-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GB7zMF9oeK+I8pOpYWko0NCg2RHGa+A2zVY85EB5jWozjetQfG0Gpe8GA5ikKmP1 d7p0bFV0793hc13As+B0ng== 0000903893-97-000713.txt : 19970501 0000903893-97-000713.hdr.sgml : 19970501 ACCESSION NUMBER: 0000903893-97-000713 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAGEN INC CENTRAL INDEX KEY: 0000857171 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 043029787 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11352 FILM NUMBER: 97591421 BUSINESS ADDRESS: STREET 1: 99 ERIE ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6174912527 MAIL ADDRESS: STREET 1: 99 ERIE ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996. COMMISSION FILE NUMBER 1-11352 ------------ DYNAGEN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------ Delaware 04-3029787 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 99 ERIE STREET, CAMBRIDGE, MASSACHUSETTS 02139 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ------------ (617) 491-2527 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- ------------------- COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE REDEEMABLE COMMON STOCK PURCHASE WARRANTS BOSTON STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF CLASS -------------- COMMON STOCK, $.01 PAR VALUE REDEEMABLE COMMON STOCK PURCHASE WARRANTS ------------ INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] As of April 24, 1997, 30,114,206 shares of the registrant's Common Stock, $.01 par value, were issued and outstanding. The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of April 24, 1997, based upon the closing price of such stock on the Nasdaq Stock Market's SmallCap Market ("Nasdaq") on that date ($1.22) was $33,589,902. ================================================================================ PART I ITEM 1. BUSINESS INTRODUCTION DynaGen, Inc. ("DynaGen" or the "Company") develops and markets proprietary and generic therapeutic and diagnostic products for the human healthcare market. During 1996, DynaGen began expanding its business focus from being a development and licensing company to building a diversified healthcare company focused on the manufacture and distribution of generic drug products and specialty pharmaceuticals, as well as the continued development of therapeutic and diagnostic products. The Company intends to implement this strategy through the acquisition of businesses, technologies and products that the Company believes are undervalued, as well as through continued internal product development. In August 1996, the Company acquired the tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc. Prior to the Able acquisition, DynaGen's business consisted of developing proprietary diagnostic products and proprietary therapeutic and diagnostic product candidates. The Company's lead therapeutic product candidate, NicErase(r)-SL, is intended as an aid in smoking cessation and to provide relief from nicotine withdrawal symptoms. The Company is currently conducting a multi-center pivotal Phase 3 clinical trial of NicErase-SL. Results from this trial are anticipated to be available in the second quarter of 1997. There can be no assurance that the results of the Company's ongoing Phase 3 clinical trial of NicErase-SL will be favorable for the Company. In addition, the Company is also considering alternative delivery formats for its lobeline-based NicErase technology and intends to seek strategic partners to further develop and market these delivery formats. In December 1996, the Company licensed worldwide, exclusive rights to develop a lobeline sulfate nasal delivery formulation, NicErase-NS, to Nastech Pharmaceutical Company, Inc. ("Nastech"). DynaGen is also developing OrthoDyn(r), a bioresorbable bone cement system for bone and joint repair which is currently in the preclinical development stage. In April 1997, the Company entered into an agreement with Smith & Nephew, plc ("Smith & Nephew") providing Smith & Nephew an exclusive period of 12 months to evaluate the OrthoDyn product's human orthopaedic applications. Additionally, the Company expanded its resorbable polymer technology patent base by obtaining a patent for its Sleeper(tm) vaccine technology which enables vaccines to be delivered in a single administration rather than in multiple vaccinations over a period of time. In December 1996, the Company obtained United States Food and Drug Administration (the "FDA") clearance to market its proprietary NicCheck(r) I product for detection of nicotine and/or its metabolites in urine as an aid in indicating smoking status of individuals. The Company has recently commenced marketing NicCheck to physicians, smoking cessation programs, HMOs, and insurance companies. In December 1996, the Company licensed technology from BioLoc, Inc. ("BioLoc") that is intended to improve the accuracy and efficiency, and reduce the overall cost of, breast surgical biopsy procedures. The Company is also conducting early stage research on a proprietary bacterial extract for the treatment of infectious diseases. The Company changed its year end from June 30 to December 31. Accordingly, the Company began a new 12 month fiscal year on January 1, 1997. The six month period resulting from this change, July 1, 1996 through December 31, 1996, is referred to as the "Transition Period." MULTISOURCE BUSINESS The U.S. multisource or generic pharmaceutical market approximates $8 billion in annual sales. This sector has grown due to a number of factors including the large number of drugs coming off patent, the growing importance and impact of managed care organizations which prefer lower cost generics to brand products, and the increasing physician, pharmacist and consumer acceptance of generic drugs. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs. They are required to meet the same governmental standards as the brand-name drugs and must receive FDA approval prior to manufacture and sale. Generic drugs may be manufactured and marketed only if relevant patents (and any additional government-mandated market exclusivity periods) have expired. These drugs are typically sold under their generic chemical names at prices significantly below those of their brand-name equivalents. 1 To successfully participate in the multisource business, DynaGen intends to compete with other generic companies through vertical integration of key elements of the multisource business including manufacturing, packaging and distribution. In August 1996, the Company acquired Able, a 46,000 square foot tablet and suppository manufacturing facility. As part of this acquisition, the Company obtained rights to eleven approved Abbreviated New Drug Applications ("ANDAs") as well as other generic formulations. Since the acquisition, DynaGen has updated and expanded the manufacturing capability, validated several of the acquired products, retrained employees in quality assurance procedures, and has successfully met FDA requirements and guidelines to manufacture these products. The Company is increasing sales of its current generic products through the expansion of its distribution networks and by providing contract manufacturing services to various pharmaceutical companies. The following is a list of generic products that the Company obtained in the Able acquisition:
GENERIC PRODUCT THERAPEUTIC CATEGORY BRAND NAME(1) --------------- -------------------- ------------- ANDA PRODUCTS: Clorazepate tablets (three dosages) Anxiolytic Tranxene Clorazepate capsules (three dosages)(2) Anxiolytic Tranxene Loperamide tablets(2) Antidiarrheal Imodium Acetaminophen suppositories (three dosages)(2) Analgesic Tylenol suppositories Hydrocortisone acetate cream (1%)(2) Anti-inflammatory Anusol-HC cream OTHER GENERIC FORMULATIONS: Bisacodyl tablets Laxative Dulcolax Choline magnesium trisalicylate tablets (three dosages) Anti-inflammatory Trilisate Methenamine Mandelate tablets (two dosages) Urinary Antibacterial Mandelamine Phenazopyridine HCL tablets (two dosages) Urinary Tract Analgesic Pyridium Salsalate tablets (two dosages) Anti-inflammatory Disalcid
- -------- (1) All brand names are registered trademarks of their respective manufacturers. (2) These products are not presently being marketed by the Company. In April 1997, the Company signed an agreement with Kali Laboratories Inc. ("Kali"), a privately-held company specializing in the development of generic drugs. The agreement provides for Kali to assist DynaGen in developing seven specific generic drugs and obtaining FDA approval for these drugs. The patents on these targeted drugs have expired or will expire over the next five years and provide an opportunity for DynaGen to introduce generic equivalents. Kali's management and its scientific staff have significant experience in developing and obtaining approvals on generic drugs. DynaGen believes that by outsourcing the development and approval activities it will benefit from the experience of a highly seasoned team of scientists while reducing the requirement of major investment in personnel and laboratory equipment. To complement the acquisition of Able and pursue vertical integration, the Company recently entered into an agreement to acquire all of the outstanding shares of Superior Pharmaceutical Company ("Superior"), a privately-held distributor of generic pharmaceutical products. Superior has its primary operations in Cincinnati, Ohio, where it employs approximately 65 people, and has 40,000 square feet of office, warehouse and distribution space. Superior reported 1996 sales of approximately $32 million with pre-tax income of over $3 million. Under the terms of the agreement, DynaGen will pay Superior's shareholders a total of $16.5 million, consisting of cash, three-year notes and shares of DynaGen Common Stock. The shareholders may also receive certain cash incentive payments based on Superior's performance during the three years following the close of the transaction. The aquisition of Superior is subject to customary closing conditions and the Company intends to close this acquisition during the second quarter of 1997. There can be no assurance that the Superior aquisition will close in the second quarter of 1997, or at all. 2 The Company plans to raise capital in order to finance the proposed acquisition of Superior through the sale of its securities. There can be no assurance that the Company will be able to secure this financing or that such financing will be available on favorable terms. If the Company is unable to obtain such financing, it will be unable to close the Superior acquisition. Concurrently with the completion of the proposed Superior acquisition, Superior and the Company intend to enter into a line of credit to provide financing for Superior. The Company and Superior are currently engaged in discussions with a commercial bank regarding such line of credit. There can be no assurance that the Company will be able to secure the line of credit or that the line of credit will be available on favorable terms. If the Company is unable to obtain a line of credit for Superior, it will be unable to close the Superior acquisition. The Company intends to fund Superior's operations with the line of credit and Superior's cash generated from operations. SPECIALTY PHARMACEUTICAL BUSINESS DynaGen's specialty or emerging pharmaceutical business strategy is to create a business based on branded generic products and multi-drug combinations in convenient packaging for specific indications and treatments. Physicians routinely prescribe two or more separate drugs for the treatment of several common medical problems. These drugs are separately prescribed and dispensed but are taken at various times during the course of the day as directed by the physician. A major problem in such multi-drug therapies is lack of compliance by the patient and therefore less than desirable therapeutic efficacy. For this reason, the Company initially intends to focus its efforts in this area on compliance enhancement packaging. DynaGen has identified near-term opportunities in compliance enhancement packaging in the areas of women's healthcare and respiratory infection. The Company is developing convenience packaging which it believes will provide ease of prescription, dispensing, storage and self-administration. Convenience packaging also provides cost advantages to the consumer since there is only a single "co-pay" instead of multiple co-payments. The Company's proposed specialty pharmaceutical products are in an early stage of development and therefore are subject to the risks of unsuccessful development, marketing and commercialization. These proposed products will require substantial further development which may include clinical testing, bio-equivalency studies and regulatory approval, all at a substantial cost to the Company. The use of specialty pharmaceuticals will require the acceptance of a new way of prescribing medication and there can be no assurance a market will develop for such products. Additional investment by the Company in manufacturing, marketing and sales infrastructures will also be required prior to commercialization. No assurance can be given that these development efforts will be successfully completed or that the products, if introduced, will be successfully marketed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." THERAPEUTIC PRODUCTS OVERVIEW OF SMOKING CESSATION THERAPY The rationale behind currently marketed nicotine based smoking cessation products is that by gradually decreasing the concentration and daily dosage of nicotine, one can overcome nicotine dependency without experiencing withdrawal problems. Nicorette(r), a nicotine-containing gum currently marketed by SmithKline Beecham Consumer Health Care, was the first prescription product approved by the FDA as an aid to smoking cessation. Nicotine-containing transdermal patches and nasal sprays have also been developed and initially approved by the FDA for prescription use and marketed as such by pharmaceutical companies. Beginning in 1996, the FDA granted approval for several nicotine patch and gum products, including some of the products mentioned above, to be sold over-the-counter ("OTC"), without prescription. The FDA approval of OTC products has caused a shift in the smoking cessation marketplace from prescription to OTC use. Until December 1993, there was a variety of non-FDA approved over-the-counter smoking cessation products. Several of these products contained lobeline as their active ingredient because it was believed that lobeline could temporarily replace nicotine and help to overcome nicotine dependency and withdrawal problems. The majority of the lobeline products were taken orally assuming that a sufficient quantity of lobeline would be absorbed from the gastrointestinal ("GI") tract into the bloodstream. These formulations have not been proven to be effective and they have not received FDA approval. 3 DynaGen's research is consistent with the hypothesis that lobeline relieves nicotine withdrawal symptoms by binding to nicotine receptors in the brain without activating the addiction mechanisms. Based on the belief that a lobeline formulation which does not depend on absorption from the GI tract might be an effective tobacco substitute, DynaGen has developed alternative delivery formulations, focusing primarily on the sublingual tablet, NicErase-SL. NICERASE-SL. DynaGen is developing NicErase-SL, a sublingual tablet that is held under the tongue where it dissolves in one to three minutes and releases lobeline, the active ingredient of the tablet. As the tablet dissolves, the lobeline enters the bloodstream directly through blood vessels under the tongue and in the mouth. NicErase-SL is designed for use by individuals who want to stop smoking. It is expected that NicErase-SL will be used in a six-week program that includes smoking cessation counseling, as is the case for other FDA approved prescription smoking cessation products. DynaGen has shown in clinical studies that NicErase-SL reduces symptoms of tobacco withdrawal and is now evaluating its effectiveness as an aid in smoking cessation in a 750 subject multi-center pivotal Phase 3 clinical trial. Results from this first trial are anticipated to be available in the second quarter of 1997. At a minimum, a second similar trial would also be necessary before the Company could file with the FDA a New Drug Application to market NicErase-SL as a prescription product. The FDA currently requires that smoking cessation products be initially marketed for prescription use with a possible switch to OTC only after a positive history of prescription use has been established and demonstrated to the FDA's satisfaction. In light of the shift in the smoking cessation market from prescription to OTC products and of the expanding availability of different dosage formats of nicotine-based smoking cessation products such as the nicotine nasal spray, the Company is refocusing its traditional development strategy by concentrating on outlicensing its technology to one or more strategic partners. The Company intends to minimize research and development expenditures on products which have a long development and approval process. Since alternative drug delivery formats have proven successful in the nicotine replacement therapy market, the Company is considering the development of additional delivery formats for NicErase, such as a transdermal patch and adhesive buccal wafer. The Company believes that a product available in multiple delivery dosage formats may create more diverse marketing opportunities. In December 1996, DynaGen licensed its technology for the development of a lobeline-containing nasal spray to Nastech. Under the terms of this agreement, Nastech will be responsible for all remaining preclinical and clinical development of the product. DynaGen and Nastech will divide equally all future license and sales royalty revenues. To date, the Company has not entered into any collaborative arrangements with any third party with respect to the development and commercialization of NicErase, except for the agreement with Nastech. The Company's future NicErase development and commercialization activities will depend on a number of factors including the results of the Company's current pivotal Phase 3 clinical trial for NicErase-SL, the changing demands of the smoking cessation market and the Company's ability to secure a suitable marketing and development partner. There can be no assurance that the results of the current pivotal Phase 3 clinical trial will be sufficient to support further clinical development of NicErase-SL or a second pivotal Phase 3 clinical trial. Even if such results are promising, there can be no assurance that such results will be repeated in future clinical trials, or that the Company will receive the necessary regulatory approvals to commercialize NicErase-SL or any other NicErase format. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." ORTHODYN BIORESORBABLE BONE CEMENT The global orthopaedics market continues to expand, and the Company believes that resorbable materials are one of the most rapidly growing sectors. With significant growth projected in the elderly population comes an increased demand for orthopaedic materials. Advances continue to be made in the design of total joint prostheses and other fixation devices. The area of bioresorbable bone substitutes is of prime interest to the major orthopaedics manufacturers, with most having the goal of adding such materials to their product line. 4 OrthoDyn is based on a family of bioresorbable, biocompatible polyesters derived from compounds naturally occurring in the body. It is a composite polymer/filler system and has strength and stiffness more similar to human bone than fully ceramic systems. It is initially moldable, forming a very cohesive dough, cures fast (10 to 30 minutes) with little or no heat evolution, and has strength, stiffness and toughness similar to human bone. Preclinical studies have demonstrated acceptable specifications with regard to degradation time, biocompatibility and strength. These studies also have provided early indications that new bone effectively grows into and replaces the cement. The polymer component also has potential use for formation of preformed bioresorbable pins, plates and screws. In line with DynaGen's goal to minimize development expenditures on products which have long-term development and clinical approval programs, the Company and Smith & Nephew have recently entered into an agreement providing Smith & Nephew with an exclusive period of 12 months to evaluate the OrthoDyn product's human orthopaedic applications. There can be no assurance that the Company will enter into a definitive agreement with Smith & Nephew or that such an agreement will prove successful for DynaGen. Furthermore, no assurance can be given that continued preclinical development of OrthoDyn will be successful, that the necessary regulatory approvals will be obtained or that the OrthoDyn products will be successfully marketed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." ADDITIONAL BIORESORBABLE POLYMER TECHNOLOGIES Vaccine delivery represents a potential area for the application of the Company's controlled release delivery systems. DynaGen's patent application covering its Sleeper(tm) technology has recently been granted notice of allowance from the U.S. Patent and Trademark Office. This technology involves a unique combination of a bioresorbable polymer and a vaccine such that, upon injection, the Sleeper delivery system immediately releases the initial amount of vaccine corresponding to the first shot and then, after a predetermined period of time, will release in a "burst" the second load of vaccine representing the "booster" shot. DynaGen also has developed a polymer system that can be applied to the controlled, sustained release of a wide variety of drugs. The Company is pursuing both corporate alliances and outlicensing approaches for further development of these resorbable polymer technologies. There can be no assurance that the Company will be able to find a suitable development partner for these bioresorbable polymer technologies, that development efforts for these technologies will be successfully completed or that the products, if introduced, will be successfully marketed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." OTHER THERAPEUTIC PRODUCTS The Company is also conducting early stage research on a proprietary bacterial extract for the treatment of infectious diseases and is currently engaged in the characterization and partial purification of the extract prior to filing an investigational new drug application. Management is also evaluating potential clinical applications for this technology. These types of therapeutics have been studied in the past and have had mixed results. There can be no assurance that the Company can successfully develop, test and market products based on this technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." DIAGNOSTIC PRODUCTS The health care industry has shifted to a managed care approach which integrates prevention, diagnostic, therapeutic and compliance technologies into a panel of products for specific disease management. In light of this structural shift, the Company is developing diagnostic products which may help in the prevention and diagnosis of disease and in the determination of compliance with smoking cessation programs. 5 BREAST BIOPSY TECHNOLOGY DynaGen recently licensed technology that is intended to improve the accuracy and efficiency, and reduce the overall cost, of breast surgical biopsy procedures from BioLoc, a privately held Boston-based company. The acquisition of the BioLoc technology fits DynaGen's strategy of developing distinctive healthcare products based on technologies acquired by the Company from outside sources. Core needle biopsy, the most commonly used non-surgical procedure for diagnosis of suspicious lesions in breasts, is limited in its ability due to the difficulty in capturing the targeted tissue and the need for multiple attempts to obtain accurate and sufficient samples, resulting in unnecessary pain, scarring and anxiety. The BioLoc technology is intended to overcome the shortcomings of the core needle biopsy procedure by accurately guiding the surgical biopsy instruments directly to the suspected tissue lesion identified during mammography examination. Imaging and location tracking technologies are combined to provide a three-dimensional view of the breast tissue which the Company believes will allow the accurate depiction of the biopsy target and guidance for its surgical removal. The Company is now completing its patent application covering this technology and developing a prototype system. The BioLoc technology is in an early stage of development and therefore is subject to the risks of unsuccessful development, marketing and commercialization. This proposed product will require substantial further development and preclinical and clinical testing and regulatory approval, at a substantial cost to the Company. Additional investment by the Company in manufacturing, marketing and sales infrastructures will also be required prior to commercialization. No assurance can be given that these development efforts will be successfully completed or that the products, if introduced, will be successfully marketed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS NICCHECK I. NicCheck I is a simple colorometric test for the detection of nicotine and/or its metabolites in urine. The test distinguishes between smokers and nonsmokers with 97% accuracy and is also able to distinguish between high and low consumers of nicotine. NicCheck I can be used both as a companion product for NicErase-SL or independently for clinical evaluation. The NicCheck I result may be used to determine the appropriate level of nicotine replacement therapy during smoking cessation efforts. Smokers who are trying to quit may become more motivated by observing a decrease in color intensity of the NicCheck I results as they reduce nicotine consumption. NicCheck I may also prove to be a cost-effective means for insurance companies to employ risk assessment/risk management strategies. The FDA recently granted the Company clearance to market NicCheck I in the United States and the Company is now attempting to establish multilevel sales and marketing approaches. NICCHECK II. The Company is initiating preclinical studies for detecting exposure to secondhand smoke. Secondhand smoke causes and exacerbates a number of respiratory problems in nonsmokers. The Company believes that physicians could use NicCheck II to promote early intervention. TUBERCULOSIS DIAGNOSTIC PRODUCTS DynaGen has also developed proprietary diagnostic tests for certain infectious diseases including tuberculosis ("TB"). The Company is currently selling MycoDot(r), a product to detect antibodies against mycobacteria in blood or serum, through distributors primarily in Southeast Asia, Pacific Rim countries, China, India, and Japan. DynaGen has received clearance under three premarket notification 510(k)s from the FDA to market its MycoAKT(r) diagnostic tests that identify three mycobacterial species in culture. The Company has granted exclusive U.S. manufacturing and distribution rights and semi-exclusive worldwide rights for MycoAKT to a third party. The Company continues to pursue licensing arrangements for the promotion and distribution of these products, but does not expect to generate material amounts of revenue from sales of these products. 6 SALES AND MARKETING The Company's generic therapeutic products are sold through private label arrangements primarily through direct sales efforts to drug wholesalers, distributors and retail drug chains and other pharmaceutical companies. In the near future, the Company also intends to market its generic therapeutic products under its own "Able Laboratories" name. The Company markets its diagnostic products under its own name primarily through distributors. The Company has relatively limited experience in sales, marketing and distribution. There can be no assurance that the Company can successfully implement its sales and marketing strategy or that it can successfully market or sell any of its products or proposed products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." MAJOR CUSTOMERS During the Transition Period, approximately 85% of total revenues were derived from three major customers: Schein Pharmaceutical ("Schein") (53%), Genelabs Diagnostic Pte LTD ("Genelabs") (18%) and Alpharma, Inc. (14%). For the fiscal year ended June 30, 1996, approximately 79% of total revenues were derived from three major customers: Bristol-Myers Products ("BMP") (45%), Hainan OSROC Bio-Tech Co. Ltd. ("OSROC") (23%) and Remel LP ("Remel") (11%). For the fiscal year ended June 30, 1995, approximately 77% of total revenues were derived from two major customers: BMP (50%) and Genelabs (27%). There is no assurance that the revenues from Schein and Genelabs will recur. The revenue from BMP represents the recognition over two years of a one-time payment of $500,000 and will not recur. In addition, the revenue from Alpharma, Inc. was derived from a temporary supply agreement which ended in February 1997 and is not expected to recur. The loss of any key customer and the inability of the Company to replace revenues provided by a key customer could have a material adverse effect on the Company's business, financial condition and results of operations. INDUSTRY SEGMENTS AND SALES BY GEOGRAPHIC AREA Financial information with respect to the Company's business segments and product sales by geographic area is presented in Note 11 of "Notes to Consolidated Financial Statements." BACKLOG The dollar amount of backlog orders for the Company's products as of December 31, 1996 was approximately $300,000. Although orders are subject to cancellation without penalty, management expects to fill substantially all of them in the near future. MANUFACTURING AND SUPPLIERS DynaGen's generic products are manufactured at its Able Laboratories facility in South Plainfield, New Jersey. The principal components used in the Company's generic products are active and inactive pharmaceutical ingredients and certain packaging materials. Sources for certain materials for the Company's products must be approved by the FDA, and in many instances only one source has been approved. Active raw material ingredients are purchased primarily from United States distributors of bulk pharmaceutical materials manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials. However, if raw materials from a specified supplier were to become unavailable, the Company would be required to file a supplement to its ANDA and revalidate the manufacturing process using the new supplier's materials. If unexpected delays in obtaining new materials do occur, it could result in the loss of revenues and have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." The Company's strategy is to license its diagnostic products for manufacture and distribution by third parties. The Company has entered into license agreements for the manufacture and distribution of its MycoAKT and MycoDot products. MycoDot is produced by a single licensed manufacturer in India. Nicheck I is produced by a contract manufacturer in the United States. The Company's dependence upon third parties for the manufacture and distribution of its diagnostic products could have a material adverse effect on its ability to deliver its products on a timely basis. 7 Clinical supplies of the Company's proprietary NicErase-SL product candidate are manufactured by a third-party contract manufacturer. The Company's Cambridge, Massachusetts and South Plainfield, New Jersey facilities are registered with the FDA and subject to current Good Manufacturing Practices ("cGMP") as prescribed by the FDA. COMPETITION The Company competes with other generic manufacturers, specialized biotechnology companies and major pharmaceutical companies. Many of these competitors possess substantially greater financial and other resources, such as expertise in clinical trials, FDA submissions and marketing, that are needed to commercialize a pharmaceutical product. In the generic pharmaceutical market, the Company competes with off-patent drug manufacturers, brand-name pharmaceutical companies that manufacture off-patent drugs, the original manufacturers of brand-name drugs and manufacturers of new drugs that may be used for the same indications as the Company's products. Revenues and gross profit derived from generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors unique to the generic pharmaceutical industry. As patents for brand name products and related exclusivity periods mandated by regulatory authorities expire, the first generic manufacturer to receive regulatory approval for generic equivalents of such products is usually able to achieve relatively high revenues and gross profit. As other generic manufacturers receive regulatory approvals on competing products, prices and revenues typically decline. Accordingly, the level of revenues and gross profit attributable to generic products developed and manufactured by the Company is dependent, in part, on its ability to develop and introduce new generic products, the timing of regulatory approval of such products, and the number and timing of regulatory approvals of competing products. In addition, competition in the United States generic pharmaceutical market continues to intensify as the pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care costs. Brand name companies are increasingly selling their products into the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No regulatory approvals are required for a brand name manufacturer to sell directly or through a third party to the generic market, nor do such manufacturers face any other significant barriers to entry into such market. These competitive factors may have a material adverse effect on the Company's ability to sell its generic products. In the field of nicotine addiction, the NicErase-SL product candidate will compete with both prescription and OTC products. In particular, management believes that the principal drug competition for its proposed NicErase product is nicotine chewing gum, nicotine nasal spray and the nicotine patch which several pharmaceutical companies, such as SmithKline Beecham, Hoechst Marion Roussel, McNeil Consumer Products Co. and Ciba Self-Medication have developed and are marketing in the United States and elsewhere. Competition has been increasing due to the FDA approval of several nicotine patch and gum products to be sold OTC, without prescription (see "Overview of Smoking Cessation Therapy"). These FDA approvals have caused a shift in the smoking cessation marketplace from prescription to OTC use. Other programs that emphasize behavioral modification approaches, such as hypnosis, will create additional competition in the smoking cessation market. There can be no assurance that the results of pivotal Phase 3 clinical trials will prove successful for the Company's NicErase-SL product candidate or that it will receive the necessary regulatory approvals and even if such approvals are obtained, that such product will be commercially successful. OrthoDyn, the Company's orthopedic product candidate, will compete with products from a number of much larger companies in the bone repair market, including, but not limited to, Johnson & Johnson Co., Pfizer (Howmedica) and Bristol-Myers Squibb Co. (Zimmer). There can be no assurance that the Company's OrthoDyn product candidate will receive the necessary regulatory approvals and even if such approvals are obtained that such product will be commercially successful. Management believes that the Company's current and proposed diagnostic products will compete on the basis of price, performance and technological features such as speed of detection, absence of radioactive substance, accuracy and reliability. Management believes that Gen-Probe, Inc. and Becton-Dickinson, among others, are its immediate competitors and that other companies may introduce competing products. There can be no assurance that the Company will be able to successfully market any of its diagnostic products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." 8 GOVERNMENT REGULATION The Company's therapeutic and diagnostic products will be subject to significant government regulation in the United States principally by the FDA, and to a lesser extent, by the Drug Enforcement Administration, state governments and other countries. Federal and state regulations and statutes impose certain requirements on the testing, manufacture, labeling, storage, recordkeeping, approval, advertising and promotion of the Company's products. Noncompliance with applicable requirements can result in judicially and administratively imposed sanctions including seizures of adulterated or misbranded products, injunction actions, fines and criminal prosecutions. Administrative enforcement measures can also involve product recalls and the refusal of the government to approve new drug applications ("NDAs") or ANDAs. In order to conduct clinical tests and produce and market products for human diagnostic and therapeutic use, the Company must comply with mandatory procedures and safety standards established by the FDA and comparable state and foreign regulatory agencies. Typically, such standards require that products be approved by the FDA as safe and effective for their intended use prior to being marketed for human applications. To obtain FDA approval for a new drug or generic equivalent, a prospective manufacturer must, among other things, comply with the FDA's cGMP regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time, and the Company must follow cGMP regulations at all times during the manufacture and other processing of drugs. To comply with the requirements set forth in these regulations, the Company must continue to expend significant time to provide adequate resources in the areas of development, production, quality control and quality assurance. FDA approval is required before the Company can market any new drug, including a generic equivalent of a previously approved drug or a new indication or delivery method for a previously approved drug. There are three principal ways to obtain FDA approval of a new drug: 1) New Drug Application (NDA) -- A prospective manufacturer must submit to the FDA full reports of well-controlled clinical studies and other data to prove that a drug is safe and effective and meets other requirements for approval. 