UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement Pursuant to Section 14 (c)
Check the appropriate Box:
|X| Preliminary Information Statement
|_| Confidential, for use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
|_| Definitive Information Statement
DAUPHIN TECHNOLOGY, INC.
------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required
|X| Fee computed on table below per Exchange Act Rules 14c-5(g) and
0-1:
(1) Title of each class of securities to which transaction applies:
common stock
(2) Aggregate number of securities to which transaction applies:
490,332,879
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. $0.63 is the average of the
five previous day's closing price and is multiplied by the number
of transaction shares to arrive at the transaction value. The fee,
as revised November 2005, is $107.00 per $1,000,000 of transaction
value; therefore the transaction value is then multiplied by
.000107 to arrive at the total fee.
(4) Proposed maximum aggregate value of transaction: $308,909,714
(5) Total Fee Paid: $33,053
|_| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previously filing
by registration statement number, or the Form or Schedule and the
date of its filing.
(1) Amount Previously Paid: $0
(2) Form, Schedule or Registration Statement No. NA
(3) Filing Party: NA
(4) Date Filed: August 17, 2006
Contact Person: A. O. Headman, Jr., ESQ, Cohne Rappaport & Segal
257 East 200 South, Suite 700, Salt Lake City, UT 84111;
Tel: 801-532-2666, Fax: 801-355-1813
DAUPHIN TECHNOLOGY, INC.
1014 East Algonquin Road, Suite 111
Schaumburg, IL 60173
NOTICE OF ACTION TO BE TAKEN WITHOUT A STOCKHOLDERS' MEETING
--------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
Notice is hereby given that Dauphin Technology, Inc. plans to take
certain corporate action pursuant to the written consent of our Board of
Directors and the holders of a majority of our outstanding voting securities
("Majority Stockholders"). The action we plan to take is to:
(i) amend our Articles of Incorporation to increase the number of
shares of common stock that we are authorized to issue from 100,000,000 to
850,000,000;
(ii) acquire GeoVax, Inc., a Georgia corporation, in a merger
transaction;
(iii) change our name to GeoVax Labs, Inc.;
(iv) elect a new Board of Directors; and
(v) adopt an equity incentive plan for use following the closing of the
Merger.
Under Illinois law, the approval of the holders of 2/3 of our
outstanding Voting Rights (defined below) is required to approve proposals (i),
(ii) and (iii) listed above. The approval of the holders of a majority of our
outstanding Voting Rights is required to approve proposals (iv) and (v). On
January 20, 2006, our Board of Directors unanimously approved the above
referenced proposals, and the Majority Stockholders have consented in writing to
each of the proposals. The action by written consent was sufficient to approve
and adopt each of the proposals. Accordingly, no other votes are necessary to
adopt or approve any of the proposals.
The Board of Directors has fixed the close of business on June 29, 2006
as the Record Date for determining the stockholders entitled to notice of the
foregoing.
THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS' MEETING
WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN AND NO PROXY OR VOTE IS
SOLICITED BY THIS NOTICE.
August __, 2006
By Order of the Board of Directors
This Notice and the accompanying Information Statement are dated August __, 2006
and are first being mailed to our stockholders on or about August __, 2006.
DAUPHIN TECHNOLOGY, INC.
1014 East Algonquin Road, Suite 111
Schaumburg, IL 60173
PRELIMINARY INFORMATION STATEMENT
---------------------------------
August __, 2006
This Information Statement is being provided to you by the
Board of Directors of Dauphin Technology, Inc.
_____________________
This Information Statement, and the Notice of Action Taken Without a
Stockholders' Meeting (jointly, the "Information Statement"), is furnished by
the Board of Directors of Dauphin Technology, Inc. ("Dauphin", the "Company,"
"we," or "us"), an Illinois corporation, to the holders of Dauphin's common
stock at June 29, 2006 (the "Record Date"), to provide information with respect
to action taken by the written consent of the Majority Stockholders (defined
below). Our Board of Directors and the Majority Stockholders approved by written
consent the following proposals:
o a proposal to amend our Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 to
850,000,000 shares (the "Authorized Shares Amendment Proposal");
o a proposal to enter into and consummate an Agreement and Plan of
Merger, as amended, (the "Merger Agreement") pursuant to which a
wholly-owned subsidiary of Dauphin will merge with and into
GeoVax, Inc. ("GeoVax"), a Georgia corporation (the "Merger"). As
a result of the Merger, the stockholders of GeoVax will own, in
the aggregate, 490,332,879 of the 733,332,879 shares of Dauphin
common stock outstanding immediately following the completion of
the Merger (the Merger Proposal");
o a proposal to amend our Articles of Incorporation to change our
name to GeoVax Labs, Inc. (the "Name Change Proposal");
o a proposal to adopt the GeoVax Labs, Inc. (formerly Dauphin
Technology, Inc.) 2006 Equity Incentive Plan (the "2006 Equity
Incentive Plan Proposal") for use following the completion of the
Merger; and
o the election of the following members to our Board of Directors
(the "Board Election"):
Donald G. Hildebrand
David A. Kennedy
Edith Murphree
Gary Teal
John N. (Jack) Spencer
Andrew J. Kandalepas
Dean G. Kollintzas
The above-listed proposals are collectively referred to as the
"Transaction Proposals."
Immediately following the closing of the Merger, the current Dauphin
common stock and preferred stock holders will own 119,969,028 shares of Dauphin
common stock (16.4% of the Dauphin common stock then issued and outstanding);
1
the GeoVax shareholders will own 490,332,879 shares of Dauphin common stock
(66.9% of the Dauphin common stock then issued and outstanding); and 123,030,972
shares of Dauphin common stock (16.7% of the Dauphin common stock then issued
and outstanding) will be owned by persons issued shares in exchange for the
conversion of debt, new cash investments and for services rendered.
Our Board of Directors decided to obtain written consent of the
Majority Stockholders (defined below) to avoid the costs and management time
required to hold a special meeting of stockholders. All required corporate
approvals of the Transaction Proposals have been obtained, subject to furnishing
this notice, and to 20 days elapsing from the date of this notice. This
Information Statement is furnished solely for the purpose of informing Dauphin
stockholders of this corporate action in the manner required by Rule 14c-2(b)
under the Securities Exchange Act of 1934, as amended.
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS
MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN.
We have asked brokers and other custodians, nominees, and fiduciaries
to forward this Information Statement to the beneficial owners of our common
stock held of record by such and Dauphin will reimburse the brokers and other
custodians, nominees, and fiduciaries for out-of-pocket expenses incurred in
forwarding such material.
INTEREST OF CERTAIN PERSONS IN FAVOR OF OR IN OPPOSITION
TO MATTERS ACTED UPON
Our President Andrew J. Kandalepas, will be issued 20,000,000 shares of
our common stock for services rendered in connection with the Merger. Dauphin is
not aware of any other interest that would be substantially affected through the
adoption of the Transaction Proposals, whether adversely or otherwise.
VOTING SECURITIES
As of the Record Date, Dauphin's authorized capitalization consisted of
100,000,000 shares of common stock, par value $.001 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. All of our preferred stock
has been designated as Series A Preferred Stock. Each share of Series A
Preferred Stock is convertible into two shares of our common stock. At June 29,
2006, the Record Date, we had 99,969,028 shares of common stock issued and
outstanding and 10,000,000 shares of Series A Preferred Stock issued and
outstanding.
Each share of common stock entitles its holder to one vote on each
matter submitted to the stockholders for a vote. Each share of Series A
Preferred Stock entitles the holder to 20 votes on each matter submitted to the
stockholders for a vote. Accordingly, as of the Record Date, we had a total of
299,969,028 rights to vote ("Voting Rights") outstanding consisting of
99,969,028 votes attributed to common stock and 200,000,000 votes attributed to
Series A Preferred Stock. We have obtained the written consent of the
stockholders representing 217,975,496 Voting Rights ("Majority Stockholders") on
each of the Transaction Proposals. The Majority Stockholders from whom we
obtained written consents were as follows:
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Name Votes
---------------------------------- ------------------
Stavros N. Pagageorgiou 1,500,000 (1)
Helen S. Pagageorgiou 1,500,000 (1)
Nikolaos S. Pagageorgiou 5,000,000 (1)
Vasiliki A. Leandrou 2,000,000 (1)
Per K. Reichborn 3,276,000 (2)
Marinis Loukas 2,213,896 (2)
Rick Jones 1,350,000 (2)
Peter M. Tsolinas 1,250,000 (2)
John Douros 1,732,600 (2)
Evangelos Alexandris 1,500,000 (2)
Spiro Angelos 1,000,000 (2)
Dan L. Schlapkol 2,045,000 (2)
Edwin E. Fromer 1,000,000 (2)
Mark Robins 2,608,000 (2)
(1) These votes are attributed to shares of preferred stock and were voted
pursuant to a conversion Agreement dated May 15, 2006.
(2) These votes are attributed to shares of common stock and were obtained
between June 28, 2006 and July 5, 2006.
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SUMMARY OF THE INFORMATION STATEMENT
This summary highlights selected information from this Information
Statement and does not contain all of the information that is important to you.
To better understand the Merger, you should read this entire document carefully,
including the Merger Agreement attached as Annex A to this Information
Statement, together with all other Annexes attached hereto.
The Parties
Dauphin (page 9). Dauphin is an inactive Illinois corporation.
Dauphin's current business plan is to commence active operations through the
completion of a reverse merger transaction with another operating company.
Dauphin has identified GeoVax as a suitable acquisition target. After the Merger
and as a result of the Name Change Proposal, Dauphin's name will be GeoVax Labs,
Inc. The mailing address of Dauphin's principal executive office is currently
1014 East Algonquin Road, Suite 111, Schaumburg, IL 60173, and its telephone
number is (847) 303-6566. After the Merger, Dauphin's address will be the
address of GeoVax. Dauphin's financial statements for the year ended December
31, 2005 and for the three months and six months ended June 30, 2006 are
attached to this Information Statement.
GeoVax Acquisition, Corp. GeoVax Acquisition, Corp. ("Merger
Subsidiary"), a wholly owned subsidiary of Dauphin, was organized as a
corporation under the laws of the State of Georgia on January 4, 2006. It was
formed to effect a Merger with GeoVax and is a wholly owned subsidiary of
Dauphin. Merger Subsidiary will merge into GeoVax in the Merger and will no
longer exist following the effective time of the Merger.
GeoVax (page 16). GeoVax is a development stage biotechnology company
established to develop, license, and commercialize the manufacture and sale of
human vaccines for diseases, such as AIDS, caused by Human Immunodeficiency
Virus ("HIV") and other infectious agents. GeoVax was incorporated in Georgia on
June 27, 2001. The mailing address of GeoVax's principal executive offices is
1256 Briarcliff Road, Atlanta, GA and its telephone number is (404) 727-0971.
Following the Merger, GeoVax will be a wholly owned subsidiary of Dauphin.
Geovax's financial statements for the year ended December 31, 2005 and for the
three months and six months ended June 30, 2006 are included in this Information
Statement.
The Merger (page 36)
The Merger Agreement provides for a business combination transaction by
means of a Merger between Merger Subsidiary and GeoVax in which GeoVax will be
the surviving entity. GeoVax will become a wholly owned subsidiary of Dauphin as
a result of the Merger. This will be accomplished through an exchange of all the
issued and outstanding shares of capital stock of GeoVax for shares of Dauphin
common stock. Dauphin and GeoVax plan to complete the Merger promptly but not
before the expiration of 20 days from the date this Information Statement is
mailed to Dauphin's Stockholders, provided that the conditions specified in the
Merger Agreement have been satisfied or waived. The Merger will be completed
when Articles of Merger are filed in the office of the Georgia Secretary of
State.
Operations Following the Merger
Following the Merger, Dauphin will be a holding company and will own
GeoVax as a wholly owned subsidiary. GeoVax will continue with its current
biotechnology operations following the Merger.
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Dauphin's Recommendations to Stockholders; Reasons for the Merger
After careful consideration of the terms and conditions of the Merger
Agreement, the amendment to the Articles of Incorporation, and the 2006 Equity
Incentive Plan, the Board of Directors of Dauphin has determined that the
Merger, and the other Transaction Proposals, are fair to, and in the best
interests of, Dauphin and the Dauphin stockholders. In reaching its decision
with respect to the Merger and the other Transaction Proposals, the Board of
Directors of Dauphin reviewed various industry and financial data and the due
diligence and evaluation materials provided by GeoVax to determine that the
consideration to be paid to the GeoVax stockholders was reasonable. Accordingly,
Dauphin's Board of Directors recommended that Dauphin's Majority Stockholders
vote in favor of each of the Transaction Proposals. Neither Dauphin nor GeoVax
obtained a fairness opinion as to whether the terms and conditions of the Merger
or the Merger consideration are fair.
Consent of Majority Stockholders
Under Illinois law, the approval of the holders of 2/3 of our
outstanding Voting Rights is required to approve (i) the Authorized Shares
Amendment Proposal; (ii) the Merger Proposal; and (iii) the Name Change
Proposal. Under Illinois law, the approval of the holders of a majority of our
outstanding Voting Rights is required to approve the 2006 Equity Incentive Plan
and the Board Election. The Majority Stockholders are those stockholders who
together own 217,975,496 of the Voting Rights (73%) and have consented in
writing to each of the Transaction Proposals. No additional Dauphin stockholder
approval is required to consummate the Transaction Proposals.
The Amendment to the Articles of Incorporation (page 34)
As a condition to the closing of the Merger and among the Transaction
Proposals approved by the Majority Stockholders, Dauphin will amend its Articles
of Incorporation to change its name to GeoVax Labs, Inc., and to increase the
number of shares of common stock authorized from 100,000,000 to 850,000,000. We
cannot complete the Merger unless we increase the number of shares of common
stock that we are authorized to issue.
The Proposed 2006 Equity Incentive Plan
As a condition to the closing of the Merger, we must adopt the 2006
Equity Incentive Plan ("2006 Equity Incentive Plan") for use following the
Merger. The 2006 Equity Incentive Plan has been approved, subject to the closing
of the Merger, by the Dauphin Board of Directors and the Majority Stockholders.
The 2006 Equity Incentive Plan reserves 36,000,000 shares of Dauphin common
stock for issuance in accordance with the plan's terms. The purpose of the 2006
Equity Incentive Plan is to enable Dauphin (which will then be named GeoVax
Labs, Inc.), after the closing date of the Merger, to offer an opportunity to
acquire a proprietary interest in Dauphin to the employees, officers, directors,
and consultants of Dauphin and GeoVax whose past, present, and/or potential
contributions to Dauphin or GeoVax have been, are, or will be important to the
success of Dauphin or GeoVax. The various types of awards that may be provided
under the plan will enable Dauphin to respond to changes in compensation
practices, tax laws, accounting regulations, and the size and diversity of its
business. The 2006 Equity Incentive Plan is included as Annex C to this
Information Statement.
Management of Dauphin and GeoVax (page 53)
Dauphin. After the consummation of the Merger, the Board of Directors
of Dauphin will consist of Andrew J. Kandalepas, Donald G. Hildebrand, David A.
Kennedy, Edith Murphree, John N. (Jack) Spencer, Gary Teal and Dean G.
5
Kollintzas. After the consummation of the Merger, the executive officers of
Dauphin are expected to be: Donald G. Hildebrand, Chairman/President/CEO; Andrew
J. Kandalepas, Vice Chairman and Vice President; Edith Murphree, Vice President;
and Gary Teal, Secretary/Treasurer.
GeoVax. After the consummation of the Merger, the Board of Directors of
GeoVax will consist of Donald G. Hildebrand, David A. Kennedy, Andrew J.
Kandalepas, John N. (Jack) Spencer, Edith Murphree, and Gary Teal. After the
consummation of the Merger, the executive officers of GeoVax will be: Donald G.
Hildebrand, Chairman/President/CEO; Andrew J. Kandalepas, Vice Chairman and Vice
President; Edith Murphree, Vice President; and Gary Teal, Secretary/Treasurer.
The Merger Consideration (page 40)
The holders of the outstanding shares of common stock and preferred
stock of GeoVax immediately before the Merger will receive in exchange for such
GeoVax shares an aggregate of 490,332,879 shares of Dauphin common stock
(assuming no GeoVax stockholder exercises his, her, or its dissenter's rights).
In addition, Dauphin will assume outstanding GeoVax stock options and warrants
that are not exercised prior to the Merger, each on terms comparable to the
Merger consideration paid to GeoVax's stockholders. The number of Dauphin Shares
that are issuable upon the exercise of outstanding GeoVax options and warrants
is approximately 34,319,910.
GeoVax stockholders will receive approximately 29.2832 shares of
Dauphin common stock for every share of GeoVax common and preferred stock that
they own.
Neither Dauphin nor GeoVax obtained a fairness opinion as to the terms
of the Merger or an appraisal or other valuation as to the value of Dauphin or
GeoVax.
Dissenters' Rights (page 56)
Dauphin stockholders do not have dissenters' rights under Illinois law
in connection with the Merger because their shares of common stock will remain
outstanding and unchanged after the Merger and Dauphin is not merging into
GeoVax in the Merger nor is GeoVax merging into Dauphin in the Merger.
The Board of Directors of GeoVax has determined that the consideration
to be paid to the GeoVax stockholders is reasonable and that the Merger is in
the best interest of GeoVax and its stockholders. Notwithstanding this, holders
of GeoVax capital stock who did not consent to the Merger Agreement and the
Merger may demand appraisal of their shares in compliance with the requirements
of Section 14-2-1302 of the Georgia Business Corporation Act and will be
entitled to be paid, in cash, the fair value of their shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger.
Provided however, that a condition to the closing of the Merger is that no
GeoVax stockholder shall exercise dissenter's rights.
Quotation or Listing (page 57)
Dauphin's outstanding common stock is currently quoted in the "Pink
Sheets." Following the completion of the Merger, Dauphin will use reasonable
efforts to obtain the listing for trading of Dauphin common stock on NASDAQ or
the OTCBB. As a result of the change of our name to GeoVax Labs, Inc., we will
be required to obtain a new trading symbol and a new cusip number.
Tax Consequences of the Merger (page 49)
We anticipate that the Merger will qualify as reorganization within the
meaning of Section 368(a) of the Internal Revenue Code; however, we have not
obtained a tax opinion, nor have we obtained any confirmation of such tax
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treatment from the Internal Revenue Service. We anticipate that a GeoVax
stockholder's receipt of Dauphin common stock in the Merger will be tax-free for
United States federal income tax purposes. We anticipate that no gain or loss
will be recognized by Dauphin or GeoVax as a result of the Merger.
Accounting Treatment (page 39)
We anticipate that the Merger will be accounted for under the purchase
method of accounting as a reverse acquisition in accordance with U.S. generally
accepted accounting principles for accounting and financial reporting purposes.
Under this method of accounting, Dauphin will be treated as the "acquired"
company. In accordance with guidance applicable to these circumstances, the
Merger will be considered to be a capital transaction in substance. Accordingly,
for accounting purposes, the Merger will be treated as the equivalent of GeoVax
issuing stock for the net monetary assets of Dauphin, accompanied by a
recapitalization. The net monetary assets of Dauphin will be stated at their
fair value, essentially equivalent to historical costs, with no goodwill or
other intangible assets recorded. The retained earnings deficit of GeoVax will
be carried forward after the Merger. Operations prior to the Merger will be
those of GeoVax.
Regulatory Matters
The Merger and the transactions contemplated by the Merger Agreement
are not subject to any additional federal or state regulatory requirement or
approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), except for filings with the State of Georgia necessary to
effectuate the transactions contemplated by the Merger proposal.
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION PROPOSALS
Q. Why am I receiving this A. Dauphin and GeoVax have agreed to a
Information Statement? business combination under the terms of the
Merger Agreement dated January 20, 2006, as
amended on June 29, 2006, which is
described in this Information Statement.
The Merger Agreement, as amended, is
referred to as the Merger Agreement. A copy
of the Merger Agreement is attached to this
Information Statement as Annex A, which we
encourage you to review.
The Transaction Proposals required approval
by Dauphin stockholders. In order to reduce
the expenses and time necessary to obtain
stockholder approval, we decided to obtain
stockholder approval by the written consent
of the holders of a majority of our Voting
Rights. We obtained approval of the holders
of 73% of Dauphin's total Voting Rights on
each of the Transaction Proposals.
Although we have obtained all stockholder
approval necessary to complete the
Transaction Proposals, we are required to
mail this Information Statement to all
Dauphin stockholders under Illinois
corporate law and SEC Rule 14c-2(b) before
we can complete the Merger.
Q. What are the Transaction A. The Transaction Proposals are proposals to
Proposals? (i) increase our authorized common shares
to 850,000,000; (ii) consummate the Merger;
(iii) change our name to GeoVax Labs, Inc.;
(iv) adopt an equity incentive plan; and
(v) elect new directors.
Q. Why is Dauphin proposing A. Dauphin's previous operations were
the Merger? unsuccessful and we have been a shell
corporation for several years. Our business
plan is to acquire another business in a
reverse merger transaction. Our Board of
Directors believes that GeoVax is a
suitable acquisition target and will
provide current Dauphin stockholders with
the potential for increased value of their
investment in Dauphin.
Q. What conditions are A. The Merger Agreement contains a number of
there to a closing of closing conditions all of which must be
the Merger? fulfilled or waived. The most significant
closing condition was that Dauphin must
have not less than $2,000,000 in net cash
assets prior to the closing of the Merger.
Pursuant to the Merger Agreement as
amended, Dauphin has tendered to GeoVax a
non-refundable deposit in the amount of
$2,000,000. We anticipate that, immediately
prior to closing, substantially all of our
debt will be converted to common stock.
Q. Why is Dauphin proposing A. Dauphin is proposing the 2006 Equity
the 2006 Equity Incentive Plan as a condition of the Merger
Incentive Plan? to enable us, following the Merger, to
attract, retain and reward directors,
officers, employees and consultants using
equity-based incentives. The 2006 Equity
Incentive Plan will be effective upon
consummation of the Merger.
Q. What will happen in the A. As a consequence of the Merger, a wholly
proposed Merger and owned subsidiary of Dauphin will be merged
Related Transactions? with and into GeoVax and GeoVax will
continue as the surviving corporation,
becoming a wholly owned subsidiary of
Dauphin operating under the name GeoVax,
Inc. Stockholders of GeoVax will become
stockholders of Dauphin. Dauphin's name
will be changed to GeoVax Labs, Inc.
Q. What will Dauphin A. Dauphin stockholders will not receive any
stockholders receive in additional shares of common stock or other
the Merger? consideration in the Merger. Dauphin
stockholders will continue to hold the
shares of Dauphin common stock that they
owned prior to the Merger.
Q. What will GeoVax A. GeoVax stockholders will receive their pro
stockholders receive in rata share of 490,332,879 shares of Dauphin
the Merger? common stock in exchange for their stock of
GeoVax. In the Merger, Dauphin will agree
to assume or adopt outstanding warrants and
options of GeoVax at the time of closing on
terms that are comparable to the Merger
consideration paid to GeoVax's
stockholders.
8
Q. How much of Dauphin will A. We anticipate that following the closing of
existing Dauphin the Merger, we will have the following
stockholders own after shares of common stock issued and
the Merger? outstanding:
shares owned by current
Dauphin common stockholders 99,969,028
shares issued to Dauphin
preferred stockholders 20,000,000
shares issued to Dauphin
debt holders 42,919,030
shares issued in private
placement 38,000,000
shares issued for services 40,000,000
shares reserved for
contingencies 2,611,942
shares issued to GeoVax
stockholders 490,332,879
-----------
Total 733,332,879
-----------
Q. Who will manage Dauphin? A. Following the Merger, the Board of
Directors of Dauphin will consist of Donald
G. Hildebrand, David A. Kennedy, John N.
(Jack) Spencer, Edith Murphree, and Gary
Teal, all of whom are currently directors
of GeoVax, Andrew J. Kandalepas, who is
currently a director and president of
Dauphin and Dean G. Kollintzas. Following
the Merger, the officers of Dauphin will
be: Donald G. Hildebrand,
Chairman/President/CEO; Andrew J.
Kandalepas, Vice Chairman and Vice
President; Edith Murphree, Vice President;
and Gary Teal, Secretary/Treasurer.
Q. What happens if the A. If the Merger is not consummated, we will
Merger is not continue to be a shell company and will
consummated? attempt to locate another target business
for potential acquisition.
Q. When do you expect the A. We anticipate that the Merger will be
Merger to be completed? completed promptly following the
fulfillment of all conditions to closing.
We anticipate the closing of the Merger
will occur, assuming the closing conditions
are met, in the third or fourth quarter
2006. For a description of the conditions
to completion of the Merger, see the
section entitled "Conditions to Closing of
the Merger" beginning on page 42.
Q. What do I need to do now? A. Dauphin urges all Dauphin stockholders to
read carefully and consider the information
contained in this Information Statement,
including the annexes, and to consider how
the Merger will affect you as a stockholder
of Dauphin.
Q. What are the federal We anticipate that the Merger will qualify
income tax consequences as a reorganization within the meaning of
of the Merger? Section 368(a) of the Internal Revenue
Code. We anticipate that a GeoVax
stockholder's receipt of Dauphin common
stock and warrants in the Merger will be
tax-free for United States federal income
tax purposes. We anticipate that no gain or
loss will be recognized by Dauphin or
GeoVax as a result of the Merger. For a
description of the material federal income
tax consequences of the Merger, please see
the information set forth in "Federal
Income Tax Consequences" beginning on page
49.
We have not obtained a tax opinion as to
the tax treatment of the Merger and how it
may affect Dauphin, GeoVax or their
respective stockholders.
Q. Who can help answer my A. If you have questions about the Merger or
questions? if you need additional copies of this
Information Statement you should contact:
Andrew J. Kandalepas
Dauphin Technology, Inc.
1014 East Algonquin Road, Suite 111
Shaumburg, IL 60174
Tel: (847) 303-6566
9
You may also obtain additional information
about Dauphin from documents filed with the
SEC by following the instructions in the
section entitled "Where You Can Find More
Information" on page 61.
INFORMATION CONCERNING DAUPHIN
Dauphin was formed on June 6, 1988 to engage in the computer business.
We are currently an inactive corporation. Our current business plan is to
commence active operations through the completion of a reverse merger
transaction with another operating company. Dauphin has identified GeoVax as a
suitable acquisition target.
In 1993 and 1994, Dauphin encountered severe financial problems. On
January 3, 1995, Dauphin 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. Dauphin 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 was primarily engaged
in designing and marketing mobile hand-held, pen-based computers and set-top
boxes. Dauphin also was a provider of private, interactive cable systems to the
extended stay hospitality industry. One of Dauphin's subsidiaries also performed
design services, specializing in hardware and software development, to customers
in the communications, computer, video, and automotive industries. Dauphin was
unsuccessful in these operations and terminated all operations in December 2003.
Business Plan
Our current business plan is to serve as a vehicle for the acquisition
of, or the merger or consolidation with another company (a "Target Business").
We have identified GeoVax as a suitable Target Business. If we are unable to
complete the proposed Merger with GeoVax, we will attempt to locate other Target
Businesses as potential merger partners.
We intend to utilize our limited current assets, equity securities,
debt securities, borrowings or a combination thereof in effecting a business
combination with a Target Business that we believe has significant growth
potential. Our efforts in identifying a prospective Target Business are expected
to emphasize businesses primarily located in the United States; however, we
reserve the right to acquire a Target Business located primarily elsewhere.
While we may, under certain circumstances, seek to effect business combinations
with more than one Target Business, as a result of our limited resources we
will, in all likelihood, have the ability to effect only a single business
combination.
We may effect a business combination with a Target Business that may be
financially unstable or in its early stages of development or growth. To the
extent we effect a business combination with a financially unstable company or
an entity in its early stage of development or growth (including entities
without established records of revenue or income); we will become subject to
numerous risks inherent in the business and operations of financially unstable
and early stage or potential emerging growth companies. In addition, to the
extent that we effect a business combination with an entity in an industry
characterized by a high level of risk, Dauphin will become subject to the
currently unascertainable risks of that industry. An extremely high level of
risk frequently characterizes certain industries, which experience rapid growth.
Although management will endeavor to evaluate the risks inherent in a particular
industry or Target Business, there can be no assurance that we will properly
ascertain or assess all risks.
10
Probable Lack of Business Diversification. As a result of our limited
resources, in all likelihood, we will have the ability to effect only a single
business combination. Accordingly, the prospects for our success will be
entirely dependent upon the future performance of a single business. Unlike
certain entities that have the resources to consummate several business
combinations or entities operating in multiple industries or multiple segments
of a single industry, it is highly likely that we will not have the resources to
diversify our operations or benefit from the possible spreading of risks or
offsetting of losses. Our probable lack of diversification may subject us to
numerous economic, competitive and regulatory developments, any or all of which
may have a material adverse impact upon the particular industry in which we may
operate subsequent to consummation of a business combination. The prospects for
our success may become dependent upon the development or market acceptance of a
single or limited number of products, processes or services. Accordingly,
notwithstanding the possibility of capital investment in and management
assistance to the Target Business by us, there can be no assurance that the
Target Business will prove to be commercially viable.
No Independent Appraisal of Potential Acquisition Candidates. We do not
anticipate that we will obtain an independent appraisal or valuation of a Target
Business. Therefore, our stockholders will need to rely primarily upon
management to evaluate a prospective business combination.
Limited Ability to Evaluate Management of a Target Business. The role
of our present management, following a business combination, cannot be stated
with any certainty. Although we intend to scrutinize closely the management of a
prospective Target Business in connection with our evaluation of the
desirability of effecting a business combination with such Target Business,
there can be no assurance that our assessment of such management will prove to
be correct. While it is possible that certain of our directors or our executive
officers will remain associated in some capacities with Dauphin following
consummation of a business combination, it is unlikely that any of them will
devote a substantial portion of their time to the affairs of Dauphin subsequent
thereto. Moreover, there can be no assurance that such personnel will have
significant experience or knowledge relating to the operations of the particular
Target Business. We also may seek to recruit additional personnel to supplement
the incumbent management of the Target Business. There can be no assurance that
we will have the ability to recruit additional personnel or that such additional
personnel will have the requisite skills, knowledge or experience necessary or
desirable to enhance the incumbent management. In addition, there can be no
assurance that the future management of the Company will have the necessary
skills, qualifications or abilities to manage a public company intending to
embark on a program of business development.
Selection of a Target Business and Structuring of a Business
Combination. Our management has substantial flexibility in identifying and
selecting a prospective Target Business within the specified businesses. In
evaluating a prospective Target Business, management will consider, among other
factors, the following: (i) costs associated with effecting the business
combination; (ii) equity interest in and opportunity for control of the Target
Business; (iii) growth potential of the Target Business; (iv) experience and
skill of management and availability of additional personnel of the Target
Business; (v) capital requirements of the Target Business; (vi) competitive
position of the Target Business; (vii) stage of development of the Target
Business; (viii) degree of current or potential market acceptance of the Target
Business; (ix) proprietary features and degree of intellectual property or other
protection of the Target Business; (x) the financial statements of the Target
Business; and (xi) the regulatory environment in which the Target Business
operates.
The foregoing criteria are not intended to be exhaustive and any
evaluation relating to the merits of a particular Target Business will be based,
to the extent relevant, on the above factors as well as other considerations
deemed relevant by management in connection with effecting a business
combination consistent with our business objectives. In connection with its
11
evaluation of a prospective Target Business, management anticipates that it will
conduct a due diligence review which will encompass, among other things, meeting
with incumbent management and inspection of facilities, as well as a review of
financial, legal and other information which will be made available to us.
The time and costs required to select and evaluate a Target Business
(including conducting a due diligence review) and to structure and consummate
the business combination (including negotiating relevant agreements and
preparing requisite documents for filing pursuant to applicable securities laws
and state "blue sky" and corporation laws) cannot presently be ascertained with
any degree of certainty. Our current executive officer and directors intend to
devote only a small portion of their time to the affairs of the Company and,
accordingly, consummation of a business combination may require a greater period
of time than if our management devoted their full time to Dauphin's affairs.
However, each of our officers and directors will devote such time as they deem
reasonably necessary to carry out the business and affairs of the Company,
including the evaluation of potential Target Businesses and the negotiation of a
business combination and, as a result, the amount of time devoted to the
business and affairs of the Company may vary significantly depending upon, among
other things, whether we have identified a Target Business or are engaged in
active negotiation of a business combination. Any costs incurred in connection
with the identification and evaluation of a prospective Target Business with
which a business combination is not ultimately consummated will result in a loss
to the Company and reduce the amount of capital available to otherwise complete
a business combination or for the resulting entity to utilize.
We anticipate that various prospective Target Businesses will be
brought to our attention from various non-affiliated sources, including
securities broker-dealers, investment bankers, venture capitalists, bankers,
other members of the financial community and affiliated sources, including,
possibly, our executive officer, directors and their affiliates. While we have
not yet ascertained how, if at all, we will advertise and promote Dauphin, we
may elect to publish advertisements in financial or trade publications seeking
potential business acquisitions. While we do not presently anticipate engaging
the services of professional firms that specialize in finding business
acquisitions on any formal basis (other than the independent investment banker),
we may engage such firms in the future, in which event we may pay a finder's fee
or other compensation.
As a general rule, Federal and state tax laws and regulations have a
significant impact upon the structuring of business combinations. We will
evaluate the possible tax consequences of any prospective business combination
and will endeavor to structure a business combination so as to achieve the most
favorable tax treatment to the Company, the Target Business and their respective
stockholders. There can be no assurance that the Internal Revenue Service or
relevant state tax authorities will ultimately assent to Dauphin's tax treatment
of a particular consummated business combination. To the extent the Internal
Revenue Service or any relevant state tax authorities ultimately prevail in
recharacterizing the tax treatment of a business combination, there may be
adverse tax consequences to Dauphin, the Target Business and their respective
stockholders. Tax considerations as well as other relevant factors will be
evaluated in determining the precise structure of a particular business
combination, which could be effected through various forms of a merger,
consolidation or stock or asset acquisition.
There currently are no limitations on our ability to borrow funds to
effect a business combination. However, our limited resources and lack of
operating history may make it difficult to borrow funds. The amount and nature
of any borrowings by Dauphin will depend on numerous considerations, including
our capital requirements, potential lenders' evaluation of our ability to meet
debt service on borrowings and the then prevailing conditions in the financial
markets, as well as general economic conditions. We do not have any arrangements
with any bank or financial institution to secure additional financing and there
can be no assurance that such arrangements if required or otherwise sought,
would be available on terms commercially acceptable or otherwise in the best
interests of the Company. Our inability to borrow funds required to effect or
facilitate a business combination, or to provide funds for an additional
12
infusion of capital into a Target Business, may have a material adverse effect
on our financial condition and future prospects, including the ability to effect
a business combination. To the extent that debt financing ultimately proves to
be available, any borrowings may subject us to various risks traditionally
associated with indebtedness, including the risks of interest rate fluctuations
and insufficiency of cash flow to pay principal and interest. Furthermore, a
Target Business may have already incurred debt financing and, therefore, all the
risks inherent thereto.
Competition
We expect to encounter intense competition from other entities having
business objectives similar to that of Dauphin. Many of these entities are well
established and have extensive experience in connection with identifying and
effecting business combinations directly or through affiliates. Many of these
competitors possess greater financial, technical, human and other resources than
we do and there can be no assurance that Dauphin will have the ability to
compete successfully. Our financial resources will be limited in comparison to
those of many of our competitors. Further, such competitors will generally not
be required to seek the prior approval of their own stockholders, which may
enable them to close a business combination more quickly than Dauphin. This
inherent competitive limitation may compel us to select certain less attractive
business combination prospects. There can be no assurance that such prospects
will permit us to satisfy our stated business objectives.
Uncertainty of Competitive Environment of Target Business
In the event that we succeed in effecting a business combination, we
will, in all likelihood, become subject to intense competition from competitors
of the Target Business. In particular, certain industries which experience rapid
growth frequently attract an increasingly large number of competitors including
competitors with increasingly greater financial, marketing, technical, human and
other resources than the initial competitors in the industry. The degree of
competition characterizing the industry of any prospective Target Business
cannot presently be ascertained. There can be no assurance that, subsequent to a
business combination, we will have the resources to compete effectively,
especially to the extent that the Target Business is in a high-growth industry.
DAUPHIN MANAGEMENT DISCUSSION AND ANALYSIS
Overview
Dauphin has been inactive and had no operations since 2003. Dauphin's
assets consist of a limited amount of cash. Dauphin's expenses have been funded
through the sale of equity and debt securities and from short-term loans. From
2002 through January 2006, Dauphin filed none of its required Forms 10-K or
Forms 10-Q or other required filings by the Securities and Exchange Commission
due to its lack of capital and its termination of operations. In January 2006,
Dauphin filed its Form 10-K for the year ended December 31, 2004. In June 2006,
Dauphin filed its Form 10-K for the year ended December 31, 2005 and its Form
10-Q for the quarter ended March 31, 2006. In August 2006, Dauphin filed its
Form 10-Q for the quarter ended June 30, 2006. The financial statements for the
year ended December 31, 2005 and for the three months and six months ended June
30, 2006 are attached hereto.
Dauphin's current business plan is to commence active operations
through the completion of a reverse merger transaction with another operating
company. Dauphin has identified GeoVax as a suitable acquisition target. After
the Merger and as a result of the Name Change Proposal, Dauphin's name will be
GeoVax Labs, Inc.
The following discussion of our financial condition and results of
operations should be read in conjunction with our Financial Statements and Notes
thereto that are attached as annexes to this Information Statement. This
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain descriptions of our expectations regarding future trends
affecting our business. These forward-looking statements, and other
forward-looking statements made elsewhere in this document. The following
discussion sets forth certain factors that we believe could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Results of Operations
Three Months and Six Months Ended June 30, 2006 Compared to Three Months and Six
months Ended June 30, 2005.
Revenues. Dauphin has no active operations and we had no revenues for
the three months or six months ended June 30, 2006 or the three months or six
ended June 30, 2006.
General and Administrative Expenses. For the three months ended June
30, 2006, we had general and administrative expenses of $337,935 which consisted
primarily of approximately $190,200 in professional fees and $48,750 of
compensation paid to our chief executive officer. For the three months ended
June 30, 2005, we had general and administrative expenses of $224,733 which
primarily consisted of approximately $43,000 in professional fees and $48,750 of
compensation paid to our chief executive officer. We had general and
administrative expenses of $657,092 and $386,581 for the six months ended June
30, 2006 and 2005, respectively.
Interest Expense. For the three months ended June 30, 2006, we had
interest expense of $21,511 compared to interest expense of $15,000 for three
months ended June 30, 2005. We had interest expense of $39,408 and $30,000 for
the six months ended June 30, 2006 and 2005, respectively.
Gain and Loss on Accounting for Derivatives. FAS 133, as amended,
establishes accounting and reporting standards for derivative instruments
embedded in other contracts. As required by SFAS 133, Dauphin records all
derivatives on the balance sheet at fair value. Dauphin 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.
For the three months ended June 30, 2006, we had a gain of $1,134,641 attributed
to accounting for derivative securities related to the retirement of debt in
exchange for the issuance of a warrant. For the three months ended June 30,
2005, we had a loss of $195,493 attributed to accounting for derivative
securities. We had a gain of $1,229,390 related to our derivative securities for
the six months ended June 30, 2006 and a loss of $226,076 for the six months
ended June 30, 2005.
Gain/Loss. For the three months ended June 30, 2006, we had a gain of
$775,195 attributable primarily to the non-cash gain of $1,134,641 resulting
from accounting treatment for derivative securities. For the three months ended
June 30, 2005, we had a loss of $435,226. We had a gain of $532,890 and a loss
of $642,657 for the six months ended June 30, 2006 and 2005, respectively.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenues. We discontinued our previous operations in 2003 and conducted
no operations in 2004 or 2005 and therefore, had no revenues.
General and Administrative Expenses. General and administrative
expenses decreased to approximately $876,000 for the year ended December 31,
2005 compared to $1,549,000 for the year ended December 31, 2004.
Interest Expense. Interest expense decreased to approximately $62,000
for the year ended December 31, 2005 from $337,000 for the year ended December
31, 2004. The decrease in interest expense in 2005 resulted largely from the
completion of the amortization of debt discount in the third quarter of 2004.
Gain and Loss on Accounting for Derivatives. SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments
embedded in other contracts. As required by SFAS 133, Dauphin records all
14
derivatives on the balance sheet at fair value. Dauphin 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 derivatives arose from the issuance of convertible debentures and warrants
during 2005 and 2004. Dauphin had a loss of $470,593 attributed to derivative
accounting for the year ended December 31, 2005, compared to a gain of $227, 197
for the year ended December 31, 2004
Loss on Discontinued Operations. For the year ended December 31, 2004,
we had a loss of $548,865 attributed to discontinued operations. We had no loss
attributed to discontinued operations for the year ended December 31, 2005.
Loss. Dauphin had a loss of $1,408,534 for the year ended December 31,
2005 compared to a loss of $2,207,806 for the period ended December 31, 2004.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues. 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.
General and Administrative Expenses. General and Administrative
expenses increased to approximately $1,549,000 for 2004 as compared to $677,000
for 2003. Losses from continuing operations were $1,658,941 and $735,159 in 2004
and 2003 respectively. A material part of the change in loss from continuing
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. 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 from Discontinued Operations. Losses from 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.
Loss. Dauphin had a loss of $2,207,806 for the period ended December
31, 2004 compared to a loss of $3,077,080 for the period ended December 31,
2003.
Liquidity and Capital Resources
At June 30, 2006
Dauphin has incurred a net operating loss in each year since its
founding and as of June 30, 2006, has an accumulated deficit of $71,001,523. We
expect to incur operating losses over the foreseeable future even if we complete
the Merger. As of June 30, 2006, we had total assets, consisting of cash of
$95,070 and total liabilities of $5,968,621, consisting of accounts payable,
convertible debentures, promissory notes and other liabilities. As of June 30,
2006 we had current liabilities in excess of current assets of approximately
15
$5,062,000. We anticipate that approximately $3,331,000 of our liabilities will
convert into shares of our common stock if the Merger is completed. Subsequent
to June 30, 2006, Dauphin entered into two 2% convertible loan agreements with
one investor in exchange for $2,000,000 in cash. Both of the loans are
unsecured, are due at December 31, 2006 and will be converted to common stock
immediately prior to the closing of the transaction described herein.
At December 31, 2005
Dauphin has incurred a net operating loss in each year since its
founding and as of December 31, 2005, has an accumulated deficit of $71,534,413.
We expect to incur operating losses over the foreseeable future, even if we
complete the Merger. There can be no assurance that Dauphin will ever achieve a
profitable level of operations or if profitability is achieved, that it can be
sustained.
For the year ended December 31, 2005 we used $1,191,525 of cash in
operating activities from continuing operations and generated $1,496,993 of cash
from financing activities and used $234,916 of cash for discontinued operations
that produced an increase in cash of $70,552 for the year. Financing activities
consisted primarily of the issuance of convertible loans for $626,400 and the
sale of preferred stock for $550,000. As of December 31, 2005 Dauphin had
current liabilities in excess of current assets of approximately $5,715,000. The
Consolidated Statements of Cash Flows, included in this report, detail the other
sources and uses of cash and cash equivalents.
Dauphin has funded losses from operations in the current year primarily
from the issuance of debt and the sale of Dauphin's preferred stock in private
placement transactions, and will require additional funding from these sources
to sustain its future operations. Dauphin anticipates that the issuance of debt
will continue to fund operating losses in the short-term. There is no assurance
that Dauphin will be successful in raising the funds needed to sustain its
operations.
Off-Balance Sheet Arrangements
Dauphin has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Critical Accounting Policies
Dauphin's critical accounting policies include the following:
Stock Options and Warrants. In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," Dauphin 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, Dauphin will continue to use this methodology 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 Dauphin'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.
Share-Based Payments is an amendment of FASB Statements No. 123 and 95.
FAS No. 123(R) and 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
16
beginning after December 15, 2005. This means that the Company was required to
implement FAS No. 123(R) no later than the quarter beginning January 1, 2006.
Therefore, the Company adopted the modified prospective method of FAS No. 123(R)
on January 1, 2006.
Income Taxes. Dauphin 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.
Interest Rate Risk
We anticipate that a substantial amount of our 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 increased interest expense.
Inflation
Dauphin does not believe that inflation will negatively impact its
business plans.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity. All of Dauphin'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 for the year ended December 31, 2004.
INFORMATION CONCERNING GEOVAX
GeoVax is a development stage biotechnology company established to
develop, license and commercialize the manufacture and sale of human vaccines
for diseases caused by Human Immunodeficiency Virus ("HIV") and other infectious
agents. GeoVax was incorporated in Georgia on June 27, 2001.
Overview
AIDS is considered by many in the scientific and medical community to
be the most lethal infectious disease in the world. According to the 2006 Report
on the Global AIDS Epidemic published by UNAIDS (the Joint United Nations
Programme on HIV/AIDS); the number of people living with HIV continues to grow,
from 35 million in 2001 to approximately 38 million in 2005, the most recent
year reported. Approximately 25 million people have died since the first cases
of AIDS were identified in 1981 and, during 2005; approximately four million
people became newly infected with HIV. According to an International AIDS
Vaccine Research Institute (IAVI) report dated June 13, 2005, the global market
for a safe and effective AIDS vaccine has been estimated at approximately $4
billion.
17
The standard approach to treating HIV infection has been to lower viral
loads by using drugs, reverse transcriptase inhibitors ("RTIs") and protease
inhibitors ("PIs"), or a combination of these drugs, to inhibit two of the viral
enzymes that are necessary for the virus to reproduce. The cost of these drugs
range from $12,000 per year to $60,000 per year. However, HIV is prone to
genetic changes that can produce strains of HIV that are resistant to currently
approved RTIs and PIs. Generally, HIV that is resistant to one drug within a
class is likely to become resistant to the entire class, meaning that it may be
impossible to re-establish suppression of a genetically altered strain by
substituting different RTI and PI combinations. Furthermore, these treatments
continue to have significant limitations, such as viral resistance, toxicity and
patient non-adherence to the complicated treatment regimens. As a result, over
time, many patients develop intolerance to these medications or simply give up
taking the medications due to the side effects and the difficult dosing
regimens.
According to International AIDS Vaccine Initiative, the cost and
complexity of new treatment advances for AIDS puts them out of reach for most
people in the countries where treatment is needed the most and as noted above,
in industrialized nations, where drugs are more readily available, side effects
and increased rates of viral resistance have raised concerns about their long
term use. AIDS vaccines, therefore, are seen by many as the most promising way
to end the HIV/AIDS pandemic. It is expected that vaccines for HIV/AIDS, once
developed, will be used internationally by any organization that provides health
care services, including hospitals, medical clinics, the military, prisons and
schools.
Products in Development
HIV infection severely damages the immune system, the body's defense
against disease. HIV infects and gradually destroys T-cells and macrophages,
both white blood cells that play key roles in protecting humans against
infectious disease caused by viruses, bacteria, fungi, yeast and other
micro-organisms. Opportunistic infections by organisms, normally posing no
problem for control by a healthy immune system, can ravage persons with immune
systems damaged by HIV. Destruction of the immune system occurs over years. The
average onset of AIDS, the final stage of HIV infection, usually occurs after
eight to 10 years of HIV infection.
There are several AIDS-causing HIV-1 virus subtypes that are found in
different regions of the world. The three most prevalent subtypes are A, B and
C. The predominant subtype found in Europe, North America, South America, Japan
and Australia is B, whereas the predominant subtypes in Africa are A and C and
in India the predominant subtype is C. Each subtype is at least 20% different in
its genetic sequence from other subtypes. These differences may mean that
vaccines against one subtype may be only partially effective against other
subtypes, although this is not yet certain. GeoVax plans to develop regionally
formulated AIDS vaccines comprised of various preparations, depending on the
HIV-1 subtype prevalence in a geographic area of the world.
GeoVax's operations to date have been focused on the development and
testing of its AIDS vaccine candidates which are based on DNA and rMVA
technology that have been developed by Dr. Harriet Robinson of Emory University
and Chairperson of the GeoVax Scientific Advisory Board in collaboration with
scientists at the Centers for Disease Control and the National Institutes of
Health (NIH). These vaccines operate by stimulating multiprotein T-cells and
antibody responses against the AIDS virus in the recipient.
The vaccines are comprised of two distinct vaccine components, DNA and
recombinant MVA (Modified Vaccinia Ankara) virus. Both the DNA and the rMVA
vaccines express multiple HIV-1 proteins in the vaccinated individual. The DNA
is used to prime the immune response, the efficacy of which is enhanced by the
rMVA vaccination, which boosts the immune response. GeoVax believes that the
18
vaccines provide broad protection against a large segment of the AIDS virus,
thus preventing virus escape, large scale viral replication and the onset of
clinical signs of AIDS in the vaccinated individual.
The vaccines underwent efficacy trials in non-human primates for a
period of over 42 months. In these pre-clinical trials, 22 out of 23 monkeys
were protected against AIDS while 5 out of 6 non-vaccinated control animals died
of clinical AIDS. Following these animal trials, the vaccines were approved for
Phase I trials on humans by the US Food and Drug Administration ("FDA"). The
trials were conducted by HIV Vaccine Trials Network, a division of NIAID-NIH.
