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                                  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 SeptemberJune 30, 20022005

                                       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                                 60074Illinois                                     87-0455038
   (State or other jurisdiction             (I.R.S. Employer Identification No.)
 of incorporation or organization)

 1014 E. Algonquin Rd., Suite 111, Schaumburg, Illinois            60067
      (Address of principal executive offices)                   (Zip Code)

                                 
(847) 358-4406303-6566 (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 No X ----- ----- 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 No _____ -------- ----- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 15, 2002, 68,631,680June 30, 2006, 99,569,028 shares of the registrant's common stock, $.001 par value, were issued and outstanding. DAUPHIN TECHNOLOGY, INC.Dauphin Technology, Inc. (A Development Stage Company) Table of Contents -----------------
Page PART I FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2002 and December 31, 2001 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine months and Three Months Ended September 30, 2002 and 2001 4 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Year Ended December 31, 2001 and Nine Months Ended September 30, 2002 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2002 and 2001 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II OTHER INFORMATION 17 Item 1. Legal Proceedings Item 2. Changes in the Rights of the Company's Security Holders Item 3. Default by the Company on its Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6(a). Exhibits Item 6(b). Reports on Form 8-K SIGNATURE 17
Page PART I FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2005 and December 31, 2004 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, 2005 and 2004, six months ended June 30, 2005 and 2004 and cumulative amounts since January 1, 2004 (Commencement of development stage) 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended June 30, 2005 and 2004, six months ended June 30, 2005 and 2004 and cumulative amounts since January 1, 2004 (Commencement of development stage) 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 Item 3. Controls and Procedures 11 PART II OTHER INFORMATION 12 Item 1. Legal Proceedings 12 Item 2. Unregistered sale of equity securities and Use of Proceeds 12 Item 3. Default Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6(a). Exhibits 12 SIGNATURE 12 2 Dauphin Technology, Inc. CONDENSED(A Development Stage Company) CONSOLIDATED BALANCE SHEETS SeptemberJune 30, 20022005 and December 31, 20012004 - -------------------------------------------------------------------------------- ASSETS June 30, December 31, 2005 2004 ------------ ------------ (Unaudited) -------------------------------------------------------------------------------
September 30, 2002 December 31, 2001 ------------------ ----------------- CURRENT ASSETS: Cash $ 48,251 $ 725,364 Accounts receivable- Trade, net of allowance for bad debt of $50,621 at September 30, 2002 and December 31, 2001 58,947 67,201 Employee receivables 3,248 3,248 Inventory, net of reserve for obsolescence of $2,981,623 at December 31, 2001 192,308 518,452 Prepaid expenses 76,631 37,883 ------------- ------------- Total current assets 379,385 1,352,148 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $659,008 at September 30, 2002 and $475,899 at December 31, 2001 1,548,490 1,824,935 ESCROW DEPOSIT - 368,181 ASSETS NOT USED IN BUSINESS - 75,017 INSTALLATION CONTRACTS, net of accumulated amortization of $57,143 and $22,857 at September 30, 2002 and December 31, 2001, respectively 262,857 297,143 ------------- ------------- Total assets $ 2,190,732 $ 3,917,424 ============= ============= CURRENT LIABILITIES: Accounts payable $ 720,772 $ 477,716 Accrued expenses 153,276 103,792 Short-term borrowings 179,395 - Current portion of long-term debt 9,896 82,507 Customer Deposits 433 7,741 ------------- ------------- Total current liabilities 1,063,772 671,756 LONG-TERM DEBT 7,693 43,580 CONVERTIBLE DEBENTURES 2,024,285 1,153,197 ------------- ------------- Total liabilities 3,095,750 1,868,533 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' (DEFICIT) EQUITY: Preferred stock, $0.01 par value, 10,000,000 shares authorized but unissued - - Common stock, $0.001 par value, 100,000,000 shares authorized; 68,127,313 and 64,059,813 issued and outstanding at September 30, 2002 and at December 31, 2001, respectively 68,128 64,061 Warrants 3,438,494 4,227,499 Paid-in capital 59,958,520 57,351,406 Accumulated deficit (64,370,160) (59,594,075) ------------- ------------- Total shareholders' (deficit) equity (905,018) 2,048,891 ------------- ------------- Total liabilities and shareholders'(deficit) equity $ 2,190,732 $ 3,917,424 ============= =============
CURRENT ASSETS: Cash $ 101,911 $ 7,829 Prepaid expenses - 2,500 Assets from discontinued operations - 8,832 ------------ ------------ Total assets $ 101,911 $ 19,161 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 193,570 $ 68,602 Accrued expenses 294,488 323,838 Short-term borrowings 8,961 200,000 Current portion of long-term debt 13,515 13,515 Derivative liability 986,641 760,565 Convertible debentures 950,000 950,000 Liabilities from discontinued operations - 243,748 ------------ ------------ Total current liabilities 2,447,175 2,560,268 CONVERTIBLE LOANS 2,656,078 2,405,078 ------------ ------------ Total liabilities $ 5,103,253 $ 4,965,346 ------------ ------------ COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' DEFICIT: Preferred stock, $0.01 par value, 10,000,000 shares authorized, issued and outstanding at June 30, 2005 100,000 - Common stock, $0.001 par value, 100,000,000 shares authorized; 99,251,688 shares issued and outstanding at June 30, 2005 and 98,501,688 shares issued and outstanding at December 31, 2004 99,252 98,502 Additional paid-in capital 65,567,942 65,081,192 Accumulated deficit (70,768,536) (70,125,879) ------------ ------------ Total shareholders' deficit (5,001,342) (4,946,185) ------------ ------------ Total liabilities and shareholders' deficit $ 101,911 $ 19,161 ============ ============ The accompanying notes are an integral part of these balance sheets.consolidated financial statements. 3 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine months and three months ended September 30, 2002 and 2001 (Unaudited)
Nine MonthsDauphin Technology, Inc. (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended June 30, 2005 and 2004, the six months ended June 30, and 2004 and cumulative amounts since January 1, 2004 (Commencement of development stage) (Unaudited) - ----------------------------------------------------------------------------------------------------------- Cumulative Amounts Three Months Ended SeptemberJune 30, Six Months Ended SeptemberJune 30, -------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ----Since ---------------------------- ---------------------------- January 1, 2005 2004 2005 2004 2004 ------------ ------------ ------------ ------------ ------------ NET SALES $ 375,636- $ 79,074- $ 177,054- $ 68,639 DESIGN SERVICE REVENUE 76,875 1,169,711 - 352,905 ------------ ----------- ----------- ----------- TOTAL REVENUE 452,511 1,248,785 177,054 421,544$ - COST OF SALES 178,740 74,113 62,338 70,072 COST OF SERVICES 494,679 940,094 - 300,735- - - - ------------ ----------- ----------------------- ------------ ------------ ------------ Gross (loss) profit (220,908) 234,578 114,716 50,737 SELLING,- - - - - GENERAL AND ADMINISTRATIVE EXPENSES 3,389,635 3,332,042 1,128,208 751,432 RESEARCH AND DEVELOPMENT EXPENSE 473,873 1,760,140 109,398 519,244 AMORTIZATION OF GOODWILL - 825,000 - 275,000224,733 755,740 386,581 821,516 1,935,481 ------------ ----------- ----------- ----------------------- ------------ ------------ ------------ Loss from operations (4,084,416) (5,682,604) (1,122,890) (1,494,939)(224,733) (755,756) (386,581) (821,516) (1,935,481) Derivative (loss) gain (195,493) (68,289) (226,076) 295,252 1,121 INTEREST EXPENSE 698,605 16,744 221,659 4,964 INTEREST INCOME 6,936 208,217 518 94,524(15,000) (94,061) (30,000) (210,759) (367,238) ------------ ----------- ----------- ----------------------- ------------ ------------ ------------ Loss from continuing operations before income taxes (4,776,085) (5,491,131) (1,344,031) (1,405,379)and discontinued operations (435,226) (918,090) (642,657) (737,023) (2,301,598) INCOME TAXES - - - - - ------------ ----------- ----------- ----------- NET LOSS------------ ------------ ------------ ------------ Net loss from continuing operations (435,226) (918,090) (642,657) (737,023) (2,301,598) DISCONTINUED OPERATIONS Loss from discontinued operations - (93,183) - (173,948) (548,865) ------------ ------------ ------------ ------------ ------------ Net loss $ (4,776,085) $(5,491,131) $(1,344,031) $(1,405,379)(435,226) $ (1,011,273) $ (642,657) $ (910,971) $ (2,850,463) ============ =========== =========== =========== BASIC AND DILUTED============ ============ ============ ============ LOSS PER SHARESHARE: Continuing Operations $ (0.07)(0.00) $ (0.09)(0.01) $ (0.01) $ (0.01) $ (0.02) Discontinued Operations (0.00) (0.00) (0.00) (0.00) (0.01) ------------ ------------ ------------ ------------ ------------ Total Basic and Diluted $ (0.02)(0.00) $ (0.01) $ (0.01) $ (0.01) $ (0.03) ============ =========== =========== ======================= ============ ============ ============ Weighted average number of shares of common stock outstanding 65,848,720 62,849,497 67,291,757 63,819,568