2) "Paper" NDAs -- Under certain circumstances, the FDA will permit safety and efficacy to be demonstrated by submission of published literature and journal articles. 3) Abbreviated New Drug Applications (ANDA) -- The Waxman-Hatch Act of 1984 established a statutory procedure for the submission and FDA review and approval of ANDAs for generic versions of drugs previously approved by the FDA. Under the ANDA procedure, the FDA waives the requirement of conducting complete clinical studies of safety and efficacy, and instead typically requires the applicant to submit data illustrating that the generic drug formulation is bioequivalent to a previously approved drug. "Bioequivalence" means that the rate of absorption and the levels of concentration of a generic drug in the body needed to produce a therapeutic effect are substantially equivalent to those of the previously approved drug. For some drugs, the FDA may require other means of demonstrating that the generic drug is bioequivalent to the original drug. The NDA and ANDA approval process generally takes a number of years and involves the expenditure of substantial resources. FDA approval of an NDA dealing with a new pharmaceutical or biological product for human use is a multistep process. Generally, preclinical animal testing first must be conducted to establish the safety and potential efficacy of the experimental product for treatment of a given disease or condition. Once the product has been found to be reasonably safe in animals, suggesting that human testing would be appropriate, an investigational new drug ("IND") application is submitted to the FDA. FDA acceptance of the IND allows a company to initiate clinical testing on human subjects. The initial phase of clinical testing (Phase 1) is conducted to evaluate the safety and, if possible, to gain early evidence of effectiveness of the experimental product in humans. If acceptable product safety is demonstrated, then Phase 2 trials are initiated. The Phase 2 trials involve studies in a small sample of the actual intended patient population to assess the efficacy of the drug for a specific application, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse side effects. Phase 2 studies are also utilized to evaluate combinations of products for therapeutic activity. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase 3 trials may be initiated. Phase 3 trials are 9 expanded controlled trials that are intended to gather additional information about safety and effectiveness in order to evaluate the overall risk-benefit relationship of the experimental product and to provide an adequate basis for product labeling. These trials also may compare the safety and activity of the experimental product with currently available products. It is not possible to estimate the time in which Phase 1, 2 and 3 studies will be completed with respect to a given product, although the time period can be as long as several years. Upon completion of clinical testing, which demonstrates that the product is safe and effective for a specific indication, an NDA or a Product License Application ("PLA") for a biological product may be submitted to the FDA. This application includes details of the manufacturing procedures, testing processes, preclinical studies and clinical trials. FDA first determines whether to accept the application for filing. If it does, FDA's review commences; if it does not, the Company may need to obtain additional data before resubmitting the application. FDA approval of the application is required before the applicant may market the new product. In addition, the FDA may impose conditions on the approval, such as post-marketing testing and surveillance programs to monitor a product's safety and effectiveness. The Waxman-Hatch Act establishes certain statutory protections for FDA-approved drugs, which protections could preclude submission or delay the approval of a competing ANDA. One such provision allows a five-year market exclusivity period for NDAs involving new chemical compounds and a three-year market exclusivity period for NDAs (including different dosage forms) containing data from new clinical investigations essential to the approval of the application. Both patented and non-patented drug products are subject to these market exclusivity provisions. Another provision of the act extends patents for up to five years as compensation for reduction of the effective market life of the patent resulting from the time involved in the federal regulatory review process. The Orphan Drug Act also has market exclusivity provisions of seven years for the first approved drug for a rare disease or condition. A grant of exclusivity under this act can preclude the approval of both NDAs and ANDAs for the orphan indication. The Prescription Drug User Fee Act of 1992, enacted to expedite drug approval by providing the FDA with resources to hire additional medical reviewers, imposes three types of user fees on manufacturers of NDA-approved prescription drugs. Applicants submitting only ANDAs and most other off-patent drug manufacturers, including the Company, are not currently subject to any of the three user fees. If the Company submits NDAs for non-ANDA products, the Company will be subject to user fees. Penalties for wrongdoing in connection with the development or submission of an ANDA were established by the Generic Drug Enforcement Act of 1992, authorizing the FDA to permanently or temporarily bar companies or individuals from submitting or assisting in the submission of an ANDA. They may also temporarily deny approval and suspend applications to market generic drugs. The FDA may also suspend the distribution of all drugs approved or developed in connection with certain wrongful conduct and also has authority to withdraw approval of an ANDA under certain circumstances and to seek civil penalties. The Company does not expect the law to have a material impact on the review or approval of the Company's ANDAs. Reimbursement legislation such as Medicaid, Medicare, Veterans Administration and other programs govern reimbursement levels. All pharmaceutical manufacturers rebate to individual states a percentage of their revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers currently rebate 11% of average net sales price for products marketed under ANDAs. NDA manufacturers are required to rebate the greater of 15.2% of average net sales price or the difference between average net sales price and the lowest net sales price during a specified period. The Company believes that the federal and/or state governments may continue to enact measures in the future aimed at reducing the cost of drugs and devices to the public. The Company cannot predict the nature of such measures or their impact on the Company's profitability. The Company's manufacturing subsidiary, Able, currently manufactures several products which are regulated as "old drugs" and subject to the requirements of the Over-the-Counter Drug Review regulations promulgated by the FDA. This class of drugs requires no prior approval from FDA before marketing, but such products must comply with applicable FDA monographs which specify, 10 among other things, required ingredients, dosage levels, label contents and permitted uses. These monographs may be changed from time to time, in which case the Company may be required to change the formulation, packaging or labeling of any affected product. Changes to monographs normally have a delayed effective date, so while the Company may have to incur costs to comply with any such changes, disruption of distribution is not likely. There are two principal methods by which FDA authorization may be obtained to market medical device products, such as the Company's diagnostic test kits. One method is to seek FDA clearance through a premarket notification filing under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Applicants under the 510(k) procedure must prove that the device for which marketing clearance is sought is substantially equivalent to a device on the market prior to the Medical Device Amendments of 1976 or a device marketed thereafter pursuant to the 510(k) procedure. The review period for a 510(k) submission is generally shorter than that of a premarket approval ("PMA") procedure, however, it cannot be estimated with any degree of certainty. If the 510(k) procedure is not applicable, a PMA must be obtained from the FDA. Under the PMA procedure, the applicant must conduct substantial clinical testing that is required to determine the safety, effectiveness and potential hazards of the product. Clinical testing requires prior review of the study protocol by an institutional review board ("IRB") and patients informed consent, and may require submission of an investigational device exemption application to the FDA (for significant risk devices). Prior to human testing, animal testing may be required to determine the safety of the product. The review period under a PMA application is generally longer than review of a 510(k) and it may include review of the application by an outside advisory committee of experts in the field. In addition, the preparation of a PMA application is significantly more complex, expensive and time consuming than the 510(k) procedure and no assurance can be given that the FDA will grant approval for the sale of the Company's products for routine clinical applications or that the length of time the approval process will require will not be extensive. The FDA can also significantly delay the approval of a pending NDA, ANDA, 510(k) or PMA under its "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy." Manufacturers of drugs and devices must also comply with the FDA's cGMP standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDA's refusal to approve additional applications. In addition, if the Company elects to manufacture its drugs, devices or biological products itself, it will be necessary to meet mandated FDA manufacturing requirements by applying for appropriate FDA establishment registration such as an Establishment License Application for biological products, Drug Establishment Registration for its drug products and a Device Establishment Registration for devices. There can be no assurance that the appropriate approvals from the FDA will be granted as to any of the Company's proposed products or processes, that the process to obtain such approvals will not be excessively expensive or lengthy, or that the Company will have sufficient funds to pursue such approvals. The failure to receive the requisite approvals for the Company's products or processes, when and if developed, or significant delays in obtaining such approvals, would prevent the Company from commercializing its products as anticipated and would have a materially adverse effect on the business, financial condition and results of operations of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors That May Affect Future Results." Able is subject to a consent decree entered by the court on April 9, 1992 in United States v. Able Laboratories, Inc., Civ. No. 91-4916 (D.N.J.) for failure to comply with FDA cGMP and has been operating under this consent decree since April 1992. The principals involved in the issuance of that order are no longer employed by Able, DynaGen or any of its affiliates. Since the acquisition by DynaGen, Able has made substantial commitments (both directed and financial) to improve the plant, personnel, and equipment in order to effect an improvement in its operations. Key management changes have been made with individuals who have knowledge and commitment for cGMP in order to ensure continued cGMP compliance. Ongoing cGMP training on a regularly scheduled basis will also be provided to Able's employees. 11 Additionally, the latest Establishment Inspection, conducted on November 12, 13, 18, and 19, 1996 under the authority of an Order of Permanent Injunction did not result in the issuance of an FDA Form 483, and the Establishment Inspection Report (EIR) classified the inspection as "NN" -- no official action indicated. The Company is in the process of initiating changes and plans to request the FDA to join Able in a petition for relief from the consent decree. PRODUCT LIABILITY AND INSURANCE COVERAGE The Company presently maintains product liability insurance in the amount of $3,000,000 for its products presently being marketed. The Company does not presently maintain product liability insurance on any of its proposed products. Although, the Company intends to obtain product liability insurance prior to the commercialization of certain products which are not presently insured, there can be no assurance that the Company will obtain such insurance at favorable rates or, even if obtained, that any insurance will be adequate to cover potential liabilities. In the event of a successful suit against the Company, insufficiency of insurance coverage could have a materially adverse impact on the Company's operations and financial condition. Furthermore, the costs of defending or settling a product liability claim and any attendant negative publicity may have a materially adverse impact on the Company, even if the Company ultimately prevails. Furthermore, certain food and drug retailers require minimum product liability insurance coverage as a precondition to purchasing or accepting products for commercial distribution. Failure to satisfy these insurance requirements could impede the Company's ability to achieve broad commercial distribution of its proposed products, which could have a materially adverse effect upon the business and financial condition of the Company. RESEARCH AND DEVELOPMENT For the Transition Period, the Company expended $1,092,253 on research and development activities. For the fiscal years ended June 30, 1996, 1995 and 1994, the Company expended $3,118,145, $1,718,006 and $2,183,849, respectively, on research and development activities. PATENTS AND PROPRIETARY TECHNOLOGY As part of its initial organization, the Company acquired several patents related to the polymer technologies. In addition, the Company has filed several U.S. and foreign patent applications for processes and products relating to its controlled release delivery systems, smoking cessation technology, nicotine detection product, bioresorbable bone cement product, immunological tests for the diagnosis of mycobacterial disease, and other technologies. No assurance can be given that existing patent applications will be granted or that any patents, if issued, will provide the Company with adequate protection relating to the covered products, technology or processes. To date, the Company has received two U.S. patents related to its NicErase smoking cessation technology covering: (i) the transdermal delivery system for the administration of lobeline as an aid to smoking cessation and (ii) sublingual tablet formulations. The Company has received a U.S. patent related to a controlled release delivery system for drug dependency. In April 1997, the Company received a notice of allowance from the U.S. patent office for the Company's pulsed release vaccine delivery technology. Competitors may have filed applications for, or may have been issued patents or may obtain additional patents and proprietary rights relating to, products or processes competitive with those of the Company. Accordingly, there can be no assurance that the Company's patent applications will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology; nor can there be any assurance that any patents issued to the Company will not be infringed or circumvented by others or that others will not obtain patents that the Company would need to license or circumvent. There can be no assurance that licenses that might be required for the Company's processes or products would be available on reasonable terms, if at all. In addition, there can be no assurance that the Company's patents, if issued, would be held valid by a court. The Company's generic and specialty pharmaceutical businesses rely upon unpatented trade secrets and proprietary technologies and processes. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise 12 gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its right to unpatented trade secrets. The Company requires its employees, consultants and other advisors to execute confidentiality agreements. However, there is no assurance that these agreements will provide meaningful protection or adequate remedies for the Company's trade secrets in the event of unauthorized use or disclosure of such information. The manufacture and sale of certain products developed by the Company will involve the use of processes, products or information, the rights to certain of which are owned by others. Although the Company has obtained licenses with regard to the use of certain of such processes, products and information, there can be no assurance that such licenses will not be terminated or expire during critical periods, that the Company will be able to obtain licenses for other rights which may be important to it, or, if obtained, that such licenses will be obtained on commercially reasonable terms. If the Company is unable to obtain such licenses, the Company may have to develop alternatives to avoid infringing patents of others, potentially causing increased costs and delays in product development and introduction, or precluding the Company from developing, manufacturing or selling its proposed products. Additionally, there can be no assurance that the patents underlying any licenses will be valid and enforceable. To the extent any products developed by the Company are based on licensed technology, royalty payments on the licenses will reduce the Company's gross profit from such product sales and may render the sales of such products uneconomical. MycoDot(R), NicErase(R), MycoAKT(R), NicCheck(R) and OrthoDyn(R) are registered trademarks of the Company. Sleeper(tm) is a trademark of the Company. EMPLOYEES As of April 24, 1997, the Company and its subsidiary had 67 full-time employees, of whom 16 were employed in selling, general and administrative activities and 51 were employed in research and development and manufacturing of its products. Six of the Company's employees hold doctoral degrees including one who holds a Doctorate in Medicine (M.D.). None of the Company's employees are represented by a union. The Company believes its relationship with its employees is good. ITEM 2. PROPERTIES The Company maintains its principal executive offices and laboratory facilities at 99 Erie Street in Cambridge, Massachusetts. The premises, which consist of approximately 27,000 square feet of space, are leased from an unaffiliated party, for a term expiring on September 30, 1997. The Able Laboratories subsidiary is located at a 46,000 square foot leased manufacturing facility in South Plainfield, New Jersey. The premises are leased from an unaffiliated party for a term expiring on March 31, 2000. The Company believes that its present facilities are adequate to meet its current needs. If new or additional space is required, the Company believes that adequate facilities are available at competitive prices in the Boston, Massachusetts and South Plainfield, New Jersey metropolitan areas. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain legal proceedings incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any existing matters should have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, whether through the solicitation of proxies or otherwise, during the Transition Period. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and Redeemable Common Stock Purchase Warrants ("Public Warrants") are traded principally on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "DYGN" and "DYGNW," respectively, and on the Boston Stock Exchange under the symbols "DYG" and "DYGW," respectively. The Company's Class A Redeemable Common Stock Purchase Warrants ("Class A Public Warrants") traded principally on Nasdaq under the symbol "DYGNZ" and on the Boston Stock Exchange under the symbol "DYGZ" until they were redeemed on December 14, 1995. The following table sets forth, for the periods indicated, the range of quarterly high and low sale prices as reported on Nasdaq for the Company's Common Stock, Public Warrants and Class A Public Warrants.
CLASS A COMMON STOCK PUBLIC WARRANTS PUBLIC WARRANTS(1) ------------ --------------- ------------------ HIGH LOW HIGH LOW HIGH LOW ---- --- ---- --- ---- --- FISCAL 1995 July 1 to September 30, 1994 $1.44 $ .53 $ .44 $ .13 $ .56 $ .13 October 1 to December 31, 1994 2.75 1.19 .75 .34 1.69 .47 January 1 to March 31, 1995 3.13 1.63 1.38 .38 2.25 .88 April 1 to June 30, 1995 4.63 2.13 2.63 .75 3.81 1.25 FISCAL 1996 - ----------- July 1 to September 30, 1995 6.55 1.63 5.00 .50 5.19 1.00 October 1 to December 31, 1995 3.88 1.88 2.81 1.00 2.81 .56 January 1 to March 31, 1996 3.66 2.19 2.44 1.13 -- -- April 1 to June 30, 1996 3.19 2.13 2.50 1.13 -- -- TRANSITION PERIOD - ----------------- July 1 to September 30, 1996 2.56 1.50 1.63 .88 -- -- October 1 to December 31, 1996 1.88 1.03 1.00 .16 -- --
- -------- (1) Redeemed on December 14, 1995. On April 24, 1997, the last reported sale prices of the Company's Common Stock and Public Warrants as reported on Nasdaq were $1.22 and $.50, respectively. As of April 24, 1997, based upon information from the Company's transfer agent, there were approximately 753 holders of record of the Company's Common Stock. As of such date, the Company estimates that there are approximately 12,000 beneficial holders of the Company's Common Stock. The Company has not declared or paid any cash dividends since its inception and does not anticipate paying any cash dividends to its stockholders in the foreseeable future. The Company currently intends to retain earnings, if any, to fund the development and future growth of its business. 14 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the audited financial statements of the Company. This information should be read in conjunction with the financial statements and notes thereto set forth elsewhere herein.
YEARS ENDED JUNE 30, -------------------- TRANSITION PERIOD ENDED DECEMBER 31, 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues $ 359,908 $ 555,745 $ 497,553 $ 437,005 $ 883,910 $ 192,332 Costs and Expenses 4,687,745 5,899,650 3,836,295 4,264,141 4,388,575 2,837,862 Loss From Continuing Operations (4,306,140) (5,097,419) (3,042,383) (3,645,804) (3,405,387) (2,660,040) Loss From Discontinued Operations -- -- -- (14,945) (48,095) (40,984) Net Loss (4,306,140) (5,097,419) (3,042,383) (3,660,749) (3,453,482) (2,701,024) Loss Per Share: From Continuing Operations (.15) (.21) (.14) (.22) (.26) (.23) From discontinued Operations -- -- -- -- -- (.01) Net Loss (.15) (.21) (.14) (.22) (.26) (.24) Weighted Average Number of Shares Outstanding 28,794,118 24,433,949 21,179,703 16,517,117 13,070,565 11,471,849
AT JUNE 30, ----------- AT DECEMBER 31, 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: Total Assets $7,463,149 $11,576,666 $5,114,021 $7,834,706 $5,602,289 $ 1,942,367 Convertible Note Payable 1,600,000 2,000,000 -- -- -- -- Total Liabilities 2,409,133 2,733,032 587,207 420,964 441,171 604,238 Working Capital 5,502,295 10,203,693 4,102,747 6,967,894 4,584,747 739,465 Stockholders' Equity 5,054,016 8,843,634 4,526,814 7,413,742 5,161,118 1,338,129
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops and markets proprietary and generic therapeutic and diagnostic products for the human healthcare market. The Company has begun expanding its business focus from being a development and licensing company to building a diversified healthcare company focused on the manufacture and distribution of generic drug products and specialty pharmaceuticals as well as the continued development of therapeutic and diagnostic products. The Company intends to implement this strategy through the acquisition of businesses, technologies and products that the Company believes are undervalued as well as through internal product development. In August 1996, the Company acquired the tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc. In addition, the Company has signed an agreement to purchase all of the outstanding shares Superior Pharmaceutical Company ("Superior"), a distributor of generic pharmaceuticals. The Company has financed its operations primarily through the proceeds from its public and private stock offerings, a convertible note and limited revenues from product sales and technology license fees and royalties. Management anticipates that revenues from product sales will not be sufficient to fund its current operations or produce an operating profit until such 15 time as the Company is able to establish acceptance of its products in their respective markets and expand its distribution channels. The Company has incurred losses since inception and expects to incur additional losses until such time as it is able to successfully develop, manufacture, and sell or license its existing and proposed products and technologies. RESULTS OF OPERATIONS TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THE SIX MONTH PERIOD ENDED DECEMBER 31, 1995 REVENUES Revenues for the six month period ended December 31, 1996 (the "Transition Period") were $360,000 versus $333,000 for the six months ended December 31, 1995. This increase of $27,000 is a result of an increase in Able product sales partially offset by a decrease in fee revenue which was due to one-time fees from Bristol-Meyers Products recognized during the six months ended December 31, 1995. The increase in product sales resulted from the Company realizing sales from its Able subsidiary since its acquisition on August 19, 1996. The Company's product sales also increased due to improved diagnostic products sales. COST OF SALES Cost of sales was 99% of product sales for the Transition Period compared with 50% for the six months ended December 31, 1995. Tablet and suppository production at Able during the Transition Period did not support the minimum level of fixed manufacturing costs required at the facility. Management expects that the cost of product sales, as a percentage of sales, will decrease as sales orders and production volumes increase. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the Transition Period were $1,092,000 versus $1,037,000 for the six months ended December 31, 1995, an increase of $55,000. This increase is primarily attributable to costs associated with the ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a 510(k) application with the U.S. Food and Drug Administration for its NicCheck(R) product. The Company is also conducting early stage research on a bacterial extract for the treatment of infectious diseases. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the Transition Period were $3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an increase of $2,050,000. The increase in selling, general and administrative expenses is primarily due to additional payroll and plant operating costs of approximately $793,000 resulting from the acquisition of Able. In addition, the Company incurred additional costs of approximately $865,000 for the use of business consultants to develop, seek and obtain alliances for certain Company products, potential products and financial development. The Company incurred additional costs of approximately $80,000 towards patent applications for several of its products. Legal expenses increased by approximately $106,000 primarily related to assistance with technology licensing, pending acquisitions and corporate regulatory filings. The remainder is due to a net increase in other operating expenses. OTHER INCOME (EXPENSE) Investment income increased by $46,000 from $112,000 to $158,000 for the Transition Period as compared to same period ended December 31, 1995. The Company had greater funds available for investment during the Transition Period compared to the six months ended December 31, 1995. The Company incurred interest expense of $74,000 and amortized debt financing costs of $62,000 during the Transition Period, both associated with the $2,000,000 convertible note issued in 1996. 16 INCOME TAXES There were no provisions for income taxes for the Transition Period and the six months ended December 31, 1995 due to operating losses incurred by the Company and valuation reserves applied against deferred tax assets. As of December 31, 1996 and December 31, 1995, for Federal and state income tax reporting purposes, the Company had net operating loss carryforwards of approximately $23,460,000 and $19,270,000 respectively. In addition, the Company had Federal and state research tax credit carryforwards of approximately $583,000 and $120,000, respectively, available to reduce future tax liabilities. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 REVENUES Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000 versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase of $58,000 is a result of an increase in license fees of $85,000 offset by a $27,000 decrease in product sales. The increase in license fee revenue is attributable to one-time license fees received under distribution arrangements for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec product sales remained consistent between Fiscal 1996 and Fiscal 1995. The decrease in total product sales resulted from lower shipments of other products in Fiscal 1996. COST OF SALES Cost of product sales was 44% of net product sales in Fiscal 1996 compared to 54% in Fiscal 1995. This decrease in the cost of sales percentage is primarily attributable to a reallocation of certain manufacturing staff to product marketing and support roles. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $3,118,000 for Fiscal 1996 versus $1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is primarily due to approximately $1,200,000 in additional therapeutic product development costs and $285,000 in compensation expense resulting from stock grants. The increase in therapeutic development is mainly attributable to the initiation of the first of two planned pivotal Phase 3 clinical trials for the Company's NicErase-SL smoking cessation product. The increase in research and development expenses was partially offset by a decrease in diagnostic product development costs of $74,000. The Company has limited diagnostic product development primarily to NicCheck, a test to detect the presence of nicotine. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for Fiscal 1996 were $2,685,000 versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling, general and administrative expenses increased in the following areas: staffing - $355,000, investor relations - $165,000, consulting - $111,000 and legal - $62,000. The increase in investor relations expenses is attributable to a new program designed to inform investors on corporate developments and strategy. Legal expenses increased primarily for assistance with certain licensing arrangements, regulatory issues, stock grants and options. The increase in staffing expenses is primarily due to the award of stock grants and options. Consulting expenses relate to assistance provided towards developing a strategy for business alliances for certain Company products. OTHER INCOME (EXPENSE) The increase in investment income is primarily due to greater funds available for investment during Fiscal 1996. The increases in interest expense and debt financing cost amortization are attributable to the $2,000,000 convertible note issued in 1996. INCOME TAXES There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995 due to operating losses incurred by the Company and valuation reserves applied against deferred tax assets. 17 YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994 REVENUES Revenues for Fiscal 1995 were $498,000 versus $437,000 for the year ended June 30, 1994 ("Fiscal 1994"). This increase of $61,000, or 14%, is a result of an increase in diagnostic product sales of $248,000 offset by a decrease in contract service revenue of $138,000 and a decrease in license fees and royalties of $49,000. Product sales were realized primarily from sales of MycoDot, a tuberculosis antibody detection product, to a distributor in Asia. The Company also recognized fee revenue of $250,000 from Bristol-Myers Products ("BMP"). The Company granted BMP the right to evaluate its smoking cessation technology for which the Company received a $500,000 payment, of which $250,000 was deferred as revenue until Fiscal 1996. In July 1995, BMP informed the Company that it decided not to exercise its option to license the technology as BMP's strategic interest was in developing an over-the-counter smoking cessation product. The Company's NicErase-SL smoking cessation product is being developed for prescription use. In Fiscal 1994, royalties were attributable to a one-time payment under an agreement to license certain tuberculosis diagnostic technology. Contract service revenues for Fiscal 1994 related to the Company's development of a vaccine delivery system under a U.S. Army contract completed in Fiscal 1994. The Company is no longer performing any contract development work. COST OF SALES Cost of product sales for Fiscal 1995 was 54% of net product sales. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $1,718,000 for Fiscal 1995 versus $2,184,000 for Fiscal 1994, a decrease of $466,000 or 21%. In Fiscal 1995, the Company expended $1,476,000 on therapeutic product development and $242,000 towards diagnostic product development, compared to $1,500,000 and $684,000, respectively, in Fiscal 1994. This is reflective of the Company's strategy whereby resources were directed towards NicErase-SL development with limited expenditures towards other therapeutic and diagnostic product development. During Fiscal 1995, therapeutic product development focused primarily on NicErase-SL, as the Company completed a multi-center pilot Phase 3 clinical trial. Diagnostic product development included limited development efforts for the Company's NicCheck and MycoAKT products. In March 1995, the Company received clearance from the FDA to market the MycoAKT products and is currently seeking and evaluating strategic alliances with third parties. MycoAKT diagnostic test kits are used to identify three mycobacterial species. The Company continued its manufacturing development scale-up and regulatory approval efforts with respect to NicCheck, a nicotine detection product. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for Fiscal 1995 were $1,984,000 versus $1,997,000 for Fiscal 1994, a decrease of $13,000. Comparing Fiscal 1995 to Fiscal 1994, savings realized from decreases in salaries and related benefits, public relations expenditures, use of outside business consultants and travel expenses were offset by increases in product marketing and support costs and business insurance. Product marketing and support efforts focused primarily on the implementation of distribution arrangements (including sales and marketing support in connection with such distribution arrangements) for the Company's tuberculosis related diagnostic products and business development efforts for NicCheck. OTHER INCOME (EXPENSE) Investment income increased by $113,000 from $183,000 to $296,000 when comparing Fiscal 1994 to Fiscal 1995. The Company had greater funds available for investment during Fiscal 1995 as a result of the Company's March 1994 public offering. INCOME TAXES There were no provisions for income taxes for Fiscal 1995 and 1994 due to operating losses incurred by the Company. 18 DISCONTINUED OPERATIONS In May 1994, the Company sold certain assets of its contract research and development business that related to the Company's fluid systems consulting services ("FSD"). The Company sold accounts receivable, work in process and certain furniture and equipment for $165,000, and assigned to the buyer all of the outstanding consulting projects. In addition, the Company entered into a sub-lease agreement whereby the buyer occupies the space used by the FSD business. This transaction resulted in a loss on disposal of $13,000. In management's opinion, these services did not fit the strategic direction of the Company's core therapeutic and diagnostic business. Moreover, these services were not expected to be a significant source of revenues, profit or cash flow to the Company in the future. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had working capital of $5,502,000 versus working capital of $10,204,000 at June 30, 1996. Cash and investment securities were $5,117,000 at December 31, 1996 as compared to $10,464,000 at June 30, 1996. Working capital was used primarily for research and development and to fund the purchase of Able and its operations during the Transition Period. As discussed in Note 2 to the financial statements, in August 1996, the Company acquired certain assets of Able, a generic pharmaceutical products subsidiary of Alpharma Inc., for $550,000 in cash and acquisition costs of $150,000. Able manufactures and markets prescription and over-the-counter pharmaceuticals from a 46,000 square foot leased manufacturing facility in South Plainfield, New Jersey. DynaGen obtained the rights to several approved ANDA products through this purchase. DynaGen plans to increase sales of its generic product portfolio by expanding Able's distribution network, by reintroducing discontinued products and by developing new ANDA products. The acquisition has increased revenues, costs and expenses, capital expenditures and net cash used for operating activities. DynaGen intends to fund Able's operations until it becomes self-supporting. There can be no assurance that the Company will be successful in assimilating this or any future acquisition or that Able will generate sufficient revenues to become self-supporting. Management anticipates that the available working capital will be sufficient to fund the current level of operations, including the Able business, through June 1997, but that the available working capital will not be sufficient to fund the acquisition of Superior. The Company has realized limited revenues from license fees and the sale of its diagnostic products. Its future prospects and revenue potential from product sales cannot be determined with any certainty at this time. The Company plans to raise capital in order to finance the proposed acquisition of Superior through the sale of its securities. There can be no assurance that the Company will be able to secure this financing or that such financing will be available on favorable terms. If the Company is unable to obtain such financing, it will be unable to close the Superior acquisition. Concurrently with the completion of the proposed Superior acquisition, Superior and the Company intend to enter into a line of credit to provide financing for Superior. The Company and Superior are currently in discussions with a commercial bank regarding such line of credit. There can be no assurance that the Company will be able to secure the line of credit or that the line of credit will be available on favorable terms. If the Company is unable to obtain a line of credit for Superior, it will be unable to close the Superior acquisition. The Company intends to fund Superior's operations with the line of credit and Superior's cash generated from operations. The Company also continues to pursue additional sources of capital in order to fund the growth of the Able generic drug business and its product development efforts. The Able financing may take the form of a line of credit or equipment notes or leases. There can be no assurance that the Company will be able to secure additional financing for the Able business or its continued product development efforts or that financing will be available on favorable terms. If the Company is unable to obtain such additional financing, the Company's ability to maintain its current level of operations would be materially and adversely affected and the Company will be required to reduce or eliminate certain expenditures, including its research and development activity with respect to certain proposed products. ENVIRONMENTAL LIABILITY The Company has no known material environmental violations or assessments. 