These trials began in January 2003 and were satisfactorily concluded in June
2004.
The start of a series of four additional human trials evaluating
GeoVax's AIDS vaccines at four locations in the United States began in April
2006. These human trials are designed to determine if GeoVax's vaccines are safe
and will stimulate the level of immune responses (T-cell and antibody) that may
protect against the development of clinical signs of AIDS. Increasing numbers of
people will be included in each successive trial in the series. These trials are
intended to provide human data that indicates GeoVax's vaccine is safe and that
it has the capability to protect vaccinated individuals against the development
of AIDS.
Research and Development
During 2005, GeoVax spent $1,640,814 on its research and development
efforts. GeoVax spent $2,566,902 and $1,456,094, in 2004 and 2003, respectively,
on research and development of its vaccines. As its vaccines continue to go
through the process to obtain regulatory approval, GeoVax expects its research
and development costs to continue to increase significantly as even larger human
trials proceed in the United States and foreign countries. GeoVax estimates
that, to date, more than $28 million has been spent on the development of the
GeoVax AIDS vaccines by GeoVax and its collaborators.
Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in GeoVax's ongoing research and development
activities and in the manufacture of its products under development. Complying
with these regulations involves a considerable amount of time and expense.
In the United States, drugs are subject to rigorous federal regulation
and, to a lesser extent, state regulation. The Federal Food, Drug and Cosmetic
Act, as amended (the "FDC Act"), and the regulations promulgated thereunder, and
other federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of medications and medical devices. Product
development and approval within this regulatory framework is difficult to
predict, takes a number of years and involves great expense.
The steps required before a pharmaceutical agent may be marketed in the
United States include:
o pre-clinical laboratory tests, in vivo pre-clinical studies and
formulation studies;
o the submission to the Food and Drug Administration (the "FDA") of
an Investigational New Drug Application (IND) for human clinical
testing which must become effective before human clinical trials
can commence;
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product;
19
o the submission of a New Drug Application to the FDA; and
o FDA approval of the New Drug Application prior to any commercial
sale or shipment of the product.
In addition to obtaining FDA approval for each product, each domestic
manufacturing establishment must be registered with, and approved by, the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with the FDA's Good Manufacturing Practices for products,
drugs and devices.
GeoVax has completed the pre-clinical laboratory tests, in vivo
pre-clinical studies and formulation studies and has submitted an IND
(Investigational New Drug application) to the FDA, which has been approved.
Independent clinical trials are currently being conducted by HVTN, the HIV
Trials Network Division of NIH-NIAID. One clinical trial has been satisfactorily
concluded and a series of an additional four trials began in April 2006.
Pre-clinical Trials
Pre-clinical testing includes laboratory evaluation of chemistry and
formulation, as well as cell culture and animal studies to assess the potential
safety and efficacy of the product. Pre-clinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of pre-clinical testing are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to the commencement of
human clinical trials. Unless the FDA objects to an IND, the IND becomes
effective 30 days following its receipt by the FDA.
Clinical Trials
Clinical trials involve the administration of the AIDS vaccines to
healthy volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with the FDA's Good
Clinical Practices standard under protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria to
be evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent institutional review board at the institution where the study will
be conducted. The institutional review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the product into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II is the proof of principal
stage and involves studies in a limited patient population in order to determine
the efficacy of the product for specific, targeted indications, determine dosage
tolerance and optimal dosage and identify possible adverse side effects and
safety risks. When there is evidence that the product may be effective and has
an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical efficacy and to test for safety within
an expanded patient population at geographically dispersed multi-center clinical
study sites. Phase III frequently involves randomized controlled trials and,
whenever possible, double blind studies. The manufacturer or the FDA may suspend
clinical trials at any time if either believes that the individuals
participating in the trials are being exposed to unacceptable health risks.
20
New Drug Application and FDA Approval Process
The results and details of the AIDS vaccine development, pre-clinical
studies and clinical studies are submitted to the FDA in the form of a New Drug
Application. If the New Drug Application is approved, the manufacturer may
market the product in the United States.
International Approval
Whether or not the FDA has approved the drug, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the drug in such countries. The requirements
governing the conduct of clinical trials and drug approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval.
Other Regulations
In addition to FDA regulations, GeoVax business activities may also be
regulated by the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Violations of regulatory requirements at any stage may result in
various adverse consequences, including regulatory delay in approving or refusal
to approve a product, enforcement actions, including withdrawal of approval,
labeling restrictions, seizure of products, fines, injunctions and/or civil or
criminal penalties. Any product that GeoVax develops must receive all relevant
regulatory approvals or clearances before it may be marketed.
Competition
FDA and other regulatory approvals of GeoVax vaccines have not yet been
obtained and GeoVax has not yet generated any revenues from product sales.
GeoVax's future competitive position depends on its ability to obtain FDA and
other regulatory approvals of its vaccines and to license or sell the vaccines
to third parties on favorable terms.
Overall, the biopharmaceutical industry is competitive and subject to
rapid and substantial technological change. There are many companies and
individuals conducting research and development activities in the area of
HIV/AIDS vaccines, all of which may compete with GeoVax. Developments by others
may render GeoVax's proposed vaccination technologies noncompetitive or
obsolete, or GeoVax may be unable to keep pace with technological developments
or other market factors. Technological competition in the industry from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Many of the pharmaceutical companies that compete with GeoVax are huge,
multinational corporations, such as Merck & Co., Chiron Inc. and Aventis-Pasteur
that have significantly greater research and development capabilities than
GeoVax has as well as substantially more marketing, manufacturing, financial and
managerial resources. In addition, acquisitions of, or investments in, small
pharmaceutical or biotechnology companies by such large corporations could
increase their research, financial, marketing, manufacturing and other
resources. Competitor technologies may ultimately prove to be safer, more
effective or less costly than any vaccine that GeoVax develops. GeoVax does not
currently represent a competitive presence in the HIV/AIDS vaccine market. There
currently is no FDA licensed and commercialized AIDS vaccine or competitive
vaccine available in the world market.
21
Intellectual Property
GeoVax is the exclusive licensee of 12 patents and other technology
(the "Emory Technology") owned or otherwise controlled by Emory University
("Emory") pursuant to a License Agreement originally entered into on August 23,
2002 and restated on June 23, 2004 (the "License Agreement"). In exchange for a
worldwide, exclusive, non-transferable right and license to the Emory
Technology, GeoVax:
o issued to Emory 1,188,000 shares of common stock;
o agreed to pay to Emory an annual royalty equal to a percentage
(5%, 6%, 6.5% or 7.5%, depending on the amount of cumulative
world-wide net sales) of cumulative world-wide net sales;
o agreed to pay milestone payments of cash as the products made from
the Emory Technology are developed, approved and launched;
o agreed to pay minimum royalties of $3,000,000 for the third year,
$6,000,000 for the fourth year, $9,000,000 for the fifth year and
$12,000,000 for the sixth year following the launch of any product
made from the Emory Technology;
o in the event that no milestone payment is paid during any calendar
year as to any product made from the Emory Technology, agreed to
pay a maintenance fee of $100,000 on the fourth anniversary of the
License Agreement, $200,000 on the fifth anniversary of the
License Agreement, $1,000,000 on the sixth anniversary of the
License Agreement and $1,500,000 on every subsequent anniversary
of the License Agreement through expiration.
The License Agreement expires on the expiration date of the last to
expire of the patents licensed thereunder.
GeoVax may not use the Emory Technology for any purpose other than the
purposes permitted by the License Agreement, allow any person to access or use
the Emory Technology or advertise, market, sell or distribute the Emory
Technology
Emory also reserved the right to use the Emory Technology for research,
educational and non-commercial clinical purposes. The United States Government
also has the irrevocable, royalty-free, paid-up right to practice and have
practiced certain patents throughout the world.
GeoVax is also the exclusive licensee of five patents from MFD, Inc.,
an entity controlled by Henry B. Kopf, the inventor (the `MFD Patents") pursuant
to a license agreement dated December 26, 2004 (the "MFD License Agreement"). In
exchange for 83,333 shares of GeoVax common stock which was valued at $1.20 per
share by the parties, GeoVax obtained a fully paid, worldwide, irrevocable,
exclusive license in and to the MFD Patents to use, market, offer for sale,
sell, lease and import for any AIDS and smallpox vaccine made with GeoVax
technology and non-exclusive rights for other products. The term of the MFD
License Agreement ends on the expiration date of the last to expire of the MFD
Patents.
GeoVax is also a non-exclusive licensee of four patents owned by the
NIH. The license agreement with NIH (the "NIH License Agreement") was entered
into on July 10, 2003 and subsequently amended on April 7, 2004. Pursuant to the
NIH License Agreement, GeoVax licensed the patent rights and certain materials
for the purpose of laboratory experiments conducted to evaluate the suitability
for commercial development of the patent rights and materials. GeoVax paid
$2,000 to NIH upon the execution of the original NIH License Agreement and an
additional $2,000 upon the execution of the amendment to the NIH License
Agreement. The NIH License Agreement is expected to continue on an annual
renewable basis.
22
Property
GeoVax rents laboratory facilities and equipment from EmTech
Biotechnology Development, Inc. pursuant to a sublease signed on December 1,
2001. The facilities are located at 1256 Briarcliff Road, Atlanta, Georgia 30318
and are owned by Emory University. The sublease term is month-to-month. Pursuant
to the sublease, the monthly rent for the facilities is approximately $3,000 per
month.
GeoVax Outstanding Securities
As of June 29, 2006, GeoVax had issued a total of 10,548,648 shares of
common stock, no par value, to a total of 25 stockholders. As of June 29, 2006,
GeoVax also had issued a total of 5,987,520 shares of Series A Preferred Stock
to one stockholder.
There is no public trading market for GeoVax's securities.
GeoVax has never declared or paid any cash dividends on its common
stock and does not expect to declare or pay any cash dividends in the
foreseeable future.
On December 20, 2002, the GeoVax Board of Directors adopted, and on
December, 19, 2003, the stockholder holding a majority of the GeoVax voting
stock approved, the 2002 Stock Option and Incentive Plan (the "Plan") under
which options designated as either incentive ("ISO") or nonqualified stock
options may be issued to employees, officers, directors, consultants and
independent contractors. The exercise price for any option granted may not be
less than fair value (110% of fair value for ISOs granted to certain employees)
and may be exercised for a period of up to ten years from the date of grant
(with the exception of certain ISOs, which will have a term not to exceed five
years). Options granted under the Plan have vesting periods ranging from
immediately to four years. GeoVax reserved 1,650,000 shares of common stock for
issuance under the Plan.
The following table sets forth, as of December 31, 2005, the number of
securities to be issued upon exercise of outstanding options, the weighted
average exercise price of the outstanding options and the number of securities
remaining available for future issuance under the Plan.
Equity Compensation and Consultant Plan Information
Number of securities
remaining available for
Number of securities to Weighted average future issuance under the
be issued upon exercise exercise price of equity compensation plan
of outstanding options, outstanding options (excluding securities
warrants and rights warrants and rights reflected in column (a)
Plan Category (a) (b) (c)
-------------------------------------- ------------------------- --------------------- -------------------------------
Shareholder Approved 1,172,000 $1.26 -0-
Not Approved by Stockholders N/A N/A N/A
23
Financial Statements
The financial statements of GeoVax for the years ended December 31,
2005 and December 31, 2004 and for the three months ended March 31, 2006 are
attached hereto. Also attached hereto is unaudited proforma financial
information giving effect to the Merger.
GEOVAX MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Management's discussion and analysis of results of operations and
financial condition are based upon GeoVax's financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, GeoVax evaluates these
estimates based on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Critical Accounting Policies and Estimates
GeoVax has identified the following accounting principles that it
believes are key to an understanding of its financial statements. These
important accounting policies require management's most difficult, subjective
judgments.
Other Assets - Other assets consist principally of license agreements
for technology use obtained through the issuance of GeoVax common stock. These
license agreements are amortized on a straight line basis over ten years.
Long-Lived Assets - Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Revenue Recognition - Revenue consists of subcontracted government
grant revenue received pursuant to collaborative arrangements with Emory
University. Revenues from these collaborative research arrangements are deferred
and recorded as income as the related costs are incurred.
Stock-Based Compensation - Effective January 1, 2006, GeoVax adopted
Statement of Financial Accounting Standards ("SFAS") No.123 (revised 2004),
Share-Based Payment, which requires the measurement and recognition of
compensation expense for all share-based payments made to employees and
directors based on estimated fair values on the grant date. SFAS No. 123R
replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees.
GeoVax has adopted SFAS No. 123R using the modified prospective
application method which requires it to record compensation cost related to
unvested stock awards as of December 31, 2005 by recognizing the unamortized
grant date fair value of those awards over the remaining service periods with no
24
change in historical reported earnings. Awards granted after December 31, 2005
are valued at fair value in accordance with the provisions of SFAS No. 123R and
recognized on a straight line basis over the service periods of each award.
GeoVax did not grant or modify any share-based compensation during the three
months ended June 30, 2006.
Prior to January 1, 2006, GeoVax accounted for stock-based compensation
using the intrinsic value method in accordance with APB Opinion No. 25 and
applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation and Disclosure. Under those provisions,
GeoVax provided pro forma disclosures as if the fair value measurement
provisions of SFAS No. 123 had been used in determining compensation expense.
GeoVax used a minimum value option-pricing model to determine the pro forma
impact on its net income. This model utilizes certain information, such as the
interest rate on a risk-free security maturing generally at the same time as the
option being valued and requires certain other assumptions, such as the expected
amount of time an option will be outstanding until it is exercised or expired,
to calculate the fair value of stock options granted.
Plan of Operation
GeoVax is a development stage biotechnology company. GeoVax was founded
in June 2001 by Mr. Donald Hildebrand, Dr. Harriet Robinson and Emory University
for the purpose of developing, licensing and commercializing the manufacture and
sale of human vaccines for diseases caused by Human Immunodeficiency Virus
("HIV") and other infectious agents. GeoVax' research and development efforts
are lead by Dr. Robinson, who has a Master's Degree in biochemistry, a Ph.D. in
microbiology and 30 years of teaching and research experience in the fields of
vaccinology and immunology and Mr. Hildebrand, a microbiologist with extensive
domestic and international industrial experience in vaccine research, product
development and corporate management.
GeoVax' capital requirements, particularly as they relate to product
research and development, have been and will continue to be significant.
However, it has not, and due to the significant period of time that it will take
to obtain regulatory approval of its products, it will not, generate revenues
from its products for at least several years, if at all. GeoVax has funded its
operations to date by obtaining research grant funding and by selling its
securities. On one occasion, GeoVax obtained a short term loan from Emory
University, which has been repaid.
GeoVax intends to continue to seek FDA approval of its products. This
may take several months, and may even take years. Following the Merger, GeoVax
anticipates that it will have sufficient funds to complete the FDA approval
process for its currently existing products. If the funds on hand are not, in
fact, sufficient to complete the process necessary to obtain FDA approval on its
currently existing products, GeoVax would be required to obtain additional
capital, which would likely come from grants, from offerings of its securities
or from loans. If the funds on hand following the Merger prove to be
insufficient to obtain FDA approval of its products, GeoVax cannot guarantee
that additional financing will be available to it, on acceptable terms or at
all. If GeoVax fails to obtain financing as needed, either through an offering
of its securities or by obtaining additional loan or grant money, it may be
unable to maintain its operations.
25
Comparison of the Three and Six Months Ended June 30, 2006 to the Three and Six
months Ended June 30, 2005
During the three and six months ended June 30, 2006 GeoVax recorded
grant revenue of $478,853 as compared to $56,672 and $221,999 during the three
months and six months ended June 30, 2005, an increase of $422,181 and $256,854
or approximately 745% and 116%, respectively. During the three months and six
months ended June 30, 2006, Geovax evaluated its in-house activities associated
with its federal grants and determined that certain past activities could be
appropriately charged to the grants. Therefore, Geovax recorded the accumulated
charges as grant revenue and reduced its unearned revenue associated with the
grants accordingly. At June 30, 2006, GeoVax has remaining unearned grant
revenue of $374,052 which will be recorded as revenue as future associated
activities are performed and expenses incurred. Federal grant availability
varies considerably. Because grant funding from federal agencies is primarily
allocated to basic research projects, the availability of federal grant money to
GeoVax is expected to decline as its research moves toward product development
and human testing of formulated AIDS vaccines.
During the three months and six months ended June 30, 2006, GeoVax
incurred $109,205 and $400,261 of research and development expense as compared
to $470,723 and $826,839 during the three months and six months ended June 30,
2005, a decrease of $361,518 and $426,578 or approximately 76.8% and 51.6%,
respectively. The amount for the three months and six months ended June 30, 2006
includes $1,587 and $63,937, respectively, of share-based compensation expense
associated with the adoption of SFAS No. 123R on January 1, 2006. Excluding
these amounts, research and development expense decreased by $363,105 and
$490,515, or approximately 77.1% and 59.3%, from the three months and six months
ended June 30, 2005. Research and development expenses vary considerably on a
quarter-to quarter basis, depending on the need for vaccine manufacturing and
testing of manufactured vaccine by third parties. GeoVax expects its research
and development costs to increase later in 2006 as it manufactures more vaccine
supplies for clinical trials in 2007.
During the three months and six months ended June 30, 2006, GeoVax
incurred general and administrative costs of $179,677 and $331,324, as compared
to $156,783 and $273,479 during the three months and six months ended June 30,
2005, an increase of $22,894 and $57,845 or approximately 14.6% and 21.2%,
respectively. General and administrative costs include officers salaries, legal
and accounting costs, patent costs, and amortization and accretion expense
associated with intangible assets and redeemable preferred stock outstanding.
General and administrative expense for the six months ended June 30, 2006
includes $29,300 of share-based compensation expense associated with the
adoption of SFAS No. 123R on January 1, 2006. Excluding this amount, general and
administrative expense increased by $28,545, or approximately 10.4%, from the
six month period ended June 30, 2005. Increases in depreciation expense and
travel expense accounted for the majority of the year over year increase; there
were no other significant changes in the amount or makeup of general and
administrative expenses.
Other income (expense) for the three months and six months ended June
30, 2006 was made up of $6,192 and $16,039 of interest income as compared to
interest income of $1,019 and $5,693 for the three months and six months ended
June 30, 2005. The interest income was earned on cash and cash equivalents,
which totaled $405,184 on June 30, 2006.
GeoVax had income of $196,163 for the three months ended June 30, 2006
as compared to a net loss of $569,815 for the three months ended June 30, 2005
and a net loss of $236,693 for the six months ended June 30, 2006, a decrease of
$635,933 or approximately 72.9%, as compared to a net loss of $872,626 for the
six months ended June 30, 2005. The income for the three months ended June 30,
2006 and the decrease in net loss for the six months ended June 30, 2006 is
attributable to the higher grant revenues recorded, combined with lower research
and development expenses.
As it was during the three months and six months ended June 30, 2005,
the primary source of cash during the three months and six months ended June 30,
2006 was previously received grant money. Net cash used in operating activities
for the six months ended June 30, 2006 was $865,681 as compared to net cash used
in operating activities of $1,579,641 for the six months ended June 30, 2005, a
decrease of $713,960 or approximately 45.2%. The primary uses of cash for the
six months ended June 30, 2006 and June 30, 2005 consisted of general operating
costs and product research and development expenses. Net cash used in investing
activities for the six months ended June 30, 2006 totaled $1,842 for the
purchase of property and equipment, as compared to $48,485 for the purchase of
property and equipment that was used during the six months ended June 30, 2005.
No cash was provided by or used in financing activities during the six months
ended June 30, 2006 and June 30, 2005.
At June 30, 2006 cash and cash equivalents, which totaled $1,272,707 at
December 31, 2005, were decreased by $867,523, leaving $405,184 in cash and cash
equivalents.
26
Comparison of the Fiscal Year ended December 31, 2005 to the Fiscal Year ended
December 31, 2004
During the fiscal year ended December 31, 2005, GeoVax recorded
$670,467 in grant revenue as compared to $714,852 during the fiscal year ended
December 31, 2004, a decrease of $44,385 or approximately 6.2%. During the
fiscal year ended December 31, 2005, GeoVax spent $1,640,814 on research and
development as compared to $2,566,902 during the fiscal year ended December 31,
2004, a decrease of $926,088 or approximately 36.1%. GeoVax expects that its
research and development costs will increase as it progresses through the human
clinical trial process leading up to possible product approval by the FDA. At
the same time, GeoVax expects that grant money from the federal government will
decrease because grant funding from federal agencies is primarily allocated to
basic research projects. Therefore, the availability of federal grant money to
GeoVax is expected to decline as its research moves toward product development
and human testing of formulated AIDS vaccines.
During the fiscal year ended December 31, 2005, GeoVax incurred general
and administrative costs of $655,199, as compared to $524,780 during the fiscal
year ended December 31, 2004, an increase of $130,419 or approximately 24.9%.
General and administrative costs include officers' salaries, legal and
accounting costs, patent costs, and amortization and accretion expense
associated with intangible assets and redeemable preferred stock outstanding.
General and administrative costs increased during the fiscal year ended December
31, 2005 primarily as a result of higher patent costs and administrative
personnel costs.
Other income (expense) for the fiscal year ended December 31, 2005 was
made up of $16,073 of interest income and $1,613 of interest expense, as
compared to interest income of $25,002 and $-0- of interest expense for the
fiscal year ended December 31, 2004. The interest income was earned on cash and
cash equivalents, which totaled $1,272,707 on December 31, 2005.
GeoVax had a net loss of $1,611,086 for the fiscal year ended December
31, 2005 as compared to a net loss of $2,351,828 for the fiscal year ended
December 31, 2004, a decrease of $740,742 or approximately 31.5%. The decrease
in operating loss is attributable to fluctuations in the timing of activities
and related costs associated with the development of its products.
The primary source of cash during the fiscal year ended December 31,
2005 was grant money and proceeds derived from the sale of GeoVax securities.
Net cash used in operating activities was $1,807,069 during the fiscal year
ended December 31, 2005 as compared to $1,514,143 used in operating activities
during the fiscal year ended December 31, 2004, an increase of $292,926 or
approximately 19.3%. This increase was due to several factors, including lower
grant funding received in 2005 as compared to 2004 and higher patent costs. The
primary uses of cash for the fiscal years ended December 31, 2005 and December
31, 2004 consisted of general operating costs and product research and
development expenses. GeoVax has applied for grants from various government
agencies that, if approved, will provide funding for the development of its
products; however, GeoVax cannot be certain that it will be awarded any funds
through grants.
Net cash used in investing activities for the fiscal year ended
December 31, 2005 totaled $48,485, as compared to $7,070 used in investing
activities for the fiscal year ended December 31, 2004. Investing activities for
both fiscal years consisted of the purchase of property and equipment. During
the fiscal year ended December 31, 2005, GeoVax received $1,500,000 in net
proceeds from the sale of common stock as compared to $989,919 in net proceeds
received from the sale of common stock for the fiscal year ended December 31,
2004, an increase of $510,081 or 51.6%. Its cash and cash equivalents, which
totaled $1,628,261 at December 31, 2004, were decreased by $355,554, leaving
$1,272,707 in cash and cash equivalents at December 31, 2005.
27
Comparison of the Fiscal Year ended December 31, 2004 to the Fiscal Year ended
December 31, 2003
During the fiscal year ended December 31, 2004, GeoVax recorded
$714,852 in grant revenue as compared to $992,720 during the fiscal year ended
December 31, 2003, a decrease of $277,868 or approximately 28%. During the
fiscal year ended December 31, 2004, GeoVax spent $2,566,902 on research and
development as compared to $1,456,084 during the fiscal year ended December 31,
2003, an increase of $1,110,818 or approximately 76.3%. GeoVax expects that its
research and development costs will increase as it progresses through the human
clinical trial process leading up to possible product approval by the FDA. At
the same time, GeoVax expects that grant money from the federal government will
decrease because grant funding from federal agencies is primarily allocated to
basic research projects. Therefore, the availability of federal grant money to
GeoVax is expected to decline as its research moves toward product development
and human testing of formulated AIDS vaccines.
During the fiscal year ended December 31, 2004, GeoVax incurred general
and administrative costs of $524,780, as compared to $511,940 during the fiscal
year ended December 31, 2003, an increase of $12,840 or approximately 2.5%.
General and administrative costs include officers' salaries, legal and
accounting costs, patent costs, and amortization and accretion expense
associated with intangible assets and redeemable preferred stock outstanding.
There were no significant changes year-to-year changes in the amount, or makeup
of Geovax's general and administrative costs.
Other income (expense) for the fiscal year ended December 31, 2004 was
made up of $25,002 of interest income as compared to interest income of $31,556
for the fiscal year ended December 31, 2003. The interest income was earned on
cash and cash equivalents, which totaled $1,628,261 at December 31, 2004 as
compared to $2,159,555 at December 31, 2003.
GeoVax had a net loss of $2,351,828 for the fiscal year ended December
31, 2004 as compared to a net loss of $947,804 for the fiscal year ended
December 31, 2003, an increase of $1,404,024 or approximately 148%. The increase
in operating loss is attributable to the significant increase in research and
development costs combined with the decrease in grant revenue.
The primary source of cash during the fiscal year ended December 31,
2004 was grant money and proceeds derived from the sale of GeoVax securities.
Net cash used in operating activities was $1,514,143 during the fiscal year
ended December 31, 2004 as compared to $235,729 used in operating activities
during the fiscal year ended December 31, 2003, an increase of $1,278,414, or
approximately 542.3%. During the fiscal years ended December 31, 2004 and 2003,
cash was used primarily to fund GeoVax's general operating expenses and research
and development costs.
Net cash used in investing activities for the fiscal year ended
December 31, 2004 totaled $7,070, as compared to $22,757 used in investing
activities for the fiscal year ended December 31, 2003. Investing activities for
both fiscal years consisted of the purchase of property and equipment. During
the fiscal year ended December 31, 2004, GeoVax received $989,919 in net
proceeds from the sale of common stock as compared to $2,459,609 in net proceeds
received from the sale of common stock for the fiscal year ended December 31,
2003, a decrease of $1,469,690 or 59.8%. Its cash and cash equivalents, which
totaled $2,159,555 at December 31, 2003, were decreased by $531,294 or 24.6%,
leaving $1,628,261 in cash and cash equivalents at December 31, 2004.
28
FORWARD-LOOKING STATEMENTS
Some of the information in this Information Statement constitutes
forward-looking statements. You can identify these statements by forward-looking
words such as "may," "expect," "anticipate," "contemplate," "believe,"
"estimate," "intends," and "continue" or similar words. You should read
statements that contain these words carefully because they:
o discuss future expectations;
o contain projections of future results of operations or financial
condition; or
o state other "forward-looking" information.
We believe it is important to communicate our expectations to our
stockholders. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors and
cautionary language discussed in this Information Statement provide examples of
risks, uncertainties and events that may cause actual results to differ
materially from the expectations described by us or GeoVax in its
forward-looking statements.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Information Statement.
All forward-looking statements included herein attributable to any of
Dauphin, GeoVax or any person acting on either party's behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Except to the extent required by applicable laws and
regulations, Dauphin and GeoVax undertake no obligations to update these
forward-looking statements to reflect events or circumstances after the date of
this Information Statement or to reflect the occurrence of unanticipated events.
RISK FACTORS
An investment in Dauphin following the Merger will include different
risks than an investment in Dauphin on a stand-alone basis. Moreover, by reason
of the pending Merger, and the resulting change in the business of Dauphin as
compared to Dauphin's business as currently conducted, the nature of the
investment by each Dauphin stockholder will change significantly. In addition to
the other information contained in or incorporated by reference into this
Information Statement, you should carefully review the risks described below
together with all of the other information included in this information
statement. For convenience purposes, in this Risk Factor Section we refer to
Dauphin and GeoVax jointly as the "Combined Company."
Risks Related to the Merger
The issuance of shares of Dauphin common stock to GeoVax stockholders in the
Merger will substantially dilute the percentage ownership interests of current
Dauphin stockholders.
If the Merger is completed, we expect that we will issue to GeoVax
stockholders approximately 490,332,879 shares of Dauphin common stock, which
will be approximately 67% of the shares of Dauphin common stock issued and
outstanding immediately following the Merger. The issuance of our common stock
to GeoVax stockholders will cause a significant reduction in the relative
percentage interest of current Dauphin stockholders in Dauphin's future earnings
(if any), voting, liquidation book values and market capitalization.
29
If the Merger is not completed, we will have nonetheless incurred substantial
costs and our financial results and operations and the market price of our
common stock may be adversely affected.
We have incurred and expect to continue to incur substantial costs in
connection with the proposed Merger. These costs are primarily associated with
the fees of financial advisors, attorneys, accountants and consultants. In
addition, we have diverted significant management resources in an effort to
complete the Merger and are subject to restrictions contained in the Merger
Agreement on the conduct of our business. If the Merger is not completed, we
will receive little or no benefit from these costs.
In addition, if the Merger is not completed, we may experience negative
reactions from the financial markets which may adversely affect the trading
price of our common stock.
Future sales of substantial amounts of our common stock may adversely affect our
market price.
In connection with the Merger, we will issue a significant number of
additional shares of our common stock to a small number of GeoVax stockholders.
Although the Dauphin shares to be issued in the Merger will not be immediately
freely tradable, we anticipate such shares will be tradable in market
transactions one year after the closing of the Merger subject to the
requirements of Rule 144 promulgated under the Securities Exchange Act of 1934,
as amended. Future sales of substantial amounts of our common stock into the
public market, or perceptions in the market that such sales could occur, may
adversely affect the prevailing market price of our common stock.
The pro forma financial statements presented for illustrative purposes may not
be an indication of the Combined Company's financial condition or results of
operations following the Merger.
The pro forma financial statements contained in this Information
Statement are presented for illustrative purposes only and may not be an
indication of the Combined Company's financial condition or results of
operations following the Merger. The pro forma financial statements have been
derived from the financial statements of Dauphin and GeoVax and certain
adjustments and assumptions have been made regarding the Combined Company after
giving effect to the Merger. The information upon which these adjustments and
assumptions have been made is preliminary, and these kinds of adjustments and
assumptions are difficult to make with complete accuracy. Moreover, the pro
forma financial statements do not reflect all costs that are expected to be
incurred by the Combined Company in connection with the Merger. For example, the
impact of any incremental costs incurred in integrating the two companies is not
reflected in the pro forma financial statements. As a result, the actual
financial condition and results of operations of the Combined Company following
the Merger may not be consistent with, or evident from, these pro forma
financial statements.
The assumptions used in preparing the pro forma financial information
may not prove to be accurate, and other factors may affect the Combined
Company's financial condition or results of operations following the Merger. Any
potential decline in the Combined Company's financial condition or results of
operations could cause the stock price of the Combined Company to decline.
The completion of the Merger is subject to the satisfaction or waiver of
conditions.
The Merger is subject to the satisfaction or waiver of a number of
closing conditions set forth in the Merger Agreement. If these conditions are
not satisfied or waived, the Merger will not be completed. Also, even if all of
these conditions are satisfied, the Merger may not be completed, as each of
Dauphin and GeoVax has the right to terminate the Merger Agreement under certain
circumstances specified in the Merger Agreement and described in greater detail
in "The Merger Agreement--Termination."
30
Factors Affecting Business, Operating Results and Financial Condition
GeoVax is a development stage company and, other than research and development,
has had no operations to date.
GeoVax is a development stage company and, to date, other than its
research and development activities, it has had no operations. GeoVax's products
are not ready for sale. These factors raise substantial doubt about GeoVax's
ability to continue in business. During the fiscal year ended December 31, 2005,
GeoVax had a net loss of $1,611,086 and a net loss since inception of
$5,699,477.
GeoVax's products are still being developed and are unproven. These products may
not be successful.
In order to become profitable, GeoVax must generate revenue through
sales of its products, however its products are in varying stages of development
and testing. GeoVax's products have not been proven in human research trials and
have not been approved by any government agency for sale. If GeoVax cannot
successfully develop and prove its products, it will not become profitable.
GeoVax has sold no products or generated any revenues and we do not anticipate
any significant revenues to be generated in the foreseeable future.
GeoVax has conducted pre-clinical trials and is in the process of
conducting clinical trials and will continue to do so for several more years
before it is able to commercialize its technology. There can be no assurance
that it will ever generate significant revenues.
Our post-Merger business will require continued funding. If we do not receive
adequate funding, we may not be able to continue our operations.
To date, GeoVax has financed its operations principally through the
private placement of common and preferred stock. We estimate that after
consummation of the Merger, the Combined Company could require substantial
additional financing at various intervals for our operations, including for
clinical trials, for operating expenses including intellectual property
protection and enforcement, for pursuit of regulatory approvals and for
establishing or contracting out manufacturing, marketing and sales functions.
There is no assurance that such additional funding will be available on terms
acceptable to the Combined Company or at all. If the Combined Company is not
able to secure the significant funding that is required to maintain and continue
its operations at current levels or at levels that may be required in the
future, it may be required to severely curtail, or even to cease, its
operations.
The Combined Company will be subject to the risks and uncertainties inherent in
new businesses. Its failure to plan or forecast accurately could have a material
adverse impact on its development.
The Combined Company will be subject to the risks and uncertainties
inherent in new businesses, including the following:
o it may not have enough money to develop its products and bring
them to market;
o it may experience unanticipated development or marketing expenses,
which may make it more difficult to develop its products and bring
them to market;
o even if it is able to develop products and bring them to market,
the Combined Company may not earn enough revenue from the sales of
its products to cover the costs of operating its business.
31
If, because of the Combined Company's failure to plan or project
accurately, it is unsuccessful in its efforts to develop products or if the
products it develops do not produce revenues as anticipated, it is not likely
the Combined Company will ever become profitable and it may be required to
curtail some or all of its operations.
The Combined Company's success will be dependent, in part, upon its President
and Chief Executive Officer, Donald Hildebrand, Harriet Robinson, its primary
scientist, and Andrew J. Kandalepas. The loss of the services of any of these
individuals would have an adverse effect on its post-merger operations.
The success of the Combined Company following the Merger will depend,
to a significant degree, on its continued receipt of services from GeoVax's
President and Chief Executive Officer, Mr. Donald G. Hildebrand, and on the
research expertise of Dr. Harriet Robinson, in addition to the services from
Andrew J. Kandalepas. The loss of services of any of these individuals would
have a material adverse effect on the Combined Company's business and
operations.
Regulatory and legal uncertainties could result in significant costs or
otherwise harm the business of the Combined Company following the closing of the
Merger.
Following the closing of the Merger, in order to manufacture and sell
its products, the Combined Company must comply with extensive international and
domestic regulation. In order to sell its products in the United States,
approval from the FDA is required. The FDA approval process is expensive and
time-consuming. The Combined Company cannot predict whether its products will be
approved by the FDA. Even if they are approved, the Combined Company cannot
predict the time frame for approval. Foreign regulatory requirements differ from
jurisdiction to jurisdiction and may, in some cases, be more stringent or
difficult to obtain than FDA approval. As with the FDA, we cannot predict if or
when we may obtain these regulatory approvals. If the Combined Company cannot
demonstrate that its products can be used safely and successfully in a broad
segment of the patient population on a long-term basis, our products would
likely be denied approval by the FDA and the regulatory agencies of foreign
governments.
Following the closing of the Merger, the Combined Company will face intense
competition and rapid technological change that could result in products that
are superior to the products the Combined Company will be commercializing or
developing.
The market for vaccines that protect against HIV/AIDS is intensely
competitive and is subject to rapid and significant technological change. The
Combined Company will have numerous competitors in the United States and abroad,
including, among others, large companies such as Merck & Co. and Chiron Inc.
These competitors may develop technologies and products that are more effective
or less costly than any of the Combined Company's future products or that could
render its products obsolete or noncompetitive. Many of these competitors have
substantially more resources than the Combined Company will have. In addition,
the pharmaceutical industry continues to experience consolidation, resulting in
an increasing number of larger, more diversified companies than the Combined
Company. Among other things, these companies can spread their research and
development costs over much broader revenue bases than the Combined Company can
and can influence customer and distributor buying decisions.
The Combined Company's products may not gain market acceptance among
physicians, patients, healthcare payors and the medical community. Significant
factors in determining whether the Combined Company will be able to compete
successfully include:
32
o the efficacy and safety of its vaccines;
o the time and scope of regulatory approval;
o reimbursement coverage from insurance companies and others;
o the price and cost-effectiveness of its products; and
o patent protection.
Product candidates of the Combined Company are based on new technology and,
consequently, are inherently risky. Concerns about the safety and efficacy of
its products could limit its future success.
Following the close of the Merger, the Combined Company will be subject
to the risks of failure inherent in the development of product candidates based
on new technologies. These risks include the possibility that the products it
creates will not be effective, that its product candidates will be unsafe or
otherwise fail to receive the necessary regulatory approvals or that its product
candidates will be hard to manufacture on a large scale or will be uneconomical
to market.
Many pharmaceutical products cause multiple potential complications and
side effects, not all of which can be predicted with accuracy and many of which
may vary from patient to patient. Long term follow-up data may reveal additional
complications associated with the Combined Company's products. The responses of
potential physicians and others to information about complications could
materially affect the market acceptance of the Combined Company's products,
which in turn would materially harm its business.
Unsuccessful or delayed regulatory approvals required to exploit the commercial
potential of the products of the Combined Company could increase its future
development costs or impair its future sales.
No GeoVax technologies have been approved by the FDA for sales in the
United States or in foreign countries. To exploit the commercial potential of
GeoVax's technologies, GeoVax is conducting and planning to conduct additional
pre-clinical studies and clinical trials. This process is expensive and can
require a significant amount of time. Failure can occur at any stage of testing,
even if the results are favorable. Failure to adequately demonstrate safety and
efficacy in clinical trials would prevent regulatory approval and restrict our
ability to commercialize our technologies. Any such failure may severely harm
the business of the Combined Company. In addition, any approvals obtained may
not cover all of the clinical indications for which approval is sought, or may
contain significant limitations in the form of narrow indications, warnings,
precautions or contraindications with respect to conditions of use, or in the
form of onerous risk management plans, restrictions on distribution, or
post-approval study requirements.
State pharmaceutical marketing compliance and reporting requirements may expose
the Combined Company to regulatory and legal action by state governments or
other government authorities.
In recent years, several states, including California, Vermont, Maine,
Minnesota, New Mexico and West Virginia, have enacted legislation requiring
pharmaceutical companies to establish marketing compliance programs and file
periodic reports on sales, marketing, pricing and other activities. Similar
legislation is being considered in other states. Many of these requirements are
new and uncertain, and available guidance is limited. Unless the Combined
Company is in full compliance with these laws, it could face enforcement action
and fines and other penalties and could receive adverse publicity, all of which
could harm its business.
The Combined Company may be subject to new federal and state legislation to
submit information on our open and completed clinical trials to public
registries and databases.
33
In 1997, a public registry of open clinical trials involving drugs
intended to treat serious or life-threatening diseases or conditions was
established under the Food and Drug Administration Modernization Act, or the
FDMA, in order to promote public awareness of and access to these clinical
trials. Under the FDMA, pharmaceutical manufacturers and other trial sponsors
are required to post the general purpose of these trials, as well as the
eligibility criteria, location and contact information of the trials. Since the
establishment of this registry, there has been significant public debate focused
on broadening the types of trials included in this or other registries, as well
as providing for public access to clinical trial results. A voluntary coalition
of medical journal editors has adopted a resolution to publish results only from
those trials that have been registered with a no-cost, publicly accessible
database, such as www.clinicaltrials.gov. Federal legislation was introduced in
the fall of 2004 to expand www.clinicaltrials.gov and to require the inclusion
of study results in this registry. The Pharmaceutical Research and Manufacturers
of America has also issued voluntary principles for its members to make results
from certain clinical studies publicly available and has established a website
for this purpose. Other groups have adopted or are considering similar proposals
for clinical trial registration and the posting of clinical trial results.
Failure to comply with any clinical trial posting requirements could expose the
Combined Company to negative publicity, fines and other penalties, all of which
could materially harm the business of the Combined Company.
The Combined Company will face uncertainty related to pricing and reimbursement
and health care reform.
In both domestic and foreign markets, sales of the Combined Company's
products will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers, health maintenance organizations and other health care-related
organizations. Reimbursement by such payors is presently undergoing reform and
there is significant uncertainty at this time how this will affect sales of
certain pharmaceutical products.
Medicare, Medicaid and other governmental healthcare programs govern
drug coverage and reimbursement levels in the United States. Federal law
requires all pharmaceutical manufacturers to rebate a percentage of their
revenue arising from Medicaid-reimbursed drug sales to individual states.
Generic drug manufacturers' agreements with federal and state governments
provide that the manufacturer will remit to each state Medicaid agency, on a
quarterly basis, 11% of the average manufacturer price for generic products
marketed and sold under abbreviated new drug applications covered by the state's
Medicaid program. For proprietary products, which are marketed and sold under
new drug applications, manufacturers are required to rebate the greater of (a)
15.1% of the average manufacturer price or (b) the difference between the
average manufacturer price and the lowest manufacturer price for products sold
during a specified period.
Both the federal and state governments in the United States and foreign
governments continue to propose and pass new legislation, rules and regulations
designed to contain or reduce the cost of health care. Existing regulations that
affect the price of pharmaceutical and other medical products may also change
before any products are approved for marketing. Cost control initiatives could
decrease the price that the Combined Company receives for any product developed
in the future. In addition, third-party payors are increasingly challenging the
price and cost-effectiveness of medical products and services and litigation has
been filed against a number of pharmaceutical companies in relation to these
issues. Additionally, some uncertainty may exist as to the reimbursement status
of newly approved injectable pharmaceutical products. The Combined Company's
products may not be considered cost effective or adequate third-party
reimbursement may not be available to enable the Combined Company to maintain
price levels sufficient to realize an adequate return on its investment.
34
Other companies may claim that the Combined Company infringes their intellectual
property or proprietary rights, which could cause the Combined Company to incur
significant expenses or prevent it from selling products.
The success of the Combined Company will depend in part on its ability
to operate without infringing the patents and proprietary rights of third
parties. The manufacture, use and sale of new products have been subject to
substantial patent rights litigation in the pharmaceutical industry. These
lawsuits generally relate to the validity and infringement of patents or
proprietary rights of third parties. Infringement litigation is prevalent with
respect to generic versions of products for which the patent covering the brand
name product is expiring, particularly since many companies which market generic
products focus their development efforts on products with expiring patents.
Other pharmaceutical companies, biotechnology companies, universities and
research institutions may have filed patent applications or may have been
granted patents that cover aspects of the Combined Company' products or its
licensors' products, product candidates or other technologies.
Future or existing patents issued to third parties may contain patent
claims that conflict with the Combined Company's products. The Combined Company
is expected to be subject to infringement claims from time to time in the
ordinary course of business, and third parties could assert infringement claims
against the Combined Company in the future with respect to its current products
or with respect to products that the Combined Company may develop or license.
Litigation or interference proceedings could force the Combined Company to:
o stop or delay selling, manufacturing or using products that
incorporate or are made using the challenged intellectual
property;
o pay damages; or
o enter into licensing or royalty agreements that may not be
available on acceptable terms, if at all.
Any litigation or interference proceedings, regardless of their
outcome, would likely delay the regulatory approval process, be costly and
require significant time and attention of key management and technical
personnel.
Any inability to protect intellectual property rights in the United States and
foreign countries could limit the Combined Company's ability to manufacture or
sell products.
The Combined Company will rely on trade secrets, unpatented proprietary
know-how, continuing technological innovation and, in some cases, patent
protection to preserve a competitive position. The Combined Company's patents
and licensed patent rights may be challenged, invalidated, infringed or
circumvented, and the rights granted in those patents may not provide
proprietary protection or competitive advantages to the Combined Company. The
Combined Company and its licensors may not be able to develop patentable
products. Even if patent claims are allowed, the claims may not issue, or in the
event of issuance, may not be sufficient to protect the technology owned by or
licensed to the Combined Company. Third party patents could reduce the coverage
of the patent's license, or that may be licensed to or owned by the Combined
Company. If patents containing competitive or conflicting claims are issued to
third parties, the Combined Company may be prevented from commercializing the
products covered by such patents, or may be required to obtain or develop
alternate technology. In addition, other parties may duplicate, design around or
independently develop similar or alternative technologies.
The Combined Company may not be able to prevent third parties from
infringing or using its intellectual property, and the parties from whom the
Combined Company may license intellectual property may not be able to prevent
third parties from infringing or using the licensed intellectual property. The
35
Combined Company generally will attempt to control and limit access to, and the
distribution of, its product documentation and other proprietary information.
Despite efforts to protect this proprietary information, however, unauthorized
parties may obtain and use information that the Combined Company may regard as
proprietary. Other parties may independently develop similar know-how or may
even obtain access to these technologies.
The laws of some foreign countries do not protect proprietary
information to the same extent as the laws of the United States, and many
companies have encountered significant problems and costs in protecting their
proprietary information in these foreign countries.
The U.S. Patent and Trademark Office and the courts have not
established a consistent policy regarding the breadth of claims allowed in
pharmaceutical patents. The allowance of broader claims may increase the
incidence and cost of patent interference proceedings and the risk of
infringement litigation. On the other hand, the allowance of narrower claims may
limit the value of the Combined Company's proprietary rights.
The Combined Company may be required to defend lawsuits or pay damages for
product liability claims.
Product liability is a major risk in testing and marketing
biotechnology and pharmaceutical products. The Combined Company may face
substantial product liability exposure in human clinical trials and for products
that it sells after regulatory approval. Historically, GeoVax has carried
product liability insurance and the Combined Company is expected to continue
such policies. Product liability claims, regardless of their merits, could
exceed policy limits, divert management's attention, and adversely affect our
reputation and the demand for the Combined Company's products.
Our stock price has been volatile in response to market and other factors.
The market price for Dauphin's common stock has been, and the market
price for the Combined Company's stock after the Merger may continue to be,
volatile and subject to price and volume fluctuations in response to market and
other factors, including the following, some of which are beyond our control:
o the increased concentration of the ownership of Dauphin shares by
a limited number of affiliated stockholders following the Merger
may limit interest in the Combined Company's securities;
o variations in quarterly operating results from the expectations of
securities analysts or investors;
o announcements of technological innovations or new products or
services by the Combined Company or its competitors;
o general technological, market or economic trends;
o investor perception of the industry or prospects of the Combined
Company;
o investors entering into short sale contracts;
o regulatory developments affecting the biopharmaceutical industry;
and
o additions or departures of key personnel.
AUTHORIZED SHARES AMENDMENT PROPOSAL
General
As a condition to the closing of the Merger, we must increase the
number of shares of authorized common stock from 100,000,000 to 850,000,000. As
36
of June 29, 2006, we had 99,969,028 shares of common stock issued and
outstanding and 10,000,000 Shares of Series A Preferred Stock issued and
outstanding. The 10,000,000 Shares of Series A Preferred Stock are convertible
into 20,000,000 shares of our common stock. Prior to the closing of the Merger,
we will issue additional shares of our common stock in connection with a private
placement and in connection with the conversion into common stock of our
outstanding debt and preferred stock. We anticipate that immediately prior to
the closing of the Merger, we will have approximately 243,000,000 shares of
common stock issued and outstanding. As a result of the Merger, we anticipate
that we will have approximately 733,332,879 shares of our common stock issued
and outstanding, including Dauphin shares issued to GeoVax stockholders in the
Merger.
Our Board of Directors and the Majority Stockholders have adopted and
approved an amendment to our Articles of Incorporation to increase the number of
authorized shares of our common stock from 100,000,000 shares to 850,000,000
shares. A copy of the Authorized Shares Amendment is included in the Articles of
Amendment that is attached to this Information Statement as Annex B. We have not
increased the number of shares of Preferred Stock we are authorized to issue.
This number shall remain at 10,000,000.
Consent Required
Approval of the Authorized Shares Amendment Proposal, through an
amendment to our Articles of Incorporation, required the consent of the holders
of two-thirds (2/3) of the outstanding voting shares. As of the Record Date,
Majority Stockholders beneficially owned 217,975,496 Voting Rights representing
approximately 73% of the total Voting Rights that could be cast as of the Record
Date. The Majority Stockholders have given their written consent to the
Authorized Shares Amendment Proposal and accordingly, the requisite stockholder
approval of this Proposal was obtained by the execution of the Majority
Stockholders' written consent in favor of the Proposal.
Reason for Amendment
To issue our shares of common stock in the Merger, and in connection
with the conversion of outstanding debt and Series A Preferred Stock, we need to
increase our authorized common stock. Our Board of Directors also believes that
it is desirable to have additional authorized shares of common stock available
for other possible future financings, possible future acquisition transactions,
and other general corporate purposes. Our Board of Directors believes that
having such additional authorized shares of common stock available for issuance
in the future should give us greater flexibility and may allow such shares to be
issued without the expense and delay of a special meeting of stockholders. Aside
from allowing us to consummate the transaction with GeoVax, the unissued shares
of common stock will be available for issuance from time to time as may be
deemed advisable or required for various other purposes, including the issuance
of shares in connection with financing transactions, or as compensation, and the
issuance of shares in connection with stock splits or stock dividends, as well
as for other corporate purposes.