Basic 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000 Diluted 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000 The accompanying notes are an integral part of these consolidated financial statements. 4 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY Year ended December 31, 2001 and nine months ended September 30, 2002 (Unaudited)
Common Stock ------------ Paid-in Shares Amount Capital Warrants ------ ------ ------- --------Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2005 and 2004 (Unaudited) - ----------------------------------------------------------------------------------------- Cumulative Amounts Six Months Ended June 30, Since -------------------------- January 1, 2005 2004 2004 ----------- ----------- ----------- BALANCE, December 31, 2000 61,652,069 $ 61,653 $53,479,116 $ 3,321,810 Issuance of common stock in connection with: Stock purchase agreement 258,968 259 280,640 19,101 Beneficial conversion feature and warrants - - 914,279 684,600 Stock Options exercised 35,600 36 28,528 - Warrants exercised 285,000 285 242,025 (71,236) Acquisition of business 766,058 766 1,125,339 - Personal guarantee 1,032,118 1,032 1,240,709 - Vendor payments 30,000 30 40,770 273,224 Net loss - - - - ------------ --------- ----------- ------------ BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499 Issuance of common stock in connection with: Stock Options exercised 57,500 57 49,557 - Beneficial conversion feature - - 66,000 - Warrants exercised 3,710,000 3,710 2,391,857 (1,077,817) Conversion of convertible note 300,000 300 99,700 - Consulting fees - - - 288,812 Net loss - - - - ------------ --------- ----------- ------------ BALANCE, September 30, 2002 68,127,313 $ 68,128 $59,958,520 $ 3,438,494 ============ ========= =========== ============ Treasury Stock -------- ----- Accumulated Shares Amount Deficit Total ------ ------ ------- ----- BALANCE, December 31, 2000 - $ - $(46,341,715) $ 10,520,864 Issuance of common stock in connection with: Stock purchase agreement - - - 300,000 Beneficial conversion feature and warrants - - - 1,598,879 Stock Options exercised - - - 28,564 Warrants exercised - - - 171,074 Acquisition of business - - - 1,126,105 Personal guarantee - - - 1,241,741 Vendor payments - - - 314,024 Net loss - - (13,252,360) (13,252,360) --------------- -------- ------------ ------------ BALANCE, December 31, 2001 - - (59,594,075) 2,048,891 Issuance of common stock in connection with: Stock Options exercised - - - 49,614 Beneficial conversion feature - - - 66,000 Warrants exercised - - - 1,317,750 Conversion of convertible note - - - 100,000 Consulting fees - - - 288,812 Net loss - - (4,776,085) (4,776,085) --------------- -------- ------------ ------------ BALANCE, September 30, 2002 - $ - $(64,370,160) $ (905,018) =============== ======== ============ ============
The accompanying notes are an integral part of these statements. 5 Dauphin Technology, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2002 and 2001 (Unaudited) - --------------------------------------------------------------------------------
2002 2001 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES - Net loss(loss) gain $ (4,776,085)(642,657) $ (4,085,752)(910,971) $(2,850,463) Non-cash items included in net loss: Depreciation and amortization 284,020 197,734 Amortization of goodwilldebt discount - 550,000 Interest expense on convertible notes 687,088 - Warrants90,418 269,588 Convertible loans issued in lieu of consulting fees 288,812 88,550 Gain on sale of building (33,014) - - 1,161,500 Common stock issued to vendorsin lieu of convertible loans 37,500 - 40,80037,500 Common stock issued pursuant to personal guaranteefor consulting fees - 1,241,741 Loss on sale of assets 45,017 - Write off assets not used in business 60,000 - Decrease in accounts435,000 Changes in: Accounts receivable - trade 8,254 45,690 Decrease in accounts receivable(13,500) 3,248 Assets of discontinued operations 8,832 8,520 166,123 Prepaid expenses 2,500 - 2,500 Accounts payable 124,968 (43,810) 60,480 Accrued expenses (29,350) (160,713) (73,852) Liabilities from employees - 3,342 Decrease (increase) in inventory 326,144 (21,492) Increase in prepaid expenses (38,748) (63,412) Decrease in escrow deposits 368,181 141,009 Increase (decrease) in accounts payable 243,056 (59,862) Increase (decrease) in accrued expenses 49,484 (454) Decrease in customer deposits (7,308) (2,756) ------------- -------------discontinued operations (243,748) (1,028,429) (1,188,240) ----------- ----------- ----------- Net cash used in operating activities (2,495,099) (1,924,862) CASH FLOWS FROM INVESTING ACTIVITIES - Proceeds from sale of building 431,389 - Proceeds from sale of assets 30,000 - Purchase of equipment (431,664) (61,341) ------------- ------------- Net cash provided by (used in) investing activities 29,725 (61,341)(741,955) (2,058,485) (1,976,616) CASH FLOWS FROM FINANCING ACTIVITIES - Proceeds from issuance of restricted shares 49,614 106,300- 323,000 323,000 Proceeds from exerciseissuance of warrants 1,317,750preferred stock 550,000 - Repayment of long-term leases and other obligations (108,498) (46,652)550,000 Derivative liability 226,076 (295,251) 1,662 Issuance of convertible loans 251,000 2,420,136 1,494,578 Repayment of convertible debentures 350,000 - - (100,000) Payments on short-term borrowings (200,000) (200,000) (200,000) Increase in short-term borrowing 179,3958,961 - ------------- -------------8,961 ----------- ----------- ----------- Net cash provided by financing activities 1,788,261 59,648 ------------- ------------- Decrease836,037 2,247,885 2,078,201 ----------- ----------- ----------- Net increase in cash (677,113) (1,926,555)94,082 189,400 101,585 CASH BEGINNING OF PERIOD 725,364 2,683,480 ------------- -------------7,829 326 326 ----------- ----------- ----------- CASH END OF PERIOD $ 48,251101,911 $ 756,925 ============= ============= CASH PAID DURING THE PERIOD FOR -189,726 $ 101,911 =========== =========== =========== Cash Paid During The Period FOR: Interest $ 11,517- $ 11,7801,258 $ 18,262 NONCASH TRANSACTIONS: Common stock issued in connection with: Services $ 37,500 $ - $ 37,500 The accompanying notes are an integral part of these consolidated financial statements 5
Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The accompanying notesfinancial statements are unaudited, but in the opinion of the management of the Company, contain all adjustments, consisting of only normal recurring accruals, necessary to present fairly the financial position at June 30, 2005, the results of operations for the three months and six months ended June 30, 2005 and 2004, and the cash flows for the six months ended June 30, 2005 and 2004 and cumulative amounts since January 1, 2004 (date of commencement of development stage). Reference is made to the Company's Form 10-K for the year ended December 31, 2004. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2005. Effective January 1, 2004, the Company is considered a development stage company as defined in SFAS No. 7. The Company's development stage activities consist of evaluating potential merger candidates and raising additional financing. 2. Related Party Transactions During the second quarter of 2005, our CEO loaned $17,130 to the Company. The loan bore no interest and was paid back in the same quarter. 3. Stock-Based Compensation For stock options granted to employees prior to January 1, 2005, the Company utilized the footnote disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages entities to adopt a fair-value based method of accounting for stock options or similar equity instruments. However, it also allows an integral partentity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS No. 123 as applicable. Accordingly, no compensation cost has been recognized in the consolidated financial statements for stock options granted to employees. There have been no stock options granted during the second quarter of 2005 or 2004, nor since January 1, 2004. 