19 RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based Compensation" in the Transition Period. As discussed in Note 1 to the financial statements, the adoption of SFAS No. 121 and No. 123 did not have a material effect on the Company's financial position, results of operations and cash flows. The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," in February 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share, and is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. SFAS No. 128 requires the restatement of all prior-period earnings per share data presented. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain "forward looking" information that involves risks and uncertainties. In particular, statements contained in this Form 10-K that are not historical facts (including, but not limited to, statements contained in "Item 1. Business" relating to the Company's strategy with respect to the development and marketing of the Company's products and to statements contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to liquidity and capital resources) constitute forward looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed within this Form 10-K, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. The following discussion of the Company's risk factors should be read in conjunction with the financial statements and related notes thereto. The following factors, among others, could cause actual results to differ materially from those contained in forward looking statements contained or incorporated by reference in this report and presented by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial condition. History of Losses; Anticipation of Future Losses. The Company has incurred operating losses since its inception and has an accumulated deficit of $24,315,191 as of December 31, 1996. The Company incurred a net loss of $4,306,140 for the Transition Period ended December 31, 1996, as compared with a net loss of $1,809,816 for the same period ended December 31, 1995. The Company incurred a net loss of $5,097,419 for the fiscal year ended June 30, 1996, compared with a net loss of $3,042,383 for the fiscal year ended June 30, 1995. Such losses have resulted principally from expenses incurred in research and development and from general and administrative costs associated with the Company's development efforts. The continued development of the Company's products will require the commitment of substantial resources to conduct further development and preclinical and clinical trials, and to establish manufacturing, sales, marketing, regulatory and administrative capabilities. In addition, the Company's recently acquired subsidiary, Able, has incurred net operating losses in the past. The Company expects to provide its Able subsidiary with working capital during the foreseeable future until Able can become self-supporting. The Company expects to incur substantial operating losses over the next several years as its product programs expand, various clinical trials commence and marketing efforts are launched. The amount of net losses and the time required by the Company to reach sustained profitability are highly uncertain and to achieve profitability, the Company must, among other things, successfully complete development of its products, obtain regulatory approvals, and establish manufacturing and marketing capabilities by itself or with third parties. There is no assurance that the Company will ever generate substantial revenues or achieve profitability. 20 Future Capital Needs; Uncertainty of Additional Funding. It is anticipated that the Company will continue to expend significant amounts of capital to fund its research and development, clinical trials and generic pharmaceutical business and the proposed acquisition of Superior. The Company's available working capital is inadequate for completion of the Company's development programs, and additional financing will be necessary for the continued support of the Company's proposed products and operations, including the establishment of manufacturing, marketing and distribution capabilities for its proposed products and the continued operations of Able. There can be no assurance that the Company will be able to secure additional financing or that such financing will be available on favorable terms. If the Company is unable to obtain such additional financing, the Company's ability to maintain its current level of operations would be materially and adversely affected and the Company will be required to reduce its overall expenditures including its research and development activity with respect to certain proposed products. In addition, the Company will require additional financing to fund the proposed Superior acquisition and a line of credit to fund Superior's operations. There can be no assurance that the Company will be able to secure such financing or line of credit or that such financing or line of credit will be available on favorable terms. If the Company is unable to obtain such financing or line of credit, it will be unable to close the Superior acquisition. Uncertainties Related to NicErase-SL. Under applicable law, the Company will not be permitted to sell NicErase-SL, and thus generate any revenue from its development of NicErase-SL, unless it obtains the necessary regulatory approvals from the FDA for the commercial sale of that product. To obtain such regulatory approvals, the Company must demonstrate to the satisfaction of the FDA, through preclinical studies and clinical trials, that NicErase-SL is safe and effective. Although the results of the Company's pilot Phase 3 clinical trials were encouraging, they do not necessarily indicate, and they do not guarantee, that the results of the ongoing multi-center Phase 3 clinical trial will be favorable to the Company. Nor do the results obtained in the small-scale pilot tests completed by the Company to date necessarily indicate that the Company will ultimately succeed in obtaining FDA approval for the commercial sale of NicErase-SL. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's clinical trials will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or will result in marketable products. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If NicErase-SL is not shown to be safe and effective in either current ongoing, or any future clinical trials, and if the Company is thus unable to commercialize NicErase-SL it would have a material adverse effect on the Company's business, financial condition and results of operations. Integration of Able and Superior Acquisitions. In August 1996, the Company acquired certain assets of Able, and in March 1997, the Company signed an agreement to purchase all of the outstanding shares of Superior. There can be no assurance that the anticipated benefits from the Able acquisition or the proposed Superior acquisition will be realized. Additionally, there can be no assurance that the Company will be able to effectively market the existing Able products, that it will obtain FDA approval to market additional generic drugs or that it will be successful in managing the combined operations. The integration of Able and Superior requires substantial attention from management, many of whom have limited experience in integrating acquisitions. The diversion of management's attention, the process of integrating the businesses and any difficulties encountered in the transition process could cause an interruption of business, and could have a material adverse effect on the Company's operations and financial performance. Risks Associated with Managing a Changing Business. The Company has begun to expand its business focus from being a development and licensing company to building a diversified healthcare company focused on the manufacture and distribution of generic drug products as well as the continued development of therapeutic and diagnostic products. In order to achieve this expansion, the Company must undergo substantial changes in its operations, which may significantly strain the Company's limited administrative, operational and financial resources. The ability of the Company to achieve its business objectives will depend in large part on its ability to build and expand its manufacturing operations and sales and marketing capabilities, to generally expand its operational capabilities and its 21 financial and management information systems, to develop the management skills of its managers and supervisors and to train, motivate and manage both its existing employees and the additional employees that will be required if the Company is to expand its business. There can be no assurance that the Company will succeed in developing all or any of these capabilities, and any failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Future Acquisitions. Management may from time to time consider other acquisitions of assets, businesses or technologies that will enable the Company to acquire complementary skills and capabilities, offer new products, expand its customer base or obtain other competitive advantages. There can be no assurance that the Company will be able to successfully identify suitable acquisition candidates, obtain financing on satisfactory terms, complete acquisitions, integrate acquired operations into its existing operations or expand into new markets. Acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, and amortization expense related to intangible assets acquired, any of which could materially adversely affect the Company's business and results of operations. Acquisitions, including the Company's recent acquisition of Able and the proposed purchase of Superior, involve a number of potential risks, including difficulties in the assimilation of the acquired company's operations and products, diversion of management's resources, uncertainties associated with operating in new markets and working with new employees and customers, and the potential loss of the acquired company's key employees. There can also be no assurance that the Able acquisition, the proposed Superior acquisition and future acquisitions, if any, will not have a material adverse effect upon the Company's business and results of operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable to those achieved by the Company's existing operations, or otherwise perform as expected. Limited Manufacturing Capability and Experience. The Company's NicCheck, MycoDot and MycoAKT products are currently made by licensed manufacturers. The Company intends to enter into licenses, joint venture and similar collaborative arrangements with third parties for the manufacture of other proprietary products and proposed products. There are no other such agreements and there can be no assurance that the Company will be successful in securing manufacturing agreements for its products or that such agreements will prove to be on terms favorable to the Company. In addition, the Company's dependence upon third parties for the manufacture of its products and proposed products could have an adverse effect on the Company's profitability and its ability to deliver its proposed products on a timely and competitive basis. To the extent that the Company attempts to manufacture any of its products, there can be no assurance that the Company will be able to attract and retain qualified manufacturing personnel, or build or rent manufacturing facilities. The Company's generic therapeutic products are manufactured at its Able Laboratories facility in South Plainfield, New Jersey. In order to maintain compliance with FDA GMP standards, the Company will have to make significant investments in its infrastructure and plant facility. The Company will need to raise capital to finance these investments and there can be no assurance that the Company will be able to obtain such financing or that such financing will be available on favorable terms. There can be no assurance that such capital expenditures and overhead costs will not have a material effect upon the Company's ability to achieve profitability. There can be no assurance that the Company will retain the key employees it acquired in the Able acquisition. Limited Commercialization of Proprietary Products. The Company has commercially introduced and is currently marketing through distributors only two of its proprietary products, yielding limited revenues from the sale of these products. Historically, substantially all of the Company's revenues had been generated from research and development contracts and license fees. The Company's ability to achieve profitability will depend on its ability to develop and introduce commercially viable products, obtain regulatory approvals for these products and either successfully manufacture, market and distribute such products on its own or enter into collaborative agreements for product manufacturing, marketing and distribution. Many of the Company's proposed therapeutic and diagnostic products will require substantial further development, preclinical and clinical testing, and investment by the Company or third party licensees in manufacturing, marketing and sales infrastructures prior to their commercialization. No assurance can be given that the Company's development efforts will be successfully completed, that regulatory approvals will be obtained, or that these products, once introduced, will be successfully marketed. 22 Early Stage of Product Development. Several of the Company's proposed products, including its specialty pharmeceuticals, OrthoDyn, the breast biopsy technology being licensed from BioLoc and the bacterial extract for treatment of infectious diseases, are at an early stage of development. The Company does not expect that its early stage products will be available for a significant number of years, if at all. The early stage products will require significant research and development, and potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Potential products may be found ineffective or cause harmful side effects during preclinical testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical to produce, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. There can be no assurance that the Company's or its collaborative partners' product development efforts will be successfully completed, that required regulatory approvals will be obtained or that any products, if introduced, will be successfully marketed or achieve customer acceptance. Lack of Marketing Experience. The Company currently does not plan to market its proprietary products directly and does not have adequate resources or expertise to develop a substantial marketing organization and internal sales force for these products. Since the Company does not have the financial or other resources to undertake extensive direct marketing activities, the Company intends to enter into marketing arrangements with third parties, including possible joint venture, license or distribution arrangements. While the Company intends to license its products for manufacture and sale to established health care or pharmaceutical companies, it has had very limited success in its efforts to enter into such agreements to date. There can be no assurance that the Company will be able to locate collaborative partners or that these strategic alliances, if consummated, will prove successful. With respect to the Company's generic therapeutic products, there can be no assurance that present and potential customers of Able will continue their recent buying patterns without regard to the Able acquisition, and any significant delay or reduction in orders could have a material adverse effect on the Company's near-term business and results of operations. Regulation by Government Agencies. The Company's research, preclinical development, clinical trials, manufacturing and marketing of its proposed products are subject to extensive regulation by numerous governmental authorities in the United States (including the FDA), and other equivalent foreign regulatory authorities. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive. There can be no assurance that the Company will be able to obtain the necessary approvals for clinical testing or for the manufacturing or marketing of its proposed products. Further, additional governmental regulation may be established which could prevent or delay regulatory approval of the Company's products. The regulatory process may delay for long periods, and ultimately prevent, marketing of new products or impose costly procedures that would have a material adverse effect on the Company's business. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. The Company's success in the generic drug market depends, in part, on its ability to obtain FDA approval of ANDAs for its new products, as well as its ability to procure a continuous supply of raw materials and to validate the manufacturing processes used to produce consistent test batches for FDA approval. Sources for certain materials for the Company's products must be approved by the FDA, and in many instances only one source has been approved. If raw materials from a specified supplier were to become unavailable, the Company would be required to file a supplement to its ANDA and revalidate the manufacturing process using a new supplier's materials. This could cause a delay of several months in the manufacture of the drug involved and the consequent loss of potential revenue and market share. Additionally, there is often a time lag, sometimes significant, between the receipt of ANDA approval and the actual marketing of the approved product due to this validation process. The Able Laboratories facility is subject to plant inspections by the FDA to determine compliance with GMP standards. The Company could be subject to fines and sanctions such as the suspension of manufacturing or the seizure of drug products if it were found to be in non-compliance with GMP standards. 23 Rapid Technological Advances and Competition. The therapeutic and diagnostic markets in which the Company competes have undergone and can be expected to continue to undergo rapid and significant technological advances. There can be no assurance that the technological developments of others will not render the Company's technology or products incorporating such technology either uneconomical or obsolete. The Company competes with a number of specialized biotechnology companies and major pharmaceutical companies. Most of these companies have substantially greater financial, technical and human resources and research and development staffs and facilities, as well as substantially greater experience in conducting clinical trials, obtaining regulatory approvals, and manufacturing and marketing products than does the Company. There can be no assurance that the Company's products or proposed products will be able to compete successfully. In addition, with its newly acquired generic product line, the Company is now competing in a new market with off-patent drug manufacturers, brand-name pharmaceutical companies that manufacture off-patent drugs, the original manufacturers of brand-name drugs and manufacturers of new drugs that may be used for the same indications as the Company's products. There is no assurance that the Company will compete successfully in this market. Revenues and gross profit derived from generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors unique to the generic pharmaceutical industry. As patents for brand name products and related exclusivity periods mandated by regulatory authorities expire, the first generic manufacturer to receive regulatory approval for generic equivalents of such products is usually able to achieve relatively high revenues and gross profit. As other generic manufacturers receive regulatory approvals on competing products, prices and revenues typically decline. Accordingly, the level of revenues and gross profit attributable to generic products developed and manufactured by the Company is dependent, in part, on its ability to develop and introduce new generic products, the timing of regulatory approval of such products, and the number and timing of regulatory approvals of competing products. In addition, competition in the United States generic pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care costs. Brand name companies are increasingly selling their products into the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No regulatory approvals are required for a brand name manufacturer to sell directly or through a third party to the generic market, nor do such manufacturers face any other significant barriers to entry into such market. These competitive factors may have a material adverse effect on the Company's ability to sell its generic products. Dependence on Patents and Proprietary Technology. The Company owns certain patents and has applied for other patents relating to its technology and proposed products. No assurance can be given, however, whether pending patent applications will be granted or whether any patents granted will be enforceable or provide the Company with meaningful protection from competitors. Even if a competitor were to infringe the Company's patents, the costs of enforcing its patent rights may be substantial or even prohibitive. In addition, there can be no assurance that the Company's proposed products will not infringe the patent rights of others. The Company may be forced to expend substantial resources if the Company is required to defend against any such infringement claims. The Company also may desire or be required to obtain licenses from others in order to further develop, produce and market commercially viable products effectively. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. The Company also relies on unpatented proprietary know-how and trade secrets, and employs various methods including confidentiality agreements with employees, consultants, manufacturing and marketing partners to protect its trade secrets and know-how. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such trade secrets and know-how or obtain access thereto. The manufacture and sale of certain products developed by the Company will involve the use of processes, products or information, the rights to certain of which are owned by others. Although the Company has obtained licenses with regard to the use of certain such processes, products and information, there can be no assurance that such licenses will not be terminated or expire during critical periods, that the Company will be able to obtain licenses for other rights which may be important to it, or, if obtained, that such licenses will be obtained on commercially reasonable terms. If the Company is unable to obtain such licenses, the Company may have to develop 24 alternatives to avoid infringing patents of others, potentially causing increased costs and delays in product development and introduction, or precluding the Company from developing, manufacturing or selling its proposed products. Additionally, there can be no assurance that the patents underlying any licenses will be valid and enforceable. To the extent any products developed by the Company are based on licensed technology, royalty payments on the licenses will reduce the Company's gross profit from such product sales and may render the sales of such products uneconomical. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and related Independent Auditors' Report are presented in the following pages. The financial statements filed in this Item 8 are as follows: Independent Auditors' Report Financial Statements: Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995 Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting or financial disclosure matters. 25 DYNAGEN, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report ............................................................. 27 Financial Statements: Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995 ........ 28 Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 ........................................ 29 Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 ...................... 30 Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 ................................... 31 Notes to Consolidated Financial Statements ........................................... 32
26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders DYNAGEN, INC. Cambridge, Massachusetts We have audited the accompanying consolidated balance sheets of DynaGen, Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995 and the related consolidated statements of loss, changes in stockholders' equity and cash flows for the six months ended December 31, 1996 and for each of the years in the three-year period ended June 30, 1996. 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 generally accepted auditing standards. 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 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 DynaGen, Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995, and the results of their operations and their cash flows for the six months ended December 31, 1996 and for each of the years in the three-year period ended June 30, 1996 in conformity with generally accepted accounting principles. As indicated in Note 1 to the consolidated financial statements, the Company needs additional capital to fund its operations, its acquisition of Superior Pharmaceutical Company and the continued support of its proposed products. WOLF & COMPANY, P.C. Boston, Massachusetts February 14, 1997, except for Note 14 as to which the date is March 7, 1997 27 DYNAGEN, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, ------------------------ 1996 1996 1995 ---- ---- ---- ASSETS Current assets: Cash and cash equivalents (including interest-bearing deposits of $1,835,000, $154,000 and $142,000, respectively) $ 2,112,300 $ 375,948 $ 263,956 Investment securities available for sale at fair value (Note 3) 3,004,700 10,087,918 4,201,876 Accounts receivable 261,932 89,703 28,971 Inventory (Note 4) 451,883 -- -- Notes receivable (Note 8) 185,000 75,000 -- Accrued interest receivable 40,179 86,873 86,653 Prepaid expenses and other current assets 255,434 221,283 108,498 ------- ------- ------- Total current assets 6,311,428 10,936,725 4,689,954 --------- ---------- --------- Property and equipment, net (Notes 5 and 6) 673,969 143,350 153,280 - - ------- ------- ------- Other assets: Patents and trademarks, net of accumulated amortization of $65,639, $54,341 and $46,024, respectively 265,840 277,138 268,809 Deferred debt financing costs, net of accumulated amortization of $119,039 and $57,230, respectively (Note 6) 119,039 217,475 -- Deposits and other assets 92,873 1,978 1,978 ------ ----- ----- Total other assets 477,752 496,591 270,787 ------- ------- ------- $ 7,463,149 $ 11,576,666 $ 5,114,021 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 712,239 $ 519,624 $ 263,786 Accrued payroll and payroll taxes 96,894 147,441 73,421 Deferred revenue -- 65,967 250,000 --------- --------- ------- Total current liabilities 809,133 733,032 587,207 Convertible note payable (Notes 6, 10 and 14) 1,600,000 2,000,000 -- --------- --------- ------- Total liabilities 2,409,133 2,733,032 587,207 --------- --------- ------- Commitments and contingencies (Note 9) Stockholders' equity (Notes 10 and 14): Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding -- -- -- Common stock, $.01 par value, 75,000,000 shares authorized, 29,106,231, 28,559,999 and 21,448,487 shares, respectively, issued and outstanding 291,062 285,600 214,485 Additional paid-in capital 29,076,838 28,567,068 19,236,300 Accumulated deficit (24,315,191) (20,009,051) (14,911,632) ------------ ------------ ------------ 5,052,709 8,843,617 4,539,153 Unrealized gain (loss) on investment securities available for sale (Note 3) 1,307 17 (12,339) --------- --------- ------- Total stockholders' equity 5,054,016 8,843,634 4,526,814 --------- --------- --------- $ 7,463,149 $ 11,576,666 $ 5,114,021 ============ ============= =============
See accompanying notes to consolidated financial statements. 28 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF LOSS
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ----------------------------- -------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- (UNAUDITED) Revenues (Note 11): Net product sales $ 358,467 $ 57,855 $ 220,745 $ 247,553 -- $ Contract revenues -- -- -- -- 138,255 License fees and royalties 1,441 275,000 335,000 250,000 298,750 ---------- ---------- ---------- ---------- ---------- Total revenues 359,908 332,855 555,745 497,553 437,005 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales 356,312 28,837 96,680 134,392 -- Contract costs -- -- -- -- 82,903 Research and development 1,092,253 1,036,622 3,118,145 1,718,006 2,183,849 Selling, general and administrative 3,239,180 1,188,733 2,684,825 1,983,897 1,997,389 ---------- ---------- ---------- ---------- ---------- Total costs and expenses 4,687,745 2,254,192 5,899,650 3,836,295 4,264,141 ---------- ---------- ---------- ---------- ---------- Operating loss (4,327,837) (1,921,337) (5,343,905) (3,338,742) (3,827,136) ---------- ---------- ---------- ---------- ---------- Other income (expense): Investment income 157,788 111,521 367,715 296,555 183,082 Interest expense (Note 6) (74,282) -- (63,999) (196) (1,750) Amortization of debt financing costs (Note 6) (61,809) -- (57,230) -- -- ---------- ---------- ---------- ---------- ---------- Other income (expense), net 21,697 111,521 246,486 296,359 181,332 ---------- ---------- ---------- ---------- ---------- Loss from continuing operations (4,306,140) (1,809,816) (5,097,419) (3,042,383) (3,645,804) ---------- ---------- ---------- ---------- ---------- Loss from operations of fluid systems consulting services -- -- -- -- (1,538) Loss on disposal of fluid systems consulting services -- -- -- -- (13,407) ---------- ---------- ---------- ---------- ---------- -- -- -- -- (14,945) ---------- ---------- ---------- ---------- ---------- Net loss $(4,306,140) $(1,809,816) $(5,097,419) $(3,042,383) $(3,660,749) =========== =========== =========== =========== =========== Net loss per share $ (.15) $ (.08) $ (.21) $ (.14) $ (.22) =========== =========== =========== ============ ============ Weighted average shares outstanding 28,794,118 22,217,645 24,433,949 21,179,703 16,517,117 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 29 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (NOTES 6, 9, 10 AND 14)
UNREALIZED GAIN (LOSS) SERIES A CONVERTIBLE ON INVESTMENT PREFERRED STOCK COMMON STOCK ADDITIONAL SECURITIES ----------------------- --------------------- PAID-IN ACCUMULATED AVAILABLE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT FOR SALE TOTAL ------ ------ ------ ------ ------- ------- -------- ----- Balance at June 30, 1993 -- $ -- 14,544,297 $145,443 $13,224,175 $ (8,208,500) $ -- $5,161,118 Shares issued in 1994 public offering -- -- 6,400,000 64,000 5,553,729 -- -- 5,617,729 Shares issued in private placement -- -- 128,571 1,286 385,227 -- -- 386,513 Cancellation of stock options issued for future services -- -- -- -- (72,540) -- -- (72,540) Exercise of lenders' warrants -- -- 101,667 1,016 19,317 -- -- 20,333 Change in method of accounting for investment securities -- -- -- -- -- -- (38,662) (38,662) Net loss for the year ended June 30, 1994 -- -- -- -- -- (3,660,749) -- (3,660,749) ----- ------- --------- ------- ------- ---------- ------- --------- Balance at June 30, 1994 -- -- 21,174,535 211,745 19,109,908 (11,869,249) (38,662) 7,413,742 Exercise of stock options -- -- 500 5 370 -- -- 375 Exercise of underwriters' warrants -- -- 273,452 2,735 126,022 -- -- 128,757 Decrease in unrealized loss on investment securities -- -- -- -- -- -- 26,323 26,323 Net loss for the year ended June 30, 1995 -- -- -- -- -- (3,042,383) -- (3,042,383) ----- ------- --------- ------- ------- ---------- ------- --------- Balance at June 30, 1995 -- -- 21,448,487 214,485 19,236,300 (14,911,632) (12,339) 4,526,814 Exercise of underwriters' warrants -- -- 503,982 5,040 32,085 -- -- 37,125 Exercise of public warrants -- -- 3,244,494 32,445 3,822,762 -- -- 3,855,207 Shares issued in private placements 1,178,264 3,461,150 1,520,686 15,207 1,376,204 -- -- 4,852,561 Conversion of preferred stock (1,178,264) (3,461,150) 1,612,834 16,128 3,445,022 -- -- -- Exercise of stock options -- -- 95,855 959 4,616 -- -- 5,575 Employee stock and stock option grants -- -- 117,250 1,172 557,685 -- -- 558,857 Stock options issued for future services -- -- -- -- 55,225 -- -- 55,225 Stock issued for interest obligation -- -- 16,411 164 37,169 -- -- 37,333 Change in unrealized gain (loss) on investment securities -- -- -- -- -- -- 12,356 12,356 Net loss for the year ended June 30, 1996 -- -- -- -- -- (5,097,419) -- (5,097,419) ----- ------- --------- ------- ------- ---------- ------- --------- Balance at June 30, 1996 -- -- 28,559,999 285,600 28,567,068 (20,009,051) 17 8,843,634 Exercise of stock options -- -- 81,767 818 15,682 -- -- 16,500 Stock issued for interest obligation -- -- 50,052 500 79,117 -- -- 79,617 Stock options issued for services -- -- -- -- 55,742 -- -- 55,742 Conversion of note payable -- -- 414,413 4,144 359,229 -- -- 363,373 Increase in unrealized gain on investment securities -- -- -- -- -- -- 1,290 1,290 Net loss for the six months ended December 31, 1996 -- -- -- -- -- (4,306,140) -- (4,306,140) ----- ------- --------- ------- ------- ---------- ------- --------- Balance at December 31, 1996 -- $ -- 29,106,231 $291,062 $29,076,838 $(24,315,191) $ 1,307 $5,054,016 ========== ========= =========== ======== =========== ============= ======== =========
See accompanying notes to consolidated financial statements. 30 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ------------ -------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- Cash flows from operating activities: Net loss $(4,306,140) $(1,809,816) $ (5,097,419) $(3,042,383) $(3,660,749) Adjustments to reconcile net loss to net cash used for operating activities: Stock and stock options issued for services 55,742 -- 558,857 -- -- Depreciation and amortization 129,558 32,440 125,610 64,195 91,163 Amortization and accretion of (discounts) premiums on investment securities (31,497) (19,539) (134,474) 101,553 50,997 Stock issued for interest obligation 79,617 -- 37,333 -- -- Write-off of patent costs -- -- 41,852 40,893 -- Gain on sales of investment securities -- -- -- -- (4,424) Loss on disposal of fluid systems consulting services -- -- -- -- 13,407 (Increase) decrease in operating assets: Accounts receivable (172,229) (23,621) (60,732) 30,518 (70,317) Inventory (138,583) -- -- -- -- Prepaid expenses and other current assets 12,543 (47,227) (57,780) 24,121 (48,667) Deposits and other assets (90,895) -- -- -- -- Increase (decrease) in operating liabilities: Accounts payable and accrued expenses 142,068 (3,770) 329,858 (77,933) (11,534) Deferred revenue (65,967) (150,000) (184,033) 250,000 -- ---------- ---------- ---------- ---------- ---------- Net cash used for operating activities (4,385,783) (2,021,533) (4,440,928) (2,609,036) (3,640,124) ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchase of investment securities (2,567,445) (5,937,166) (29,913,212) (3,187,379) (7,198,023) Proceeds from sales and maturities of investment securities 9,683,450 5,600,000 24,174,000 5,500,000 4,136,330 Purchase of wholly-owned subsidiary (700,000) -- -- -- -- Purchase of property and equipment (200,370) (2,874) (36,020) (23,339) (32,522) Patent and trademark costs -- (32,867) (72,611) (69,293) (63,911) Decrease in deposits -- -- -- 9,325 2,971 Net proceeds from disposal of fluid systems consulting services -- -- -- -- 153,752 (Increase) decrease in notes receivable (110,000) -- (75,000) -- 16,072 ---------- ---------- ---------- ---------- ---------- Net cash provided by (used for) investing activities 6,105,635 (372,907) (5,922,843) 2,229,314 (2,985,331) ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from stock warrants and options 16,500 3,896,088 3,897,907 129,132 20,333 Net proceeds from private stock placements -- -- 4,852,561 -- 386,513 Net proceeds from convertible note payable -- -- 1,725,295 -- -- Net proceeds from public stock offerings -- -- -- -- 5,617,729 Decrease in deferred offering costs -- -- -- -- 50,000 Principal payments on capital lease -- -- -- (5,824) (8,673) ---------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 16,500 3,896,088 10,475,763 123,308 6,065,902 ---------- ---------- ---------- ---------- ---------- Net change in cash and cash equivalents 1,736,352 1,501,648 111,992 (256,414) (559,553) Cash and cash equivalents at beginning of period 375,948 263,956 263,956 520,370 1,079,923 ---------- ---------- ---------- ---------- ---------- Cash and cash equivalents at end of period $ 2,112,300 $ 1,765,604 $ 375,948 $ 263,956 $ 520,370 =========== =========== ============ =========== ========== Supplemental cash flow information: Interest paid on capital lease $ -- $ -- $ -- $ 196 $ 1,750 Stock options issued (cancelled) in exchange for future services -- -- 55,225 -- (72,540) Conversion of preferred stock to common stock -- -- 3,461,150 -- -- Additional cash flow information is included in Notes 2 and 6.
