UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
----- Act of 1934.
For fiscal year ended December 31, 2004
_____ Transaction Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Illinois 87-0455038
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1014 E. Algonquin Rd., Suite 111, Schaumburg, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 303-6566
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
Indicate by check mark whether the Registrant (1) has filed all 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. (1) Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant as of January 17, 2006 is $115,480,713.
As of January 17, 2006, the number of Shares of the Registrant's Common Stock,
$.001 par value, is 99,552,339 issued and outstanding.
2
DAUPHIN TECHNOLOGY, INC.
Table of Contents
PART I 4
Item 1. Description of Business 4
General 4
Previous Operations 5
Discontinued Products and Services 5
Research and Development 6
Employees 6
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to Vote of Security Holders 6
PART II 6
Item 5. Market for the Registrant's Common Stock and Related
Security Holders Matters 6
Market Price of Common Stock 6
Holders 7
Dividend Policy 7
Common Stock 7
Preferred Stock 7
Warrants and Options 8
Transfer Agent and Registrar 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Forward Looking Statements 9
Critical Accounting Policies 9
Interest Rate Risk 10
Inflation 10
Results of Operations 2004 Compared to 2003 10
Fourth Quarter 2004 Compared to Fourth Quarter 2003 10
Results of Operations 2003 Compared to 2002 11
Liquidity and Capital Resources 11
Off-Balance Sheet Arrangements 11
Risk Factors 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14
Interest Rate Sensitivity 14
Foreign Currency Exchange Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting
or Financial Disclosure 14
Item 9A. Controls and Procedures 14
Item 9B. Other Information 15
PART III 15
Item 10. Directors, Executive Officers and Officers of the Registrant 15
Directors and Officers 15
Other: Involvement in Certain Legal Proceedings 16
Compliance With Section 16(a) of the Exchange Act 16
Involvement by Management in Public Companies 16
Code of Ethics 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Party Transactions 17
Item 14. Principal Accounting Fees and Services 17
PART IV 18
Item 15. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
3
Note: This Form 10-K contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and the nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company.
PART I
Item 1. Business
General
Dauphin Technology, Inc. ("Dauphin," "we," "our," "us," or "Company") an
Illinois corporation, was formed on June 6, 1988 and became a public entity in
1991. 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.
Following its emergence from bankruptcy, Dauphin and its subsidiaries were
primarily engaged in designing and marketing mobile hand-held, pen-based
computers and set-top boxes. The Company also was a provider of private,
interactive cable systems to the extended stay hospitality industry. One of the
Company's subsidiaries also performed design services, specializing in hardware
and software development, to customers in the communications, computer, video
and automotive industries. At one point the Company employed more than 125
people consisting of engineering, sales and marketing, customer service,
administrative, and other personnel.
The Company was unsuccessful in its operations and terminated those operations
in December 2003. (See "Item 1, Description of Business - Previous Operations").
Included in those operations was Suncoast Automation, Inc., which the Company
sold on April 28, 2003. We were unsuccessful in generating income from or
positive cash flow from any of our operations, including Suncoast's operations.
Our operations in Greece and Suncoast operations have been included and
presented as "Discontinued Operations" in this Form 10-K and in the consolidated
financial statements for the years ended December 31, 2004, 2003 and 2002. Due
to the fact that the Company has no operations, the Company, since January 1,
2004, is considered a development stage company under SFAS No. 7. Because of a
lack of resources, we were unable to comply 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 and to seek out potential merger and or
acquisition candidates. As a result the Company is considered a development
stage business since January1, 2004 for financial reporting purposes.
In July 2005, the Company entered into a non-binding letter of intent whereby
Dauphin intends to acquire all of the issued and outstanding capital stock of
GeoVax, Inc. a Georgia biotechnology company 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 proposed
transaction shall become binding upon the parties' execution of a Definitive
Merger and Reorganization Agreement, and an affirmative vote of approval from
each companies' shareholders. There is no assurance that we will be successful
in finalizing this transaction. If the transaction is completed, there is no
assurance that the surviving company will be economically successful.
The Company's executive offices are at 1014 East Algonquin Road, Suite 111,
Schaumburg, Illinois. Currently, the Company employs one individual.
The Company's stock is traded on the over-the-counter market and is quoted in
the National Quotation Bureau's Pink Sheets, under the symbol DNTK.
4
Previous Operations
Following our emergence from bankruptcy in 1996, 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 focused on producing and marketing other
electronic devices, namely set top boxes, coupled with targeted acquisitions in
the technology sector.
On August 28, 2000 the Company, through a newly formed subsidiary named ADD
Acquisitions Corp., acquired all of the assets of T & B Design, Inc. (f/k/a
Advanced Digital Designs, Inc.), Advanced Technologies, Inc., and 937 Plum Grove
Road Partnership pursuant to an Asset Purchase Agreement. The subsidiary then
changed its name to Advanced Digital Designs, Inc. ("ADD"). ADD specialized in
design services in the telecommunications industry, especially wireless and
cable-based product development, as well as multimedia development, including
digital video decoding and processing.
To assist us in further development and marketing of our set-top box products,
on July 1, 2001, we acquired substantially all of the net assets of Suncoast
Automation, Inc. ("Suncoast"). Suncoast was a provider of private, interactive
cable systems to the extended stay hospitality industry utilizing our set-top
boxes.
In August 2001, we signed a sales and marketing agreement with the Hellenic
Telecommunications Organization S.A. (OTE) to sell set-top boxes through their
more than 400 retail shops, as well as to participate in several vertical
projects, meaning with other businesses or governmental agencies, that OTE was
managing. This relationship marked our entry into the consumer marketplace with
our products. As a result of the agreement with OTE and other similar marketing
agreements reached with Orbit Plan and the Dialogue Group of Companies, we
established a European branch office consisting of twelve sales, marketing,
customer service and technical support personnel located in Piraeus, Greece.
The Company planned to market for consumer use, in conjunction with its three
versions of set-top boxes, a portfolio of complimentary peripheral devices such
as video telephones, displays, home cinema equipment, wireless local area
network (LAN) devices and various conferencing accessories. Specific consumer
markets included retail chains, Internet Service Providers (ISP), and satellite
programming providers.
As a result of the agreements noted above, we became involved in vertical
projects to develop communications solutions for law enforcement, defense,
surveillance and Olympic security utilizing Terrestrial Trunked Radio (TETRA)
technology. As a part of this solution, the Company began development of a next
generation Orasis(R) by exploring alternative mobile hand-held computer products
through original equipment manufacturers.
Discontinued Products and Services
Orasis(R) was a hand-held computer we developed with features to meet the
desires expressed by 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. In 2001 we began developing
a new version of the Orasis(R). The new Orasis(R) had most of the same features
as the original design, but incorporated new technologies.
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. The OraLynx(TM) set-top box processed high-speed
video, provided storage and worked with coaxial cable, ADSL and fiber. For
service providers, the OraLynx(TM) set-top box enabled integration of data,
voice, and video over one unified network using one termination device. For end
users, the OraLynx(TM) set-top box served as a simple yet sophisticated gateway
and access device that can be controlled with a remote control, keyboard or
other mobile handheld device. The OraLynx(TM) set-top box could be networked to
PC's, Internet appliances, and more. The OraLynx(TM) provided direct access to
interactive TV, video-on-demand and ATM or IP voiceover phone service. Basic
unit features were as follows:
o High quality/high speed user interface (2D graphics)
o Seamless Video-on-Demand Service
5
o Instant Telephone Access
o IP or ATM voiceover
o Supports standard Internet protocols and various Internet
connections (xDSL, SONET, ATM25, Ethernet)
o Networking and Smart Appliance Interface
o Provides wireless or conventional networking
The Company also designed, constructed, installed and maintained private
interactive entertainment systems, focused primarily on the extended stay
hospitality industry, which utilized our set-top boxes. We provided all service
and maintenance on the entire systems. In addition to basic cable TV, our
systems offered high speed internet connectivity, tiered programming,
pay-per-view, games, room messaging, folio view, express check-out and community
channels.
Since December 2003, the Company has conducted no operations with the exception
of our CEO's efforts to find a suitable merger candidate.
Research and Development
Substantially all of our research and development efforts related to the
development of handheld computers and set-top boxes. In an effort to compete in
the highly competitive hardware markets, we endeavored to develop
technologically advanced products. Our total research and development
expenditures were approximately $0.0, $0.0 and $517,771 in 2004, 2003 and 2002,
respectively and have been included in discontinued operations. The Company
retained all rights and intellectual property acquired during the development of
their hand-held products and peripheral devices, and its set-top boxes.
Employees
As of December 31, 2004, we had one full-time employee.
Item 2. Properties
The Company's offices are currently located at 1014 East Algonquin Road, Suite
111, Schaumburg, Illinois. In 2003 and 2002 we operated a branch office
consisting of 2,800 square feet at II Merarchias 2 Street and Aki Miaouli, 185
35, Piraeus, Greece.
Suncoast Automation Inc. facilities were located at 150 Dunbar Avenue, Oldsmar,
Florida 34677. Suncoast occupied 3,000 square feet of space of which 1,500
square feet was office space and 1,500 square feet was warehouse. This lease was
transferred as part of the sale of Suncoast in April 2003.
Item 3. Legal Proceedings
On October 17, 2005, the Company settled a dispute with two former employees of
one of its subsidiaries, Suncoast Automation, Inc., by issuing them, in total,
300,651 shares of its common stock.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the years ending
2004, 2003 and 2002.