4. Weighted Average Shares The computation of basic income (loss) per common share is based on the weighted average number of shares outstanding during each period. The computation of diluted income (loss) per common share is based on the weighted average number of common shares outstanding during the period, plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding, using the treasury stock method and the average market price per share during the period. Options to purchase 20,000 shares and 626,666 shares at June 30, 2005 and 2004, respectively, at prices between $.12 and $2.75 and warrants to purchase 1,704,999 shares, 2,001,671 shares at June 30, 2005 and 2004, respectively, at prices between $.10 and $1.31 were outstanding but were excluded for the calculations for diluted income (loss) per share as the effect was antidilutive. 5. Supplemental Cash Flow Information Interest in the amount of $18,262 has been paid during the period from January 1, 2004 to June 30, 2005. No amounts have been paid for income taxes during the same period. 6. Liquidity The Company is a development stage company and does not have revenues from operations. In addition, the Company has a deficit in working capital and stockholders' equity, and has incurred sustained losses. The Company has funded losses from operations in the current quarter primarily from the issuance of debt and the sale of the Company's restricted common stock in private placement transactions, and will require additional funding from these statements.sources to sustain its future operations. The Company anticipates that the issuance of debt and the sale of the Company's restricted common stock will continue to fund operating losses in the short-term; however, there can be no assurance that it will be successful in doing so. 6 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION7. Definitive Merger Agreement with GeoVax On January 20, 2006, Dauphin entered into a Definitive Agreement and Plan of Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc., a Georgia biotechnology company, was established to develop, license and commercialize the manufacture and sale of human vaccines for diseases caused by HIV-1 (Human Immunodeficiency Virus) and other infectious agents. The Merger shall become effective upon, among other things, an affirmative vote of approval from each companies' shareholders. If the Merger is completed, there is no assurance that the surviving company will be economically successful. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF BUSINESSFINANCIAL CONDITION AND BASISRESULTS OF PRESENTATION DescriptionOPERATIONS Forward-looking statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of BusinessSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than historical or current facts, including, without limitation, statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such risks and uncertainties include, without limitation, the following: * financing of future operations, variations in our quarterly results, the occurrence of unanticipated events and circumstances and general economic conditions, including stock market volatility, results of future operations, challenges in establishing and/or managing joint ventures; These risks and uncertainties are beyond our control and, in many cases; we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. When used in this document, the words "assumptions," "believes," "plans," "expects," "anticipates," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate," or the negative of such terms and similar expressions as they relate to us or our management are intended to identify forward-looking statements. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the condensed consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Forms 10-K for the periods ending December 31, 2004 and 2005. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Critical accounting policies Cash and Cash Equivalents Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. The carrying amount approximates the fair value due to short maturity of these investments. Income Taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements and tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities (excluding non-deductible goodwill) and using enacted tax rates in effect for the years in which the differences are expected to become recoverable or payable. 7 Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries design and market mobile hand-held, pen-based computers, broadband set-top boxes and provide interactive cable systems to the extended stay hospitality industry, out of its main facility in northern Illinois, an office in central Florida and its branch office in Piraeus, Greece. The Company, an Illinois corporation, was formed on June 6, 1988 and became a public entity in 1991. Basis of Presentation The consolidated financial statements include the accounts of Dauphin and its wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All significant intercompany transactions and balances have been eliminated in consolidation. 2. SUMMARYMANAGEMENT'S DISCUSSION AND ANALYSIS OF MAJOR ACCOUNTING POLICIES EarningsFINANCIAL CONDITION AND THE RESULTS OF OPERATIONS - CONTINUED (Unaudited) (Loss) Per Common Share Basic earningsloss per common share areis calculated on income available to common stockholders dividedby dividing net loss for the year by the weighted-average number of shares outstanding during the period, which were 65,848,72099,127,000 and 95,086,000 for the nine-month period Septemberperiods ending June 30, 2002, 62,849,497 for the nine-month period September 30, 2001, 67,291,757 for the three-month period ended September 30, 20022005 and 63,819,568 for the three-month period ended September 30, 2001.2004 respectively. Diluted loss per common share is adjusted for the assumed conversion exercise of stock options and warrants unless such adjustment would have an anti-dilutive effect. Approximately 11 million additional shares would be outstanding if all warrants and all stock options were exercised as of September 30, 2002. Unaudited Financial Statements The accompanying statements are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of results have been included. The interim financial statements contained herein do not include all of the footnotes and other information required by accounting principles generally accepted in the United States of America for complete financial statements as provided at year-end. For further information, refer to the consolidated financial statements and footnotes thereto included in the registrant's annual report on Form 10-K for the year ended December 31, 2001. No interim review, in accordance with Statement on Auditing Standards No. 71, of these interim financial statements was performed by an independent certified public accountant. The reader is reminded that the results of operations for the interim period are not necessarily indicative of the results for the complete year.effect 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 Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of the derivative liability. Fair Value of Financial Instruments The Company financial instruments consist of cash, payables, and notes payable. The carrying amount of cash and payables approximates fair value because of the short-term nature of these items. The aggregate carrying amount of notes payable approximates fair value as the individual notes bear interest at market interest rates. Strategic Direction In November 2003, Dauphin's Board of Directors, as then constituted, considered and approved a plan to discontinue all operations effective January 1, 2004, and to seek out potential merger and or acquisition candidates. As a result the Company is considered a development stage business since January 1, 2004 for financial reporting purposes. On January 20, 2006, Dauphin Technology,signed a definitive Agreement and Plan of Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 3. RISKS AND UNCERTAINTIES, a Georgia biotechnology company, was established to develop, license and commercialize the manufacture and sale of human vaccines for diseases caused by HIV-1 (Human Immunodeficiency Virus) and other infectious agents. The Merger shall become effective upon, among other things, an affirmative vote of approval from each companies' shareholders. If the Merger is completed, there is no assurance that the surviving company will be economically successful. Results of Operations The Company was unsuccessful in its previous operations and terminated those operations in December 2003. We were unsuccessful in generating income from or positive cash flow from any of our operations. Currently, the Company is working on the proposed transaction with GeoVax as described above. The loss of $642,657 for the six months ended June 30, 2005 is the result of employee wages, legal and professional fees, and a loss pertaining to the derivative. The loss of $910,971 for the six months ended June 30, 2004 is a result of employee wages, professional fees and interest expense offset by a gain associated with the derivative instrument. We anticipate that our general and administrative expenses going forward will be approximately $90,000 per month. Liquidity and Capital Resources The Company has incurred a net operating loss in each year since its founding and as of SeptemberJune 30, 20022005, has an accumulated deficit of $64,370,160.$70,768,536. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to design and develop and market commercially acceptable products. There can be no assurance thatAs of June 30, 2005 the Company will ever achieve a profitable levelhad current liabilities in excess 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 Statescurrent assets of America, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years, and such losses have continued through the unaudited quarter ended September 30, 2002. Revenues from the Company's design services have ceased. In addition, the Company has used, rather than provided, cash in its operations. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Management has taken the following steps to revise its operating and financial requirements: The Company has concentrated its efforts on marketing its set-top boxes, halted all further development of the next generation Orasis and is exploring alternative mobile hand-held computers and other peripheral products through original equipment manufacturers. In January 2002 the management of the Company began terminating employees who were not a critical part of the marketing efforts. The facility in McHenry, which housed the RMS operations, has been closed, all personnel have been terminated and the remaining inventory and equipment were auctioned and sold. The building used by ADD to perform design services has been sold and all engineers have been terminated. The Company has also changed its primary focus and has begun concentrating its efforts on becoming a reseller and distributor of mobile hand-held computer products, pc monitors and TV displays, vehicle multimedia systems and various accessories and peripherals. The Company has been working with several original equipment manufactures in the Far East to provide the various products.approximately $2,345,000. 8 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 4. BUSINESS SEGMENTS The Company has three reportable segments: Dauphin Technology, Inc. and RMS ("Dauphin"), Advanced Digital Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). Dauphin is involved in the design and distribution of hand-held pen-based computer systems and accessories and smartbox set-top boxes. ADD performed design services, process methodology consulting and intellectual property development. Suncoast provides private, interactive cable systems to the hospitality industry. September 30, 2002 September 30, 2001 ------------------ ------------------ Revenue Dauphin $ 24,330 $ 10,435 ADD 286,250 1,265,743 Suncoast 351,306 - Inter-company elimination (209,375) (448,937) ------------ ------------- Total $ 452,511 $ 827,241 ============ ============= Operating (Loss) Dauphin $ (3,056,469) $ (4,049,983) ADD (353,283) (137,682) Suncoast (674,664) - Inter-company elimination - - ------------ ------------- Total $( 4,084,416) $ (4,187,665) ============ ============= September 30, 2002 December 31, 2001 ------------------ ----------------- Assets Dauphin $ 18,614,459 $ 17,461,145 ADD 2,264,616 2,699,250 Suncoast 1,835,576 1,702,791 Inter-company elimination (20,524,119) (17,945,762) ------------ ------------- Total $ 2,190,732 $ 3,917,424 ============ ============= 5. COMMITMENTS AND CONTINGENCIES The Company is an operating entity and in the normal course of business, from time to time, may be involved in litigation. In management's opinion, any current or pending litigation is not material to the overall financial position of the Company. 6. CONVERTIBLE DEBT AND WARRANTS In connection with a Securities Purchase Agreement entered into with Crescent International Ltd., an institutional investor, on September 28, 2001, a Convertible Note was funded on October 2, 2001 and is due September 28, 2004. The Company is not required to pay interest on the Convertible Note unless the Company fails to deliver shares upon conversion. In such event, the Note will bear an interest rate of 8.0% per annum, payable in quarterly installments. The Company has recorded a beneficial conversion feature on the Convertible Note and Warrants based on the fair value of the common stock of $0.99 per share as of the date of commitment. The Warrants with an exercise price of $1.3064 per share, are valued using the Black-Scholes valuation method, and are recorded at $684,600. The beneficial conversion feature is calculated to be $914,279 and has been recorded as Additional Paid in Capital and a discount to the Convertible Note. The beneficial conversion feature is being amortized over three years, the life of the Note. For the nine month period ended September 30, 2002, the Dauphin Technology, Inc. 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 6. CONVERTIBLE DEBT AND WARRANTS - Continued Company recognized $626,588 as interest expense on the amortization of the beneficial conversion feature. At conversion, the Company may record an additional beneficial conversion based on the market price of the stock at the conversion date. During the third quarter of 2002, Crescent converted $100,000 of the convertible note in exchange for 300,000 shares of common stock of the Company. In April 2002, the Company entered into convertible note agreements with three individuals for $350,000. These Convertible Notes are due in October 2002 and bear an interest rate of 10.0% per annum, payable at the termination of the Note. At the option of the holder, at any time until the Convertible Note is paid in full, the Note may be converted, either in whole or in part, up to the principal amount of the Note, into shares of Common Stock of the Company at a conversion price of $0.50 per share. The beneficial conversion feature is calculated to be $66,000 and has been recorded as Additional Paid in Capital and a discount to the Convertible Note. The beneficial conversion feature is being amortized over six months, the life of the Note. For the nine month period ended September 30, 2002, the Company recognized $60,500 as interest expense on the amortization of the beneficial conversion feature. The Company is currently exploring alternative financing arrangements in order to repay these notes. 7. EQUITY TRANSACTIONS 2002 Events During the first quarter of 2002, the Company received proceeds in the amount of $410,000 for the exercise of 933,333 warrants. Additionally, employees exercised 57,500 stock options at prices ranging from $0.50 to $0.89 per share. In March 2002, the Company re-priced approximately 1,023,000 warrants it had previously issued to outside consultants. The warrants were originally issued with an exercise price ranging from $2.00 to $5.00, and were re-priced with an exercise price of $0.60 per share. The re-pricing created a charge to earnings of approximately $27,218, which was calculated using the Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate of 5%, volatility factor of 443% and an expected remaining life of 10 months. During the second quarter of 2002, the Company received proceeds in the amount of $416,000 for the exercise of 1,040,000 warrants. In May 2002, the Company re-priced approximately 2,245,667 warrants it had previously issued to outside consultants. The warrants were originally issued with an exercise price ranging from $2.00 to $5.00, and were re-priced with an exercise price of $0.40 per share. The re-pricing created a charge to earnings of approximately $139,900, which was calculated using the Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate of 5%, volatility factor of 443% and an expected remaining life of 7 months. In August and September 2002, the Company re-priced approximately 1,854,667 warrants it had previously issued to outside consultants. The warrants were originally issued with an exercise price ranging from $1.50 to $0.50, and were re-priced with an exercise price of $0.25 per share. The re-pricing created a charge to earnings of approximately $121,700, which was calculated using the Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate of 5%, volatility factor of 443% and an expected remaining life ranging from 1 to 5 months. During the third quarter of 2002, the Company received proceeds in the amount of $491,750 for the exercise of 1,736,667 warrants. During the third quarter of 2002, Crescent International Ltd. exercised $100,000 of the convertible note in exchange for 300,000 shares of common stock of the Company. 10 Dauphin Technology, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 8. SUBSEQUENT EVENT During October 2002, the Company began discussions with UniversalGR, a company offering applied software and hardware solutions around the world, including the United States and Greece. It specializes in project management, consulting, design, development, support services and installation of complete technological solutions. These discussions resulted in a letter of intent being signed on November 7, 2002 whereby the Company would acquire controlling interest of the outstanding common stock of UniversalGR in exchange for approximately eight million shares of common stock of the Company at the closing of the transaction, an additional 3,500,000 shares of common stock of the Company upon UniversalGR achieving revenues of $10,000,000 and an additional 3,500,000 shares of common stock of the Company upon UniversalGR achieving another $10,000,000 in revenue within the first fifteen months after closing the transaction. Preliminary due diligence has begun and the potential closing is scheduled for early December, 2002. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2001 Total revenues for the three months ended September 30, 2002 and 2001 were approximately $177,000 and $422,000, respectively. Net sales increased- CONTINUED (Unaudited) The Company has funded losses from $69,000 in 2001 to approximately $177,000 in 2002. Net sales generated by the Company's interactive cable system subsidiary, Suncoast, accounted for approximately $170,000 of these revenuesoperations in the third quarter of 2002 and approximately $65,000 in the third quarter of 2001. The balance of sales is parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues in the third quarter of 2002 were $0 as compared to revenues of $353,000 in the second quarter of 2001. This reduction in design service revenue is a cessation in engineering projects available in the marketplace which the Company began experiencing in 2001. The Company does not anticipate any further revenuescurrent year primarily from design services for the remainder of fiscal year 2002. Cost of sales represents costs associated with the Suncoast operations, which decreased from $70,000 in 2001 to approximately $62,000 in 2002. Cost of services decreased from $301,000 in 2001 to $0 in 2002. The decrease is a result of reduction in engineering staff which began during the first quarter of 2002. Gross profit of $115,000 in 2002 is primarily attributable to the Suncoast operations. Gross profit of $51,000 for the third quarter of 2001 was negatively affected by the decline in engineering projects available to the Company. Selling, general and administrative expenses increased to approximately $1,128,000 in 2002 from $751,000 in 2001. The increase of approximately $377,000 is due to the increase in expenses of the Company's branch office in Piraeus, Greece in the amount of $190,000, the increase in expenses of the interactive cable system subsidiary, Suncoast, amounting to approximately $73,000, increase in the corporate office expenses of $141,000 and offset by the decrease in expenses of the design engineering subsidiary amounting to approximately $27,000. The Company operated its branch office in Piraeus, Greece for the full three month period in 2002, whereas in 2001, expenses were only for one month. The Suncoast subsidiary incurred higher marketing, advertising and general administrative expenses in 2002. Included in the Corporate office selling, general and administrative expenses in 2002 is approximately $121,700 expense associated with the repricing of warrants which had previously been issued to outside consultants, travel costs of approximately $50,000, offset by a general reduction in office expenses of approximately $30,000. Amortization of goodwill in 2001 amounted to $275,000 in the third quarter. This goodwill was a result of the acquisition of the net assets of Advanced Digital Designs, Inc. in 2000. The remaining balance of the goodwill was written off in the fourth quarter of 2001. Research and Development expenses decreased to approximately $109,000 during the third quarter ended September 30, 2002 from $519,000 for the corresponding period in 2001. The set-top box design was substantially completed in the fourth quarter of 2001 which is reflected in the decrease in Research and Development expenses. In 2002, approximately 55% of Research and Development costs consisted of costs related to the development of software for the set-top box, with 45% related to further development of alternative mobile hand-held computer devices. In 2001, the majority of Research and Development costs were for the set-top box. Interest expense increased to approximately $222,000 for the third quarter of 2002 from $5,000 for the third quarter of 2001. Included in interest expense in the third quarter of 2002 is three months amortization of the debt discount associated with the Convertible Notes, amounting to $220,000. The remaining interest is related to other borrowings. Interest expense in the third quarter of 2001 related to capital equipment leases and short term borrowings. Interest income declined from $95,000 in 2001 to $500 in 2002 due to the reduction of short-term funds held on deposit. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) Net loss The consolidated loss after tax decreased for the third quarter ended September 30, 2002 to approximately ($1,344,000) or ($0.02) per share from ($1,405,000) or ($0.02) per share in 2001. The loss for 2002 was primarily attributed to the decrease in revenues from design services, the increase in selling, general and administrative costs generated by Suncoast and the branch office, the repricing of warrants, and the increase in interest expense. The loss for 2001 was primarily attributed to the amortization of goodwill associated with the acquisition of Advanced Digital Designs, Inc., and research and development costs regarding the set-top box. Loss per common share is calculated based on the monthly weighted average number of common shares outstanding, which were 67,291,757 for the three-month period ended September 30, 2002, and 63,819,568 for the three-month period ended September 30, 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 Total revenues for the Company decreased from approximately $1,249,000 in the first nine months of 2001 to $453,000 in the first nine months of 2002. Net sales increased from $79,000 in 2001 to approximately $376,000 in 2002. Net sales generated by the Company's interactive cable system subsidiary, Suncoast, accounted for approximately $351,000 of these revenues with the balance being parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues in the first nine months of 2002 were approximately $77,000 as compared to revenues of $1,170,000 in the first nine months of 2001. This reduction in design service revenue is a continuation of the decline in engineering projects available in the marketplace, which the Company began experiencing in 2001. The Company does not anticipate any further revenues from design services for the remainder of fiscal year 2002. Cost of sales represents costs associated with the Suncoast operations for 2002, whereas cost of sales in 2001 related to the costs of parts and accessories. Cost of services decreased from $940,000 in 2001 to $495,000 in 2002. The decrease is a result of reduction in engineering staff which began during the first quarter of 2002. Included in the costs for 2002 are termination and severance benefits paid to the engineering staff. Because of the reduction in design services revenue and the additional termination and severance benefits, gross profit margins were negatively affected and generated a gross loss of $221,000 for the third quarter of 2002 compared to a gross profit of $235,000 for the same period in 2001. Selling, general and administrative expenses increased to approximately $3,390,000 for the first nine months ended September 30, 2002 as compared to $3,332,000 for 2001. Included in selling, general and administrative expenses in 2001 is approximately $1,242,000 attributable to the issuance of common stock for reimbursement pursuant to a personal guarantee. Selling, generaldebt and administrative expenses of the design engineering subsidiary for the nine months ended September 30, 2001, were approximately $124,000 as compared to $8,000 in 2002. This reduction is offset by the expenses of the Company's interactive cable system subsidiary, Suncoast, amounting to approximately $847,000, and the Company's branch office in Piraeus, Greece which amounted to approximately $767,000. The Company acquired the net assets of Suncoast in July 2001 and opened the branch office in August 2001. In the nine months ended September 30, 2002, approximately $289,000 of additional costs were incurred in connection with the repricing of warrants which had previously been issued to outside consultants. Amortization of goodwill in 2001 amounted to $825,000 for the nine months ended September 30, 2001. This goodwill was a result of the acquisition of the net assets of Advanced Digital Designs, Inc. in 2000. The remaining balance of the goodwill was written off in the fourth quarter of 2001. Research and Development expenses decreased to approximately $474,000 for the nine months ended September 30, 2002 from $1,760,000 for the corresponding period in 2001. The set-top box design was substantially completed in the fourth quarter of 2001 which is reflected in the decrease in Research and Development expenses. In 2002, approximately 68% of Research and Development costs consisted of costs related to the development of software 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) for the set-top box, with 32% related to further development of alternative mobile hand-held computer