See accompanying notes to consolidated financial statements. 31 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation The consolidated financial statements include the accounts of DynaGen, Inc. (the "Company") which is developing and marketing therapeutic and diagnostic products for the human health care market and its wholly-owned subsidiary, Able Laboratories, Inc. ("Able"), which is engaged in the manufacture of generic pharmaceuticals. (See Note 2.) All significant intercompany balances and transactions have been eliminated in consolidation. Future Capital Needs; Uncertainty of Additional Funding It is anticipated that the Company will continue to expend significant amounts of capital to fund its research and development, clinical trials, its generic pharmaceutical business and the proposed acquisition of Superior. (See Note 14.) The Company's available working capital is inadequate for completion of the Company's development programs, and additional financing will be necessary for the continued support of the Company's proposed products and operations, including the establishment of manufacturing, marketing and distribution capabilities for its proposed products. The Company plans to secure financing for the Superior acquisition through the sale of equity and/or debt securities. In addition, the Company plans to obtain lines of credit, equipment notes or leases from financial institutions to support the operations of both Superior and Able. There can be no assurance that the Company will be able to secure additional financing or that such financing will be available on favorable terms. If the Company is unable to obtain such additional financing, the Company's ability to maintain its current level of operations would be materially and adversely affected and the Company will be required to reduce its overall expenditures including its research and development activity with respect to certain proposed products. Change in Year End On January 30, 1997, the Company adopted December 31 as its fiscal year end. The accompanying consolidated financial statements include audited financial statements for the six month transition period ended December 31, 1996. Audited financial statements are also presented for the three fiscal years ended June 30, 1996, 1995 and 1994. Unaudited financial statements and the related notes thereto are presented for the six months ended December 31, 1995 for comparative purposes only. All adjustments, consisting of only normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the unaudited financial information, have been made. Use of Estimates In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents include interest-bearing deposits with original maturities of three months or less. Investment Securities Effective June 30, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and carried at amortized cost. Investments that are 32 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and carried at fair value, with unrealized gains and losses included in earnings. Investments not classified as either of the above are classified as "available for sale" and carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. The cumulative effect of the change in accounting principle at June 30, 1994 was to decrease stockholders' equity by $38,662. There was no effect on the net loss for the year ended June 30, 1994. Prior to June 30, 1994, investment securities were carried at amortized cost which approximated fair value. Gains and losses on disposition of investment securities are computed by the specific identification method. Inventory Inventory is valued at the lower of cost or market on a first-in first-out (FIFO) method. Property and Equipment Property and equipment are stated at cost. Depreciation expense is provided over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the life of the related lease term. Goodwill, Organization Expenses, Patents, Trademarks and Deferred Debt Financing Costs Goodwill and organization expenses were amortized over a five-year period on a straight-line basis and were fully amortized as of June 30, 1994. Patent and trademark costs are amortized over a five-year period on a straight-line basis commencing on the earlier of the date placed in service or the date the patent or trademark is granted. Deferred debt financing costs are being amortized on a straight-line basis over the two-year term of the convertible note payable. The related amortization expense for the six months ended December 31, 1996 and 1995 was $73,107 and $10,792, respectively, and for the years ended June 30, 1996, 1995 and 1994 was $79,660, $11,385 and $21,388, respectively. Deferred Offering Costs Deferred offering costs represent costs incurred in connection with raising capital. Upon completion of an offering, the amount credited to additional paid-in capital is reduced by the deferred offering costs. Revenue Recognition Revenues from product sales are recognized when products are shipped. Revenues from license fees and royalties are recognized as the terms of the agreements are met. Revenues earned under long-term contracts are recognized using the percentage-of-completion method. Anticipated losses on uncompleted contracts are charged to operations when incurred. Income Taxes Deferred tax assets and liabilities are recorded for temporary differences between the financial statement and tax bases of assets and liabilities using the currently enacted income tax rates expected to be in effect when the taxes are actually paid or recovered. A deferred tax asset is also recorded for net operating loss, capital loss and tax credit carryforwards to the extent their realization is more likely than not. The deferred tax expense for the period represents the change in the deferred tax asset or liability from the beginning to the end of the period. 33 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Stock-Based Compensation In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plans generally have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to remain with the accounting in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. The disclosure requirements of this Statement are effective for the Company's consolidated financial statements for the six months ended December 31, 1996. The pro forma disclosures include the effects of all awards granted on or after July 1, 1995. (See Note 10.) Net Loss Per Share Net loss per share is calculated based on the weighted average number of common shares outstanding during the year. The effect of all common stock equivalents has been excluded from the calculation since its inclusion would be anti-dilutive. New Accounting Pronouncements The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in March 1995. SFAS No. 121 requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 is effective for the six months ended December 31, 1996. The impact of adoption of the new standard was not material to the Company's financial position, results of operations and cash flows. The FASB issued SFAS No. 128, "Earnings per Share," in February 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share, and is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. SFAS No. 128 requires the restatement of all prior period earnings per share data presented. 2. ACQUISITION OF ABLE LABORATORIES, INC. On August 19, 1996, the Company acquired certain assets of Able consisting primarily of machinery and equipment, raw materials and finished goods inventory, and other assets of the tablet business. The assets were transferred by the Company to a newly formed and wholly-owned subsidiary named Able Laboratories, Inc. The purchase price consisted of $550,000 in cash and acquisition costs of $150,000. The acquisition has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. The Company allocated $313,300 of the purchase price to inventory and $386,700 to property and equipment. The results of operations related to Able have been included with those of the Company since August 19, 1996. 34 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 2. ACQUISITION OF ABLE LABORATORIES, INC. -- (CONTINUED) Unaudited pro forma consolidated operating results for the Company, assuming the acquisition of Able had been made as of July 1, 1995 are as follows:
SIX MONTHS ENDED DECEMBER 31, ----------------------------- YEAR ENDED 1996 1995 JUNE 30, 1996 ---- ---- ------------- Revenues ................................. $ 378,733 $ 2,406,200 $ 4,875,562 Net loss ................................. $(4,415,080) $(1,755,997) $(6,598,550) Net loss per share ....................... $ (.15) $ (.08) $ (.27)
The unaudited pro forma information is not necessarily indicative either of the results of operations that would have occurred had the purchase been made on July 1, 1995 or of future results of operations of the combined companies. 3. INVESTMENT SECURITIES The amortized cost and fair value of investment securities available for sale is as follows:
DECEMBER 31, 1996 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government agency obligations ............... $1,499,696 $1,000 $(71) $1,500,625 Corporate obligations ............................ 1,503,697 378 -- 1,504,075 ---------- ------ ---- ---------- $3,003,393 $1,378 $(71) $3,004,700 ========== ====== ==== ==========
JUNE 30, 1996 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government obligations ..................... $ 187,301 $ -- $ (100) $ 187,201 U.S. Government agency obligations .............. 4,295,274 3,445 (1,252) 4,297,467 Corporate obligations ........................... 5,605,326 2 (2,078) 5,603,250 --------- ------ ------ --------- $10,087,901 $3,447 $(3,430) $10,087,918 =========== ====== ======= ===========
JUNE 30, 1995 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government agency obligations .............. $1,702,408 $ 97 $ (8,209) $1,694,296 Corporate obligations ........................... 2,511,807 -- (4,227) 2,507,580 --------- ------ ------ --------- $4,214,215 $ 97 $(12,436) $4,201,876 =========== ====== ======= ===========
At December 31, 1996, all debt securities mature within one year. There were no sales of securities available for sale during the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995. 35 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 4. INVENTORY Inventory consists of the following at December 31, 1996: Raw materials ...................... $259,330 Work-in-progress ................... 163,847 Finished goods ..................... 28,706 -------- $451,883 ======== 5. PROPERTY AND EQUIPMENT Property and equipment consist of:
JUNE 30, DECEMBER 31, ------------------ ESTIMATED 1996 1996 1995 USEFUL LIVES ---- ---- ---- ------------ Laboratory equipment .............. $ 702,141 $ 220,164 $220,164 7 years Furniture and fixtures ............ 270,353 173,572 143,091 3-7 years Leasehold improvements ............ 39,288 30,976 25,437 1-2 years ------ ------ ------ 1,011,782 424,712 388,692 Less accumulated depreciation and amortization .................... (337,813) (281,362) (235,412) -------- -------- -------- $ 673,969 $ 143,350 $153,280 ========= ========= ========
Depreciation and amortization expense for the six months ended December 31, 1996 and 1995 was $56,451 and $21,648, respectively. Depreciation and amortization expense for the years ended June 30, 1996, 1995 and 1994 was $45,950, $52,810 and $69,775, respectively. 6. DEBT Convertible Note Payable On February 7, 1996, the Company issued a $2,000,000 convertible note payable in connection with a private placement. Deferred debt financing costs were $274,705. (See Note 10.) The note matures on February 7, 1998 and bears interest at 8% per annum, with interest payable quarterly in cash or the Company's common stock. The note is convertible into shares of common stock at any time at the option of the investor at a rate of 67% of the five-day average of the closing bid price per share of the Company's common stock one trading day prior to the date the notice of conversion is received by the Company. The Company may require conversion of the note under certain circumstances. During the six months ended December 31, 1996, $400,000 of the note payable was converted for 414,413 shares of the Company's common stock and $36,627 of related deferred debt financing costs were charged to additional paid-in capital. (See Note 14.) Interest expense on the convertible note payable for the six months ended December 31, 1996 was $74,282 and for the year ended June 30, 1996 was $63,999. Amortization expense on deferred debt financing costs for the six months ended December 31, 1996 was $61,809 and for the year ended June 30, 1996 was $57,230. Capital Lease In December 1991, the Company entered into a lease agreement for telephone equipment with a cost of $25,329. During the year ended June 30, 1995, the Company made the final payment due under the lease and acquired title to the equipment. Interest expense on the lease for the years ended June 30, 1995 and 1994 was $196 and $1,750, respectively. 36 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 7. INCOME TAXES The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective July 1, 1993. There was no provision for income taxes for the six months ended December 31, 1996 and 1995 and for the years ended June 30, 1996, 1995 and 1994 due to the Company's net operating losses. The difference between the statutory Federal income tax rate of 34% and the Company's effective tax rate is primarily due to net operating losses incurred by the Company and the valuation reserve against the Company's deferred tax asset. The components of the net deferred tax asset are as follows:
JUNE 30, DECEMBER 31, ----------------------------- 1996 1996 1995 ---- ---- ---- Deferred tax asset: Federal .............................. $ 8,008,000 $ 6,523,000 $ 4,929,000 State ................................ 1,986,000 1,793,000 1,433,000 --------- --------- --------- 9,994,000 8,316,000 6,362,000 Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000) ---------- ---------- ---------- Net deferred tax asset .................. $ -- $ -- $ -- =========== =========== ===========
The following differences give rise to deferred income taxes:
JUNE 30, DECEMBER 31, ------------------------------- 1996 1996 1995 Net operating loss carryforward ......... $ 9,185,000 $ 7,533,000 $ 5,496,000 Research tax credit carryforward ........ 662,000 657,000 672,000 Other ................................... 147,000 126,000 194,000 ------- ------- ------- 9,994,000 8,316,000 6,362,000 Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000) ---------- ---------- ---------- Net deferred tax asset .................. $ -- $ -- $ -- ============ =========== ===========
The change in the valuation reserve is as follows:
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ------------ -------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- Balance at beginning of period ......... $8,316,000 $6,362,000 $6,362,000 $5,084,000 $ -- Adoption of SFAS No. 109 ............... -- -- -- -- 3,525,000 Increase due to current period net operating loss ....................... 1,678,000 688,000 1,954,000 1,278,000 1,559,000 --------- ------- --------- --------- --------- Balance at end of period ............... $9,994,000 $7,050,000 $8,316,000 $6,362,000 $5,084,000 ========== ========== ========== ========== ==========
As of December 31, 1996, the Company has Federal and state net operating loss carryforwards of approximately $23,460,000 and $19,270,000, respectively. The Federal and state net operating loss carryforwards expire in varying amounts beginning in 2003 and 1997, respectively. In addition, the Company has Federal and state research tax credit carryforwards of approximately $583,000 and $120,000, respectively, available to reduce future tax liabilities. The Federal and state research tax credit carryforwards expire in varying amounts beginning in 2003 and 2006, respectively. Use of net operating loss and tax credit carryforwards is subject to annual limitations based on ownership changes in the Company's common stock as defined by the Internal Revenue Code. 37 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 8. RELATED PARTY TRANSACTIONS Notes Receivable During the year ended June 30, 1996, the Company loaned $75,000 in the aggregate to an officer/director and an officer under notes which bear interest at 5.05% per annum and have an extended due date of August 1, 1997. These notes are secured by common stock of the Company issuable on exercise of stock options held by the officers. In October 1996, the Company granted a $250,000 line-of-credit to each of two officer/directors which bear interest at 6.07% per annum and mature on October 4, 1997. These lines-of-credit are secured by common stock of the Company held by the officer/directors. At December 31, 1996, borrowings of $110,000 were outstanding under the lines-of-credit. The Company recognized interest income on notes receivable of $4,562 during the six months ended December 31, 1996. At December 31, 1996, accrued interest receivable of $4,562 is included in the consolidated balance sheet. During the year ended June 30, 1994, an officer/director repaid $900 of a note receivable and the Company forgave the balance of $15,172. Consulting Fees During 1996, the Company retained a consulting company for strategic marketing and business development. The chief executive officer of the consulting firm is also a director of the Company. During the six months ended December 31, 1996 the Company paid the consulting firm $56,800 in fees. The Company also entered into a marketing and business development agreement for some of its technologies with another consulting firm. A principal of this consulting firm is a director of the Company. During the six months ended December 31, 1996, fees of $12,500 were paid to this consulting firm. The Company retained a director as a consultant to assist with certain public and investor relations matters. During the years ended June 30, 1996 and 1995, the director was paid fees of $31,000 and $49,000, respectively. During the years ended June 30, 1996 and 1995, the Company paid consulting fees of $11,550 and $18,188, respectively, to the spouse of an officer/director for research and development services. 9. COMMITMENTS AND CONTINGENCIES Lease Agreements The Company's current lease agreement for its corporate headquarters provides for a monthly rental of $15,188 plus real estate taxes and operating expenses through September 30, 1997. The lease agreement for Able provides for a monthly rental of $21,965 plus real estate taxes and certain operating expenses through March 31, 2000. At December 31, 1996, the aggregate future minimum rental expense (excluding real estate taxes and operating expenses) payable under the lease agreements amounts to approximately $400,000, $264,000, $264,000 and $66,000, respectively, for the years ending December 31, 1997, 1998, 1999 and 2000. Future minimum rentals to be received in 1997 under a noncancelable sublease are $70,000. Rent expense, net of subleases, for the six months ended December 31, 1996 and 1995 was $130,463 and $31,000, respectively, and for the years ended June 30, 1996, 1995 and 1994 was $61,366, $71,031 and $142,917, respectively. Real estate tax expense for the six months ended December 31, 1996 and 1995 was $53,976 and $44,000, respectively, and for the years ended June 30, 1996, 1995 and 1994 was $90,637, $91,307 and $70,479, respectively. 38 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 9. COMMITMENTS AND CONTINGENCIES -- (Continued) Employment Agreements As of December 31, 1996, the Company has employment agreements with three officer/directors that provide for minimum annual salaries, reimbursement of business related expenses and participation in other employee benefit programs. The agreements also include confidentiality, non-disclosure, severance, automatic renewal and non-competition provisions. Salary levels are subject to periodic review by the Board of Directors. Consulting Agreements In May 1993, the Company entered into a two-year consulting agreement for public relations services. As part of the compensation for the services to be rendered, the consultant was granted an option under the 1991 Stock Plan (see Note 10) to purchase 37,200 shares of common stock at $.60 per share exercisable through May 1, 2000. The Company valued the option at $145,080 and was amortizing this expense over the term of the consulting agreement. In May 1994, the consulting agreement was terminated and options to purchase 18,600 shares of common stock valued at $72,540 were cancelled. In February 1996, the Company entered into a six-month public and investor relations services agreement with a public relations firm. As compensation for these services, the firm was granted an option under the 1991 Stock Plan (see Note 10) to purchase 20,000 shares of the Company's common stock at $.01 per share exercisable through February 1, 2003 as long as the firm maintains a business relationship with the Company. The Company valued the option at $55,225 and amortized the expense over the six month term of the agreement. Demand Registration Rights The Company has agreed that, under certain circumstances, it will register under federal and state securities laws certain shares of common stock issued in connection with private placements and certain shares of common stock issuable in connection with warrants issued to the Company's investment banker and agents for the private placements. The Company will bear the cost of registering these securities. (See Note 10). Contingencies Legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's financial position. 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS 1992 Public Offering Warrants In October 1992, the Company completed a public offering of 920,000 units at $5.00 per unit, each unit consisted of one share of common stock and one redeemable common stock purchase warrant. The warrant originally allowed the holder to purchase one share of common stock at a price of $6.50, subject to adjustment in certain instances, through September 24, 1995. As a result of subsequent debt and equity financings, the 917,800 warrants that remain outstanding have been adjusted to allow the holder to purchase 1.7 shares with each warrant at an exercise price of $3.90 per warrant. Furthermore, on August 7, 1995, the Company extended the expiration date of the warrants to September 24, 1997. During the year ended June 30, 1996, 2,200 warrants were exercised to purchase 3,300 shares of common stock. Net proceeds were $9,438. 39 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued) 1994 Public Offering On March 23, 1994, the Company completed a public offering of 1,600,000 units at $4.50 per unit. Each unit consisted of four shares of common stock and two Class A redeemable common stock purchase warrants. Each warrant allowed the holder to purchase one share of common stock at a price of $1.20, subject to adjustment in certain instances, through March 16, 1999. Net proceeds of the offering after deduction of all expenses were $5,617,729. The underwriting agreement granted the underwriters warrants to purchase 160,000 units at $7.425 per unit, subject to adjustment in certain instances, during the period March 16, 1995 to March 16, 1999. The warrants contain, among other things, a net exercise feature. Public Offering Warrants In May 1995, the Company filed a registration statement to register the shares issuable upon the exercise of the warrants issued in the 1992 and 1994 public offerings and the shares issuable upon the exercise of the warrants issued to the underwriters of the 1994 public offering. Registration costs of $34,593 were deducted from net proceeds of warrant exercises during the year ended June 30, 1995. 1994 Public Offering Warrants In June 1995, 22,000 warrants issued to the underwriters of the 1994 public offering were exercised at $7.425 per warrant. The Company received proceeds of $163,350 and issued the warrant holder 88,000 shares of common stock and 44,000 Class A redeemable common stock purchase warrants. In addition, in June 1995, 35,000 warrants issued to the underwriters of the 1994 public offering were exercised, using their net exercise feature, in exchange for 185,452 shares of common stock. During the period from July 1995 to November 1995, 103,000 warrants issued to the underwriters of the 1994 public offering were exercised to acquire 503,982 shares of common stock and 10,000 Class A redeemable common stock purchase warrants using their net exercise feature and payment to the Company of $37,125. In December 1995, the Company completed the redemption of the Class A redeemable common stock purchase warrants resulting in the purchase of 3,241,194 shares of common stock yielding net proceeds of $3,845,769 after deducting expenses. The remaining 12,806 unexercised warrants were redeemed by the Company for $.01 per warrant. Private Placements During the year ended June 30, 1993, the Company entered into two common stock private placement agreements. In July 1993, the Company sold 128,571 shares of common stock at $3.50 per share. Net proceeds were $386,513 after deducting commissions and expenses of $63,486. The Company issued warrants to the placement agents to purchase 68,328 shares of common stock at $4.75 per share and 47,400 shares of common stock at $5.53 per share. During the year ended June 30, 1995, the warrant to purchase 47,400 shares was cancelled. The agents' warrants are exercisable over a four-year period commencing one year from the closing date and carry certain demand registration rights. The exercise price is subject to adjustment in certain instances. As a result of subsequent debt and equity financings, the warrant exercise price has been adjusted to $4.37 per share. On February 7, 1996, the Company raised $3 million in a private placement, from the sale to a single investor of 579,626 shares of common stock at a price of approximately $1.73 per share and the issuance of a $2 million convertible note. (See Note 6.) Placement costs for this transaction were $421,157 of 40 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued) which $146,452 was charged to additional paid-in capital and $274,705 was capitalized as deferred debt financing costs. During the six months ended December 31, 1996, $400,000 of the note was converted for 414,413 shares of common stock and $36,627 of related deferred debt financing costs were charged to additional paid-in capital. (See Note 14.) On February 21, 1996 and March 4, 1996, the Company issued, in private placements, an aggregate of 388,500 shares of common stock and 1,178,264 shares of Series A preferred stock for aggregate consideration of $3,500,000. Placement costs of $487,461 were charged to additional paid-in capital. The Series A preferred stock was convertible into common stock 100 days after initial issuance into that number of shares obtained by dividing the consideration paid for the preferred stock by 80% of the five-day average of the closing bid price per share of the common stock at the date of the conversion. Each share of preferred stock had a liquidation value equal to $2.9375, the consideration paid per share. In June 1996, the 1,178,264 shares of Series A preferred stock were converted into 1,612,834 shares of common stock based on the above formula. In February 1996, the Company issued, in a private placement, 552,560 shares of common stock for aggregate consideration of $1,000,000. Placement costs of $13,526 were charged to additional paid-in capital. Bonus Compensation In February 1996, the Company granted to certain employees and a consultant, bonus compensation paid in the form of (1) 117,250 shares of common stock outside of the 1991 Stock Plan and the 1989 Stock Option Plan and (2) stock options under the 1991 Stock Plan for 65,000 shares of common stock at an exercise price of $.01 per share. The Company recognized $558,857 in compensation expense associated with the grants. Stock Option Plans The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and reserved 600,000 shares of common stock for issuance to employees, officers, directors and consultants. Under the 1989 Plan, the Board of Directors will grant options and establish the terms of the options in accordance with plan provisions. The 1989 Plan options are exercisable for a period of ten years from the date of issuance. The following table summarizes the activity of options granted under the 1989 plan:
SIX MONTHS YEARS ENDED JUNE 30, ENDED -------------------------------------------------------- DECEMBER 31, 1996 1996 1995 1994 ----------------- ------------------- ------------------ -------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- ------ ------- Outstanding at beginning of period ...................... 220,000 $.87 270,000 $.71 270,000 $.71 270,000 $1.98 Granted ....................... -- -- -- -- -- -- 83,000 .75 Cancelled ..................... -- -- -- -- -- -- (83,000) 4.87 Exercised ..................... (12,000) .75 (50,000) .05 -- -- -- -- Outstanding at end of period .. 208,000 .88 220,000 .87 270,000 .71 270,000 .71 ======= ======= ======= ======= Exercisable at end of period .. 200,500 .89 197,500 .89 228,500 .72 187,000 .71 ======= ======= ======= ======= Reserved for future grants at end of period ............... -- -- -- -- ======== ======== ======= ======
41 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued) Information pertaining to options outstanding under the 1989 Plan at December 31, 1996 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------ ----------- ---- ----- ----------- ----- $.75-$.88 ............... 206,000 4.6 Years $ .83 198,500 $ .84 $5.87 ................... 2,000 4.7 Years 5.87 2,000 5.87 ------- ------- 208,000 4.6 Years .88 200,500 .89 ======= =======
The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved 1,200,000 shares of common stock for issuance to employees, officers, directors and consultants. (See Note 14.) Under the 1991 Plan, the Board of Directors may grant options, stock awards and purchase rights, and establish the terms of the grant in accordance with the provisions of the plan. The 1991 Plan options are exercisable for a period of seven years from the date of issuance and certain options contain a net exercise provision. As of December 31, 1996, no stock awards or purchase rights have been granted under the 1991 Plan. The following table summarizes the activity of options granted under the 1991 Plan:
YEARS ENDED JUNE 30, SIX MONTHS ------------------------------------------------------ ENDED DECEMBER 31, 1996 1996 1995 1994 ---- ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- ------ ----- Outstanding at beginning of period ....................... 640,900 $1.04 609,100 $1.26 586,600 $1.18 597,200 $5.14 Granted ........................ 326,000 1.01 105,000 .29 50,000 1.94 589,000 1.09 Cancelled ...................... (56,000) 1.81 (21,500) 5.29 (27,000) .75 (599,600) 5.05 Exercised ...................... (113,000) .75 (51,700) .32 (500) .75 -- -- Outstanding at end of period ... 797,900 1.02 640,900 1.04 609,100 1.26 586,600 1.18 ======= ======= ======= ======= Exercisable at end of period ... 343,992 1.18 418,300 1.09 201,826 1.87 58,600 4.18 ======= ======= ======= ======= Reserved for future grants at end of period .................... 236,900 506,900 590,400 613,400 ======= ======= ======= ======= Weighted average fair value of options granted during the period ....................... $1.23 $2.94 N/A N/A
42 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued) Information pertaining to options outstanding under the 1991 Plan at December 31, 1996 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------ ----------- ---- ----- ----------- ----- $.01-$.75 ........ 587,900 5.1 Years $ .61 276,300 $ .59 $1.31-$1.94 ...... 180,000 6.8 Years 1.54 37,692 1.71 $5.25-$6.25 ...... 30,000 2.1 Years 5.92 30,000 5.92 ------- ------- 797,900 5.0 Years 1.02 343,992 1.18 ======= =======
Other Stock Options and Warrants On September 6, 1990, the Company's Board of Directors granted non-qualified stock options to purchase 450,000 shares of common stock at a price of $.875 per share through September 2000, all of which are currently exercisable by a former director of the Company. In January 1993, the Company granted an option to purchase 20,000 shares of common stock at a price of $5.25 per share exercisable through January 15, 1999. On November 20, 1995, the Company entered into a one-year investment banking agreement with the underwriter of the Company's prior public offerings. As compensation for services, the Company granted a warrant to purchase 400,000 shares of common stock at an exercise price of $2.50 per share. The warrant is exercisable through November 20, 2000. The shares underlying the warrant were registered on a Form S-3 registration statement declared effective on March 29, 1996. In September 1996, the Company and the underwriter amended the agreement, and the Company paid the underwriter $500,000 in consulting fees for services rendered. On July 24, 1996, the Company's Board of Directors granted non-qualified stock options to two directors of the Company to purchase an aggregate of 660,000 shares of common stock at an exercise price of $1.94 per share. These options are exercisable by the directors until July 24, 2003. On October 28, 1996, the Company's Board of Directors granted a non-qualified stock option to a director of the Company to purchase 330,000 shares of common stock at an exercise price of $1.31 per share. This option is exercisable by the director until October 28, 2003. The weighted average fair value of these options, estimated using the Black-Scholes option-pricing model, on the date of grant was $1.20 per share. On December 10, 1996, the Company granted warrants to purchase an aggregate of 100,000 shares of common stock at an exercise price of $1.44 per share. These warrants are exercisable through December 31, 2003. The Company valued the warrants at $99,000 and is expensing the warrants over their vesting period. Expense for the six months ended December 31, 1996 was $19,800. Stock-Based Compensation At December 31, 1996, the Company has two stock-based compensation plans and stock options issued outside of the plans, which are described above. The Company applies APB Opinion No. 25 and related Interpretations in accounting for stock options issued to employees and directors. Had 43 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued) compensation cost for the Company's stock options issued to employees and directors been determined based on the fair value at the grant dates consistent with SFAS No. 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1996 JUNE 30, 1996 ----------------- ------------- Net loss: As reported ..................... $(4,306,140) $(5,097,419) Pro forma ....................... $(4,489,433) $(5,146,869) Net loss per share: As reported ..................... $ (.15) $ (.21) Pro forma ....................... $ (.16) $ (.21)
Common stock equivalents have been excluded from all calculations of net loss per share because the effect of including them would be anti-dilutive. The fair value of each option grant under the 1991 Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the six months ended December 31, 1996 and the year ended June 30, 1996, respectively; dividend yield of 0%; risk-free interest rates of 6.5% and 6.4%; expected volatility of 80% and 80% and expected lives of 3.8 and 3.9 years. Weighted average assumptions used in valuing stock options issued outside of the plans during the six months ended December 31, 1996 were dividend yield of 0%; risk free interest rate of 6.8%; expected volatility of 81% and an expected life of 5 years. Common Stock Reserved The Company has reserved common stock at December 31, 1996 as follows:
NUMBER OF SHARES Convertible note payable .................................... 2,122,000 1992 public offering warrants ............................... 1,560,260 Private placement agents' warrants .......................... 68,328 Stock option plans .......................................... 1,242,800 Other stock options and warrants ............................ 1,960,000 --------- Total .................................................... 6,953,388 =========
The number of shares of common stock reserved in connection with the convertible note payable is subject to adjustment (see Notes 6 and 14.) 11. REVENUES AND SEGMENT INFORMATION Product Sales During the six months ended December 31, 1996 and 1995, the Company's sales to foreign customers amounted to 21% and 16% of total revenues, respectively. During the years ended June 30, 1996 and 1995, the Company's sales to foreign customers amounted to 36% and 42% of total revenues, 44 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED) respectively. Sales to two domestic customers amounted to 53% and 14% of total revenues, and sales to one foreign customer amounted to 18% of total revenues during the six months ended December 31, 1996. Sales to one foreign customer amounted to 23% of total revenues during the year ended June 30, 1996 and sales to a different foreign customer amounted to 27% of total revenues during the year ended June 30, 1995. A summary of sales by geographic area is as follows:
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ------------ -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Far East and Asia ........................... $ 68,815 $39,812 $183,706 $185,997 United States ............................... 281,934 4,693 18,877 39,860 Europe ...................................... 7,403 5,622 8,466 16,462 Other ....................................... 315 7,728 9,696 5,234 -------- ------- -------- -------- $358,467 $57,855 $220,745 $247,553 ======== ======= ======== ========
A summary of sales by product is as follows:
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ------------ -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Diagnostic tests ............................ $ 86,781 $57,855 $220,745 $247,553 Generic pharmaceuticals ..................... 271,686 -- -- -- -------- ------- -------- -------- $358,467 $57,855 $220,745 $247,553 ======== ======= ======== ========
Contract Revenues The Company had a contract with the U.S. Government which amounted to approximately 32% of total revenues during the year ended June 30, 1994. License Fees and Royalties During the year ended June 30, 1994, the Company received $273,750 in full satisfaction of all minimum royalties due under an agreement in which it granted world-wide licenses to manufacture and sell certain diagnostic tests. Revenue under this agreement was 63% of total revenues for the year ended June 30, 1994. In May 1994, the Company received a non-refundable payment of $25,000 for entering into a letter of intent relating to a distribution agreement for its MycoDot diagnostic test. During the year ended June 30, 1995, the Company entered into an agreement where it granted a third party the right to evaluate licensing the Company's smoking cessation technology for a $500,000 fee, $250,000 of which was refundable should the Company license its smoking cessation technology to a different party prior to October 15, 1995. On July 13, 1995, the third party informed the Company that it would not exercise its right to license the technology at this time. Revenues earned under this agreement were approximately 45% and 50% of total revenues for the years ended June 30, 1996 and 1995, respectively. License fee revenue for the year ended June 30, 1996 includes $250,000 related to the smoking cessation technology mentioned above, $60,000 for certain rights to manufacture and sell the Company's MycoAKT latex agglutination products, and $25,000 for exclusive MycoDot distribution rights in Japan. 45 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED) Segment Information The Company has two principal operating segments: the development and marketing of therapeutic and diagnostic products for the human health care market and the manufacture and distribution of generic pharmaceuticals through its recently acquired subsidiary, Able Laboratories, Inc. During the years ended June 30, 1996, 1995 and 1994, the Company's continuing operations consisted of the development and marketing of therapeutic and diagnostic products for the human health care market. Segment information for the six months ended December 31, 1996 is as follows:
THERAPEUTICS AND GENERIC DIAGNOSTIC PRODUCTS PHARMACEUTICALS ------------------- --------------- Operating revenues ................................ $ 88,222 $ 271,686 Operating loss .................................... $(1,867,120) $ (842,877) Identifiable assets ............................... $ 509,885 $1,410,679 Depreciation and amortization ..................... $ 94,626 $ 34,932 Capital expenditures .............................. $ 10,449 $ 576,621
Operating loss represents net sales less operating expenses for each segment, and excludes general corporate expenses and other income and expenses of a general corporate nature. Identifiable assets by segment are those assets that are used in the Company's operations within that segment. General corporate assets consist principally of cash, investment securities, notes receivables, accrued interest receivable, certain office furniture and equipment and deferred debt financing costs. 12. EMPLOYEE BENEFIT PLAN The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan"). Employees who have attained the age of 21 may elect to reduce their current compensation, subject to certain limitations, and have that amount contributed to the 401(k) Plan. The Company may make discretionary contributions to the 401(k) Plan up to 25% of employee compensation, subject to certain limitations. Employee contributions to the 401(k) Plan are fully vested at all times and all Company contributions become vested over a period of six years. The Company has made no contributions to the 401(k) Plan as of December 31, 1996. 13. DISCONTINUED OPERATIONS The Company sold the assets of its fluid systems consulting business on May 6, 1994. A summary of the loss on disposal is as follows:
Net proceeds on sale .................................................. $153,752 Book values of assets sold: Accounts receivable ................................................. (92,373) Recoverable amounts on long-term contracts .......................... (45,871) Property and equipment .............................................. (28,915) ------- Loss on disposal ...................................................... $(13,407) ========
46 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 13. DISCONTINUED OPERATIONS -- (Continued) A summary of the loss from operations of the fluid systems consulting business for the year ended June 30, 1994 is as follows:
Contract revenues ..................................................... $502,057 Contract costs ........................................................ 288,480 Selling, general and administrative expenses .......................... 215,115 ------- Loss from operations .................................................. $ (1,538) ========
14. SUBSEQUENT EVENTS On January 13, 1997, $1,065,000 of the convertible note (see Note 6) was exchanged for 989,594 shares of common stock of the Company. On January 15, 1997 the Company granted warrants to a public relations consultant to purchase 50,000 shares of common stock at an exercise price of $1.97. These warrants are exercisable through January 15, 2002. On January 30, 1997, the stockholders approved an increase in the number of authorized shares of common stock from 40,000,000 to 75,000,000 shares. The stockholders also voted to amend the 1991 Stock Plan to increase the number of shares of common stock authorized for issuance thereunder from 1,200,000 to 2,600,000 shares. On March 7, 1997, the Company entered into an agreement to acquire the stock of Superior Pharmaceutical Company ("Superior") of Cincinnati, Ohio. Superior, a privately-held company, markets and distributes generic pharmaceutical products to independent, retail chain and institutional pharmacies. Superior reported 1996 sales of $32 million with pre-tax income of over $3.0 million. Under the terms of the agreement, DynaGen will pay Superior's shareholders a total of $16.5 million, consisting of $6.5 million in cash to be paid at the closing, $5 million in three-year notes and 1,666,666 shares of DynaGen common stock. The agreement provides that the aggregate value of the DynaGen common stock to be issued is to be equal to $5,000,000. If at the first twelve-month anniversary of the closing, the value of the common stock issued is less than $5,000,000, then DynaGen shall deliver to the selling stockholders additional shares (and cash, if average closing bid price is less than $1.50) to satisfy the deficiency. The shareholders may also receive certain incentive payments based on Superior's performance during the three years following the close of the transaction. The successful completion of the transaction is subject to, among other closing conditions, obtaining satisfactory equity and debt financing. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1996 and June 30, 1996, the Company's financial instruments include investment securities which are carried at fair value (see Note 3), notes receivable (see Note 8) and a convertible note payable (see Note 6). The carrying value of the notes receivable approximate their fair value as these instruments bear interest and mature in less than one year. The fair value of the outstanding balance of the convertible note payable is approximately $2,786,000 and $2,985,000 at December 31, 1996 and June 30, 1996, respectively, based on the fair value of the common stock issuable on conversion of the note. 47 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 16. QUARTERLY DATA (UNAUDITED) Summaries of operating results on a quarterly basis are as follows:
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30, ------------ -------------------- 1996 1996 1995 ---- ---- ---- SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net product sales ..... $ 299 $ 59 $ 70 $ 93 $ 39 $ 19 $ 25 $ 154 $ 41 $ 28 License fees and royalties ........... 1 -- 25 35 25 250 -- 250 -- -- ------- ------- ------- ------- ------- ------ ------- ------- ------ ------- Total revenues ..... 300 59 95 128 64 269 25 404 41 28 ------- ------- ------- ------- ------- ------ ------- ------- ------ ------- Cost of sales ......... 331 25 22 46 21 8 14 76 24 20 Research and development ......... 332 760 1,230 852 566 470 420 340 434 524 Selling, general and administrative ...... 2,166 1,073 616 880 618 571 462 499 588 435 ------- ------- ------- ------- ------- ------ ------- ------- ------ ------- Total costs and expenses ......... 2,829 1,858 1,868 1,778 1,205 1,049 896 915 1,046 979 ------- ------- ------- ------- ------- ------ ------- ------- ------ ------- Operating loss ........ (2,529) (1,799) (1,773) (1,650) (1,141) (780) (871) (511) (1,005) (951) Other income, net ..... 1 21 74 62 57 54 70 69 75 82 ------- ------- ------- ------- ------- ------ ------- ------- ------ ------- Net loss ........... $(2,528) $(1,778) $(1,699) $(1,588) $(1,084) $ (726) $ (801) $ (442) $ (930) $ (869) ======= ======= ======= ======= ======= ======== ======= ======= ====== ======= Net loss per share .... $ (.09) $ (.06) $ (.06) $ (.06) $ (.05) $ (.03) $ (.04) $ (.02) $ (.04) $ (.04) ======= ======= ======= ======= ======= ======= ======= ======= ======== ======= Weighted average shares outstanding .. 28,972 28,616 27,288 26,062 22,628 21,808 21,195 21,175 21,175 21,175 ======= ======= ======= ======= ======= ======= ======= ======= ======== =======
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers of the Company, their ages and their positions held in the Company are as follows:
NAME AGE POSITION ---- --- -------- Dhananjay G. Wadekar 43 Chairman of the Board, Executive Vice President and Director Dr. Indu A. Muni 54 President, Chief Executive Officer, Treasurer and Director Dr. F. Howard Schneider 57 Senior Vice President -- Technology and Director Dr. Ian R. Ferrier(1)(2) 54 Director Steven Georgiev(1)(2) 63 Director Dr. Michael Sorell 49 Director Peter J. Mione 50 Vice President -- Clinical and Regulatory Affairs Theodore A. Olsson 43 Vice President -- Corporate Development
- --------- (1) Member of the Audit Committee. (2) Member of the Executive Compensation Committee, which was established on July 24, 1996. The By-laws of the Company provide for the annual election of the Board of Directors. All Directors of the Company are elected to hold office until the next annual meeting of Stockholders, and until their successors have been duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors. DHANANJAY G. WADEKAR. Mr. Wadekar is a co-founder of the Company and has served as a director of the Company since inception and as Chairman of the Board and Executive Vice President of the Company since November 1991. In addition, he served as the Chairman, Chief Executive Officer and Treasurer of the Company from its inception until July 1990 and as a consultant to the Company during the period July 1990 to October 1991. Since April 1996, Mr. Wadekar has served as a director of CSL Lighting Manufacturing, Inc., a publicly traded manufacturer of high-end lighting fixtures. Mr. Wadekar was a director of Holometrix, Inc., a publicly traded thermal instrumentation company which he founded, from 1985 until November 1994. DR. INDU A. MUNI. Dr. Muni is a co-founder of the Company and has served as President and a director of the Company since inception and as Chief Executive Officer and Treasurer since July 1990. From May 1988 to November 1988, Dr. Muni served as Vice President of Biomaterial and Environmental Science and Engineering for Holometrix, Inc., a publicly traded thermal instrumentation company. Between July 1987 and May 1988, Dr. Muni provided biological consulting services to pharmaceutical and biotechnology companies as an independent consultant. From February 1981 to July 1987, Dr. Muni served as Executive Vice President of Bioassay Systems Corporation, a publicly traded provider of contract research and development services in the areas of pharmaceutical and diagnostic systems. DR. F. HOWARD SCHNEIDER. Dr. Schneider has served as a director of the Company since September 1989, was Chairman of the Board of the Company from July 1990 until February 1991 and became Senior Vice President -- Technology effective June 1991. Dr. Schneider was previously a partner and Senior Vice President of Bogart Delafield Ferrier, Inc. ("Bogart Delafield Ferrier"), a healthcare consulting firm that provides strategic consulting services to pharmaceutical and biotechnology companies. Dr. Schneider participated in the management buyout of Bogart Delafield Ferrier from its parent corporation, McCann Healthcare Group, a subsidiary of Inter Public Group. 49 DR. IAN R. FERRIER. Dr. Ferrier has served as a director of the Company since July 1996. In 1982, he founded Bogart Delafield Ferrier. Dr. Ferrier has served as Chief Executive Officer of Bogart Delafield Ferrier since 1982 and as Chairman since 1989. He earned a medical degree from Edinburgh University and specialized in clinical pharmacology during postgraduate training. Prior to founding Bogart Delafield Ferrier, he held various clinical research and management positions with ICI Pharmaceuticals, Kalipharma Inc., and the Tech America Group. He serves as a director on the board of Nastech Pharmaceuticals Co., Inc., a publicly traded company, and on the boards of several privately held biotechnology and pharmaceutical companies. STEVEN GEORGIEV. Mr. Georgiev has served as a director of the Company since July 1996. Since November 1993, he has been Chief Executive Officer of Palomar Medical Technologies, Inc. ("Palomar"), a publicly traded Massachusetts firm specializing in medical applications of lasers, and from November 1993 until August 1994 he was also President of Palomar. Mr. Georgiev was a consultant to Palomar's predecessor, Dymed Corporation, from June 1991 until Palomar's September 1991 merger with Dymed Corporation, at which time he became Palomar's Chairman of the Board of Directors. Mr. Georgiev has been a director of Excel Technology, Inc., a publicly traded laser system and electro-optical component company, since October 1992, and of XXsys Technology, Inc. since June 1994. Mr. Georgiev earned a B.S. degree in Engineering Physics from Cornell University and a M.S. in Management from the Massachusetts Institute of Technology. DR. MICHAEL SORELL. Dr. Sorell has served as a director of the Corporation since October 1996. Since February 1996, he has served as the Principal of MS Capital, LLC, which provides strategic consulting in the areas of medical technology and financial management to emerging biotech and healthcare companies. From August 1994 to February 1996, Dr. Sorell was an emerging growth strategist for Morgan Stanley & Co. Sciences Fund, a joint venture with Essex Investment Management of Boston, MA. Dr. Sorell originally joined Morgan Stanley in July 1986 as a Research Analyst covering pharmaceutical and biotechnology companies, was promoted to Vice President in January 1990 and became a Principal in January 1992. Prior to Morgan Stanley, Dr. Sorell was on the attending staff of Memorial Sloan-Kettering Cancer Center as a pediatric oncologist and later joined Schering-Plough Corporation in clinical research. Dr. Sorell earned an M.D. degree from the Albert Einstein College of Medicine in 1972. PETER J. MIONE. Mr. Mione has served the Company as Vice President -- Clinical and Regulatory Affairs since November 1991 and initially as Manager of Regulatory Affairs from May 1989 to October 1991. Mr. Mione is responsible for monitoring clinical studies, preparation of protocols, and submission of data on the Company's proposed products to the FDA for approval. Prior to joining the Company, Mr. Mione was an independent consultant from October 1988 to April 1989 and served as Administrative Coordinator at Toxikon Corp. (from 1987 to 1988), a company providing toxicology study services. Prior thereto, Mr. Mione was Director of Regulatory Compliance at Genus Diagnostics, a manufacturer of diagnostic kits. THEODORE A. OLSSON. Mr. Olsson has served as Vice President -- Corporate Development since August 1996, and initially served as Director, Polymer Products from November 1993 to August 1996. Prior to joining the Company, Mr. Olsson served as Senior Consultant and Unit Manager for Arthur D. Little, Inc. from July 1990 to November 1993. Mr. Olsson has a Bachelor of Science degree in Biochemistry from the University of Massachusetts, Amherst. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and The Nasdaq Stock Market. Officers, directors and greater-than-ten percent stockholders are required by Securities and Exchange Commission regulations to furnish the Company with all Section 16(a) forms they file. 50 Based solely on its review of the copies of such forms received by it, the Company believes that during the Transition Period all of its officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements except for Theodore Olsson. Mr. Olsson, an officer of the Company, was late in filing his Initial Statement of Beneficial Ownership of Securities of the Corporation on Form 3, which was due on August 30, 1996, and subsequently filed it on November 6, 1996. SIGNIFICANT EMPLOYEES The Company also relies on the services of the following significant employees: SUSAN BARRETT, age 41, has served as General Manager of the Company's subsidiary Able Laboratories, since November 1996. Ms. Barrett has over 15 years of operations, quality, and sales and marketing experience in the multisource pharmaceutical industry. From November 1995 to November 1996, Ms. Barrett was a consultant to pharmaceutical wholesalers and manufacturers in the areas of quality, regulatory, sales and marketing and strategic planning. She was Director of Sales at Qualitest Products, Inc., a privately held generic pharmaceutical distributor and manufacturer, from May 1995 to November 1995 and at Alpharma, Inc., a publicly traded generic pharmaceutical company, from January 1993 to April 1995. From March 1991 to December 1992, Ms. Barrett worked for Zenith Laboratories and was responsible for development of sales strategies. Ms. Barrett has a Bachelor of Science Degree from New York Institute of Technology in Industrial Management. DR. NICOLAE ISTRATE, age 53, has served as Section Leader, Immunology since September 1991 and as Senior Research Immunologist for the Company since April 1990, and as a Consultant to the Company for six months prior to that time. From December 1988 to October 1989, Dr. Istrate was the Director of the Hybridoma Laboratory for Cambridge Medical Technology Corporation of Billerica, Massachusetts where his responsibilities included the establishment of a monoclonal antibody laboratory and research in diagnostic methods and testing. From March 1987 to September 1988, Dr. Istrate was Manager of the Departmental Laboratory for Swine and Bovine Viral Vaccines in Timisoara, Romania, where he developed methods for viral diagnosis and viral vaccines. Dr. Istrate holds a Doctorate Degree in Veterinary Medicine and a Ph.D. in Microbiology from the Faculty of Veterinary Medicine in Bucharest, Romania. DR. SARASWATHY V. NOCHUR, age 37, became Director -- Diagnostic Products in February 1994 and previously served the Company as Product Manager -- Diagnostic Reagents from July 1991 to February 1994 and as Research Scientist from July 1989 to June 1991. Dr. Nochur initially served the Company as a consultant from March 1989 to July 1989. From October 1983 to December 1988, Dr. Nochur conducted research in connection with her doctoral dissertation at the Massachusetts Institute of Technology on the deregulation of cellulase and the optimization of ethanol production from cellulose. From 1982 to 1983, she was employed by Hoechst Pharmaceuticals where her work involved the development of immunodiagnostic products based on polyclonal antibody detection systems. DENNIS R. BILODEAU, CPA, age 39, has served as Controller for the Company since July 1992. Prior to joining the Company, Mr. Bilodeau was a self employed CPA from January 1992 to July 1992. From May 1990 to December 1991, Mr. Bilodeau was a senior supervisor at Siegfried and Associates, Certified Public Accountants. Mr. Bilodeau's prior experience included positions in financial management and public accounting. Mr Bilodeau received a Bachelor Degree in accounting from the University of Massachusetts, Amherst. CYNTHIA A. KILEY, age 36, has served the Company since inception, most recently as Director, Human Resources. She was Manager of Administrations from May 1992 to September 1993 and prior to that served as Office Manager. Ms. Kiley was Manager of Publications for Holometrix, Inc. from May 1988 to February 1989. From 1984 to May 1988, Ms. Kiley was responsible for publications management for Dynatech Scientific, Inc. Ms. Kiley received her Bachelor of Arts Degree in Biology from Emmanuel College. 51 SCIENTIFIC ADVISORY BOARD To provide scientific guidance to the Company's product development programs, as well as assistance in recruiting employees and collaborators, the Company works with a network of experts who serve as consultants to the Company. Each consultant has entered into a consulting agreement with the Company. These consulting agreements typically specify the compensation to be paid to the consultant and require that all information about the Company's products and technology be kept confidential. Most of the consultants are employed by employers other than the Company and may have commitments to or consulting or advisory agreements with other entities that may limit their availability to the Company. The consultants have agreed, however, not to provide any services to any other entities that might conflict with the services that they provide the Company. Members of the Company's Scientific Advisory Board offer consultation on specific issues encountered by the Company. The current members of the Scientific Advisory Board are: DR. F. HOWARD SCHNEIDER, Chairman of the Scientific Advisory Board, Senior Vice President -- Technology and Director. DR. JUDITH K. OCKENE, Professor of Medicine and Director of the Division of Preventive and Behavioral Medicine at the University of Massachusetts Medical School in Worcester, MA. Dr. Ockene has served as a member of the Advisory Committee and Scientific Editor of Surgeon General's Reports on Smoking and Health. DR. LEE B. REICHMAN, Director of the New Jersey Medical School National Tuberculosis Center and Professor of Medicine, Preventive Medicine and Community Health at the University of Medicine and Dentistry of New Jersey. Dr. Reichman is a leading expert on tuberculosis. DR. THOMAS J. RYAN, Professor of Medicine and former Chief of Cardiology at The University Hospital in Boston. Dr. Ryan is a past President of the American Heart Association. DR. SAUL TZIPORI, Professor and Division Head in Infectious Diseases at Tufts University School of Veterinary Medicine and Professor of Medicine at New England Medical Center in Boston. Dr. Tzipori is a past Associate Director of the International Center for Diarrheal Disease Research in Bangladesh. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors who are not employees of the Company receive a participation fee of $1,000 for each meeting of the Board of Directors attended and for each committee meeting attended, up to a maximum of $1,000 per calendar day, regardless of how may meetings occur on one day. All directors are also reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings and other services as directors. Directors are entitled to receive stock options under the 1991 Stock Plan and the 1989 Stock Option Plan. To date, Mr. Wadekar and Dr. Muni have received no options, and Dr. Schneider has received options to purchase a total of 310,000 shares of the Company's Common Stock under the 1991 Stock Plan and 1989 Stock Option Plan. In addition, the Board of Directors granted to Dr. Ferrier, Mr. Georgiev and Dr. Sorell options to purchase 330,000 shares each, which options were granted outside of the 1991 Stock Plan and 1989 Stock Option Plan. The Board of Directors, which administers the Company's 1989 Stock Option Plan and 1991 Stock Plan, has a general policy of awarding stock options at not less than fair market value at the date of grant, and options generally vest over 2, 3 or 4 years. During the fiscal year ended June 30, 1996, however, stock options were awarded to Dr. Schneider and certain other employees of the Company at an exercise price of $.01, which options were fully vested on the date of grant. 52 EXECUTIVE COMPENSATION COMMITTEE On July 24, 1996, the Board established an Executive Compensation Committee, of which Dr. Ferrier and Mr. Georgiev are the members. The Executive Compensation Committee reviews and sets cash and non-cash compensation for Dr. Muni and Mr. Wadekar and provides guidance to the Board of Directors on the cash and non-cash compensation payable to other officers and employees of the Company. SUMMARY COMPENSATION TABLE The following table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for the Transition Period and for the fiscal years ended June 30, 1996, 1995 and 1994, of those persons who were at December 31, 1996 (i) the chief executive officer and (ii) each other executive officer of the Company whose annual compensation exceeded $100,000 (the "Named Officers"):
LONG-TERM COMPENSATION(3) ---------------- AWARDS ANNUAL COMPENSATION(2) ---------------- ---------------------- NUMBER OF FISCAL SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) COMPENSATION ($) SARS (#) COMPENSATION ($)(4) --------------------------- ------- --- --- ---------------- -------- ------------------- DR. INDU A. MUNI ............... 1996A 72,500 -- -- -- 297 President, Chief Executive 1996 115,500 -- -- -- 304 Officer and Treasurer 1995 115,500 -- -- -- 304 1994 112,875 -- -- -- 304 DHANANJAY G. WADEKAR ........... 1996A 72,500 -- -- -- 297 Chairman of the Board and 1996 115,500 -- -- -- 304 Executive Vice President 1995 115,500 -- -- -- 304 1994 112,875 -- -- -- 304 DR. F. HOWARD SCHNEIDER ......... 1996A 62,833 -- -- -- 297 Senior Vice President -- 1996 115,500 -- -- 10,000 304 Technology 1995 115,500 -- -- -- 304 1994 112,875 -- -- 150,000(5) 15,476
- --------- (1) Information regarding the Transition Period is set forth in the row headed "1996A". (2) Excludes perquisites and other personal benefits, the aggregate annual amount of which for each officer was less than the lesser of $50,000 or 10% of the total salary and bonus reported. (3) The Company did not grant any restricted stock awards or stock appreciation rights ("SARs") or make any long-term incentive plan payouts during the Transition Period or the fiscal years ended June 30, 1996, 1995 and 1994. (4) Amount represents the dollar value of group-term life insurance premiums paid by the Company for the benefit of the Named Officer except with respect to Dr. Schneider in the fiscal year ended 1994 for which the amount is comprised of: (i) $15,172 representing forgiveness from repayment of a loan owed to the Company by Dr. Schneider and (ii) $304 representing the dollar value of group-term life insurance premiums paid by the Company. (5) The Company repriced certain of Dr. Schneider's outstanding options in Fiscal 1994 as follows: Options to purchase 150,000 shares granted in July 1992 at an exercise price of $5.25 were canceled in exchange for options to purchase 150,000 shares at an exercise price of $.75 per share, the fair market value of the Company's Common Stock on the date of exchange, April 27, 1994. OPTIONS/SAR GRANTS TABLE There were no grants of stock options or SARs made to the Named Officers during the Transition Period. 53 OPTION EXERCISES AND FISCAL YEAR END VALUES Presented below is further information with respect to unexercised stock options to purchase the Company's Common Stock held by each Named Officer as of December 31, 1996. None of the Named Officers exercised any stock options during the Transition Period.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($) --------------------- --------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Dr. Indu A. Muni ..................... -- -- -- -- Dhananjay G. Wadekar ................. -- -- -- -- Dr. F. Howard Schneider .............. 200,000 60,000 107,400 33,750
Stock Plans. The Company currently maintains two employee stock plans: the 1989 Stock Option Plan and the 1991 Stock Plan. Each plan is administered by the Board of Directors. The 1991 Stock Plan currently provides for the grant of incentive stock options, non-qualified options, awards and authorizations to purchase up to 2,600,000 shares of Common Stock. The terms of options issued under the 1991 Stock Plan, including number of shares, exercise price, duration and vesting, are generally determined by the Board of Directors. As of April 24, 1997, options to purchase a total of 786,400 shares of Common Stock were outstanding under the 1991 Stock Plan, of which options for 342,492 shares were then exercisable, and 1,636,900 shares of Common Stock were reserved for future option grants. The 1989 Stock Option Plan provides for the grant of incentive stock options and non-qualified options to purchase up to an aggregate of 600,000 shares of Common Stock to the Company's employees, officers, directors and consultants. The terms of such options, including number of shares, exercise price, duration and vesting, are generally determined by the Board of Directors. As of April 24, 1997, options to purchase a total of 208,000 shares of Common Stock were exercisable and outstanding under the 1989 Stock Option Plan and no shares of Common Stock were reserved for future option grants. EMPLOYMENT AND CONSULTING AGREEMENTS The Company has entered into employment agreements with Dr. Muni, the Company's President, Chief Executive Officer and Treasurer, Mr. Wadekar, the Company's Chairman of the Board and Executive Vice President, and Dr. Schneider, the Company's Senior Vice President -- Technology. Dr. Muni's agreement expires in August 1997, and Mr. Wadekar's and Dr. Schneider's agreements expire in October 1997. Under the agreements, Dr. Muni, Mr. Wadekar and Dr. Schneider were paid annual base salaries of $115,500, effective October 1, 1993. Effective July 1, 1996, the Executive Compensation Committee increased Dr. Muni and Mr. Wadekar's annual base salaries to $145,000 and approved an arrangement whereby Dr. Schneider is paid an annual base salary of $116,000 for a four-day work week. In addition, Dr. Muni, Mr. Wadekar and Dr. Schneider have each agreed that (i) during his respective period of employment with the Company and for a period of one year thereafter, he will not engage in any business activity engaged in or under development by the Company and (ii) for a period of three years following his respective period of employment, he will not engage in any activities for any direct competitor similar or related to those activities engaged in during the preceding two years of employment with the Company. In the event the Company terminates Dr. Muni's, Mr. Wadekar's or Dr. Schneider's employment without cause, the Company is obligated to pay to him an amount equal to three months base salary. 54 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Executive Compensation Committee and the Board of Directors are responsible for determining compensation for executive officers of the Company. Drs. Muni and Schneider and Mr. Wadekar serve on the Board of Directors. None of these three officers was present during discussion of and abstained from voting with respect to his own compensation as an executive officer of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 24, 1997, certain information concerning the ownership of the Company's Common Stock by: (i) each person who is known by the Company to own beneficially five percent or more of the outstanding shares of the Company's Common Stock; (ii) each of the Company's directors; (iii) each Named Officer; and (iv) all directors and executive officers as a group. Except as otherwise indicated, to the knowledge of the Company, the persons listed in the table have sole voting and investment powers with respect to the shares indicated.
SHARES PERCENTAGE OF BENEFICIALLY OUTSTANDING NAME OF BENEFICIAL OWNER OWNED COMMON STOCK(1) ------------------------ ----- --------------- Dhananjay G. Wadekar ................................................. 1,351,250 4.5% 99 Erie Street Cambridge, Massachusetts 02139 Dr. Indu A. Muni ..................................................... 1,137,250 3.8% 99 Erie Street Cambridge, Massachusetts 02139 Dr. F. Howard Schneider(2) ........................................... 330,000 1.1% 99 Erie Street Cambridge, Massachusetts 02139 Dr. Ian R. Ferrier ................................................... 0 0% c/o Bogart Delafield Ferrier, Inc. North Tower, 5th Floor 49 Headquarters Plaza Morristown, New Jersey 07960 Steven Georgiev ...................................................... 0 0% c/o Palomar Medical Technologies, Inc. 66 Cherry Hill Drive Beverly, Massachusetts 01915 Dr. Michael Sorell ................................................... 0 0% 115 East 42nd Street New York, NY 10128 All Directors and Executive Officers as a group (8 persons)(3) 2,946,500 9.7%
- ---------- (1) As of April 24, 1997, there were 30,114,206 shares of the Company's Common Stock outstanding. Pursuant to the rules of the Securities and Exchange Commission (the "Commission"), shares of Common Stock that an individual or group has a right to acquire on or before June 23, 1997 (i.e., within 60 days after April 24, 1997) pursuant to the exercise of presently exercisable or outstanding options, warrants or conversion privileges are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Information with respect to beneficial ownership is based upon information furnished by such stockholder. 55 (2) Includes 260,000 shares issuable to Dr. Schneider pursuant to immediately exercisable stock options. Does not include 100 shares owned by Dr. Schneider's wife, of which he disclaims any beneficial interest or control. (3) Includes 365,000 shares issuable pursuant to immediately exercisable stock options. Does not include 100 shares owned by Dr. Schneider's wife of which he disclaims any beneficial interest or control. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In fiscal 1996, the Company entered into a strategic marketing relationship for certain of the Company's technologies with Bogart Delafield Ferrier. In connection with this relationship, the Company paid to Bogart Delafield Ferrier during the calender year 1996 $80,000 in fees plus $12,388 for expenses. Bogart Delafield Ferrier is also entitled to royalties of 1 1/2 % of the dollar value of any transaction with respect to certain of the Company's technologies initiated with a pharmaceutical or managed care company between March 12, 1996 and December 31, 1996. No such transaction was initiated during this time period. Dr. Ferrier, who became a director of the Company in July 1996, is Chief Executive Officer and Chairman of Bogart Delafield Ferrier. The Company also entered into a consulting agreement with M.S. Capital, LLC. to provide marketing and business development services with respect to certain of the Company's technologies. Dr. Michael Sorell, a director of the Corporation, is the principal of M.S. Capital, LLC. Pursuant to the consulting agreement, the Company paid M.S. Capital, LLC $12,500 during the Transition Period. 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: The following financial statements are filed as part of this report: Independent Auditors' Report Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995 Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: No financial statement schedules have been included as part of this report because they are either not required or the information is otherwise included. 3. List of Exhibits: The following exhibits, required by Item 601 of Regulation S-K, are filed as a part of this Annual Report on Form 10-K. Exhibit numbers, where applicable, in the left column correspond to those of Item 601 of Regulation S-K.
EXHIBIT NO. ITEM AND REFERENCE --- ------------------ 2a -- Asset Purchase Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition Corp., Able Laboratories, Inc. and Alpharma USPD Inc. (filed as Exhibit 2.1 to Registrant's Form 8-K dated August 19, 1996 and incorporated by reference). 2b -- Product Supply Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition Corp. and Able Laboratories, Inc. (filed as Exhibit 2.2 to Registrant's Form 8-K dated August 19, 1996 and incorporated by reference). 2c -- Agreement and Plan of Merger among the Registrant, DynaGen Acquisition Corporation, Superior Pharmaceutical Company and the stockholders of Superior Pharmaceutical Company dated March 7, 1997 (filed herewith). 3a -- Certificate of Incorporation, as amended (filed herewith). 3b -- By-laws, as amended (filed as Exhibit 3b to Registrant's Registration Statement on Form S-1, No. 33-46445, and incorporated by reference). 4a -- Specimen Common Stock Certificate (filed as Exhibit 4a to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 4b -- Specimen Warrant Certificate (filed as Exhibit 4b to Registrant's Registration Statement on Form S-1, No. 33-46445, and incorporated by reference). 4c -- Form of Warrant Agreement (filed as Exhibit 1d to Registrant's Registration Statement on Form S-1, No. 33-46445, and incorporated by reference). 4d -- Subscription Agreement between the Registrant and GFL Performance Fund Limited, dated January 31, 1996 (filed as Exhibit 4b to Registrant's Registration Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference). 4e -- Note Purchase Agreement between the Registrant and GFL Performance Fund Limited, dated January 31, 1996 (filed as Exhibit 4c to Registrant's Registration Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference). 4f -- Convertible Note issued by the Registrant to GFL Performance Fund Limited, dated February 7, 1996 (filed as Exhibit 4d to Registrant's Registration Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference).
57
EXHIBIT NO. ITEM AND REFERENCE --- ------------------ 4g -- Registration Rights Agreement between the Registrant and GFL Performance Fund Limited, dated February 7, 1996 (filed as Exhibit 4e to Registrant's Registration Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference). 4h -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer Securities Inc., dated February 16, 1996 (filed as Exhibit 4e to Registrant's Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference). 4i -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer Securities Inc., dated February 29, 1996 (filed as Exhibit 4f to Registrant's Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference). 4j -- Registration Rights Agreement between the Registrant and Julius Baer Securities Inc., dated February 16, 1996 (filed as Exhibit 4g to Registrant's Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference). 4k -- Registration Rights Agreement between the Registrant and Julius Baer Securities Inc., dated February 29, 1996 (filed as Exhibit 4h to Registrant's Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference). 4l -- Investment Banking Agreement between the Registrant and H. J. Meyers & Co., Inc., dated November 20, 1995 (filed as Exhibit 4f to Amendment No. 1 to Registrant's Registration Statement on Form S-3, No. 333-1748, and incorporated herein by reference). 4m -- Amendment No. 1 to Investment Banking Agreement between Registrant and H.J. Meyers & Co., Inc. dated September 23, 1996 (filed herewith). 4n -- Common Stock Purchase Warrant issued by the Registrant to H. J. Meyers & Co., Inc., dated November 20, 1995 (filed as Exhibit 4g to Amendment No. 1 to Registrant's Registration Statement on Form S-3, No. 333-1748, and incorporated herein by reference). 4o -- Form of Warrant Agent Agreement (filed as Exhibit 4g to Registrant's Registration Statement on Form S-1, No. 33-71416, and incorporated by reference). 4p -- Common Stock Purchase Warrant issued by Registrant to Zach Spigelman dated December 10, 1996 (filed herewith). 4q -- Common Stock Purchase Warrant issued by Registrant to Rich Theriault dated December 10, 1996 (filed herewith). 4r -- Common Stock Purchase Warrant issued by Registrant to Shawn Basu dated December 10, 1996 (filed herewith). 4s -- Common Stock Purchase Warrant issued to Leonardo G. Zangani dated January 15, 1997 (filed herewith). 10a* -- 1989 Stock Option Plan, as amended (filed as Exhibit 10c to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 10b* -- Form of Incentive Stock Option Agreement under 1989 Stock Option Plan of the Registrant (filed as Exhibit 4.6 to Registrant's Registration Statement on Form S-8, No. 33-66826, and incorporated by reference). 10c* -- Form of Non-Qualified Stock Option Agreement under 1989 Stock Option Plan of the Registrant (filed as Exhibit 4.7 to Registrant's Registration Statement on Form S-8, No. 33-66826, and incorporated by reference). 10d* -- 1991 Stock Plan, as amended (filed herewith). 10e* -- Form of Incentive Stock Option Agreement under 1991 Plan (filed as Exhibit 10aa to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
58
EXHIBIT NO. ITEM AND REFERENCE --- ------------------ 10f* -- Form of Non-Qualified Stock Option Agreement under 1991 Plan (filed as Exhibit 10bb to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 10g* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option to Dr. Ian Ferrier (filed as Exhibit 10g to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10h* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option to Steven Georgiev (filed as Exhibit 10h to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10i* -- Employment Agreement dated September 1, 1989 by and between the Company and Dr. Indu A. Muni (filed as Exhibit 10a to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 10j* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Indu A. Muni (filed as Exhibit 10bb to Registrant's Registration Statement on Form S-1, No. 33-71416, and incorporated by reference). 10k* -- Employment Agreement dated October 1, 1991 by and between the Company and Dr. F. Howard Schneider (filed as Exhibit 10w to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 10l* -- Employment Agreement dated November 1, 1991 by and between the Company and Dhananjay G. Wadekar (filed as Exhibit 10x to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated by reference). 10m* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Dhananjay G. Wadekar (filed as Exhibit 10cc to Registrant's Registration Statement on Form S-1, No. 33-71416, and incorporated by reference). 10n -- Lease Agreement dated September 26, 1991 by and between the Company and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its facility at 99 Erie Street, Cambridge, Massachusetts (previously filed as the only Exhibit to Registrant's Form 10-Q for the quarter ended September 30, 1991). 10o -- Amendment to Lease Agreement dated May 15, 1992 by and between the Company and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit 10o to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10p -- Second Amendment to Lease Agreement dated May 31, 1993 by and between the Company and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit 10w to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated by reference). 10q -- Third Amendment to Lease Agreement dated April 1, 1995 by and between the Company and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit 10r to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated by reference). 10r -- Exercise of Option to Extend Lease Term dated May 3, 1996, from the Company to Meredith & Grew, Incorporated with respect to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit 10r to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10s -- Lease Agreement dated November 29, 1984 between Hollywood Court Associates and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10s to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
59
EXHIBIT NO. ITEM AND REFERENCE --- ------------------ 10t -- Space Expansion and Term Extension Agreement dated April 1988 between Hollywood Court Associates and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10t to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10u -- Assignment of Lease dated April 1989 between Hollywood Court Associates and CVN Associates L.P. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10u to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10v -- Space Expansion Agreement dated June 1993 between CVN Associates, L.P. and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10v to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10w -- Term Extension Agreement dated June 1993 between CVN Associates, L.P. and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10w to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10x -- Assignment of Lease dated August 19, 1996 between Able Laboratories, Inc. and Able Acquisition Corp. (predecessor corporation to Able) with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10 w to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10y -- Landlord's Consent to Assignment of Lease dated August 19, 1996 among CVN Associates, L.P., Able Acquisition Corp. (predecessor corporation to Able), Able Laboratories, Inc. and the Company with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10y to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10z -- Guaranty of Lease dated August 19, 1996 between the Company and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10z to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference). 10aa* -- Non Qualified Stock Option Agreement dated October 28, 1996 granting a stock option to Dr. Michael Sorell (filed herewith). 21 -- Subsidiary of the Registrant (filed herewith). 23a -- Consent of Wolf & Company, P.C. dated April 29, 1997 (filed herewith). 24a -- Power of Attorney is contained on page 61 of this Annual Report on Form 10-K. 27 -- Financial Data Schedule (filed herewith in electronic format only).