PART II
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 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:
6
Bid Prices
- ----------
2002 2003 2004
---- ---- ----
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter $ 1.370 $ 0.520 $ 0.260 $ 0.130 $ 0.380 $ 0.050
Second Quarter 0.790 0.390 0.170 0.080 0.770 0.130
Third Quarter 0.650 0.300 0.140 0.070 0.460 0.150
Fourth Quarter 0.480 0.190 0.090 0.040 0.340 0.100
Holders
The number of shareholders of record of the Company's common stock as of October
24, 2005 as reported by the Company's transfer agent is approximately 19,000. A
number of the Company's shareholders on record are brokerage firms or stock
clearing agencies. Therefore, we believe the total number of beneficial
shareholders is greater than 19,000.
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 October 24, 2005 there were 98,802,339
shares of common stock issued and outstanding held by approximately 19,000
shareholders of record. As of October 24, 2005, the Company does not have
sufficient authorized common stock to issue to holders of outstanding warrants
and options, or shares needed should the convertible debt holders exercise their
right to convert to common stock. 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
The Company is authorized to issue up to 10,000,000 shares of preferred stock,
$0.01 par value. In the second quarter of 2005, we issued 10,000,000 shares of
the Company's preferred stock to one investor as follows: 10,000,000 shares of
$0.01 Par Value, Preferred Shares of stock designated "Series A, $0.01 Par
Value, Preferred Stock," and bears the following preferences, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions as follows:
(1) Designation and Initial Number. The class of shares of Preferred Stock
hereby classified shall be designated the "Series A, $0.01 Par Value, Preferred
Stock." The initial number of authorized shares of the Preferred Stock shall be
10,000,000 shares.
(2) Dividends. The holders of the Preferred Stock shall be entitled to receive,
out of funds at the time legally available for payment of dividends, a
cumulative annual dividend at the rate of $0.01 per share payable on the last
day of each year, if, as and when determined by the Board of Directors, before
any dividend shall be set apart or paid during the relevant annual period on any
other capital stock. An "annual period" shall mean a twelve-month period
commencing on the first day of January and ending the last day of December in
each year.
7
(3) Liquidation or Dissolution. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation, the
holders of the issued and outstanding Preferred Stock shall be entitled to
receive for each share of Preferred Stock, before any distribution of the assets
of the Corporation shall be made to the holders of any other capital stock,
$0.01 per share, plus all accrued and unpaid dividends declared thereon, without
interest. After such payment shall have been made in full to the holders of the
issued and outstanding Preferred Stock, or funds necessary for such payment
shall have been set aside in trust for the account of the holders of the issued
and outstanding Preferred Stock so as to be and continue to be available
therefore, then, before any further distribution of the assets of the
Corporation shall be made, a dollar amount equal to that already distributed in
the aggregate to the holders of the Preferred Stock shall be distributed pro
rata to the holders of the other issued and outstanding capital stock of the
Corporation, subject to the rights of any other class of capital stock set forth
in the Articles of Incorporation, as amended, of the Corporation. After such
payment shall have been made in full to the holders of such other issued and
outstanding capital stock, or funds necessary for such payment shall have been
set aside in trust for the account of the holders of such other issued and
outstanding capital stock so as to be and continue to be available therefore,
the holders of the issued and outstanding Preferred Stock shall be entitled to
participate with the holders of all other classes of issued and outstanding
capital stock in the final distribution of the remaining assets of the
Corporation, and, subject to any rights of any other class of capital stock set
forth in the Articles of Incorporation, as amended, of the Corporation, the
remaining assets of the Corporation shall be divided and distributed ratably
among the holders of both the Preferred Stock and the other capital stock then
issued and outstanding according to the proportion by which their respective
record ownership of shares of the Preferred Stock and such other capital stock
bears to the total number of shares of the Preferred Stock and such other
capital stock then issued and outstanding. If, upon such liquidation,
dissolution, or winding up, the assets of the Corporation distributable, as
aforesaid, among the holders of the Preferred Stock shall be insufficient to
permit the payment to them of said amount, the entire assets shall be
distributed ratably among the holders of the Preferred Stock. A consolidation or
merger of the Corporation, a share exchange, a sale, lease, exchange or transfer
of all or substantially all of its assets as an entirety, or any purchase or
redemption of stock of the Corporation of any class, shall not be regarded as a
"liquidation, dissolution, or winding up of the affairs of the Corporation"
within the meaning of this Section 3.
(4) Voting Rights. Each share of Preferred Stock is entitled to twenty votes,
voting together with the holders of shares of Common Stock and not as a class,
on each matter submitted to a vote at a meeting of stockholders of the
Corporation.
(5) Changes in Terms of Preferred Stock. The terms of the Preferred Stock may
not be amended, altered or repealed, and no class of capital stock or securities
convertible into capital stock shall be authorized that has rights superior to
or on a parity with the holders of Preferred Stock as to dividends, liquidation
or voting, without the consent of the holders of at least two-thirds of the
outstanding shares of Preferred Stock.
Warrants and Options
As of October 24, 2005 there are a total of 1,704,999 Warrants issued and
outstanding in the hands of approximately 10 investors and consultants,
resulting from fund raising. These Warrants are convertible at any time into the
Company's $0.001 par value common stock. The per share strike prices of these
Warrants range from $0.10 to $1.3064. These Warrants typically expire three
years from the date of issuance with the earliest set to expire December 3, 2005
and the latest June 24, 2007. 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' ownership percentage of the Company will be diluted. The Company
has 626,666 options outstanding at December 31, 2004.
Transfer Agent and Registrar
American Stock Transfer and Trust Company, 6201 15th Avenue, Brooklyn, New York
11219.
8
Item 6. Selected Financial Data
The Selected Financial Data for the years 2003, 2002, 2001 and 2000 has been
reclassified to conform to the presentation of 2004. The Company became a
development stage company effective January 1, 2004, and the operations of the
Company have been presented as discontinued operations.
Year Ended December 31
- ----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Sales $ - $ - $ 19,621 $ 16,678 $ 63,913
Net Loss from Continuing
Operations (1,658,941) (735,159) (2,087,341) (8,937,121) (5,370,538)
Net Loss from Discontinued
Operations (548,865) (2,341,921) (2,978,505) (6,095,339) (2,144,441)
--------------------------------------------------------------------------------------
Total Net Loss $ (2,207,806) $ (3,077,080) $ (5,065,846) $ (15,032,460) $ (7,514,979)
Loss Per Share from
Continuing Operations $ (0.02) $ (0.01) $ (0.03) $ (0.14) $ (0.09)
Loss Per Share from
Discontinued Operations (0.00) (0.03) (0.04) (0.10) (0.06)
--------------------------------------------------- ----------------------------------
Total Loss Per Share $ (0.02) $ (0.04) $ (0.07) $ (0.24) $ (0.15)
Total Assets $ 19,161 $ 172,197 $ 2,028,420 $ 3,917,424 $ 11,160,777
Long - Term Debt $ 2,405,078 $ 2,591 $ 1,077,650 $ 1,196,777 $ 102,133
Working Capital(Deficit) $ (2,541,107) $ (3,814,621) $ (1,918,335) $ 680,392 $ 3,015,210
Shareholders (Deficit) Equity $ (4,946,185) $ (3,817,212) $ (1,486,358) $ 268,940 $ 10,520,864
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Dauphin is currently a development stage company. In December 2003 our previous
operations were terminated. We currently have no operations and limited assets.
As described in Item 1 of this Form 10-K, we have entered into a letter of
intent to acquire GeoVax, Inc. If the transaction contemplated by the letter of
intent takes place, it will result in us conducting certain business operations
now conducted by GeoVax. However, there is no assurance that the Company will be
successful in completing the transaction. Accordingly, any comparison between
the current financial position and business plan of the Company and our
historical financial condition and operations is not meaningful.
Critical Accounting Policies
The Company's critical accounting policies include the following:
Revenue Recognition - The Company recognizes revenues from goods and services
when there is a binding agreement, the product has been completely shipped or
service has been delivered, collection is reasonably assured, and the Company
has no significant obligations remaining. Portions of the purchase price of the
Company's products collected from customers in advance of product delivery are
recorded as deferred revenue.
Stock Options and Warrants - In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company estimates the fair value of the
consideration recorded for stock options and warrants issued using the
Black-Scholes option-pricing model. For those stock options and warrants that
have variable characteristics, the Company will continue to use this methodology
9
to periodically reassess the fair value of the consideration to determine if the
value of the consideration recorded in the consolidated financial statements
requires adjustment. Changes in the assumptions used in the option-pricing
model, including the market price of the Company's common stock and risk-free
interest rates, may result in fluctuations in the estimated fair value and
carrying value of the consideration recorded for variable non-employee stock
options and warrants.
Income Taxes - The Company accounted for income taxes in accordance with the
asset and liability method of accounting for income taxes prescribed by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under the asset and liability method, deferred tax assets and liabilities
were recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
were measured using enacted tax rates expected to apply to the taxable income in
the years in which those temporary differences are expected to be recovered or
settled.
Impairment of Assets - On an ongoing basis, the Company estimated the future
undiscounted cash flows, before interest, of the operating unit to which the
goodwill relates in order to evaluate its impairment. If impairment existed, the
carrying amount of the goodwill was reduced by the estimated shortfall of cash
flows.