devices. In 2001, the majority of Research and Development costs were for the set-top box. Interest expense for the nine months ended September 30, 2002 increased to approximately $699,000 as compared to $17,000 for the same period in 2001. Included in interest expense for 2002 is nine months amortization of the debt discount associated with the Convertible Notes, amounting to $687,000. The remaining interest is related to capital equipment leases, mortgage note and other borrowings. Interest expense for the nine months ended September 30, 2001 related to capital equipment leases and short term borrowings. Interest income declined from $208,000 for the nine months ended September 30, 2001 to $7,000 for the nine months ended September 30, 2002 due to the reduction of short-term funds held on deposit. Balance Sheet Total assets for the Company at September 30, 2002 were approximately $2,191,000, a decrease of approximately $1,726,000 from December 31, 2001. The decrease was primarily attributable to the net cash used in operations of approximately $2,495,000, the purchase of equipment of $432,000, offset by the proceeds from the sale of the buildingCompany's restricted common stock in private placement transactions, and will require additional funding from these sources to sustain its future operations. The Company anticipates that the issuance of debt and the sale of the Company's restricted common stock will continue to fund operating losses in the short-term. There is no assurance that the Company will be successful in raising the needed amounts of capital and debt needed to sustain the Company. When used in this Form 10-Q, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth under the "Risks and Uncertainties" set forth below that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. Dauphin expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. This discussion should be read together with the financial statements and other assetsfinancial information included in this Form 10-Q. We are a development stage company as defined in SFAS No. 7 effective January 1, 2004. The Company's development stage activities consist of $460,000, exercise of stock warrantsevaluating potential merger candidates and stock options of $1,368,000raising additional financing. Risks and Uncertainties Readers should carefully consider the increaserisks described below in borrowings of $529,000. LIQUIDITY AND CAPITAL RESOURCESevaluating the Company's business. The Company hasfollowing risks and uncertainties are not the only risks and uncertainties facing the Company. We have an accumulated deficit due to substantial losses incurred a net operating loss in each year since it's foundingover the last nine years Since July 1996 we have operated with substantial losses from operations and as of September 30, 2002 hashave an accumulated deficit of approximately $64,370,000 and a deficit in shareholders equity$70,768,536 as of approximately $905,000.June 30, 2005. The Company expects to incur operating losses over the near term. The Company's ability to achieve profitability will depend on many factors including the Company's ability to procure and market commercially acceptable products. There can be no assurance that the Company will ever achieve a profitable level of operations or if profitability is achieved, that it can be sustained. ForOur financial performance may make it difficult for potential sources of capital to evaluate the nine months ended September 30, 2002,viability of our business to date and to assess its future viability. We currently have no operations. The Company was unsuccessful in its operations and terminated those operations in December 2003. Our previous business operations were limited and did not result in (i) significant revenues, (ii) the Company used $2,495,000accumulation of casha significant dollar amount of assets, or (iii) in operating activities, and generated $29,000earnings. Because of cash from investing activities and $1,788,000a lack of cash from financing activities that produced a decrease in cashresources, we were unable to fund the costs of $677,000 for the nine months. The net loss of $4,726,000 was partially offset by the non-cash items of depreciation and amortization, repricing of warrants issued in lieu of consulting fees, decrease in inventory and amortizationcomplying with our filing requirements under Section 13 of the Securities Exchange Act of 1934, as amended. In November 2003, Dauphin's Board of Directors, as then constituted, considered and approved a plan to discontinue all operations effective January 1, 2004, and to seek out potential merger and or acquisition candidates. The Company's ability to continue as a going concern is questionable Because of recurring operating losses, the excess of current liabilities over current assets, the stockholders' deficit, and negative cash flows from operations, there is substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on attaining profitable operations, restructuring its debt discount associated withobligations, and obtaining additional outside financing. The Company has funded losses from operations in the Convertible Note. Investing activities consistedcurrent year primarily from the issuance of the purchase of equipment for installations associated with the interactive cable systemsdebt and proceeds from the sale of the Company's restricted common stock in private placement transactions, and will require additional funding from these sources to sustain its future operations. The Company anticipates that the issuance of debt and the sale of the Company's restricted common stock will continue to fund operating losses in the short-term but there is no assurance that the Company will be successful in obtaining additional capital or financial resources. Planned transaction with GeoVax may not be completed On January 20, 2006, Dauphin signed a buildingdefinitive Agreement and Plan of Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc., a Georgia biotechnology company, was established to develop, license and commercialize the manufacture and sale of human vaccines for diseases caused by HIV-1 (Human Immunodeficiency Virus) and other assets. Financing activities consistedinfectious agents. The Merger shall become effective upon, among other things, an affirmative vote of the exercise of options and warrants, increase in convertible notes and the increase in short-term borrowings. As of September 30, 2002, the Company had current liabilities in excess of current assets, whereas at December 31, 2001, the Company had a current asset to current liabilities ratio of 2:1. The Condensed Consolidated Statements of Cash Flows, included in this report, detail the other sources and uses of cash and cash equivalents. On September 28, 2001 the Company entered into a $10 million Securities Purchase Agreement with Crescent International Ltd., ("Crescent") an institutional investor. Under the Securities Purchase Agreement, the Company issued a Convertible Note for $2.5 million. Although the Company had the option to issue further convertible notes to Crescent subject to certain conditions precedent, such option expired on February 1, 2002 and no additional notes were issued. In addition, the Company issued warrants exercisable to purchase 700,000 shares of common stock at a price of $1.3064 per share for a five-year term. The Stock Purchase Agreement further permits the Company to sell to Crescent up to $7.5 million in common stock of the Company over a 24-month period. Additionally, the Company agreed not to exercise any draw downs against its existing common stock purchase agreement with Techrich International Ltd. ("Techrich"), which expired on January 28, 2002. 14approval 9 Dauphin Technology, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) The Securities Purchase Agreement permits- CONTINUED (Unaudited) from each companies' shareholders. There is no assurance that we will be successful in finalizing this transaction. If the Company to sell to Crescent and requires Crescent to purchase fromtransaction is completed, there is no assurance that the Company, at the Company's sole discretion, common stocksurviving company will be economically successful. Regardless of the Company for up to $7.5 million over a 24-month period. Individual salesoutcome with GeoVax, we may not be successful in finding any suitable merger or acquisition candidate. If we are limited to $1.5 million, or a higher amount if agreed to by the Company and Crescent, and each sale is subjectnot successful in finding any suitable candidate, it would raise substantial doubt as 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)ability to continue any operations. Funding Requirements In order to continue its planned transaction, the Company must obtain additional funding. The Company has no source of working capital except the prospect of obtaining new equity or debt financing. We have oneno revenues and therefore rely solely on obtaining either equity or more currently effective registrationdebt financing. The Company must continue to sell equity or find another source of operating capital until its operations are profitable. While the Company's financial statements coveringhave been prepared under the resale by Crescent of all shares issued in prior salesassumption that the Company will continue as a going concern, the independent registered public accounting firm's report on the Company's 2004 and 2005 financial statements, included an explanatory paragraph relating to Crescent and issuable upon the conversion of the Convertible Note, (3) there must be no disputesubstantial doubt as to the adequacy of disclosures made in any such registration statement, (4) such registration statements must not be subjectCompany's ability to any stop order, suspension or withdrawal, (5) thecontinue as a going concern. 