Effect of the Proposal/Advantages and Disadvantages
The Authorized Shares Amendment will permit our Board of Directors to
issue shares of common stock in connection with the Merger and various other
types of transactions, such as financing transactions or as compensation. If the
Authorized Shares Amendment were not approved, Dauphin would not be able to
consummate the Merger with GeoVax and may be unable, in the future, to issue
common stock for other purposes. On the other hand, the issuance of additional
shares of common stock will dilute the percentage of common stock owned by our
existing stockholders. The issuance of additional shares of common stock would
also increase the number of voting shares necessary to acquire control of the
Board or to meet the voting requirements imposed by Illinois law with respect to
a merger or other business combination. This could make it more costly or more
difficult to accomplish these actions.
37
Chapter 805, Section 10.20 of the Illinois Business Corporation Act
Chapter 805, Section 10.20 of the Illinois Business Corporation Act of
1983 permits the amendment of a corporation's articles of incorporation to allow
for an increase or decrease of the aggregate number of authorized shares of a
class so long as it is approved by the holders of at least two-thirds of the
votes entitled to be cast on the amendment.
Effective Date
The Authorized Shares Amendment will become effective upon filing the
Articles of Amendment with the Illinois Secretary of State. Under federal
securities laws, we cannot file the Amendment until at least 20 days after
mailing this Information Statement.
THE MERGER PROPOSAL
The discussion in this document of the Merger and the principal terms
of the Merger Agreement dated as of January 20, 2006, and amended as of June 29,
2006 by and among Dauphin, GeoVax, and Merger Subsidiary is subject to, and is
qualified in its entirety by reference to, the Merger Agreement. A copy of the
Merger Agreement, as amended, is attached as Annex A to this Information
Statement and is incorporated in this Information Statement by reference.
General Description of the Merger
Pursuant to the Merger Agreement, Merger Subsidiary, a wholly owned
subsidiary of Dauphin, will merge with and into GeoVax and GeoVax will be the
surviving entity and a wholly owned subsidiary of Dauphin. The separate
corporate existence of Merger Subsidiary shall cease. Dauphin will be renamed
GeoVax Labs, Inc. after completion of the Merger. If the Merger is completed,
holders of all the issued and outstanding shares of GeoVax common and preferred
stock will receive an aggregate of 490,332,879 shares of Dauphin common stock.
After the completion of the Merger, GeoVax stockholders will own approximately
67% of Dauphin's common stock then issued and outstanding.
Consent Required
Approval of the 2006 Merger required the consent of the holders of 67%
of our outstanding Voting Rights. As of the Record Date, Majority Stockholders
beneficially owned 217,975,496 Voting Rights representing approximately 73% of
the total Voting Rights that could be cast. The Majority Stockholders have given
their written consent to the Merger; accordingly, the requisite stockholder
approval of this Proposal was obtained by the execution of the Majority
Stockholders' written consent in favor of the Proposal.
Background of the Merger
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Dauphin and GeoVax. The following is a
brief discussion of the background of these negotiations, the Merger Agreement,
and related transactions.
History of the Transaction. Dauphin terminated all operations in
December 2003. Since 2004, its business plan has been to serve as a vehicle for
the acquisition of, or the merger or consolidation with, another company. During
the first six months of 2004, Dauphin's President and Chief Executive Officer,
38
Andrew J. Kandalepas, had discussions with various business owners in an attempt
to find an individual or entity to provide Dauphin with required capital and
assist in the execution of Dauphin's business plan. Following unsuccessful
discussions with Sanyo Hellas Holdings, S.A., a diversified holding company
headquartered in Greece, Dauphin sought assistance from Douglas P. Morris,
President and owner of Hyacinth Resources, LLC. Mr. Morris was a past director
of Dauphin and had been a consultant to Dauphin for several years. In November,
2004, Dauphin and Mr. Morris entered into a new consulting relationship.
Mr. Morris and his associates provided various suggestions regarding
potential merger and/or acquisition targets for Dauphin to consider. Between
November, 2004 and January 27, 2005, Mr. Morris and Mr. Kandalepas met with
various owners and their business advisors on repeated occasions, both in the
United States and Greece, to review potential Dauphin acquisition targets.
Ultimately, on or about January 27, 2005, Mr. Kandalepas, Mr. Morris and GeoVax
officers, including GeoVax's CEO, Donald G. Hildebrand, met in Atlanta, Georgia.
GeoVax officers stated that GeoVax sought a merger with a public company, such
as Dauphin, to enable critical financing required to continue ongoing HIV
vaccine development and testing. After lengthy negotiations about the structure
of the proposed merger, the two companies agreed on the terms of a proposed
merger and executed a letter of intent on April 8, 2005.
Following initial due diligence discussions between the companies'
legal and other advisors, a transaction structure was confirmed and an amended
letter of intent was executed on or about July 19, 2005. Thereafter, the
companies' advisors have addressed various conditions set forth in the letter of
intent, including completion of financial audits and Dauphin's efforts to
satisfy periodic reporting requirements under the Exchange Act, as well as the
negotiation and preparation of a definitive Merger Agreement. A definitive
Merger Agreement was executed on January 20, 2006 conforming substantially to
the amended letter of intent. The Merger Agreement was amended as of June 29,
2006 to extend the date for satisfaction of closing conditions from June 30,
2006 to September 1, 2006 and to reduce the amount of cash Dauphin is required
to have as a condition of closing from $13,000,000 to $2,000,000.
Dauphin's Board of Directors' Reasons for the Approval of the Merger
The final agreed-upon consideration in the Merger Agreement was
determined by the negotiations between Dauphin and GeoVax. Dauphin conducted a
due diligence review of GeoVax that included an industry analysis, a description
of GeoVax's existing business model and a review of financial projections, which
enabled the board of directors to ascertain the reasonableness of this
consideration. During its negotiations with GeoVax, Dauphin did not receive
services from any financial advisor. The Dauphin Board of Directors concluded
that the Merger Agreement with GeoVax is in the best interests of Dauphin's
stockholders.
The Dauphin Board of Directors considered a wide variety of factors in
connection with its evaluation of the Merger. In light of the complexity of
those factors, the Dauphin Board of Directors did not consider it practicable
to, nor did it attempt to, quantify or otherwise assign relative weights to the
specific factors it considered in reaching its decision. In addition, individual
members of the Dauphin board may have given different weight to different
factors.
In considering the Merger, the Dauphin Board of Directors gave
considerable weight to the following factors:
o GeoVax's high potential for future growth;
o The opportunity to invest in a growing, dynamic industry;
o The experience of GeoVax's management; and
o GeoVax's ability to execute its business plan after the Merger
using Dauphin's cash.
39
No fairness opinion was obtained by Dauphin as to whether the Merger
consideration and the other terms of the Merger Agreement are fair to the
Dauphin Stockholders. The conversion ratio was arbitrarily determined based upon
the arm's-length negotiation of Dauphin and GeoVax.
Material Federal Income Tax Consequences of the Merger
The following section is a summary of the material United States
federal income tax consequences of the Merger to holders of Dauphin common stock
and to holders of GeoVax securities. This discussion addresses only those
Dauphin and GeoVax security holders that hold their securities as a capital
asset within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended ("the Code"), and does not address all of the possible United States
federal income tax consequences that may be relevant to particular holders in
light of their individual circumstances or to holders that are subject to
special rules, such as:
o financial institutions;
o investors in pass-through entities;
o tax-exempt organizations;
o dealers in securities or currencies;
o persons that hold Dauphin or GeoVax common stock as part of a
straddle, hedge, constructive sale, or conversion transaction;
o persons who are not citizens or residents of the United States;
and
o stockholders who acquired their shares of GeoVax common and
preferred stock through the exercise of an employee stock option,
or otherwise, as compensation.
The following is based upon the Code, applicable treasury regulations,
published rulings, and court decisions, all as currently in effect as of the
record date, and all of which are subject to change, possibly with retroactive
effect. Tax considerations under state, local, foreign, or federal laws other
than those pertaining to the income tax, are not addressed.
Neither Dauphin, nor GeoVax intends to request any ruling from the
Internal Revenue Service as to the United States federal income tax consequences
of the Merger, nor did they obtain an opinion of counsel as to the tax
consequences of the Merger.
Tax Consequences of the Merger to GeoVax stockholders. We anticipate
that the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. As a consequence:
o no gain or loss will be recognized by stockholders of GeoVax who
receive shares of Dauphin common stock in exchange for shares of
GeoVax common and preferred stock;
o the aggregate tax basis of the shares of Dauphin common stock
received in the Merger will be equal to the aggregate tax basis of
the shares of GeoVax common and preferred stock for which they are
exchanged;
o the holding period of Dauphin common stock received in exchange
for shares of GeoVax common and preferred stock will include the
holding period of the GeoVax common and preferred stock for which
they are exchanged; and
o any GeoVax stockholder who exercises his or her dissenters'
rights, and who receives cash in exchange for his or her shares of
GeoVax stock, generally must recognize gain or loss measured by
the difference between the amount of cash received and the tax
basis of such stockholders' shares of GeoVax common or preferred
stock.
40
Tax Consequences of the Merger to Dauphin stockholders. No gain or loss
will recognized by stockholders of Dauphin in the Merger.
Tax Consequences of the Merger Generally to Dauphin and GeoVax. No gain
or loss will be recognized by Dauphin or GeoVax as a result of the Merger.
This discussion is intended to provide only a general summary of the
material United States federal income tax consequences of the Merger, and it is
not a complete analysis or description of all potential United States federal
tax consequences of the Merger. This discussion does not address tax
consequences that may vary with, or are contingent on, your individual
circumstances. In addition, the discussion does not address any non-income tax
or any foreign, state, or local tax consequences of the Merger. Accordingly, you
are strongly urged to consult with your tax advisor to determine the particular
tax consequences applicable to you as a result of the Merger. Such consequences
may arise under United States federal, state, or local tax laws, as well as
under the laws of foreign governments.
Anticipated Accounting Treatment
The Merger will be accounted for under the purchase method of
accounting as a reverse acquisition in accordance with U.S. generally accepted
accounting principles for accounting and financial reporting purposes. Under
this method of accounting, Dauphin will be treated as the "acquired" company. In
accordance with guidance applicable to these circumstances, the Merger will be
considered to be a capital transaction in substance. Accordingly, for accounting
purposes, the Merger will be treated as the equivalent of GeoVax issuing stock
for the net monetary assets of Dauphin, accompanied by a recapitalization. The
net monetary assets of Dauphin will be stated at their fair value, essentially
equivalent to historical costs, with no goodwill or other intangible assets
recorded. The retained earnings deficit of GeoVax will be carried forward after
the Merger. Operations prior to the Merger will be those of GeoVax.
SELECTED FINANCIAL DATA
DAUPHIN SELECTED FINANCIAL DATA
-------------------------------
Year Ended December 31
----------------------
2005 2004 2003 2002 2001
------------- ------------- ----------- ------------ -------------
Net Sales $ - $ - $ - $ 19,621 $ 16,678
Net Loss from Continuing
Operations (1,408,534) (1,658,941) (735,159) (2,087,341) (8,937,121)
Net Loss from Discontinued
Operations (2,341,921) (2,978,505)
- (548,865) (6,095,339)
------------- ------------- ----------- ------------ -------------
Total Net Loss $ (1,408,534) $ (2,207,806) $ (3,077,080) $ (5,065,846) $ (15,032,460)
Loss Per Share from
Continuing Operations $ (0.01) $ (0.02) $ (0.01) $ (0.03) $ (0.14)
Loss Per Share from
Discontinued Operations 0.00 0.00 (0.03) (0.04) (0.10)
------------- ------------- ----------- ------------ -------------
Total Loss Per Share $ (0.01) $ (0.02) $ (0.04) $ (0.07) $ (0.24)
Total Assets $ 78,381 $ 19,161 $ 172,197 $ 2,028,420 $ 3,917,424
Long - Term Debt $ - $ 2,405,078 $ 2,591 $ 1,077,650 $ 1,196,777
Working Capital (Deficit) $ (5,715,192) $ (2,541,107) $ (3,814,621) $ (1,918,335) $ 680,392
Shareholders (Deficit) Equity $ (5,715,192) $ (4,946,185) $ (3,817,212) $ (1,486,358) $ 268,940
41
Six Months Ended June 30,
2006 2005
Net Sales $ - $ -
Net Gain/(Loss) from Continuing
Operations 532,890 (642,657)
----------------- ----------------
Total Net Loss $ 532,890 $ (642,657)
Gain/(Loss) Per Share from
Continuing Operations $ 0.01 $ (0.01)
----------------- ----------------
Total Loss Per Share $ 0.01 $ (0.01)
Total Assets $ 95,070 $ 101,911
Long - Term Debt $ - $ 2,656,078
Working Capital (Deficit) $ (5,062,302) $ (2,342,264)
Shareholders (Deficit) Equity $ (5,062,302) $ (5,001,342)
GEOVAX SELECTED FINANCIAL DATA
------------------------------
Fiscal Years Ended December 31,
2005 2004 2003 2002 2001
(Unaudited) (Unaudited)
Statement of Operations Data
Grant revenues $ 670,467 $ 714,852 $ 992,720 $ 180,237 $ -
Operating expenses 2,296,013 3,091,682 1,968,024 800,913 171,904
Loss from operations (1,625,546) (2,376,830) (975,304) (620,646) (171,904)
Other income (expense) 14,460 25,002 27,500 2,539 502
Net loss (1,611,086) (2,351,828) (947,804) (618,137) (170,592)
Average common shares outstanding 10,548,648 9,810,716 7,522,330 5,465,268 -
Net loss per common share (0.15) (0.24) (0.13) (0.11) (0.00)
Fiscal Years Ended December 31,
2005 2004 2003 2002 2001
(Unaudited) (Unaudited) (Unaudited)
Balance Sheet Data
Current assets $ 1,435,538 $ 1,631,444 $ 2,163,627 $ 222,820 $ 373,313
Total assets 1,685,218 1,870,089 2,316,622 371,027 375,630
Current liabilities 1,169,246 1,321,111 577,819 210,576 15,090
Redeemable convertible
preferred stock 1,016,555 938,475 866,391 799,844 531,122
Deficit accumulated during
development stage (5,699,447) (4,088,361) (1,736,533) (788,729) (170,592)
Stock subscription receivable
for common stock (500,000) (2,000,000) - - -
Total stockholders' equity
(deficiency) (500,583) (389,497) 1,738,803 160,451 360,540
Total liabilities and stockholders'
equity (deficiency) $ 1,685,218 $ 1,870,089 $ 2,316,622 $ 371,027 $ 375,630
42
Six Months Ended
------------------
June 30,
---------
2006 2005
Grant revenue $ 478,853 $ 221,999
Operating expenses 731,585 1,100,318
Loss from operations (252,732) (878,319)
Other income (expense) 16,039 5,693
Net loss (236,693) (872,626)
Basic and diluted loss per
common share $ (0.02) $ (0.08)
Weighted average shares
Outstanding 10,548,648 10,548,648
PRO FORMA SELECTED FINANCIAL INFORMATION
Fiscal Year Ended Six Months Ended
----------------- ------------------
December 31, 2005 June 30, 2006
----------------- --------------
As reported As adjusted As reported As adjusted
--------------- -------------- ------------- -------------
Statement of Operations Data
Grant revenue $ -- $ 670,467 $ -- $ 478,853
Operating expenses 875,811 3,093,743 657,092 1,349,636
Loss from operations (875,811) (2,423,276) (657,092) (870,783)
Other income (expense) (532,723) 14,460 1,189,982 16,039
Net income (loss) (1,408,534) (2,408,816) 532,890 (854,744)
Average shares outstanding 99,266,000 733,332,879 99,636,000 696,666,212
Cash dividends declared
per Share -- -- -- --
Net income (loss) per
common share $ (0.01) $ 0.00 $ 0.01 $ (0.00)
Six Months Ended
June 30, 2006
As reported As adjusted
Balance Sheet Data
Current assets $ 95,070 $ 2,427,931
Total assets 95,070 2,656,941
Current liabilities 5,157,372 435,540
Redeemable convertible
preferred stock -- --
Deficit accumulated during
development stage (71,001,523) (5,936,140)
Stock subscription receivable
for common stock -- --
Total stockholders' equity
(deficit) (5,062,302) 2,221,401
Total liabilities and stockholders'
equity (deficit) $ 95,070 $ 2,656,941
Book value per share (0.05) 0.00
43
THE MERGER AGREEMENT
The following summary of the material provisions of the Merger
Agreement is qualified by reference to the complete text of the Merger Agreement
and First Amendment to Agreement and Plan of Merger, copies of which are
attached as Annex A to this Information Statement, and are incorporated by
reference. All stockholders are encouraged to read the Merger Agreement and
First Amendment to Agreement and Plan of Merger in their entirety for a more
complete description of the terms and conditions of the Merger.
General; Structure of Merger
On January 20, 2006, Dauphin entered into a Merger Agreement
subsequently amended on June 29, 2006 with GeoVax. Merger Subsidiary, a wholly
owned subsidiary of Dauphin, formed to effectuate the Merger by merging with and
into GeoVax, is also a party to the Merger Agreement. GeoVax will be the
surviving corporation in the Merger and, as a result, will be a wholly owned
subsidiary of Dauphin through an exchange of all the issued and outstanding
shares of capital stock of GeoVax for shares of common stock of Dauphin.
Closing and Effective Time of the Merger
The closing of the Merger will take place promptly following the
satisfaction of the conditions described below under "The Merger Agreement --
Conditions to Closing of the Merger," unless Dauphin and GeoVax agree in writing
to another time. The Merger is expected to be consummated in the third or fourth
quarter of 2006.
Name; Headquarters; Stock Symbols
After completion of the Merger:
o the name of Dauphin will be GeoVax Labs, Inc.;
o the officers and directors of GeoVax, together with Andrew J.
Kandelepas, currently a director of Dauphin, and Dean G.
Kollintzas will be the officers and directors of Dauphin;
o the principal executive offices will be located at 1256 Briarcliff
Road, Atlanta, GA 30806, which is GeoVax's corporate headquarters;
and
o as a result of the Merger and change of Dauphin's name to GeoVax
Labs, Inc., Dauphin will be issued a new trading symbol.
Merger Consideration
Pursuant to the Merger Agreement, the holders of the outstanding shares
of GeoVax common and preferred stock immediately before the Merger will receive
in exchange for such GeoVax shares an aggregate of 490,332,879 shares of Dauphin
common stock (assuming no GeoVax stockholder exercises his, her or its
dissenter's rights). In addition, Dauphin will assume outstanding GeoVax stock
options that have not been exercised prior to the Merger, and may assume certain
outstanding GeoVax warrants that are not exercised prior to the Merger, each on
terms comparable to the Merger consideration paid to GeoVax's stockholders. We
anticipate there will be GeoVax options and warrants that will entitle their
holders to acquire up to 34,319,910 shares of Dauphin common stock following the
Merger.
44
GeoVax stockholders who do not exercise their dissenters' rights will
receive approximately 29.2832 shares of common stock of Dauphin for every share
of GeoVax common and preferred stock they own.
Promptly after the Merger is completed, Dauphin will cause each record
holder of GeoVax common and preferred stock to be mailed instructions and a
letter of transmittal for exchanging their GeoVax stock certificates for Dauphin
stock certificates. To effectuate the exchange of GeoVax securities for Dauphin
common stock, the GeoVax equity holders must comply with the instructions set
forth in the letter of transmittal.
Representations and Warranties
The Merger Agreement contains the representations and warranties of
GeoVax and Dauphin relating to, among other things:
o proper corporate organization and similar corporate matters;
o capital structure of each constituent company;
o the authorization, performance, and enforceability of the Merger
Agreement;
o licenses and permits;
o taxes;
o financial information and absence of undisclosed liabilities;
o holding of leases and ownership of other properties, including
intellectual property;
o accounts receivable;
o inventory;
o contracts;
o title and condition of assets;
o absence of certain changes;
o employee matters;
o environmental matters;
o compliance with applicable laws;
o absence of litigation; and
o with respect to Dauphin, compliance with applicable provisions of
securities laws, including past SEC and transaction-related
filings. Covenants
From the date of the Merger Agreement and until the closing of the
Merger, except as contemplated by the Merger Agreement or as otherwise consented
to by Dauphin and GeoVax in writing, Dauphin and GeoVax each agrees to:
(a) Carry on its business only in the ordinary course of business
and use commercially reasonable efforts to preserve intact its present business
organization, keep available the services of its executive officers and key
employees, and preserve its relationships with customers, clients, service
providers, and others having material business dealings with it;
(b) Timely file all tax returns and timely withhold and pay all
taxes;
(c) Maintain in full force and effect all governmental
authorizations reasonably required for the operation of its business as
presently conducted;
45
(e) Comply in all material respects with all Legal Requirements
and Governmental Authorizations as defined in the Merger Agreement applicable to
them;
(f) Not amend its articles of incorporation or bylaws;
(g) Not merge or consolidate with, or agree to merge or
consolidate with, or purchase substantially all of the assets of, or otherwise
acquire any business of, or enter into any joint venture or partnership with,
any person;
(h) Not take any action, or omit to take any action, that would
result in a Breach, as defined in the Merger Agreement, of any of the
representations and warranties set forth in the Merger Agreement at, or prior
to, the Closing;
(i) Not issue, reissue, sell, deliver, pledge, authorize, or
propose the issuance, reissuance, sale, delivery, or pledge of shares of capital
stock of any class, or securities convertible into capital stock of any class,
or any rights, warrants, or options to acquire any convertible securities or
capital stock;
(j) Not adjust, split, combine, subdivide, reclassify or redeem,
purchase or otherwise acquire, or propose to redeem or purchase or otherwise
acquire, any shares of its capital stock, or any of its other securities;
(k) Not declare, set aside, or pay any dividend or other
distribution (whether in cash, stock, property, or any combination thereof) in
respect of its capital stock, redeem or otherwise acquire any shares of its
capital stock or other securities, alter any term of any of its outstanding
securities;
(l) (i) except as required under any employment agreement, not
increase in any manner the compensation of any of its directors, officers, or
other employees; (ii) not pay, or agree to pay, any pension, retirement
allowance, or other employee benefit not required or permitted by any existing
plan, agreement, or arrangement to any such director, officer, or employee,
whether past or present; or (iii) not commit itself to any additional pension,
profit-sharing, bonus, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay, retirement, or
other employee benefit plan, agreement, or arrangement, or to any employment
agreement or consulting agreement (arising out of prior employment ) with, or
for the benefit of, any person, or, except to the extent required to comply with
applicable law, amend any of such plans or any of such agreements in existence
on the date of the Merger Agreement;
(m) Not terminate, enter into or amend in any material respect any
contract, agreement, lease, license, or commitment, or take any action, or omit
to take any action that would cause a breach, violation, or default (however
defined) under any contract, except in the ordinary course of business and
consistent with past practice;
(n) Not permit any of its current insurance (or reinsurance)
policies to be cancelled or terminated or any of the coverage thereunder to
lapse, unless simultaneously with such termination, cancellation, or lapse,
replacement policies providing coverage equal to, or greater than, coverage
remaining under those cancelled, terminated, or lapsed policies are in full
force and effect;
(o) Not enter into other material agreements, commitments, or
contracts not in the ordinary course of business or in excess of current
requirements; and
46
(p) Not maintain its books of account and records in other than
its usual, regular, and ordinary accounting practice.
No Negotiation. During the period after the execution of the Merger Agreement
and prior to the closing of the Merger neither Dauphin nor GeoVax shall,
directly or indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal,
or offer from any person relating to a possible transaction similar to the
transactions contemplated in the Merger Agreement;
(b) participate in any negotiations or discussions, or enter into
any agreement with, or provide any non-public information to, any person
relating to, or in connection with, any such transaction; or
(c) consider, entertain, or accept any proposal or offer from any
person relating to any such possible transaction.
Conditions to Closing of the Merger
Consummation of the Merger Agreement and the related transactions was
conditioned on the Dauphin stockholders, (i) adopting the Merger Agreement and
approving the Merger, (ii) approving the change of Dauphin's name, (iii)
approving the increase of the authorized shares of Dauphin's common stock from
100,000,000 to 850,000,000; (iv) adopting the 2006 Equity Incentive Plan; and
(v) electing GeoVax directors as directors of Dauphin. The Majority Stockholders
have approved all of such actions.
In addition, the consummation of the transactions contemplated by the
Merger Agreement is conditioned upon:
o no order, stay, judgment, or decree being issued by any
governmental authority preventing, restraining, or prohibiting in
whole or in part, the consummation of such transactions;
o the execution and delivery to each party of each of the various
transaction documents;
o the delivery by each party to the other party of a certificate to
the effect that the representations and warranties of each party
are true and correct in all material respects as of the closing
and all covenants contained in the Merger Agreement have been
materially complied with by each party;
o the receipt of necessary consents and approvals by third parties
and the completion of necessary proceedings;
o holders of not more than 5% of the shares of any of GeoVax's
common stock, or Series A preferred stock outstanding immediately
before the closing, not having taken action to exercise their
dissenters' rights under the Georgia Business Corporations Act;
o The most significant closing condition was that Dauphin must have
not less than $2,000,000 in net cash assets prior to the closing
of the Merger. Pursuant to the Merger Agreement as amended,
Dauphin has met this requirement by tendering to GeoVax a
non-refundable deposit in the amount of $2,000,000. The $2,000,000
was raised through the issuance of convertible notes which are
included in the conversion of debt including in the table set
forth below. We anticipate that, immediately prior to closing,
substantially all of our debt will be converted to common stock.
Dauphin shall use its best efforts to raise an additional $11
million at, prior to or within 90 days of the consummation of the
Merger;
47
o Except as otherwise agreed to by the SEC, Dauphin shall have filed
any delinquent SEC Reports and its 2005 10-K, and it shall have
responded to, and fully resolved to the SEC's satisfaction, any
written comments to such reports made by the SEC prior to the
Closing;
o the representations and warranties of each party set forth in the
Merger Agreement shall be true and correct in all material
respects
o no Material Adverse Effect relating to the business or financial
condition of either Dauphin or GeoVax shall have occurred; and
o the holders of all outstanding convertible promissory notes and
Series A Preferred Stock shall have been converted into Dauphin
common stock.
Issuance of Shares Prior to Closing
As described above, one of the conditions for the closing of the Merger
is that Dauphin shall have cash of not less than $2,000,000 and substantially no
liabilities. To fulfill this condition, Dauphin sold convertible notes in the
amount of $2,000,000 and delivered the proceeds to GeoVax. Prior to or after
closing Dauphin intends to sell shares of its common stock for cash to a limited
number of investors as well as convert its outstanding debt into common stock
and its preferred stock into common stock. We anticipate that we will issue the
following shares prior to the closing of the Merger:
shares to issued in private placement 38,000,000
shares to be issued in conversion of debt 42,919,030
shares to be issued in conversion of preferred stock 20,000,000
Shares to be issued for services 40,000,000
shares reserved for contingencies 2,611,942
-----------
Total additional shares issued prior to closing 143,530,972
We plan to issue 20,000,000 shares of our common stock to Hyacinth
Resources, LLC for services rendered in connection with the Merger. We also plan
to issue 20,000,000 shares of our common stock to our president Andrew J.
Kandalepas for services rendered in connection with the Merger. We have reserved
2,611,943 shares for issuance in connection with the Merger.
Dauphin has agreed that it will have no more than 243,000,000 shares
outstanding immediately prior to the closing (not including convertible
securities) and 733,332,879 shares after the closing (not including convertible
securities).
Termination
The Merger Agreement may be terminated at any time, but not later than
the closing as follows:
o By mutual written consent of Dauphin and GeoVax;
o By either party if a governmental entity shall have issued an
order, decree, or ruling, or has taken any other action, in any
case having the effect of permanently restraining, enjoining, or
otherwise prohibiting the Merger, which order, decree, ruling, or
other action is final and non-appealable;
o By either party if the closing conditions have not been satisfied
by September 1, 2006; or
o By either party if the other party has breached any of its
covenants or representations and warranties in any material
respect and has not cured its breach within thirty days of
receiving notice of an intent to terminate, provided that the
terminating party is itself not in breach.
48
Effect of Termination
In the event of proper termination by either Dauphin or GeoVax, the
Merger Agreement will become void and have no effect, and no liability or
obligation will attach to either Dauphin or GeoVax, except that:
o The confidentiality obligations set forth in the Merger Agreement
will survive;
o The rights of the parties to bring actions against each other for
breach of the Merger Agreement will survive; and
o The fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid
by the party incurring such expenses.
Fees and Expenses
All fees and expenses incurred in connection with the Merger Agreement
and the transactions contemplated thereby will be paid by the party incurring
such expenses whether or not the Merger Agreement is consummated.
Confidentiality; Access to Information
Dauphin and GeoVax will afford to the other party and its financial
advisors, accountants, counsel, and other representatives, prior to the
completion of the Merger, reasonable access during normal business hours, upon
reasonable notice, to all of their respective properties, books, records, and
personnel to obtain all information concerning the business, including the
status of product development efforts, properties, results of operations, and
personnel, as each party may reasonably request. Dauphin and GeoVax will
maintain in confidence any non-public information received from the other party,
and use such non-public information only for purposes of consummating the
transactions contemplated by the Merger Agreement.
Amendment
The Merger Agreement may be amended by the parties thereto at any time
by execution of an instrument in writing signed on behalf of each of the
parties.
Extension; Waiver
At any time prior to the closing, any party to the Merger Agreement
may, in writing, to the extent legally allowed:
o extend the time for the performance of any of the obligations or
other acts of the other parties to the agreement;
o waive any inaccuracies in the representations and warranties made
to such party contained in the Merger Agreement or in any document
delivered pursuant to the Merger Agreement; and
o waive compliance with any of the agreements or conditions for the
benefit of such party contained in the Merger Agreement.
49
NAME CHANGE PROPOSAL
General
As a condition to the closing of the Merger we must amend our Articles
of Incorporation to change our name to GeoVax Labs, Inc. Our Board of Directors
and the Majority Stockholders have unanimously adopted and approved an amendment
to our Articles of Incorporation to change our name from Dauphin Technology,
Inc., to GeoVax Labs, Inc. A copy of the Name Change Amendment is included in
the Articles of Amendment, which have been attached to this Information
Statement as Annex B.
Like the Authorized Shares Amendment, the Name Change Amendment will be
implemented by filing the Articles of Amendment with the Secretary of State of
Illinois. Once we file the Articles of Amendment, our name will change from
Dauphin Technology, Inc. to GeoVax Labs, Inc. Under federal securities laws, we
cannot file the Amendment until at least 20 days after mailing this Information
Statement.
Consent Required
Approval of the Name Change Proposal, through an amendment to our
Articles of Incorporation, required the consent of the holders of two-thirds
(2/3) of the outstanding voting shares. As of the Record Date, Majority
Stockholders beneficially owned 217,975,496 Voting Rights representing
approximately 73% of the total Voting Rights that could be cast as of the Record
Date. The Majority Stockholders have given their written consent to the Name
Change Proposal, and accordingly, the requisite stockholder approval of this
Proposal was obtained by the execution of the Majority Stockholders' written
consent in favor of the Proposal.
Reason for Amendment
The name GeoVax Labs, Inc. will reflect the change in our business and
is a condition to the closing of the Merger.
Effect of the Proposal/Advantages and Disadvantages
Other than changing our name, this proposal will not have an effect on
our business or operations.
Chapter 805, Section 10.20 of the Illinois Business Corporation Act
Chapter 805, Section 10.20 of the Illinois Business Corporation Act of
1983 permits the amendment of a corporation's articles of incorporation to allow
it to change its name so long as the amendment is approved by the holders of at
least two-thirds of the votes entitled to be cast on the amendment.
Effective Date
The Name Change Amendment will become effective upon filing the
Articles of Amendment with the Illinois Secretary of State. Under federal
securities laws, we cannot file the Amendment until at least 20 days after
mailing this Information Statement.
50
ADOPTION OF GEOVAX LABS, INC. 2006 EQUITY INCENTIVE PLAN
Purpose of the 2006 Equity Incentive Plan
As a condition to the closing of the Merger Agreement, Dauphin must
adopt a stock incentive plan in a form acceptable to GeoVax. Our Board of
Directors and the Majority Stockholders have approved the 2006 Equity Incentive
Plan attached hereto as Annex C. The 2006 Equity Incentive Plan will be
effective at the closing of the Merger. The purpose of the 2006 Equity Incentive
Plan is to promote the long-term success of Dauphin and its subsidiaries and to
increase stockholder value by:
o attracting and retaining key employees and directors of
outstanding ability;
o encouraging key employees and directors to focus on long-range
objectives; and
o further aligning the interests of key employees and directors with
the stake of the stockholders.
A summary of the 2006 Equity Incentive Plan is set forth below. This
summary is, however, qualified in its entirety by and subject to the more
complete information set forth in the 2006 Stock Incentive Plan.
Consent Required
Approval of the 2006 Equity Incentive Plan Proposal required the
consent of the holders of a majority of our outstanding Voting Rights. As of the
Record Date, Majority Stockholders beneficially owned 217,975,496 Voting Rights
representing approximately 73% of the total Voting Rights that could be cast as
of the Record Date. The Majority Stockholders have given their written consent
to the 2006 Equity Incentive Plan Proposal, and accordingly, the requisite
stockholder approval of this Proposal was obtained by the execution of the
Majority Stockholders' written consent.
Maximum Aggregate Shares Issuable under the 2006 Plan
The total shares of Dauphin common stock subject to the 2006 Equity
Incentive Plan shall not exceed the sum of 36,000,000 shares. The numbers of
shares reserved under the 2006 Stock Incentive Plan are subject to adjustment in
the event of a change in the capitalization of Dauphin. The total number of
shares covered by the 2006 Equity Incentive Plan will represent 6% of the shares
of common stock outstanding as of the closing date of the Merger. To the extent
that any shares covered by a prior stock incentive plan remain unissued after
the award is canceled, exchanged, or expires unexercised, then such shares of
common stock may again be available for use under the 2006 Equity Incentive
Plan.
Term of the 2006 Equity Plan
The 2006 Equity Incentive Plan will become effective at the Effective
Time of the Merger. Unless the 2006 Equity Incentive Plan is earlier terminated
in accordance with its provisions, no stock incentives will be granted under the
2006 Equity Incentive Plan after the earlier of ten years from the effective
date, or the date on which all of the shares reserved for the 2006 Equity
Incentive Plan have been issued or are no longer available for use under the
2006 Equity Incentive Plan.
Administration of the 2006 Plan
The Plan will be administered by a committee of two or more members of
the Board of Directors. The Committee will have full power to:
51
o select eligible participants to receive awards under the 2006
Equity Incentive Plan;
o determine the sizes and types of stock incentives to award under
the 2006 Equity Incentive Plan;
o determine the terms and conditions of such awards;
o interpret the 2006 Equity Incentive Plan and any agreement or
instrument entered into under the 2006 Equity Incentive Plan;
o establish, amend, or waive rules or regulations for the
administration of the 2006 Equity Incentive Plan;
o amend the terms and conditions of any outstanding stock incentives
as allowed under the 2006 Equity Incentive Plan; and
o make all other determinations, or take such other actions, as may
be necessary or advisable for the administration of the 2006
Equity Incentive Plan.
Notwithstanding the foregoing, only a committee comprised solely of two
or more directors, each of whom must be both an "outside director" within the
meaning of the Code already defined, and a "non-employee director" as defined in
Rule 16b-3 under the Securities Exchange Act of 1934, as amended, may grant
stock incentives that will (1) meet the performance-based exception from the tax
deductibility limitations of Section 162(m) of the Code, or (2) be exempt from
Section 16(b) of the Securities Exchange Act of 1934.
Types of Stock Incentives
The Board of Directors and the Committee may grant the following stock
incentives under the 2006 Equity Incentive Plan (each individually, a "Stock
Incentive"):
o stock options to purchase shares of common stock, including
options intended to qualify under Section 422 of the Code
("incentive stock options") and options not intended to qualify
under Section 422 of the Code ("non-qualified stock options");
o restricted stock awards; and
o restricted stock bonus.
Each of the above Stock Incentives will be evidenced by a stock
incentive agreement executed by Dauphin and the eligible recipient, in such form
and with such terms and conditions as the Committee may, pursuant to the
provisions of the 2006 Equity Incentive Plan, determine in their discretion from
time to time.
Eligible Recipient
Awards of Stock Incentives under the 2006 Equity Incentive Plan may be
made to employees of Dauphin and its subsidiaries, non-employee directors, and
consultants or advisors that provide services (other than the offering, sale or
marketing of Dauphin's securities) to Dauphin or its subsidiaries (collectively,
the "Participants"). Only employees are eligible to receive a grant of incentive
stock options.
Provisions Applicable to Stock Options
Exercise Price. With respect to each grant of an incentive stock option
to a Participant who is not a stockholder holding more than 10% of Dauphin's
total voting stock ("ten-percent stockholder"), the exercise price will not be
less than the fair market value of the shares, which is equal to the closing
52
sales price of the common stock on the grant date ("Fair Market Value"). With
respect to each grant of an incentive stock option to a recipient who is a
ten-percent stockholder, the exercise price will not be less than 110% of the
Fair Market Value of the shares.
Option Term. Stock options may not be exercised after the tenth
anniversary of the grant date, except that any incentive stock option granted to
a ten-percent stockholder may not be exercised after the fifth anniversary of
the grant date.
Transferability Restrictions. A stock option issued under the 2006
Equity Incentive Plan may not be transferable or assignable, except by the laws
of descent and distribution, and may be exercisable only by the Participant.
However, a non-qualified stock option may be transferred by the Participant as a
bona fide gift to his or her spouse, lineal descendant or ascendant, siblings,
and children by adoption.
Payment. Payment for shares purchased pursuant to exercise of a stock
option may be made in cash or by delivery to Dauphin of a number of shares that
have been owned and completely paid for by the Participant for at least six
months prior to the date of exercise, or a combination thereof. In addition, the
stock option may be exercised through a brokerage transaction as permitted under
the provisions of Regulation T, applicable to cashless exercises promulgated by
the Board of Governors of the Federal Reserve System, unless prohibited by
Section 402 of the Sarbanes-Oxley Act of 2002. Except as otherwise provided in
the 2006 Equity Incentive Plan, payment must be made at the time that the stock
option, or any part thereof, is exercised, and no shares shall be issued or
delivered to the Participant upon exercise of its option until full payment has
been made by the Participant. Unless prohibited by the Sarbanes-Oxley Act of
2002, in the sole discretion of the Committee, a stock option may be exercised
by delivery to Dauphin of a promissory note executed by the Participant, with
such other terms and conditions as the Committee may determine. Other methods of
payment may also be used if approved by the Committee in its sole and absolute
discretion and provided for under the related stock incentive agreement.
Repricing of Stock Options. The Committee may approve the repricing of
all or any portion of outstanding stock options granted under the 2006 Equity
Incentive Plan without the additional approval of the stockholders.
Provisions Applicable to Stock Bonus
A stock bonus is an award of shares under the 2006 Equity Incentive
Plan for extraordinary service to Dauphin or any subsidiary of Dauphin. The
Committee will determine the number of shares to be awarded and any conditions,
criteria, or performance requirements applicable to the stock bonus.
Provisions Applicable to Stock Awards
A stock award is an offer by Dauphin to sell to an eligible person
shares that may or may not be subject to restrictions. The Committee may
determine the terms, conditions, restrictions, and other provisions of each
stock award. Stock awards issued under the 2006 Equity Incentive Plan may have
restrictions that lapse based upon the service of a Participant, or based upon
the attainment of performance goals established pursuant to the business
criteria listed in the 2006 Equity Incentive Plan, or based upon any other
criteria that the Committee may determine appropriate. The purchase price of
shares sold pursuant to a stock award will be determined by Dauphin on the date
the stock award is granted but may not be less than the fair market value of
Dauphin common stock on the date of grant, provided however, in the case of a
sale to a holder of 10% or more of Dauphin's common stock, the purchase price
shall not be less than 110% of the fair market value.
53
Repurchase Rights
The Committee may attach a right of Dauphin, or an assignee of Dauphin,
to repurchase all, or any portion of, a Stock Award under the 2006 Equity
Incentive Plan.
Amendment and Termination
The Board of Directors or the Committee may suspend, terminate, or
amend the 2006 Equity Incentive Plan from time to time except that certain
amendments as specified in the 2006 Equity Incentive Plan may not be made
without the approval of the stockholders of Dauphin, including an amendment to
increase the number of shares reserved and issuable under the 2006 Equity
Incentive Plan, to extend the term of the 2006 Equity Incentive Plan, or to
decrease the minimum exercise price of any Stock Incentive. The Board of
Directors or the Committee may also modify, amend or cancel any Stock Incentive
granted under the 2006 Equity Incentive Plan, including the repricing of any
outstanding Stock Options granted under the 2006 Equity Incentive Plan;
provided, however, that without the consent of the Participant affected, no such
modification, amendment or cancellation may diminish the rights of such
Participant under the Stock Incentive previously granted under the 2006 Equity
Incentive Plan.
Federal Income Tax Consequences
The following is a brief description of the material United States federal
income tax consequences associated with Stock Incentives under the 2006 Equity
Incentive Plan. It is based on existing United States laws and regulations, and
there can be no assurance that those laws and regulations will not change in the
future. The summary does not purport to be complete and does not discuss the tax
consequences upon a Participant's death, or the provisions of the income tax
laws of any municipality, state or foreign country in which the Participant may
reside, or all possible tax consequences of the receipt or exercise of stock
rights under the 2006 Equity Incentive Plan, which consequences may vary
depending upon a participant's individual tax and financial circumstances.
Incentive Stock Options. An option holder has no tax consequences upon
issuance or, generally, upon exercise of an incentive stock option ("ISO").
However, the excess of the fair market value of the shares transferred upon the
exercise of an ISO over the exercise price for such shares generally will
constitute an item of alternative minimum tax adjustment to the option holder
for the year in which the option is exercised, and thus it may increase the
option holder's federal income tax liability as a result of the exercise of an
ISO under the alternative minimum tax rules of the Code. An option holder will
recognize income when he sells or exchanges the shares acquired upon exercise of
an ISO. This income will be taxed at the applicable capital gains rate if the
sale or exchange occurs after the expiration of the requisite holding periods.
Generally, the requisite holding periods expire two years after the date of
grant of the ISO and one year after the date of acquisition of the common stock
pursuant to the exercise of the ISO.
If an option holder disposes of the common stock acquired pursuant to
exercise of an ISO before the expiration of the requisite holding periods, the
option holder will recognize ordinary income in an amount equal to the
difference between the option price and the lesser of (i) the fair market value
of the shares on the date of exercise, and (ii) the price at which the shares
are sold. However, if the option holder is subject to suit under Section 16(b)
of the Securities Exchange Act of 1934 (the short swing profits rule), the
option holder will recognize ordinary income in an amount equal to the
difference between the option price and the lesser of (i) the fair market value
of the shares as of a later date (such later date being the earlier of (1) the
expiration of six months from the date of exercise, or (2) the first day on
54
which the disposition of such property would not subject such option holder to
suit under Section 16(b) of the Securities Exchange Act of 1934, unless the
option holder makes a timely Code ss.83(b) election, in which event the fair
market value of the shares will be determined on the date of exercise), and (ii)
the price at which the shares are sold. This amount will be taxed at ordinary
income rates. If the sale price of the shares is greater than the fair market
value on the date of exercise, the difference will be recognized as gain by the
option holder and taxed at the applicable capital gains rate. If the sale price
of the shares is less than the option price, the option holder will recognize a
capital loss equal to the excess of the option price over the sale price. Such
capital gain or loss will be treated as long-term or short-term capital gain or
loss depending upon whether the holding period applicable to the long-term
capital assets has been satisfied.
For these purposes, the use of shares acquired upon exercise of an ISO
to pay the option price of another option (whether or not it is an ISO) will be
considered a disposition of the shares. If this disposition occurs before the
expiration of the requisite holding periods, the option holder will have the
same tax consequences as are described above in the preceding paragraph. If the
option holder transfers any such shares after holding them for the requisite
holding periods, or transfers shares acquired pursuant to exercise of a
nonqualified stock option ("NQSO") or on the open market, he generally will not
recognize any income upon the exercise. Whether or not the transferred shares
were acquired pursuant to an ISO, and regardless of how long the option holder
has held such shares, the basis of the new shares received pursuant to the
exercise will be computed in two steps. In the first step, a number of new
shares equal to the number of older shares tendered (in payment of the option's
exercise) is considered exchanged under Code ss.1036 and the rulings thereunder.
Accordingly, these new shares receive the same holding period and the same basis
the option holder had in the old tendered shares, if any, plus the amount
included in income from the deemed sale of the old shares and the amount of cash
or other nonstock consideration paid for the new shares, if any. In the second
step, the number of new shares received by the option holder in excess of the
old tendered shares receives a basis of zero, and the option holder's holding
period with respect to such shares commences upon exercise.
An option holder may have tax consequences upon exercise of an ISO if
the aggregate fair market value of shares of the common stock subject to ISOs
that first become exercisable by an option holder in any one calendar year
exceeds $100,000. If this occurs, the excess shares will be treated as though
they are a NQSO instead of an ISO. Upon exercise of an option with respect to
these shares, the option holder will have the tax consequences described below
with respect to the exercise of NQSOs.
Generally, there will be no tax consequences to Dauphin upon issuance
or upon exercise of an ISO. However, to the extent that an option holder
recognizes ordinary income upon exercise, as described above, Dauphin generally
will have a deduction in the same amount, provided Dauphin satisfies applicable
federal income tax reporting requirements or the option holder actually reports
such income on his or her federal income tax return.
Non-Qualified Stock Option. Neither Dauphin nor the option holder has
income tax consequences from the issuance of NQSOs. Generally, in the tax year
when an option holder exercises NQSOs, the option holder recognizes ordinary
income in the amount by which the fair market value of the shares at the time of
exercise exceeds the option price for such shares. However, if the option holder
is subject to suit under Section 16(b) of the Securities Exchange Act of 1934
(the short swing profits rule), the option holder recognizes ordinary income in
the amount by which the fair market value of the shares determined as of a later
date exceeds the option price for such shares, with such later date being the
earlier of (i) the expiration of six months from the date of exercise, or (ii)
the first day on which the disposition of such property would not subject such
option holder to suit under Section 16(b) of the Securities Exchange Act of
1934, unless the option holder makes a timely Code ss.83(b) election, in which
event the fair market value of the shares will be determined on the date of
exercise. Dauphin generally will be entitled to a deduction in the same amount
as the ordinary income recognized by the option holder in Dauphin's tax year
during which the option holder recognizes ordinary income, provided Dauphin
satisfies applicable federal income tax reporting requirements or the option
holder actually reports such income on his or her federal income tax return.
55
If a NQSO issued under the 2006 Equity Incentive Plan does not have an
exercise price that is greater than or equal to the fair market value of the
stock subject to the NQSO as of the date of grant of the NQSO, then such NQSO
issued under the Plan generally would be considered a "nonqualified deferred
compensation plan" subject to taxation under Code ss.409A. Even if a NQSO issued
under the 2006 Equity Incentive Plan does have an exercise price that is greater
than or equal to the fair market value of the stock subject to the NQSO as of
the date of grant of the NQSO, if there is some additional deferral feature
within the NQSO, then such NQSO might be considered a "nonqualified deferred
compensation plan" subject to taxation under Code ss.409A. If this were to
occur, the above-discussed tax consequences would be dramatically changed.
Dauphin does not intend to issue any NQSO that might be considered a
"nonqualified deferred compensation plan" subject to taxation under Code
ss.409A.
Depending upon the time that a Participant holds its shares of common
stock after exercise, the sale or other taxable disposition of the shares
acquired through the exercise of a NQSO generally will result in a short-term or
long-term capital gain or loss equal to the difference between the amount
realized on such disposition and the fair market value of such shares when the
NQSO was exercised (or if the option holder was subject to Section 16(b) of the
Securities Exchange Act of 1934 and did not make a timely Code ss.83(b)
election, the fair market value on the delayed determination date, if
applicable).
Special rules apply to an option holder who exercises a NQSO by paying
the exercise price, in whole or in part, by the transfer of shares of common
stock to Dauphin. If an option holder exercises a NQSO by paying the option
price with previously acquired common stock, the option holder will generally
recognize income (relative to the new shares he is receiving) in two steps. In
the first step, a number of new shares equivalent to the number of older shares
tendered (in payment of the NQSO exercised) is considered to have been exchanged
in accordance with Code ss.1036 and the rulings thereunder. Accordingly, no gain
or loss is recognized upon the exchange, and the new shares received in the
exchange obtain the same holding period and the same basis the option holder had
in the old tendered shares. In the second step, with respect to the number of
new shares acquired in excess of the number of old shares tendered, the option
holder will recognize income on those new shares equal to their fair market
value less any nonstock consideration tendered.
The excess new shares received will obtain a basis equal to the amount
of income recognized by the option holder through its exercise, and increased by
any nonstock consideration tendered. The holding period for the excess new
shares commences upon the exercise of the option.