Interest Rate Risk
We anticipate that a substantial amount of our current and future debt, and the
associated interest expense will be subject to changes in the level of interest
rates. Increases in interest rates would result in incremental interest expense.
Inflation
The Company does not believe that inflation will negatively impact its business
plans.
Results of Operations 2004 Compared to 2003
The following discussion should be read in conjunction with the Consolidated
Financial Statements. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
As described in Footnote 16 to the financial statements herein, Dauphin
substantially discontinued its operations in the fourth quarter of 2003.
Accounting rules dictate that results from our previous operations be treated
as, "Discontinued Operations" for financial statement purposes. As a result,
revenues for the Company for 2004 and 2003 were $0.0.
Selling, general and administrative expenses increased to approximately
$1,548,000 for 2004 as compared to $677,000 for 2003. Losses from operations
were $(1,658,941) and $735,159 in 2004 and 2003 respectively. A material part of
the change in operations was due to the fair market adjustment of the derivative
liability at each year end. General and administrative expenses for 2004
consisted of expenses associated with the issuance of common stock for
reimbursement pursuant to numerous agreements in lieu of cash to numerous
consultants.
Interest expense decreased to approximately $337,000 for the year ended December
31, 2004 from $555,000 for the year ended December 31, 2003. The decrease in
interest expense in 2004 resulted from a decrease in amortization of debt
discount.
Losses on operations of discontinued operations were $548,865 and $1,115,496 in
2004 and 2003 respectively. We recorded a loss on the sale of a discontinued
subsidiary in 2003 of $1,226,425.
Fourth-Quarter 2004 Compared with Fourth-Quarter 2003
Selling, general and administrative expenses for fourth-quarter of 2004
increased to $214,653 compared with $27,630 for the fourth-quarter of 2003. This
increase was due primarily as a result of settlement payments made to
consultants and former employees. All other selling, general and administrative
expenses are comparable between the fourth quarter of 2004 and 2003.
Interest expense for the fourth quarter of 2004 decreased over that of the
fourth quarter for 2003. The decrease in interest is attributable to the
amortization of the beneficial conversion feature associated with the
Convertible Notes in 2003 which discount became fully amortized in the third
quarter of 2004.
10
Losses on operations of discontinued operations for the fourth quarter of 2004
and 2003 were $328,603 and $987,585 respectively.
Results of Operations 2003 Compared to 2002
Selling, general and administrative expenses decreased to approximately $676,000
for 2003 as compared to $2,413,000 for 2002. Selling, general and administrative
expenses for 2003 consisted of corporate related overhead, including salaries,
professional fees and additional costs associated with financing. For the year
2002, selling, general and administrative costs were primarily expenses
associated with corporate overhead including salary and related benefits, rent
expense, legal and professional fees, and travel related expenses.
Interest expense decreased to approximately $555,000 for the year ended December
31, 2003 from $928,000 for the year ended December 31, 2002. The interest
expense in 2003 and 2002 is the amortization of the debt discount associated
with the Convertible Notes.
Losses on operations of discontinued subsidiaries were $1,115,496 and $2,978,505
in 2003 and 2002 respectively.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since its founding
and as of December 31, 2004, has an accumulated deficit of $70,125,879. The
Company expects to incur operating losses over the near term. There can be no
assurance that the Company will ever achieve a profitable level of operations or
if profitability is achieved, that it can be sustained.
For the year ended December 31, 2004 the Company used $1,234,661 of cash in
operating activities and generated $1,242,164 of cash from financing activities
that produced an increase in cash of $7,503 for the year. The net loss of
$2,207,806 was partially offset by the non-cash items of convertible loans
issued in lieu of consulting fees and assets from discontinued operations.
Financing activities consisted primarily of the issuance of convertible loans
for $1,243,578 and the sale of stock for $323,000. As of December 31, 2004 the
Company had current liabilities in excess of current assets of approximately
$2,541,000. The Consolidated Statements of Cash Flows, included in this report,
detail the other sources and uses of cash and cash equivalents.
The Company has funded losses from operations in the current year 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
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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Risk Factors
Readers should carefully consider the risks described below in evaluating the
Company's business. The following risks and uncertainties are not the only risks
and uncertainties facing the Company.
We have an accumulated deficit due to substantial losses incurred over the last
eight years.
Since July 1996 we have operated with substantial losses from operations and
have an accumulated deficit of $70,125,879 as of December 31, 2004. 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. Our financial
performance may make it difficult for potential sources of capital to evaluate
the viability of our business to date and to assess its future viability.
11
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 accumulation of a significant
dollar amount of assets, or (iii) in earnings. Because of a lack of funds, we
were unable to fund the costs of complying 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 and to seek out potential merger and or
acquisition candidates. During 2004, the Company wound down its remaining
operations and completed ceasing those operations in December 2004.
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 obligations, and
obtaining additional outside financing. The Company has funded losses from
operations in the current year 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 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.
Planned transaction with GeoVax may not be completed.
In July 2005, the Company entered into a non-binding letter of intent whereby
Dauphin intends to acquire all of the issued and outstanding capital stock of
GeoVax, Inc. a Georgia biotechnology company 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 proposed
transaction shall become binding upon the parties' execution of a Definitive
Merger and Reorganization Agreement, and an affirmative vote of approval from
each companies' shareholders. There is no assurance that we will be successful
in finalizing this transaction. If the transaction is completed, there is no
assurance that the surviving company will be economically successful. Regardless
of the outcome with GeoVax, we may not be successful in finding any suitable
merger or acquisition candidate. If we are not successful in finding any
suitable candidate, it would raise substantial doubt as to our 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 no revenues and therefore rely
solely on obtaining either equity or debt 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 have been prepared under the assumption
that the Company will continue as a going concern, the independent registered
public accounting firm's report on the Company's 2004 financial statements,
included an explanatory paragraph relating to the substantial doubt as to the
Company's ability to continue as a going concern.
The Company does not have sufficient 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.
The Company is not compliant with all of the required annual and periodic
filings.
12
As of the date of this report, we have not filed all of the reports necessary to
be compliant with the Securities and Exchange Commission's requirements for
publicly traded companies. The fact that we are not compliant means, among other
things, that there is not current information publicly available to shareholders
or potential investors. Although the Company intends to file all of the reports
required to become compliant, there can be no assurance that we will be
successful in doing so.
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.
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 stock
prices for other biotechnology companies. A significant drop in our stock price
could expose us to the risk of securities class action lawsuits. Defending
against such lawsuits could result in substantial costs and divert management's
attention and resources. An unfavorable outcome of such a matter may have a
material adverse impact on the business, results of operations, financial
position, or liquidity.
General Economic and Other Conditions.
The Company's business may be adversely affected from time to time by such
matters as changes in general economic, business and international conditions,
prices and costs, technological developments and other factors of a general
nature.
We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future.
We have not declared, paid, or distributed any cash dividends on our shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.
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 significant 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 obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.
13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
All of the Company's long-term debt is at fixed rates; therefore, the fair value
of these instruments is not affected by changes in market interest rates.
Foreign Currency Exchange Risk
Dauphin was exposed to foreign exchange risks through its branch operation in
Greece and has been included in discontinued operations.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements are included in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting or Financial
Disclosure
On March 1, 2005, our Board of Directors determined to engage Tanner LC, Salt
Lake City, Utah, as the Company's independent registered public accounting firm.
Previously, we had engaged Grant Thornton LP, Chicago, Illinois, as our
independent auditor through the year ended December 31, 2001. Grant Thornton LP
informed the Company on June 25, 2003, that the auditor relationship had ceased
with the Company. The report of Grant Thornton LP on the Company's consolidated
balance sheet as of December 31, 2001, and the related consolidated statements
of operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 2001, contain a qualified opinion as to a going
concern.
In connection with our three most recent fiscal year audits and any subsequent
interim period preceding the disengagement of Grant Thornton LP, there were no
disagreements with Grant Thornton LP or reportable events on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
the former accountant, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. In connection with its
audit of the Company's 2001 financial statements, Grant Thornton LP noted no
matters involving the internal control structure and operations that they
considered to be material weaknesses.
No consultations occurred between the Company and Tanner LC during the three
most recent fiscal years and any subsequent interim period prior to Tanner LC's
appointment regarding either(i) the application of accounting principles to a
specific completed or contemplated transaction, the type of audit opinion that
might be rendered on the Company's financial statements, or other information
provided that was considered by the Company in reaching a decision as to an
accounting, auditing, or financial reporting issue, or (ii) any matter that was
the subject of disagreement or a reportable event requiring disclosure under
Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that financial
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized, and reported within the required time periods, and 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 the 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."
14
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.
There has been no change in our internal control over financial reporting during
the fourth quarter ended December 31, 2004, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Officers of the Registrant
Directors and Officers
The following table sets forth the name, age, date elected or appointed as
Director, Executive Officer or Officer position with the Company, present
principal occupation and employment history for the past five years of each
person who is a Director, Executive Officer or Officer.
Name Age Date Present Office
- ---- --- ---- --------------
Andrew J. Kandalepas 55 1995 Chairman of the Board of Directors
Chief Executive Officer
Chief Financial Officer
Mr. Kandalepas joined Dauphin as Chairman of the Board in February
1995. He was named CEO and President of Dauphin in November of 1995. In
addition, Mr. Kandalepas is the founder and President of CADserv,
engineering services firm. Mr. Kandalepas graduated from DeVry
Institute in 1974 with a Bachelor's Degree in Electronics Engineering
Technology. He then served as a product engineer at GTE for two years.