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 mustdoes 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 ofsufficient shares of common stock authorized to meet its obligations Currently, we do not have enough authorized shares of common stock to issue to holders of options and warrants, as well obligations pursuant to our convertible loans and convertible debentures. This deficiency in the number of authorized shares of common stock can only be rectified by an affirmative vote of the majority of our shareholders to amend our Articles of Incorporation to reflect an increased number of authorized shares of common stock. There can be no assurance that our shareholders will approve an amendment to our Articles of Incorporation. Shareholders may suffer dilution from the exercise of existing options, warrants and convertible notes; the terms upon which we will be able to obtain additional equity capital could be adversely affected Our common stock may become diluted if any of the outstanding warrants to purchase our common stock are exercised. The total number of shares that may be issued pursuant to the outstanding warrants is 1,704,999 at June 30, 2005 and is presently 700,000. It is likely that our shares will be subject to substantial price and volume fluctuations due to a number of factors, many of which will be beyond our control The securities markets have recently experienced significant price and volume fluctuations. The market prices and volume of securities of and development-stage companies have been especially volatile. Market volatility and other market conditions could reduce the market price for our shares. Our stock price has fluctuated in the past and could continue to do so in the future. Your investment in the Company's stock could lose value. Some of the factors that could significantly affect the market price of the Company's stock are discussed in these Risk Factors and elsewhere in this report, and also include: variations in quarterly financial results; changes in political, economic and market conditions either generally or specifically to particular industries; and fluctuations in stock prices generally, particularly with respect to the applicable sale must not violatestock prices for other biotechnology companies. A significant drop in our stock price could expose us to 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 amountrisk of securities issued to Crescent equals or exceeds $5 million, the Company shall issue to Crescentclass action lawsuits. Defending against such lawsuits could result in substantial costs and divert management's attention and resources. An unfavorable outcome of such a subsequent incentive warrant exercisable to purchase 400,000 shares of common stock atmatter may have a price equal to the bid pricematerial adverse impact on the date the incentive warrant is issued.business, results of operations, financial position, or liquidity. General Economic and Other Conditions The Company cannot currently access these funds because it does not have a current effective registration statement with the SecuritiesCompany's business may be adversely affected from time to time by such matters as changes in general economic, business and Exchange Commission covering shares available to sell to Crescent. The Company elected to pursue the above financing arrangements with Crescent International because the Company's previous financing arrangement with Techrich contained certain limitations as it related to the market price of our common stock, the average volume of shares traded on a daily basisinternational conditions, prices and costs, technological developments and other such factors which wouldof a general nature. We have not generate the greatest benefit to the Company's shareholders. In addition, the financing arrangement with Techrich expired at the endpaid any dividends and have no expectation of January 2002. Because of the changes in circumstances and the current financial conditions of the Company, management decided to explore alternatives. Several were reviewed, including private placements, various long-term debt arrangements with different investment bankers and other equity lines similar to the one with Techrich. Management felt that the financing offered by Crescent was the best alternative and waspaying dividends in the best interest offoreseeable future We have not declared, paid, or distributed any cash dividends on our shares in the Company and its shareholders. The Company expectspast, nor are any cash dividends contemplated in the foreseeable future. There is no assurance that our operations will generate any profits from which to rely on the above financing arrangements in order to continue its development and procurement of products and to continue its ongoingpay cash dividends. Even if profits are generated through operations in the short-term. The long-term cash needs of the Company will be dependent on the successfulfuture, our present intent is to retain any such profits for acquisitions, product development, production and procurement of the Company's productsmarketing, and their success in the market place. At the current rate, the Company is not able to internally generate sufficient funds for operations and will be required to rely on outside sources for continued funding until such time as the Company's operations generate a profit and cash is generated from operations. The Company has historically issued and may continue, if the circumstances warrant, common stock to vendors and suppliers in lieu of cash for products and services provided to the Company. In order to provide additional cash for operations, in April 2002, the Company entered into convertible note agreements with three individuals for $350,000. These Convertible Notes are due in October 2002 and bear an interest rate of 10.0% per annum, payable at the termination of the Note. At the option of the holder, at any time until the Convertible Note is paid in full, the Note may be converted, either in whole or in part, up to the principal amount of the Note, into shares of Common Stock of the Company at a conversion price of $0.50 per share. As of November 12, 2002, these notes had not been converted into common stock of the Company, and the Company had not repaid the loans. The Company is currently exploring alternative financing arrangements in order to repay these notes. 15general working capital requirements. 10 Dauphin Technology, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RISK FACTORS We operate- CONTINUED (Unaudited) Our shares are not widely traded There is only a limited market for our shares. If a large portion of the shares eligible for immediate resale after registration were to be offered for public resale within a short period of time, the current public market would likely be unable to absorb such shares. This could result in a highly competitivesignificant reduction in current market prices. There can be no assurance that investors will be able to resell shares at the price they paid for the shares or at any price. Our shares are subject to special trading rules relating to "penny stocks" which restrict trading Our shares are covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell "penny stock" to persons other than certain established customers. For transactions covered by the rule, the broker-dealer must obtain sufficient information from the customer to make an appropriate suitability determination, provide the customer with a written statement setting forth the basis of the determination and volatile industry. We are faced with aggressive pricing by competitors; competition for necessary parts, componentsobtain a signed copy of the suitability statement from the customer. The rule may affect the ability of broker-dealers to sell our shares and supplies; continually changing customer demands and rapid technological developments; and risks that buyersalso may encounter difficulties in obtaining governmental licenses or approvals, or in completing installation and construction of infrastructure, necessaryaffect your ability 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 discussedsell shares in the Company's fiscal year 2001 Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. During