Stock Bonus. A recipient of a stock bonus will recognize income upon
its receipt, but generally only to the extent that it is not subject to a
substantial risk of forfeiture. If the stock bonus is subject to restrictions
that lapse in increments over a period of time, so that the holder becomes
vested in a portion of the shares as the restrictions lapse, the holder will
recognize income in any tax year only with respect to the shares that become
nonforfeitable during that year. If a holder of restricted stock cannot sell the
common stock without being subject to suit under Section 16(b) of the Securities
Exchange Act of 1934 (the short swing profits rule), the common stock will be
treated as subject to a substantial risk of forfeiture. The income recognized
will be equal to the fair market value of those shares, determined as of the
time that the restrictions on those shares lapse. That income generally will be
taxable at ordinary income tax rates. Dauphin generally will be entitled to a
deduction in an amount equal to the amount of ordinary income recognized by the
holder of the restricted stock, provided Dauphin satisfies applicable federal
income tax reporting requirements or the holder of the restricted stock actually
reports such income on his or her federal income tax return.
56
Alternatively, a holder of restricted stock may make a timely Code
ss.83(b) election to recognize ordinary income for the taxable year in which he
receives an award of restricted stock in an amount equal to the fair market
value of all shares of restricted stock awarded to him (even if the shares are
subject to forfeiture). That income will be taxable at ordinary income tax
rates. At the time of disposition of the shares, a holder who has made such an
election will recognize gain in an amount equal to the difference between the
sales price and the fair market value of the shares at the time of the award.
Such gain will be taxable at the applicable capital gains rate. A timely Code
ss.83(b) election must be made within 30 days after the transfer of the
restricted stock to the holder. Dauphin generally will be entitled to a
deduction equal to the amount of ordinary income recognized by the holder at the
time of his election, provided Dauphin satisfies applicable federal income tax
reporting requirements or the employee actually reports such income on his or
her federal income tax return.
Limitation on Tax Deductions for Dauphin. Notwithstanding the preceding
provisions, no federal income tax deduction is allowed for compensation paid to
a "covered employee" in any taxable year of Dauphin to the extent that such
compensation exceeds $1,000,000. The $1,000,000 limitation is reduced (but not
below zero) by the amount (if any) that would have been included in the
compensation of a covered employee for a taxable year but for being disallowed
by reason of being a golden parachute payment under Code ss.280G. (See "Golden
Parachute Payments" below.) For this purpose, "covered employees" are generally
the chief executive officer of Dauphin and the four highest compensated officers
of Dauphin, and the term "compensation" generally includes amounts includable in
gross income as a result of the exercise of stock options or stock appreciation
rights, or the receipt of restricted stock. This deduction limitation does not
apply to compensation that is commission based compensation, performance based
compensation, or compensation that would not be includable in an employee's
gross income.
Regulations indicate that compensation attributable to a stock option,
or a stock appreciation right, generally will satisfy the limitation exception
for performance based compensation if the grant or award is made by a
compensation committee composed of "outside" directors, the plan under which the
option or right is granted states the maximum number of shares with respect to
which the options or rights may be granted during a specified period to any
employee, and, under the terms of the option or right, the amount of
compensation the employee could receive is based solely on an increase in the
value of the stock after the date of the grant or award. Stock options and stock
appreciation rights granted under the 2006 Equity Incentive Plan may possibly
satisfy these requirements, depending upon the specific terms, provisions,
restrictions, and limitations of such options or rights.
Awards under the 2006 Equity Incentive Plan generally may satisfy the
limitation exception for performance based compensation if (1) compensation
received under the award is paid solely on account of, and contingent upon, the
attainment of one or more pre-established, objective performance goals
established by a compensation committee, (2) the material terms of the
performance goal under which the compensation is to be paid must be disclosed
to, and subsequently approved by, the stockholders before the compensation is
paid, and (3) the compensation committee must certify in writing prior to
payment of the compensation that the performance goals and other material terms
have been satisfied.
ERISA. The 2006 Equity Incentive Plan is not, and is not intended to
be, an employee benefit plan subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), as it does not provide either welfare
benefits or a deferral of income for periods extending to the termination of
employment or retirement.
Golden Parachute Payments. Under Code ss.280G, no federal income tax
deduction is allowed to a corporation for "excess parachute payments" made to
"disqualified individuals," and receipt of such payments subjects the recipient
to a 20% excise tax under Code ss.4999. For this purpose, "disqualified
individuals" are generally officers, stockholders, or highly compensated
individuals performing services for a corporation, and the term "excess
57
parachute payments" generally includes payments in the nature of compensation
that are contingent on a change in the ownership or effective control of a
corporation, to the extent that such payments (in present value) exceed three
times the payee's average annual taxable compensation from the corporation for
the previous five years. Certain payments with respect to non-publicly traded
corporations, payments for reasonable compensation for services rendered after a
change of control transaction, and payments from qualified plans are generally
not included in determining "excess parachute payments."
New Plan Benefits
The Stock Incentives that would be granted under the 2006 Equity
Incentive Plan to the eligible recipients are subject to the discretion of the
Board of Directors, the Committee, or management of Dauphin, and the incentives
are therefore not determinable at this time. Dauphin expects to issue such
shares to the members of the Board of Directors following the stockholders'
adoption of the 2006 Equity Incentive Plan.
CURRENT DIRECTORS AND ELECTION OF DIRECTORS
Dauphin's bylaws currently provide that the number of directors shall
be fixed from time to time, but shall be comprised of not less than three, and
not more than nine members, and that each director shall be elected to serve
until the next annual meeting of stockholders and until his or her successor
shall be elected and shall qualify.
Currently we have three directors. Biographical information about our
current directors is as follows:
Andrew J. Kandalepas. Mr. Kandalepas, age 54, is the current President,
Chief Executive Officer and Chairman of the Board of Dauphin Technology, Inc.
Under his leadership, beginning in 1995, Dauphin Technology developed and
marketed several high tech products including, miniature hand held computers and
Set Top Boxes. Additionally, during his 11 year tenure at Dauphin, Mr.
Kandalepas, has been successful in raising in excess of $60M in private and
public capital as well as expanding Dauphin's shareholder base from 400
shareholders in 1995 to approximately 11,000 shareholders currently.
Mr. Kandalepas has a varied 30-plus year career as an entrepreneur and
executive manager. After 12 successful years with GTE and Motorola, he founded
Cadserv Corporation, a privately owned Engineering and Circuit Board Solutions
boutique service provider to major electronic OEM's.
Mr. Kandalepas is an active participant in the local Greek community
and founder of the St. Athanasios, Greek Orthodox Seminary in Woodstock,
Illinois. He earned his Electronics Engineering Degree in 1974, from DeVry
Institute of Technology.
Gary E. Soiney. Mr. Soiney, age 66, has served as a director of Dauphin
since 1995. Mr. Soiney graduated from the University of Wisconsin in Milwaukee
with a degree in Business Administration. He is currently an owner of 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. Dr. Kiddy, age 43, has served as a director of
Dauphin since 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
58
Haven, Connecticut and at Delaware Valley Medical Center. He is currently on the
executive medical committee for Unity Health Care and operates a private
business providing healthcare to patients in over 150 nursing homes throughout
the state of Missouri.
As a condition to the closing of the Merger, we were required to elect
the designees of GeoVax to our Board of Directors in place of our current
directors, other than Andrew J. Kandalepas, and appoint the designees of GeoVax
as our executive officers. The following table sets forth the names of those
persons who will serve as officers and directors of Dauphin immediately
following the closing of the Merger.
Name Age Position
---- --- --------
Donald G. Hildebrand 65 Chairman/President/CEO
David A. Kennedy 48 Board Member/Vice President
John N. (Jack) Spencer 65 Board Member/ /Chairperson Audit Committee
Edith Murphree 53 Board Member/Vice President
Gary Teal 49 Board Member/Corporate Secretary-Treasurer
Andrew J. Kandalepas 54 Board Member/Vice Chairman and Vice President
Dean G. Kollintzas 33 Board Member
Biographical information about those persons who will serve as officers
and directors of Dauphin is as follows:
Donald G. Hildebrand. Mr. Hildebrand is a founder of GeoVax and has
served as a member of its Board of Directors since June 2001. Prior to founding
GeoVax, Mr. Hildebrand was employed as North American President and Chief
Executive Officer of Rhone Merieux, Inc., a subsidiary of Rhone Merieux, S.A., a
world leader in the biopharmaceutical and animal health industries. Under Mr.
Hildebrand's leadership, which began in 1984 and ended in 1997, Rhone Merieux,
Inc. had grown its annual sales from $0 to over $200 million per year. In 1997,
Mr. Hildebrand agreed to become Global Vice President of Merial Limited, a
position that he held until 2000. Merial Limited, a joint venture formed by
Rhone Merieux, S.A. and Merck AgVet, is the largest animal health company in the
world, with annual sales exceeding $1.8 billion. Prior to joining Rhone Merieux,
Inc., Mr. Hildebrand founded Biocraft Ltd., which he sold to Solvay & Cie of
Brussels, Belgium in 1981. Subsequent to this merger, Mr. Hildebrand was
appointed Director of Global Biological Operations/Research/Development and
Manufacturing for Salsbury/Solvay. Mr. Hildebrand received his BS in
microbiology from the University of Wisconsin.
David A. Kennedy. Mr. Kennedy joined the GeoVax Board of Directors in
March of 2004. In July 1998, Mr. Kennedy and others founded InteCap, an
intellectual property consulting firm. He was employed by InteCap and led the
firm's intellectual property transaction and licensing practice through June of
2003. From June 2003 through August 2005, Mr. Kennedy founded and then was
employed as the Chief Executive Officer of Intellectual Property Asset
Corporation ("IPAC"). IPAC provides intellectual property valuation, consulting
services and transaction services. Since August of 2005, Mr. Kennedy has served
as the Chief Executive Officer of alseT IP, LLC. alseT IP provides financing to
companies, universities and inventors receiving royalty streams from
intellectual property. Mr. Kennedy currently serves as an Advisor to IPAC, and
as a member of the Board of Directors of ExchangeBlvd.com, Inc., which is a
publicly traded company. Mr. Kennedy is a certified public accountant in the
state of Georgia and a graduate of the University of Georgia.
John N. (Jack) Spencer. Mr. Spencer will join the GeoVax Board of
Directors upon consummation of the Merger. Mr. Spencer is a certified public
accountant and was a partner of Ernst & Young where he spent more than 38 years
until he retired in 2000. During his career with Ernst & Young, he coordinated
59
that Firm's services to public and private companies primarily in the
manufacturing, distribution and medical and information technology industries.
Mr. Spencer has been active in Georgia's technology community, where he served
as president and a director of the Business and Technology Alliance and was
co-founder and is the treasurer of the Atlanta Venture Forum. In 2002, Mr.
Spencer was awarded the Georgia Biomedical Partnership's first annual award for
being a principal architect of the biomedical community in Georgia. He also
served as president of the Georgia Biomedical Partnership in 2003 and 2004. Mr.
Spencer serves as a director of a number of companies, including Firstwave
Technologies, Inc., a public company, where he is also chair of the audit
committee. Mr. Spencer received a BS degree from Syracuse University, and he
earned an MBA degree from Babson College. He also attended the Harvard Business
School Advance Management Program.
Edith Murphree. Ms. Murphree became a member of the GeoVax Board of
Directors in April 2005. She is currently, and has been since October 2003, Vice
President for Finance at Emory University in Atlanta, Georgia. Prior to being
appointed Vice President for Finance, Ms. Murphree was the Associate Vice
President for Administration at Emory University, a position that she held from
1998 through 2003. Ms. Murphree began her association with Emory University in
1987 when she was appointed Assistant Vice President for Finance and Controller.
Ms. Murphree currently serves as a director of the boards the Emory Federal
Credit Union, SOLINET (Southeastern Library Network) and the Clifton Casualty
Insurance Company, Ltd. Ms. Murphree received a BS in accounting from the
University of Alabama and a Masters of Business Administration in finance from
Georgia State University.
Gary Teal. Mr. Teal became a member of the GeoVax Board of Directors in
December 2001. He has been Senior Associate Vice President for Administration at
Emory University and Chief of Staff to the CEO since 2004. He also became
Administrative Dean to the Woodruff Leadership Academy at Emory University in
2002. Mr. Teal was Associate Vice President for Health Affairs: 2000 - 2004;
Director of Financial Services, Emory Healthcare: 1994 - 2004; Assistant Vice
President for Health Affairs: 1995 - 1999; Director of Projects, Woodruff Health
Sciences Center: 1993 - 1995 and Emory University Director of Financial
Disbursements: 1986 - 1993. Previous to Emory affiliations Mr. Teal was
Associate Director of Disbursements, Office of the Vice President for Finance at
Georgia State University, Atlanta, GA from 1982 - 1986. Mr. Teal received his
BBA and MBA from Georgia State University.
Andrew J. Kandalepas - (Information provided above).
Dean G. Kollintzas. Mr. Kollintzas is an Intellectual Property Attorney
specializing in biotechnology and pharmaceutical licensing, FDA regulation, and
corporate/international transactions. He has worked in Israel as a U.S.
consultant to the firm of Baratz, Gilat, Bar-Natan with biotechnology companies
such a Clal Biotechnology Industries Limited and D-Pharm. As an associate with
the firm LaFollette, Godfrey & Kahn in Madison, Wisconsin, Mr Kollintzas worked
with the Wisconsin Alumni Research Foundation "WARF" on various FDA and
intellectual property engagements as well as many of its commercialization
efforts. Mr. Kollintzas received a Microbiology degree from the University of
Illinois and a J.D. from Franklin Pierce Law Center. He is a member of the
Wisconsin and American Bar Associations.
Scientific Advisory Board
Dr. Harriet Latham Robinson. Dr. Robinson is a co-founder of GeoVax and
has served as Chief of its Scientific Advisory Board since formation of the
company in 2001. Dr Robinson is recognized as one of the leading AIDS vaccine
researchers where she has devoted over 15 years toward developing effective and
safe AIDS vaccines designed to prevent clinical AIDS. Over the past several
years Dr. Robinson has received over $23 million in Federal grants supporting
our AIDS vaccine development program. Dr. Robinson has been the Asa Griggs
60
Candler Professor of Microbiology and Immunology at Emory University in Atlanta,
Georgia since 1999 and has been Chief, Division of Microbiology and Immunology,
Yerkes National Primate Center and Professor at the Emory U. School of Medicine
1998-present. She was Professor, Dept of Microbiology & Immunology at the
University of Massachusetts Medical Center 1988-1997 and Staff, then Senior,
then Principle Scientist at the University of Massachusetts Worcester Foundation
for Experimental Biology 1977-1987. She was also a National Science Foundation
Postdoctoral Fellow at the Stanford School of Medicine in Berkeley, CA
1965-1967. Over the past several years she has received numerous honors and
awards as guest lecturer and/or member of the National Foundation for Infectious
Diseases, World Health Organization [WHO], American Academy of Science, National
Institutes of Health[NIH], Rockefeller Foundation, Gates Foundation, American
Society for Microbiology and several others. She additionally has over 200
scientific publications. Dr Robinson has a B.A degree from Swarthmore College
and M.S. and PhD from the Massachusetts Institute of Technology
Consent Required
The Majority Stockholders owning 73% of the total Voting Rights
consented to the election of the above-listed nominees for director of Dauphin
effective at the time of the closing of the Merger.
Information about Committees
Dauphin's Board of Directors does not currently have a nominating
committee, an audit committee, or a compensation committee. No person currently
serving as a director of Dauphin qualifies as an "audit committee financial
expert," as defined by the Sarbanes Oxley Act of 2002, and the regulations
promulgated under the Securities Act of 1933 and the Securities Exchange Act of
1934. In selecting individuals to serve as our Board of Directors following the
closing of the Merge, we sought out individuals who would be able to guide our
operations based on their business experience, both past and present, or their
education.
We anticipate that a nominating committee, audit committee, and other
committees of the Board of Directors will be formed after the closing of the
Merger. Following the closing of the Merger, we anticipate that Mr. Spencer will
be designated as our audit committee financial expert.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We plan to issue up to 20,000,000 shares of our commons stock to our
president, Andrew J. Kandalepas, for services rendered in the Merger and in
connection with the recently settled litigation, within certain preferred
stockholders.
DISSENTERS' RIGHTS
There are no dissenters' rights applicable to the Transaction
Proposals.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 17, and after consummation of the
Merger by:
o each person known by us to be the beneficial owner of more than 5%
of our outstanding shares of common stock either on August 17,
2006, or after the consummation of the Merger;
o each of our current executive officers and directors;
o each director nominee;
o all our current executive officers and directors as a group; and
o all of our executive officers and directors as a group after the
consummation of the Merger.
61
Beneficial Ownership of
Beneficial Ownership of Our Our Common Stock After
Common Stock on August 15, 2006 the Consummation of the Merger
------------------------------------------------------------------------------
Percent of Class
After Merge Assuming
Percentage of No Exercise of
Name and Address of Number Class Before Number Conversion or
Beneficial Owner of Shares Merger of Shares Dissenters' Rights
-----------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas (1) 1,917,497 1.9% 21,917,497 3.0%
Dr. Daniel D. Kiddy (2) 1,555,350 1.6% 1,555,350 .2%
Gary E. Soiney (3) 500,000 - 500,000 .01%
Dean G. Kollintzas -0- -0- -0- -0-
Donald G. Hildebrand -0- -0- 58,444,582 8.0%
Stavros N. Pagageorgiou (4) 3,000,000 2.5% 3,000,000 .4%
Helen S. Pagageorgiou (5) 3,000,000 2.5% 3,000,000 .4%
Nikolaos Pagageorgiou (6) 10,000,000 8.3% 10,000,000 1.4%
Vasiliki A. Leandrou (7) 4,000,000 3.3% 4,000,000 .5%
David A. Kennedy(8) -0- -0- 20,064,292 2.7%
Edith Murphree -0- -0- -0- -
Gary Teal -0- -0- -0- -
Emory University -0- -0- 230,995,252 31.4%
Harriet Robinson -0- -0- 59,674,476 8.1%
Total Prior to Merger (9) 119,969,028 100.0% - -
Total After Merger (10) - - 733,332,879 100.0%
(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) Mr. Pagageorgiou is the owner of 1,500,000 shares of Dauphin
Preferred Stock each share of which is convertible into 2 shares
of Dauphin common stock. The 3,000,000 amount assumes the
conversion of all of his shares of preferred stock. Although each
shares of preferred stock is convertible into two shares of common
stock, each share of preferred stock has 20 votes in all matters
voted upon by the stockholders of Dauphin.
(5) Ms. Pagageorgiou is the owner of 1,500,000 shares of Dauphin
Preferred Stock each share of which is convertible into 2 shares
of Dauphin common stock. The 3,000,000 amount assumes the
conversion of all of his shares of preferred stock. Although each
shares of preferred stock is convertible into two shares of common
stock, each share of preferred stock has 20 votes in all matters
voted upon by the stockholders of Dauphin.
(6) Mr. Pagageorgiou is the owner of 5,000,000 shares of Dauphin
Preferred Stock each share of which is convertible into 2 shares
of Dauphin common stock. The 10,000,000 amount assumes the
conversion of all of his shares of preferred stock. Although each
shares of preferred stock is convertible into two shares of common
stock, each share of preferred stock has 20 votes in all matters
voted upon by the stockholders of Dauphin.
(7) Mr. Leandrou is the owner of 2,000,000 shares of Dauphin Preferred
Stock each share of which is convertible into 2 shares of Dauphin
common stock. The 4,000,000 amount assumes the conversion of all
of his shares of preferred stock. Although each shares of
preferred stock is convertible into two shares of common stock,
each share of preferred stock has 20 votes in all matters voted
upon by the stockholders of Dauphin.
(8) Includes Mr. Kennedy's proportionate share of the common stock
owned by IP Squared Biotech LLC.
(9) There are 99,969,028 shares of Dauphin common stock issued and
outstanding and 10,000,000 shares of Dauphin preferred stock
issued and outstanding. The 119,969,028 gives effect to the
conversion of the 10,000,000 shares preferred stock into
20,000,000 shares of common stock.
(10) Following the closing of the Merger we anticipate there will be a
total of 733,332,879 shares of Dauphin common stock issued and
outstanding and no shares of preferred stock issued or
outstanding.
MARKET PRICE OF DAUPHIN
COMMON STOCK AND DIVIDEND INFORMATION
Our common stock is quoted on the Pink Sheets under the symbol DNTK.
Historically, Dauphin has not paid cash dividends and Dauphin has no intention
to do so in the foreseeable future. The following table sets forth for the
periods indicated the high and low sales prices for Dauphin common stock as
quoted by the Pink Sheets.
Market Prices
-----------------------------
High Low
-------------- -------------
2004
First Quarter .38 .05
Second Quarter .77 .13
Third Quarter .46 .15
Fourth Quarter .34 .10
2005
First Quarter .33 .13
Second Quarter .56 .24
Third Quarter .51 .41
Fourth Quarter .91 .47
2006
First Quarter 1.16 .32
Second Quarter .73 .36
Third Quarter (through August 3, 2006) .71 .52
62
Holders
The number of stockholders of record of Dauphin's common stock as of
June 29, 2006 as reported by the Company's transfer agent was approximately
11,000. A number of Dauphin's stockholders on record are brokerage firms or
stock clearing agencies. Therefore, we believe the total number of beneficial
stockholders is greater than 11,000.
Dividend Policy
Dauphin has not paid any cash dividends on its common stock to date and
does not intend to pay dividends prior to the completion of the Merger. The
payment of dividends in the future will be contingent upon revenues and
earnings, if any, capital requirements, and its general financial condition
subsequent to completion of the Merger. The payment of any dividends subsequent
to the Merger will be within the discretion of the then Board of Directors. It
is the present intention of the Board of Directors to retain all earnings, if
any, for use in the business operations. Accordingly, the Board does not
anticipate declaring any dividends in the foreseeable future.
Preferred Stock
Dauphin is authorized to issue up to 10,000,000 shares of Series A
Preferred Stock, $0.01 par value. In the second quarter of 2005, we issued
10,000,000 of Preferred Stock to one investor. 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 Dauphin. Holders of the 10,000,000 shares of preferred stock
have agreed to convert and exchange such shares for 20,000,000 shares of Dauphin
common stock upon closing of the Merger.
Warrants, Options and Convertible Debt
Currently, there are outstanding options and warrants to purchase
shares of Dauphin common stock. Information about outstanding options and
warrants is as follows:
Shares Underlying Exercise Expiration
Holder Option/Warrant Price Date
------ ----------------- -------- -----------
Crescent International Ltd. 700,000 $1.3064 June 24, 2007
Currently, Dauphin has outstanding debt in the amount of $5,460,878
that will be converted into 42,919,030 shares of common stock prior to the
Merger.
We anticipate that as a result of the Merger, we will assume options
and warrants of GeoVax which will entitle the holders to acquire shares of
Dauphin common stock as follows:
63
Shares Underlying Exercise Expiration
Holder Option/Warrant Price Date
------ ----------------- -------- -----------
Donald G. Hildebrand 600,000 $1.32 (1)
John Creech 15,000 $1.20 (3)
Mark Keister 202,000 $1.20 (4)
Harriett Robinson 300,000 $1.20 (5)
Jack Berg 45,000 $1.20 (6)
Michael Hellerstein 10,000 $1.20 (2)
(1) Options are vested and includes an option for 300,000 shares,
which expires on December 20, 2007 and an option for 300,000
shares which expires on February 5, 2009.
(2) Options vest in three increments on May 12, 2006 (3,333 shares);
May 12, 2007 (3,333 shares) and May 12, 2008 (3,334 shares). All
expire May 12, 2010.
(3) Options are vested; one third expires on each of February 5; 2009,
2010 & 2011.
(4) 177,000 Options are vested and 25,000 vest on February 5, 2007.
Expirations include 59,000 on February 5, 2009; 34,000 on April 1,
2009; 25,000 on February 5, 2010; 34,000 on April 1, 2010; 25,000
on February 5, 2011 and 25,000 on February 5, 2012.
(5) Options are vested and one third expires on February 5; 2009, 2010
and 2011 respectively.
(6) Options are vested and one third expires on February 5; 2009, 2010
and 2011 respectively.
Note: The foregoing share amounts and exercise prices will be adjusted,
to the extent rights under the Option Agreements are ever exercised,
consistent with the Merger Consideration.
Transfer Agent and Registrar
Dauphin's transfer agent is American Stock Transfer and Trust Company,
6201 15th Avenue, Brooklyn, New York 11219.
EXPERTS
The financial statements of Dauphin for the year ended December 31,
2005 are attached to this Information Statement. Such financial statements have
been audited by Porter Keadle Moore, LLP, independent registered public
accounting firm, as set forth in its reports thereon. Such financial statements
have been included herein in reliance upon such reports given on the authority
of such firm as experts in accounting and auditing. The financial statements of
Dauphin for the year ended December 31, 2004 have been audited by Tanner, LC,
independent registered public accounting firm, as set forth in its reports
thereon. Such financial statements have been included herein in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of GeoVax at December 31, 2005
and 2004, and for each of the three years in the period ended December 31, 2005,
appearing in this information statement have been audited by Porter Keadle
Moore, LLP, independent registered public accounting firm, as set forth in its
reports thereon appearing elsewhere herein and are included in reliance upon
such report given on the authority of said firm as experts in accounting and
auditing.
64
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 5, 2006 we filed a Form 8-K and subsequent Form 8-K/A to
announce that we dismissed our independent registered public accounting firm,
Tanner LC. There were no disagreements with Tanner on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
The reports of Tanner on Dauphin's financial statements as of and for
the fiscal years ended December 31, 2004, 2003 and 2002 contained no adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principle, except for the addition of an
explanatory paragraph in the report of Tanner on Dauphin's financial statements
expressing substantial doubt about the Company's ability to continue as a going
concern.
During Dauphin's fiscal years ending December 31, 2004 and interim
period preceding the cessation of the relationship with Tanner, there were no
disagreements (as defined in Item 304 (a) (1) (iv) of Regulation S-K) except
that Tanner reported in a letter to Dauphin's Board of Directors dated November
11, 2005 that Tanner 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
effects 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."
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 weaknesses
existed in our internal control over accounting for derivative transactions.
Certain disclosures in the footnotes to the financial statements were 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.
During the fiscal year ended December 31, 2004, the Registrant had no
disagreement with Tanner as to any matter of accounting principles or practices,
financial statements disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Tanner would have caused it to make reference to
the subject matter of such disagreement in connection with its report for the
year ended December 31, 2004.
Effective May 5, 2006, the Board of Directors of Dauphin Technology,
Inc., appointed Porter Keadle Moore, LLP ("PKM"), an Atlanta, Georgia based
firm, as its new independent registered public accounting firm. The decision to
appoint new auditors was approved by Dauphin's Board of Directors.
65
ADDITIONAL AND AVAILABLE INFORMATION
Dauphin is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file periodic reports,
proxy statements, and other information with the SEC relating to its business,
financial condition, and other matters. Such reports, proxy statements and other
information can be inspected and copied at the public reference facility
maintained by the SEC at 100 F Street, N.E., Room 1024, and Washington, D.C.
20549. Information regarding the public reference facilities may be obtained
from the SEC by telephoning 1-800-SEC-0330. Our filings are also available to
the public on the SEC's website (http://www.sec.gov). Copies of such materials
may also be obtained by mail from the Public Reference Section of the SEC at100
F Street, N.E., Washington, D.C. 20549 at prescribed rates.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
DAUPHIN CONTACT INFORMATION
All inquiries regarding Dauphin should be addressed to our principal
executive offices:
DAUPHIN TECHNOLOGY, INC.
1014 East Algonquin Road, Suite 111
Schaumburg, IL 60173
By order of the Board of Directors:
/s/ Andrew J. Kandalepas
------------------------
President and Chief Executive Officer
66
INDEX TO ATTACHMENTS
Annex A Merger Agreement
Annex B Articles of Amendment to Articles of Incorporation
Annex C 2006 Equity Incentive Plan
Financial Statements
Audited Financial Statement Dauphin Technology, Inc. for the year ended
December 31, 2005
Unaudited Financial Statements of Dauphin Technology, Inc. for the Quarter ended
June 30, 2006
Audited Financial Statement of GeoVax, Inc. for the year ended December 31, 2005
Audited Financial Statement of GeoVax, Inc. for the year ended December 31, 2004
Unaudited Financial Statements of GeoVax, Inc. for the Quarter ended June 30,
2006
Proforma Financial Information
Annex A Merger Agreement
------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GEOVAX, INC.,
GEOVAX ACQUISITION CORP.,
AND
DAUPHIN TECHNOLOGY, INC.
January 20, 2006
TABLE OF CONTENTS
ARTICLE I THE MERGER; CONVERSION OF SHARES
1.1 The Merger 1
1.2 Effective Time 2
1.3 Conversion of Interests 2
1.4 Exchange of GeoVax Common Stock 2
1.5 Articles of Incorporation of the Surviving
Corporation 3
1.6 Bylaws of the Surviving Corporation 3
1.7 Directors and Officers of the Surviving Corporation
and Dauphin 3
1.8 Dissenting Interests 4
1.9 Amendments to Dauphin's Articles of Incorporation 4
1.10 Dauphin Securities and Dauphin Convertible Securities 4
ARTICLE II CLOSING
2.1 Closing Date and Place 4
ARTICLE III PRE-CLOSING OBLIGATIONS
3.1 Obligations of the Parties 5
3.2 Conduct of Business Prior to Closing 5
3.3 Access; Cooperation 7
3.4 Notice Regarding Dissenters' Rights Actions 7
3.5 No Negotiation 7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GEOVAX
4.1 Due Organization; No Subsidiaries 8
4.2 Books and Records 8
4.3 Capitalization 8
4.4 Financial Statements 8
4.5 Absence of Changes 9
4.6 Title to Assets 10
4.7 Receivables 10
4.8 Equipment 10
4.9 Real Property 11
4.10 Proprietary Assets 11
4.11 Contracts 11
4.12 Liabilities 12
4.13 Compliance with Legal Requirements 12
4.14 Government Authorizations 13
i
Table of Contents
(continued)
Page
4.15 Tax Matters 13
4.16 Employee and Labor Matters 14
4.17 Benefit Plans; ERISA 14
4.18 Environmental Matters 14
4.19 Insurance 15
4.20 Related Party Transaction 16
4.21 Certain Payments, Etc. 16
4.22 Proceedings; Orders 17
4.23 Authority; Binding Nature of Agreements 17
4.24 Non-Contravention; Consents 17
4.25 Brokers 18
4.26 Full Disclosure 18
4.27 Restricted Securities 18
ARTICLE V REPRESENTATIONS AND WARRANTIES OF DAUPHIN
5.1 Due Organization; Subsidiaries, Etc. 18
5.2 Books and Records 19
5.3 Capitalization 19
5.4 SEC Filings 20
5.5 Financial Statements 20
5.6 Absence of Changes 21
5.7 Title to Assets 22
5.8 Receivables 23
5.9 Inventory 23
5.10 Equipment 23
5.11 Real Property 23
5.12 Proprietary Assets 23
5.13 Contracts 23
5.14 Liabilities, Bankruptcy 23
5.15 Compliance with Legal Requirements 24
5.16 Government Authorizations 24
5.17 Tax Matters 24
5.18 Employees 25
5.19 Employee Benefit Plans 25
5.20 Environmental Matters 25
5.21 Insurance 26
5.22 Related Party Transactions 26
5.23 Subsidiaries and Investments 26
5.24 Certain Payments, Etc. 28
5.25 Proceedings; Orders 28
ii
Table of Contents
(continued)
Page
5.26 Authority; Binding Nature of Agreements 28
5.27 Non-Contravention; Consents 28
5.28 Brokers 29
5.29 Internal Accounting Controls 29
5.30 Listing and Maintenance Requirements 30
5.31 Application of Takeover Protections 30
5.32 No SEC or NASD Inquiries 30
5.33 Full Disclosure 30
ARTICLE VI CLOSING CONDITIONS
6.1 Conditions to the Obligations of GeoVax 30
6.2 Conditions to the Obligations of Dauphin 32
ARTICLE VII NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES 33
ARTICLE VIII TERMINATION
8.1 Events of Termination 34
ARTICLE IX MISCELLANEOUS
9.1 Severability 34
9.2 Entire Agreement 35
9.3 Corporate Affairs 35
9.4 Notices 35
9.5 Amendments; Waivers 36
9.6 Successors and Assigns 36
9.7 Governing Law; Submission to Jurisdiction 37
9.8 Waiver of Jury Trial 37
9.9 Subsequent Documentation 37
9.10 Counterparts 37
9.11 Interpretation 37
Exhibit A - Certain Definitions
Exhibit B - Articles of Amendment to Dauphin Articles of Incorporation
Exhibit C - GeoVax Shareholder Transmittal Document
Schedule 1.3(b) - GeoVax Convertible Securities
Schedule 1.7(b) - Dauphin Post-Merger Officers and Directors
Schedule 1.1 - Dauphin Securities and Convertible Securities
Disclosure Schedule GeoVax
Disclosure Schedule Dauphin
iii
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated January 20, 2006, by and
among Dauphin Technology, Inc., an Illinois corporation ("Dauphin"), GeoVax
Acquisition Corp., a Georgia corporation and wholly-owned subsidiary of Dauphin
("Merger Subsidiary"), and GeoVax, Inc., a Georgia corporation ("GeoVax").
RECITALS
The Boards of Directors for GeoVax, Dauphin and Merger Subsidiary, have
approved the merger of the Merger Subsidiary with and into GeoVax (the "Merger")
upon the terms and subject to the conditions set forth herein.
As a result of the Merger, GeoVax will be a wholly-owned subsidiary of
Dauphin, and the shareholders of GeoVax will, in the aggregate, own a majority
of the outstanding shares of Dauphin common stock immediately following the
Effective Time of the Merger.
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization within the meaning of Sections 368(a)(1)(A) and
(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code").
The parties desire to make certain representations, warranties, and
agreements in connection with the Merger and also to prescribe various
conditions to the Merger.
Certain terms used in this Agreement are defined and attached in
Exhibit "A."
AGREEMENT :
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the receipt and sufficiency of which are hereby
acknowledged, the Parties, intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER; CONVERSION OF SHARES
1.1 The Merger . Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.2), the Merger Subsidiary will be
merged with and into GeoVax in accordance with the provisions of the Code of
Georgia Annotated (the "Georgia Act"), whereupon the separate corporate
existence of the Merger Subsidiary will cease, and GeoVax will continue as the
surviving corporation (the "Surviving Corporation"). From and after the
Effective Time, the Surviving Corporation will possess all the rights,
privileges, powers, and franchises and be subject to all the restrictions,
disabilities, and duties of GeoVax and Merger Subsidiary, all as more fully
described in the Georgia Act.
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1.2 Effective Time . As soon as practicable after each of the
conditions set forth in Sections 6.1 and 6.2 have been satisfied or waived,
GeoVax and Merger Subsidiary will file, or cause to be filed, with the Secretary
of State of the State of Georgia, Articles of Merger for the Merger, in the form
required by, and executed in accordance with, the applicable provisions of the
Georgia Act. The Merger will become effective at the time of the filing or, if
agreed to by Dauphin and GeoVax, such later time or date set forth in the
Articles of Merger (the "Effective Time").
1.3 Conversion of Interests . Subject to the terms and conditions of
this Agreement, at the Effective Time, by virtue of the Merger, and without any
action on the part of GeoVax and/or the Merger Subsidiary:
(a) All of the shares of GeoVax Common Stock ("GeoVax Common
Stock") and all of the shares of GeoVax preferred stock ("GeoVax
Preferred Stock") issued and outstanding immediately prior to the
Effective Time (except for GeoVax Common Stock and GeoVax Preferred
Stock owned by dissenting shareholders of GeoVax) will be converted
into the right to receive an aggregate of 490,332,879 shares common
stock of Dauphin, par value $.001 per share ("Dauphin Shares"). The
Dauphin Shares into which shares of GeoVax Common Stock and GeoVax
Preferred Stock are converted as a result of the Merger are referred to
herein as the "Merger Consideration". As a result of the Merger, each
share of GeoVax Common Stock will be converted into the right to
receive 29.2832 Dauphin Shares and each share of GeoVax Preferred Stock
will be converted into the right to receive 29.2832 Dauphin Shares.
(b) All stock options, warrants, convertible debt, other
convertible securities, or other rights to acquire shares of GeoVax
(collectively the "GeoVax Convertible Securities") outstanding at the
Effective Time, whether or not exercisable and whether or not vested
(all of which are listed on Schedule1.3(b) hereto), shall remain
outstanding following the Effective Time but shall be assumed by
Dauphin. GeoVax Convertible Securities shall continue to have, and be
subject to, the same terms and conditions as set forth in the
underlying Convertible Securities documents, but will be convertible
into Dauphin Shares as described on Schedule 1.3(b). At the time of
Closing, the number of GeoVax Convertible Securities shall not exceed
1,355,000.
(c) At the Effective Time, one hundred (100) shares of GeoVax
Common Stock shall be issued to Dauphin.
(d) Each share of Merger Subsidiary common stock, par value $.001
per share, issued and outstanding immediately prior to the Effective
Time, will be canceled as of the Effective Time.
1.4 Exchange of GeoVax Stock .
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(a) At the Closing, GeoVax will arrange for each holder of record
("GeoVax Shareholder") of GeoVax Common Stock and GeoVax Preferred
Stock outstanding immediately prior to the Effective Time to deliver to
Dauphin appropriate evidence of such GeoVax Shareholder's shares
("GeoVax Certificates"), together with an appropriate assignment signed
by the GeoVax Shareholder, in exchange for the number of whole Dauphin
Shares into which such GeoVax Shares have been converted as provided in
Section 1.3(a), and the surrendered GeoVax Certificate(s) will be
canceled.
(b) All Dauphin Shares issued upon the surrender and exchange of
shares of GeoVax Common Stock and GeoVax Preferred Stock in accordance
with the terms of this Agreement will be deemed to have been issued in
full satisfaction of all rights pertaining to such GeoVax Stock.
(c) As of the Effective Time, the holders of shares of GeoVax
Common Stock and GeoVax Preferred Stock will cease to have any rights
as shareholders of GeoVax, except for those rights, if any, that they
may have pursuant to the Georgia Act. Except as provided in Section 1.8
of this Agreement, until such GeoVax Certificates are surrendered for
exchange, each GeoVax Certificate will, after the Effective Time,
represent for all purposes only the right to receive certificates
representing the number of whole Dauphin Shares into which GeoVax
Common Stock shall have been converted pursuant to the Merger as
provided in Section 1.3(a).
(d) No fractional Dauphin Shares will be issued in the Merger. Any
fractional share otherwise required as Merger Consideration will be
rounded up to the nearest whole share.
(e) Immediately prior to Closing, Dauphin will have no more than
243,000,000 shares of Dauphin common stock outstanding. Immediately
prior to the Closing Dauphin will have no more than 12,000,000 Dauphin
Convertible Securities issued and outstanding. Immediately after the
Closing, there will be approximately 733,332,879 shares of Dauphin
Stock issued and outstanding, not including any shares issuable in
connection with the GeoVax's Convertible Securities or the Dauphin
Convertible Securities.
1.5 Articles of Incorporation of the Surviving Corporation . The
Articles of Incorporation of GeoVax in effect immediately prior to the Effective
Time will be the Articles of Incorporation of the Surviving Corporation.
1.6 Bylaws of the Surviving Corporation . The bylaws of GeoVax in
effect immediately prior to the Effective Time will be the bylaws of the
Surviving Corporation, until such time as they are amended in accordance with
applicable law.
1.7 Directors and Officers of the Surviving Corporation and Dauphin.
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(a) Directors and Officers of the Surviving Corporation . The
directors and officers of GeoVax, as of the Effective Time, shall
continue as the directors of the Surviving Corporation.
(b) Directors of the Dauphin . At the Effective Time, the current
officers and directors of the Dauphin shall resign and those persons
listed on Schedule 1.7 (b) shall be appointed as officers and directors
of Dauphin.
1.8 Dissenting Interests . As a condition to Closing, there shall be no
dissenting GeoVax Shareholders under the Georgia Act.
1.9 Amendments to Dauphin's Articles of Incorporation . Prior to the
Effective Time, Dauphin shall amend its Articles of Incorporation to change its
name to GeoVax Labs, Inc., and to increase its authorized capital stock from
100,000,000 to 850,000,000 shares pursuant to all applicable Legal Requirements.
The Articles of Amendment to be filed pursuant to this Section 1.9 shall be
substantially in the form of Exhibit B attached hereto.
1.10 Dauphin Securities and Dauphin Convertible Securities . Schedule
1.10 attached hereto describes all Dauphin securities, debts and other interests
that are to be converted into Dauphin Common Stock prior to or at the Closing.
Schedule 1.10 also describes all Dauphin stock purchase warrants (the "Dauphin
Convertible Securities") that will not be converted prior to Closing but that
will remain issued and outstanding according to their current terms and
conditions. In addition to any shares of Dauphin Common Stock to be issued prior
to closing as described in Schedule 1.10, Dauphin may also issue up to
23,000,000 shares or rights to acquire shares of Dauphin Common Stock prior to
Closing in consideration of consulting agreements or other agreements to provide
services to Dauphin either prior to or after the Closing.
Notwithstanding anything else contained herein to the contrary, at the
time of Closing, exclusive of any Dauphin securities to be issued in the Merger,
the number of shares of Dauphin Common Stock shall not exceed 243,000,000 and
the number of Dauphin Convertible Securities shall not exceed 12,000,000.
ARTICLE II
CLOSING
2.1 Closing Date and Place . Subject to the satisfaction of the
conditions herein described, the closing of the Merger (the "Closing") shall
take place on such date as the Parties may mutually agree following the
satisfaction (or waiver) of the conditions to Closing set forth in Article VI at
the offices of Rieck & Crotty at 55 West Monroe Street, Suite 3390, Chicago,
Illinois 60603.
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ARTICLE III
PRE-CLOSING OBLIGATIONS
3.1 Obligations of the Parties . The Parties shall apply for and
diligently prosecute all applications for, and shall use commercially reasonable
efforts promptly to obtain, such Consents, authorizations, and approvals from
such Persons as shall be necessary to permit the consummation of the Merger, and
shall use commercially reasonable best efforts to bring about the satisfaction
as soon as practicable of all the conditions contained in Article VI and to
effect the consummation of the Merger.
3.2 Conduct of Business Prior to Closing . From the date of this
Agreement and until the Closing, except as contemplated by this Agreement or as
otherwise consented to by the Parties in writing, such consent not to be
unreasonably withheld, conditioned or delayed, each of Dauphin and GeoVax agrees
to:
(a) Carry on its business only in the Ordinary Course of Business
and use commercially reasonable efforts to preserve intact its present
business organization, keep available the services of its executive
officers and key employees and preserve its relationships with
customers, clients, service providers and others having material
business dealings with it;
(b) Timely file all Tax Returns and timely withhold and pay all
Taxes;
(c) Maintain in full force and effect all Governmental
Authorizations reasonably required for the operation of its business as
presently conducted;
(d) Comply with all obligations contained in this Agreement;
(e) Comply in all material respects with all Legal Requirements
and Governmental Authorizations applicable to them;
(f) Except as contemplated herein, not amend its articles of
incorporation or bylaws;
(g) Except as contemplated herein, not merge or consolidate with,
or agree to merge or consolidate with, or purchase substantially all of
the assets of, or otherwise acquire any business of, or enter into any
joint venture or partnership with, any Person;
(h) Not take any action or omit to take any action that would
result in a Breach of any of the representations and warranties set
forth in this Agreement at, or prior to, the Closing;
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(i) Except as contemplated in Section 1.10, not issue,
reissue, sell, deliver, pledge, authorize, or propose the issuance,
reissuance, sale, delivery or pledge of shares of capital stock of any
class, or securities convertible into capital stock of any class, or
any rights, warrants or options to acquire any convertible securities
or capital stock;
(j) Not adjust, split, combine, subdivide, reclassify or
redeem, purchase or otherwise acquire, or propose to redeem or purchase
or otherwise acquire, any shares of its capital stock, or any of its
other securities;
(k) Not declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock, redeem or otherwise acquire
any shares of its capital stock or other securities, alter any term of
any of its outstanding securities;
(l) (i) except as required under any employment agreement,
not increase in any manner the compensation of any of its directors,
officers, or other employees; (ii) not pay, or agree to pay, any
pension, retirement allowance or other employee benefit not required or
permitted by any existing plan, agreement or arrangement to any such
director, officer or employee, whether past or present; or (iii) not
commit itself to any additional pension, profit-sharing, bonus,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other
employee benefit plan, agreement or arrangement, or to any employment
agreement or consulting agreement (arising out of prior employment )
with or for the benefit of any person, or, except to the extent
required to comply with applicable law, amend any of such plans or any
of such agreements in existence on the date of this Agreement;
(m) Not terminate, enter into or amend in any material
respect any contract, agreement, lease, license or commitment, or take
any action, or omit to take any action this will cause a breach,
violation or default (however defined) under any contract, except in
the ordinary course of business and consistent with past practice;
(n) Not permit any of its current insurance (or
reinsurance) policies to be cancelled or terminated or any of the
coverage thereunder to lapse, unless simultaneously with such
termination, cancellation or lapse, replacement policies providing
coverage equal to or greater than coverage remaining under those
cancelled, terminated or lapsed policies are in full force and effect;
(o) Not enter into other material agreements, commitments
or contracts not in the ordinary course of business or in excess of
current requirements;
(p) Not maintain its books of account and records in other
than its usual, regular and ordinary manner, consistent with its past
practice; and
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(1) Promptly advise the other Party, in writing, of any
fact, condition, occurrence or change known to the Party that
reasonably could be expected to have, individually or in the aggregate,
a Material Adverse Effect on such Party, as the case may be, or cause a
Breach of this Article III or require an amendment to a Party's
Disclosure Schedule.
3.3 Access; Cooperation . Each Party shall provide the other Party and
its Representatives the right, upon reasonable notice and during normal business
hours, permission to enter into its offices to inspect its records and business
operations and to consult with its management, executives and legal and
accounting advisors and, subject to mutually agreed upon timing and procedures,
to consult with any personnel that report to any of the management or executives
of such Party to complete the other Party's due diligence investigation. Each
Party shall cooperate with the other Party and its Representatives and,
generally, do all other acts and things in good faith as may be reasonable to
timely effectuate the purposes of this Agreement and the consummation of the
transactions contemplated herein.
3.4 Notice Regarding Dissenters' Rights Actions . GeoVax shall give
Dauphin prompt notice of any written shareholder demand received by it prior to
the Closing Date, under which GeoVax will be required to purchase shares of
capital stock pursuant to the dissenting rights provisions of the Georgia Act.
3.5 No Negotiation . During the period after the execution of this
Agreement and prior to Closing, neither Party shall, directly or indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal,
or offer from any Person relating to a possible transaction similar to the
transactions contemplated in this Agreement;
(b) participate in any negotiations or discussions, or enter into
any agreement with, or provide, any non-public information to, any Person
relating to or in connection with any such transaction; or
(c) consider, entertain, or accept any proposal or offer from any
Person relating to any such possible transaction.
Each Party shall promptly notify the other Party in writing of any
material inquiry, proposal, or offer relating to any such transaction that is
received during the period specified at the beginning of Section 3.5.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIE S OF GEOVAX
Subject to the exceptions set forth in GeoVax's Disclosure Schedule,
attached as Schedule IV, GeoVax represents and warrants to Dauphin as follows:
4.1 Due Organization; No Subsidiaries . GeoVax is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Georgia. GeoVax is not required to be qualified, authorized, registered, or
licensed to do business as a foreign corporation in any jurisdiction other than
the jurisdictions in which it is so licensed, qualified, or registered, or where
the failure to be so licensed, qualified or registered would have a Material
Adverse Effect on its business and operations. GeoVax does not have any
subsidiaries, and does not own, beneficially or otherwise, any shares or other
securities of, or any direct or indirect interest of any nature in, any other
Entity.
4.2 Books and Records . The books and records of GeoVax delivered to
Dauphin prior to the Closing fully and fairly reflect the transactions to which
GeoVax is a party or by which its assets are bound.
4.3 Capitalization . The authorized capital stock of GeoVax consists of
(i) 50,000,000 shares of common stock, no par value, of which 10,756,983 shares
are issued and outstanding, and (ii) 20,000,000 shares of preferred stock, no
par value, of which 5,987,520 shares are issued and outstanding. All of the
issued and outstanding shares of GeoVax preferred stock have been designated as
Series A Preferred Stock. All of the issued and outstanding shares of GeoVax
capital stock are duly authorized, validly issued, fully paid, non-assessable
and free of preemptive rights. At the Effective Time, all of the issued and
outstanding shares of GeoVax Common Stock and GeoVax Preferred Stock will be
converted into the right to receive the Merger Consideration. There are no
voting trusts or any other agreements or understandings with respect to the
voting of GeoVax's capital stock.
4.4 Financial Statements .
(a) GeoVax has provided Dauphin with a copy of the audited balance
sheet of GeoVax as of December 31, 2003 and December 31, 2004, and the related
statement of operations, stockholders' deficiency, and cash flows for the two
years then ended, and for the period from inception (June 27, 2001) to December
31, 2004, together with the unqualified report thereon (except with respect to
its continuation as a going concern) of Tripp, Chafin & Causey, LLC ("TCC"),
independent auditors (collectively, "GeoVax's Audited Financials").