Mr. Kandalepas left GTE to serve ten years as a supervisor of PCB
design for Motorola prior to founding CADserv in 1986.
Gary E. Soiney 65 1995 Secretary, Director
Mr. Soiney has served as a Director since November of 1995. He is also
a member of the Audit Committee. Mr. Soiney graduated from the
University of Wisconsin in Milwaukee with a degree in Business
Administration. He is currently a 75% owner in Pension Design &
Services, Inc., a Wisconsin corporation, which performs administrative
services for qualified pension plans to business primarily in the
Mid-West.
Dr. Daniel D. Kiddy 42 2002 Director
Dr. Kiddy was elected to the Board of Directors at the Annual Meeting
of Shareholders held on June 25, 2002. Dr. Kiddy is a surgeon
specializing in podiatric medicine with a private practice in O'Fallon,
Missouri. He began private practice in 1992 after completing surgical
residencies at Yale, St. Raphael Hospital in New Haven, Connecticut and
at Delaware Valley Medical Center. He is currently on the executive
medical committee for Unity Health Care and operates private business
providing healthcare to patients in over 150 nursing homes throughout
the state of Missouri.
15
All Directors are elected annually and hold office until the next annual meeting
of the shareholders of the Company or until their successors have been elected
and qualified.
Other: Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions material to the evaluation of the ability and
integrity of any Director or Executive Officer during the past five years.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, as amended, requires our executive officers
and directors and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC initial statements of beneficial
ownership, reports of changes in ownership and annual reports concerning their
ownership, of common stock and other of our equity securities on Forms 3, 4, and
5, respectively. Executive officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish us with copies of all Section 16(a)
reports they file. To the best of our knowledge, none of our executive officers
or directors have complied with all Section 16(a) filing requirements applicable
to them during our most recent fiscal year. However, and in connection with our
program to bring ourselves current, each of our directors, executive officers
and 5% stockholders have agreed to make all requisite Exchange Act filings as
promptly as possible.
Involvement by Management in Public Companies
None of the Directors, Executive Officers or Officers has had, or presently has,
any involvement with a public company, other than the Company.
Code of Ethics
The Company has not yet adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions because we have not had any
operations since December 2003. Upon consummation of ongoing operations, we
intend to adopt one.
Item 11. Executive Compensation
The following table sets forth in the format required by applicable regulations
of the Securities and Exchange Commission the compensation for Executive
Officers of the Company who served in such capacities as of December 31, 2004.
SUMMARY COMPENSATION TABLE
- ----------------------- --------- ---------------------------- ------------------------------- ------------------
FISCAL LONG-TERM ALL OTHER
YEAR ANNUAL COMPENSATION COMPENSATION (1) COMPENSATION
ENDED (2)
NAME AND TITLE DEC. 31
- ----------------------- --------- ------------ --------------- --------------- --------------- ------------------
SALARY BONUS AWARDS PAYOUTS
- ----------------------- --------- ------------ --------------- --------------- --------------- ------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
OPTIONS (#) PLAN PAY
OUTS ($)
- ----------------------- --------- ------------ --------------- --------------- --------------- ------------------
Andrew J. Kandalepas 2004 $195,000 $ -0- -0- $ -0- $ 5,000
Chairman, CEO and 2003 195,000 -0- -0- -0- 5,000
President 2002 195,000 -0- -0- -0- 5,000
- ----------------------- --------- ------------ --------------- --------------- --------------- ------------------
16
(1) The Company presently has no long-term compensation arrangements and
had no such plans during fiscal years 2002 through 2004.
(2) The amounts disclosed in this column consist of Company discretionary
contributions to the Company's 401(k) Plan and insurance premiums paid
by the Company. The Company made no discretionary contributions to the
410(k) Plan in fiscal years 2002 through 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of October 24, 2005, the number and percentage
of outstanding shares of the Company's common stock beneficially owned by (i)
each Executive Officer and Director, (ii) all Executive Officers and Directors
as a group, (iii) all persons known by the Company to own beneficially more than
5% of the Company's common stock. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain
shares may be deemed to be beneficially owned by more than one person (if, for
example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of an
option or warrant) within 60 days of the date as of which the information is
provided; in computing the percentage ownership of any person, the amount of
shares is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.
Amount and Nature Percent of
of Beneficial Shares of
Name Title Ownership Common Stock
- --------------------------------------------------------------------------------
Andrew J. Kandalepas Chairman, Chief
Executive Officer
& President 1,917,497 (1) 2.9%
Dr. Daniel D. Kiddy Director 1,555,350 (2) 1.6%
Gary E. Soiney Secretary, Director 500,000 (3) *
Executive Officers and
Directors as a group (3 persons) 3,972,847 (4) 4.5%
_____________________
* Less than 1%
(1) Includes a loan convertible into 850,000 shares.
(2) Includes a loan convertible into 1,380,000 shares.
(3) Includes a loan convertible into 500,000 shares.
(4) Includes loans convertible into 2,730,000 shares.
Item 13. Certain Relationships and Related Transactions
None
17
Item 14. Principal Accounting Fees and Services
Audit Fees
On March 1, 2005, we engaged Tanner LC ("Tanner") as our principal accountants
to audit our annual financial statements for the three fiscal years ended
December 31, 2004. Obviously we did not pay any fees to Tanner during the fiscal
year ended December 31, 2004. However, subsequent to that date and as of the
date of this report, we have paid Tanner approximately $135,000 for professional
services rendered in connection with the audit for the fiscal years ending
December 31, 2004 and 2003. We anticipate, however, that we will pay Tanner an
additional amount of money upon their completion of the audits for the fiscal
years ending December 31, 2004, 2003, and 2002.
Audit-Related Fees
There have been no additional fees billed to us by Tanner for professional
services rendered for assurance and related services reasonably related to the
performance of audit or review of our financial statements and not reported in
the previous paragraph.
Tax Fees
There have been no fees billed to us by Tanner for professional services
rendered for tax compliance and related tax services.
All Other Fees
There have been no other fees billed to us by Tanner for services rendered other
than the services described in the previous three paragraphs.
The engagement of Tanner to render audit or non-audit services required the
prior approval of our Board of Directors since we do not have an audit committee
of our Board of Directors.
PART IV
Item 15. Exhibits, Financial Statement Schedules
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accountanting Firm..................F-2
Consolidated Balance Sheets - December 31, 2004 and 2003....................F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002, and cumulative amounts....................F-4
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2002, 2003 and 2004................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002, and cumulative amounts....................F-6
Notes to Consolidated Financial Statements..................................F-7
INDEX TO EXHIBITS
Exhibit
Number
- -------
31.1 Certification of Chief Executive 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 of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
BY: /s/ Andrew J. Kandalepas
-------------------------
Andrew J. Kandalepas,
President, Chief Executive and Chief Financial Officer
(Principal Executive and Financial Officer)
Date: January 17, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Andrew J. Kandalepas Chairman of the Board of Directors January 17, 2006
Andrew J. Kandalepas Chief Executive Officer, President,
Chief Financial Officer
/s/ Daniel D. Kiddy Director January 17, 2006
Dr. Daniel D. Kiddy
/s/ Gary E. Soiney Secretary and Director January 17, 2006
Gary E. Soiney
19
Dauphin Technology, Inc.
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Report of Independent Registered Public Accountanting Firm..................F-2
Consolidated Balance Sheets - December 31, 2004 and 2003....................F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002, and cumulative amounts....................F-4
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2002, 2003 and 2004................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002, and cumulative amounts....................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dauphin Technology, Inc.