October 2002, the Company began discussions with UniversalGR, a company offering applied software and hardware solutions around the world, including the United States and Greece. It specializes in project management, consulting, design, development, support services and installation of complete technological solutions. These discussions resulted in a letter of intent being signed on November 7, 2002 whereby the Company would acquire controlling interest of the outstanding common stock of UniversalGR in exchange for approximately eight million shares of common stock of the Company at the closing of the transaction, an additional 3,500,000 shares of common stock of the Company upon UniversalGR achieving revenues of $10,000,000 and an additional 3,500,000 shares of common stock of the Company upon UniversalGR achieving another $10,000,000 in revenue within the first fifteen months after closing the transaction. UniversalGR has recently signed a $43.5 million contract with Tihovatis, AE to provide technology equipment, consulting, maintenance and support services for a housing and resort development currently under construction. Preliminary due diligence has begun and the potential closing is scheduled for early December, 2002. The pending acquisition will create a vehicle for the Company to sell its products through. UniversalGR currently has a contract for approximately $43.5 million for the installation of security equipment, appliances, computers, cameras and other technology equipment in a housing development and hotel. The successful completion of the pending acquisition is critical to the Company's future success.secondary market. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Substantially all of the Company's liquid investments and long-term debt are at fixed rates; therefore, the fair value of these instruments is affected by changes in market interest rates. The Company believes that the market risk arising from its holdings of liquid investments is minimal as substantially all of the Company's investments mature within one year. Dauphin is exposed to foreign exchange risks through its branch operation in Greece. The Company does not believe that the potential exposure is significant in light of the current size of its operations in Greece. We do not currently and do not intend in the future to utilize derivative financial instruments for trading purposes, unless the operations of the branch facility in Greece become significant. At that time, the Company will initiate a risk management policy to monitor interest rate and foreign exchange risks. Item 4. Controls and Procedures.CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q, the Company's principal executive officer and principal financial 16 officer have concluded that the Company'sprocedures We maintain disclosure controls and procedures (as defineddesigned to ensure that financial information required to be disclosed in Rules 13a-14(c) and 15d-14(c)our reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange ActAct), is recorded, processed, summarized, and reported within the required time periods, specifiedand that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In connection with the completion of its audit of, and issuance of its report on, our consolidated financial statements for the year ended December 31, 2004, Tanner LC identified deficiencies that existed in Securitiesthe design or operation of our internal control over financial reporting that it considered to be "significant deficiencies" or "material weaknesses." The Public Company Accounting Oversight Board ("PCAOB") has defined "significant deficiency" as a control deficiency, or a combination of control deficiencies, that adversely affects the company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that the misstatement of the company' annual or interim financial statements that is more than inconsequential will not be detected. The PCAOB has defined a "material weakness" as a "significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial will not be prevented or detected." In connection with the completion of its audit of, and Exchange Commission rulesissuance of its report on, our consolidated financial statements for the year ended December 31, 2005, Porter Keadle Moore, LLP ("PKM") considered our internal controls in order to determine their auditing procedures for the purpose of expressing their opinion on the financial statements and forms.not to provide assurance on our internal controls. PKM noted certain matters involving our internal controls and our operation that they consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters relating to significant deficiencies in the design or operation of the internal control that, in PKM's judgment, could adversely affect our ability to record, process, summarize, and report financial data consistent with the assertions of management in our financial statements. The significant deficiencies or material weakness in our internal controls relate to segregation of incompatible duties, the timely reconciliation of general ledger accounts, controls over inventory, property and equipment, debt documentation and derivative transactions and accounting for acquisitions and disposals. Additionally, significant deficiencies or material weakness in our internal control over accounting for derivative transactions, certain disclosures in the footnotes to the financial statements was related to the stock option disclosures required by SFAS No. 123R. We have disclosed these significant deficiencies and material weaknesses to our Board of Directors. Additional effort is needed to fully remedy these significant deficiencies and material weaknesses and we are continuing our efforts to improve and strengthen our internal controls over financial reporting. Our management and Board of Directors will continue to work with our management and outside advisors with the goal to implement internal controls over financial reporting that are adequate and effective. 11 Dauphin Technology, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS - CONTINUED (Unaudited) (b) Changes in internal controls.controls and procedures There werehas been no significant changeschange in our internal control over financial reporting during the Company'ssecond quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.control over financial reporting. PART II -II. OTHER INFORMATION Item 1. Legal Proceedings NoneLEGAL PROCEEDINGS On March 7, 2006, the Company filed legal action against preferred shareholders Stavros N. Papageorgiou and Nikolaos S. Papageorgiou, their advisor, Miltos Louizidis, and the investment banking firm of Crescent International, Ltd. (the "Defendants"). The complaint alleges, among other things, breaches of various agreements, fraud, tortious interference, conspiracy, and breaches of fiduciary duties by the Defendants. Specifically, Dauphin alleges that the Defendants embarked upon a scheme to defraud, tortiously interfere with contracts and business relationships, and to breach fiduciary duties in order to steal from Dauphin and its shareholders certain critical business opportunities, including its current efforts to merge with GeoVax, Inc. On May 15, 2006, the Company and the preferred shareholders agreed to settle all legal actions between them. The settlement confirms the parties' agreement to proceed with the GeoVax merger, based upon a conversion and exchange of preferred shares upon closing of the merger, on the basis of a 1-preferred-for-2-common share exchange, as anticipated by the Merger Agreement. In addition, a convertible note representing a Company liability of approximately $1.3 million has been cancelled. On May 16, 2006, an agreed order was entered in the Circuit Court of Cook County, Illinois, dismissing all claims. Item 2. Changes in the Rights of the Company's Security Holders. NoneUNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS - None. Item 3. Default by the Company on its Senior Securities. NoneDEFAULTS UPON SENIOR SECURITIES - None. Item 4. Submission of Matters to a Vote of Securities Holders. NoneSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. Item 5. Other Information. NoneOTHER INFORMATION - None. Item 6(a)6 (a). Exhibits. Exhibit 99.1EXHIBITS 31. Certifications 31.1 Certification of Chief Executive Officer Certification Exhibit 99.2and Chief Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes- Oxley Act of 2002 32.1 Certification Item 6(b). Reports on Form 8-K. Noneof the Principal Executive and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAUPHIN TECHNOLOGY, INC. (Registrant) Date: November 18, 2002 By:BY: /s/ Andrew J. Kandalepas -------------------------------------------------------------- Andrew J. Kandalepas, President, Chief Executive Officer Date: November 18, 2002 By: /s/ Harry L. Lukens, Jr. ------------------------------ Harry L. Lukens, Jr.and Chief Financial Officer 17 (Principal Executive and Financial Officer) Date: June 30, 2006 12 - --------------------------------------------------------------------------------