles, GPS module and other attachable devices
Much more flexible and powerful than a Personal Digital Assistant ("PDA"), the Orasis is an MS-DOS/Windows 95/98/2000, Windows NT and Linux compatible machine. Although the basic unit carries a number of advanced features, the most significant advantage of Orasis( is its upgradability. The expansion bay allows for the use of CDROM, floppy drive, wireless radio, extended battery pack or any other device through the PCI expansion bus. Unlike competitor models Orasis does not lock the customer into a single format. Orasis affords a customer complete flexibility and versatility offered by no other mobile computer presently on the market. It is a time, labor, and money- saving device that can be custom-configured with a variety of options to meet the end-user's needs.
During the later part of 1999 the Company was engaged in negotiations and eventually on February 17, 2000 signed a contract to develop and produce set- top boxes. In conjunction with continued development of Orasis( and the recent shift in focus away from contract manufacturing, the Company began design and development of such boxes. A set-top box is an electronic device that converts digital signals into a user acceptable format via other electronic devices such as television sets, telephones and computers. As a result of recent events the Company is rewriting its Marketing and Sales plans to include a strategy for the set-top box.
Markets Every day on TV, radio and in the newspapers we hear and read about people's ability to contact the farthest reaches of our planet in seconds. We hear about business meetings that take place over the wires, on a large TV screen instead of in person. The increased use of the internet as a means of commerce and communication drives us forward every day to reach for the things that only a few years ago we read about in science fiction books. We also read about constant improvements in digital and cellular technology in order to allow anyone to constantly "stay connected".
Based on the latest statistics, the mobile computing devices market is approximately $95 billion in annual revenue. Sales of laptop and notebook computers represent a large portion of this market. However, the growth rate of hand-held pen-based devices exceeds that of laptops and notebooks. Based on the latest Frost and Sullivan studies, the total pen-tablets market, in which Orasis( competes, is several billion dollars and is growing at approximately twenty five percent per year. Dauphin's management estimates that market may be growing even faster than latest predictions.
Unlike several years ago, the pen-based computer market is more defined and is ready for a product such as Orasis(. The total mobile market includes more than sixty products that fall within the Personal Digital Assistant ("PDA") category of the pen-based market. These devices include electronic organizers, mobile fax machines and electronic notepads. Most of these devices are palm-top size, requiring either pen or keyboard input. In addition to PDA's, there are approximately twenty devices that would qualify as computers or pen tablets. Orasis( belongs in the latter category.
Until the introduction of Orasis(, pen based devices were no match for the laptops. The processor speed, limited expandability and memory limitations of hand-held computers made notebooks and laptops much more popular with the mobile workforce. Orasis( bridges the gap between notebook or laptop computers and pen-based computers. Added features and flexibility of the unit may also attract public attention, thereby growing the overall category.
The set-top box market is a relatively new phenomenon. According to International Data Corporation, the worldwide installed base of set-top boxes was a mere 2.2 million in 1998 and is expected to exceed 14.8 million boxes in the year 2000, growing to over 35.5 million in 2002. Currently with the market in its infancy, the "set-top box" has not been perfected. Existing designs do not offer the flexibility or future capacity that Dauphin's customers seek.
Sales and Marketing Orasis( is a niche product. Dauphin targets vertical markets for the distribution of Orasis(. To deliver its mobile product to the market, in April of 1998, Dauphin hired six mobile industry experts, Channel Managers, to target various industries. Each Channel Manager's job was to find a number of software solution providers to a particular industry and partner with them to offer a final electronic solution to the end user. In particular, the industries these individuals targeted were medical, government, sales field automation, transportation, utilities and education. During 1998, approximately 60 VAR's signed Orasis( distribution agreements. During 1999, changes in the Company strategy resulted in the termination of all Channel Managers. Currently, all VAR relationships and sales inquiries are handled internally by the Company's sales and customer service personnel.
Due to the fact that the set-top box contract was signed just recently, management is still determining the scope of the marketing effort and sales strategy.
Competition A dozen manufacturers including Epson, Fujitsu, IBM, Mitsubishi and Kalidor produce "pen tablets". The list of competitors may be imposing, but Dauphin management feels that Orasis( has advantages over the competition including flexibility, adaptability and compactness. Based on the opinions of industry experts such as Pen Computing magazine, units produced by these firms are less capable than Orasis(. Such units are generally designed with a single processor and become obsolete as soon as new processors or faster software is introduced. Also, due to the fact that major components of Orasis( are upgradable, the life expectancy of the product is estimated to be 5 years. Over time, consumers' return on investment of Orasis( should be much higher than any existing computer.