We have audited the accompanying consolidated balance sheets of Dauphin
Technology, Inc. ("Company" "development stage company") as of December 31, 2004
and 2003, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for the years ended December 31, 2004, 2003 and
2002, and cumulative amounts. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dauphin Technology,
Inc. as of December 31, 2004 and 2003, and the results of their operations and
cash flows for the years ended December 31, 2004, 2003 and 2002, and cumulative
amounts in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses,
negative cash flows from operations and has discontinued substantially all of
its operations. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/TANNER LC
Salt Lake City, Utah
November 11, 2005
F-2
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
- --------------------------------------------------------------------------------------------------------------
ASSETS
2004 2003
---- ----
CURRENT ASSETS:
Cash $ 7,829 $ 326
Accounts receivable-Employee - 3,248
Prepaid expenses 2,500 2,500
Assets from discontinued operations 8,832 166,123
------------- ------------
Total assets $ 19,161 $ 172,197
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 68,602 $ 133,089
Accrued expenses 323,838 368,340
Short-term borrowings 200,000 200,000
Current portion of long-term debt 13,515 10,924
Derivative liability 760,565 984,979
Convertible debentures, net of debt
discount of $- and $333,750, respectively 950,000 1,101,246
Liabilities from discontinued operations 243,748 1,188,240
------------- ------------
Total current liabilities 2,560,268 3,986,818
LONG TERM DEBT - 2,591
CONVERTIBLE LOANS 2,405,078 -
------------- ------------
Total liabilities $ 4,965,346 $ 3,989,409
============= ============
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 10,000,000 shares authorized but
unissued - -
Common stock, $0.001 par value, 100,000,000 shares authorized;
98,501,688 shares issued and outstanding at December 31, 2004 and
82,994,811 shares issued and outstanding at December 31, 2003 98,502 82,996
Additional paid-in capital 65,081,192 64,017,865
Accumulated deficit (70,125,879) (67,918,075)
------------- ------------
Total shareholders' deficit (4,946,185) (3,817,212)
------------- ------------
Total liabilities and shareholders' deficit $ 19,161 $ 172,197
============= ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2004, 2003 and
2002, and Cumulative Amounts
- ------------------------------------------------------------------------------------------------------------
2004
and
Cumulative Amounts
since becoming a
development stage company 2003 2002
------------------------- ---- ----
NET SALES $ - $ - $ 19,621
COST OF SALES - - 15,000
---------------- ---------------- --------------
Gross profit - - 4,621
GENERAL AND ADMINISTRATIVE EXPENSES 1,548,900 676,643 2,413,065
---------------- ---------------- --------------
Loss from operations (1,548,900) (676,643) (2,408,444)
Derivative gain 227,197 496,375 1,243,460
INTEREST EXPENSE (337,238) (554,891) (927,879)
INTEREST INCOME - - 5,522
---------------- ---------------- --------------
Loss from continuing operations before income
taxes and discontinued operations (1,658,941) (735,159) (2,087,341)
INCOME TAXES - - -
---------------- ---------------- --------------
Net loss from continuing operations (1,658,941) (735,159) (2,087,341)
DISCONTINUED OPERATIONS
Loss from discontinued operations (548,865) (1,115,496) (2,978,505)
Loss from sale of discontinued assets - (1,226,425) -
---------------- ---------------- --------------
(548,865) (2,341,921) (2,978,505)
---------------- ---------------- --------------
Net loss $ (2,207,806) $ (3,077,080) $ (5,065,846)
================ ================ ==============
LOSS PER SHARE:
Continuing Operations $ (0.02) $ (0.01) $ (0.03)
Discontinued Operations (0.00) (0.03) (0.04)
---------------- ---------------- --------------
Total Basic and Diluted $ (0.02) $ (0.04) $ (0.07)
================ ================ ==============
Weighted average number of shares of common stock
outstanding
Basic 96,794,000 81,041,000 67,222,000
Diluted 96,794,000 81,041,000 67,222,000
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2002, 2003 and 2004
Common
Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------
Balance, December 31, 2001
as previously reported 64,059,813 $ 64,061 $ 61,578,905 $ (59,594,075) $ 2,048,891
Adjustment for derivative
liability (Note 17) - - (1,598,879) (181,072) (1,779,951)
-----------------------------------------------------------------------------
Restated balance, January 1, 2002 64,059,813 64,061 59,980,026 (59,775,147) 268,940
Common stock issued for:
Cash 1,644,206 1,644 368,356 - 370,000
Exercise of stock options and
warrants 5,488,700 5,488 1,762,073 - 1,767,561
Conversion of convertible debt 1,989,700 1,990 548,010 - 550,000
Unamortized discount on debt
conversion - - (329,167) - (329,167)
Conversion of short-term
borrowings and accrued interest 1,551,000 1,551 309,949 - 311,500
Services 492,512 493 161,108 - 161,601
Repricing of warrants - - 388,058 - 388,058
Warrants issued for services - - 24,995 - 24,995
Beneficial conversion feature - - 66,000 - 66,000
Net loss - - - (5,065,846) (5,065,846)
-----------------------------------------------------------------------------
Balance, December 31, 2002 75,225,931 75,227 63,279,408 (64,840,993) (1,486,358)
Common stock issued for:
Cash 571,428 571 39,429 - 40,000
Exercise of stock options and
warrants 360,555 361 64,539 - 64,900
Conversion of convertible debt 5,145,887 5,146 609,855 - 615,001
Unamortized discount on debt
conversion - - (284,583) - (284,583)
Services 1,099,999 1,100 125,526 - 126,626
Exercise of warrants in lieu of
consulting fees owed 591,011 591 105,791 - 106,382
Warrants issued for services - - 77,900 - 77,900
Net loss - - - (3,077,080) (3,077,080)
-----------------------------------------------------------------------------
Balance, December 31, 2003 82,994,811 82,996 64,017,865 (67,918,073) (3,817,212)
Common stock issued for:
Cash 4,733,333 4,732 318,268 - 323,000
Conversion of convertible debt 9,273,544 9,274 375,726 - 385,000
Unamortized discount on debt
conversion - - (64,167) - (64,167)
Services 1,500,000 1,500 433,500 - 435,000
Net loss - - - (2,207,806) (2,207,806)
-----------------------------------------------------------------------------
Balance, December 31, 2004 98,501,688 $ 98,502 $ 65,081,192 $ (70,125,879) $ (4,946,185)
-----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and
2002, and Cumulative Amounts
- --------------------------------------------------------------------------------------------------------------
2004
and
Cumulative Amounts
since becoming a
development stage company 2003 2002
------------------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,207,806) $ (3,077,080) $ (5,065,846)
Non-cash items included in net loss
Depreciation and amortization - - 33,645
Amortization of debt discount 269,588 519,167 824,997
Loss on sale of building and equipment - 35,655 -
Convertible loans issued in lieu
of consulting fees 1,161,500 - -
Interest expense on convertible debt - - 66,000
Warrants issued in lieu of consulting fees - 77,900 24,995
Common stock issued to vendors - 126,626 161,601
Common stock issued for services 435,000 - -
Warrants exercised in lieu of consulting fees - 106,382 -
Repricing of warrants - - 388,058
Changes in:
Receivable employee 3,248 - -
Prepaid expenses - 4,753 1,936
Assets from discontinued operations 157,291 1,711,009 1,781,243
Accounts payable (64,487) (223,641) 158,061
Accrued expenses (44,503) 230,127 129,690
Liabilities from discontinued operations (944,492) 777,410 35,273
------------- ------------- -------------
Net cash (used in) provided by
operating activities (1,234,661) 288,308 (1,460,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - 7,670 -
------------- ------------- -------------
Net cash provided by investing activities - 7,670 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares 323,000 40,000 370,000
Proceeds from exercise of warrants and options - 64,900 1,767,561
Issuance of convertible debentures and warrants net
of financing - - 250,000
Derivative Liability (224,414) (496,376) (1,243,460)
Increase in short-term borrowing - 150,000 355,000
Issuance of convertible loans 1,243,578 - -
Repayment of convertible debentures (100,000) (150,000) -
Repayment of long-term leases and other obligations - (1,638) (110,934)
------------- ------------- -------------
Net cash (used in) provided by financing
activities 1,242,164 (393,114) 1,388,167
------------- ------------- -------------
Net increase (decrease) in cash 7,503 (97,136) (72,180)
CASH, beginning of year 326 97,462 169,642
------------- ------------- -------------
CASH, end of year $ 7,829 $ 326 $ 97,462
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 18,262 $ 7,407 $ 13,014
Income Taxes - - -
NONCASH TRANSACTIONS:
Common stock issued in connection with
Conversion of short-term borrowings and accrued
interest to common stock $ - $ - $ 311,500
Conversion of note to common stock 385,000 615,001 550,000
Unamortized discount upon converstion of debt 64,167 284,583 329,167
Warrants forfeited 344,694 1,516,862 51,250
The accompanying notes are an integral part of these consolidated financial statements
F-6
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
marketed mobile hand-held, pen-based computers, broadband set-top boxes and
provided private, interactive cable systems to the extended stay hospitality
industry out of the corporate offices located in northern Illinois, a facility
in central Florida and a branch office in Piraeus, Greece. The Company, an
Illinois corporation, was formed on June 6, 1988 and became a public entity in
1991. 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 accumulation of a
significant dollar amount of assets, or (iii) in earnings. Because of a lack of
resources, we were unable to comply 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 effective approximately January 1, 2004 to discontinue all operations and
to seek out potential merger and or acquisition candidates.
Development Stage Company
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.
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 inter-company transactions and balances have been eliminated in
consolidation. The wholly owned subsidiaries have been classified as
discontinued operations for all periods presented.
2. GOING CONCERN:
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. 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 obligations, and obtaining
additional outside financing. The Company has funded losses from operations in
the current year 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 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.
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.
3. SUMMARY OF MAJOR 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.
F-7
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued:
Trade Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
identifying troubled accounts and by using historical experience applied to an
aging of accounts.
The Company grants credit to its customers, substantially all of whom are
businesses located in the United States. The Company does not require collateral
on any of its trade accounts receivable. Accounts over 60 days are considered
past due. Accounts are charged-off when deemed uncollectible.
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.
(Loss) Per Common Share
Basic loss per common share is calculated by dividing net loss for the year by
the weighted-average number of shares outstanding during the period, which were
96,794,000, 81,041,000 and 67,222,000 for the years ended December 31, 2004,
2003 and 2002, respectively. Diluted loss per common share is adjusted for the
assumed exercise of stock options and warrants unless such adjustment would have
an anti-dilutive effect
Stock Compensation
Stock Options and Stock-Based Compensation - For stock options granted to
employees, the Company utilizes the footnote disclosure provisions of Statement
of Financial Accounting Standards (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 entity 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 has 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. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date consistent with the provisions of SFAS No. 123,
the Company's net loss and loss per share would have been as indicated below:
Years Ended December 31,
2004 2003 2002
----------------------------------------------
Reported net loss applicable to
common stockholders $ (2,207,806) $ (3,077,080) $ (5,065,846)
Deduct: Total stock-based employee
compensation determined under fair
value based method, net of
related tax effects - (19,000) (413,000)
----------------------------------------------
Pro forma net loss $ (2,207,806) $ (3,096,080) $ (5,478,846)
==============================================
Basic and diluted loss per share:
As reported $ (0.02) $ (0.04) $ (0.07)
==============================================
Pro forma $ (0.02) $ (0.04) $ (0.08)
==============================================
F-8
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued:
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.0% 5.0% 5.0%
Volatility factor 201% 233% 254%
Expected life in years 2.75 2.75 2.75
The weighted average fair value of options and warrants granted during 2004,
2003 and 2002 was $0.00, $0.17 and $0.80, respectively.