(b) Included in GeoVax's Audited Financials are the unaudited
balance sheets of GeoVax as of September 30, 2005, and the related statement of
operations, stockholders' deficiency and cash flows for the nine months then
ended, as reviewed by TCC ("GeoVax's Interim Financials").
8
(c) GeoVax's Audited Financials, and GeoVax's Interim Financials,
(collectively "GeoVax's Financial Statements") are (i) in accordance with the
books and records of GeoVax, (ii) correct and complete in all material respects,
(iii) fairly present the financial position and results of operations of GeoVax
as of the dates indicated, and (iv) prepared in accordance with U.S. GAAP
(except that (x) unaudited financial statements may not be in accordance with
GAAP because of the absence of footnotes normally contained therein, and (y)
interim (unaudited) financials are subject to normal year-end audit adjustments
that in the aggregate will not have a material adverse effect on GeoVax, its
business, financial condition, or the results of operations).
4.5 Absence of Changes . Except (i) as set forth in Part 4.5 of the
Disclosure Schedule, since September 30, 2005; and (ii) in furtherance of the
Merger.
(a) there has not been any adverse change to GeoVax, and no event
has occurred that would reasonably be expected to have a Material Adverse Effect
on GeoVax;
(b) there has not been any loss, damage, or destruction to, or any
interruption in the use of, any of the assets of GeoVax (whether or not covered
by insurance) that would be expected to have a Material Adverse Effect on
GeoVax;
(c) GeoVax has not purchased or otherwise acquired any asset from
any other Person, except for Contracts entered into, and assets acquired, by
GeoVax in the Ordinary Course of Business;
(e) GeoVax has made no capital expenditures outside of the
Ordinary Course of Business;
(f) GeoVax has not sold or otherwise transferred, or leased or
licensed, any asset to any other Person except in the Ordinary Course of
Business;
(g) GeoVax has not written off as uncollectible, or established
any extraordinary reserve with respect to, any account receivable or other
indebtedness;
(h) GeoVax has not made any loan or advance to any other Person;
(i) GeoVax has not (i) established or adopted any Employee Benefit
Plan, or (ii) paid any bonus or made any profit-sharing or similar payment to,
or increased the amount of the wages, salary, commissions, fees, fringe benefits
or other compensation or remuneration payable to, any of its directors,
officers, members, employees, or independent contractors;
(j) no Contract by which GeoVax (or any of the assets owned or
used by GeoVax) is or was bound, or under which GeoVax has or had any rights or
interests, has been amended or terminated;
9
(k) GeoVax has not incurred, assumed, or otherwise become subject
to any Liability, other than accounts payable incurred by GeoVax in bona fide
transactions entered into in the Ordinary Course of Business;
(l) GeoVax has not discharged any Encumbrance or discharged or
paid any indebtedness or other Liability, except for accounts payable paid in
bona fide transactions in the Ordinary Course of Business;
(m) GeoVax has not forgiven any debt or otherwise released or
waived any right or claim;
(n) GeoVax has not changed any of its methods of accounting or
accounting practices in any respect;
(o) GeoVax has not entered into any transaction or taken any other
action outside the Ordinary Course of Business;
(p) GeoVax has not agreed, committed, or offered (in writing or
otherwise) to take any of the actions referred to in the clauses above.
4.6 Title to Assets . GeoVax owns, and has good and valid title to, all
assets it purports to own, including all assets reflected on GeoVax Interim
Financials; all assets acquired by GeoVax since September 30, 2005; all rights
of GeoVax under the GeoVax Contracts; and all other assets reflected in the
books and records of GeoVax as being owned by GeoVax. Except as set forth in
Part 4.6 of the Disclosure Schedule, all of its assets are owned by GeoVax free
and clear of any Encumbrances.
4.7 Receivables . GeoVax's Interim Financials provide an accurate
summary of all accounts receivable, notes receivable, and other receivables of
GeoVax as of September 30, 2005. All existing GeoVax accounts receivable
represent valid obligations of GeoVax customers arising from bona fide
transactions entered into in the Ordinary Course of Business.
4.8 Equipment . Part 4.8 of the Disclosure Schedule accurately
identifies all equipment, materials, prototypes, tools, supplies, vehicles,
furniture, fixtures, improvements, and other tangible assets owned by GeoVax.
Part 4.8 of the Disclosure Schedule also accurately identifies all tangible
assets leased to GeoVax. Each asset identified or required to be identified in
Part 4.8 of the Disclosure Schedule (i) is structurally sound, free of defects
and deficiencies and in good condition and repair (ordinary wear and tear
excepted); (ii) complies in all material respects with, and is being operated
and otherwise used in material compliance with, all applicable Legal
Requirements; and (iii) is adequate and appropriate for the uses to which it is
being put. The assets identified in Part 4.8 of the Disclosure Schedule are
adequate for the conduct of the business of GeoVax in the manner in which such
business is currently being conducted.
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4.9 Real Property . GeoVax owns no real property or any interest in
real property, except for the leaseholds created under the real property leases
identified in Part 4.9 of the Disclosure Schedule.
4.10 Proprietary Assets .
(a) Part 4.10(a) of the Disclosure Schedule sets forth each
Proprietary Asset owned by GeoVax, including, but not limited to, any
Proprietary Asset registered with any Governmental Body or for which an
application has been filed with any Governmental Body.
(b) GeoVax's use of any Proprietary Asset in the Ordinary Course
of Business does not materially violate, conflict with, or infringe on the
rights of any other Person in a manner that would have a Material Adverse Effect
on this Agreement.
(c) GeoVax is the owner of all right, title and interest, or has
otherwise obtained sufficient rights, in and to each of its Proprietary Assets
necessary for GeoVax to use such Proprietary Assets in the Ordinary Course of
Business, free and clear of Encumbrances and other adverse claims.
(d) To the knowledge of GeoVax, no GeoVax employee has entered
into any Contract that restricts or limits in any way the scope or type of work
in which the employee may be engaged, or requires the employee to transfer,
assign, or disclose information concerning his work to anyone other than GeoVax.
4.11 Contracts .
(a) Part 4.11 of the Disclosure Schedule identifies each GeoVax
Contract, except for any GeoVax Immaterial Contract (the "GeoVax Contracts").
GeoVax has delivered or made available to Dauphin accurate and complete copies
of all GeoVax Contracts identified in Part 4.11 of the Disclosure Schedule,
including all material contract amendments. Each GeoVax Contract is valid and in
full force and effect.
(b) Except as set forth in Part 4.11 of the Disclosure Schedule:
(i) to the best knowledge of GeoVax, no Person has violated or breached, or
declared or committed any default under, any GeoVax Contract; (ii) to the best
knowledge of GeoVax, no event has occurred, and no circumstance or condition
exists, that might (with or without notice or lapse of time) (A) result in a
violation or breach of any of the provisions of any GeoVax Contract, (B) give
any Person the right to declare a default or exercise any remedy under any
GeoVax Contract, (C) give any Person the right to accelerate the maturity or
performance of any GeoVax Contract, or (D) give any Person the right to cancel,
terminate, or modify any GeoVax Contract; (iii) GeoVax has not received any
notice or other communication (in writing or otherwise) regarding any actual,
alleged, possible, or potential violation or breach of, or default under, any
GeoVax Contract; and (iv) GeoVax has not waived any right under any GeoVax
Contract.
(c) The performance of GeoVax Contracts will not result in any
violation of or failure to comply with any Legal Requirement.
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(d) GeoVax Contracts identified in Part 4.11 of the Disclosure
Schedule (together with GeoVax Immaterial Contracts) collectively constitute all
of the Contracts necessary to enable GeoVax to conduct its business in the
manner that it currently conducts its business.
4.12 Liabilities
(a) Except as may be set forth in Part 4.12 of the Disclosure
Schedule, GeoVax has no Liabilities, except for (i) liabilities identified as
such in the GeoVax Interim Financials; (ii) accounts payable incurred by GeoVax
in bona fide transactions entered into in the Ordinary Course of Business since
September 30, 2005; and (iii) obligations under the Contracts listed in Part
4.11 of the Disclosure Schedule, to the extent that the existence of such
obligations is ascertainable solely by reference to the GeoVax Contracts.
(b) Part 4.12 of the Disclosure Schedule (i) provides an accurate
and complete breakdown and aging of GeoVax accounts payable as of September 30,
2005, and (ii) provides an accurate and complete breakdown of all notes payable,
and other indebtedness of GeoVax, as of the date of this Agreement.
(c) GeoVax has not, at any time, (i) made a general assignment for
the benefit of creditors, (ii) filed, or had filed against it, any bankruptcy
petition or similar filing, (iii) suffered the attachment or other judicial
seizure of all or a substantial portion of its assets, (iv) admitted in writing
its inability to pay its debts as they become due, (v) been convicted of, or
pleaded guilty or no contest to, any felony, or (vi) taken or been the subject
of any action that may have an adverse effect on its ability to comply with or
perform any of its covenants or obligations contemplated under this Agreement.
4.13 Compliance with Legal Requirements . Except as set forth in Part
4.13 of the Disclosure Schedule: (a) GeoVax is in material compliance with each
Legal Requirement that is applicable to it or to the conduct of its business or
the ownership or use of any of its assets; (b) to the best of its knowledge,
GeoVax has at all times been in material compliance with each Legal Requirement
that is or was applicable to it, or to the conduct of its business, or the
ownership or use of any of its assets; (c) no event has occurred, and no
condition or circumstance exists, that might (with or without notice or lapse of
time) constitute or result directly or indirectly in a material violation by
GeoVax of, or a failure on the part of GeoVax to comply with, any Legal
Requirement; and (d) GeoVax has not received, at any time, any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding (i) any actual, alleged, possible, or potential violation of,
or failure to comply with, any Legal Requirement, or (ii) any actual, alleged,
possible, or potential obligation on the part of GeoVax to undertake, or to bear
all or any portion of the cost of, any cleanup or any remedial, corrective or
response action of any nature.
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4.14 Government Authorizations . Part 4.14 of the Disclosure Schedule
identifies: (a) each material Governmental Authorization that is held by GeoVax;
and (b) each other material Governmental Authorization that, to the knowledge of
GeoVax, is held by any employee of GeoVax and relates to, or is useful in
connection with, GeoVax's business. Each material Governmental Authorization
identified or required to be identified in Part 4.14 of the Disclosure Schedule
is valid and in full force and effect.
Except as set forth in Part 4.14 of the Disclosure Schedule: (i) GeoVax
is, and has at all times been, in material compliance with all of the terms and
requirements of each material Governmental Authorization identified or required
to be identified in Part 4.14 of the Disclosure Schedule; (ii) no event has
occurred, and no condition or circumstance exists, that would reasonably be
expected to (with or without notice or lapse of time) (A) constitute or result
directly or indirectly in a material violation any material Governmental
Authorization identified, or required to be identified, in Part 4.14 of the
Disclosure Schedule, or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, termination, or modification of any
material Governmental Authorization identified, or required to be identified, in
Part 4.14 of the Disclosure Schedule; (iii) GeoVax has never received any notice
or other communication (in writing or otherwise) from any Governmental Body or
any other Person regarding (A) any actual, alleged, possible, or potential
violation of, or failure to comply with, any term or requirement of any material
Governmental Authorization, or (B) any actual, proposed, possible, or potential
revocation, withdrawal, suspension, cancellation, termination, or modification
of any material Governmental Authorization.
The Governmental Authorizations identified in Part 4.14 of the
Disclosure Schedule constitute all of the material Governmental Authorizations
necessary (i) to enable GeoVax to conduct its business in the manner in which it
currently conducts such business, and (ii) to permit GeoVax to own and use its
assets in the manner in which they are currently owned and used.
4.15 Tax Matters .
(a) Each Tax Return required to be filed by GeoVax has been duly
filed with the appropriate Governmental Body. To the best Knowledge of GeoVax,
each Tax that GeoVax was required to have paid, or that was claimed by any
Governmental Body to be payable by GeoVax, has been duly paid in full. Any Tax
required to have been withheld or collected by GeoVax has been duly withheld and
collected; and (to the extent required) each such Tax has been paid to the
appropriate Governmental Body.
(b) There has been no examination or audit of any Tax Return of
GeoVax that has been conducted since December 31, 1999.
(c) No claim or other Proceeding is pending or has been threatened
against GeoVax in respect to any Tax. There are no unsatisfied Liabilities for
Taxes (including liabilities for interest, additions to tax, and penalties
thereon, or related expenses) with respect to any notice of deficiency or
similar document received by GeoVax.
13
4.16 Employee and Labor Matters .
(a) Part 4.16 of the Disclosure Schedule sets forth the employees
of GeoVax.
(b) Except as set forth in Part 4.16 of the Disclosure Schedule,
GeoVax is not a party to or bound by, and has never been a party to or bound by,
any employment contract or any union contract, collective bargaining agreement,
or similar Contract.
(c) Except as set forth in Part 4.16 of the Disclosure Schedule,
the employment of the employees of GeoVax is terminable by GeoVax at will and no
employee is entitled to severance pay or other benefits following termination or
resignation, except as otherwise provided by law.
(d) To the knowledge of GeoVax (i) no employee of GeoVax intends
to terminate his employment (including, by reason of the consummation of the
transactions contemplated herein, Dauphin's assumption of the employment
arrangements GeoVax holds with its employees prior to Closing in connection with
Dauphin's assumption of GeoVax's Contract obligation and rights; and (ii) no
employee of GeoVax is a party to, or is bound by, any confidentiality agreement,
noncompetition agreement, or other Contract (with any Person) that may have an
adverse effect on the employee's performance of any of his duties or
responsibilities as an employee of GeoVax upon and after the consummation of the
transactions contemplated in this Agreement.
4.17 Benefit Plans; ERISA .
(a) Part 4.17 of the Disclosure Schedule identifies each of
GeoVax's Employee Benefit Plans. Except as set forth in Part 4.17 of the
Disclosure Schedule, GeoVax has never established, adopted, maintained,
sponsored, contributed to, participated in, or incurred any Liability with
respect to any Employee Benefit Plan. GeoVax has never provided or made
available any fringe benefit, or other benefit of any nature, to any of its
employees. Each contribution or other payment that is required to have been
accrued or made under or with respect to any Plan has been duly accrued and made
on a timely basis.
(b) No Plan (i) provides or provided any benefit guaranteed by the
Pension Benefit Guaranty Corporation; (ii) is or was a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA; or (iii) is or was subject to the
minimum funding standards of Section 412 of the Code or Section 302 of ERISA.
There is no Person that (by reason of common control or otherwise) is, or has at
any time been, treated together with GeoVax as a single employer within the
meaning of Section 414 of the Code.
4.18 Environmental Matters .
14
(a) GeoVax is not liable, or to the best knowledge of GeoVax,
potentially liable, for any response cost or natural resource damages under
Section 107(a) of CERCLA, or under any of the other so-called "superfund" or
"superlien" laws or similar Legal Requirements, at or with respect to any site.
(b) GeoVax has never received any notice or other communication
(in writing or otherwise) from any Governmental Body or other Person regarding
any actual, alleged, possible, or potential Liability arising from, or relating
to, the presence, generation, manufacture, production, transportation,
importation, use, treatment, refinement, processing, handling, storage,
discharge, release, emission, or disposal of any Hazardous Material. No Person
has ever commenced, or to the best knowledge of GeoVax threatened to commence,
any contribution action or other Proceeding against GeoVax in connection with
any such actual, alleged, possible, or potential Liability; and no event has
occurred, and to the best knowledge of GeoVax, no condition or circumstance
exists, that may directly or indirectly give rise to, or result in GeoVax
becoming subject to, any such Liability.
(c) Except as set forth in Part 4.18 of the Disclosure Schedule,
GeoVax has never generated, manufactured, produced, transported, imported, used,
treated, refined, processed, handled, stored, discharged, released, or disposed
of any Hazardous Material (whether lawfully or unlawfully). Except as set forth
in Part 4.18 of the Disclosure Schedule, GeoVax has never permitted (knowingly
or otherwise) any Hazardous Material to be generated, manufactured, produced,
used, treated, refined, processed, handled, stored, discharged, released, or
disposed of (whether lawfully or unlawfully) (i) on or beneath the surface of
any real property that is, or that has at any time been, owned by, leased to,
controlled by or used by GeoVax, (ii) in or into any surface water, groundwater,
soil or air associated with or adjacent to any such real property; or (iii) in
or into any well, pit, pond, lagoon, impoundment, ditch, landfill, building,
structure, facility, improvement, installation, equipment, pipe, pipeline,
vehicle, or storage container that is or was located on or beneath the surface
of any such real property, or that is or has at any time been owned by, leased
to, controlled by, or used by GeoVax.
4.19 Insurance .
(a) Part 4.19 of the Disclosure Schedule accurately sets forth,
with respect to each insurance policy maintained by or at the expense of, or for
the direct or indirect benefit of, GeoVax, the name of the insurance carrier
that issued the policy and the policy number. Each of the policies identified in
Part 4.19 of the Disclosure Schedule is valid, enforceable, and in full force
and effect. All of the information contained in the applications submitted in
connection with these policies was (at the times said applications were
submitted) accurate and complete, and all premiums and other amounts owing with
respect to said policies have been paid in full on a timely basis.
15
(b) To the knowledge of GeoVax, no event has occurred, and no
condition or circumstance exists, that might (with or without notice or lapse of
time) directly or indirectly give rise, to or serve as a basis for, any
insurance claim. GeoVax has not received: (i) any notice or other communication
(in writing or otherwise) regarding the actual or possible cancellation or
invalidation of any of the policies identified in Part 4.19 of the Disclosure
Schedule or regarding any actual or possible adjustment in the amount of the
premiums payable with respect to any of said policies; (ii) any notice or other
communication (in writing or otherwise) regarding any actual or possible refusal
of coverage under, or any actual or possible rejection of any claim under, any
of the policies identified in Part 4.19 of the Disclosure Schedule; or (iii) any
indication that the issuer of any of the policies identified in Part 4.19 of the
Disclosure Schedule may be unwilling or unable to perform any of its obligations
thereunder.
4.20 Related Party Transactions . Except as set forth in Part 4.20 of
the Disclosure Schedule (a) no Related Party has any direct or indirect interest
of any nature in any of the assets of GeoVax; (b) no Related Party is, or has
been at any time since December 31, 2002, indebted to GeoVax; (c) since December
31, 2002, no Related Party has entered into, or has had any direct or indirect
financial interest in, any GeoVax Contract, transaction, or business dealing of
any nature involving GeoVax; (d) no Related Party is competing, or has at any
time since December 31, 2002, competed, directly or indirectly, with GeoVax.
4.21 Certain Payments, Etc . Neither GeoVax nor any officer, employee,
agent or other Person associated with or acting for or on behalf of GeoVax has,
at any time, directly or indirectly: (a) used any entity funds (i) to make any
unlawful political contribution or gift, or for any other unlawful purpose
related to any political activity, (ii) to make any unlawful payment to any
governmental official or employee, or (iii) to establish or maintain any
unlawful or unrecorded fund or account of any nature; (b) made any false or
fictitious entry, or failed to make any entry that should have been made, in any
of the books of account or other GeoVax records; (c) made any payoff, influence
payment, bribe, rebate, kickback, or unlawful payment to any Person; (d)
performed any favor or given any gift that was not deductible for federal income
tax purposes; (e) made any payment (whether or not lawful) to any Person, or
provided (whether lawfully or unlawfully) any favor or anything of value
(whether in the form of property or services, or in any other form) to any
Person, for the purpose of obtaining or paying for (i) favorable treatment in
securing business, or (ii) any other special concession; or (f) agreed,
committed, or offered (in writing or otherwise) to take any of the actions
described in clauses "(a)" through "(e)" above.
16
4.22 Proceedings; Orders . Except as set forth in Part 4.22 of the
Disclosure Schedule, to the knowledge of GeoVax, there is no pending Proceeding,
and no Person has threatened in writing to commence any Proceeding: (i) that
involves GeoVax or that otherwise relates to or might affect the business of
GeoVax or any assets of GeoVax material to its business operations (whether or
not GeoVax is named as a party thereto); or (ii) that challenges, or that may
have the effect of preventing, delaying, making illegal, or otherwise
interfering with any of the transactions contemplated hereby. Except as set
forth in Part 4.22 of the Disclosure Schedule, no event has occurred, and no
claim, dispute, or other condition or circumstance exists, that might directly
or indirectly give rise to, or serve as a basis for, the commencement of any
such Proceeding. There is no Order to which GeoVax is subject; and no Related
Party is subject to any Order that relates to GeoVax's business. To the
knowledge of GeoVax, no GeoVax employee is subject to any Order that may
prohibit that employee from engaging in, or continuing, any conduct, activity,
or practice relating to the business of GeoVax.
4.23 Authority; Binding Nature of Agreements . Subject to the approval
of the GeoVax Shareholders under the Georgia Act, GeoVax has the right, power,
and authority to enter into and to perform its obligations under this Agreement,
to which it is or may become a party; and the execution, delivery, and
performance of this Agreement by GeoVax have been duly authorized by all
necessary action on the part of GeoVax. Subject to the approval of GeoVax
Shareholders, this Agreement constitutes the legal, valid, and binding
obligation of GeoVax, enforceable against GeoVax in accordance with its terms.
4.24 Non-Contravention; Consents . Neither the execution, nor the
delivery of this Agreement, nor the consummation or performance of the Merger,
will directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with, or result in a violation of, or
give any Governmental Body or other Person the right to challenge the Merger or
to exercise any remedy or obtain any relief under any Legal Requirement or any
Order to which GeoVax is subject;
(b) contravene, conflict with or result in a violation of any of
the terms or requirements of any Governmental Authorization, or give any
Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or
modify, any Governmental Authorization;
(c) contravene, conflict with, or result in a violation or breach
of, or result in a default under, any provision of any Contract; or
(d) give any Person the right to (i) declare a default or exercise
any remedy under any GeoVax Contract, (ii) accelerate the maturity or
performance of any GeoVax Contract, or (iii) cancel, terminate, or modify any
GeoVax Contract.
17
GeoVax is not required to make any filing with, or give any notice to,
or to obtain any Consent from any Person, other than its board of directors and
shareholders, in connection with the execution and delivery of this Agreement or
the consummation or performance of the Merger.
4.25 Brokers . GeoVax has not agreed to pay, nor has it taken any
action that might result in any Person claiming to be entitled to receive, any
brokerage commission, finder's fee, or similar commission or fee in connection
with the Merger.
4.26 Full Disclosure . To the knowledge of GeoVax, the representations
and warranties contained in this Article IV do not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements and the information contained in this Article IV is not misleading,
except to the extent such omission would not reasonably be expected to result in
a Material Adverse Effect.
4.27 Restricted Securities . GeoVax understands that the Dauphin Shares
will constitute "restricted securities" under the federal securities laws
inasmuch as they are being acquired from Dauphin in a transaction not involving
a public offering and, under such laws and applicable regulations, may not be
resold without registration under, or the availability of an exemption from, the
registration requirements of the Securities Act of 1933 and similar state
securities laws. As a condition to the receipt of Dauphin Shares in the Merger,
each GeoVax Shareholder shall represent that it is familiar with Securities and
Exchange Commission Rule 144, as presently in effect, and each GeoVax
Shareholder understands the resale limitations and the Securities Act of 1933
pursuant to the form of Exhibit C attached hereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF DAUPHIN
Subject to the exceptions set forth in Dauphin's Disclosure Schedule,
as attached hereto as Schedule V, Dauphin represents and warrants to GeoVax as
follows:
5.1 Due Organization; Subsidiaries, Etc . Dauphin is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Illinois and Dauphin's only subsidiary is GeoVax Acquisition Corp., a Georgia
corporation which is duly organized, validly existing, and in good standing
under the laws of the State of Georgia (the "Dauphin Subsidiary"). Except for
any requirements arising as a result of the closing of the Merger, neither
Dauphin, nor the Dauphin Subsidiary is required to be qualified, authorized,
registered, or licensed to do business as a foreign corporation in any
jurisdiction other than the jurisdictions in which they are so licensed,
qualified or registered, or where the failure to be so licensed, qualified or
registered would not have a Material Adverse Effect.
18
5.2 Books and Records . The books and records of Dauphin and the
Dauphin Subsidiary delivered to GeoVax prior to the Closing fully and fairly
reflect the transactions to which Dauphin and the Dauphin Subsidiary is a party
or by which they or their assets are bound.
5.3 Capitalization . Dauphin's authorized capital stock consists of (i)
100,000,000 shares of Common Stock, of which 99,552,339 shares are issued and
outstanding, and (ii) 10,000,000 shares of Preferred Stock, of which 10,000,000
shares are designated as Series A, $0.01 Par Value, Preferred Stock, of which
10,000,000 shares are issued and outstanding (the "Dauphin Series A Preferred
Stock"). All of the preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of the Dauphin Series A
Preferred Stock are set forth in that certain "Exhibit A to Statement of
Resolution Establishing Series" filed with the Secretary of State of Illinois on
July 14, 2005. At or prior to the Closing, all shares of Dauphin Series A
Preferred Stock shall have been duly converted to common stock or otherwise
cancelled. At or prior to Closing, Dauphin shall amend its Articles of
Incorporation to authorize 850,000,000 shares of its common stock subject to
compliance with all applicable Legal Requirements.
(a) At the Closing, Dauphin shall have no more than 243,000,000
issued and outstanding shares of common stock (including all shares of common
stock issued upon conversion of the Dauphin Series A Preferred Stock and shares
of common stock sold for cash to meet the condition set forth in Section 6.1(b)
of this Agreement).
(b) All issued and outstanding shares of Dauphin capital stock are
duly authorized, validly issued, fully paid, non-assessable, and free of
preemptive rights. When issued in the Merger, the Dauphin Shares will be duly
authorized, validly issued, fully paid, non-assessable, and free of preemptive
rights.
(c) Except as set forth in Part 5.3(c) of the Disclosure Schedule,
there are no outstanding or authorized options, rights, warrants, calls,
convertible securities, rights to subscribe, conversion rights, or other
agreements or commitments to which Dauphin is a party or which are binding upon
Dauphin providing for the issuance or transfer by Dauphin of additional shares
of Dauphin's capital stock and Dauphin has not reserved any shares of its
capital stock for issuance, nor are there any outstanding stock option rights,
phantom equity or similar rights, contracts, arrangements or commitments to
issue capital stock of Dauphin. There are no voting trusts or any other
agreements or understandings with respect to the voting of Dauphin's capital
stock. There are no obligations of Dauphin to repurchase, redeem, or otherwise
re-acquire any shares of its capital stock as of the Closing.
(d) Except as disclosed in Part 5.3(d) of the Disclosure Schedule,
no Person has any demand or piggyback registration rights with respect to any of
Dauphin's capital stock, except for registration rights as may be granted to
investors in the private placement described in Section 6.1(b) of this
Agreement.
19
5.4 SEC Reports . Dauphin has not filed with the United States
Securities and Exchange Commission (the "SEC"), any Form 10-K or 10-KSB since
the Form 10-K filed in April 2002 for the year ending December 31, 2001, any
Form 10-Q or 10-QSB since the Form 10-Q filed in November 2002 for the nine
months ending September 30, 2002. As a condition to the Closing of the Merger,
Dauphin shall bring current all of its past due Form 10-K's and Form 10-Q's, or
Form 10-KSB's and 10-QSB's, as the case may be, and shall file such documents
with the SEC as may be required by the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder, except to the extent the SEC grants a written waiver of any
requirement prior to the Closing.
Dauphin's Form 10-K's and 10-Q's, or Form 10-KSB's and 10Q-SB's,
that have not yet been filed (the "Delinquent SEC Reports"), Dauphin's Form
10-KSB for the year ending December 31, 2005 (the "2005 10-K"), and the
Information Statement on Schedule 14C that Dauphin will file with the SEC prior
to the Closing in furtherance of the Merger (the "Information Statement"), will
when filed comply in all material respects with the requirements of the Exchange
Act, and the rules and regulations promulgated thereunder and none of the
Delinquent SEC Reports, the 2005 10-K or the Information Statement shall contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. Dauphin's Form
10-K's and 10-Q's that have been filed (the "Filed SEC Reports") comply in all
material respects with the requirements of the Exchange Act, and the rules and
regulations promulgated thereunder, and none of the Filed SEC Reports contain an
untrue statement of a material fact or omit a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Notwithstanding
anything else contained herein to the contrary, Dauphin makes no representation
or warranty as to any disclosure regarding GeoVax which was provided by GeoVax
or its Representatives.
Except as disclosed in part 5.4 of the Disclosure Schedule, the
consolidated financial statements of Dauphin included in any of the Filed SEC
Reports, the Delinquent SEC Reports, the 2005 10-K or the Information Statement
comply or will comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, and the statements have been or will have been prepared in
accordance with generally accepted accounting principles in the United States
(except, in the case of unaudited statements, as permitted by the applicable
form under the Securities Act of 1933, as amended, and/or the Exchange Act)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present or will present the financial
position of Dauphin as of the dates thereof and its consolidated statements of
operations, stockholders' equity and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal and recurring year-end
audit adjustments that were not, and are not, expected to have a Material
Adverse Effect on Dauphin).
5.5 Financial Statements .
20
(a) Included in the Filed SEC Reports , and, when filed, the
Delinquent SEC Reports and the 2005 10-K, are Dauphin's audited consolidated
balance sheets as of December 31, 2002, 2003, 2004 and 2005, and the related
statement of operations, stockholders' equity, and cash flows for each of the
years then ended, together with the unqualified report thereon (except with
respect to continuation as a going concern) of Tanner, LC, independent auditors
and/or any other auditor of Dauphin (collectively, "Dauphin's Audited
Financials").
(b) Included in the Delinquent SEC Reports will be the unaudited
consolidated balance sheet of Dauphin as of September 30, 2005, and the related
statement of operations, stockholders equity (deficit) and cash flows for the
nine months then ended, as reviewed by Tanner, LC ("Dauphin's Interim
Financials").
(c) Dauphin's Audited Financials and Dauphin's Interim Financials
(collectively "Dauphin's Financial Statements") are (i) in accordance with the
books and records of Dauphin, (ii) correct and complete, (iii) fairly present
the financial position and results of operations of Dauphin and each Subsidiary
as of the dates indicated, and (iv) prepared in accordance with U.S. GAAP
(except that (x) unaudited financial statements may not be in accordance with
GAAP because of the absence of footnotes normally contained therein, and (y)
interim (unaudited) financials are subject to normal year-end audit adjustments
that in the aggregate will not have a Material Adverse Effect on Dauphin or the
Dauphin Subsidiary.
(d) The accounting discrepancy described in the November 18, 2005
letter from Tanner, LC to Grant Thornton regarding Dauphin's audited financial
statements for the year ending December 31, 2001, and any proposed remedial
action to correct such discrepancy, including, without limitation, the potential
restatement of Dauphin's audited financial statements for the year ending
December 31, 2001 and any related amendment to Dauphin's Form 10-K for such
year, would not reasonably be expected to have a Material Adverse Effect on
Dauphin.
5.6 Absence of Changes . Except (i) as set forth in Part 5.6 of the
Disclosure Schedule, since September 30, 2005; (ii) as permitted by Section 1.10
of this Agreement; or (iii) in furtherance of the Merger:
(a) there has been no adverse change in, and no event has occurred
that reasonably would be expected to have a Material Adverse Effect on, Dauphin
or the Dauphin Subsidiary;
(b) there has been no loss, damage or destruction to, or any
interruption in the use of, any of the material assets of Dauphin or the Dauphin
Subsidiary (whether or not covered by insurance);
(c) neither Dauphin, nor the Dauphin Subsidiary has purchased or
otherwise acquired any material assets from any other Person;
(d) neither Dauphin, nor the Dauphin Subsidiary has leased or
licensed any material asset from any other Person;
21
(e) neither Dauphin, nor the Dauphin Subsidiary has made any
capital expenditure;
(f) neither Dauphin, nor the Dauphin Subsidiary has sold or
otherwise transferred, or leased, or licensed any material asset to any other
Person;
(g) neither Dauphin, nor the Dauphin Subsidiary has written off as
uncollectible, or established any extraordinary reserve with respect to, any
account receivable or other indebtedness;
(h) neither Dauphin, nor the Dauphin Subsidiary has made any loan
or advance to any other Person;
(i) neither Dauphin, nor the Dauphin Subsidiary has established or
adopted any Employee Benefit Plan; or
(j) no Contract by which Dauphin nor the Dauphin Subsidiary is or
was bound, or under which Dauphin or the Dauphin Subsidiary has or had any
rights or interest, has been amended or terminated;
(k) neither Dauphin, nor the Dauphin Subsidiary has incurred,
assumed or otherwise become subject to any Liability, other than accounts
payable incurred by Dauphin in bona fide transactions entered into in the
Ordinary Course of Business;
(l) neither Dauphin, nor the Dauphin Subsidiary has forgiven any
debt or otherwise released or waived any right or claim;
(m) neither Dauphin, nor the Dauphin Subsidiary has changed its
methods of accounting or accounting practices in any respect;
(n) neither Dauphin, nor the Dauphin Subsidiary has entered into
any transaction or taken any other action outside the Ordinary Course of
Business;
(o) Dauphin has not made any extraordinary distributions to any of
its shareholders; and
(p) neither Dauphin, nor the Dauphin Subsidiary has agreed,
committed or offered (in writing or otherwise) to take any of the actions
referred to in the clauses above.
5.7 Title to Assets . Dauphin's asset consists, and at Closing will
consist, primarily of cash. Dauphin owns, and has good and valid title to, all
of the all assets purported to be owned by it, including all assets reflected on
the Dauphin Interim Financials; all assets acquired by Dauphin since September
30, 2005; all rights of Dauphin under Dauphin's Contracts; and all other assets
reflected in the books and records of Dauphin as being owned by Dauphin.
22
5.8 Receivables . Dauphin has no receivables.
5.9 Inventory . Dauphin has no inventory.
5.10 Equipment . Dauphin has no equipment.
5.11 Real Property . None of Dauphin's assets consists of any owned
real property or any interest in real property, except for the leasehold created
under the real property leases identified in Part 5.11 of the Disclosure
Schedule.
5.12 Proprietary Assets . Dauphin owns no Proprietary Assets.
5.13 Contracts .
(a) Part 5.13 of the Disclosure Schedule identifies and provides
an accurate and complete description of each Dauphin Contract, except for any
Immaterial Contracts (the "Dauphin Contracts"). Dauphin has delivered, or made
available to GeoVax, accurate and complete copies of all Dauphin Contracts
identified in Part 5.13 of the Disclosure Schedule, including all material
contract amendments. Each Dauphin Contract is valid and in full force and
effect.
(b) Except as set forth in Part 5.13 of the Disclosure Schedule:
(i) to the best knowledge of Dauphin, no Person has violated or breached, or
declared or committed any default under, any Dauphin Contract; (ii) to the best
knowledge of Dauphin, no event has occurred, and no circumstance or condition
exists, that might (with or without notice or lapse of time) (A) result in a
violation or breach of any of the provisions of any Dauphin Contract, (B) give
any Person the right to declare a default or exercise any remedy under any
Dauphin Contract, (C) give any Person the right to accelerate the maturity or
performance of any Dauphin Contract, or (D) give any Person the right to cancel,
terminate, or modify any Dauphin Contract; (iii) Dauphin has not received any
notice or other communication (in writing or otherwise) regarding any actual,
alleged, possible, or potential violation or breach of, or default under, any
Dauphin Contract; and (iv) Dauphin has not waived any right under any Dauphin
Contract.
(c) The performance of Dauphin Contracts will not result in any
violation of, or failure to comply with, any Legal Requirement.
(d) No Person is renegotiating, or has the right to renegotiate,
any amount paid or payable to Dauphin under any Dauphin Contract or any other
term or provision of any Dauphin Contract.
5.14 Liabilities, Bankruptcy .
23
(a) Except as may be set forth in Part 5.14 of the Disclosure
Schedule, Dauphin has no Liabilities, except for (i) liabilities identified as
such in the Dauphin Interim Financials; and (ii) obligations under the Contracts
listed in Part 5.13 of the Disclosure Schedule, to the extent that the existence
of such obligations is ascertainable solely by reference to Dauphin Contracts.
At the Closing, Dauphin shall have no Liability or Encumbrance whatsoever.
(b) Part 5.14 of the Disclosure Schedule (i) provides an accurate
and complete breakdown and aging of Dauphin's accounts payable as of September
30, 2005, and (ii) provides an accurate and complete breakdown of all notes
payable and other Dauphin indebtedness as of the date of this Agreement.
(c) Except as set forth in the Filed SEC Reports and Delinquent
SEC Reports or Part 5.14 of the Disclosure Schedule, neither Dauphin, nor the
Dauphin Subsidiary has, at any time, (i) made a general assignment for the
benefit of creditors, (ii) filed, or had filed against it, any bankruptcy
petition or similar filing, (iii) suffered the attachment or other judicial
seizure of all or a substantial portion of its assets, (iv) admitted in writing
its inability to pay its debts as they become due, (v) been convicted of, or
pleaded guilty or no contest to, any felony, or (vi) taken or been the subject
of any action that may have an adverse effect on its ability to comply with or
perform any of its covenants or obligations contemplated under this Agreement.
5.15 Compliance with Legal Requirements . Except as set forth in
Section 5.4, the Filed SEC Reports, or in Part 5.15 of the Disclosure Schedule
(a) Dauphin and each Dauphin Subsidiary is in material compliance with each
Legal Requirement that is applicable to it, or to the conduct of its business or
the ownership or use of any of its assets; (b) to the best of its knowledge,
each of Dauphin and the Dauphin Subsidiaries has at all times been in material
compliance with each Legal Requirement that is or was applicable to it, or to
the conduct of its business, or the ownership or use of any of its assets; (c)
no event has occurred, and no condition or circumstance exists, that might (with
or without notice or lapse of time) constitute or result directly or indirectly
in a material violation by Dauphin of, or a failure on the part of Dauphin to
comply with, any Legal Requirement; and (d) Dauphin has not received, at any
time, any notice or other communication (in writing or otherwise) from any
Governmental Body, or any other Person, regarding (i) any actual, alleged,
possible, or potential violation of, or failure to comply with, any Legal
Requirement, or (ii) any actual, alleged, possible, or potential obligation on
Dauphin's part to undertake, or to bear all or any portion of the cost of, any
cleanup or any remedial, corrective, or response action of any nature.
5.16 Government Authorizations . Except for its respective Articles of
Incorporation, neither Dauphin, nor the Dauphin Subsidiary has any Governmental
Authorization.
5.17 Tax Matters .
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(a) Except as set forth in Part 5.17 of the Disclosure Schedule,
each Tax Return required to be filed by Dauphin has been duly filed with the
appropriate Governmental Body. To the best Knowledge of Dauphin, each Tax
required to have been paid, or claimed by any Governmental Body to be payable,
by Dauphin and the Dauphin Subsidiaries has been duly paid in full. Any Tax
required to have been withheld or collected by Dauphin, or each Dauphin
Subsidiary, has been duly withheld and collected; and (to the extent required)
each such Tax has been paid to the appropriate Governmental Body.
(b) There has been no examination or audit of any Dauphin Tax
Return and or any Tax Return of a Dauphin Subsidiary that has been conducted
since December 31, 1999.
(c) There has been no claim or other Proceeding that is pending or
has been threatened against, Dauphin or its Subsidiaries in respect to any Tax.
There are no unsatisfied Liabilities for Taxes (including liabilities for
interest, additions to taxes and penalties, or related expenses) with respect to
any notice of deficiency or similar document received by Dauphin or the Dauphin
Subsidiary.
5.18. Employees . Except as described in Part 5.18 o f the Disclosure
Schedule, n either Dauphin, nor the Dauphin Subsidiary, has any employees.
Except as described in Part 5.18 o f the Disclosure Schedule, neither Dauphin,
nor the Dauphin Subsidiary owes any compensation of any kind, deferred or
otherwise, to any current or previous employees. Except as described in Part
5.18 o f the Disclosure Schedule, neither Dauphin, nor the Dauphin Subsidiary
has a written or oral employment agreement with any officer or director of
Dauphin or the Dauphin Subsidiary. Neither Dauphin, nor the Dauphin Subsidiary
is a party to, or bound by, any collective bargaining agreement. Except as
described in Part 5.18 o f the Disclosure Schedule , there are no loans or other
obligations payable or owing by Dauphin or the Dauphin Subsidiary to any
stockholder, officer, director, or employee of Dauphin or the Dauphin
Subsidiary, nor are there any loans or debts payable or owing by any of such
persons to Dauphin or the Dauphin Subsidiary, or any guarantees by Dauphin or
the Dauphin Subsidiary of any loan or obligation of any nature to which any such
person is a party.
5.19 Employee Benefit Plans . Neither Dauphin, nor the Dauphin
Subsidiary, has any (a) non-qualified deferred or incentive compensation or
retirement plans or arrangements, (b) qualified retirement plans or
arrangements, (c) other employee compensation, severance or termination pay or
welfare benefit plans, programs or arrangements, or (d) any related trusts,
insurance contracts, or other funding arrangements maintained, established or
contributed to by Dauphin or the Dauphin Subsidiary. As a condition to the
Closing, Dauphin shall adopt an incentive stock plan in the form agreed to by
GeoVax.
5.20 Environmental Matters .
(a) Neither Dauphin, nor the Dauphin Subsidiary is liable or, to
the best knowledge of Dauphin, potentially liable for any response cost or
natural resource damages under Section 107(a) of CERCLA, or under any other
so-called "superfund" or "superlien" law or similar Legal Requirement, at or
with respect to any site.
25
(b) Neither Dauphin, nor the Dauphin Subsidiary, has ever received
any notice or other communication (in writing or otherwise) from any
Governmental Body, or other Person, regarding any actual, alleged, possible, or
potential Liability arising from or relating to the presence, generation,
manufacture, production, transportation, importation, use, treatment,
refinement, processing, handling, storage, discharge, release, emission, or
disposal of any Hazardous Material. No Person has ever commenced, to the best
knowledge of Dauphin, or threatened to commence, any contribution action or
other Proceeding against Dauphin or the Dauphin Subsidiary in connection with
any such actual, alleged, possible, or potential Liability; and to the best
knowledge of Dauphin, no event has occurred, and no condition or circumstance
exists, that may directly or indirectly give rise to, or result in, Dauphin or
the Dauphin Subsidiary becoming subject to any such Liability.
(c) Neither Dauphin, nor the Dauphin Subsidiary, has generated,
manufactured, produced, transported, imported, used, treated, refined,
processed, handled, stored, discharged, released, or disposed of any Hazardous
Material (whether lawfully or unlawfully). Neither Dauphin, nor the Dauphin
Subsidiary, has permitted (knowingly or otherwise) any Hazardous Material to be
generated, manufactured, produced, used, treated, refined, processed, handled,
stored, discharged, released, or disposed of (whether lawfully or unlawfully)
(i) on or beneath the surface of any real property that is, or that has at any
time been, owned by, leased to, controlled by, or used by Dauphin or the Dauphin
Subsidiary; (ii) in or into any surface water, groundwater, soil, or air
associated with, or adjacent to, any such real property; or (iii) in or into any
well, pit, pond, lagoon, impoundment, ditch, landfill, building, structure,
facility, improvement, installation, equipment, pipe, pipeline, vehicle, or
storage container that is, or was, located on or beneath the surface of any such
real property, or that is, or has, at any time been owned by, leased to,
controlled by, or used by Dauphin or the Dauphin Subsidiary.
5.21 Insurance . Neither Dauphin, nor the Dauphin Subsidiary, has any
insurance policies in effect.
5.22 Related Party Transactions . Except as set forth in (i) its SEC
Documents, or (ii) Part 5.22 of the Disclosure Schedule, (a) no Related Party
has any direct or indirect interest of any nature in any of the assets of
Dauphin or the Dauphin Subsidiary; (b) no Related Party is, or has, at any time
since December 31, 2002, been indebted to Dauphin or the Dauphin Subsidiary; (c)
since December 31, 2002, no Related Party has entered into, or has had any
direct or indirect financial interest in, any Dauphin Contract, transaction, or
business dealing of any nature involving Dauphin or the Dauphin Subsidiary; (d)
no Related Party is competing, or has at any time since December 31, 2002,
competed, directly or indirectly, with Dauphin or the Dauphin Subsidiary; (e) no
Related Party has any claim or right against Dauphin; and (f) no event has
occurred, and no condition or circumstance exists, that might (with or without
notice or lapse of time) directly or indirectly give rise to, or serve as a
basis for, any claim or right in favor of any Related Party against Dauphin or
the Dauphin Subsidiary.
5.23 Subsidiaries and Investments .
26
(a) Except as set forth in Part 5.23 of the Disclosure Schedule,
Dauphin does not own any capital stock or have any interest of any kind
whatsoever in any corporation, partnership, or other form of business
organization (any such organization is referred to as a "Dauphin Subsidiary").
(b) Part 5.23 of the Disclosure Schedule sets forth true and
complete copies of the charter of each Dauphin Subsidiary, as well as any
limited liability company agreement, operating agreement, or shareholder
agreement relating to such Dauphin Subsidiary, and any acquisition agreement
relating to the Dauphin Subsidiary. All corporate or other action that has been
taken by the Dauphin Subsidiary has been duly authorized and does not conflict
with or violate any provision of its charter, bylaws or other organizational
documents.
(c) Except as set forth in Part 5.23 of the Disclosure Schedule,
all outstanding shares of capital stock or other ownership interests of each
Dauphin Subsidiary are validly issued, fully paid, nonassessable, and free of
preemptive rights and are owned (either directly or indirectly) by Dauphin
without any encumbrances.
(d) Except as set forth in Parts 5.13 or 5.23 of the Disclosure
Schedule, there are no outstanding securities convertible into, or exchangeable
for, the capital stock of, or other equity interests in, the Dauphin Subsidiary,
and no outstanding options, rights, subscriptions, calls commitments, warrants,
or rights of any character for Dauphin, the Dauphin Subsidiary or any other
person or entity to purchase, subscribe for, or to otherwise acquire any shares
of such stock or other securities of the Dauphin Subsidiary.
(e) Except as set forth in Parts 5.13 or 5.23 of the Disclosure
Schedule, there are no outstanding agreements affecting or relating to the
voting, issuance, purchase, redemption, repurchase, or transfer of any capital
stock of, or other equity interests in, the Dauphin Subsidiary.
(f) Each Dauphin Subsidiary's stock register, or similar register
of ownership, has complete and accurate records indicating the following: (i)
the name and address of each person or entity owning shares of capital stock or
other equity interest of the Dauphin Subsidiary, and (ii) the certificate number
of each certificate evidencing shares of capital stock or other equity interest
issued by the Dauphin Subsidiary, the number of shares or other equity interests
evidenced by each such certificate, the date of issuance of such certificate,
and, if applicable, the date of cancellation. Copies of same have been made
available to GeoVax.
27
5.24 Certain Payments, Etc . Neither Dauphin, nor the Dauphin
Subsidiary, has, and no officer, employee, agent or other Person associated
with, or acting for or on behalf of, Dauphin or the Dauphin Subsidiary has, at
any time, directly or indirectly, (a) used any corporate funds (i) to make any
unlawful political contribution or gift, or for any other unlawful purpose
relating to any political activity, (ii) to make any unlawful payment to any
governmental official or employee, or (iii) to establish or maintain any
unlawful or unrecorded fund or account of any nature; (b) made any false or
fictitious entry, or failed to make any entry that should have been made, in any
of the books of account or other records of Dauphin or the Dauphin Subsidiary;
(c) made any payoff, influence payment, bribe, rebate, kickback, or unlawful
payment to any Person; (d) performed any favor or given any gift that was not
deductible for federal income tax purposes; (e) made any payment (whether or not
lawful) to any Person, or provided (whether lawfully or unlawfully) any favor or
anything of value (whether in the form of property or services, or in any other
form) to any Person, for the purpose of obtaining or paying for (i) favorable
treatment in securing business, or (ii) any other special concession; or (f)
agreed, committed, or offered (in writing or otherwise) to take any of the
actions described above in clauses "(a)" through "(e)."
5.25 Proceedings; Orders . To the knowledge of Dauphin, there is
no pending Proceeding, and no Person has threatened in writing to commence any
Proceeding: (i) that involves Dauphin or the Dauphin Subsidiary or that
otherwise relates to, or might affect the business of, Dauphin; or (ii) that
challenges, or that may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, the Merger. To the knowledge of Dauphin, no event
has occurred, and no claim, dispute, or other condition or circumstance exists,
that might directly or indirectly give rise to or serve as a basis for the
commencement of any such Proceeding. There is no Order to which Dauphin or the
Dauphin Subsidiary, or any asset owned or used by Dauphin or its subsidiary, is
subject; and none of the shareholders or any other Related Party is subject to
any Order that relates to Dauphin's business or to any of the assets of Dauphin
or the Dauphin Subsidiary.
5.26 Authority; Binding Nature of Agreements . Dauphin has the
absolute and unrestricted right, power, and authority to enter into and to
perform its obligations under the Merger Agreement; and Dauphin's execution,
delivery, and performance of this Agreement has been duly authorized by all
necessary action on the part of Dauphin and its board of directors and officers.
This Agreement constitutes the legal, valid, and binding obligation of Dauphin,
enforceable against Dauphin in accordance with the terms of the Agreement.