For the Company to be competitive, it must continue to offer leading technology and market driven products. When new products are introduced, there is a small window of opportunity before clones are developed. However, being a small company, Dauphin's strength is in its flexibility to meet industry demands and to partner with solution providers to jointly offer unique solutions for problems that customers encounter.
Customer Dependence The Company is not dependent on any one customer.
Research and Development Due to the relatively small size of Dauphin, most of the product development was in cooperation with three contract engineering firms. Approximately $1,576,000 was spent on research and development in 1998 and approximately $510,000 more was spent in 1999. Dauphin retained all rights and intellectual property acquired during the development of Orasis(.
The Company is planning to continue research and development of electronic products to complement Orasis(. In addition to peripheral devices such as office and mobile docking station, the Company is planning to work on various scaled down, higher-tech devices than Orasis(.
In connection with negotiating the set-top box contract, in the third quarter of 1999, the Company began researching and designing certain set-top boxes to satisfy provisions in the recently signed contract.
Production Because the main components of Orasis( are complex, the assembly of the motherboard is outsourced. SMT Unlimited supplies RMS with the ready assembled and tested motherboards for final assembly. SMT Unlimited is capable of producing hundreds of motherboards per day.
RMS assembles, tests and ships the final product to Dauphin customers. All manufacturing support for the product is performed by RMS. With additional staffing, RMS is capable of assembling 200 Orasis( units per day.
Source and Availability of Raw Materials Component parts are obtained from suppliers around the world. Since the development of Orasis( commenced late in 1997 and throughout 1998, all components used in the design are state of the art and are Year 2000 compliant. Components such as the latest mobile Intel processors, color video controllers and CACHE memory chips are in high demand. Such components are available in short supply. However, management does not anticipate any delays in production.
Software Licensing Agreements The Company is leasing BIOS (basic input/output software) for Orasis( from Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and licenses proprietary software products for original equipment manufacturers and related software for personal computers. A Master License Agreement was signed for the right of distribution of Phoenix software. The Company pays $4 per unit sold for this license.
The Company has entered into a Pen Products Original Equipment Manufacturing Distribution License Agreement and Sub-license Agreement for Dedicated Systems with Annabooks Software LLC ("Annabooks"), the supplier of products offered by Microsoft Corporation ("Microsoft"). Microsoft is the third-party beneficiary under these agreements. Under the terms of these agreements, the Company is authorized to install DOS, Windows 95, 98, 2000 and NT, and Windows for Pen, among others, on the computers it sells. For this right, the Company must pay Annabooks royalties for each unit sold, although quantity discounts are available. The Company pays approximately $78 per license for each computer it sells.
Patents, Copyrights and Trademarks In view of rapid technological and design changes inherent to the computer industry, the Company does not believe that, in general, patents and/or copyrights are an effective means of protecting its interests. However, due to the unique configuration of the Orasis(, the Company did patent its mechanical design and processor upgradability concepts. It also expects to patent its set-top box design following development. The Company also attempts to maintain its proprietary rights by trade secret protection and by the use of non-disclosure agreements. It is possible that the Company's products could be duplicated by competitors and duplication and sale could therefore adversely affect the Company. However, management believes that the time spent by competitors engineering the product would be too long for the rapidly changing computer industry.
In 1997 the Company applied for and received a trademark on the name "Orasis."
R.M. Schultz & Associates, Inc. Using automatic assembly equipment, RMS is capable of assembling large quantities of electronic products. The majority of the work performed by RMS since its inception has been in a through-hole or large component electronic assembly. Since the RMS acquisition the Company spent more than $750,000 to build a 5,000 square foot environmentally controlled room inside the RMS facility and to acquire surface mount equipment. Surface mount assembly equipment allows for high-speed/high-tech component placement on a printed circuit board, a newer method of product assembly. In the past, RMS used services of other firms to incorporate surface mount portions of the final product. It may now complete this function itself.
During 1999, the Company refocused its direction away from contract manufacturing to research and development of electronic devices. As a result, RMS production will focus on the assembly of Orasis( units, set-top boxes and other products, which may be developed in the future by the Company.
Item 2.
Item 2. Properties
The Company's executive offices consist of 7,300 square feet of office space and 2,700 square feet of warehouse space located at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067. The Company pays approximately $12,000 per month to rent the facilities. In December 1998, in conjunction with upgrading the facilities, Dauphin signed a five-year lease extension. The lease called for increased rent, but provided for reconstruction of facilities to better suit the Company's needs. The Company believes the space will be adequate for the foreseeable future.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050. The facilities are leased from Enclave Corporation, a company that is owned by Richard M. Schultz, past President of RMS. RMS occupies 53,000 square feet of space, of which 7,000 square feet is for office space and 5,000 square feet is surface mount portion of production. The lease has a five-year term starting on June 6, 1997 with an optional extension for an additional five years. The rent is approximately $14,000 per month. The Company believes the space will be adequate for RMS operations for the foreseeable future.