Weighted Average Shares
The computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during the 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 626,666 shares, 2,041,730
shares and 5,833,062 shares at December 31, 2004, 2003, and 2002, respectively,
at prices between $.12 and $2.75 and warrants to purchase 1,704,999 shares,
2,213,671 shares and 3,922,544 shares at December 31, 2004, 2003, and 2002,
respectively, at prices between $.12 and $3.74 were outstanding but were
excluded for the calculation of diluted income (loss) per share as the effect
was anti-dilutive.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization expense is included in general and
administrative expenses and loss from discontinued operations and is computed
using the straight-line and mid-quarter methods over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the life
of the respective lease or the service life of the improvements. The Company
capitalizes assets with a cost in excess of one thousand dollars.
Upon retirement or other disposition of property and equipment, the cost and
related accumulated depreciation and amortization are removed from their
respective accounts. The resulting gain or loss is included in the determination
of net earnings (loss). Major renewals and betterments are capitalized while
minor expenditures for maintenance and repairs are charged to expense as
incurred.
Long-Lived Assets
The Company evaluates the carrying value of long-term assets based upon current
and anticipated undiscounted cash flows, and recognizes impairment where such
estimated cash flows will be less than the carrying value of the assets.
Measurement of the amount of the impairment, if any, is based upon the
difference between the carrying value and fair value.
Revenue
The Company recognizes revenue on sales of its products when persuasive evidence
of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is reasonably assured.
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.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of trade accounts receivable and the derivative
liability. In the normal course of business, the Company provides credit terms
to its customers. Accordingly, the Company performs ongoing credit evaluations
of its customers and maintains allowances for possible losses which, when
realized, have been within the range of management's expectations. The Company
adjusts the derivative to the fair market value at each period end based upon
the Black Scholes calculations.
F-9
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued:
Fair Value of Financial Instruments
The Company financial instruments consist of cash, receivables, notes
receivables, payables, derivative and notes payable. The carrying amount of
cash, receivables and payables approximates fair value because of the short-term
nature of these items. The aggregate carrying amount of the notes receivable and
notes payable approximates fair value as the individual notes bear interest at
market interest rates.
Reclassification
Certain balances in the 2003 and 2002 consolidated financial statements have
been reclassified to conform to the current year presentation.
4. ACCRUED EXPENSES:
Accrued expenses reported as current liabilities consist of the following:
Years ended December 31,
2004 2003
---- ----
Compensation and related taxes $ 178,000 $ 244,000
Interest 55,000 47,000
Other 90,838 77,340
----------- -----------
Total $ 323,838 $ 368,340
=========== ===========
The accrued compensation is payable to our chief executive officer, with amounts
originating from fiscal years 2002 through fiscal year 2004.
5. SHORT-TERM BORROWINGS:
In December 2004, the Company entered into a loan agreement with an individual
for $200,000. The loan was due in June 2005 and bore an interest rate of 10% per
annum and is unsecured. In April 2005, the loan was converted into preferred
shares of the Company in conjunction with a financing arrangement with the same
investor as described in Footnote 20 Subsequent Events.
6. LONG-TERM DEBT:
As of December 31, 2004, Long-term debt is presented as $0.0, however the
current portion of long-term debt is $13,515 because it came due in June 2004.
At December 31, 2004 and 2003 long-term debt consisted of a loan with McHenry
County Department of Planning and Development, payable in equal monthly
installments over 24 months with 4.11% interest and is unsecured. This loan is
unsecured and was due on June 15, 2004, and is currently in default. To date,
this loan has not been paid.
7. CONVERTIBLE LOANS:
During the year 2004, the Company entered into 2% convertible loan agreements
with approximately 30 individuals in exchange for $1,243,578 in cash. In
addition, the Company issued convertible agreements in the amount of $1,161,500
for various settlement of amounts due vendors for services provided to the
Company during the year. The convertible agreements can be converted into common
stock of the Company at prices ranging from $0.05 to $0.13 per share. To date,
none of these loans have been converted, are all due in 2006 and are unsecured.
F-10
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
8. CONVERTIBLE DEBENTURES:
At December 31, 2004 and 2003, convertible debentures totaled $950,000 and
$1,101,246, net of debt discounts of $0 and $333,750 respectively. The debt
discount arose from the allocation of the proceeds between the debt and the
embedded derivative relating to the conversion feature and the warrants issued
with the convertible debentures. The debt discount is being amortized over the
life of the loan and is adjusted as the debentures are converted to common
stock. The amounts at both year ended 2004 and 2003 are attributable to the
financing arrangement the Company had with Crescent International Ltd. as
described below.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million on October 2, 2001. Although the Company had the option to issue further
convertible notes to Crescent subject to certain conditions precedent, such
option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The
Securities Purchase Agreement further permits the Company to sell to Crescent up
to $7.5 million in common stock of the Company over a 24-month period.
Additionally, the Company agreed not to exercise any drawdowns against its
existing common stock purchase agreement with Techrich International Ltd., which
expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued. The Convertible Note was funded on October 2, 2001
and was due September 28, 2004, and is currently in default. The Company shall
not be required to pay interest on the Convertible Note unless the Company fails
to deliver shares upon conversion. In such event, the Note will bear an interest
rate of 8.0% per annum, payable in quarterly installments. The holder of the
convertible debenture converted in 2002, 2003 and 2004, $700,000, $615,001 and
$385,000, respectively, of the debenture note. It was determined under EITF
00-19, EITF 05-02 and SFAS 133 that this convertible debenture contains a
derivative.
9. DERIVATIVE LIABILITY
SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments embedded in other contracts. As required by SFAS 133, the
Company records all derivatives on the balance sheet at fair value. The Company
reports as income or loss in the current financial statements the change in the
fair value of the derivative at the balance sheet date with that of the previous
reported date. The Company has derivative liabilities arising from the following
at December 31, 2004 and 2003:
F-11
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
9. DERIVATIVE LIABILITY - Continued:
2004 2003
---- ----
Derivative arising from the issuance
of the Convertible debentures and
warrant to Crescent International.
The underlying debt was due
September 2004 and the derivative
is currently due. See Note 8. $ 593,990 $ 984,979
Derivative arising from the warrants
granted with insufficient unissued
shares available. The derivative is
currently due. $ 166,575 -
------------ ------------
Total $ 760,565 $ 984,979
============ ============
10. WARRANTS:
During 2003, the Company issued warrants to purchase 699,999 shares of common
stock, to certain investors at exercise prices ranging from $0.10 to $0.56 per
share (approximating the market price at date of grant). The warrants expire in
three to five years. The warrants issued to consultants are measured at fair
value and recorded as expense, while the warrants issued in capital raising are
measured in fair value and recorded as an offset of the capital received. The
warrants are recorded at the fair value estimated on the date of grant based on
the Black-Scholes single-option-pricing model:
December 31, 2004 December 31, 2003
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 5.0%
Volatility factor 201% 233%
Expected life in years 2.75 2.75
Information regarding these warrants for 2004 and 2003 is as follows:
2004 2003
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
Warrants outstanding beginning of year 2,213,671 $ 0.7867 3,922,544 $ 2.0809
Warrants exercised - - (951,566) 0.6221
Warrants granted - - 699,999 1.3316
Warrants expired (508,672) 0.6125 (1,457,306) 1.3896
----------- --------- ----------- ---------
Warrants outstanding at year end 1,704,999 $ 0.6834 2,213,671 $ 0.7867
Weighted average fair value of
warrants granted during the year $ - $ 0.1143
Warrants exercisable at year end 1,704,999 2,213,671
Warrant price range at year end $ 0.10 to $1.3064 $ 0.10 to $5.481
The following table summarizes information about the warrants outstanding at
December 31, 2004 and 2003:
DECEMBER 31, 2004
Warrants Outstanding Warrants Exercisable
- ---------------------------------------------------------------------------------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Shares Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Exercise Price
$0.1000 200,000 1.35 $0.1000 200,000 $0.1000
$0.1200 499,999 1.35 $0.1200 499,999 $0.1200
$0.5600 305,000 0.92 $0.5600 305,000 $0.5600
$1.3064 700,000 1.74 $1.3064 700,000 $1.3064
--------- ---- ------- --------- -------
Total for 2004 1,704,999 1.43 $0.6834 1,704,999 $0.6834
F-12
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
10. WARRANTS - Continued
DECEMBER 31, 2003
Warrants Outstanding Warrants Exercisable
- ---------------------------------------------------------------------------------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Shares Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Exercise Price
$0.1000 200,000 2.35 $0.1000 200,000 $0.1000
$0.1200 499,999 2.35 $0.1200 499,999 $0.1200
$0.4600 108,000 0.53 $0.4600 108,000 $0.4600
$0.5600 305,000 1.92 $0.5600 305,000 $0.5600
$1.1000 142,000 0.20 $1.1000 142,000 $1.1000
$1.1452 22,006 0.72 $1.1452 22,006 $1.1452
$1.3064 700,000 2.74 $1.3064 700,000 $1.3064
$1.3600 70,000 0.31 $1.3600 70,00 $1.3600
$1.5000 166,666 0.78 $1.5000 166,666 $1.5000
--------------- ------------------- ----------------- ------------------ -----------------
Total for 2003 2,213,671 1.98 $0.7867 2,213,671 $0.7867
During 2004 and 2003, 508,672 and 1,457,306 warrants, respectively, with a value
of $344,694 and $1,516,862, respectively, expired and were forfeited without
being exercised.