Dauphin shall seek shareholder approval of this Agreement and all matters
required hereunder.
5.27 Non-Contravention; Consents . Neither the execution, nor
delivery, of this Agreement, nor the consummation or performance of the Merger,
will directly or indirectly (with or without notice or lapse of time):
28
(a) contravene, conflict with, or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the Merger or to
exercise any remedy or obtain any relief under any Legal Requirement or any
Order to which Dauphin or any of the assets of Dauphin are subject;
(b) contravene, conflict with, or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate, or modify any Governmental Authorization
that is held by Dauphin;
(c) contravene, conflict with, or result in a violation or breach of,
or result in a default under any provision of any of the Dauphin Contracts;
(d) give any Person the right to (i) declare a default or exercise any
remedy under any Dauphin Contract, (ii) accelerate the maturity or performance
of any Contract, or (iii) cancel, terminate, or modify any Dauphin Contract; or
(e) result in the imposition or creation of any Encumbrance upon, or
with respect to, any of Dauphin's assets.
Dauphin is not required to make any filing with, or give any notice to,
or to obtain any Consent from, any Person other than its board of directors and
shareholders in connection with the execution and delivery of this Agreement, or
the consummation or performance of the Merger.
5.28 Brokers . Except as set forth in Part 5.28 of the Disclosure
Schedule, Dauphin has not agreed to pay, nor has it taken any action that might
result in any Person claiming to be entitled to receive, any brokerage
commission, finder's fee, or similar commission or fee in connection with the
Merger.
5.29 Internal Accounting Controls . Except as described in Dauphin's
Form 10-K for the year ended December 31, 2004, since December 31, 2004, Dauphin
has maintained a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. Dauphin has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Dauphin and designed
such disclosure controls and procedures to ensure that material information
relating to Dauphin is made known to the certifying officer by others within
those entities, particularly during the period in which Dauphin's Form 10-K or
10-Q, as the case may be, is being prepared.
29
Dauphin's certifying officer has evaluated the effectiveness of
Dauphin's controls and procedures as of end of the filing period prior to the
filing date of the Form 10-Q for the quarter ended September 30, 2005 (the
"Evaluation Date"). Dauphin presented in its most recently filed Form 10-K, or
Form 10-Q, the conclusions of the certifying officer about the effectiveness of
the disclosure controls and procedures based on his evaluation as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in Dauphin's internal controls (as such term is defined in Item 307(b)
of Regulation S-K under the Exchange Act) or, to the Company's knowledge, in
other factors that could significantly affect the Company's internal controls.
5.30 Listing and Maintenance Requirements . Dauphin is currently quoted
on the Pink Sheets Electronic Quotation Service. Dauphin has not, in the 12
months preceding the date hereof, received any notice from the Pink Sheets, or
the NASD, or any trading market on which Dauphin's common stock is, or has been,
listed or quoted informing Dauphin that it is not in compliance with the
quoting, listing, or maintenance requirements of the Pink Sheets, or such other
trading market. Dauphin is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such quoting, listing,
and maintenance requirements.
5.31 Application of Takeover Protections . Dauphin and its board of
directors have taken all necessary action, if any, to render inapplicable any
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under Dauphin's certificate or articles of incorporation (or similar charter
documents) or the laws of its state of incorporation that is, or could become,
applicable to GeoVax, or the GeoVax Shareholders, as a result of the Merger or
the exercise of any rights by GeoVax, or the GeoVax Shareholders, pursuant to
this Agreement.
5.32 No SEC or NASD Inquiries . Neither Dauphin, nor, to the knowledge
of Dauphin any of its past or present officers or directors, is, or ever has
been, the subject of any formal or informal inquiry or investigation by the SEC
or NASD.
5.33 Full Disclosure . To the knowledge of Dauphin, the representations
and warranties contained in this Article V do not contain any untrue statement
of a material fact, or omit to state any material fact necessary to make the
statements and information contained in this Article V not misleading, except to
the extent that such omission would not be reasonably expected to result in a
Material Adverse Effect.
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to the Obligations of GeoVax . The obligations of GeoVax
to effect the Merger contemplated by this Agreement shall be subject to the
fulfillment, or written waiver, by GeoVax, at or prior to the Closing, of each
of the following conditions:
(a) At the Closing, Dauphin shall have delivered or caused to be
delivered to GeoVax the following:
30
(i) resolutions duly adopted by the Board of Directors and
the holders of a majority of the issued and outstanding shares of
Dauphin common stock authorizing and approving the Merger and the
other actions of Dauphin required pursuant to this Agreement, and
the execution, delivery, and performance of this Agreement;
(ii) a certificate of good standing for Dauphin and each
Dauphin Subsidiary from their respective jurisdictions of
incorporation, dated not earlier than five days prior to the
Closing Date;
(iii) written resignations of all officers and directors of
Dauphin and each Dauphin Subsidiary in office immediately prior to
the Closing and the appointment of those persons listed on
Schedule 1.7(b) as the officers and directors of Dauphin and each
Dauphin Subsidiary;
(i v) all corporate records, agreements, seals, and any
other information reasonably requested by GeoVax's representatives
with respect to Dauphin; and
(v) such other documents as GeoVax and/or the GeoVax
Shareholders may reasonably request in connection with the
transactions contemplated hereby.
(b) At the Closing, Dauphin shall have no less than $13,000,000 in
net cash proceeds, free and clear of any Encumbrance, resulting from a private
placement of Dauphin's common stock, occurring at, or prior to, the Closing.
Dauphin shall provide GeoVax with a bank statement reasonably satisfactory to
GeoVax showing such proceeds in a bank account in Dauphin's name. In addition,
Dauphin shall provide GeoVax with new signature cards provided by the bank where
such funds are deposited naming one or more designees of GeoVax to be the new
signatories with full power of disposition of such account from and after the
Closing.
(c) Prior to the mailing of the Information Statement to Dauphin's
shareholders in accordance with Regulation 14C under the Exchange Act, Dauphin
will have filed any Delinquent SEC Reports as requested by the SEC in any
written comments to the Information Statement, and will have responded to and
fully resolved to the SEC's satisfaction any written comments to the Information
Statement, and prior to the Closing Dauphin will have filed all the Delinquent
SEC Reports and the 2005 10-K, and shall have responded to and fully resolved to
the SEC's satisfaction any written comments to such reports made by the SEC
prior to the Closing.
(d) Dauphin's board of directors and shareholders shall have duly
adopted and approved an equity incentive plan in form and substance acceptable
to GeoVax.
31
(e) Dauphin shall have performed and complied, in all material
respects, with the covenants and agreements contained in this Agreement required
to be performed by it at or prior to the Closing, and GeoVax shall have received
a certificate to that effect from an officer of Dauphin, dated the Closing Date;
(f) The representations and warranties of Dauphin set forth in
this Agreement shall be true and correct in all material respects when made and
as of the Closing Date with the same effect as though made at and as of the
Closing Date, and GeoVax shall have received a certificate to that effect from
an officer of Dauphin, dated the Closing Date;
(g) No Material Adverse Effect relating to the business or
financial condition of Dauphin shall have occurred after the date of this
Agreement or prior to the Closing;
(h) GeoVax shall have received from Dauphin such further executed
instruments and documents as are reasonably required to carry out the
transactions contemplated by, and to evidence the fulfillment of, the conditions
contained in this Agreement, and the performance by Dauphin of all conditions
for the consummation of such transactions; and
(i) No party hereto shall be subject to any Order of a
Governmental Body that prevents or delays any of the transactions contemplated
by this Agreement, and no Proceeding shall be threatened in writing or pending
before any Governmental Body.
(j) The holders of all outstanding convertible promissory notes of
Dauphin shall have delivered to Dauphin irrevocable conversion notices, together
with all original executed notes, or affidavits of lost notes in form and
substance acceptable to GeoVax, and Dauphin shall have duly converted all such
notes to common stock in accordance with the terms and conditions of such notes.
(k) Dauphin shall have filed with the appropriate Governmental
Body each Tax Return required to be filed by it prior to the Closing, including,
without limitation, those specified in Part 5.17 of Dauphin's Disclosure
Schedule.
6.2 Conditions to the Obligations of Dauphin . The obligations of
Dauphin to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment, as reasonably determined by Dauphin, or, at the sole
election of Dauphin, the waiver, at or prior to the Closing, of the following
conditions:
(a) At the Closing, GeoVax shall have delivered or caused to be
delivered to Dauphin the following:
(i) resolutions duly adopted by the GeoVax Board of
Directors and the holders of a majority of the issued and
outstanding shares of GeoVax common stock authorizing and
approving the Merger and the execution, delivery, and performance
of this Agreement;
32
(ii) a certificate of good standing for GeoVax, from its
respective jurisdiction of incorporation, dated not earlier than
five days prior to the Closing Date;
(b) GeoVax shall have performed and complied in all material
respects with the covenants and agreements contained in this Agreement required
to be performed by GeoVax at, or prior to, the Closing, and Dauphin shall have
received a certificate to that effect from an officer of the Company, dated the
Closing Date;
(c) There shall be no dissenting GeoVax Shareholder.
(d) GeoVax shall have delivered all GeoVax financial statements and pro
forma financial statements required to be filed with the SEC as part of the
post-Merger Form 8-K;
(e) The representations and warranties of GeoVax set forth in this
Agreement shall be true and correct in all material respects when made, and as
of the Closing Date, with the same effect as though made at, and as of, the
Closing Date, and Dauphin shall have received a certificate to that effect from
an officer of GeoVax, dated the Closing Date;
(f) No Material Adverse Effect relating to GeoVax's business or
financial condition shall have occurred after the date of this Agreement or
prior to the Closing;
(g) Dauphin shall have received from GeoVax such further instruments
and documents as are reasonably required to carry out the transactions
contemplated by, and to evidence the fulfillment of, the agreements contained in
this Agreement, and the performance of all conditions for the consummation of
such transactions; and
(h) No party hereto shall be subject to any Order of a Governmental
Body that would prevent or delay any of the transactions contemplated by this
Agreement, and no Proceeding shall be threatened in writing or pending before
any Governmental Body.
ARTICLE VII
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties made by Dauphin and GeoVax
(including the representations and warranties set forth in Sections 4 and 5 and
the representations and warranties set forth in any certificate delivered at
Closing by an officer of GeoVax and Dauphin) shall not survive the Closing. For
purposes of this Agreement, each statement or other item of information set
forth in a Party's Disclosure Schedule shall be deemed to be a part of the
representations and warranties made by such Party in this Agreement.
33
ARTICLE VIII
TERMINATION
8.1 Events of Termination . This Agreement may, by notice given in the
manner hereinafter provided, be terminated and abandoned at any time prior to
completion of the Closing, as follows:
(a) by GeoVax if (1) there has been a material Breach by Dauphin
and, in the case of a covenant or agreement Breach, such Breach shall not have
been cured within ten (10) days after receipt by Dauphin of notice specifying
particularly such Breach, (2) if GeoVax identifies hereafter any fact,
circumstance or event that could be reasonably determined to have a Material
Adverse Effect on Dauphin and such fact, circumstance or event is not cured by
Dauphin within ten (10) days after receipt by Dauphin of notice specifying
particularly such fact, event or circumstance, or (3) if the Closing Conditions
have not been satisfied by the close of business on June 30, 2006;
(b) by Dauphin (1) if there has been a material Breach by GeoVax
and, in the case of a covenant or agreement Breach, such Breach shall not have
been cured within ten (10) days after receipt by GeoVax of notice specifying
particularly such Breach, or (2) if Dauphin identifies hereafter any fact,
circumstance or event that could be reasonably determined to have a Material
Adverse Effect on GeoVax, or Dauphin following the Merger, and such fact,
circumstance or event is not cured by GeoVax within ten (10) days after receipt
by GeoVax of notice specifying particularly such fact, event or circumstance, or
(3) if the Closing Conditions have not been satisfied by the close of business
on June 30, 2006; or
(c) at any time by mutual written agreement of GeoVax and Dauphin.
This Agreement may not be terminated after completion of the
Closing, except by mutual agreement of GeoVax and Dauphin.
ARTICLE IX
MISCELLANEOUS
9.1 Severability . If any provision of this Agreement is declared
by any court or other Governmental Body to be null, void, or unenforceable, this
Agreement shall be construed so that the provision at issue shall survive to the
extent it is not so declared null, void, or unenforceable and all of the other
provisions of this Agreement shall remain in full force and effect.
34
9.2 Entire Agreement . This Agreement, together with all exhibits
and schedules hereto attached, constitutes the entire agreement among the
Parties pertaining to the subject matter hereof and completely supersedes all
prior or contemporaneous agreements, understandings, arrangements, commitments,
negotiations, and discussions of the Parties, whether oral or written, all of
which shall have no substantive significance or evidentiary effect. Each Party
acknowledges, represents, and warrants that it has not relied on any
representation, agreement, understanding, arrangement, or commitment that has
not been expressly set forth in this Agreement. Each Party acknowledges,
represents and warrants that this Agreement is fully integrated and parol
evidence is needed to reflect the intentions of the Parties. The Parties
specifically intend that the literal words of this Agreement shall, alone,
conclusively determine all questions concerning the Parties' intent.
9.3 Corporate Affairs . Each Party will make every reasonable
effort to keep confidential any information obtained by them concerning the
other Party, including its internal organization, finances, procedures, and
customers. Neither Party will make any public announcement, or release any
publicity regarding the other Party, other than routine oral communications with
analysts, shareholders, and prospective investors without the prior written
consent (which shall not be unreasonably withheld or delayed) of the Party being
named, unless, in the good faith opinion of counsel to the party contemplating
such disclosure, such disclosure is required by law and time does not permit the
party to obtain such consent, or such disclosure may otherwise be necessary in
connection with the filing of Tax Returns, or claims for refunds, or in
conducting a Tax audit or other proceedings. This Section 9.3 shall survive the
termination of this Agreement. Notwithstanding anything herein to the contrary,
any Party (and any employee, representative, or other agent of such Party) may
disclose to any and all persons, without limitation of any kind, the tax
treatment and tax structure of the transactions contemplated by this Agreement
and all materials of any kind (including opinions or other tax analyses) that
are provided to it relating to such tax treatment and tax structure. For this
purpose, tax treatment and tax structure shall not include the identity of any
existing or future Party (or any affiliate of such Party) to this Agreement.
9.4 Notices . Unless otherwise expressly provided herein, all
notices, requests, demands, instructions, documents, and other communications to
be given hereunder by either Party to the other shall be in writing, shall be
sent to the address/fax number set forth below (provided that any Party may at
any time change its address for notice or other such information by giving
written notice thereof in accordance with this Section), and shall be deemed to
be duly given upon the earliest of (a) hand delivery, or (b) the first business
day after sending by reputable overnight delivery service for next-day delivery.
If to GeoVax:
Donald G. Hildebrand
GeoVax, Inc.
1256 Briarcliff Road
Atlanta, GA 30306
35
with a copy to:
Richardson & Patel, LLP
10900 Wilshire Blvd., Suite 500
Los Angeles, CA 90024
Attn: Kevin Friedmann
Fax: (310) 208-1154
If to Dauphin:
Andrew J. Kandalepas
Dauphin Technology, Inc.
1014 East Algonquin Road, Suite 111
Schaumburg, IL 60667
with a copy to:
Cohne Rappaport & Segal Rieck & Crotty
257 East 200 South, Suite 700 55 West Monroe St., Suite 3390
Salt Lake City, Utah 84111 Chicago, IL 60603
Attn: A. O. Headman, Jr. Attn: Ronald Duplack
Fax No: (801) 355-1813 Fax: (312) 726-0647
9.5 Amendments; Waivers . This Agreement may not be amended or
modified unless such amendment or modification is in writing and signed by all
of the Parties to this Agreement. The terms, covenants, representations,
warranties, or conditions of this Agreement may only be waived in writing. Any
waiver of any condition, or of the Breach of any provision, term, covenant,
representation, or warranty contained in this Agreement, in any one or more
instances, shall not be deemed to be or construed as a further or continuing
waiver of any condition, or of the breach of any other provision, term,
covenant, representation, or warranty of this Agreement.
9.6 Successors and Assigns . The rights and obligations under this
Agreement may not be assigned or delegated unless in writing executed by the
Parties hereto, and any attempted assignment or delegation without such prior
written consent shall be void and of no force or effect. This Agreement shall
inure to the benefit of, and shall be binding upon, the successors and permitted
assigns of the Parties to this Agreement.
36
9.7 Governing Law; Submission to Jurisdiction . This Agreement and
all transactions contemplated hereby shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, and shall be
treated in all respects as a State of Illinois contract, without regard to any
state's laws related to choice or conflict of laws. The Parties irrevocably
agree and consent to the jurisdiction of the courts of the States of Illinois
and the federal courts of the United States sitting in such state for the
adjudication of any matters arising under, or in connection with, this Agreement
..
9.8 WAIVER OF JURY TRIAL . THE PARTIES HEREBY IRREVOCABILITY WAIVE
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION, PROCEEDING, CLAIM, OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, ARISING OUT OF, OR RELATING TO, THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
9.9 Subsequent Documentation . At any time, and from time to time
after the Closing Date, each of the Parties to this Agreement shall use its best
efforts to take such action as may be necessary, or as may be reasonably
requested by another Party to this Agreement, to carry out and consummate the
transactions contemplated by this Agreement.
9.10 Counterparts . This Agreement may be executed in any number
of counterparts and by different Parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
Delivery of an executed counterpart of this Agreement by telefacsimile shall be
equally as effective as delivery of an original executed counterpart of this
Agreement. Any Party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver an original executed counterpart of this
Agreement, but the failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.
9.11 Interpretation . In this Agreement, unless a clear contrary
intention appears:
(a) the singular number includes the plural number and vice versa;
(b) reference to any Person includes such Person's successors and
assigns, but, if applicable, only if such successors and assigns are not
prohibited by this Agreement, and reference to a Person in a particular capacity
excludes such Person in any other capacity or individually;
(c) reference to gender does not exclude the other gender;
(d) reference to any agreement, document, or instrument means such
agreement, document, or instrument as amended or modified and in effect from
time to time in accordance with the terms thereof;
37
(e) reference to any Legal Requirement means such Legal
Requirement as amended, modified, codified, replaced, or reenacted, in whole or
in part, and in effect from time to time, including rules and regulations
promulgated thereunder, and reference to any section or other provision of any
Legal Requirement means that provision of such Legal Requirement from time to
time in effect and constituting the substantive amendment, modification,
codification, replacement, or reenactment of such section or other provision;
(f) "hereunder," "hereof," "hereto," and words of similar import
shall be deemed references to this Agreement as a whole and not to any
particular Article, Section, or other provision hereof;
(g) "including" (and with correlative meaning "include") means
including without limiting the generality of any description preceding such
term;
(h) "or" is used in the inclusive sense of "and/or";
(i) with respect to the determination of any period of time,
"from" means "from and including" and "to" means "to but excluding"; and
(j) references to documents, instruments, or agreements shall be
deemed to refer as well to all addenda, exhibits, schedules, or amendments
thereto.
IN WITNESS WHEREOF, Dauphin and GeoVax have executed, or caused to be
executed by their duly authorized representatives, this Agreement as of the date
first above written.
DAUPHIN TECHNOLOGY, INC., GEOVAX, INC.,
An Illinois corporation A Georgia corporation
By: /s/ Andrew J. Kandalepas, President By: /s/ Donald G. Hildebrand, CEO
GEOVAX ACQUISITION CORP.,
A Georgia corporation
By: /s/ Andrew J. Kandalepas, President
38
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger ("Amendment") is
dated June 29, 2006 by and among Dauphin Technology, Inc., an Illinois
corporation ("Dauphin"), GeoVax Acquisition Corp., a Georgia corporation and
wholly-owned subsidiary of Dauphin ("Merger Subsidiary"), and GeoVax, Inc., a
Georgia corporation ("GeoVax").
WHEREAS, the parties to this Amendment entered into a certain Agreement
and Plan of Merger dated January 20, 2006 ("Merger Agreement"); and
WHEREAS, the parties to this Amendment desire to amend the Merger
Agreement as hereinafter provided;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment agree as follows:
1. All capitalized terms not defined herein shall have the respective
meanings assigned to them in the Merger Agreement.
2. Section 1.4 (e) is hereby modified to read as follows:
"(e) Immediately prior to Closing, Dauphin will have no more than
243,000,000 shares of Dauphin common stock outstanding. Immediately
prior to the Closing, Dauphin will have Dauphin Convertible Securities
issued and outstanding in an amount not greater than the amount set
forth on Schedule 1.10. Immediately after the Closing, there will be
approximately 733,332,879 shares of Dauphin Stock issued and
outstanding, not including any shares issued in connection with the
GeoVax's Convertible Securities or the Dauphin Convertible Securities."
3. Section 1.10 is hereby modified to read as follows:
"1.10 Dauphin Securities and Dauphin Convertible Securities.
Schedule 1.10 attached hereto describes all Dauphin securities, debts
and other interests that are to be converted into Dauphin Common Stock
prior to or at the Closing. Schedule 1.10 also describes all Dauphin
stock purchase warrants (the "Dauphin Convertible Securities") that
will not be converted prior to Closing but that will remain issued and
outstanding according to their current terms and conditions.
Notwithstanding anything else contained herein to the contrary, at
the time of Closing, exclusive of any Dauphin securities to be issued
in the Merger, the number of shares of Dauphin Common Stock shall not
exceed 243,000,000 and the number of Dauphin Convertible Securities
shall not exceed the amount set forth in Schedule 1.10."
4. Schedule 1.10 is deleted and replaced with the attached Schedule
1.10.
5. Section 6.1 (b) is hereby modified to read as follows:
"(b) As a condition to the execution of this Amendment, Dauphin
shall pay to GeoVax no less than $2,000,000 in net cash proceeds, free
and clear of any Encumbrance, resulting from a private placement of
Dauphin's common stock or convertible notes, occurring at, or prior to,
the Closing, as a non-refundable deposit in furtherance of the Closing
of the transaction described herein and in satisfaction of the
condition to raise any additional net cash proceeds from such private
placement. Notwithstanding the foregoing, Dauphin shall use its best
efforts to raise an additional $11,000,000 in net cash proceeds, free
and clear of any Encumbrance, resulting from a private placement of
Dauphin's common stock or convertible notes, occurring at, or prior to,
or within ninety (90) days following the Closing. At any time at, or
within ninety (90) days following the Closing, Dauphin shall provide
GeoVax with new signature cards provided by the bank where any such
additional funds are deposited naming one or more designees of GeoVax
to be the new signatories with full power of disposition of such
account from and after the Closing."
6. Section 8.1 (a) (3) is modified to read as follows:
"(3) if the Closing Conditions have not been satisfied by the
close of business on September 1, 2006;"
7. Section 8.1 (b) (3) is modified to read as follows:
"(3) if the Closing Conditions have not been satisfied by the
close of business on September 1, 2006;"
8. This Amendment shall be effective upon GeoVax's receipt of the
payment referenced in Section 5 hereof. Except as amended hereby, the Merger
Agreement shall continue in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date set forth above.
Dauphin Technology, Inc., GeoVax, Inc.,
an Illinois corporation a Georgia corporation
By: /s/ Andrew J. Kandalepas
----------------------------
President and Chief
Executive Officer
By: /s/ Donald Hildebrand
----------------------
President and Chief Executive
Officer
GeoVax Acquisition Corp.,
a Georgia corporation
By: /s/ Andrew J. Kandalepas
----------------------------
President and Chief Executive Officer
Annex B Articles of Amendment to Articles of Incorporation
-----------------------------------------------------------
FORM BCA 10.30 (rev. Dec. 2003)
ARTICLES OF AMENDMENT
Business Corporation Act
Secretary of State
Department of Business Services
Springfield, IL 62756
217-782-1832
www.cyberdriveillinois.com
Remit payment in the form of a
check or money order payable
to Secretary of State.
_________________File# 5636-672-5 Filing Fee: $50 Approved:________
-Submit in duplicate---Type or Print clearly in black ink--
Do not write above this line--
1. Corporate Name (see Note 1 on page 4.): Dauphin Technology, Inc.
2. Manner of Adoption of Amendment: The following amendment to the
Articles of Incorporation was adopted on 2006 in the manner indicated
below.
Mark and "X" in one box only.
[] By a majority of the incorporators, provided no directors were
named in the Articles of Incorporation and no directors have been
elected. (See Note 2 on page 4.)
[] By a majority of the board of directors, in accordance with
Section 10.10, the Corporation having issued no shares as of time
of adoption of this amendment. (See Note 2 on page 4.)
[] By a majority of the board of directors, in accordance with
Section 10.15, shares having been issued but shareholder action
not being required for the adoption of the amendment. (See Note 3
on page 4.)
[] By the shareholders, in accordance with Section 10.20, a
resolution of the board of directors having been duly adopted and
submitted to the shareholders. At a meeting of shareholders, not
less than the minimum number of votes required by statute and by
the articles of incorporation were voted in favor of the
amendment. (See Note 4 on page 4.)
[X] By shareholders, in accordance with Sections 10.20 and 7.10, a
resolution of the board of directors having been duly adopted and
submitted to the shareholders. Consent in writing has been signed
by shareholders having not less than the minimum number of votes
required by statute and by the articles of Incorporation.
Shareholders who have not consented in writing have been given
notice in accordance with Section 7.10. (See Notes 4 and 5 on Page
4).
[] By the shareholders, in accordance with Section 10.20, a
resolution of the board of directors having been duly adopted and
submitted to the shareholders. A consent in writing has been
signed by all the shareholders entitled to vote on this amendment.
(See Note 5 on page 4.)
3. Text of Amendment:
a. When amendment effects a name change, insert the New Corporate
Name below. Use page 2 for all other amendments.
Article I: Name of the Corporation: GeoVax Labs, Inc.
-----------------
New Name
Text of Amendment
b. If amendment affects the corporate purpose, the amended purpose is
required to be set forth in its entirety.
The number of authorized shares of $0.001 par value common stock is
850,000,000 shares.
4. The manner, if not set forth in Article 3b, in which any exchange,
reclassification or cancellation of issued shares, or a reduction of
the number of authorized shares of any class below the number of issued
shares of that class, provided for or effected by this amendment, is as
follows (if not applicable, insert "No change"):
5. a. The manner, if not set forth in Article 3b, in which said
amendment effects a change in the amount of paid-in capital is as
follows (if not applicable, insert "No change"): (Paid-in capital
replaces the terms Stated Capital and Paid-in Surplus and is equal
to the total of these accounts.)
b. The amount of paid-in capital as changed by this amendment is as
follows) if not applicable, insert "No change"): (Paid-in Capital
replaces the terms Stated Capital and Paid-in Surplus and is equal
to the total of these accounts.) (See Note 6 on page 4.)
Before Amendment After Amendment
Paid-in capital: $ 65,117,942 $ 65,117,942
------------ ------------
Complete either item 6 or item 7 below. All signatures must be in BLACK INK.
2
6. The undersigned Corporation has caused this statement to be signed by a
duly authorized officer who affirms, under penalties of perjury, the
facts stated herein are true and correct.
Dated: 2006 Dauphin Technology, Inc.
---- -------------------------
Month & Day Year Exact Name of Corporation
__________________________________
Any Authorized Officer's Signature
Andrew J. Kandalepas, CEO
-------------------------
Name and Title (type or print)
7. If amendment is authorized pursuant to Section 10.10 by the
incorporators, the incorporators must sign below, and type or print
name and title.
OR
If amendment is authorized by the directors pursuant to Section 10.10
and there are no officers, a majority of the directors, or such
directors as may be designated by the board, must sign below, and type
or print name and title.
The undersigned affirms, under penalties of perjury, that the facts
stated herein are true and correct.
Dated _________________, ______
Month & Day Year
________________________________ ____________________________
________________________________ ____________________________
________________________________ ____________________________
________________________________ ____________________________
3
NOTES AND INSTRUCTIONS
1. State the true and exact corporate name as it appears on the records of
the Office of the Secretary of State BEFORE any amendments herein
reported.
2. Incorporators are permitted to adopt amendments ONLY before any shares
have been issued and before any directors have been named or elected.
(ss.10.10)
3. Directors may adopt amendments without shareholder approval in only
seven instances, as follows:
a. To remove the names and addresses of directors named in the
Articles of Incorporation.
b. To remove the name and address of the initial registered agent and
registered office, provided a statement pursuant to 5.10 is also
filed
c. To increase, decrease, create or eliminate the par value of the
shares of any class, so long as no class or series of shares is
adversely affected.
d. To split the issued whole shares and unissued authorization shares
by multiplying them by a whole number, so long as no class or
series is adversely affected thereby.
e. To change the corporate name by substituting the word
"corporation", "incorporated", "company", "limited" or the
abbreviation "corp.," "inc.," "co.," or "ltd." For a similar word
or abbreviation in the name, or by adding a geographical
attribution to the name.
f. To reduce the authorized shares of any class pursuant to a
cancellation statement filed in accordance with 9.05.
g. To reinstate the Articles of Incorporation as currently amended.
(ss.10.15)
4. All amendments not adopted under 10.10 or 10.15 require (1) that the
board of directors adopt a resolution setting forth the proposed
amendment and (2) that the shareholders approve the amendment.
Shareholder approval may be (1) by vote at a shareholders' meeting
9either annual or special) or (2) by consent, in writing, without a
meeting.
To be adopted, the amendment must receive the affirmative vote or
consent of the holders of at least two-thirds of the outstanding shares
entitled to vote on the amendment (but if class voting applies, then
also at least a two-thirds vote within each class is required).
The Articles of incorporation may supersede the two-thirds vote
requirement by specifying any smaller or larger vote requirement not
less than a majority of the outstanding shares entitled to vote and not
less than a majority within each class when class voting applies.
(ss.10.20)
4
5. When shareholder approval is by consent, all shareholders must be
given notice of the proposed amendment at least five days before the
consent is signed. If the amendment is adopted, shareholders who have
not signed the consent must be promptly notified of the passage of the
amendment. (ss.7.10 & 10.20)
6. In the event of an increase in paid-in capital, the corporation must
pay all applicable franchise taxes, penalties and interest before this
document can be accepted for filing.
5
Annex C 2006 Equity Incentive Plan
----------------------------------
GEOVAX LABS, INC.
(formerly Dauphin Technology, Inc.)
2006 STOCK PLAN
As Adopted January 20, 2006
This Plan will become effective only upon the closing of
the reverse merger transaction between Dauphin Technology, Inc.
and GeoVax, Inc. contemplated by that certain Agreement
and Plan of Merger, dated as of January 20, 2006, as amended.
1. PURPOSE.
The purpose of this Plan is to provide incentives to attract, retain
and motivate eligible persons whose present and potential contributions are
important to the success of the Company, and its Parent and Subsidiaries (if
any), by offering them an opportunity to participate in the Company's future
performance through awards of Options, the right to purchase Common Stock and
Stock Bonuses. Capitalized terms not defined in the text are defined in Section
2.
2. DEFINITIONS.
As used in this Plan, the following terms will have the following
meanings:
"AWARD" means any award under this Plan, including any Option, Stock
Award or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed written
agreement between the Company and the Participant setting forth the terms and
conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means any cause, as defined by applicable law, for the
termination of a Participant's employment with the Company or a Parent or
Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" means GeoVax Labs, Inc. (formerly Dauphin Technology, Inc.),
an Illinois corporation, or any successor corporation.
"COMMITTEE" means that committee appointed by the Board of Directors to
administer and interpret the Plan as more particularly described in Section 5 of
the Plan; provided, however, that the term Committee will refer to the Board of
Directors during such times as no Committee is appointed by the Board of
Directors.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
1
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is publicly traded and is then listed on
a national securities exchange, its closing price on the date of
determination on the principal national securities exchange on which
the Common Stock is listed or admitted to trading;
(b) if such Common Stock is quoted on the NASDAQ National Market
or the NASDAQ SmallCap Market, its closing price on the NASDAQ National
Market or the NASDAQ SmallCap Market, respectively, on the date of
determination;
(c) if neither of the foregoing is applicable, by the Committee in
good faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 6.
"PARENT" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PERFORMANCE FACTORS" means the factors selected by the Committee, in
its sole and absolute discretion, from among the following measures to determine
whether the performance goals applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return
growth;
(g) Return on equity;
(h) Operating cash flow return on income;
2
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual business objectives.
"PERFORMANCE PERIOD" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Stock Awards or Stock Bonuses, if such Awards
are restricted.
"PLAN" means this GeoVax Labs, Inc. 2006 Stock Plan, as amended from
time to time.
"PURCHASE PRICE" means the price at which the Participant of a Stock
Award may purchase the Shares.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 3 and 19, and any
successor security.
"STOCK AWARD" means an award of Shares pursuant to Section 7.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 8.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Company, provided that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to a
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
3. SHARES SUBJECT TO THE PLAN.
3
3.1 Number of Shares Available. Subject to Sections 3.2 and 19, the
total aggregate number of Shares reserved and available for grant and issuance
pursuant to this Plan, shall be 36,000,000 Shares and will include Shares that
are subject to: (a) issuance upon exercise of an Option but cease to be subject
to such Option for any reason other than exercise of such Option; (b) an Award
granted hereunder but forfeited or repurchased by the Company at the original
issue price; and (c) an Award that otherwise terminates without Shares being
issued. At all times the Company shall reserve and keep available a sufficient
number of Shares as shall be required to satisfy the requirements of all
outstanding Options granted under this Plan and all other outstanding but
unvested Awards granted under this Plan.
3.2 Adjustment of Shares. In the event that the number of outstanding
shares is changed by a stock dividend, recapitalization, stock split, reverse
stock split, subdivision, combination, reclassification or similar change in the
capital structure of the Company without consideration, then (a) the number of
Shares reserved for issuance under this Plan, (b) the Exercise Prices of and
number of Shares subject to outstanding Options, and (c) the number of Shares
subject to other outstanding Awards will be proportionately adjusted, subject to
any required action by the Board or the stockholders of the Company and
compliance with applicable securities laws; provided, however, that fractions of
a Share will not be issued but will either be replaced by a cash payment equal
to the Fair Market Value of such fraction of a Share or will be rounded up to
the nearest whole Share, as determined by the Committee.
4. ELIGIBILITY.
ISOs (as defined in Section 6 below) may be granted only to employees
(including officers and directors who are also employees) of the Company or of a
Parent or Subsidiary of the Company. All other Awards may be granted to
employees, officers, directors, consultants, independent contractors and
advisors of the Company or any Parent or Subsidiary of the Company, provided
such consultants, independent contractors and advisors render bona-fide services
not in connection with the offer and sale of securities in a capital-raising
transaction or promotion of the Company's securities. A person may be granted
more than one Award under this Plan.
5. ADMINISTRATION.
5.1 Committee.
(a) The Plan shall be administered and interpreted by a committee
consisting of two (2) or more members of the Board.
(b) Members of the Committee may resign at any time by delivering
written notice to the Board. The Board shall fill vacancies in the
Committee. The Committee shall act by a majority of its members in
office. The Committee may act either by vote at a meeting or by a
memorandum or other written instrument signed by a majority of the
Committee.
(c) If the Board, in its discretion, does not appoint a Committee,
the Board itself will administer and interpret the Plan and take such
other actions as the Committee is authorized to take hereunder;
provided that the Board may take such actions hereunder in the same
manner as the Board may take other actions under the Certificate of
Incorporation and bylaws of the Company generally.
4
5.2 Committee Authority. Without limitation, the Committee will have
the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject
to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or as alternatives
to, other Awards under this Plan or any other incentive or compensation
plan of the Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
5.3 Committee Discretion. Any determination made by the Committee with
respect to any Award will be made at the time of grant of the Award or, unless
in contravention of any express term of this Plan or Award, at any later time,
and such determination will be final and binding on the Company and on all
persons having an interest in any Award under this Plan. The Committee may
delegate to one or more officers of the Company the authority to grant an Award
under this Plan to Participants who are not Insiders of the Company. No member
of the Committee shall be personally liable for any action taken or decision
made in good faith relating to this Plan, and all members of the Committee shall
be fully protected and indemnified to the fullest extent permitted under
applicable law by the Company in respect to any such action, determination, or
interpretation.
6. OPTIONS.
The Committee may grant Options to eligible persons and will determine
whether such Options will be Incentive Stock Options within the meaning of the
Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number of Shares
subject to the Option, the Exercise Price of the Option, the period during which
the Option may be exercised, and all other terms and conditions of the Option,
subject to the following:
5
6.1 Form of Option Grant. Each Option granted under this Plan will be
evidenced by an Award Agreement which will expressly identify the Option as an
ISO or an NQSO (hereinafter referred to as the "Stock Option Agreement"), and
will be in such form and contain such provisions (which need not be the same for
each Participant) as the Committee may from time to time approve, and which will
comply with and be subject to the terms and conditions of this Plan.
6.2 Date of Grant. The date of grant of an Option will be the date on
which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
6.3 Exercise Period. Options may be exercisable within the times or
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("Ten Percent Stockholder") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines, provided, however, that in all events a Participant will be entitled
to exercise an Option at the rate of at least 20% per year over five years from
the date of grant, subject to reasonable conditions such as continued
employment; and further provided that an Option granted to a Participant who is
an officer or director may become fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company.
6.4 Exercise Price. The Exercise Price of an Option will be determined
by the Committee when the Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided that: (a) the
Exercise Price of an ISO will be not less than 100% of the Fair Market Value of
the Shares on the date of grant; and (b) the Exercise Price of any Option
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 9 of this Plan.
6.5 Method of Exercise. Options may be exercised only by delivery to
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee, (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding the Participant's
investment intent and access to information and other matters, if any, as may be
required or desirable by the Company to comply with applicable securities laws,
together with payment in full of the Exercise Price for the number of Shares
being purchased.
6.6 Termination. Notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option will always be subject to the
following:
6
(a) If the Participant's service is Terminated for any reason except
death or Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been exercisable upon
the Termination Date no later than three (3) months after the Termination Date
(or such longer time period not exceeding five (5) years as may be determined by
the Committee, with any exercise beyond three (3) months after the Termination
Date deemed to be an NQSO).
(b) If the Participant's service is Terminated because of the
Participant's death or Disability (or the Participant dies within three (3)
months after a Termination other than for Cause or because of Participant's
Disability), then the Participant's Options may be exercised only to the extent
that such Options would have been exercisable by the Participant on the
Termination Date and must be exercised by the Participant (or the Participant's
legal representative) no later than twelve (12) months after the Termination
Date (or such longer time period not exceeding five (5) years as may be
determined by the Committee, with any such exercise beyond (i) three (3) months
after the Termination Date when the Termination is for any reason other than the
Participant's death or Disability, or (ii) twelve (12) months after the
Termination Date when the Termination is for Participant's death or Disability,
deemed to be an NQSO).
(c) Notwithstanding the provisions in paragraph 6.6(a) above, if the
Participant's service is Terminated for Cause, neither the Participant, the
Participant's estate nor such other person who may then hold the Option shall be
entitled to exercise any Option with respect to any Shares whatsoever, after
Termination, whether or not after Termination the Participant may receive
payment from the Company or a Subsidiary for vacation pay, for services rendered
prior to Termination, for services rendered for the day on which Termination
occurs, for salary in lieu of notice, or for any other benefits. For the purpose
of this paragraph, Termination shall be deemed to occur on the date when the
Company dispatches notice or advice to the Participant that his service is
Terminated.
6.7 Limitations on Exercise. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent the Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
6.8 Limitations on ISO. The aggregate Fair Market Value (determined as
of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
6.9 Modification, Extension or Renewal. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefore, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
7
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 6.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
6.10 No Disqualification. Notwithstanding any other provision in this
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
7. STOCK AWARD.
A Stock Award is an offer by the Company to sell to an eligible person
Shares that may or may not be subject to restrictions. The Committee will
determine to whom an offer will be made, the number of Shares the person may
purchase, the price to be paid (the "Purchase Price"), the restrictions to which
the Shares will be subject, if any, and all other terms and conditions of the
Stock Award, subject to the following:
7.1 Form of Stock Award. All purchases under a Stock Award made
pursuant to this Plan will be evidenced by an Award Agreement (the "Stock
Purchase Agreement") that will be in such form (which need not be the same for
each Participant) as the Committee will from time to time approve, and will
comply with and be subject to the terms and conditions of this Plan. The offer
of a Stock Award will be accepted by the Participant's execution and delivery of
the Stock Purchase Agreement and payment for the Shares to the Company in
accordance with the Stock Purchase Agreement.
7.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
Stock Award will be determined by the Committee on the date the Stock Award is
granted and may not be less than 85% of the Fair Market Value of the Shares on
the grant date, except in the case of a sale to a Ten Percent Stockholder, in
which case the Purchase Price will be 100% of the Fair Market Value. Payment of
the Purchase Price must be made in accordance with Section 9 of this Plan.
7.3 Terms of Stock Awards. Stock Awards may be subject to such
restrictions as the Committee may impose. These restrictions may be based upon
completion of a specified number of years of service with the Company or upon
completion of the performance goals as set out in advance in the Participant's
individual Stock Purchase Agreement. Stock Awards may vary from Participant to
Participant and between groups of Participants. Prior to the grant of a Stock
Award subject to restrictions, the Committee shall: (a) determine the nature,
length and starting date of any Performance Period for the Stock Award; (b)
select from among the Performance Factors to be used to measure performance
goals, if any; and (c) determine the number of Shares that may be awarded to the
Participant. Prior to the transfer of any Stock Award, the Committee shall
determine the extent to which such Stock Award has been earned. Performance
Periods may overlap and Participants may participate simultaneously with respect
to Stock Awards that are subject to different Performance Periods and have
different performance goals and other criteria.
7.4 Termination During Performance Period. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
8
to the Stock Award only to the extent earned as of the date of Termination in
accordance with the Stock Purchase Agreement, unless the Committee determines
otherwise.
8. STOCK BONUSES.
8.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares for
extraordinary services rendered to the Company or any Parent or Subsidiary of
the Company. A Stock Bonus will be awarded pursuant to an Award Agreement (the
"Stock Bonus Agreement") that will be in such form (which need not be the same
for each Participant) as the Committee will from time to time approve, and will
comply with and be subject to the terms and conditions of this Plan. A Stock
Bonus may be awarded upon satisfaction of such performance goals as are set out
in advance in the Participant's individual Award Agreement (the "Performance
Stock Bonus Agreement") that will be in such form (which need not be the same
for each Participant) as the Committee will from time to time approve, and will
comply with and be subject to the terms and conditions of this Plan. Stock
Bonuses may vary from Participant to Participant and between groups of
Participants, and may be based upon the achievement of the Company, Parent or
Subsidiary and/or individual performance factors or upon such other criteria as
the Committee may determine.
8.2 Terms of Stock Bonuses. The Committee will determine the number of
Shares to be awarded to the Participant. If the Stock Bonus is being earned upon
the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant. Prior
to the payment of any Stock Bonus, the Committee shall determine the extent to
which such Stock Bonuses have been earned. Performance Periods may overlap and
Participants may participate simultaneously with respect to Stock Bonuses that
are subject to different Performance Periods and different performance goals and
other criteria. The number of Shares may be fixed or may vary in accordance with
such performance goals and criteria as may be determined by the Committee. The
Committee may adjust the performance goals applicable to the Stock Bonuses to
take into account changes in law and accounting or tax rules and to make such
adjustments as the Committee deems necessary or appropriate to reflect the
impact of extraordinary or unusual items, events or circumstances to avoid
windfalls or hardships.
8.3 Form of Payment. The earned portion of a Stock Bonus may be paid to
the Participant by the Company either currently or on a deferred basis, with
such interest or dividend equivalent, if any, as the Committee may determine.
Payment of an interest or dividend equivalent (if any) may be made in the form
of cash or whole Shares or a combination thereof, either in a lump sum payment
or in installments, all as the Committee will determine.
9. PAYMENT FOR SHARE PURCHASES.
Payment for Shares purchased pursuant to this Plan may be made in cash
(by check) or, where expressly approved for the Participant by the Committee and
where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by the
Participant for more than six (6) months and have been paid for within the
meaning of SEC Rule 144; or (2) were obtained by the Participant in the public
market;
9
(c) by waiver of compensation due or accrued to the Participant for
services rendered;
(d) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and
a broker-dealer that is a member of the National Association of
Securities Dealers (an "NASD Dealer") whereby the Participant
irrevocably elects to exercise the Option and to sell a portion of the
Shares so purchased to pay for the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD
Dealer whereby the Participant irrevocably elects to exercise the
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(f) by any combination of the foregoing.
10. WITHHOLDING TAXES.
10.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
10.2 Stock Withholding. When, under applicable tax laws, a participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay the
Company the amount required to be withheld, the Committee may allow the
Participant to satisfy the minimum withholding tax obligation by electing to
have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be
determined. All elections by a Participant to have Shares withheld for this
purpose will be made in accordance with the requirements established by the
Committee and will be in writing in a form acceptable to the Committee.
11. PRIVILEGES OF STOCK OWNERSHIP.
11.1 Voting and Dividends. No Participant will have any of the rights
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will be
a stockholder and will have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are issued pursuant to a Stock Award with restrictions, then any new,
additional or different securities the Participant may become entitled to
receive with respect to such Shares by virtue of a stock dividend, stock split
or any other change in the corporate or capital structure of the Company will be
subject to the same restrictions as the Stock Award; provided, further, that the
Participant will have no right to retain such stock dividends or stock
distributions with respect to Shares that are repurchased at the Participant's
Purchase Price or Exercise Price pursuant to Section 13.
10
11.2 Financial Statements. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
12. NON-TRANSFERABILITY.
Awards of Shares granted under this Plan, and any interest therein,
will not be transferable or assignable by the Participant, and may not be made
subject to execution, attachment or similar process, other than by will or by
the laws of descent and distribution. Awards of Options granted under this Plan,
and any interest therein, will not be transferable or assignable by the
Participant, and may not be made subject to execution, attachment or similar
process, other than by will or by the laws of descent and distribution, by
instrument to an inter vivos or testamentary trust in which the options are to
be passed to beneficiaries upon the death of the trustor, or by gift to
"immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e). During the
lifetime of the Participant an Award will be exercisable only by the
Participant. During the lifetime of the Participant, any elections with respect
to an Award may be made only by the Participant unless otherwise determined by
the Committee and set forth in the Award Agreement with respect to Awards that
are not ISOs.
13. REPURCHASE RIGHTS.
At the discretion of the Committee, the Company may reserve to itself
and/or its assignee(s) in the Award Agreement a right to repurchase a portion of
or all of the unvested Shares held by a Participant following such Participant's
Termination Date. Such repurchase by the Company shall be for cash and/or
cancellation of purchase money indebtedness and the price per share shall be the
Participant's Exercise Price or Purchase Price, as applicable.
14. CERTIFICATES.
All certificates for Shares or other securities delivered under this
Plan will be subject to such stop transfer orders, legends and other
restrictions as the Committee may deem necessary or advisable, including
restrictions under any applicable federal, state or foreign securities law, or
any rules, regulations and other requirements of the SEC or any stock exchange
or automated quotation system upon which the Shares may be listed or quoted.
15. ESCROW; PLEDGE OF SHARES.
To enforce any restrictions on a Participant's Shares, the Committee
may require the Participant to deposit all certificates representing Shares,
together with stock powers or other instruments of transfer approved by the
Committee appropriately endorsed in blank, with the Company or an agent
designated by the Company to hold in escrow until such restrictions have lapsed
or terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates.
16. EXCHANGE AND BUYOUT OF AWARDS.
11
The Committee may, at any time or from time to time, authorize the
Company, with the consent of the respective Participants, to issue new Awards in
exchange for the surrender and cancellation of any or all outstanding Awards.
The Committee may at any time buy from a Participant an Award previously granted
with payment in cash, Shares or other consideration, based on such terms and
conditions as the Committee and the Participant may agree.
17. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE.
An Award will not be effective unless such Award is in compliance with
all applicable federal and state securities laws, rules and regulations of any
governmental body, and the requirements of any stock exchange or automated
quotation system upon which the Shares may then be listed or quoted, as they are
in effect on the date of grant of the Award and also on the date of exercise or
other issuance. Notwithstanding any other provision in this Plan, the Company
will have no obligation to issue or deliver certificates for Shares under this
Plan prior to: (a) obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable; and/or (b) completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company will be under no obligation to register the
Shares with the SEC or to effect compliance with the registration, qualification
or listing requirements of any state securities laws, stock exchange or
automated quotation system, and the Company will have no liability for any
inability or failure to do so.
18. NO OBLIGATION TO EMPLOY.
Nothing in this Plan or any Award granted under this Plan will confer
or be deemed to confer on any Participant any right to continue in the employ
of, or to continue any other relationship with, the Company or any Parent or
Subsidiary of the Company or limit in any way the right of the Company or any
Parent or Subsidiary of the Company to terminate Participant's employment or
other relationship at any time, with or without cause.