Item 3.
Item 3. Legal Proceedings
The Company is involved in a wrongful discharge lawsuit brought by an ex- employee/officer. The suit was filed on April 11, 1998 in the Circuit Court of Cook County, Illinois and as of the date hereof four out of five claims have been dismissed. Management believes that the Company has several defenses to the remaining claim. Management is of the opinion that any such unfavorable disposition will not be material to the Company's results of operations or financial position.
The Company is involved in a breach of contract lawsuit with the Enclave Corporation, current landlord of RMS. The suit was filed on January 5, 2000 in the Nineteenth Judicial Circuit Court, McHenry Illinois. The suit is claiming $5,200 damages and other non-monetary breaches. The Company believes that it has several defenses and intends to vigorously defend its position. Management is of the opinion that any such unfavorable disposition will not be material to the Company's results of operations or financial position.
During 1999 and through the date of this report, the Company has been engaged in various other legal proceedings. Management believes that all material events have been fully accounted for in the financial statements attached hereto. Further resolution of any existing litigation would not be material to the overall financial condition of the Company.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 1999.
PART II Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holders Matters
Market Price of Common Stock The Company's common stock is traded on a limited basis on the over-the- counter market and is quoted in the National Quotation Bureau's Pink Sheets. The following table shows the range of representative bid prices for the common stock. The prices represent quotations between dealers and do not include retail mark-up, markdown, or commission, and do not necessarily represent actual transactions:
Bid Prices 1997 1998 1999 High Low High Low High Low --------- -------- --------- --------- --------- --------- First Quarter $ 1.625 $ 1.187 $ 1.625 $ 1.016 $ 1.219 $ 0.453 Second Quarter 1.219 0.750 1.391 0.875 0.938 0.391 Third Quarter 1.172 0.875 2.031 0.875 0.750 0.266 Fourth Quarter 2.590 1.063 0.906 0.500 0.703 0.219
Holders The number of shareholders on record of the Company's common stock as of March 27, 2000 as reported by the Company's transfer agent is approximately 5,500. A number of the Company's shareholders on record are brokerage firms or stock clearing agencies. Therefore, the Company believes the total number of beneficial shareholders is greater than 5,500.
Dividend Policy The Company has not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company's business.
Common Stock The authorized capital stock of the Company consists of 100,000,000 shares of common stock, $0.001 par value. As of March 27, 2000 there were 53,935,308 shares of common stock issued and outstanding held by approximately 5,500 shareholders of record. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor (see "Market Price of Common Stock" and "Dividend Policy"). In the event of a liquidation, dissolution or winding up of the Company, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no right to convert their common stock into any other securities and have no cumulative voting rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock No preferred shares have been issued to date. The Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by shareholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding and the Company has no present plans for the issuance thereof. However, the issuance of any such preferred stock could affect the rights of the holders of common stock, and, therefore, reduce the value of the common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, thereby preserving control of the Company by present owners.
Warrants and Options As of March 27, 2000 there are a total of 5,511,211 Warrants issued and outstanding in the hands of approximately 30 investors. These Warrants are convertible at any time into Company's $0.001 par value common stock. The strike prices of these Warrants range from $0.20 to $2.00. These Warrants expire between three and five years from the date of issuance. The Warrants include a change of form provision in them, whereby if a change in the form of the common stock occurs due to stock splits, stock dividends, or mergers, the holders are entitled to receive a pro-rata increase of shares at a discounted price. However, the holders of the Warrants do not have any voting rights and are not entitled to receive any cash or property dividends declared by the Board of Directors until they convert the Warrants into common shares. At the time such Warrants are exercised, the common shareholders of the Company's pro-rata share of the Company will be diluted. If such Warrants are not exercised within allotted time, they expire.
As of March 27, 2000 there are a total of 3,630,500 Options issued and outstanding in the hands of certain consultants resulting from funding raised by such consultants. These Options are convertible at any time into the Company's $0.001 par value common stock of which 18,000 Options shall be converted at a $1.00 strike price, and the remainder shall be converted at a $10.00 strike price per share. These options expire between three and five years from the date of issuance. Additionally, there are 1,941,000 Options issued and outstanding in the hands of more than twenty employees and former employees. These Options are exercisable at any time into the Company's $0.001 par value common stock. The strike prices of these Options range from $0.50 to $1.00. These Options expire between three and five years from the date of issuance. At the time such Options are exercised, the common shareholders of the Company's pro-rata share of the Company will be diluted. If such Options are not exercised within the allotted time, they expire.
Transfer Agent and Registrar American Stock Transfer and Trust Company, 40 Wall Street, New York, New York, 10005
Item 6.
Item 6. Selected Financial Data Year Ended December 31