During 2002, the Company re-priced approximately 6,201,000 warrants it had
previously issued to outside consultants and warrant holders. The warrants
carried an exercise price ranging from $7.50 to $0.25, and were re-priced with
exercise prices ranging from $0.60 to $0.18 per share. The total re-pricing
created a charge to earnings of approximately $388,000, which was calculated
using the Black-Scholes pricing model assuming 0% dividend yield, risk free
interest rate of 6%, volatility factor of 433% and an expected life equal to the
number of days remaining before the warrants would expire. These ranged from 589
days to 32 days.
11. STOCK OPTIONS:
Information regarding stock options for 2004 and 2003 is as follows:
2004 2003
---- ----
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Options outstanding beginning of year 2,041,730 $ 1.3532 5,833,062 $ 1.3913
Options exercised - - - -
Options granted - - 110,000 0.9018
Options forfeited (1,415,064) - (3,901,332) -
---------- --------- ---------- ---------
Options outstanding at year end 626,666 $ 1.3532 2,041,730 $ 1.3532
Weighted average fair value of
options granted during the year $ - $ 0.1745
Options exercisable at year end 626,666 2,041,730
Option price range at year end $ 0.12 to $2.75 $ 0.12 to $3.87
F-13
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
11. STOCK OPTIONS - Continued:
The following tables summarize information about the options outstanding at
December 31, 2004 and 2003:
DECEMBER 31, 2004
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -----------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------ --------- ----------------- -------------- ---------------- --------------
$ 0.1200 50,000 1.25 $ 0.1200 50,000 $ 0.1200
$ 0.2200 60,000 1.00 $ 0.2200 60,000 $ 0.2200
$ 0.3300 50,000 0.75 $ 0.3300 50,000 $ 0.3300
$ 0.5300 50,000 0.50 $ 0.5300 50,000 $ 0.5300
$ 0.6600 50,000 0.25 $ 0.6600 50,000 $ 0.6600
$ 0.7000 25,000 0.23 $ 0.7000 25,000 $ 0.7000
$ 0.9000 166,666 0.13 $ 0.9000 166,666 $ 0.9000
$ 1.0800 110,000 0.01 $ 1.0800 110,000 $ 1.0800
$ 1.1562 12,500 0.04 $ 1.1562 12,500 $ 1.1562
$ 1.3700 40,000 0.37 $ 1.3700 40,000 $ 1.3700
$ 2.7500 12,500 0.22 $ 2.7500 12,500 $ 2.7500
------- ---- -------- ------- --------
Total for 2004 626,666 0.39 $ 0.7741 626,666 $ 0.7741
DECEMBER 31, 2003
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- ------------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ----------------- --------- ---------------- -------------- ---------- --------------
$ 0.1200 50,000 2.25 $ 0.1200 50,000 $ 0.1200
$ 0.2200 60,000 2.00 $ 0.2200 60,000 $ 0.2200
$ 0.3300 50,000 1.75 $ 0.3300 50,000 $ 0.3300
$ 0.5300 50,000 1.50 $ 0.5300 50,000 $ 0.5300
$ 0.6600 50,000 1.25 $ 0.6600 50,000 $ 0.6600
$ 0.7000 25,000 1.23 $ 0.7000 25,000 $ 0.7000
$ 0.7600 3,750 0.92 $ 0.7600 3,750 $ 0.7600
$ 0.8700 16,000 0.88 $ 0.8700 16,000 $ 0.8700
$ 0.8900 85,566 0.88 $ 0.8900 85,566 $ 0.8900
$ 0.9000 166,666 1.13 $ 0.9000 166,666 $ 0.9000
$ 0.9800 50,000 0.75 $ 0.9800 50,000 $ 0.9800
$ 1.0000 16,000 1.88 $ 1.0000 16,000 $ 1.0000
$ 1.0500 25,000 0.98 $ 1.0500 25,000 $ 1.0500
$ 1.0800 350,000 0.78 $ 1.0800 350,000 $ 1.0800
$ 1.1562 37,500 0.79 $ 1.1562 37,500 $ 1.1562
$ 1.1600 50,000 0.87 $ 1.1600 50,000 $ 1.1600
$ 1.1900 3,750 0.67 $ 1.1900 3,750 $ 1.1900
$ 1.3100 20,000 0.32 $ 1.3100 20,000 $ 1.3100
$ 1.3700 50,000 1.25 $ 1.3700 50,000 $ 1.3700
$ 1.4100 166,666 0.63 $ 1.4100 166,666 $ 1.4100
$ 1.4600 200,000 0.50 $ 1.4600 200,000 $ 1.4600
$ 1.5156 25,000 0.23 $ 1.5156 25,000 $ 1.5156
$ 2.7500 107,500 0.62 $ 2.7500 107,500 $ 2.7500
$ 3.5938 50,000 0.16 $ 3.5938 50,000 $ 3.5938
$ 3.8750 333,332 0.25 $ 3.8750 333,332 $ 3.8750
--------- ---- -------- --------- --------
Total for 2003 2,041,730 0.81 $ 1.6443 2,041,730 $ 1.6443
F-14
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLAN:
The Company maintains a salary deferral 401(k) plan covering substantially all
employees who meet specified service requirements. Contributions are based upon
participants' salary deferrals and compensation and are made within Internal
Revenue Service limitations. For the years 2004, 2003 and 2002, the Company did
not make any matching contributions. The Company does not offer post-employment
or post-retirement benefits. The Company does not administer this plan, and
contributions are determined in accordance with provisions of the plan.
13. INCOME TAXES:
A reconciliation of the income tax benefit on losses at the U.S. federal
statutory rate to the reported income tax expense follows:
2004 2003 2002
---- ---- ----
U.S. federal statutory rate applied to pretax loss $ (750,000) $ (1,046,000) $ (1,722,000)
Permanent differences and adjustments 2,000 3,000 3,000
Change in valuation allowance 748,000 1,043,000 1,719,000
----------- ------------ ------------
Income tax provision $ - $ - $ -
=========== ============ ============
As of December 31, 2004 and 2003, the Company had generated deferred tax assets
as follows:
December 31,
2004 2003
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 18,990,000 $ 18,205,000
Intangible Assets 1,325,000 1,393,000
Depreciation - (163,000)
Accrued liabilities 61,000 64,000
Derative liability 260,000 336,000
Discount on covertible debenture - (113,000)
------------ ------------
Deferred tax assets 20,636,000 19,885,000
Less valuation allowance 20,636,000 19,885,000
------------ ------------
Net deferred tax asset $ - $ -
============ ============
Deferred income taxes include the tax impact of net operating loss (NOL)
carryforwards. Realization of these assets, as well as other assets listed
above, is contingent on future taxable earnings by the Company. A valuation
allowance of $20,636,000 and $19,885,000 at December 31, 2004 and 2003,
respectively, has been applied to these assets. During 1995, there was an
ownership change in the Company as defined under Section 382 of the Internal
Revenue Code of 1986, which adversely affects the Company's ability to utilize
the NOL carryforward.
The amount of net operating loss available for use is dependant upon the IRS
regulations in force at the time of usage. The amount of net operating loss may
be limited based upon a change of ownership.
14. COMMITMENTS AND CONTINGENCIES:
The Company conducts its operations from facilities which are rented under month
to month rental agreements and one non-cancelable operating lease in Greece. The
leases on the Greek facility expired in 2004. Minimum rental payments for 2004
amounted to approximately $70,000. Total rental expense was approximately
$75,000, $155,000 and 289,000 for 2004, 2003 and 2002 respectively.
During 2002, 2003 and 2004 the Company was engaged in various legal proceedings
as part of its business restructuring. The Company has not accrued any amounts
in the financial statements, the Company believes the amounts payable, if any,
will be immaterial to the Company's financial operations.
F-15
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
15. EQUITY TRANSACTIONS:
2004 Transactions
During the first quarter of 2004, the Company received proceeds in the amount of
$323,000 for the issuance of 4,733,333 shares of restricted common stock.
During the second quarter of 2004, the Company issued 1,500,000 in lieu of
consulting fees in the amount of $435,000.
During the year, Crescent International Ltd. exercised $385,000 of the
convertible note in exchange for 9,273,544 shares of common stock of the
Company. The related unamortized debt discount totaling $64,167 was reversed
through paid in capital.
2003 Transactions
During the first quarter of 2003, the Company received proceeds in the amount of
$64,900 for the exercise of 360,555 warrants. Additionally, two warrant holders
exercised 591,011 warrants in lieu of consulting fees due them in the amount of
$106,382.
During the second quarter of 2003, the Company issued 499,999 shares of
restricted common stock valued at $60,000 to a group of consultants for services
rendered to the Company. Additionally, these consultants were issued 699,999
warrants at a value of $77,900.00.