19. CORPORATE TRANSACTIONS.
19.1 Assumption or Replacement of Awards by Successor. In the event of
(a) a dissolution or liquidation of the Company, (b) a merger or consolidation
in which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares or the Company by tender offer or
similar transaction, any or all outstanding Awards may be assumed, converted or
replaced by the successor corporation (if any), which assumption, conversion or
replacement will be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to stockholders (after
taking into account the existing provisions of the Awards). The successor
corporation may also issue, in place of outstanding Shares of the Company held
by the Participant, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant. In the event such
successor corporation (if any) refuses to assume or substitute Awards, as
12
provided above, pursuant to a transaction described in this Subsection 19.1, (i)
the vesting of any or all Awards granted pursuant to this Plan will accelerate
upon a transaction described in this Section 19 and (ii) any or all Options
granted pursuant to this Plan will become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Committee
determines. If such Options are not exercised prior to the consummation of the
corporate transaction, they shall terminate at such time as determined by the
Committee.
19.2 Other Treatment of Awards. Subject to any greater rights granted
to Participants under the foregoing provisions of this Section 19, in the event
of the occurrence of any transaction described in Section 19.1, any outstanding
Awards will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.
19.3 Assumption of Awards by the Company. The Company, from time to
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
20. ADOPTION AND STOCKHOLDER APPROVAL.
This Plan will become effective on the date on which it is adopted by
the Board (the "Effective Date"). Upon the Effective Date, the Committee may
grant Awards pursuant to this Plan. The Company intends to seek stockholder
approval of the Plan within twelve (12) months after the date this Plan is
adopted by the Board; provided, however, if the Company fails to obtain
stockholder approval of the Plan during such 12-month period, pursuant to
Section 422 of the Code, any Option granted as an ISO at any time under the Plan
will not qualify as an ISO within the meaning of the Code and will be deemed to
be an NQSO.
21. TERM OF PLAN/GOVERNING LAW.
Unless earlier terminated as provided herein, this Plan will terminate
ten (10) years from the date this Plan is adopted by the Board or, if earlier,
the date of stockholder approval. This Plan and all agreements thereunder shall
be governed by and construed in accordance with the laws of the State of
Georgia.
22. AMENDMENT OR TERMINATION OF PLAN.
The Board may at any time terminate or amend this Plan in any respect,
including without limitation amendment of any form of Award Agreement or
instrument to be executed pursuant to this Plan; provided, however, that the
Board will not, without the approval of the stockholders of the Company, amend
this Plan in any manner that requires such stockholder approval.
13
23. NONEXCLUSIVITY OF THE PLAN.
Neither the adoption of this Plan by the Board, the submission of this
Plan to the stockholders of the Company for approval, nor any provision of this
Plan will be construed as creating any limitations on the power of the Board to
adopt such additional compensation arrangements as it may deem desirable,
including, without limitation, the granting of stock options and bonuses
otherwise than under this Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
24. ACTION BY COMMITTEE.
Any action permitted or required to be taken by the Committee or any
decision or determination permitted or required to be made by the Committee
pursuant to this Plan shall be taken or made in the Committee's sole and
absolute discretion.
14
Financial Statements
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm......................F-2
Report of Predecessor Independent Registered Public Accounting Firm..........F-3
Consolidated Balance Sheets - December 31, 2005 and 2004.....................F-4
Consolidated Statements of Operations for the
years ended December 31, 2005, 2004, 2003, and cumulative amounts............F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2003, 2004 and 2005.................................F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2005, 2004, 2003, and cumulative amounts............F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dauphin Technology, Inc.
We have audited the accompanying consolidated balance sheet of Dauphin
Technology, Inc. (a development stage company) (the "Company") as of December
31, 2005, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for the year ended December 31,
2005, and for the period of time considered part of the development stage from
January 1, 2004 to December 31, 2005, except we did not audit the Company's
financial statements for the period from January 1, 2004 to December 31, 2004
which were audited by other auditors, whose report dated November 11, 2005 on
those financial statements included an explanatory paragraph that expressed
substantial doubt about the Company's ability to continue as a going concern.
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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dauphin
Technology, Inc. as of December 31, 2005, and the results of their operations
and their cash flows for the year ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.
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 is in the development stage and
has no operations. 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.
Porter Keadle Moore, LLP
Atlanta, Georgia
June 5, 2006
F-2
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 sheet of Dauphin
Technology, Inc. ("Company" "development stage company") as of December 31, 2004
and the related consolidated statements of operations, shareholders' deficit and
cash flows for the year ended December 31, 2004 and 2003, and cumulative amounts
since January 1, 2004 (date of commencement of the development stage) to
December 31, 2004. 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 the results of their operations and cash flows
for the years ended December 31, 2004 and 2003, and cumulative amounts since
January 1, 2004 (date of commencement of the development stage) to December 31,
2004 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-3
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
--------------------------------------------------------------------------------
ASSETS
2005 2004
-------------- ---------------
CURRENT ASSETS:
Cash $ 78,381 $ 7,829
Prepaid expenses - 2,500
Assets from discontinued operations - 8,832
-------------- ---------------
Total assets $ 78,381 $ 19,161
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 196,813 $ 68,602
Accrued expenses 320,609 323,838
Short-term borrowings 50,000 200,000
Current portion of long-term debt 13,515 13,515
Derivative liability 1,231,158 760,565
Convertible debentures 950,000 950,000
Convertible loans 3,031,478 -
Liabilities from discontinued operations - 243,748
-------------- ---------------
Total current liabilities 5,793,573 2,560,268
CONVERTIBLE LOANS - 2,405,078
-------------- ---------------
Total liabilities $ 5,793,573 $ 4,965,346
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.01 par value,
10,000,000 shares authorized;
10,000,000 shares issued and
outstanding at December 31, 2005 100,000 -
Common stock, $0.001 par value,
100,000,000 shares authorized;
99,569,028 shares issued and
outstanding at December 31, 2005
and 98,501,688 shares issued and
outstanding at December 31, 2004 99,569 98,502
Additional paid-in capital 65,619,652 65,081,192
Accumulated deficit (71,534,413) (70,125,879)
-------------- ---------------
Total shareholders' deficit (5,715,192) (4,946,185)
-------------- ---------------
Total liabilities and
shareholders' deficit $ 78,381 $ 19,161
-------------- ---------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2005, 2004 and 2003
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative amounts
since becoming a
development stage
2005 2004 2003 company
NET SALES $ - $ - $ - $ -
COST OF SALES - - - -
------------- -------------- ------------- ---------------
Gross profit - - - -
GENERAL AND ADMINISTRATIVE EXPENSES
875,811 1,548,900 676,643 2,424,711
------------- -------------- ------------- ---------------
Loss from operations (875,811) (1,548,900) (676,643) (2,424,711)
Derivative (loss) gain (470,593) 227,197 496,375 (243,396)
INTEREST EXPENSE (62,130) (337,238) (554,891) (399,368)
------------- -------------- -------------- ---------------
Net loss from continuing operations (1,408,534) (1,658,941) (735,159) (3,067,475)
DISCONTINUED OPERATIONS
Loss from discontinued operations - (548,865) (1,115,496) (548,865)
Loss from sale of discontinued assets - - (1,226,425) -
------------- -------------- -------------- ---------------
- (548,865) (2,341,921) (548,865)
------------- -------------- -------------- ---------------
Net loss $ (1,408,534) $ (2,207,806) $ (3,077,080) $ (3,616,340)
============= ============== ============= ===============
LOSS PER SHARE:
Continuing Operations $ (0.01) $ (0.02) $ (0.01) $ (0.03)
Discontinued Operations 0.00 0.00 (0.03) (0.00)
------------- -------------- -------------- ---------------
Total Basic and Diluted $ (0.01) $ (0.02) $ (0.04) $ (0.03)
============= ============== ============= ===============
Weighted average number of shares of common stock
outstanding
Basic 99,266,000 96,794,000 81,041,000 98,030,000
Diluted 99,266,000 96,794,000 81,041,000 98,030,000
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2005, 2004 and 2003
Preferred
Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- --------- ------------ --------- -------------- --------------- ------------
Balance, January 1, 2003 - $ - 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 them - - 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)
Preferred stock issued 10,000,000 100,000 - - 450,000 - 550,000
Common stock issued for:
Employee Settlement - - 300,651 300 39,210 - 39,510
Services - - 16,689 17 12,500 - 12,517
Conversion of convertible debt - - 750,000 750 36,750 - 37,500
Net loss - - - - - (1,104,534) (1,408,534)
---------- ---------- ------------ --------- -------------- --------------- ------------
Balance, December 31, 2005 10,000,000 $ 100,000 99,569,028 $ 99,569 $ 65,619,652 $ (71,534,413) $ (5,715,192)
---------- ---------- ------------ --------- -------------- --------------- ------------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2005, 2004 and 2003
-----------------------------------------------------------------------------------------------------------------------
Cumulative amounts
since becoming a
development stage
CASH FLOWS FROM OPERATING ACTIVITIES 2004 2003 company
Revised Revised Revised
2005 See note 17 See note 17 See note 17
------------ ------------ ------------ ------------
Net loss $ (1,408,534) $ (2,207,806) $ (3,077,080) $ (3,616,340)
Non-cash items included in net loss
Amortization of debt discount - 269,588 519,167 269,588
Loss on sale of building and equipment - - 35,655 -
Common stock issued for convertible debt 37,500 - - 37,500
Convertible loans issued in lieu
of consulting fees - 1,161,500 - 1,161,500
Warrants issued in lieu of consulting fees - - 77,900 -
Common stock issued to vendors - - 126,626 -
Common stock issued for services 12,517 435,000 - 447,517
Warrants exercised in lieu of consulting - - 106,382 -
fees 39,510 - - 39,510
Common stock issued for employee settlement
Changes in:
Receivables - employee - 3,248 - 3,248
Prepaid expenses 2,500 - 4,753 2,500
Accounts payable 128,211 (64,487) (223,641) 63,724
Accrued expenses (3,229) (44,503) 230,127 (47,732)
------------ ------------ ------------ ------------
Net cash used in operating activities
of continuing operations (1,191,525) (447,460) (2,200,111) (1,638,985)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - - 7,670 -
------------ ------------ ------------ ------------
Net cash provided by investing activities
of continuing operations - - 7,670 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares - 323,000 40,000 323,000
Proceeds from exercise of warrants and options - - 64,900 -
Issuance of preferred stock 550,000 - - 550,000
Derivative liability 470,593 (224,414) (496,376) 246,179
Increase in short-term borrowing 50,000 - 150,000 50,000
(Decrease in short-term borrowing (200,000) - - (200,000)
Issuance of convertible loans 626,400 1,243,578 - 1,869,978
Repayment of convertible debentures - (100,000) (150,000) (100,000)
Repayment of long-term leases and other
obligations - - (1,638)
------------ ------------ ------------ ------------
-
Net cash provided by (used in) financing
activities of continuing operations 1,496,993 1,242,164 (393,114) 2,739,157
------------ ------------ ------------ ------------
CASHFLOWS FROM DISCONTINUED OPERATIONS:
Operating cash flows (234,916) (787,201) 2,359,604 (1,022,117)
Investing cash flows - - 128,815 -
------------ ------------ ------------ ------------
Financing cash flows - - - -
Net cash (used in) provided
by discontinued operations (234,916) (787,201) 2,488,419 (1,022,117)
------------ ------------ ------------ ------------
Net increase (decrease) in cash 70,552 7,503 (97,136) 78,055
CASH, beginning of year 7,829 326 97,462 326
------------ ------------ ------------ ------------
CASH, end of year $ 78,381 $ 7,829 $ 326 $ 78,381
------------ ------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ - $ 18,262 $ 7,407 $ 18,262
NONCASH TRANSACTIONS:
Conversion of note to common stock $ - $ 385,000 $ 615,001 $ 385,000
Unamortized discount upon conversion of debt - 64,167 284,583 64,167
Warrants forfeited 76,250 344,694 1,516,862 344,694
The accompanying notes are an integral part of these consolidated financial statements
F-7
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
--------------------------------------------------------------------------------
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. Due to a lack of
resources, the Company was 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 issuance of the
Company's restricted common stock services and the sale of preferred 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 preferred 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:
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.
F-8
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued:
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the assets and liabilities results in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such asset is required. A valuation allowance
is provided for the portion of the deferred tax asset when it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
(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
99,266,000 for the year ended December 31, 2005. 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:
Year Ended December 31, 2003
----------------------------
Reported net loss applicable to common stockholders $ (3,077,080)
Deduct: Total stock-based employee compensation
determined under fair value based method, net of
related tax effects (19,000)
----------------
Pro forma net loss $ (3,096,080)
================
Basic and diluted loss per share:
As reported $ (0.04)
================
Pro forma $ (0.04)
================
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, 2003
-----------------
Dividend yield 0.0%
Risk-free interest rate 5.0%
Volatility factor 233%
Expected life in years 2.75
The weighted average fair value of options and warrants granted during 2003 was
$0.17. There were no options or warrants granted during 2005 or 2004.
F-9
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
3. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued:
Weighted Average Shares
The computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during each period.
The computation of diluted income (loss) per common share is based on the
weighted average number of common shares outstanding during the period, plus the
common stock equivalents that would arise from the exercise of stock options and
warrants outstanding, using the treasury stock method and the average market
price per share during the period. Options to purchase 0, 626,666 shares, and
2,041,730 shares at December 31, 2005, 2004 and 2003, respectively, at prices
between $.12 and $2.75, and warrants to purchase 1,399,999, 1,704,999 shares
and, 2,213,671 shares at December 31, 2005, 2004 and 2003, respectively, at
prices between $.12 and $1.31 were outstanding but were excluded for the
calculations for diluted income (loss) per share as the effect was antidilutive.
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 the derivative liability. The Company adjusts
the derivative to the fair market value at each period end based upon Black
Scholes calculations.
Fair Value of Financial Instruments
The Company financial instruments consist of cash, payables, and notes payable.
The carrying amount of cash and payables approximates fair value because of the
short-term nature of these items. The aggregate carrying amount of the notes
payable approximates fair value as the individual notes bear interest at market
interest rates.
Reclassification
Certain balances in the 2004 and 2003 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,
2005 2004
---------- ----------
Compensation and related taxes $ 112,641 $ 178,000
Interest 117,130 55,000
Other 90,838 90,838
---------- ----------
Total $ 320,609 $ 323,838
---------- ----------
The accrued compensation is payable to our chief executive officer, with amounts
originating from fiscal years 2004 through fiscal year 2005.
F-10
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
5. SHORT-TERM BORROWINGS:
In September 2005, the Company entered into a loan agreement with an individual
for $50,000. The loan is due on December 31, 2006 and bears an annual interest
rate of 6% and is unsecured.
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 was unsecured. In April 2005, the loan was converted into preferred
shares of the Company in conjunction with a financing arrangement with the same
investor.
6. LONG-TERM DEBT:
As of December 31, 2005 and 2004, long term debt with a balance of $13,515
consists 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 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 2005, the Company entered into 2% convertible loan agreements
with approximately 40 individuals in exchange for $626,400 in cash. The total of
Convertible Loans outstanding at December 31, 2005 is $3,031,478. The
convertible agreements can be converted into common stock of the Company at
prices ranging from $0.10 to $0.45 per share. To date, none of these loans have
been converted, are all due in 2006 and are unsecured.
During 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.
8. CONVERTIBLE DEBENTURES:
At December 31, 2005 and 2004, convertible debentures totaling $950,000 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
F-11
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE DEBENTURES - Continued:
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, 2005 and 2004:
2005 2004
---------- ----------
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. $ 694,412 $ 593,990
Derivative arising from the warrants
granted with insufficient unissued
shares available. The derivative is
currently due. $ 536,746 $ 166,575
-----------------------
Total $1,231,158 $ 760,565
=======================
10. WARRANTS
During 2005 and 2004, the Company did not issue any warrants. The following
table outlines warrants outstanding at December 31, 2005 and 2004. The warrants
are recorded at the fair value estimated on the date of grant based on the
Black-Scholes single-option-pricing model. 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:
F-12
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
10. WARRANTS - Continued
Information regarding these warrants for 2005 and 2004 is as follows:
2005 2004
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ --------------- ------ --------------
Warrants outstanding beginning of year 1,704,999 $ 0.6834 2,213,671 $ 0.7867
Warrants expired (305,000) 0.56 (508,672) 0.6125
------ --------------- ------ --------------
Warrants outstanding at year end $ 1,399,999 $ 0.7103 1,704,999 $ 0.6834
Weighted average fair value of warrants granted
during the year $ - $ -
Warrants exercisable at year end 1,399,999 1,704,999
Warrant price range at year end $ 0.10 to $1.3064 $ 0.10 to $1.3064
The following table summarizes information about the warrants outstanding at
December 31, 2005 and 2004:
DECEMBER 31, 2005
Warrants Outstanding and Exercisable
--------------------------------------------------------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg.
Prices Shares Contractual Life Exercise Price
$0.1000 200,000 0.35 $0.1000
$0.1200 499,999 0.35 $0.1200
$1.3064 700,000 0.75 $1.3064
Total for 2005 1,399,999 0.55 $ 0.7103
DECEMBER 31, 2004
Warrants Outstanding and Exercisable
-------------------------------------------------------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg.
Prices Shares Contractual Life Exercise Price
$0.1000 200,000 1.35 $0.1000
$0.1200 499,999 1.35 $0.1200
$0.5600 305,000 0.92 $0.5600
$1.3064 700,000 1.74 $1.3064
Total for 2004 1,704,999 1.43 $ .6834
During 2005 and 2004, 305,000 and 508,672 warrants, respectively, with a value
of $76,250 and $344,694, respectively, expired and were forfeited without being
exercised.
11. STOCK OPTIONS:
Information regarding stock options for 2005 and 2004 is as follows:
2005 2004
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ --------------- ------ --------------
Options outstanding beginning of year 626,666 $ .7741 2,041,730 $ .7741
Options exercised - - - -
Options granted - - - -
Options forfeited (626,666) - (1,415,064) -
Options outstanding at year end 0 $ 0 626,666 $ .7741
Weighted average fair value of options granted
during the year $ - $ -
Options exercisable at year end 0 626,666
Option price range at year end - $ 0.12 to $2.75
F-13
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
11. STOCK OPTIONS - Continued
The following table summarizes information about the options outstanding at
December 31, 2004:
DECEMBER 31, 2004
Options Outstanding and Exercisable
-------------------------------------------------------------------------
Range of Exercise Number of Weighted Avg. Weighted Avg.
Prices Shares Contractual Life Exercise Price
$ 0.1200 50,000 1.25 $ 0.1200
$ 0.2200 60,000 1.00 $ 0.2200
$ 0.3300 50,000 0.75 $ 0.3300
$ 0.5300 50,000 0.50 $ 0.5300
$ 0.6600 50,000 0.25 $ 0.6600
$ 0.7000 25,000 0.23 $ 0.7000
$ 0.9000 166,666 0.13 $ 0.9000
$ 1.0800 110,000 0.01 $ 1.0800
$ 1.1562 12,500 0.04 $ 1.1562
$ 1.3700 40,000 0.37 $ 1.3700
$ 2.7500 12,500 0.22 $ 2.7500
Total for 2004 626,666 0.39 $ 0.7741
12. EMPLOYEE BENEFIT PLAN:
The Company no longer maintains an employee benefit plan as of December 31,
2005. In prior years the Company maintained a salary deferral 401(k) plan
covering substantially all employees who met specified service requirements.
Contributions were based upon participants' salary deferrals and compensation
and were made within Internal Revenue Service limitations. The Company does not
currently offer post-employment or post-retirement benefits.
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:
2005 2004 2003
---------- ---------- ------------
U.S. federal statutory rate applied
to pretax loss $ (478,900) $ (750,000) $ (1,046,000)
Permanent differences and adjustments 2,500 2,000 3,000
Expired net operating loss 1,324,400 - -
Change in valuation allowance (848,000) 748,000 1,043,000
---------- ---------- ------------
Income tax provision $ - $ - $ -
---------- ---------- ------------
As of December 31, 2005 and 2004, the Company had generated deferred tax assets
as follows:
December 31,
------------
2005 2004
------------ --------------
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 19,333,000 $ 20,315,000
Accrued liabilities 36,000 61,000
Derivative liability 419,000 260,000
------------ --------------
Deferred tax assets 19,788,000 20,636,000
Less valuation allowance 19,788,000 20,636,000
------------ --------------
Net deferred tax asset $ - $ -
------------ --------------
F-14
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
13. INCOME TAXES - Continued:
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 $19,841,000 and $20,636,000 at December 31, 2005 and 2004,
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 that are rented under
month-to-month rental agreements. Total rental expense was approximately
$70,000, $75,000, and $155,000 for 2005, 2004, and 2003, respectively.
During 2005, 2004 and 2003 the Company was engaged in various legal proceedings.
As of the date of this report, the Company is not involved in any litigation or
legal proceedings.
15. EQUITY TRANSACTIONS:
2005 Transactions
In the first quarter of 2005, the Company issued 750,000 shares of its common
stock pursuant to a convertible loan in the amount of $37,500.
In 2005, the Company issued 10,000,000 shares of Preferred Stock with a par
value of $.01 for $550,000. The preferences associated with this issuance
included a cumulative annual dividend at a rate of $.01 per year (if and when
paid), a preference in the event of liquidation or dissolution, voting rights
equal to twenty votes per outstanding Preferred share on each matter submitted
to a vote, and others.
In the fourth quarter of 2005, the Company issued 16,689 shares of common stock
in lieu of consulting fees in the amount of $12,517.
In the fourth quarter of 2005, the Company issued 300,651 shares of its common
stock valued at $39,510 to two former employees of one of its subsidiaries to
settle litigation over back wages.
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 common stock.
During the second quarter of 2004, the Company issued 1,500,000 shares of stock
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.
F-15
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
15. EQUITY TRANSACTIONS - Continued:
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.
During the third quarter of 2003, the Company received proceeds in the amount of
$40,000 for the issuance of 571,428 shares of 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 $615,001 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.
16. DISCONTINUED OPERATIONS:
During December of 2003, management decided to discontinue its current
operations due to insufficient sales and cash flows to support operations.
For the year ended December 31, 2004, assets and liabilities from discontinued
operations consist of the following:
2004
-----------
Assets from discontinued operations:
Cash $ 8,832
-----------
Liabilities from discontinued operations:
Accounts payable $ 178,031
Accrued expenses 65,717
-----------
Total liabilities $ 243,748
-----------
Discontinued operations were as follows for the years ending December 31:
2004 2003
---------- ------------
Revenues $ 2,301 $ 3,321,844
Cost of sales - 2,828,040
---------- ------------
Gross profit 2,301 493,804
Expenses 551,166 1,609,300
---------- ------------
Loss before income taxes (548,865) (1,115,496)
Loss on sale of subsidiary - (1,226,425)
Income tax benefit - -
---------- ------------
Loss from discontinued operations $ (548,865) $ (2,341,921)
---------- ------------
17. REVISED STATEMENT OF CASH FLOWS
The Statement of Cash Flows for the years ended December 31, 2004 and 2003 and
the Cumulative Amounts Since Inception of the Development Stage have been
revised to separately disclose the operating, investing and financing portions
of the cash flows attributable to its discontinued operations, which in prior
periods were reported on a combined basis as a single amount.
F-16
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 2005 and 2004 is as follows:
2005 Quarter Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
Revenues $ - $ - $ - $ -
Gross Profit (Loss) - - - -
Net Loss from operations (207,431) (435,226) (261,695) (504,182)
Net Income (Loss) (207,431) (435,226) (261,695) (504,182)
Net Income (Loss) per share
from operations
Basic and Diluted $ 0.00 $ 0.00 $ 0.00 $ (0.01)
Net Loss per share
Basic and Diluted $ 0.00 $ 0.00 $ 0.00 $ (0.01)
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)
F-17
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
19. RECENT ACCOUNTING PRONOUNCEMENTS:
Financial Accounting Standard (FAS) Statement No. 123(R)
Share-Based Payments is an amendment of FASB Statements No. 123 and 95. FAS No.
123(R) and 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 December
15, 2005. This means that the Company will be required to implement FAS No.
123(R) no later than the quarter beginning January 1, 2006. 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 January 1, 2006. 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.
Financial Accounting Standards Board (FASB) Statement No. 153
Exchanges of Nonmonetary Assets is an amendment of APB Opinion No. 29 and
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Statement is
effective for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005.
Financial Accounting Standards Board (FASB) Statement No. 154
Accounting Changes and Error Corrections replaces APB Opinion No. 20 and FASB
Statement No. 3. This Statement mandates retrospective application of a
voluntary change in accounting principle, unless it is impracticable to
determine either the cumulative effect or the period-specific effects of the
change. This Statement also requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted for
as a change in accounting estimate that is effected by a change in accounting
principle. The Statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.
The Company does not believe that the adoption of (if applicable) the above
mentioned standards will have a material effect on the Company's financial
position and results of operations.
20. SUBSEQUENT EVENTS:
On January 20, 2006, Dauphin entered into a definitive Agreement and Plan of
Merger (the "Merger") whereby the Company's newly formed wholly owned
subsidiary, GeoVax Acquisition Corp., would merge with and into GeoVax. Upon
completion of the Merger, GeoVax would survive the Merger as a wholly owned
subsidiary of Dauphin. GeoVax, Inc., a Georgia biotechnology company, was
established to develop, license and commercialize the manufacture and sale of
human vaccines for diseases caused by HIV-1 (Human Immunodeficiency Virus) and
other infectious agents. The Merger shall become effective upon, among other
things, an affirmative vote of approval from each companies' shareholders. If
the Merger is completed, there is no assurance that the surviving company will
be economically successful.
On March 2, 2006, the Company entered into a loan agreement with Celtic Bank
Corporation for $100,000. The loan is due on December 31, 2006 and bears an
interest rate of 12% per annum and is unsecured.
On March 7, 2006, the Company filed legal action against preferred shareholders
Stavros N. Papageorgiou and Nikolaos S. Papageorgiou, their advisor, Miltos
Louizidis, and the investment banking firm of Crescent International, Ltd. (the
"Defendants"). The complaint alleged, among other things, breaches of various
agreements, fraud, tortious interference, conspiracy, and breaches of fiduciary
duties by the Defendants. Specifically, Dauphin alleged that the Defendants
embarked upon a scheme to defraud, tortiously interfere with contracts and
business relationships, and to breach fiduciary duties in order to steal from
Dauphin and its shareholders certain critical business opportunities, including
its current efforts to merge with GeoVax, Inc.
On May 15, 2006, the Company and the preferred shareholders agreed to settle all
legal actions between them. The settlement confirms the parties' agreement to
proceed with the GeoVax merger, based upon a conversion and exchange of
F-18
Dauphin Technology, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
20. SUBSEQUENT EVENTS - Continued:
preferred shares upon closing of the merger, on the basis of a
1-preferred-for-2-common share exchange, as anticipated by the Merger Agreement.
In addition, a convertible note representing a Company liability of
approximately $1.3 million has been cancelled. On May 16, 2006, an agreed order
was entered in the Circuit Court of Cook County, Illinois, dismissing all
claims.
F-19
GEOVAX, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Audited Financial Statements
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Geovax, Inc.
Atlanta, Georgia
We have audited the accompanying balance sheet of Geovax, Inc. (a Georgia
corporation in the development stage) as of December 31, 2005, and the related
statements of operations, stockholders' deficiency and cash flows for the two
years then ended and for the period from inception (June 27, 2001) to December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. 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 accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses and negative cash flows
from operations raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Geovax, Inc. as of December 31,
2005, and the results of its operations and its cash flows for the two years
then ended and for the period from inception (June 27, 2001) to December 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.
Marietta, Georgia
February 8, 2006
F-2
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
December 31,
2005
-----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,272,707
Prepaid expenses and other 162,831
-----------------
Total current assets 1,435,538
Property and equipment, net of accumulated depreciation
of $22,882 59,463
Other assets:
Licenses, net of accumulated amortization of $59,619 189,237
Deposits 980
-----------------
Total other assets 190,217
-----------------
Total assets $ 1,685,218
=================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 316,341
Unearned grant revenue 852,905
-----------------
Total current liabilities 1,169,246
Commitments
Redeemable convertible preferred stock: no par value,
20,000,000 shares authorized;
Series A, 5,987,520 shares issued and outstanding
(Aggregate liquidation preference of $1,499,994) 1,016,555
Stockholders' deficiency:
Common stock: no par value, 50,000,000 shares
authorized; 10,548,648 shares issued and
outstanding 5,698,864
Deficit accumulated during the development stage (5,699,447)
-----------------
(583)
Stock subscription receivable for common stock (500,000)
-----------------
Total stockholders' deficiency (500,583)
-----------------
Total liabilities and stockholders' deficiency $ 1,685,218
=================
See notes to financial statements.
F-3
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
From Inception
(June 27, 2001) to
Year ended December 31, December 31,
----------------------------------
2005 2004 2005
--------------- --------------- ------------------
Revenues:
Grant Revenue $ 670,467 $ 714,852 $ 2,558,276
--------------- --------------- ------------------
670,467 714,852 2,558,276
Operating expenses:
Research and development 1,640,814 2,566,902 6,327,186
General and administrative 655,199 524,780 2,000,540
--------------- --------------- ------------------
2,296,013 3,091,682 8,327,726
--------------- --------------- ------------------
Loss from operations (1,625,546) (2,376,830) (5,769,450)
Other income (expense):
Interest income 16,073 25,002 75,672
Interest expense (1,613) - (5,669)
--------------- --------------- ------------------
14,460 25,002 70,003
--------------- --------------- ------------------
Net loss and comprehensive net loss $ (1,611,086) $ (2,351,828) $ (5,699,447)
=============== =============== ==================
See notes to financial statements.
F-4
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Deficit
Accumulated Total
Common Stock Stock during the Stockholders'
-------------------------------- Subscription Development Equity
Shares Amount Receivable Stage (Deficiency)
-------------- -------------- ---------------- ---------------- ----------------
Capital contribution at inception
(June 27, 2001) - $ 10 $ - $ - $ 10
Net loss and comprehensive
net loss for the year ended
December 31, 2001 - - - (170,592) (170,592)
-------------- -------------- ---------------- ---------------- ----------------
Balance at December 31, 2001 - 10 - (170,592) (170,582)
Sale of common stock for cash
of $.00 per share 4,704,480 470 - - 470
Issuance of common stock for
technology license 1,188,000 148,856 - - 148,856
Net loss and comprehensive
net loss for the year
ended December 31, 2002 - - - (618,137) (618,137)
-------------- -------------- ---------------- ---------------- ----------------
Balance at December 31, 2002 5,892,480 149,336 - (788,729) (639,393)
Sale of common stock for cash
of $1.20 less issuance costs 2,072,835 2,459,609 - - 2,459,609
Net loss and comprehensive
net loss for the year
ended December 31, 2003 - - - (947,804) (947,804)
-------------- -------------- ---------------- ---------------- ----------------
Balance at December 31, 2003 7,965,315 2,608,945 - (1,736,533) 872,412
Sale of common stock for cash
and stock subscription
receivable of $1.20 per share
less issuance costs 2,500,000 2,989,919 (2,750,000) - 239,919
Cash payments received on
stock subscription receivable - - 750,000 - 750,000
Issuance of common stock for
technology license 83,333 100,000 - - 100,000
Net loss and comprehensive
net loss for the year
ended December 31, 2004 - - - (2,351,828) (2,351,828)
-------------- -------------- ---------------- ---------------- ----------------
Balance at December 31, 2004 10,548,648 5,698,864 (2,000,000) (4,088,361) (389,497)
Cash payments received on
stock subscription receivable - - 1,500,000 1,500,000
Net loss and comprehensive
net loss for the year
ended December 31, 2005 - - - (1,611,086) (1,611,086)
-------------- -------------- ---------------- ---------------- ----------------
Balance at December 31, 2005 10,548,648 $ 5,698,864 $ (500,000) $ (5,699,447) $ (500,583)
============== ============== ================ ================ ================
See notes to financial statements.
F-5
GEOVAX, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
Year Ended December 31, From Inception
--------------------------------- (June 27, 2001) to
2005 2004 December 31, 2005
-------------- --------------- ----------------------
Cash flows from operating activities:
Net loss $ (1,611,086) $ (2,351,828) $ (5,699,447)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 37,450 21,422 82,501
Accretion of preferred stock redemption value 78,080 72,084 288,112
Changes in assets and liabilities:
Prepaid expenses and other current assets (159,648) 889 (162,831)
Deposits - - (980)
Accounts payable and accrued expenses (335,298) 428,771 316,341
Unearned grant revenue 183,433 314,519 852,905
-------------- --------------- ----------------------
Total adjustments (195,983) 837,685 1,376,048
-------------- --------------- ----------------------
Net cash used in operating activities (1,807,069) (1,514,143) (4,323,399)
Cash flows from investing activities:
Purchase of property and equipment (48,485) (7,070) (82,345)
-------------- --------------- ----------------------
Net cash used in investing activities (48,485) (7,070) (82,345)
Cash flows from financing activities:
Net proceeds from sale of common stock 1,500,000 989,919 4,950,008
Net proceeds from sale of preferred stock - - 728,443
Proceeds from issuance of note payable - - 250,000
Repayment of note payable - - (250,000)
-------------- --------------- ----------------------
Net cash provided by financing activities 1,500,000 989,919 5,678,451
Net increase (decrease) in cash and cash equivalents (355,554) (531,294) 1,272,707
Cash and cash equivalents at beginning of period 1,628,261 2,159,555 -
-------------- --------------- ----------------------
Cash and cash equivalents at end of period $ 1,272,707 $ 1,628,261 $ 1,272,707
============== =============== ======================
Supplemental disclosure of cash flow information:
Interest paid $ 1,613 $ - $ 5,669
See notes to financial statements.
F-6
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004, and Period
From Inception on June 27, 2001 to December 31, 2005
1. Operations and Basis of Presentation
Geovax, Inc. ("Geovax" or the "Company"), an emerging biotechnology company,
based in Atlanta, Georgia was incorporated in Georgia on June 27, 2001 ("date of
inception"). Geovax was established to develop, license and commercialize the
manufacture and sale of human vaccines for diseases caused by Human
Immunodeficiency Virus and other infectious agents. The Company has exclusively
licensed from Emory University certain Acquired Immune Deficiency Syndrome
vaccine technology which was developed in collaboration with the National
Institutes of Health and the Centers for Disease Control and Prevention.
The Company's operations to date have been focused on organizational activities,
obtaining capital, recruiting personnel and conducting research and development;
therefore the Company is considered to be a developmental stage company for
financial reporting purposes. Substantially all of the Company's products are in
research or various stages of development. In order to achieve profitable
operations, the Company must successfully complete development and clinical
testing, obtain regulatory approvals, and achieve market acceptance. There can
be no assurance that these efforts will be successful.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
experienced negative cash flows from operations since inception and has an
accumulated deficit at December 31, 2005 of approximately $5.7 million. The
Company has funded its activities to date almost exclusively from equity
financings and government grants.
The Company will continue to require substantial funds to continue research and
development, including preclinical studies and clinical trials of its product
candidates, and to commence sales and marketing efforts, if the United States
Food and Drug Administration ("FDA") or other regulatory approvals are obtained.
Management's plans in order to meet its operating cash flow requirements include
the Proposed Merger discussed in Note 8. Additional financing activities such as
private placement of its common stock, preferred stock offerings, debt and
convertible debt instruments may also be contemplated.
While the Company believes that it will be successful in obtaining the necessary
financing to fund its operations, there are no assurances that such additional
funding will be achieved and that it will 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 of
liabilities that might be necessary should the Company be unable to continue in
existence.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results inevitably
will differ from those estimates.
F-7
Cash and Cash Equivalents - Cash and cash equivalents consist of cash, bank
deposits and highly liquid investments with original maturities of three months
or less at the date of purchase. The recorded values approximate fair market
value due to the short maturities. The Company's cash and cash equivalents are
on deposit at one financial institution.
Property and Equipment - Property and equipment are stated at cost. Expenditures
for maintenance and repairs are charged to operations as incurred, while
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years.
Other Assets - Other assets consist principally of license agreements for
technology use obtained through the issuance of the Company's common stock.
These license agreements are amortized on a straight line basis over ten years.
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Revenue Recognition - The Company's revenue consists of subcontracted government
grant revenue received pursuant to collaborative arrangements with Emory
University. Revenues from these collaborative research arrangements are deferred
and recorded as income as the related costs are incurred.
Research and Development - All research and development costs, including legal
fees and other direct costs incurred in obtaining and protecting patents,
related to future and present products are charged to operations as incurred.
The Company utilizes the services of limited number of third party consultants
and service providers in conducting its research and development activities.
These consultants and service providers represent a concentration of activity
which, if disrupted, could have a significant adverse impact on the Company's
operations.
Income Taxes - The Company accounts for income taxes using the liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated 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 are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure. Accordingly, the
Company accounts for stock-based compensation under Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock issued to Employees, and related
interpretations, using the intrinsic value method. Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the measurement date
(generally the grant date) between the fair value of the Company's stock and the
exercise price.
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of SFAS No. 123 to all stock-based
employee compensation arrangements. The fair value of the Company's employee
stock options was estimated at the date of grant using a minimum-value option
pricing model with the following weighted-average assumptions for options
granted during 2005 and 2004, respectively: risk-free interest rates of 4.0% and
3.3%, expected life of the option of 8.0 and 5.7 years and no dividend yield.
Following is a reconciliation of net loss to pro forma net loss as if the fair
value method had been applied to all awards for the years ended December 31,
2005 and 2004 and for the period from inception (June 27, 2001) to December 31,
2005:
F-8
From
2005 2004 Inception
----------------- ---------------- ------------------
Net loss, as reported $ (1,611,086) $ (2,351,828) $ (5,699,447)
Deduct stock-based compensation expense
Determined under fair value method (105,955) (109,695) (215,650)
----------------- ---------------- ------------------
Pro forma net loss $ (1,717,041) $ (2,461,523) $ (5,915,097)
================= ================ ==================
The Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services, which
require that such equity instruments be recorded at their fair value on the
measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instruments vest. Nonemployee
stock-based compensation charges are amortized over the vesting period on a
straight-line basis.
New Accounting Pronouncements - In December 2004, the FASB issued SFAS No.123
(revised 2004), Share-Based Payment. Statement 123(R) provides investors and
other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
Statement 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in APB Opinion No. 25, as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. Public entities (other than those
filing as small business issuers) will be required to apply Statement 123(R) as
of the first interim or annual reporting period that begins after June 15, 2005.
Small business issuers will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 15, 2005.
The Company will apply Statement 123(R) beginning January 1, 2006, and expects
that this new pronouncement will have a significant impact on its results of
operations.
In May 2005, the FASB issued SFAS No. 154, Accounting changes and Error
Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No.
3, Reporting Accounting Changes in Interim Financial Statements. SFAS No.154
applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine the effect of a change. It also applies to changes
required by an accounting pronouncement that does not include specific
transition provisions. S FAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect that the adoption of SFAS No. 154 will have a
material impact on its financial condition or results of operations.
3. License Agreements
During 2002, the Company entered into a license agreement with Emory University
(the "Emory License"), a related party, for technology required in conjunction
with certain products under development by the Company in exchange for 1,188,000
shares of the Company's common stock valued at $148,856 (based on recent cash
sales of $.125 per share). The Emory License, among other contractual
obligations, requires payments based on milestone achievements, as defined, and
sales by the Company. The agreement requires minimum annual royalty payments of
$3 million in the third year following product launch increasing to $12 million
in the sixth year and maintenance fees of $100,000 per year beginning in 2006
increasing to $750,000 per year by 2008 and every year thereafter. Additionally,
F-9
prior patent costs in the amount of $274,783 are payable to Emory University,
one half of which is due when capital raised is equal to $5 million and the
remainder is due when capital raised equals $12 million. The Company reached the
first threshold of $5 million in December 2005, and fulfilled its payment
obligation to Emory University in January 2006, which amount was accrued and
reflected on the accompanying Balance Sheet at December 31, 2005. The Company
may terminate the Emory License on three months' written notice. In any event,
the Emory License expires on the date of the latest expiration date of the
underlying patents.
The Company is obligated to reimburse Emory University for certain ongoing costs
in connection with the filing, prosecution and maintenance of patent
applications subject to the Emory License. Such reimbursements to Emory amounted
to $96,938, $58,711 and $272,843 for the years ended December 31, 2005 and 2004,
and for the period from inception (June 27, 2001) to December 31, 2005,
respectively.
Geovax also entered into an additional license agreement during 2004 in exchange
for 83,333 shares of its common stock values at $100,000 (based on recent cash
sales of $1.20 per share).
4. Lease Commitment
The Company leases the office and laboratory space used for its operations under
a lease agreement on a month-to-month basis from a related party. Rent expense
amounted to $27,444, $25,488 and $84,701 for the years ended December 31, 2005
and 2004, and for the period from inception (June 27, 2001) to December 31,
2005, respectively.
5. Income Taxes
At December 31, 2005, the Company has federal net operating loss ("NOL")
carryforwards of approximately $5,417,000, available to offset against future
taxable income, subject to certain limitations, that expire in varying amounts
beginning in 2022 through 2025. Additionally, the Company has approximately
$202,000 in research and development ("R&D") tax credits that expire beginning
in 2022 through 2025 unless utilized earlier. Section 382 of the Internal
Revenue Code contains provisions that may limit the utilization of NOL and R&D
tax credit carryforwards in any given year as a result of significant changes in
ownership interests that may have occurred or may occur in future periods. No
income taxes have been paid to date.
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities included the following at December
31, 2005:
Deferred tax assets:
Net operating loss carryforward $2,058,324
Research and development credit carryforward 202,422
Other -
-------------
Total deferred tax assets 2,260,746
Deferred tax liabilities:
Depreciation 3,520
-------------
Total deferred tax liabilities 3,520
-------------
Net deferred tax assets 2,257,226
Valuation allowance (2,257,226)
-------------
$ -
=============
F-10
The Company has established a full valuation allowance equal to the amount of
its deferred tax asset owing to uncertainties with respect to its ability to
generate sufficient taxable income in the future.
The Company's effective tax rate varies from the statutory rate as follows for
the year ended December 31, 2005:
Federal benefit at statutory tax rate (34.0)%
State taxes, net of federal benefit (4.0)
Permanent differences 13.0
Research and development credits (12.0)
Valuation allowance 37.0
---------------
Effective income tax rate 0.0%
===============
6. Redeemable Convertible Preferred Stock
Under its Restated Certificate of Incorporation, the Company is authorized to
issue, in series, up to 20,000,000 shares of preferred stock. In December 2001
and February 2002, the Company issued 4,191,264 and 1,796,256 shares,
respectively, of Series A Redeemable Convertible Preferred Stock ("Series A")
for $.125 per share. Series A shares have many significant rights and
privileges, some of which, but not all, are described herein. Beginning in
August 2010, the Company has an obligation to redeem, upon the request of the
holders of at least 66% of the then outstanding Series A shares, up to 50% of
the Series A shares then held by such holders. Beginning in August 2012, the
Company's repurchase obligation increases to a maximum of 100% of the Series A
shares held by the requesting shareholders. In each case, the per share
redemption price to be paid by the Company would be $0.2705616 plus an
additional amount equal to any dividends declared but unpaid on such shares. In
addition, holders of Series A shares are also entitled to a liquidation
preference of $0.25052 per share plus an additional amount equal to any
dividends declared but unpaid on each such shares upon any liquidation,
dissolution or winding up of the Company, any sale of substantially all the
assets of the Company or the transfer of 50% or more of the Company's
outstanding voting securities, with such liquidation preference to be paid prior
to any payment to holders of common stock. The holders of Series A shares are
entitled to receive, if and when declared, preferential cash dividends at the
rate of $0.0100208 per share per year before payment of any dividends on the
Company's common stock with certain preferential cash dividends becoming
cumulative after August 2010. As of December 31, 2005, no dividends had been
declared. The holders of Series A shares, voting as a separate group, have the
right to elect two members of the Company's Board of Directors. Series A shares
are convertible at any time on a share-for-share basis into the Company's common
stock and are automatically converted in the event of an initial public offering
of the Company's common stock of at least $10 million. The conversion rate may
be adjusted on the occurrence of certain events.
7. Stockholders' Equity (Deficiency)
Common Stock Transactions
-------------------------
In March 2004, the Company sold 2,500,000 shares of its common stock for
$3,000,000, of which $250,000 was paid in cash and $2,750,000 of which was paid
through the issuance of an installment subscription note collateralized by such
shares. As of December 31, 2005, $500,000 of the stated installments under the
subscription note remain due and unpaid.
Stock Option Plan
-----------------
In 2002, the Board of Directors of the Company adopted the 2002 Stock Option and
Incentive Plan (the "Plan") under which options designated as either incentive
("ISO") or nonqualified stock options may be issued to employees, officers,
directors, consultants and independent contractors of the Company. The exercise
price for any option granted may not be less than fair value (110% of fair value
for ISOs granted to certain employees) and may be exercised for a period of up
to ten years from the date of grant. Options granted under the plan have vesting
periods ranging from immediately to four years. The Company has reserved
1,650,000 shares of common stock for issuance under the Plan.
F-11
Activity under the Plan is shown below.
Number of Weighted
Shares Exercise Average
Under Price per Exercise
Option Share Price
---------- ---------- ---------
Outstanding at December 31, 2001 -- -- --
Granted 300,000 $ 1.32 $ 1.32
Exercised -- -- --
Canceled -- -- --
-------- ---------------- ----------
Outstanding at December 31, 2002 300,000 1.32 1.32
Granted -- -- --
Exercised -- -- --
Cancelled -- -- --
-------- ---------------- ----------
Outstanding at December 31, 2003 300,000 1.32 1.32
Granted 913,000 1.20 - 1.32 1.24
Exercised -- -- --
Cancelled -- -- --
-------- ---------------- ----------
Outstanding at December 31, 2004 1,213,000 $ 1.20 - 1.32 $ 1.26
Granted 10.000 1.20 1.20
Exercised -- -- --
Cancelled (6,000) 1.20 1.20
-------- ---------------- ----------
Outstanding at December 31, 2005 1,217,000 $ 1.20 - 1.32 $ 1.26
-------- ---------------- ----------
The following table summarizes additional information concerning the Company's
stock options outstanding and exercisable as of December 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Number Life (years) Price Number Price
------------------------ ----------------- -------------- -------------- ----------------- -------------
$1.20 - 1.32 1,217,000 4.12 $1.26 927,000 $1.26
Warrants
--------
The Company granted in October 2002, in connection with a note payable to a
related party, a warrant to purchase up to 132,000 shares of the Company's
common stock for $.125 per share. The warrant expires in October 2012.
8. Proposed Merger
In April 2005, the Company signed a letter of intent to merge with Dauphin
Technology, Inc. ("Dauphin"), a publicly traded company with no current business
operations. In January 2006, Geovax and Dauphin entered into an Agreement and
Plan of Merger (the "Merger Agreement").
According to the Merger Agreement, Dauphin's wholly-owned subsidiary, Geovax
Acquisition Corp., would merge with and into Geovax. Geovax would survive the
merger as a wholly-owned subsidiary of Dauphin and Dauphin would change its name
to Geovax Labs, Inc. (the "Proposed Merger"). All of the shares of Geovax issued
and outstanding immediately prior to closing of the Proposed Merger will be
F-12
converted into an aggregate of 490,332,879 shares of Dauphin common stock.
Immediately after closing of the Proposed Merger, there will be approximately
733,332,879 shares of Dauphin common stock issued and outstanding, of which
approximately 67% will be held by the former shareholders of Geovax.
The Proposed Merger is subject to Dauphin having $13 million in net cash assets
at closing, and is also subject to customary closing conditions, including,
among other things, approval by the shareholders of Geovax and Dauphin,
satisfactory completion of due diligence by both parties, confirmation of the
parties' respective representations and warranties, elimination of substantially
all of Dauphin's outstanding liabilities and compliance with all applicable
legal requirements. In addition, prior to closing, Dauphin must become current
in its reporting obligations under the Securities Exchange Act of 1934, as
amended. The Company anticipates completing the Proposed Merger during the
second quarter of 2006.
F-13
GEOVAX, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Audited Financial Statements
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Geovax, Inc.
Atlanta, Georgia
We have audited the accompanying balance sheet of Geovax, Inc. (a Georgia
corporation in the development stage) as of December 31, 2004, and the related
statements of operations, stockholders' deficiency and cash flows for the two
years then ended and for the period from inception (June 27, 2001) to December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. 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 accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Geovax, Inc. as of December 31,
2004, and the results of its operations and its cash flows for the two years
then ended and for the period from inception (June 27, 2001) to December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.
Marietta, Georgia
May 6, 2005
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
December 31,
2004
-----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,628,261
Prepaid expenses 3,183
-----------------
Total current assets 1,631,444
Property and equipment, net of accumulated
depreciation of $10,319 23,541
Other assets:
Licenses, net of accumulated amortization of $34,732 214,124
Other assets 980
-----------------
Total other assets 215,104
-----------------
Total assets $ 1,870,089
=================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 651,639
Unearned grant revenue 669,472
-----------------
Total current liabilities 1,321,111
Commitments
Redeemable convertible preferred stock: no par value,
20,000,000 shares authorized;
Series A, 5,987,520 shares issued and outstanding
(Aggregate liquidation preference of $1,499,994) 938,475
Stockholders' deficiency:
Common stock: no par value, 50,000,000 shares
authorized; 10,548,648 shares issued and
outstanding 5,698,864
Deficit accumulated during the development stage (4,088,361)
-----------------
1,610,503
Stock subscription receivable for common stock (2,000,000)
-----------------
Total stockholders' deficiency (389,497)
-----------------
Total liabilities and stockholders' deficiency $ 1,870,089
=================
See notes to financial statements.