During the third quarter of 2003, the Company received proceeds in the amount of
$40,000 for the issuance of 571,428 shares of restricted common stock. The
Company also issued 300,000 shares of restricted common stock valued at $33,000
to a consultant for services rendered to the Company.
During 2003, 1,457,306 warrants with a value of $1,516,862 expired without being
exercised.
During 2003, Crescent International Ltd. exercised $615,000 of the convertible
note in exchange for 5,145,887 shares of common stock of the Company. The
related unamortized debt discount totaling $284,583 was reversed through paid in
capital.
In February 2003, the Company issued 300,000 shares of restricted common stock
valued at $33,626 to a consultant for services rendered in introducing the
Company to potential suppliers and vendors.
2002 Transactions
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.
F-16
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
15. EQUITY TRANSACTIONS - Continued:
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. The related unamortized debt
discount totaling $329,167 was reversed through paid in capital.
During the third quarter of 2002, Crescent International Ltd. ("Crescent")
exercised $100,000 of the convertible note in exchange for 300,000 shares of
common stock of the Company. During the fourth quarter of 2002, Crescent
exercised $450,000 of the convertible note in exchange for 1,689,717 shares of
common stock of the Company.
In December 2002, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Crescent International Ltd. for $220,000.
Upon receipt of the funds, the Company issued 844,206 shares of restricted
common stock to Crescent. In addition, the Company issued 492,495 shares of
restricted common stock to Crescent for settlement of fees associated with the
securities purchase agreement filed with the Securities and Exchange Commission
and approved on June 25, 2002, valued at $161,601.
In December 2002, the Company issued warrants to purchase 305,000 shares of
common stock at an exercise price of $0.56 per share as payment to consultant
for services rendered in establishing contacts with contract manufacturers in
the Far East.
In December 2002, the Company issued 825,000 shares of restricted common stock
to an investment company as re-payment for advances of $155,000.
In December 2002, the Company issued 426,000 shares of restricted common stock
for the conversion of a $100,000 convertible note at $0.25 per share and accrued
interest of $6,500.
In December 2002, the Company issued 800,000 shares of restricted common stock
to two individual investors in exchange for $150,000.
In December 2002, a convertible note holder exercised $50,000 of convertible
notes in exchange for 300,000 shares of common stock of the Company.
During the fourth quarter of 2002, the Company re-priced approximately 2,077,863
warrants it had previously issued to outside consultants and warrant holders.
The warrants were originally issued with an exercise price ranging from $7.50 to
$0.25, and were re-priced with an exercise prices ranging from $0.18 to $0.25
per share. The re-pricing created a charge to earnings of approximately $99,240,
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 20 months.
During the fourth quarter of 2002, the Company received proceeds in the amount
of $400,198 for the exercise of 1,721,200 warrants.
16. DISCONTINUED OPERATIONS:
During December of 2003, management decided to discontinue its current
operations in Greece due to insufficient sales and cash flows to support
operations. During the second quarter of 2003, management decided to sell the
net assets of its Suncoast Automation subsidiary and discontinue further
operations due to insufficient profitability and cash flows. Prior year
financial information has been restated to reflect these discontinued
operations. The sales price of Suncoast was $300,000 with a basis of $1,526,425,
which resulted in a loss of $1,226,425 from the sale.
F-17
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
16. DISCONTINUED OPERATIONS - Continued:
For the year ended December 31, 2004 and 2003, assets and liabilities from
discontinued operations consist of the following:
2004 2003
Assets from discontinued operations:
Cash $ 8,832 $ 2,732
Furniture and leasehold improvements, net - 163,391
--------- ----------
Total assets $ 8,832 $ 166,123
========= ==========
Liabilities from discontinued operations:
Accounts payable $ 178,031 $1,004,621
Accrued expenses 65,717 183,619
--------- ----------
Total liabilities $ 243,748 $1,188,240
========= ==========
Discontinued operations were as follows for the years ending December 31:
2004 2003 2002
---- ---- ----
Revenues $ 2,301 $ 3,321,844 $ 571,190
Cost of sales - 2,828,040 868,179
---------- ------------- ------------
Gross profit (loss) 2,301 493,804 (296,989)
Expenses 551,166 1,609,300 2,681,516
---------- ------------- ------------
Loss before income taxes (548,865) (1,115,496) (2,978,505)
Loss on sale of subsidiary - (1,226,425) -
Income tax benefit - - -
---------- ------------- ------------
Loss from discontinued
operations $ (548 865) $ (2,341,921) $ (2,978,505)
========== ============= ============
17. RESTATEMENT:
On September 28, 2001, the Company entered into a convertible debt financing
agreement where the Company received $2,500,000. The transaction was originally
recorded with a beneficial conversion feature and had a discount of $1,598,879
which was offset against the convertible debt with a corresponding increase to
equity. The discount was being amortized over the life of the note. At December
31, 2001, the unamortized discount was $1,346,804 with $252,075 recorded as an
expense for the amortization.
Upon further review, it was determined that the convertible debt agreement
should be accounted for under EITF 00-19, EITF 05-02 and SFAS 133, as a result
of the agreement containing a derivative. The agreement was considered to
include a derivative, as it did not contain a provision which set the total
number of shares that would satisfy the conversion of the debt into common stock
of the Company.
Based upon the above information, a derivative liability of $3,261,708 was
recorded as a liability at September 28, 2001, along with an expense for
$761,708 and debt discount of $2,500,000. The debt discount is being amortized
over the term of the loan. When conversions of the debentures to common stock
occurs, the related unamortized debt discount is reversed through paid in
capital in accordance with EITF 85-17. The derivative requires a mark to market
adjustment at every reporting period. At December 31, 2001, the derivative
liability was adjusted to the fair market value of $2,724,815. The adjustment of
$536,893 also reduced the expense which was recorded at the time of the
agreement. The net adjustment for the correction of the error for the fiscal
year ending December 31, 2001 is:
Dr. Cr.
Equity $1,598,879
Interest expense 252,075
Debt discount 1,346,804
To reverse beneficial conversion feature previously recorded:
Debt discount $2,291,667
Derivative loss 224,815
Interest expense 208,333
Derivative liability $2,724,815
To record derivative liability at fair value, debt discount and amortization of
debt discount.
F-18
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
A summary of selected quarterly information for 2004 and 2003 is as follows:
2004 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Revenues $ - $ - $ - $ -
Gross Profit (Loss) - - - -
Net Income (Loss) from operations 181,084 (918,090) (564,072) (357,863) Loss from
discontinued operations (80,765) (93,183) (46,314) (328,603)
Net Income (Loss) (100,319) (1,011,273) (610,386) (686,466)
Net Income (Loss) per share
from operations
Basic and Diluted $ (0.00) $ (0.01) $ (0.00) $ (0.01)
Net Loss per share from
discontinued operations
Basic and Diluted (0.00) (0.00) (0.00) (0.00)
Net Loss per share
Basic and Diluted (0.00) (0.01) (0.00) (0.01)
2003 Quarter Ended
March 3 June 30 Sept. 30 Dec. 31
Revenues $ - $ - $ - $ -
Gross Profit (Loss) - - - -
Net (loss) from operations (156,978) (255,500) (268,360) (54,321)
(Loss) income from
discontinued operations (112,439) 77,626 (93,098) (987,585)
Loss on sale of subsidiary - (1,226,425) - -
Net Loss (269,417) (1,404,299) (361,458) (1,041,906)
Net Loss per share from
Operations
Basic and Diluted $ (0.00) $ (0.00) $ (0.01) $ (0.00)
Net Loss per share from
Discontinued operations
Basic and Diluted (0.00) (0.01) (0.00) (0.02)
Net Loss per share
Basic and Diluted (0.00) (0.01) (0.01) (0.02)
F-19
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
19. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 123(R), Share-Based Payment, an
amendment of FASB Statements No. 123 and 95. FAS No. 123(R) replaces FAS No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees prospectively beginning with the first interim or annual period of the
first fiscal year beginning after June 15, 2005. This means that the Company
will be required to implement FAS No. 123(R) no later than the quarter beginning
July 1, 2005. The Company currently measures stock-based compensation in
accordance with APB Opinion No. 25, as discussed above. The Company anticipates
adopting the modified prospective method of FAS No. 123(R) on July 1, 2005. The
impact on the Company's financial condition or results of operations will depend
on the number and terms of stock options outstanding on the date of change, as
well as future options that may be granted. However, the Company does not
believe that the adoption of FAS No. 123(R) will have a material effect on the
Company's financial position and results of operations.
20. SUBSEQUENT EVENTS:
In the second quarter of 2005, the Company issued loan documents convertible
into 1,111,667 shares of our common stock to accredited investors in
consideration for receiving $382,000.
In the third quarter of 2005, the Company issued loan documents convertible into
85,000 shares of our common stock to accredited investors in consideration for
receiving $17,000.
In April 2005, the Company issued 10,000,000 million preferred shares to an
accredited investor in exchange for $550,000. The holder of the preferred shares
is entitled to 20 votes for each preferred share.
In July 2005, the Company entered into a non-binding letter of intent whereby
Dauphin intends to acquire all of the issued and outstanding capital stock of
GeoVax, Inc. a Georgia biotechnology company 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 proposed
transaction shall become binding upon the parties' execution of a Definitive
Merger and Reorganization Agreement, and an affirmative vote of approval from
each company's shareholders.
F-20