F-3
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
From Inception
Year ended December 31, (June 27, 2001)
---------------------------- to December 31,
2004 2003 2004
-------------- ------------- ---------------
Revenues:
Grant Revenue $ 714,852 $ 992,720 $ 1,887,809
-------------- ------------- ---------------
714,852 992,720 1,887,809
Operating expenses:
Research and development 2,566,902 1,456,084 4,686,372
General and administrative 524,780 511,940 1,345,341
-------------- ------------- ---------------
3,091,682 1,968,024 6,031,713
-------------- ------------- ---------------
Loss from operations (2,376,830) (975,304) (4,143,904)
Other income (expense):
Interest income 25,002 31,556 59,599
Interest expense - (4,056) (4,056)
-------------- ------------- ---------------
25,002 27,500 55,543
-------------- ------------- ---------------
Net loss and comprehensive
net loss $ (2,351,828) $ (947,804) $ (4,088,361)
============== ============= ===============
See notes to financial statements.
F-4
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Deficit
Accumulated Total
Common Stock Stock during the Stockholders'
-------------------------- Subscription Development Equity
Shares Amount Receivable Stage (Deficiency)
----------- ----------- ------------ ------------- --------------
Capital contribution at
inception (June 27, 2001) - $ 10 $ - $ - $ 10
Net loss for the year
ended December 31, 2001 - - - (170,592) (170,592)
----------- ------------ ------------ ------------ -------------
Balance at December 31, 2001 - 10 - (170,592) (170,582)
Sale of common stock for
cash of $.00 per share 4,704,480 470 - - 470
Issuance of common stock
for technology license 1,188,000 148,856 - - 148,856
Net loss for the year
ended December 31, 2002 - - - (618,137) (618,137)
----------- ------------ ------------ ------------ -------------
Balance at December 31, 2002 5,892,480 149,336 - (788,729) (639,393)
Sale of common stock for
cash of $1.20 less
issuance costs 2,072,835 2,459,609 - - 2,459,609
Net loss for the year
ended December 31, 2003 - - - (947,804) (947,804)
----------- ------------ ------------ ------------ -------------
Balance at December 31, 2003 7,965,315 2,608,945 - (1,736,533) 872,412
Sale of common stock for
cash and stock subscription
receivable of $1.20 per
share less issuance costs 2,500,000 2,989,919 (2,750,000) - 239,919
Cash payments received on
stock subscription receivable - - 750,000 - 750,000
Issuance of common stock
for technology license 83,333 100,000 - - 100,000
Net loss for the year ended
December 31, 2004 - - - (2,351,828) (2,351,828)
----------- ------------ ------------ ------------ -------------
Balance at December 31, 2004 10,548,648 $ 5,698,864 $ (2,000,000) $ (4,088,361) $ (389,497)
=========== ============ ============ ============ =============
F-5
GEOVAX, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
Year Ended December 31, From Inception
------------------------------- (June 27, 2001) to
2004 2003 December 31, 2004
------------- ------------- -------------------
Cash flows from operating activities:
Net loss $ (2,351,828) $ (947,804) $ (4,088,361)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 21,422 17,968 45,052
Accretion of preferred stock redemption value 72,084 66,547 210,032
Changes in assets and liabilities:
Prepaid expenses 889 10,315 (3,183)
Deposits - - (980)
Accounts payable and accrued expenses 428,771 182,055 651,638
Unearned grant revenue 314,519 435,190 669,472
------------- ------------- -------------------
Total adjustments 837,685 712,075 1,572,031
------------- ------------- -------------------
Net cash used in operating activities (1,514,143) (235,729) (2,516,330)
Cash flows from investing activities:
Purchase of property and equipment (7,070) (22,757) (33,860)
------------- ------------- -------------------
Net cash used in investing activities (7,070) (22,757) (33,860)
Cash flows from financing activities:
Net proceeds from sale of common stock 989,919 2,459,609 3,450,008
Net proceeds from sale of preferred stock - - 728,443
Proceeds from issuance of note payable - - 250,000
Repayment of note payable - (250,000) (250,000)
------------- ------------- -------------------
Net cash provided by financing activities 989,919 2,209,609 4,178,451
Net increase (decrease) in cash and cash equivalents (531,294) 1,951,123 1,628,261
Cash and cash equivalents at beginning of period 2,159,555 208,432 -
------------- ------------- -------------------
Cash and cash equivalents at end of period $ 1,628,261 $ 2,159,555 $ 1,628,261
============= ============= ===================
Supplemental disclosure of cash flow information:
Interest paid $ - $ 4,056 $ 4,056
See notes to financial statements.
F-6
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003, and Period
From Inception on June 27, 2001 to December 31, 2004
1. Operations and Basis of Presentation
Geovax, Inc. ("Geovax" or the "Company"), an emerging biotechnology company,
based in Atlanta, Georgia was incorporated in Georgia on June 27, 2001 ("date of
inception"). Geovax was established to develop, license and commercialize the
manufacture and sale of human vaccines for diseases caused by Human
Immunodeficiency Virus and other infectious agents. The Company has exclusively
licensed from Emory University certain Acquired Immune Deficiency Syndrome
vaccine technology which was developed in collaboration with the National
Institutes of Health and the Centers for Disease Control and Prevention.
The Company's operations to date have been focused on organizational activities,
obtaining capital, recruiting personnel and conducting research and development;
therefore the Company is considered to be a developmental stage company for
financial reporting purposes. Substantially all of the Company's products are in
research or various stages of development. In order to achieve profitable
operations, the Company must successfully complete development and clinical
testing, obtain regulatory approvals, and achieve market acceptance. There can
be no assurance that these efforts will be successful.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results inevitably
will differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash, bank
deposits and highly liquid investments with original maturities of three months
or less at the date of purchase. The recorded values approximate fair market
value due to the short maturities. The Company's cash and cash equivalents are
on deposit at one financial institution.
Property and Equipment - Property and equipment are stated at cost. Expenditures
for maintenance and repairs are charged to operations as incurred, while
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years.
Other Assets - Other assets consist principally of license agreements for
technology use obtained through the issuance of the Company's common stock.
These license agreements are amortized on a straight line basis over ten years.
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the assets. If such assets are considered to
F-7
2. Summary of Significant Accounting Policies (continued)
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Revenue Recognition - The Company's revenue consists of subcontracted government
grant revenue received pursuant to collaborative arrangements with Emory
University. Revenues from these collaborative research arrangements are deferred
and recorded as income as the related costs are incurred.
Research and Development - All research and development costs, including legal
fees and other direct costs incurred in obtaining and protecting patents,
related to future and present products are charged to operations as incurred.
Income Taxes - The Company accounts for income taxes using the liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated 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 are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure. Accordingly, the
Company accounts for stock-based compensation under Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock issued to Employees, and related
interpretations, using the intrinsic value method. Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the measurement date
(generally the grant date) between the fair value of the Company's stock and the
exercise price.
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of SFAS No. 123 to all stock-based
employee compensation arrangements. The fair value of the Company's employee
stock options was estimated at the date of grant using a minimum-value option
pricing model with the following weighted-average assumptions for 2004:
risk-free interest rate of 3.3%, expected life of the option of 5.7 years and no
dividend yield. Following is a reconciliation of net loss to pro forma net loss
as if the fair value method had been applied to all awards for the years ended
December 31, 2004 and 2003 and for the period from inception (June 27, 2001) to
December 31, 2004:
From
2004 2003 Inception
----------------- ---------------- ---------------
Net loss, as reported $ (2,351,828) $ (947,804) $ (4,088,361)
Deduct stock-based
compensation expense
Determined under fair
value method (109,695) - (109,695)
----------------- ---------------- ---------------
Pro forma net loss $ (2,461,523) $ (947,804) $ (4,198,056)
================= ================ ===============
The Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services, which
require that such equity instruments be recorded at their fair value on the
measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instruments vest. Nonemployee
stock-based compensation charges are amortized over the vesting period on a
straight-line basis.
New Accounting Pronouncements - In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
F-8
2. Summary of Significant Accounting Policies (continued)
first interim period beginning after June 15, 2003. This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a freestanding financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Some of the provisions of this
Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial Statements. The Company has
implemented this pronouncement and has concluded that the adoption has no
material impact to the financial statements.
In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based
Payment. Statement 123(R) provides investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in APB Opinion
No. 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been used.
Public entities (other than those filing as small business issuers) will be
required to apply Statement 123(R) as of the first interim or annual reporting
period that begins after June 15, 2005. Small business issuers will be required
to apply Statement 123(R) as of the first interim or annual reporting period
that begins after December 15, 2005. The Company has not yet evaluated the
impact of the adoption of SFAS 123(R), or whether the impact will be significant
to the Company's overall results of operations or financial position.
3. License Agreements
During 2002, the Company entered into a license agreement with Emory University
(the "Emory License"), a related party, for technology required in conjunction
with certain products under development by the Company in exchange for 1,188,000
shares of the Company's common stock valued at $148,856 (based on recent cash
sales of $.125 per share). The Emory License, among other contractual
obligations, requires payments based on milestone achievements, as defined, and
sales by the Company. The agreement requires minimum annual royalty payments of
$3 million in the third year following product launch increasing to $12 million
in the sixth year and maintenance fees of $100,000 per year beginning in 2006
increasing to $750,000 per year by 2008 and every year thereafter. Additionally,
prior patent costs in the amount of $274,783 are payable to Emory University,
one half of which is due when capital raised is equal to $5 million and the
remainder is due when capital raised equals $12 million. The Company may
terminate the Emory License on three months' written notice. In any event, the
Emory License expires on the date of the latest expiration date of the
underlying patents.
The Company is obligated to reimburse Emory University for certain ongoing costs
in connection with the filing, prosecution and maintenance of patent
applications subject to the Emory License. Such reimbursements to Emory amounted
to $58,711, $118,194 and $176,905 for the years ended December 31, 2004 and
2003, and for the period from inception (June 27, 2001) to December 31, 2004,
respectively. As of December 31, 2004, amounts owed to Emory for patent cost
reimbursements amounted to $31,573, which is accrued in the accompanying Balance
Sheet.
F-9
3. License Agreements (continued)
Geovax also entered into an additional license agreement during 2004 in exchange
for 83,333 shares of its common stock values at $100,000 (based on recent cash
sales of $1.20 per share).
4. Lease Commitment
The Company leases the office and laboratory space used for its operations under
a lease agreement on a month-to-month basis from a related party. Rent expense
amounted to $25,488, $17,069 and $57,257 for the years ended December 31, 2004
and 2003, and for the period from inception (June 27, 2001) to December 31,
2004, respectively.
5. Income Taxes
At December 31, 2004, the Company has federal net operating loss ("NOL")
carryforwards of approximately $3,880,000, available to offset against future
taxable income, subject to certain limitations, that expire in varying amounts
beginning in 2022 through 2024. Additionally, the Company has approximately
$128,000 in research and development ("R&D") tax credits that expire beginning
in 2022 through 2024 unless utilized earlier. Section 382 of the Internal
Revenue Code contains provisions that may limit the utilization of NOL and R&D
tax credit carryforwards in any given year as a result of significant changes in
ownership interests that may have occurred or may occur in future periods. No
income taxes have been paid to date.
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities included the following at December
31, 2004:
Deferred tax assets:
Net operating loss carryforward $ 1,474,422
Research and development credit carryforward 127,786
Other -
-------------
Total deferred tax assets 1,602,208
Deferred tax liabilities:
Depreciation 1,653
-------------
Total deferred tax liabilities 1,653
-------------
Net deferred tax assets 1,600,555
Valuation allowance (1,600,555)
-------------
$ -
=============
The Company has established a full valuation allowance equal to the amount of
its deferred tax asset owing to uncertainties with respect to its ability to
generate sufficient taxable income in the future.
F-10
5. Income Taxes (continued)
The Company's effective tax rate varies from the statutory rate as follows for
the year ended December 31, 2004:
Federal benefit at statutory tax rate (34.0)%
State taxes, net of federal benefit (4.0)
Permanent differences 1.8
Research and development credits (3.1)
Valuation allowance 39.3
------------
Effective income tax rate 0.0%
============
6. Redeemable Convertible Preferred Stock
Under its Restated Certificate of Incorporation, the Company is authorized to
issue, in series, up to 20,000,000 shares of preferred stock. In December 2001
and February 2002, the Company issued 4,191,264 and 1,796,256 shares,
respectively, of Series A Redeemable Convertible Preferred Stock ("Series A")
for $.125 per share. Series A shares have many significant rights and
privileges, some of which, but not all, are described herein. Beginning in
August 2010, the Company has an obligation to redeem, upon the request of the
holders of at least 66% of the then outstanding Series A shares, up to 50% of
the Series A shares then held by such holders. Beginning in August 2012, the
Company's repurchase obligation increases to a maximum of 100% of the Series A
shares held by the requesting shareholders. In each case, the per share
redemption price to be paid by the Company would be $0.2705616 plus an
additional amount equal to any dividends declared but unpaid on such shares. In
addition, holders of Series A shares are also entitled to a liquidation
preference of $0.25052 per share plus an additional amount equal to any
dividends declared but unpaid on each such shares upon any liquidation,
dissolution or winding up of the Company, any sale of substantially all the
assets of the Company or the transfer of 50% or more of the Company's
outstanding voting securities, with such liquidation preference to be paid prior
to any payment to holders of common stock. The holders of Series A shares are
entitled to receive, if and when declared, preferential cash dividends at the
rate of $0.0100208 per share per year before payment of any dividends on the
Company's common stock with certain preferential cash dividends becoming
cumulative after August 2010. As of December 31, 2004, no dividends had been
declared. The holders of Series A shares, voting as a separate group, have the
right to elect two members of the Company's Board of Directors. Series A shares
are convertible at any time on a share-for-share basis into the Company's common
stock and are automatically converted in the event of an initial public offering
of the Company's common stock of at least $10 million. The conversion rate may
be adjusted on the occurrence of certain events.
7. Stockholders' Equity (Deficiency)
Common Stock Transactions
-------------------------
In March 2004, the Company sold 2,500,000 shares of its common stock for
$3,000,000, of which $250,000 was paid in cash and $2,750,000 of which was paid
through the issuance of an installment subscription note collateralized by such
shares. As of December 31, 2004, $2,000,000 of the stated installments under the
subscription note remain due and unpaid.
Stock Option Plan
-----------------
In 2002, the Board of Directors of the Company adopted the 2002 Stock Option and
Incentive Plan (the "Plan") under which options designated as either incentive
("ISO") or nonqualified stock options may be issued to employees, officers,
directors, consultants and independent contractors of the Company. The exercise
price for any option granted may not be less than fair value (110% of fair value
for ISOs granted to certain employees) and may be exercised for a period of up
F-11
7. Stockholders' Equity (Deficiency) (continued)
to ten years from the date of grant. Options granted under the plan have vesting
periods ranging from immediately to four years. The Company has reserved
1,650,000 shares of common stock for issuance under the Plan.
Activity under the Plan is shown below.
Number of Weighted
Shares Exercise Average
Under Price per Exercise
Option Share Price
--------- -------------- ----------
Outstanding at December 31, 2001 -- -- --
Granted 300,000 $ 1.32 $ 1.32
Exercised -- -- --
Canceled -- -- --
--------- -------------- ----------
Outstanding at December 31, 2002 300,000 1.32 1.32
Granted -- -- --
Exercised -- -- --
Cancelled -- -- --
--------- -------------- ----------
Outstanding at December 31, 2003 300,000 1.32 1.32
Granted 913,000 1.20 - 1.32 1.24
Exercised -- -- --
Cancelled -- -- --
--------- -------------- ----------
Outstanding at December 31, 2004 1,213,000 $ 1.20 - 1.32 $ 1.26
========= ============== ==========
The following table summarizes additional information concerning the Company's
stock options outstanding and exercisable as of December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Number Life (years) Price Number Price
--------------- --------- ------------ --------- ------- ----------
$1.20 - 1.32 1,213,000 5.12 $1.26 635,000 $1.28
Warrants
--------
The Company granted in October 2002, in connection with a note payable to a
related party, a warrant to purchase up to 132,000 shares of the Company's
common stock for $.125 per share. The warrant expires in October 2012.
8. Subsequent Events
In April 2005, the Company signed a letter of intent to merge (the "Proposed
Merger") with a public company. Subsequent to the Proposed Merger, Geovax will
be the surviving entity. The stockholders of Geovax will own approximately 70%
of the merged entities. The Company anticipates completing the Proposed Merger
during the fourth quarter of 2005.
F-12
Dauphin Technology, Inc.
(A Development Stage Company)
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2006 and December 31, 2005 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2006 and 2005,
six months ended June 30, 2006 and 2005 and
cumulative amounts since January 1, 2004 4
(Commencement of development stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2006 and 2005,
six months ended June 30, 2006 and 2005
and cumulative amounts since January 1, 2004 5
(Commencement of development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 2006 and December 31, 2005
--------------------------------------------------------------------------------------------------------------
ASSETS
June 30, 2006 December 31, 2005
------------- -----------------
CURRENT ASSETS: (Unaudited)
Cash $ 95,070 $ 78,381
------------- -----------------
Total assets $ 95,070 $ 78,381
============= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 272,669 $ 196,813
Accrued expenses 439,130 320,609
Short-term borrowings 150,000 50,000
Current portion of long-term debt 12,427 13,515
Derivative liability 1,768 1,231,158
Conversion obligation 950,000 950,000
Convertible loans 3,331,378 3,031,478
------------- ----------------
Total current liabilities 5,157,372 5,793,573
------------- ----------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
issued and outstanding at June 30, 2006 and December 31, 2005 100,000 100,000
Common stock, $0.001 par value, 100,000,000 shares authorized;
99,969,028 shares issued and outstanding at June 30, 2006 and
99,569,028 issued and outstanding at December 31, 2005 99,970 99,570
Additional paid-in capital 65,739,251 65,619,651
Accumulated deficit (71,001,523) (71,534,413)
------------- ----------------
Total shareholders' deficit (5,062,302) (5,715,192)
------------- ----------------
Total liabilities and shareholders' deficit $ 95,070 $ 78,381
============= ================
The accompanying notes are an integral part of these consolidated financial statements.
3
Dauphin Technology, Inc.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2006 and 2005, the six months ended June 30, 2006 and 2005 and
cumulative amounts since January 1, 2004 (Commencement of development stage)
Cumulative
Amounts
Three Months Ended June 30 Six Months Ended June 30, Since
2006 2005 2006 2005 January 1, 2004
------------ -------------- ------------- ------------- -------------
NET SALES $ - $ $ - $ - $ -
COST OF SALES - - - - -
------------ -------------- ------------- ------------- -------------
Gross profit - - - - -
GENERAL AND ADMINISTRATIVE EXPENSES
337,935 224,733 657,092 386,581 3,081,803
------------ -------------- ------------- ------------- -------------
Loss from operations (337,935) (224,733) (657,092) (386,581) (3,081,803)
Derivative (loss) gain 1,134,641 (195,493) 1,229,390 (226,076) 985,994
INTEREST EXPENSE (21,511) (15,000) (39,408) (30,000) (438,776)
------------ -------------- ------------- ------------- -------------
Net income (loss) from continuing
operations 775,195 (435,226) 532,890 (642,657) (2,534,585)
DISCONTINUED OPERATIONS
Loss from discontinued operations - - - - (548,865)
------------ -------------- ------------- ------------- -------------
Net income (loss) $ 775,195 $ (435,226) $ 532,890 $ (642,657) $ (3,083,450)
============ ============== ============= ============= =============
INCOME (LOSS) PER SHARE:
Continuing Operations $ 0.01 $ (0.00) $ 0.01 $ (0.01) $ (0.02)
Discontinued Operations 0.00 (0.00) 0.00 (0.00) (0.01)
Total Basic and Diluted $ 0.01 $ (0.00) $ 0.01 $ (0.01) $ (0.03)
============ ============== ============= ============= =============
Weighted average number of shares of common stock
outstanding
Basic 99,702,000 99,252,000 99,636,000 99,127,000 98,351,000
Diluted 99,702,000 99,252,000 99,636,000 99,127,000 98,351,000
The accompanying notes are an integral part of these consolidated financial statements.
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2006 and 2005
(Unaudited)
---------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Six Months Ended June 30, Since
2006 2005 January 1, 2004
------------ ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net gain (loss) $ 532,890 $ (642,657) $ (3,083,450)
Non-cash items included in net loss:
Amortization of debt discount - - 269,588
Convertible loans issued in lieu of consulting fees - - 1,161,500
Common stock issued in lieu of convertible loans 120,000 37,500 157,500
Common stock issued for consulting fees - - 447,517
Commons stock issued for employee settlement - - 39,510
Changes in:
Accounts receivable - - 3,248
Assets of discontinued operations - 8,832 166,123
Prepaid expenses - 2,500 2,500
Accounts payable 75,856 124,968 139,580
Accrued expenses 118,521 (29,350) 70,789
Liabilities from discontinued operations - (243,748) (1,188,240)
Net cash used in operating activities 847,267 (741,955) (1,813,835)
CASH FLOWS FROM INVESTING ACTIVITIES - - -
Net cash used in investing activities - - -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of restricted shares - - 323,000
Issuance of preferred stock - 550,000 550,000
Derivative liability (1,229,390) 226,076 (983,211)
Issuance of convertible loans 305,500 251,000 2,169,878
Repayment of convertible loans (5,600) - (100,000)
Payments on long-term debt (1,088) - (1,088)
Payments on short-term borrowings - (200,000) (200,000)
Increase in short-term borrowing 100,000 8,961 150,000
Net cash provided by financing activities (830,578) 836,037 1,908,579
Net increase (decrease) in cash 16,689 94,082 94,744
CASH BEGINNING OF PERIOD 78,381 7,829 326
CASH END OF PERIOD $ 95,070 $ 101,911 $ 95,070
CASH PAID DURING THE PERIOD FOR:
Interest $ - $ - $ 18,262
NONCASH TRANSACTIONS:
Common stock issued in connection with:
Services $ - $ 37,500 $ 37,500
The accompanying notes are an integral part of these consolidated financial statements
5
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying financial statements are unaudited, but in the opinion of the
management of the Company, contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position at June
30, 2006, the results of operations for the three months and six months ended
June 30, 2006 and 2005, and the cash flows for the six months ended June 30,
2006 and 2005 and cumulative amounts since January 1, 2004 (date of commencement
of development stage).
Reference is made to the Company's Form 10-K for the year ended December 31,
2005. The results of operations for the six months ended June 30, 2006 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2006.
Effective January 1, 2004, the Company is considered a development stage company
as defined in Statement of Accounting Standards (SFAS) No. 7. The Company's
development stage activities consist of evaluating potential merger candidates
and raising additional financing.
2. Related Party Transactions
None
3. Stock-Based Compensation
For stock options granted to employees prior to January 1, 2006, the Company
utilized the footnote disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 encourages entities to adopt a fair-value
based method of accounting for stock options or similar equity instruments.
However, it also allows an 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 elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures required by SFAS
No. 123 as applicable. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for stock options granted to employees.
There have been no stock options granted during the second quarter of 2006 or
2005, nor since January 1, 2004.
4. Weighted Average Shares
The computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during each period.
The computation of diluted income (loss) per common share is based on the
weighted average number of common shares outstanding during the period, plus the
common stock equivalents that would arise from the exercise of stock options and
warrants outstanding, using the treasury stock method and the average market
price per share during the period.
Warrants to purchase 700,000 shares, and 1,704,999 shares at June 30, 2006 and
2005, respectively, at prices between $.10 and $1.36 were outstanding but were
excluded for the calculations for diluted income (loss) per share as the effect
was antidilutive.
5. Supplemental Cash Flow Information
Interest in the amount of $18,262 has been paid during the period from January
1, 2004 to June 30, 2006. No amounts have been paid for income taxes during the
same period.
6. Liquidity
The Company is a development stage company and does not have revenues from
operations. In addition, the Company has a deficit in working capital and
stockholder's equity, and has incurred sustained losses.
The Company has funded losses from operations in the current quarter primarily
from the issuance of debt and the sale of the Company's restricted common stock
in private placement transactions, and will require additional funding from
these sources to sustain its future operations. The Company anticipates that the
issuance of debt and the sale of the Company's restricted common stock will
continue to fund operating losses in the short-term; however, there can be no
assurance that it will be successful in doing so.
6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. Definitive Merger Agreement with GeoVax
On January 20, 2006, Dauphin entered into a Definitive Agreement and Plan of
Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax
Acquisition Corp., would merge with and into GeoVax. Upon completion of the
Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin.
GeoVax, Inc., a Georgia biotechnology company, was established to develop,
license and commercialize the manufacture and sale of human vaccines for
diseases caused by HIV-1 (Human Immunodeficiency Virus) and other infectious
agents. The Merger shall become effective upon, among other things, an
affirmative vote of approval from each companies' shareholders. If the Merger is
completed, there is no assurance that the surviving company will be economically
successful.
8. Conversion Obligation
On May 15, 2006, Dauphin and the preferred shareholders entered into an
agreement titled "Conversion Agreement" whereby all of the 10,000,000 shares of
preferred stock will be converted into 20,000,000 shares of newly issued common
stock upon the closing of the merger with GeoVax. The Conversion Agreement
stipulates, among other things, that the preferred shareholders or an affiliate
of theirs, had acquired the Crescent Note, which at May 15, 2006, represented a
principal liability of $950,000 and approximately $411,000 of accrued interest.
Concurrent with the execution and delivery of the Conversion Agreement, Dauphin
agreed to issue to the preferred shareholders a warrant to purchase 22 million
shares of common stock, exercisable only after the closing of the merger with
GeoVax, in exchange for the complete and full satisfaction of the obligation
under the Crescent Note, including the principal and interest. As a result, on
our balance sheet we have removed the line item "Convertible Debenture" and
replaced it with "Conversion Obligation" to reflect the value of the warrant
issued to the preferred shareholders. Accordingly, we are no longer valuing the
$950,000 Conversion Obligation as a derivative, and therefore not recording an
associated liability, which as a result, has created a net gain for the three
months and six months ending June 30, 2006. If for any reason the merger with
GeoVax does not occur, the warrant issued to the preferred shareholders will be
exchanged for a $1,361,395 note convertible into common stock of Dauphin. The
face amount of the note is the $950,000 principal obligation, along with
interest in the amount of $411,395.
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEETS
June 30, December 31,
2006 2005
--------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 405,184 $ 1,272,707
Prepaid expenses and other 212,903 162,831
--------------- ---------------
Total current assets 618,087 1,435,538
Property and equipment, net of accumulated
depreciation of $32,952 and $22,882 at
June 30, 2006 and December 31, 2005 51,235 59,463
Other assets:
Licenses, net of accumulated amortization
of $72,061at
June 30, 2006 and $59,619 at December 31, 2005 176,795 189,237
Deposits 980 980
--------------- ---------------
Total other assets 177,775 190,217
--------------- ---------------
Total assets $ 847,097 $ 1,685,218
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 61,488 $ 316,341
Unearned grant revenue 374,052 852,905
--------------- ---------------
Total current liabilities 435,540 1,169,246
Commitments
Redeemable convertible preferred stock; no
par value, 20,000,000 shares authorized;
Series A, 5,987,520 shares issued and
outstanding (Aggregate liquidation
preference $1,499,994 ) 1,055,596 1,016,555
Stockholders' deficiency:
Common stock, no par value, 50,000,000
shares authorized; 10,548,648 shares
outstanding at June 30, 2006 and
December 31, 2005 5,792,101 5,698,864
Deficit accumulated during the
development stage (5,936,140) (5,699,447)
--------------- ---------------
(144,039) (583)
Stock subscription receivable for
common stock (500,000) (500,000)
--------------- ---------------
Total stockholders' deficiency (644,039) (500,583)
--------------- ---------------
Total liabilities and stockholders'
deficiency $ 847,097 $ 1,685,218
=============== ===============
See accompanying notes.
F-5
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, From Inception
---------------------------- ---------------------------- (June 27,2001) to
2006 2005 2006 2005 June 30, 2006
------------- ----------- ------------ ------------ -----------------
Revenues
Grant revenue $ 478,853 $ 56,672 $ 478,853 $ 221,999 $ 3,037,129
------------- ----------- ------------ ------------ -----------------
478,853 56,672 478,853 221,999 3,037,129
Operating expenses:
Research and development 109,205 470,723 400,261 826,839 6,727,447
General and administrative 179,677 156,783 331,324 273,479 2,331,864
------------- ----------- ------------ ------------ -----------------
288,882 627,506 731,585 1,100,318 9,059,311
------------- ----------- ------------ ------------ -----------------
Loss from operations 189,971 (570,834) (252,732) (878,319) (6,022,182)
Other income (expense)
Interest income 6,192 1,019 16,039 5,693 91,711
Interest expense - - - - (5,669)
------------- ----------- ------------ ------------ -----------------
6,192 1,019 16,039 5,693 86,042
------------- ----------- ------------ ------------ -----------------
Net income (loss) and
comprehensive income (loss) $ 196,163 $ (569,815) $ (236,693) $ (872,626) $ (5,936,140)
============= =========== ============ ============ =================
Basic and diluted:
Income (loss) per common share $ 0.02 $ (0.05) $ (0.02) $ (0.08) $ (0.67)
Weighted average shares 10,548,648 10,548,648 10,548,648 10,548,648 8,922,557
See accompanying notes.
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Deficit
Accumulated Total
Common Stock Stock during the Stockholders'
---------------------------- Subscription Development Equity
Shares Amount Receivable Stage (Deficiency)
------------- ----------- ------------ ------------- --------------
Capital contribution at
inception (June 27, 2001) - $ 10 $ - $ - $ 10
Net loss and comprehensive
net loss for the year
ended December 31, 2001 - - - (170,592) (170,592)
------------- ----------- ------------ ------------ --------------
Balance at December 31, 2001 - 10 - (170,592) (170,582)
Sale of common stock for
cash of $.00 per share 4,704,480 470 - - 470
Issuance of common stock
for technology license 1,188,000 148,856 - - 148,856
Net loss and comprehensive
net loss for the year
ended December 31, 2002 - - - (618,137) (618,137)
------------- ----------- ------------ ------------ --------------
Balance at December 31, 2002 5,892,480 149,336 - (788,729) (639,393)
Sale of common stock for
cash of $1.20 less issuance
costs 2,072,835 2,459,609 - - 2,459,609
Net loss and comprehensive net
loss for the year
ended December 31, 2003 - - - (947,804) (947,804)
------------- ----------- ------------ ------------ --------------
Balance at December 31, 2003 7,965,315 2,608,945 - (1,736,533) 872,412
Sale of common stock for cash
and stock subscription
receivable of $1.20 per
share less issuance costs 2,500,000 2,989,919 (2,750,000) - 239,919
Cash payments received on stock
subscription receivable - - 750,000 - 750,000
Issuance of common stock for
technology license 83,333 100,000 - - 100,000
Net loss and comprehensive net
loss for the year
ended December 31, 2004 - - - (2,351,828) (2,351,828)
------------- ----------- ------------ ------------ --------------
Balance at December 31, 2004 10,548,648 5,698,864 (2,000,000) (4,088,361) (389,497)
Cash payments received on stock
subscription receivable - - 1,500,000 1,500,000
Net loss and comprehensive net
loss for the year
ended December 31, 2005 - - - (1,611,086) (1,611,086)
------------- ----------- ------------ ------------ --------------
Balance at December 31, 2005 10,548,648 5,698,864 (500,000) (5,699,447) (500,583)
Share-based compensation expense 93,237 93,237
Net loss and comprehensive net
loss for the six months ended
June 30, 2006 (unaudited) - - - (236,693) (236,693)
------------- ----------- ------------ ------------ --------------
Balance at June 30, 2006 (unaudited) 10,548,648 $ 5,792,101 $ (500,000) $ (5,936,140) $ (644,039)
============= =========== ============ ============ ==============
See accompanying notes.
7
GEOVAX, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30, From Inception
------------------------------- (June 27, 2001) to
2006 2005 June 30, 2006
------------- ------------- -------------------
Cash flows from operating activities:
Net loss $ (236,693) $ (872,626) $ (5,936,140)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 22,512 15,164 105,013
Accretion of preferred stock redemption value 39,041 39,040 327,153
Share-based compensation expense 93,237 - 93,237
Changes in assets and liabilities:
Prepaid expenses and other current assets (50,072) (56,136) (212,903)
Deposits - - (980)
Accounts payable and accrued expenses (254,853) (483,084) 61,488
Unearned grant revenue (478,853) (221,999) 374,052
------------- ------------- -------------------
Total adjustments (628,988) (707,015 747,060
------------- ------------- -------------------
Net cash used in operating activities (865,681) (1,579,641) (5,189,080)
Cash flows from investing activities:
Purchase of property and equipment (1,842) (48,485) (84,187)
------------- ------------- -------------------
Net cash used in investing activities (1,842) (48,485) (84,187)
Cash flows from financing activities:
Net proceeds from sale of common stock - - 4,950,008
Net proceeds from sale of preferred stock - - 728,443
Proceeds from issuance of note payable - - 250,000
Repayment of note payable - - (250,000)
------------- ------------- -------------------
Net cash provided by financing activities - - 5,678,451
Net increase (decrease) in cash and cash equivalents (867,523) (1,628,126) 405,184
Cash and cash equivalents at beginning of period 1,272,707 1,628,261 -
------------- ------------- -------------------
Cash and cash equivalents at end of period $ 405,184 $ 135 $ 405,184
============= ============= ===================
Supplemental disclosure of cash flow information:
Interest paid $ - $ - $ 5,669
See accompanying notes.
GEOVAX, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 2006
1. Description of Company and Basis of Presentation
Geovax, Inc. ("Geovax" or the "Company"), an emerging biotechnology company,
based in Atlanta, Georgia was incorporated in Georgia on June 27, 2001 ("date of
inception"). Geovax was established to develop, license and commercialize the
manufacture and sale of human vaccines for diseases caused by Human
Immunodeficiency Virus and other infectious agents. The Company has exclusively
licensed from Emory University certain Acquired Immune Deficiency Syndrome
vaccine technology which was developed in collaboration with the National
Institutes of Health and the Centers for Disease Control and Prevention.
The Company's operations to date have been focused on organizational activities,
obtaining capital, recruiting personnel and conducting research and development;
therefore the Company is considered to be a developmental stage company for
financial reporting purposes. Substantially all of the Company's products are in
research or various stages of development. In order to achieve profitable
operations, the Company must successfully complete development and clinical
testing, obtain regulatory approvals, and achieve market acceptance. There can
be no assurance that these efforts will be successful.
The accompanying condensed financial statements as of June 30, 2006 and for the
three-month and six month periods ended June 30, 2006 and 2005 have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal course of
business. The Company has experienced negative cash flows from operations since
inception and has an accumulated deficit at June 30, 2006 of approximately $5.9
million. The Company has funded its activities to date almost exclusively from
equity financings and government grants.
The Company will continue to require substantial funds to continue research and
development, including preclinical studies and clinical trials of its product
candidates, and to commence sales and marketing efforts, if the United States
Food and Drug Administration ("FDA") or other regulatory approvals are obtained.
Management's plans in order to meet its operating cash flow requirements include
the Proposed Merger discussed in Note 3. Additional financing activities such as
private placement of its common stock, preferred stock offerings, debt and
convertible debt instruments may also be contemplated.
While the Company believes that it will be successful in obtaining the necessary
financing to fund its operations, there are no assurances that such additional
funding will be achieved and that it will 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 of
liabilities that might be necessary should the Company be unable to continue in
existence.
The accompanying condensed financial statements as of June 30, 2006 and for the
three-month and six month periods ended June 30, 2006 and 2005 are unaudited,
but include all adjustments, consisting of normal recurring entries, which the
Company's management believes to be necessary for a fair presentation of the
periods presented. Interim results are not necessarily indicative of results for
a full year. The condensed financial statements should be read in conjunction
with the Company's audited financial statements as of December 31, 2005. The
Company's operating results will fluctuate for the foreseeable future.
Therefore, period-to-period comparisons should not be relied upon as predictive
of the results in future periods.
2. Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.123 (revised 2004), Share-Based Payment, which requires
the measurement and recognition of compensation expense for all share-based
payments made to employees and directors based on estimated fair values on the
grant date. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees.
The Company has adopted SFAS No. 123R using the modified prospective application
method which requires the Company to record compensation cost related to
unvested stock awards as of December 31, 2005 by recognizing the unamortized
grant date fair value of those awards over the remaining service periods with no
change in historical reported earnings. Awards granted after December 31, 2005
are valued at fair value in accordance with the provisions of SFAS No. 123R and
recognized on a straight line basis over the service periods of each award. The
Company did not grant or modify any share-based compensation during the six
months ended June 30, 2006.
Prior to January 1, 2006, the Company accounted for stock-based compensation
using the intrinsic value method in accordance with APB Opinion No. 25 and
applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation and Disclosure. Under those provisions,
the Company provided pro forma disclosures as if the fair value measurement
provisions of SFAS No. 123 had been used in determining compensation expense.
The Company used a minimum value option-pricing model to determine the pro forma
impact on the Company's net income. This model utilizes certain information,
such as the interest rate on a risk-free security maturing generally at the same
time as the option being valued and requires certain other assumptions, such as
the expected amount of time an option will be outstanding until it is exercised
or expired, to calculate the fair value of stock options granted.
As a result of adopting SFAS No. 123R, the Company's net income for the three
month and six month periods ended June 30, 2006 is $1,587 and $93,237 lower than
if it had continued to account for share-based compensation under APB Opinion
No. 25. The impact on both basic and diluted earnings per share for the three
month and six month periods ended June 30, 2006 was $(0.00) and $(0.01) per
share.
The following table shows the pro forma effect on net income and earnings per
share for the three month and six month periods ended June 30, 2005, and the
period from inception (June 27, 2001) through June 30, 2006 as if the Company
had applied the fair value recognition provisions of SFAS No. 123R to measure
share-based employee compensation prior to January 1, 2006:
Period from
Inception
Three Months Ended Six Months Ended (June 27, 2001) to
June 30, 2005 June 30, 2005 June 30, 2006
------------------ ----------------- ------------------
Net loss, as reported $ (569,815) $ (872,626) $ (5,936,140)
Deduct stock-based
compensation expense
determined under the
fair value method (1,945) (105,955) (308,887)
------------------ ----------------- ------------------
Pro forma net loss $ (571,760) $ (978,581) $ (6,245,027)
================== ================= ==================
Pro forma basic and
diluted loss per share $ (0.05) $ (0.09) $ (0.70)
================== ================= ==================
3. Proposed Merger
In April 2005, the Company signed a letter of intent to merge with Dauphin
Technology, Inc. ("Dauphin"), a publicly traded company with no current business
operations. In January 2006, Geovax and Dauphin entered into an Agreement and
Plan of Merger (the "Merger Agreement").
In June 2006, Geovax and Dauphin executed an amendment to the Merger Agreement
(the "Merger Amendment"), which reduced the amount of net cash Dauphin is
required to have as a condition of closing from $13 million to $2 million.
Dauphin is required to use its best efforts to raise the balance of $11 million
within 90 days after completion of the merger. In July 2006, Dauphin paid to
Geovax a non-refundable deposit of $2,000,000 in accordance with the
requirements of the Merger Amendment.
According to the Merger Agreement, as amended, Dauphin's wholly-owned
subsidiary, Geovax Acquisition Corp., would merge with and into Geovax. Geovax
would survive the merger as a wholly-owned subsidiary of Dauphin and Dauphin
would change its name to Geovax Labs, Inc. (the "Proposed Merger"). All of the
shares of Geovax issued and outstanding immediately prior to closing of the
Proposed Merger will be converted into an aggregate of 490,332,879 shares of
Dauphin common stock. Immediately after closing of the Proposed Merger, assuming
issuance of $2,000,000 of equity-based securities by Dauphin immediately prior
to the closing, the Company estimates that approximately 70% of the combined
company will be held by the former shareholders of Geovax.
The Proposed Merger is subject to customary closing conditions, including, among
other things, approval by the shareholders of Geovax and Dauphin, satisfactory
completion of due diligence by both parties, confirmation of the parties'
respective representations and warranties, elimination of substantially all of
Dauphin's outstanding liabilities and compliance with all applicable legal
requirements. In addition, prior to closing, Dauphin must become current in its
reporting obligations under the Securities Exchange Act of 1934, as amended. The
Company anticipates completing the Proposed Merger during the third quarter of
2006.
DAUPHIN TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined balance sheet aggregates the
balance sheets of Dauphin Technology, Inc. (an Illinois corporation) ("Dauphin")
and of Geovax, Inc. (a Georgia corporation) ("Geovax") as of June 30, 2006. The
accompanying unaudited pro forma combined statements of operations aggregate the
statements of operations of Dauphin and Geovax for the six months ended June 30,
2006 and for the year ended December 31, 2005.
The accompanying unaudited pro forma financial statements were prepared giving
effect to (a) a proposed transaction whereby Dauphin will acquire Geovax as a
wholly-owned subsidiary (the "Merger") and (b) the completion of certain
transactions by Dauphin immediately prior to the Merger. The following pro forma
combined balance sheet and statements of operations were prepared using the
assumptions as described in the notes and the historical financial information
available at June 30, 2006 and December 31, 2005, respectively.
The pro forma adjustments assume that these transactions had occurred as of June
30, 2006 in the case of the pro forma combined balance sheet and January 1, 2005
in the case of the pro forma combined statements of operations for the year
ended December 31, 2005 and for the six months ended June 30, 2006.
These unaudited pro forma financial statements and the notes thereto have been
prepared by management of Geovax and should be read in conjunction with the
historical financial statements and notes of Dauphin and Geovax. The historical
balances represent the financial position and results of operations for each
company and have been prepared in accordance with generally accepted accounting
principles. The pro forma financial statements have been prepared in accordance
with rules and regulations established by the Securities and Exchange Commission
and are based on certain assumptions set forth in the notes to such statements.
These statements do not purport to be indicative of the financial position or
results of operations that might have occurred, nor are they necessarily
indicative of future results.
DAUPHIN TECHNOLOGY, INC.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2006
(Unaudited)
Dauphin Pro Forma Pro Forma
Technology, Inc. Geovax, Inc. Adjustments Ref Combined
---------------- ------------ ----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 95,070 $ 405,184 $ 1,904,930 (a) $ 2,405,184
Prepaid expenses and other 212,903 (190,156) (c) 22,747
---------------- ------------ ----------------- -------------
Total current assets $ 95,070 $ 618,087 $ 2,427,931
Property and equipment, net of
accumulated depreciation - 51,235 51,235
Other assets:
Licenses, net of accumulated amortization - 176,795 176,795
Deposits - 980 980
---------------- ------------ -------------
Total other assets - 177,775 177,775
---------------- ------------ ------------ -------------
$ 95,070 $ 847,097 $ 1,714,774 $ 2,656,941
================ ============ ============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 711,799 $ 61,488 $ (711,799) (a) $ 61,488
Unearned grant revenue - 374,052 374,052
Short-term borrowings 150,000 - (150,000) (a) -
Current portion of long-term debt 12,427 - (12,427) (a) -
Derivative liability 1,768 - (1,768) (a) -
Conversion Obligation 950,000 - (950,000) (a) -
Convertible loans 3,331,378 - (3,331,378) (a) -
---------------- ------------ -------------
Total current liabilities $ 5,157,372 $ 435,540 $ 435,540
Redeemable convertible preferred stock - 1,055,596 (1,055,596) -
Stockholders' deficit:
Preferred stock 100,000 - (100,000) (a) -
Common Stock 99,970 5,792,101 106,363 (a) 696,666
(206,333) (b)
(5,095,435) (c)
Additional paid-in capital 65,739,251 - 7,055,939 (a) 7,460,875
(72,795,190) (b)
2,000,000 (b)
5,460,875 (c)
Deficit accumulated during development stage (71,001,523) (5,936,140) 71,001,523 (b) (5,936,140)
---------------- ------------ -------------
(5,062,302) (144,039) 2,221,401
Stock subscription receivable - (500,000) 500,000 -
---------------- ------------ -------------
Total stockholders' equity (deficit) (5,062,302) (644,039) 2,221,401
---------------- ------------ ------------ -------------
$ 95,070 $ 847,097 $ 1,714,774 $ 2,656,941
================ ============ ============ =============
See Notes to Pro Forma Combined Financial Statements
DAUPHIN TECHNOLOGY, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006
(Unaudited)
Dauphin Pro Forma Pro Forma
Technology, Inc. Geovax, Inc. Adjustments Ref Combined
----------------- ---------------- ----------------- ---------------
Revenues:
Grant Revenue $ - $ 478,853 $ 478,853
----------------- --------------- ---------------
- 478,853 478,853
Operating Expenses:
Research and development - 400,261 400,261
General and administrative expenses 657,092 331,324 (39,041) (e) 949,375
------------------ ---------------- ---------------
657,092 731,585 1,349,636
------------------ ---------------- ---------------
Loss from operations (657,092) (252,732) (870,783)
Other income (expense):
Interest income - 16,039 16,039
Interest expense (39,408) - 39,408 (d) -
Derivative gain 1,229,390 - (1,229,390) (d) -
------------------ ---------------- ---------------
1,189,982 16,039 16,039
------------------ ---------------- --------------- ---------------
Net loss and comprehensive net loss $ 532,890 $ (236,693) (1,229,023) $ (854,744)
================== ================ =============== ===============
Net loss per share, basic and diluted $ 0.01 $ (0.02) $ (0.00)
================== ================ ===============
Weighted average number of shares
outstanding, basic and diluted 99,636,000 10,548,648 586,481,564 (c) 696,666,212
================== ================ =============== ===============
See Notes to Pro Forma Combined Financial Statements
DAUPHIN TECHNOLOGY, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
(Unaudited)
Dauphin Pro Forma Pro Forma
Technology, Inc. Geovax, Inc. Adjustments Ref Combined
----------------- ------------ ------------------ --------------
Revenues:
Grant Revenue $ - $ 670,467 $ 670,467
----------------- ------------ -------------
- 670,467 670,467
Operating Expenses:
Research and development - 1,640,814 1,640,814
General and administrative expenses 875,811 655,199 (78,081) (e) 1,452,929
----------------- ------------ -------------
875,811 2,296,013 3,093,743
----------------- ------------ -------------
Loss from operations (875,811) (1,625,546) (2,423,276)
Other income (expense):
Interest income - 16,073 16,073
Interest expense (62,130) (1,613) 62,130 (d) (1,613)
Derivative loss (470,593) - 470,593 (d) -
----------------- ------------ -------------
(532,723) 14,460 14,460
----------------- ------------ ----------------- -------------
Net loss and comprehensive net loss $ (1,408,534) $ (1,611,086) $ 454,642 $ (2,408,816)
================= ============ ================= =============
Net loss per share, basic and diluted $ (0.01) $ (0.15) $ (0.00)
================= ============ =============
Weighted average number of shares
outstanding, basic and diluted 99,266,000 10,548,648 586,851,564 (c) 696,666,212
================= ============ ================= =============
See Notes to Pro Forma Combined Financial Statements
DAUPHIN TECHNOLOGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
1. Description & Accounting Treatment
On January 20, 2006, Dauphin and Geovax entered into an Agreement and
Plan of Merger (the "Merger Agreement") by and among Dauphin, Geovax
and Geovax Acquisition, Inc. ("Merger Sub"), a Georgia corporation
which is a wholly-owned subsidiary of Dauphin. Upon closing of the
merger transaction contemplated under the Merger Agreement (the
"Merger"), Merger Sub will be merged with and into Geovax, and Geovax
will survive as a wholly-owned subsidiary of Dauphin. In addition,
pursuant to the terms and conditions of the Merger Agreement:
o All of the shares of Geovax issued and outstanding immediately
prior to the closing of the Merger will be converted into an
aggregate of 490,332,879 shares of Dauphin common stock.
o Immediately after closing of the Merger, and assuming the issuance
of $2 million of equity-based securities by Dauphin immediately
prior to the Merger, there will be approximately 696,666,212
shares of Dauphin common stock issued and outstanding, of which
approximately 70% will be held by the former shareholders of
GeoVax.
Since the shareholders of Geovax will become the controlling
shareholders of Dauphin after this transaction, Geovax will be treated
as the acquirer for accounting purposes. The Merger is treated as a
reverse acquisition and as a recapitalization of Geovax.
2. Pro Forma Adjustments
a) As a condition to the closing of the Merger, Dauphin must (i) have
net cash assets of not less than $2,000,000 and substantially no
liabilities; (ii) have all of its Series A Preferred Stock
converted into common stock.. These adjustments reflect completion
of these pre-Merger transactions by Dauphin, and assume full
conversion of any equity-based convertible securities issued by
Dauphin to satisfy the net cash assets requirement
b) Elimination of Dauphin's equity accounts.
c) Recapitalization of Geovax.
d) Removal of Other Income/Expense associated with Dauphin
liabilities assumed to be eliminated at the beginning of the
respective periods.
e) Removal of accretion expense associated with Geovax Redeemable
Convertible Preferred Stock assumed to be converted into Common
Stock at the beginning of the respective periods.