- -------- * Indicates a management contract or any compensatory plan, contract or arrangement. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Exhibits: The Company hereby files as part of this Form 10-K the exhibits listed in Item 14(a)(3) above. (d) Financial Statement Schedules: No financial statement schedules are filed as part of this Form 10-K. 60 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF CAMBRIDGE, COMMONWEALTH OF MASSACHUSETTS ON APRIL 30, 1997. DYNAGEN, INC. By: /s/ INDU A. MUNI ---------------------------------- INDU A. MUNI PRESIDENT, CHIEF EXECUTIVE OFFICER AND TREASURER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE UNDERSIGNED OFFICERS AND DIRECTORS OF DYNAGEN, INC. HEREBY SEVERALLY CONSTITUTES AND APPOINTS DHANANJAY G. WADEKAR, DR. INDU A. MUNI AND JOHN M. HESSION, AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER TO THEM, AND EACH OF THEM SINGLY, TO SIGN FOR HIM, IN HIS NAME IN THE CAPACITY INDICATED BELOW, ALL AMENDMENTS TO SUCH REPORT ON FORM 10-K, HEREBY RATIFYING AND CONFIRMING HIS SIGNATURE AS IT MAY BE SIGNED BY HIS ATTORNEYS TO SUCH REPORT AND ANY AND ALL AMENDMENTS THERETO.
NAME CAPACITY DATE ---- -------- ---- /s/ DHANANJAY G. WADEKAR Chairman of the Board, Executive April 30, 1997 - --------------------------------------- Vice President and Director DHANANJAY G. WADEKAR /s/ DR. INDU A. MUNI President, Chief Executive Officer, April 30, 1997 - --------------------------------------- Treasurer, (Principal Executive, DR. INDU A. MUNI Financial and Accounting Officer) and Director /s/ DR. F. HOWARD SCHNEIDER Senior Vice President -- Technology April 30, 1997 - --------------------------------------- and Director DR. F. HOWARD SCHNEIDER Director April 30, 1997 - --------------------------------------- STEVEN GEORGIEV /s/ DR. IAN R. FERRIER Director April 30, 1997 - ---------------------------------------- DR. IAN R. FERRIER Director April 30, 1997 - ---------------------------------------- DR. MICHAEL SORELL
61 EX-2.C 2 AGREEMENT AND PLAN OF MERGER ================================================================================ AGREEMENT AND PLAN OF MERGER BY AND AMONG DYNAGEN, INC., DYNAGEN ACQUISITION CORP., SUPERIOR PHARMACEUTICAL COMPANY AND THE STOCKHOLDERS OF SUPERIOR PHARMACEUTICAL COMPANY DATED AS OF MARCH 7, 1997 ================================================================================ AGREEMENT AND PLAN OF MERGER Table of Contents
Page ARTICLE I - THE MERGER............................................................................................1 SECTION 1.1. The Merger.......................................................................................1 SECTION 1.2. Effective Time...................................................................................1 SECTION 1.3. Effect of the Merger.............................................................................2 SECTION 1.4. Certificate of Incorporation; By-Laws............................................................2 SECTION 1.5. Directors and Officers...........................................................................2 SECTION 1.6. (Intentionally Omitted)..........................................................................2 SECTION 1.7. Certain Other Agreements.........................................................................2 SECTION 1.8. Taking of Necessary Action; Further Action.......................................................2 ARTICLE II - CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES...................................................3 SECTION 2.1. Definitions......................................................................................3 SECTION 2.2. Merger Consideration; Conversion or Cancellation of Company Common Stock.........................3 SECTION 2.3. Exchange of Certificates.........................................................................3 SECTION 2.4. Tangible Net Worth Requirement...................................................................4 SECTION 2.5. Additional Consideration.........................................................................5 SECTION 2.6. Incentive Payments...............................................................................6 SECTION 2.7. No Fractional Shares.............................................................................6 SECTION 2.8. Checks or Certificates in Other Names............................................................7 SECTION 2.9. Distributions with Respect to Unexchanged Shares of Parent Common Stock..........................7 SECTION 2.10. Stock Transfer Books.............................................................................7 SECTION 2.11. Lost, Stolen or Destroyed Certificates...........................................................7 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................8 SECTION 3.1. Corporate Existence and Power....................................................................8 SECTION 3.2. Corporate Authorization..........................................................................8 SECTION 3.3. Governmental Authorization.......................................................................8 SECTION 3.4. Non-Contravention................................................................................8 SECTION 3.5. Capitalization...................................................................................9 SECTION 3.6. Subsidiaries.....................................................................................9 SECTION 3.7. Financial Statements.............................................................................9 SECTION 3.8. Absence of Undisclosed Liabilities..............................................................10 SECTION 3.9. Title and Condition of Assets...................................................................10 SECTION 3.10. Real Property...................................................................................11 SECTION 3.11. Condition of Tangible Assets....................................................................11 SECTION 3.12. Subsequent Events...............................................................................11 SECTION 3.13. Legal Proceedings...............................................................................13 SECTION 3.14. Material Contracts..............................................................................13 SECTION 3.15. Employees.......................................................................................14 SECTION 3.16. Transactions with Affiliates....................................................................15 SECTION 3.17. Insurance Coverage..............................................................................15 SECTION 3.18. Compliance with Laws............................................................................15 SECTION 3.19. Accounts Receivable; Inventories................................................................15 -i- SECTION 3.20. Finders' Fees..................................................................................16 SECTION 3.21. Employee Benefit Plans.........................................................................16 SECTION 3.22. Taxes..........................................................................................17 SECTION 3.23. Environmental Matters..........................................................................19 SECTION 3.24. Intellectual Property..........................................................................19 SECTION 3.25. (Intentionally Omitted)........................................................................19 SECTION 3.26. Certain FDA Matters............................................................................19 SECTION 3.27. Stockholder Representations....................................................................20 SECTION 3.28. Title..........................................................................................21 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB....................................................21 SECTION 4.1. Corporate Existence and Power...................................................................21 SECTION 4.2. Corporate Authorization.........................................................................21 SECTION 4.3. Governmental Authorization......................................................................22 SECTION 4.4. Non-Contravention...............................................................................22 SECTION 4.5. Capitalization..................................................................................22 SECTION 4.6. Legal Proceedings...............................................................................23 SECTION 4.7. Compliance with Laws............................................................................23 SECTION 4.8. SEC Documents...................................................................................23 SECTION 4.9. Board Recommendation............................................................................24 SECTION 4.10. Finders' Fees...................................................................................24 SECTION 4.11 (Intentionally Omitted).........................................................................24 SECTION 4.12. Interim Operations of Sub.......................................................................24 ARTICLE V - COVENANTS OF ALL PARTIES.............................................................................24 SECTION 5.1. Cooperation.....................................................................................24 SECTION 5.2. Other Required Information......................................................................24 SECTION 5.3. Confidentiality.................................................................................25 SECTION 5.4. Public Announcements............................................................................25 SECTION 5.5. Miscellaneous Agreements and Consents...........................................................25 SECTION 5.6. Board Representation............................................................................26 SECTION 5.7. Best Efforts and Further Assurances.............................................................26 SECTION 5.8. Operations Following Closing....................................................................26 SECTION 5.9. Guaranties of the Company.......................................................................26 ARTICLE VI - COVENANTS OF THE COMPANY............................................................................27 SECTION 6.1. Preservation of Business Organization...........................................................27 SECTION 6.2. Carry on in Regular Course......................................................................27 SECTION 6.3. Consents........................................................................................27 SECTION 6.4. Company Stockholders Meeting....................................................................28 SECTION 6.5. Access..........................................................................................28 SECTION 6.6. Documents and Information to be Furnished.......................................................28 SECTION 6.7. Notices of Certain Events.......................................................................28 SECTION 6.8. Accuracy of Representations and Warranties......................................................28 SECTION 6.9. No Solicitation.................................................................................28 SECTION 6.10. Non-Disturbance Agreement.......................................................................29 ARTICLE VII - COVENANTS OF PARENT AND SUB........................................................................29 -ii- SECTION 7.1. Preservation of Business Organization...........................................................29 SECTION 7.2. Consents........................................................................................29 SECTION 7.3. Notices of Certain Events.......................................................................29 SECTION 7.4. Nasdaq SmallCap Market Listing..................................................................30 SECTION 7.5. Accuracy of Representations and Warranties......................................................30 SECTION 7.6. Documents and Information to be Furnished.......................................................30 SECTION 7.7. Indemnification.................................................................................30 SECTION 7.8. Non-Solicitation................................................................................30 SECTION 7.9. Compliance with Lease Terms.....................................................................30 ARTICLE VIII - CONDITIONS OF CLOSING.............................................................................30 SECTION 8.1. Conditions to Obligations of Parent, Sub, Stockholders and the Company..........................30 SECTION 8.2. Additional Conditions Applicable to Parent and Sub..............................................31 SECTION 8.3. Additional Conditions Applicable to the Stockholders and Company................................33 ARTICLE IX - TERMINATION.........................................................................................34 SECTION 9.1. Termination.....................................................................................34 SECTION 9.2. Certain Remedies Upon Termination...............................................................34 SECTION 9.3. Survival Upon Termination.......................................................................35 SECTION 9.4. Effect of Termination...........................................................................35 ARTICLE X -- SURVIVAL; INDEMNIFICATION...........................................................................35 SECTION 10.1. Survival.......................................................................................35 SECTION 10.2. Mutual Indemnification.........................................................................35 SECTION 10.3. Third Person Claims............................................................................36 SECTION 10.4. Limitations on Indemnification.................................................................37 SECTION 10.5. Method of Payment..............................................................................37 SECTION 10.6. Resolutions of Conflicts; Arbitration..........................................................37 SECTION 10.7. Remedies.......................................................................................38 ARTICLE XI - MISCELLANEOUS.......................................................................................39 SECTION 11.1. Specific Performance...........................................................................39 SECTION 11.2. Expenses.......................................................................................39 SECTION 11.3. Further Assurances.............................................................................39 SECTION 11.4. Parties in Interest............................................................................39 SECTION 11.5. Entire Agreement...............................................................................39 SECTION 11.6 Amendment or Modification......................................................................40 SECTION 11.7. Waiver.........................................................................................40 SECTION 11.8. Assignability..................................................................................40 SECTION 11.9. Headings and Interpretation....................................................................40 SECTION 11.10. Notices........................................................................................40 SECTION 11.11. Law Governing..................................................................................41 SECTION 11.12. Invalidity of Provisions.......................................................................41 SECTION 11.13. Counterparts...................................................................................41
-iii- EXHIBITS EXHIBIT A FORM OF SECURED PROMISSORY NOTE EXHIBIT B FORM OF PLEDGE AGREEMENT EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT D FORM OF EMPLOYMENT AGREEMENT, ERIC HAGERSTRAND AND DENNIS SMITH EXHIBIT E FORM OF EMPLOYMENT AGREEMENT, THOMAS CANNING -iv- AGREEMENT AND PLAN OF MERGER Agreement and Plan of Merger dated as of March 7, 1997 (this "AGREEMENT") by and among DynaGen, Inc., a Delaware corporation ("PARENT"); DynaGen Acquisition Corp., a Delaware corporation and a direct, wholly-owned subsidiary of Parent ("SUB"); Superior Pharmaceutical Company, an Ohio corporation (the "COMPANY"); and Eric C. Hagerstrand ("HAGERSTRAND"), Dennis Smith ("SMITH") and Thomas Canning ("CANNING"), the stockholders of the Company. Each of Hagerstrand, Smith and Canning are hereinafter collectively referred to as the "STOCKHOLDERS". WITNESSETH: WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have each determined that it is advisable and in the best interests of each company and its respective stockholders for Parent to enter into a business combination with the Company upon the terms and subject to the conditions set forth herein; and WHEREAS, in furtherance of such combination, the respective Boards of Directors of Parent, Sub and the Company have each approved the merger (THE "MERGER") of Sub with and into the Company in accordance with the applicable provisions of the General Corporation Law of the State of Delaware ("DELAWARE LAW") and the Ohio General Corporation Law ("OHIO LAW") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Delaware Law and Ohio Law, at the Effective Time (as defined in Section 1.2), Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the "SURVIVING CORPORATION"). The name of the Surviving Corporation shall be Superior Pharmaceutical Company. SECTION 1.2. EFFECTIVE TIME. Unless this Agreement shall have earlier terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 9.1 hereof, the closing of the Merger (the "CLOSING") will take place as promptly as practicable (and in any event within two business days) after the satisfaction or, if permissible, waiver of the conditions set forth in Article VIII hereof, at the offices of Taft, Stettinius & Hollister, 1800 Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, unless another date, time or place is agreed to in writing by the parties hereto. The date upon which the Closing occurs is herein referred to as the "CLOSING DATE." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the "CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware and the Secretary of State of the State of Ohio, in such form as required by Delaware Law and Ohio Law (the date and time of such filings being the "EFFECTIVE TIME"). Agreement and Plan of Merger - Page 2 SECTION 1.3. EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in the Certificate of Merger and applicable provisions of Ohio Law. At the Effective Time, all the property, rights, privileges, powers and franchises of Sub and the Company shall vest in the Surviving Corporation, and all debts, liabilities and duties of Sub and the Company shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.4. CERTIFICATE OF INCORPORATION; BY-LAWS. Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the Articles of Incorporation and the Regulations of the Company, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation and the Regulations of the Surviving Corporation. SECTION 1.5. DIRECTORS AND OFFICERS. Effective as of the Closing, Parent shall appoint a total of five (5) directors to the board of directors of the Surviving Corporation to hold office for one year and until their successors shall have been duly elected and qualified. Two of the directors shall be Hagerstrand and Smith. Parent shall select the remaining directors in its sole discretion. Effective as of the Closing, Hagerstrand and Smith shall also be appointed officers of the Surviving Corporation. SECTION 1.6. [INTENTIONALLY OMITTED.] SECTION 1.7. CERTAIN OTHER AGREEMENTS. Concurrently with the execution and delivery of this Agreement or prior to the Closing, the following agreements (collectively, the "Operative Documents") shall be executed and delivered by Stockholders and Parent, as the case may be: (i) a Secured Promissory Note in the form of Exhibit A (the "NOTE"), duly executed by Parent and delivered to each of the Stockholders; (ii) a Pledge Agreement in the form of Exhibit B (the "PLEDGE AGREEMENT"), duly executed and delivered by each of the Stockholders and Parent; (iii) a Registration Rights Agreement in the form of Exhibit C (the "REGISTRATION RIGHTS AGREEMENT") duly executed and delivered by each of the Stockholders and Parent; (iv) Employment Agreements with each of Hagerstrand and Smith in the form of Exhibit D (the "EMPLOYMENT AGREEMENTS"), duly executed and delivered by the Company and each of Hagerstrand and Smith; and (v) an Employment Agreement with Canning in the form of Exhibit E (the "CANNING AGREEMENT"), duly executed and delivered by the Company and Canning. SECTION 1.8. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of Parent, Sub and the Company will take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Agreement as promptly as possible. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Sub, the officers and directors of the Company and Sub immediately prior to the Effective Time are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. Agreement and Plan of Merger - Page 3 ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 2.1. DEFINITIONS. "COMPANY COMMON STOCK" shall mean the Common Stock, no par value, of the Company. "MERGER CONSIDERATION" shall mean (i) $6,500,000 in cash, (ii) Notes in the aggregate principal amount of $5,000,000 and (iii) 1,666,667 shares of Parent Common Stock. "OUTSTANDING SHARES" shall mean the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time. "PARENT COMMON STOCK" shall mean the Common Stock, par value $.01 per share, of Parent. SECTION 2.2. MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF COMPANY COMMON STOCK. (a) At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Sub, the Company or the holders of any shares of Company Common Stock, each of the Outstanding Shares shall be converted into the right to receive a pro rata amount of the Merger Consideration, based on each Stockholder's equity interest in the Company. (b) If between the date of this Agreement and the Effective Time, the outstanding shares of Parent Common Stock shall have been changed into a different number of shares or a different class by reason of a stock dividend, subdivision, reclassification, recapitalization, split-up or combination, the number of shares of Parent Common Stock included in the Merger Consideration shall be appropriately adjusted. (c) At the Effective Time, each share of Company Common Stock issued and outstanding and owned by Parent or any of its subsidiaries (including Sub) or held in the treasury of the Company immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, be canceled and retired without payment of any consideration therefor and cease to exist. (d) At the Effective Time, each share of Sub Common Stock, par value $.01 per share, issued and outstanding immediately prior to the Effective Time shall thereupon be converted into and become one (1) share of Common Stock of the Surviving Corporation. SECTION 2.3. EXCHANGE OF CERTIFICATES. (a) Prior to the Effective Time, Parent will appoint its transfer agent (the "Exchange Agent") to effectuate the delivery of the consideration provided for in Section 2.2 to holders of Company Common Stock upon surrender of certificates which immediately prior to the Effective Time represented all Outstanding Shares of Company Common Stock ("Certificates"). Agreement and Plan of Merger - Page 4 (b) Upon surrender of a Certificate to the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration provided for in Section 2.2(a), and the Certificate so surrendered shall forthwith be canceled. (c) Subject to Sections 2.4, 2.5 and 2.6, all Merger Consideration issued upon conversion of the shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock. (d) Neither Parent, Sub nor the Company shall be liable to any holder of shares of Company Common Stock for any Merger Consideration delivered to a public official pursuant to any abandoned property, escheat or similar law. From and after the Effective Time, and until surrendered in accordance with the provisions of Section 2.3, each Certificate representing Outstanding Shares shall represent, for all purposes, only the right to receive the Merger Consideration. (e) Parent shall be entitled to deduct and withhold from the consideration otherwise payable to any holder of shares of Company Common Stock such amounts as Parent is required to deduct and withhold with respect to the making of any such payment under the Internal Revenue Code of 1986, as amended (the "CODE"), or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent. SECTION 2.4 TANGIBLE NET WORTH REQUIREMENT (a) As of the Closing Date, the Company shall have Tangible Net Worth (as defined in this Section 2.4) of at least $2,750,000. If the Tangible Net Worth of the Company as set forth on the balance sheet contained in the Closing Financial Statements (as defined in this Section 2.4) is less than $2,750,000 as of the Closing Date, Parent shall withhold the amount of such shortfall, pro rata from the Stockholders, from the first payment of principal under the Notes. If the Tangible Net Worth of the Company as set forth on the balance sheet contained in the Closing Financial Statements is greater than $2,750,000 as of the Closing Date, Parent shall distribute the amount of such excess, pro rata among the Stockholders, at the time of the first payment of principal under the Notes. (b) For purposes hereof, the term "Tangible Net Worth" shall mean the net worth of the Company as determined in the audited balance sheets of the Company as of December 31, 1996 (under the caption "Stockholders' Equity"), as adjusted for transactions through the Closing Date, in all cases of the type which would be set forth on a balance sheet of the Company in accordance with generally accepted accounting principles consistently applied. (c) As promptly as practicable after the Closing Date but in no event later than forty-five (45) days thereafter, Parent shall oversee and cause to be prepared by the Company's auditors (Grant Thornton LLP) and delivered to Parent and the Stockholders a reviewed balance sheet of the Company as at the close of business on the Closing Date and a reviewed statement of earnings and cash flows from January 1, 1997 to the Closing Date, together with the review report of the Company's auditors, addressed to Parent and the Stockholders, stating that its review of the Closing Financial Statements was made in accordance with statements on standards for accounting and review services issued by the American Institute of Certified Public Accountants. The reviewed Closing Statements will be presented in accordance with generally accepted accounting principles and applied on a basis consistent with such U.S. generally Agreement and Plan of Merger - Page 5 accepted accounting principles and the financial statements of the Company for the fiscal years December 31, 1994, 1995 and 1996, previously furnished to Parent. Such financial statements, as so reviewed, are referred to herein as the "Closing Financial Statements." The cost of such review and the preparation of the Closing Financial Statements by the Company's auditors shall be borne by Parent. (d) The calculation of Tangible Net Worth set forth in the balance sheet contained in the Closing Financial Statements shall be deemed to be conclusive and binding upon the parties, unless at or prior to the fifth business day following the completion of the Closing Financial Statements and their delivery to Parent and the Stockholders, Parent or the Stockholders shall give written notice to the other that it objects to the valuation, inclusion or omission of any item. Such notice shall specify Parent's or the Stockholders' objections to the computation of Tangible Net Worth, citing the items or principles disputed. In the event that Parent and the Stockholders are unable to mutually agree upon the valuation or amount of any disputed item set forth in such notice within twenty (20) days after the receipt thereof by the non-objecting party, the parties shall submit the unresolved items to arbitration by a firm of independent public accountants to be selected jointly by Parent and the Stockholders. Such accounting firm shall be requested to consider the respective positions of the parties and render an opinion as to the valuation or amount of the disputed items. The determination of such jointly selected accounting firm shall be conclusive and binding upon the parties hereto. The cost of such accounting firm shall be paid by the non-prevailing party. A party shall be deemed to have prevailed with regard to disputed matters if its last offer or demand immediately prior to submission to such accounting firm is closer to the final resolution of the disputed matters than the other party's offer or demand. SECTION 2.5.ADDITIONAL CONSIDERATION. If at the first twelve-month anniversary of the Closing, the average closing bid price of Parent Common Stock for the ten (10) trading days immediately preceding such anniversary (the "FAIR MARKET VALUE") multiplied by the aggregate number of shares of Parent Common Stock delivered at the Closing equals an amount less than $5,000,000 (the "DEFICIENCY"), then Parent, within forty-five (45) days of such anniversary shall deliver to the Stockholders, pro rata based on the Outstanding Shares, that number of shares of Parent Common Stock equal to the Deficiency divided by the Fair Market Value, if the Fair Market Value is a trading price equal to or greater than $1.50 per share of DynaGen Common Stock. To the extent the Fair Market Value is less than $1.50 per share of DynaGen Common Stock, Parent shall also pay to the Stockholders in immediately available funds the extent of the additional Deficiency below the $1.50 trading price. By way of illustration and example: (a) if the Fair Market Value as determined above is $2.00, the aggregate number of shares of DynaGen Common Stock to be issued shall be the product obtained by dividing the Deficiency of $1,666,666 [$5,000,000 less 1,666,667 x $2.00 (FMV) = $5,000,000 less $3,333,334 = $1,666,666 of Deficiency] by the Fair Market Value of $2.00 ($1,666,666 (184) $2.00 = 833,333 additional shares of DynaGen Common Stock); under such example, Parent shall issue 833,333 additional shares of DynaGen Common Stock. (b) If the Fair Market Value is under $1.50 per share of DynaGen Common Stock, Parent will then issue (in the aggregate to all Stockholders) an additional 1,666,667 shares of DynaGen Common Stock. The remaining amount of the Deficiency, calculated following the issuance of the additional 1,666,667 shares of DynaGen Common Stock, shall be an amount equal to $5,000,000 less 3,333,334 shares of DynaGen Common Stock multiplied by the Fair Market Value. Such remaining Deficiency amount shall be then paid to the Stockholders in immediately available funds. The shares of Parent Common Stock which may be issued pursuant to the foregoing provisions are referred to as the "ADJUSTMENT SHARES." Agreement and Plan of Merger - Page 6 SECTION 2.6. INCENTIVE PAYMENTS. (a) Subject to Section 2.6(b) below, if the Surviving Corporation achieves Net Sales (as defined below) for the years ending December 31, 1997, 1998 and 1999 equal to or greater than $32 million, $35 million, and $39 million respectively (the "NET SALES TARGETS"), then Parent or the Surviving Corporation shall pay to the Stockholders, pro rata based on the Outstanding Shares, an aggregate of $550,000 for each such year that these Net Sales Targets have been achieved ("TARGET PAYMENTS"). Any such payment shall be paid to the Stockholders within forty-five (45) days after Parent's independent accountants have issued their report on the Parent's audited financial statements for such period. "NET SALES" means the net sales of the Surviving Corporation determined in accordance with generally accepted accounting principles ("GAAP") applied on the basis consistent with the Company's audited statements of earnings for the year ended December 31, 1996 attached hereto as part of Schedule 3.7. (b) Upon a Change in Control (as hereinafter defined) which occurs prior to December 31, 1999, the Target Payments and all unpaid principal and interest on the Notes shall, immediately prior to consummation of the Change in Control, accelerate and become fully vested and payable to the Stockholders; provided, however, that the Parent or Surviving Corporation shall not be required to pay any Target Payment with respect to any year which was completed prior to the Change in Control and for which the Net Sales Targets were not achieved. For purposes of the foregoing, "CHANGE IN CONTROL" shall mean the acquisition of the Parent or the Surviving Corporation by (i) the sale, issuance, exchange or transfer, in a single transaction or a series of related transactions, of greater than fifty percent (50%) of the outstanding capital stock of the Parent or the Surviving Corporation to a third party in connection with any business combination or other acquisition and in which such third party has the right to elect, and does elect, a majority of the Parent's Board of Directors, (ii) the sale of all or substantially all of the assets of the Parent or the Surviving Corporation to a third party, or (iii) a merger, consolidation or other reorganization involving the Parent and one or more other entities in which the shares of the Parent's or Surviving Corporation's outstanding capital stock immediately prior to such transaction are converted into, exchanged for or represent less than a majority of the voting power of the surviving or resulting entity. (c) In the event any of Hagerstrand or Smith is terminated without "cause" under such Stockholder's Employment Agreement (as defined in the Stockholder's Employment Agreement), then the Target Payments shall, immediately upon such termination, accelerate and become fully vested and payable to all Stockholders; provided, however, that the Parent or Surviving Corporation shall not be required to pay any Target Payment with respect to any year which was completed prior to the date of termination and for which the Net Sales Targets were not achieved. In the event of any termination of Hagerstrand or Smith for cause (as defined in such Stockholder's Employment Agreement), such Stockholder shall continue to be entitled to receive his pro rata share of any Target Payment otherwise payable in the absence of any such termination; provided, however, that the Parent or Surviving Corporation shall not be required to pay any Target Payment with respect to any year which was completed prior to the date of termination and for which the Net Sales Targets were not achieved. In the event of any voluntary termination of employment by any Stockholder, such Stockholder shall not receive his pro rata share of any Target Payment otherwise payable in the absence of any such termination. SECTION 2.7. NO FRACTIONAL SHARES. No certificates or scrip for fractional shares of Parent Common Stock will be issued, no Parent stock split or dividend shall relate to any fractional share interest, and no such fractional share interest shall entitle the owner thereof to vote or to any rights of or as a stockholder of Parent. In lieu of such fractional shares (after taking into account all shares of Company Common Stock then held by any such holder), any holder of Company Common Stock who Agreement and Plan of Merger - Page 7 would otherwise be entitled to a fraction of a share of Parent Common Stock (or any other Person who is the record holder of certificates for shares of Parent Common Stock into which such shares of Company Common Stock have been converted) will, upon surrender of his Certificate or Certificates, be paid the cash value of such fraction (without interest and rounded to the nearest cent), which shall be equal to the fraction multiplied by the closing bid price per share of Parent Common Stock on the day preceding the Closing. SECTION 2.8.CHECKS OR CERTIFICATES IN OTHER NAMES. If any check or any certificate evidencing shares of Parent Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefore is registered, it shall be a condition of the issuance thereof that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the Person requesting such exchange establish to the satisfaction of the Exchange Agent or of Parent acting solely in its corporate capacity, as the case may be, that any transfer or other taxes required by reason of the issuance of a check or a certificate for shares of Parent Common Stock in any name other than that of the registered holder of the Certificate surrendered or otherwise required has been paid or is not payable. SECTION 2.9. DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES OF PARENT COMMON STOCK. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock evidenced thereby, and no other part of the Merger Consideration shall be paid to any such holder, until the holder of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder of the certificates evidencing whole shares of Parent Common Stock issued in exchange therefor, without interest, (i) promptly, the amount of any cash payable with respect to a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 2.7 and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions, with a record date after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole share of Parent Common Stock. SECTION 2.10. STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company or the Surviving Company. On or after the Effective Time, any Certificates presented to the Exchange Agent or Parent for any reason shall be converted into the Merger Consideration. SECTION 2.11. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall make payment in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, for the pro rata amount of the Merger Consideration; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of any such lost, stolen or destroyed Certificate or Certificates having an aggregate value of $100,000 or more to deliver a bond in such sum as Parent may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. Agreement and Plan of Merger - Page 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY With the exceptions of the representations and warranties set forth in Section 3.22(d) and (e), 3.27 and 3.28, which are expressly stated to be made in the respective Stockholder's individual capacity only, each of the Company and the Stockholders hereby severally, but not jointly, represent and warrant to each of Parent and Sub that except as set forth in the written disclosure schedule previously delivered by the Company to Parent (the "Company Disclosure Schedule"): SECTION 3.1. CORPORATE EXISTENCE AND POWER. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Ohio and has all requisite corporate power and authority to own, lease or operate its properties and assets and to carry on its business as now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect (as defined below) on the Company. The Company has heretofore delivered to Parent and Sub true and complete copies of its Articles of Incorporation and Code of Regulations, as amended to date and as currently in effect. For purposes of this Agreement, a "MATERIAL ADVERSE CHANGE" or a "MATERIAL ADVERSE EFFECT" shall mean, with respect to Parent on the one hand and the Company on the other hand, the result of one or more events, changes or effects which, individually or in the aggregate, would have a material adverse effect or impact on the business, assets, results of operations, prospects or financial condition of such party and its subsidiaries, taken as a whole, or is reasonably likely to delay substantially or prevent the consummation of the transactions contemplated hereby. SECTION 3.2. CORPORATE AUTHORIZATION. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger are within the Company's corporate power and authority and, subject to the approval of the Merger by the Company's stockholders (the "COMPANY STOCKHOLDER APPROVAL"), have been duly authorized by all necessary corporate action of the Company. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the Company Stockholder Approval. SECTION 3.3. GOVERNMENTAL AUTHORIZATION. Except as set forth on Schedule 3.3, the execution, delivery and performance by the Company of this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement by the Company, do not and will not require any consent, approval or action by or in respect of, or any declaration, filing or registration with, any governmental or regulatory authority (each, a "GOVERNMENTAL AUTHORITY"), other than (i) routine filings with the Secretary of State of Ohio and the Secretary of State of Delaware necessary to consummate the Merger and (ii) such filings or notifications which would not prevent or delay consummation of any of the transactions contemplated hereby in any material respect, or otherwise prevent the Company from performing its obligations under this Agreement in any material respect. SECTION 3.4. NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and other transactions contemplated by this Agreement, do not and will not, with or without the giving of notice, the lapse of time or both: (i) contravene or conflict with the Articles of Incorporation or Code of Agreement and Plan of Merger - Page 9 Regulations of the Company, (ii) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, rule, regulation, judgment, injunction, order or decree currently in effect and binding upon or applicable to the Company, (iii) except as set forth on Schedule 3.4, require any consent, approval or other action by any individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association, trust or other entity or organization, including a Governmental Authority (a "PERSON"), contravene or conflict with or constitute a violation of or a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of the Company or to a loss of any benefit to which the Company is entitled under any material provision of (A) any agreement binding upon the Company, or (B) assuming compliance with the matters referred to in Section 3.3, any material license, franchise, permit or other similar authorization held by the Company, or (iv) create or result in any mortgage, lien, pledge, claim, charge, security interest, easement, assessment, restrictive covenant, reservation, restriction or encumbrance of any kind ("LIEN") on any asset of the Company, except in the case of clauses (ii), (iii) and (iv), for such matters as would not have a Material Adverse Effect on the Company. SECTION 3.5. CAPITALIZATION. The authorized capital stock of the Company consists of (i) 750 shares of Company Common Stock, no par value, of which 200 shares are issued and outstanding as of the date hereof. Schedule 3.5 sets forth the name and address of all stockholders of the Company and the number of shares of Common Stock held by each stockholder of the Company. All issued and outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive, first refusal or other rights of any stockholder of the Company or any other Person. Except as set forth in Schedule 3.5, there are no outstanding (i) shares of capital stock or other voting securities of the Company, (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options, warrants, exchange rights, subscription rights or other agreements, commitments or rights to purchase or otherwise acquire from the Company, or agreements, commitments or obligations of the Company to issue or sell, any capital stock or securities convertible into or exchangeable for capital stock of the Company (the items in clauses (i), (ii) and (iii) being referred to collectively as the "COMPANY SECURITIES"). Except as set forth in Schedule 3.5 or as contemplated by this Agreement, there are no outstanding obligations of the Company to sell, issue or deliver, or to repurchase, redeem or otherwise acquire, any of the Company Securities. Schedule 3.5 sets forth a complete and correct list (including number of shares and exercise price) of all Company Securities described in clauses (ii) and (iii) of the definition of Company Securities. SECTION 3.6. SUBSIDIARIES. The Company does not hold or own, directly or indirectly, any equity or ownership interest in any corporation, association, partnership, joint venture or other Person. SECTION 3.7. FINANCIAL STATEMENTS. Attached hereto as Schedule 3.7 are the following financial statements of the Company (collectively, the "Financial Statements"): (i) the audited balance sheet as of December 31, 1994 and the related audited statements of earnings, retained earnings and cash flows for the year ended December 31, 1994 (together with the notes thereto, audited by, and accompanied by the report thereon, of Grant Thornton LLP); (ii) the audited balance sheet as of December 31, 1995 and the related audited statement of earnings, retained earnings and cash flows for the year ended Agreement and Plan of Merger - Page 10 December 31, 1995 (together with the notes thereto, audited by, and accompanied by the report thereon, of Grant Thornton LLP); and (iii) the audited balance sheet as of December 31, 1996 (the "BALANCE SHEET") and the related audited statements of earnings, retained earnings and cash flows for the year ended December 31, 1996 (together with the notes thereto, audited by, and accompanied by the report thereon, of Grant Thornton LLP). Each of the Financial Statements has been prepared in accordance with GAAP applied on a consistent basis and fairly presents the financial position of the Company as of its date or the results of operations or changes in financial position of the Company for the periods then ended. Except as may be set forth in the Financial Statements, all of the revenues and expenses of the Company reflected in the Financial Statements were derived or incurred in the ordinary course of business of the Company. The account records underlying the Financial Statements accurately and fairly reflect, in reasonable detail and in all material respects, the transactions of the Company, and the Company's books of account have been maintained in accordance with GAAP applied on a consistent basis. All accounts, notes and other receivables of the Company are valid and enforceable, are not subject to any valid defense, set off, counterclaim or claim for returns or refunds, and are collectible in full in accordance with their terms in the ordinary course of business of the Company, except to the extent of any reserves therefor reflected on the Balance Sheet or taken in the ordinary course of business consistent with past practice which, in the aggregate, are not materially adverse to the Company. SECTION 3.8. ABSENCE OF UNDISCLOSED LIABILITIES. To the best knowledge of the Company and the Stockholders, the Company has no liabilities or obligations which are, or reasonably could be expected to be, in the aggregate, material to the business, assets, results of operation, prospects or financial condition of the Company, except those liabilities or obligations which are (a) fully reflected or adequately reserved against in the Balance Sheet, (b) disclosed in this Agreement or in Schedule 3.8 or (c) incurred in the ordinary course of business consistent with past practice since December 31, 1996 (the "BALANCE SHEET DATE"). For the purposes of this Agreement, the phrase "LIABILITIES OR OBLIGATIONS" shall include any direct or indirect indebtedness, claim, loss, damage, deficiency (including deferred income tax and other net tax deficiencies), cost, expense, obligation, guarantee, or responsibility, whether accrued, absolute or contingent, fixed or unfixed, liquidated or unliquidated, secured or unsecured. SECTION 3.9. TITLE AND CONDITION OF ASSETS. The assets and properties owned, leased or subleased by the Company constitute, and on the Closing Date will constitute, all of the assets and properties used or held for use in the conduct of the business of the Company, and are, and on the Closing Date will be, generally adequate to conduct the business of the Company as currently conducted. The Company has, and on the Closing Date will have record and marketable title to, or valid leasehold interests in, all of its assets and properties, whether real, personal or mixed, tangible or intangible, and whether now owned, leased or subleased or acquired after the date of this Agreement, including all assets and properties identified on the Balance Sheet, except for assets and properties sold since the Balance Sheet Date in the ordinary course of business consistent with past practices and as permitted by this Agreement. Except as disclosed in the Financial Statements or in Schedule 3.9, none of such assets and properties is, or on the Closing Date will be, subject to any Liens, except for (i) Liens incurred in the ordinary course of business which are not yet due and payable, (ii) Liens which do not materially detract from the value of or interfere with the present use of the property affected thereby and which do not, individually or in the aggregate, have a Material Adverse Effect on the Company and (iii) liens securing the repayment of the Credit Facility of the Company (the "PERMITTED LIENS"). Agreement and Plan of Merger - Page 11 SECTION 3.10. REAL PROPERTY. Set forth on Schedule 3.10 is an accurate and complete list and summary description of all real property currently owned or leased by the Company and, except as set forth on Schedule 3.10, none of the described leases require any consent to the transactions contemplated by this Agreement. The Company has previously delivered to Parent and Sub accurate and complete copies of all leases listed and described on Schedule 3.10. The Company has possession of each of the aforementioned properties and, to the knowledge of the Company, no event has occurred which, with the lapse of time or notice or both, could reasonably be expected to result in a material default under any of the described leases. All rents or other material payment obligations which have become due in respect of each of such leased properties have been paid, the Company has complied in all material respects with its obligations under the said leases and the Company has not received any notice of any breach of its obligations under any covenants, agreements, statutory requirements, planning consents, by-laws, orders and regulations affecting any of such properties (whether owned or leased), their use and any business of the Company there carried on. SECTION 3.11. CONDITION OF TANGIBLE ASSETS. Except as set forth on Schedule 3.11, all material tangible property, including the real property and structures thereon, of the Company is in good operating condition, reasonable wear and tear excepted, and the operation and use of such property in the business of the Company conforms in all material respects to all applicable laws, ordinances, regulations, permits, licenses and certificates. SECTION 3.12. SUBSEQUENT EVENTS. Except as disclosed in Schedule 3.12, since the Balance Sheet Date, the business of the Company has been conducted in the ordinary course of business consistent with past practices and the Company has not: (a) Incurred any Material Adverse Change. (b) Amended or otherwise changed its Articles of Incorporation or Code of Regulations in any manner which would reasonably be expected to result in a Material Adverse Change. (c) Declared, set aside or paid any dividend or other distribution with respect to any of the Company Securities, or repurchased, redeemed or otherwise acquired any outstanding shares of capital stock or other securities of, or other equity or ownership interests in, the Company (including the Company Securities) or issued or sold any Company Securities. (d) Amended the term of any outstanding security of the Company. (e) Incurred any indebtedness for borrowed money or guaranteed any such indebtedness of another Person, issued or sold any debt securities or warrants or other rights to acquire any debt securities of the Company, guaranteed any debt securities of another Person, entered into any "keep well" or other agreement to maintain any financial statement condition of another Person or entered into any arrangement having the economic effect of any of the foregoing, except for borrowings under its existing credit facility with The Huntington Bank for secured indebtedness, whether a term loan or line of credit (the "CREDIT FACILITY"), the endorsement of checks in the normal course of business, and the extension of credit to the Company by suppliers in the normal course of business. (f) Created or assumed or permitted to exist any Lien on any asset, other than Permitted Liens . (g) Made any loan or capital contribution to or investment in any Person. Agreement and Plan of Merger - Page 12 (h) Entered into any lease or acquisition of any capital asset or made any other investment for aggregate consideration in excess of $10,000. (i) Sold, leased, pledged, transferred or otherwise disposed of any capital asset with an aggregate fair market value in excess of $10,000. (j) Entered into any agreement or transaction, or made any commitment, relating to its assets or business (including the acquisition or disposition of any assets or business) or relinquished any contract or other right, other than transactions, commitments and relinquishments in the ordinary course of business consistent with past practices and those contemplated by this Agreement. (k) Changed any method or practice of financial or tax accounting or any method of maintaining books and records. (l) (i) Granted any severance or termination pay to any director or officer of the Company or, except in the ordinary course of business consistent with past practice, to any employee of the Company, (ii) entered into any employment, severance, consulting, deferred compensation or other similar agreement (or any amendment to any agreement) with any director or officer of the Company or, except in the ordinary course of business consistent with past practice, with any employee of the Company, (iii) changed any benefits payable under existing severance or termination pay policies or employment, severance, consulting or other similar agreements, or (iv) changed the compensation, bonus or other benefits payable to directors, officers or employees of the Company other than periodic increases in the ordinary course of business consistent with past practice. (m) Paid, discharged, settled or satisfied any claim, Lien or liability, other than those (i) which were reflected or reserved against in the Balance Sheet and in the ordinary course of business consistent with past practice, or (ii) which were incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice. (n) Written down the value of any inventory or written off as uncollectible any notes, accounts or other receivables or any portion thereof other than in the ordinary course of business consistent with past practice. (o) Entered into any transaction with any affiliates of the Company, other than in the ordinary course of, and pursuant to the reasonable requirements of, the business of the Company and upon terms that were no less favorable to the Company than it could have obtained in a comparable transaction with a Person who was not an affiliate. (p) Entered into any agreement, undertaking or commitment to do any of the foregoing. (q) Suffered any damage, destruction or other casualty loss not covered by insurance affecting the business or assets of the Company which has had or would reasonably be expected to result in or have a Material Adverse Effect on the Company. SECTION 3.13. LEGAL PROCEEDINGS. Except as set forth on Schedule 3.13, there is no action, suit, litigation, governmental investigation or other proceeding pending or, to the knowledge of the Company, threatened against or relating to the Company or any of its properties or businesses, or the Agreement and Plan of Merger - Page 13 transactions contemplated by the Agreement which could reasonably be expected to have a Material Adverse Effect and, to the knowledge of the Company, no basis for any such action exists. SECTION 3.14. MATERIAL CONTRACTS. (a) Except for agreements, contracts, plans, leases, arrangements or commitments disclosed in Schedule 3.14 or any other Schedule to this Agreement, the Company is not a party to or subject to: (i) any collective bargaining agreement; (ii) any agreements that contain any material unpaid severance liabilities or obligations; (iii) any bonus, deferred compensation, incentive compensation, pension, profit-sharing or retirement plans, or any other employee benefit plans or arrangements; (iv) any employment or consulting agreement, contract or commitment with an employee or individual consultant or salesperson or consulting or sales agreement, contract or commitment with a firm or other organization not terminable by the Company on 90 days' notice without liability except to the extent applicable local law and/or general principles of wrongful termination law may limit the Company's ability to terminate such agreements, contracts or commitments; (v) agreement or plan, including, without limitation, any stock option plan, stock appreciation right plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (vi) any fidelity or surety bond or completion bond; (vii) any lease of personal property having a remaining value individually in excess of $10,000; (viii) any agreement of indemnification or guaranty; (ix) any agreement, contract or commitment containing any covenant limiting the freedom of the Company to engage in any line of business or compete with any Person; (x) any agreement, contract or commitment relating to capital expenditures and involving future obligations in excess of $10,000; (xi) any agreement, contract or commitment relating to the disposition or acquisition of assets not in the ordinary course of business or any ownership interest in any corporation, partnership, joint venture or other business enterprise; Agreement and Plan of Merger - Page 14 (xii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (viii) hereof; (xiii) any purchase order or contract for the purchase of raw materials or acquisition of assets involving $50,000 or more; (xiv) any distribution, joint marketing, supply or development agreement; or (xv) any other agreement, contract or commitment which involves payment by the Company of $25,000 or more and is not cancelable without penalty within thirty (30) days. The Company has not breached, or received in writing any claim or threat that it has breached, any of the terms or conditions of any other agreement, contract or commitment in such a manner as would permit any other party to cancel or terminate the same or would permit any other party to seek damages from the Company that could reasonably be expected to have a Material Adverse Effect. Each agreement, contract or commitment set forth in any of the Company's schedules is in full force and effect and, except as otherwise disclosed in such schedule, to the knowledge of the Company and the Stockholders, each such agreement, contract or commitment is not subject to any material default thereunder by any party obligated to the Company pursuant thereto. The Company has obtained, or will obtain prior to the Effective Time, all necessary consents, waivers and approvals as are required in connection with the Merger under any of the Company's material agreements. (b) There is no contract, agreement, commitment or obligation to which the Company is a party or is bound that, at the time it was entered into or made was, or is currently, known or expected by the Company to result in any material loss to the Company upon completion or performance thereof, or any bid, offer or proposal which, if accepted would result in such a contract, agreement, commitment or obligation. (c) Except as disclosed in Schedule 3.14, the Company is not a party to any agreement with any of its securityholders or optionholders, or any affiliate thereof, nor, to the knowledge of the Company, without inquiry by the Company, is any securityholder or optionholder of the Company a party to any agreement with any other such securityholder or optionholder relating to the Company or any of its securities. SECTION 3.15. EMPLOYEES. Schedule 3.15 sets forth a true and complete list of (a) the names, titles, annual salaries and other compensation of all employees of the Company (the "EMPLOYEES") and the location at which such Employees regularly perform services for the Company and (b) the wage rates for non-salaried Employees of the Company (by classification). Any agreements, commitments or understandings between the Company and any Employee concerning such Employee's future salary, compensation or terms of employment are described in Schedule 3.15. Except as set forth on Schedule 3.15, none of such Employees has indicated to the Company that he or she intends to resign or retire as a result of the transactions contemplated by this Agreement or otherwise. The Company is in compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice, failure to comply with which or engagement in which, as the case may be, has had, or could reasonably be expected to have, a Material Adverse Effect on the Company. There is no unfair labor practice Agreement and Plan of Merger - Page 15 complaint pending or, to the knowledge of the Company, threatened against the Company before the National Labor Relations Board. SECTION 3.16. TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 3.16, since January 1, 1993, there have been and are no agreements or other continuing transactions between the Company, on the one hand, and any affiliate of the Company, any of the stockholders of the Company, any affiliate of any stockholder of the Company, or any member of any such stockholder's family, on the other hand. Except as set forth in Schedule 3.16, to the knowledge of the Company, none of the officers or directors of the Company (a) has any material direct or indirect interest in any entity which does business with the Company or any property, asset or right which is used by the Company; or (b) has any contractual relationship with the Company. SECTION 3.17. INSURANCE COVERAGE. The Company has furnished to Parent a list of, and true and complete copies of, all insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company (including without limitation any policies pertaining to product liability). There is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid and the Company is otherwise in compliance in all material respects with the terms and conditions of all such policies and bonds. Such policies of insurance and bonds (or other policies and bonds providing substantially similar insurance coverage) have been in effect since January 1, 1995 and remain in full force and effect. SECTION 3.18. COMPLIANCE WITH LAWS. The Company is not in violation of any applicable provisions of any law, statute, ordinance, regulation, judgment, order, injunction, permit, license, certificate or other authorization, or its governing instruments, except for violations that have not had and could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 3.19. ACCOUNTS RECEIVABLE; INVENTORIES. (a) Except as set forth on Schedule 3.19(a), the accounts receivable of the Company, including the accounts receivable reflected on the Balance Sheet and accounts receivable acquired by the Company between the Balance Sheet Date and the Closing Date, are valid and existing and represent bona fide claims against debtors for sales and other charges, and were acquired in the ordinary course of business and have been collected, or are expected to be collected in the ordinary course of business within a period not exceeding 90 days from invoice date, in full and in accordance with their terms at their recorded amounts, subject only to the reserve for receivables as reflected on the face of the Balance Sheet, and (subject to the aforesaid reserves) are subject to no refunds, discounts (except for normal cash and immaterial trade discounts) or other adjustments and, to the best knowledge of the Company, to no defenses, rights of setoff, counterclaims, encumbrances or conditions affecting any thereof. The accounts receivable have been accrued on the books of the Company in the ordinary course of business consistent with past practices in accordance with GAAP, and the amount reserved for doubtful accounts and allowances disclosed in the Balance Sheet or accrued on such books is consistent with past practices. (b) Schedule 3.19(b) sets forth a detailed list of all inventory of the Company. All of the inventories that are reflected in Schedule 3.19(b) (i) were purchased or acquired in the ordinary course of the Company's business and in a manner consistent with the regular inventory practices of the Company, (ii) have been or will be used or sold in the ordinary course of business and in a manner consistent with its regular inventory practices, (iii) are not in excess of the Company's reasonable requirements, and (iv) are or will be reflected in the Company's financial statements in accordance with GAAP consistently Agreement and Plan of Merger - Page 16 applied. Since the Balance Sheet Date, due provision was made on the books of the Company in the ordinary course of business consistent with past practices to provide for all slow-moving, obsolete or unusable inventories to their estimated useful or scrap values and such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage. (c) Except as disclosed on Schedule 3.19(b), the inventory does not consist of any damaged or obsolete inventory or inventory not fit for use in the ordinary course of business, including without limitation (i) raw materials or work-in-process that are not used in current formulations of the Company's products, (ii) any raw materials or work-in-process that, according to the production schedule of the business, would not reasonably be expected to be used within six months after the Closing Date or, if earlier, the end of such raw material's or work-in-process' useful life, (iii) any finished goods that represent products returned prior to November 1, 1996, (iv) any finished goods for which no sales are forecast in the Company's sales plan, (v) any finished goods not salable in the ordinary course of business at the Company's published prices without additional manufacturing or packaging cost, (vi) any finished goods that are "remnant", and (vii) any raw materials, work-in-process or finished goods that, as a result of any judgment, order, decree or settlement relating to product labeling or otherwise, may not be used in current product formulation. All inventory has been stored, shipped and otherwise handled in compliance in all material respects with all applicable federal and state law, rules and regulations (including, without limitation those promulgated by the U.S. Food and Drug Administration ("FDA")). SECTION 3.20. FINDERS' FEES. There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Company who might be entitled to any fee or commission from Parent or any of its subsidiaries or the Company upon consummation of the Merger and the transactions contemplated by the Operative Documents. SECTION 3.21. EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule 3.21 neither the Company nor any Person that together with the Company would be treated as a single employer under Section 414 of the Code (an "ERISA AFFILIATE") has established or maintains or is obligated to make contributions to or under or otherwise participate in (a) any bonus or other type of incentive compensation plan, program, agreement, policy, commitment, contract or arrangement (whether or not set forth in a written document), (b) any pension, profit-sharing, retirement or other plan, program or arrangement, or (c) any other employee benefit plan, fund or program, including, but not limited to, those described in Section 3(3) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"). All such plans (individually, a "PLAN" and collectively, the "PLANS") have been operated and administered in all material respects in accordance with, as applicable, ERISA, and the Code, and the related rules and regulations adopted by those federal agencies responsible for the administration of such laws. No act or failure to act by the Company has resulted in, nor does the Company have knowledge of a "prohibited transaction" (as defined in ERISA) with respect to the Plans that is not subject to a statutory or regulatory exception. No "reportable event" (as defined in ERISA) has occurred with respect to any of the Plans which is subject to Title IV of ERISA. At the Effective Time, the fair market value of the assets of any Plan which is subject to Title IV of ERISA will exceed the present value of all benefits accrued under such Title IV Plan, determined on a termination basis using assumptions established by the Pension Benefit Guaranty Commission as in effect on that date. Neither the Company nor any ERISA Affiliate has (i) engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4069 of ERISA, or (ii) incurred, or reasonably expects to incur prior to the Effective Time, any liability under Title IV of ERISA arising in connection with the termination of, or complete or partial withdrawal from, any Plan covered or previously covered by Title IV or ERISA that could become a liability of the Parent or Sub or any of their ERISA Affiliates after the Agreement and Plan of Merger - Page 17 Effective Time. The Company has not previously made, is not currently making, and is not obligated in any way to make, any contributions to any multi-employer plan within the meaning of the Multi-Employer Pension Plan Amendments Act of 1980. SECTION 3.22. TAXES. (a) The term "TAXES" as used herein means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs duties, or other taxes, fees, assessments or other charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term "Returns" as used herein, means all returns, declarations, reports, statements and other documents required to be filed in respect of Taxes, and "RETURN" means any one of the foregoing returns. All citations to the Code, or the Treasury regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto. (b) The Company has filed all Returns required to be filed and has paid all Taxes owed (whether or not shown as due on such Returns), including, without limitation, all Taxes which the Company is obligated to withhold for amounts owing to employees, creditors and third parties. All such Returns were complete and correct in all material respects. All Taxes with respect to which the Company has become obligated have been paid and adequate reserves have been established for all Taxes accrued but not yet payable (including any Taxes arising out of the transactions contemplated by this Agreement). To the knowledge of the Company and the Stockholders, no issues have been raised (and are currently pending) by any taxing authority in connection with any of the Returns. No waivers of statutes of limitation with respect to any of the Returns have been given by or requested from the Company. All deficiencies asserted or assessments made as a result of any examinations have been fully paid, or are fully reflected as a liability in the financial statements of the Company, or are being contested and an adequate reserve therefor has been established and is fully reflected in the financial statements of the Company. There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company. All material elections with respect to Taxes affecting the Company, as of the date hereof, are set forth in the financial statements of the Company, or are annexed hereto in Schedule 3.22. The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, (i) in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code (without regard to the exception in Sections 280G(b)(4) and 280G(b)(5) of the Code) or (ii) in any payment which would not be deductible under Sections 162 and 404 of the Code. The Company has not agreed to make any adjustment under Section 481(a) of the Code (or any similar provision of law or regulations) by reason of a change in accounting method or otherwise, and the Company will not be required to make any such adjustment as a result of the transactions set forth in this Agreement. The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country. The Company does not own any interest in any entity which is characterized as a partnership for federal, state, local, foreign or other Tax purposes. The Company is not and has not been a United States real property holding corporation during the applicable period specified in Section 897(c)(1)(A)(ii). The Company has not participated in or cooperated with any international boycott, within the meaning of Section 999 of the Code. (c) Set forth on Schedule 3.22 is a complete and accurate description of the Company's (i) tax basis in its assets, (ii) tax elections, (iii) methods of accounting, and (iv) agreements with respect to Taxes. Agreement and Plan of Merger - Page 18 (d) The Company has never filed a consent pursuant to Section 341(f) of the Code, relating to collapsible corporations. The Company and its stockholders made (i) a valid election for the Company to be treated as an "S corporation", as that term is defined in Section 1361(a) of the Code and (ii) a similar valid election under the laws of the State of Ohio or any other applicable governmental authority, and all of such elections will be in effect at the Effective Time. An election under Section 1362(a) of the Code (and any similar election under the laws of the State of Ohio or any other applicable Governmental Authority) has been in effect with respect to the Company (and any predecessor corporation) for each of its taxable years (within the meaning of Section 1374(c) of the Code). Schedule 3.22 lists each such election and a true copy of each such election is attached thereto; there are no grounds for the revocation of any such election and no such election will be revoked retroactively or otherwise except at the Effective Time by reason of the Merger. The Company has not taken any action that would cause, or would result in, the termination of the S corporation status of the Company, other than pursuant to this Agreement. Each of the Stockholders hereby individually represents that he has not taken any action that has caused, would cause, or would result in, the termination of the S Corporation status of the Company prior to the date hereof, other than pursuant to this Agreement. Neither the Company nor any predecessor has ever (i) been a party to any merger or consolidation nor acquired substantially all of the assets of any Person, (ii) adopted a plan of liquidation, or (iii) made any election under Section 936 or 992 of the Code. There will be no tax imposed by Section 1374 of the Code and any corresponding provisions of the laws of the State of Ohio or any other applicable Governmental Authority in connection with the Merger. (e) Each of the Stockholders hereby individually represents that he has timely filed all Returns with respect to Taxes required to be paid by a Stockholder attributable to items of income, gain, deductions, losses and credits of the Company, and has timely paid all such Taxes (whether or not shown on such Returns); there has not been any audit of any Return filed by such Stockholder, or to the Company's knowledge, any previous shareholder of the Company, with respect to, or which may relate to, items of income, gain, deduction, loss or credit of the Company; no such audit of any such Stockholder is in progress and such Stockholder has not been notified by any Governmental Authority that any such audit is contemplated or pending. (f) In the event that it is determined, either (i) by a finding or order in connection with any government or judicial audit or proceeding to which the Company or the Stockholders are a party or (ii) by the Company's independent accountants, that the Company's S election pursuant to Section 1362 of the Code (or any corresponding election under the laws of the State of Ohio or any other applicable governmental authority) was not validly in effect for any period after such election was purportedly made, then the Stockholders of the Company shall promptly remit to the Company in cash, any foreign, federal, state and/or local Tax liability (including any penalties, additions to Tax or interest assessed with respect thereto) of the Company in connection with any Taxes which may be imposed on the Company as a result of such invalid election. To the extent Tax deductions or losses, which were originally treated as Company "S" corporation Tax deductions or losses, become Company Tax deductions or losses as a result of such invalid election and, under the applicable Tax laws, are disallowed to the Company (but otherwise would have been allowed if the Company had never made an S election), the Stockholders agree to pay to the Company in cash an amount equal to the difference between the Company's actual Tax liability and the Company's Tax liability had such amounts not been so disallowed. Such payment shall be made within 15 days of the date the Company's Tax liability has been determined by the Company's accountants. SECTION 3.23. ENVIRONMENTAL MATTERS. Except as set forth in Schedule 3.23, and except in all cases as, in the aggregate, have not had and could not reasonably be expected to have a Material Agreement and Plan of Merger - Page 19 Adverse Effect, the Company: (i) has obtained all approvals which are required to be obtained under all applicable federal, state, foreign or local laws or any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into ambient air, surface water, ground water, or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes by the Company or its agents ("ENVIRONMENTAL LAWS"); (ii) are in compliance in all material respects with all terms and conditions of such required approvals, and also are in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in applicable Environmental Laws; (iii) as of the date hereof, is not aware of nor has received notice of any past or present violations of Environmental Laws or any event, condition, circumstance, activity, practice, incident, action or plan which is reasonably likely to interfere with or prevent continued compliance with or which would give rise to any material common law or statutory liability, or otherwise form the basis of any material claim, action, suit or proceeding, against the Company based on or resulting from the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge or release into the environment, of any pollutant, contaminant or hazardous or toxic material or waste; and (iv) has taken all actions necessary under applicable Environmental Laws to register any products or materials required to be registered by the Company (or any of their respective agents) thereunder. SECTION 3.24. INTELLECTUAL PROPERTY. Schedule 3.24 lists all Intellectual Property Rights owned and/or used by the Company in the conduct of its business. The Company owns or has a valid license to use from third parties such Intellectual Property Rights. To the best knowledge of the Company and the Stockholders, the Company's Intellectual Property Rights do not violate, infringe upon or misappropriate the Intellectual Property Rights of any Person where such violation or infringement would have a Material Adverse Effect. "INTELLECTUAL PROPERTY RIGHT" means any trademark, service mark, registration thereof or application for registration therefor, trade name, invention, patent, patent application, trade secret, know-how, copyright, copyright registration, application for copyright registration, or any other similar type of proprietary intellectual property right, in each case which is owned or licensed by the Company and used or held for use by the Company. SECTION 3.25 (INTENTIONALLY OMITTED). SECTION 3.26. CERTAIN FDA MATTERS. (a) The Company has not made any untrue statement of a material fact or fraudulent statement to the FDA, failed to disclose a fact required to be disclosed to FDA, or committed any act, made any statement, or failed to make any statement that could provide a basis for FDA to invoke its policy respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities," set forth in 56 Fed. Reg 46191 (September 10, 1991). (b) The Company has provided to Parent for review, all correspondence to or from FDA, the U.S. Drug Enforcement Agency ("DEA") and any other state agency regulating the affairs of the Company (the "LOCAL AGENCIES"), minutes of meetings with FDA, the DEA and any Local Agency, any existing written reports of phone conversations, visits or other contracts with FDA, the DEA, and any Local Agency, notices of inspectional observations, establishment inspection reports, and all other documents in its possession concerning communications to or from FDA, the DEA and any Local Agency, (including without limitation any Form 482's issued by the FDA), or prepared by FDA, the DEA and any Local Agency which bear in any way on the Company's compliance with FDA, DEA and state regulatory requirements. Agreement and Plan of Merger - Page 20 (c) The Company has provided to Parent for review of all documents reflecting conclusions, opinions, or suggestions of Company officers, employees, or agents, in-house or outside attorneys, or outside consultants, which bear in any way on the Company's compliance with FDA, DEA and state regulatory requirements. (d) The Company is not aware of any information, whether or not in written form, that it has not provided in the course of the review, which bears in any way on the Company's compliance with FDA, DEA and state regulatory requirements. SECTION 3.27. STOCKHOLDER REPRESENTATIONS. (a) Each Stockholder hereby individually represents and warrants that (i) it is his original, present intention to acquire the Parent Common Stock for his own account and that the Parent Common Stock is being and will be acquired for the purpose of investment and not with a view to distribution or resale except as provided herein; (ii) due to his business and financial experience and his status as an "accredited investor" under Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"), each Stockholder has the ability to protect his own interests in connection with the transactions contemplated hereby and is generally familiar with the business, operations and financial condition of the Parent, and (iii) he understands that the shares of Parent Common Stock being acquired hereunder may only be resold in compliance with applicable federal and state securities laws, including Rule 144 of the Securities Act. (b) Each Stockholder individually understands and agrees that, until registered under the Securities Act or transferred pursuant to the provisions of Rule 144 as promulgated by the Securities and Exchange Commission, the Parent Common Stock issuable pursuant to this Agreement shall bear a legend, prominently stamped or printed thereon, reading substantially as follows: "The securities represented by this certificate have not been registered under the Securities Act of 1933 and any applicable state securities laws. These securities have been acquired for investment and not with a view to distribution or resale. These securities may not be offered for sale, sold, delivered after sale or transferred in the absence of an effective registration statement covering such securities under the Act and any applicable state securities laws, or the availability, in the opinion of counsel reasonably satisfactory to the Company, of an exemption from registration thereunder." (c) Each Stockholder, in his individual capacity, has had access to information relative to the Parent's business, financial condition, and results of operations prior to the purchase of the Parent Common Stock. Each Stockholder, in his individual capacity, has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the acquisition of the Parent Common Stock. Each Stockholder, in his individual capacity, can bear the economic risks of this investment and can afford a complete loss of this investment. (d) Each Stockholder, in his individual capacity, understands that: the Parent Common Stock has not been registered under the Securities Act and applicable state securities laws, and, therefore, cannot be resold unless they are subsequently registered under the Securities Act and applicable state securities laws or unless an exemption from such registration is available; and no state or governmental authority has made any finding or determination relating to the fairness of the terms of the acquisition of the Parent Common Stock. Each Stockholder, in his individual capacity, agrees not to resell or otherwise dispose of all or any part of the Parent Common Stock purchased by such Stockholder, except as permitted by law, including, without limitation, any regulations under the Securities Act and applicable Agreement and Plan of Merger - Page 21 state securities laws. Each Stockholder, in his individual capacity, also understands that any routine sales of the Parent Common Stock in reliance upon Rule 144 under the Act, if the provisions of Rule 144 should then be available as to the Parent Common Stock, can be made only after the holding period specified in Rule 144, in limited amounts, and in accordance with all the terms and conditions of Rule 144. (e) Each Stockholder hereby individually represents and warrants that he has no present need for liquidity in connection with the purchase of the Parent Common Stock. The acquisition of the Parent Common Stock by each Stockholder is consistent with the general investment objectives of each Stockholder. Each Stockholder hereby individually represents and warrants that he understands that the purchase of the Parent Common Stock involves a high degree of risk. SECTION 3.28. TITLE. Except as set forth on Schedule 3.28, each Stockholder hereby individually represents and warrants that he is the sole record and beneficial owner of, and has good, valid and marketable title to, the shares of Company Common Stock to be sold by him, free and clear of any and all liens, security interests, pledges, encumbrances, claims, equities, defects in title, rights and other restrictions of any nature on transfer or voting held by any third party (collectively "ENCUMBRANCES"). Each Stockholder individually represents and warrants that the performance by him of his obligations hereunder will be effective to transfer good, valid and marketable title to the shares to be sold by him hereunder, free and clear of any and all Encumbrances, other than those that may be imposed under federal or state securities laws, and that the consummation of the transactions herein contemplated will not result in a breach or default of the terms and provisions of any stockholder agreement, stock pledge, guaranty, loan or other agreement to which the Stockholder is a party, or of any order, rule or regulation of any court, regulation body or administrative agency applicable to the Stockholder. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub hereby jointly and severally represent and warrant to the Company as follows: SECTION 4.1. CORPORATE EXISTENCE AND POWER. Each of Parent and Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease or operate its properties and assets and to carry on its business as now being conducted. Each of Parent and Sub is duly qualified to do business and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Parent. Each of Parent and Sub has heretofore made available to the Company true and complete copies its Certificate of Incorporation and By-Laws, as amended to date and as currently in effect. SECTION 4.2. CORPORATE AUTHORIZATION. The execution, delivery and performance by Parent and Sub of this Agreement and the Operative Documents to which they are parties and the consummation by Parent and Sub of the Merger and the other transactions contemplated by this Agreement and the Operative Documents are within the corporate power and authority of Parent and Sub and have been duly authorized by all necessary corporate action. Each of the Operative Documents has been duly authorized, executed and delivered by each of Parent and Sub (to the extent a party thereto) Agreement and Plan of Merger - Page 22 and constitutes a valid and binding obligation of Parent and Sub, enforceable against each of Parent and Sub in accordance with its terms. SECTION 4.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by Parent and Sub of this Agreement and the Operative Documents (to the extent a party thereto) and the consummation by Parent and Sub of the Merger and the other transactions contemplated by this Agreement and Operative Documents, do not and will not require any consent, approval or action by or in respect of, or any declaration, filing or registration with a Governmental Authority, other than (i) routine filings with the Secretary of State of Delaware and the Secretary of State of Ohio necessary to consummate the Merger, (ii) compliance with the applicable requirements of the Securities Act, the Securities Exchange Act of 1934 (the "EXCHANGE ACT") and any applicable Blue Sky Laws in connection with the offering, sale and delivery of the shares of Parent Common Stock to be issued in the Merger and filings with the NASD and the Nasdaq SmallCap Market in connection with listing the shares of Parent Common Stock to be issued in the Merger on the Nasdaq SmallCap Market, and (iii) such filings or notifications which would not prevent or delay consummation of any of the transactions contemplated hereby in any material respect, or otherwise prevent Parent or Sub from performing its obligations under this Agreement in any material respect. SECTION 4.4. NON-CONTRAVENTION. The execution, delivery and performance by Parent and Sub of this Agreement and the Operative Documents (to the extent a party thereto) and the consummation by Parent and Sub of the Merger and other transactions contemplated by this Agreement and the Operative Documents do not and will not, with or without the giving of notice, the lapse of time or both: (i) contravene or conflict with the Certificate of Incorporation or By-Laws of Parent or any of its subsidiaries, (ii) assuming compliance with the matters referred to in Section 4.3, contravene or conflict with or constitute a violation of any provision of any law, rule, regulation, judgment, injunction, order or decree currently in effect and binding upon or applicable to Parent or any of its subsidiaries or any of their respective properties, (iii) require any consent, approval or other action by any Person, contravene or conflict with or constitute a violation of or a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Parent or any of its subsidiaries or to a loss of any benefit to which Parent or any of its subsidiaries is entitled, under any material provision of (A) any agreement binding upon Parent or any of its subsidiaries, or (B) assuming compliance with the matters referred to in Section 4.3, any license, franchise, permit or other similar authorization held by Parent or any of its subsidiaries, or (iv) create or result in any Lien on any asset of Parent or any of its subsidiaries, except in the case of clauses (ii), (iii) and (iv), for such matters as would not have a Material Adverse Effect on Parent. SECTION 4.5. CAPITALIZATION. (a) (i) As of January 31, 1997, the authorized capital stock of Parent consisted of (i) 10,000,000 shares of preferred stock, par value $.01 per share, although no shares of preferred stock were issued and outstanding or held in the treasury of Parent as of such date, and (ii) 75,000,000 shares of Common Stock, of which 30,112,706 shares were issued and outstanding and no shares were held in the treasury of Parent. As of January 31, 1997, there were reserved for issuance pursuant to (a) Parent's various stock plans and option agreements (the "PARENT PLANS") an aggregate of up to 4,102,800 shares of Common Stock, (b) warrants issued by Parent for an aggregate of up to 2,178,588 shares of Common Stock, and (c) a note issued by Parent which is convertible into approximately 465,000 shares of Common Stock. Except as provided in the immediately preceding sentence of this Section 4.5, as of January 31, 1997, there were no outstanding options, warrants, calls, rights, commitments or agreements to which Parent is a party or by which Parent is bound obligating Parent to (x) issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital Agreement and Plan of Merger - Page 23 stock of Parent or (y) grant, extend or enter into any such option, warrant, call, right, commitment or agreement. (b) All outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid and nonassessable, and are not subject to preemptive rights. The shares of Parent Common Stock to be issued and exchanged for shares of Company Common Stock in the Merger pursuant to this Agreement will, at the Effective Time, be (i) duly authorized, validly issued, fully paid and nonassessable and will not be subject to preemptive rights, and (ii) authorized for listing on the Nasdaq SmallCap Market. (c) The authorized capital stock of Sub consists of 100 shares of Common Stock, par value $.01 per share, all of which shares are issued and outstanding and owned of record by Parent. All issued and outstanding shares of Common Stock, par value $.01 per share, of Sub are validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive, first refusal or other subscription rights of any stockholder of Sub or any other Person. SECTION 4.6. LEGAL PROCEEDINGS. There is no action, suit, investigation or other proceeding pending or, to the knowledge of Parent, threatened against or relating to Parent or any of its subsidiaries or any of their respective properties or businesses, or the transactions contemplated by this Agreement which may have a Material Adverse Effect, and, to the knowledge of the Parent, no basis for any action exists. SECTION 4.7. COMPLIANCE WITH LAWS. Except as disclosed in the Parent SEC Documents (as defined in Section 4.8 below), neither Parent nor any of its subsidiaries has violated, or is in violation of, any applicable laws, regulations and ordinances relating to its business and operations, or any judgment, order or injunction, and to Parent's knowledge, there is no pending inspection or investigation relating to any violation thereof, except for violations which have not had, and (if determined adversely to Parent and its subsidiaries) could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Parent. SECTION 4.8. SEC DOCUMENTS. Parent has made available to the Company a true and complete copy of the following Parent documents: (i) its annual report on Form 10-K for the fiscal year ended June 30, 1996; (ii) its quarterly report on Form 10-Q for the fiscal quarter ended September 30, 1996; (iii) its current reports on Form 8-K dated (i) August 19, 1996, as amended, and (ii) January 15, 1997; (iv) the proxy statement dated December 27, 1996; and (v) each report, schedule, registration statement and definitive proxy filed by Parent with the U.S. Securities and Exchange Commission (the "SEC") since June 30, 1996 and publicly available prior to the Effective Date (collectively, the "PARENT SEC DOCUMENTS"), which are all of the documents (other than preliminary material) that Parent was required to file with the SEC since such date. As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Documents, and none of the Parent SEC Documents, as of their respective dates, contained any untrue statement of a material fact or omitted 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. None of Parent's subsidiaries is required to file any forms, reports or other documents with the SEC. The consolidated financial statements of Parent and its subsidiaries included in the Parent SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited Agreement and Plan of Merger - Page 24 statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present in accordance with applicable requirements of GAAP (subject, in the case of the unaudited statements, to normal recurring adjustments, none of which will be material) the consolidated financial position of Parent and its subsidiaries as of their respective dates and the consolidated results of operations and the consolidated cash flows of Parent and its subsidiaries for the periods presented therein. SECTION 4.9. BOARD RECOMMENDATION. The Board of Directors of each of Parent and Sub, at a meeting duly called and held, has by the vote of those directors present determined that this Agreement and the transactions contemplated hereby, including the Merger, the execution and delivery of the Operative Documents and the other agreements and arrangements contemplated hereby and thereby, taken together, are fair to and in the best interests of the stockholders of Parent and Sub and has approved the same. SECTION 4.10. FINDERS' FEES. Except for fees payable by Parent to Mazier Partners, there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of Parent or Sub who might be entitled to any fee or commission from the Parent or any of its subsidiaries upon consummation of the Merger and the other transactions contemplated by the Operative Documents. SECTION 4.11. (INTENTIONALLY OMITTED). SECTION 4.12. INTERIM OPERATIONS OF SUB. Sub was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby. ARTICLE V COVENANTS OF ALL PARTIES Each of the parties hereto hereby covenants and agrees with the other parties as follows: SECTION 5.1. COOPERATION. It shall cooperate fully with the other parties hereto in furnishing any information or performing any action reasonably requested by any such party, which information or action is necessary to the speedy and successful consummation of the transactions contemplated by this Agreement or is necessary, appropriate or desirable for the respective corporate purposes of Parent, Sub and the Company. SECTION 5.2. OTHER REQUIRED INFORMATION. It shall furnish to the other parties hereto any application or statement, and all information concerning itself and its Affiliates as is required to be set forth in any application or statement to be filed with any Governmental Authority in connection with the transactions contemplated by this Agreement. "AFFILIATE" means, with respect to a specified Person, any Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified. SECTION 5.3. CONFIDENTIALITY. (a) All information furnished by one party (the "DISCLOSING PARTY") to any other party (the "RECEIVING PARTY") in connection with this Agreement and the Operative Documents and the transactions contemplated hereby and thereby shall be kept confidential by the receiving party (and shall be used by it only in connection with this Agreement and the transactions Agreement and Plan of Merger - Page 25 contemplated hereby), except to the extent that such information (i) is or becomes generally available to the public other than as a direct or indirect result of disclosure by the receiving party (or any of its directors, officers, employees, agents, advisors or Affiliates (the "AGENTS")), (ii) was within the possession of the receiving party prior to its being furnished to the receiving party by or on behalf of the disclosing party (provided that the source of such information is not known by the receiving party to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the disclosing party or any other Person with respect to such information), (iii) becomes available to the receiving party on a non-confidential basis from a source other than the disclosing party or any of its Agents (provided that such source is not known by the receiving party to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the disclosing party or any other Person with respect to such information), or (iv) is required to be disclosed in any document filed with the SEC or any other Governmental Authority. (b) If the receiving party or any of its Agents is requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the confidential information, the receiving party shall use all reasonable efforts to provide the disclosing party with prompt written notice of any such request or requirement so that the disclosing party may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement. If, in the absence of a protective order or other remedy or the receipt of a waiver by the disclosing party, the receiving party or any of its Agents are nonetheless, based on the advice of counsel, required to disclose confidential information to any tribunal or else stand liable for contempt or suffer other censure or penalty, the receiving party or its Agents may, without liability hereunder, disclose to such tribunal only that portion of the confidential information which such counsel advises the receiving party is legally required to be disclosed. The receiving party shall exercise its best efforts to preserve the confidentiality of the confidential information, including by cooperating with the disclosing party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential information by such tribunal. (c) If the transactions contemplated by this Agreement shall fail to be consummated, the receiving party shall promptly cause all copies of documents or extracts thereof containing information and data as to the disclosing party to be returned to the disclosing party. SECTION 5.4. PUBLIC ANNOUNCEMENTS. Parent and Sub, on the one hand, and the Company, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, except upon the advice of counsel that such a release is required by or is appropriate under applicable law, policy or regulation of the SEC, court process or by obligations pursuant to any listing agreement with any national securities exchange or national securities quotation system. SECTION 5.5. MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms and conditions provided in this Agreement, each party shall use all reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, appropriate or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Each party shall, and shall cause each of its Affiliates to, use their respective reasonable efforts to obtain consents of all third parties and Governmental Authorities necessary, appropriate or desirable for the consummation of the transactions contemplated by this Agreement. Agreement and Plan of Merger - Page 26 SECTION 5.6. BOARD REPRESENTATION. Effective as of the Closing, Parent shall appoint to Parent's board of directors one (1) individual designated by the Stockholders and reasonably acceptable to Parent to hold office for one year or until the next annual meeting of stockholders of Parent. Any appointments for a succeeding term for the designee of the Stockholders shall be made in accordance with Parent's By-Laws. SECTION 5.7. BEST EFFORTS AND FURTHER ASSURANCES. Each of the parties to this Agreement shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. Subject to its further rights under this Agreement, each party shall use all reasonable efforts to cause the Closing to occur at the earliest practicable time. SECTION 5.8. OPERATIONS FOLLOWING CLOSING. From and after the Closing, Parent agrees to establish a separate working capital account for the benefit of the operations of the Surviving Corporation. Such account will be managed by Dennis Smith and Eric Hagerstrand; provided such individuals will inform Parent's management of the status of such working capital account as requested from time to time by Parent. All cash flow from the operations of the Surviving Corporation will be used to finance the continuing operations of the Surviving Corporation, including accounts receivable, accounts payable and payroll. Any capital expenditures and extraordinary expenses (excluding purchases of inventory) not already budgeted for or approved by the board of the Surviving Corporation shall require the prior written consent of the Parent, which shall not be unreasonably withheld or delayed. At the end of each calendar quarter, and subject in all instances to compliance at all times with the financial and other required covenants of any holder of indebtedness for borrowed money, and the prior payment of principal and interest on such indebtedness, the Surviving Corporation shall pay to the Stockholders all required payments of principal and interest on the Notes then payable to the Stockholders. To the extent there is surplus cash flow from operations following payment of all required principal and interest on outstanding indebtedness (including the Notes), the surplus cash flow from operations shall, at Parent's option, be transferred to Parent. To the extent there is any working capital deficit, including any deficit regarding payments of outstanding indebtedness for borrowed money and the Notes of the Stockholders, Parent shall advance funds to the Surviving Corporation from time to time necessary to fund such working capital deficit. SECTION 5.9. GUARANTIES OF THE COMPANY. The parties hereto shall use their best efforts to obtain terminations, signed by the respective lender, of the Company's guaranties, other than in connection with the Credit Facility, in favor of The Huntington National Bank and Hamilton County Development Co., Inc. In addition, the parties shall use their best efforts to obtain amendments to the 504 Loan Documents (as defined in Schedule 3.3 to this Agreement) which will provide that the Surviving Corporation shall have no liability to Hamilton County Development Co., Inc. as a result of such loan. If the parties are unsuccessful in obtaining such terminations and amendments, the Stockholders shall cause SPC Properties Limited ("SPC") to enter into an amendment as of the Closing (the "Lease Amendment") to the Commercial Lease Agreement dated March 9, 1995 (the "Lease") regarding the payment of the Surviving Corporation's monthly rental obligation. The Lease Amendment shall provide that the Surviving Corporation shall pay directly to the mortgagees of the leased property the Surviving Corporation's rental obligation. To the extent the rental obligation exceeds the monthly obligations of SPC to the mortgagees, the Surviving Corporation shall pay such excess to SPC. Agreement and Plan of Merger - Page 27 Notwithstanding the foregoing, SPC must ensure that by March 31, 2000, the Surviving Corporation shall have no obligation to the Huntington National Bank and Hamilton County Development Co. in connection with the loans to SPC regarding the land associated with the Lease. ARTICLE VI COVENANTS OF THE COMPANY The Company hereby covenants and agrees with Parent and Sub that, from and after the date hereof to the Closing Date: SECTION 6.1. PRESERVATION OF BUSINESS ORGANIZATION. The Company shall use all reasonable efforts to preserve without material impairment its business organization and its goodwill as to suppliers, distributors, clients and others having business relations with the Company. SECTION 6.2. CARRY ON IN REGULAR COURSE. (a) The Company shall carry on its business in the ordinary and usual course in a manner consistent with its past practices. Notwithstanding the foregoing, the Company shall not, directly or indirectly, do, or propose to do or make any commitment or obligation, with respect to (i) any act or activity referenced in Section 3.12(a) - (p), or (ii) enter into any agreement, undertaking or commitment to do any of the foregoing without the prior written consent of Parent, which shall not be unreasonably withheld or delayed, or except as specifically provided for in Section 6.2(b). (b) Between the date hereof and the Closing, the Company may make the following distributions to the Stockholders: (i) compensatory bonuses to the Stockholders consistent with past practice; (ii) contributions to the 401(k) accounts of the Company's employees consistent with its 401(k) plan and past practice; (iii) dividends to the Stockholders in order to pay tax obligations with respect to the subchapter S corporation earnings of the Company for the year ended December 31, 1996 and the stub period ending immediately prior to the Closing Date; and (iv) any payments otherwise required to be paid (consistent with past practice) to a former stockholder of the Company, Dennis Engel. In no event shall the Company payout any extraordinary or additional bonuses nor shall the Company incur any indebtedness to satisfy the payouts pursuant to this Section 6.2(b), except as set forth on Schedule 6.2(b). SECTION 6.3. CONSENTS. The Company shall use all reasonable efforts to obtain consents in writing to the transactions contemplated by this Agreement and/or such amendments, assignments or modifications of such documents or instruments as may be required so that the transactions contemplated by this Agreement shall not result in any default with respect to any law, rule, regulation, order, decree, license, agreement or commitment to which the Company is a party or its assets is bound. Without limiting the foregoing, the Company shall use its commercially reasonable efforts to assist Parent and Sub to transfer the rights and obligations of the Revolving Line of Credit to the Surviving Corporation and to assist Parent and Sub in securing any replacement or additional line of credit which Parent and Sub believes is required to fund adequately the business of the Surviving Corporation. SECTION 6.4. COMPANY STOCKHOLDERS MEETING. The Company shall, as soon as practicable, duly call, give notice of, convene and hold a meeting of its stockholders for purposes of approving this Agreement, the Merger and the transactions contemplated hereby and thereby, or, if permitted under Ohio Law, the Stockholders shall approve this Agreement and the Merger by unanimous written consent. Agreement and Plan of Merger - Page 28 SECTION 6.5. ACCESS. The Company shall (i) permit officers, employees, agents, attorneys and accountants and other Persons designated by Parent full access (after reasonable notice to the Company) during normal business hours to the properties, books, contracts, commitments, tax returns, examination reports and surveys of Governmental Authorities (including the IRS) and other records of the Company, and (ii) furnish to such designees of Parent such financial and operating data and other information relating to the assets and business of the Company as such designees may reasonably request. Unless prohibited by law or contract, such designees of Parent shall be furnished with accurate and complete copies of such contracts, commitments and other books and records and all other information with respect to the assets and business of the Company as such designees may reasonably request. The Company shall cause its respective employees, accountants, attorneys, financial advisors and other agents or representatives to cooperate with Parent in its due diligence investigation. From the date hereof until the Effective Time, Parent and the Company shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations. SECTION 6.6. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the Closing, the Company shall deliver to Parent promptly after such documents are available its unaudited monthly financial reports and all other documents, financial statements, budgets, proxy or information statements, reports, correspondence, notices and other items it delivers, or is required to deliver, to any of its stockholders or directors. SECTION 6.7. NOTICES OF CERTAIN EVENTS. The Company shall promptly notify Parent of: (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, which consent has not otherwise been disclosed to Parent pursuant to this Agreement; (ii) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (iii) any action, suit, claim, investigation or proceeding commenced relating to or involving or otherwise affecting the Company that, if it had existed on the date of this Agreement, would have been required to have been disclosed pursuant to this Agreement, or that relates to the consummation of the transactions contemplated by this Agreement; or (iv) any matter arising or discovered after the date of this Agreement that, if existing or known on the date of this Agreement, would have been required to be disclosed pursuant to this Agreement, or that constitutes a breach or prospective breach of this Agreement by the Company. SECTION 6.8. ACCURACY OF REPRESENTATIONS AND WARRANTIES. The Company shall not take or agree or commit to take any action (or omit to take any action) that would make any representation and warranty of the Company in this Agreement inaccurate in any material respect as of the Closing Date. SECTION 6.9. NO SOLICITATION. From and after the date of this Agreement until the earlier of the Effective Time or termination of this Agreement pursuant to its terms, the Company and the Stockholders shall not, and will instruct their respective directors, officers, employees, representatives, investment bankers, agents and Affiliates not to, directly or indirectly, initiate, solicit, encourage or participate in discussions with, provide information to, or approve transactions with, any Person or group concerning any merger, purchase or sale of business combination assets, sale of shares of capital stock (or securities convertible or exchangeable or otherwise evidencing, or any agreement or instrument evidencing, the right to acquire capital stock) or similar business combination involving the Company (all such transactions being referred to herein as "ACQUISITION PROPOSALS"). The Company will Agreement and Plan of Merger - Page 29 immediately cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company will (i) notify Parent as promptly as practicable if any inquiry or proposal is made or any information or access is requested in writing in connection with an Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly as practicable, notify Parent of the significant terms and conditions of any such Acquisition Proposal. In addition, subject to the other provisions of this Section 6.9, from and after the date of this Agreement until the earlier of the Effective Time and termination of this Agreement pursuant to its terms, the Company will not, and will instruct their respective directors, officers, employees, investment bankers, agents and Affiliates not to, directly or indirectly, make or authorize any public statement, recommendation or solicitation in support of any Acquisition Proposal made by any Person or group. SECTION 6.10 NON-DISTURBANCE AGREEMENT. The Company shall use its best efforts to obtain and deliver to Parent an agreement from each holder of any mortgage or deed of trust affecting the properties in which the Company has a leasehold interest, which provides that if such holder forecloses such mortgage or deed of trust (or takes a deed in lieu of foreclosure or otherwise succeeds to the rights of the landlord thereunder) or otherwise exercises its rights, such holder shall (i) not disturb the Surviving Corporation's occupancy under its Lease, (ii) shall not join the Surviving Corporation in any foreclosure actions, and (iii) shall be bound by the obligations of the landlord under the Lease between the Surviving Corporation and the landlord, in each case for so long as the Surviving Corporation continues to honor and fulfill in all material respects its obligations under the Lease. ARTICLE VII COVENANTS OF PARENT AND SUB Parent and Sub hereby covenant and agree with the Company as follows: SECTION 7.1. PRESERVATION OF BUSINESS ORGANIZATION. Prior to the Closing, Parent and Sub shall use all reasonable efforts to cause to preserve without material impairment the business organization of Parent, Sub and Parent's subsidiaries and their goodwill as to payors, providers, suppliers, distributors, clients and others having business relations with Parent, Sub and Parent's subsidiaries. SECTION 7.2. CONSENTS. Parent and Sub shall use all reasonable efforts to obtain consents in writing to the transactions contemplated by this Agreement and/or such amendments, assignments or modifications of such agreements as may be required so that the transactions contemplated by this Agreement shall not result in any default with respect to any law, rule, regulation, order, decree, license, agreement or commitment to which Parent or Sub is a party or by which any of their respective assets is bound. SECTION 7.3. NOTICES OF CERTAIN EVENTS. Prior to Closing, Parent shall promptly notify the Company of: (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, which consent has not otherwise been obtained or disclosed to the Company pursuant to this Agreement; (ii) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (iii) any action, suit, claim, investigation or proceeding commenced relating to or involving or otherwise affecting Parent or any of its subsidiaries that, if it had existed on the date of this Agreement, would have been required to have been disclosed pursuant to this Agreement, or that relates to the consummation of the transactions contemplated by this Agreement; or Agreement and Plan of Merger - Page 30 (iv) any matter arising or discovered after the date hereof that, if existing or known on the date of this Agreement, would have been required to be disclosed pursuant to this Agreement, or that constitutes a breach or prospective breach of this Agreement by Parent or Sub. SECTION 7.4. NASDAQ SMALLCAP MARKET LISTING. Parent shall use all reasonable efforts to have the shares of Parent Common Stock to be issued in the Merger accepted for listing on the Nasdaq SmallCap Market within forty-five (45) days following the Merger. SECTION 7.5. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Parent and Sub shall not (a) take or agree or commit to take any action (or omit to take any action) that would make any representation and warranty of Parent or Sub in this Agreement inaccurate in any material respect as of the Closing Date. SECTION 7.6. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the Closing, Parent shall deliver to the Company promptly after such documents are available all documents, financial statements, proxy or information statements, reports, correspondence, notices and other items it delivers, or is required to deliver, to its stockholders as a group. SECTION 7.7. INDEMNIFICATION. Subject to applicable law, Parent shall and shall cause the Surviving Corporation to honor and fulfill in all respects the obligations of the Company pursuant to indemnification agreements with the Company's directors and officers existing at or before the Effective Time. SECTION 7.8. NON-SOLICITATION. If the transactions contemplated by this Agreement are not consummated, Parent and its Affiliates shall not, for a period of one year from the date of this Agreement, directly or indirectly solicit any employee of the Company to terminate such employee's employment with the Company. Nothing herein shall prevent Parent from hiring any such employee provided Parent has not violated the first sentence of this Section 7.8. SECTION 7.9. COMPLIANCE WITH LEASE TERMS. Parent shall cause the Surviving Corporation to honor and fulfill in all respects the obligations of the Surviving Corporation pursuant to the Lease. ARTICLE VIII CONDITIONS OF CLOSING SECTION 8.1. CONDITIONS TO OBLIGATIONS OF PARENT, SUB, STOCKHOLDERS AND THE COMPANY. The obligations of each of the parties hereto under this Agreement to consummate the Merger and the other transactions to be consummated at the Closing are subject to the satisfaction or waiver of the following conditions: (a) COMPANY STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been adopted and approved by the Stockholders as required by Ohio Law. (b) GOVERNMENTAL APPROVALS. Parent, Sub and the Company shall have received all approvals or requirements of Governmental Authorities to permit the consummation of the transactions contemplated by this Agreement and the Operative Documents and to permit Parent and Sub to own the assets of, and to operate the businesses of, the Company after the Closing. Each such Agreement and Plan of Merger - Page 31 approval shall be in form and substance reasonably satisfactory to Parent and shall remain in full force and effect at the Closing Date. (c) LITIGATION; INJUNCTIONS. No action, suit, litigation, injunction, restraining order, proceeding or investigation shall (i) have been instituted and be pending, or (ii) be threatened by any Person or Governmental Authority, which would materially and adversely affect the Merger and the other transactions contemplated by this Agreement and the Operative Documents. On the Closing Date, there shall not be in force any proceeding, order or decree restraining or enjoining consummation of the Merger or the other transactions contemplated by this Agreement or the Operative Documents, or placing any limitation upon such consummation or to invalidate, suspend or require modification of any provision of this Agreement or the Operative Documents. (d) PLEDGE AGREEMENT. Parent and the Stockholders shall have executed and delivered the Pledge Agreement. (e) REGISTRATION RIGHTS AGREEMENT. Parent and the Stockholders shall have executed and delivered the Registration Rights Agreement. (f) EMPLOYMENT AGREEMENTS. The Company shall have entered into the Employment Agreements with each of Dennis Smith and Eric Hagerstrand. (g) CANNING AGREEMENT. The Company shall have entered into the Employment Agreement with Thomas Canning. SECTION 8.2. ADDITIONAL CONDITIONS APPLICABLE TO PARENT AND SUB. The obligations of Parent and Sub under this Agreement to consummate the Merger and the other transactions contemplated by this Agreement and the Operative Documents are subject to the satisfaction or waiver of the following conditions: (a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants and conditions of this Agreement to be complied with and performed by the Company (and/or the Stockholders) on or before the Closing Date shall have been complied with and performed in all material respects. (b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company (and/or the Stockholders) set forth in this Agreement shall be true and correct in all material respects as of the Closing Date with the same force and effect as if such representations and warranties were made anew at and as of the Closing Date, except: (i) to the extent such representations and warranties are by their express provisions made as of the date of this Agreement or another specified date; and (ii) for the effect of any activities or transactions which may have taken place after the date of this Agreement which are expressly contemplated by this Agreement in order to effect the transactions contemplated by this Agreement. (c) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no material adverse change in the business, assets, results of operations, prospects or financial condition of the Company, other than as a result of events or conditions affecting the generic drug industry generally or general economic conditions. Agreement and Plan of Merger - Page 32 (d) CLOSING CERTIFICATES. Parent shall have received certificates dated the Closing Date, signed by the chief executive officer and the chief financial officer of the Company, to the effect that the conditions set forth in Sections 8.2(a) through 8.2(c) have been satisfied. (e) OPINION OF COMPANY COUNSEL. Parent and Sub shall have received from counsel to the Company an opinion dated the Closing Date with respect to matters reasonably requested by Parent, which shall be in form and substance reasonably satisfactory to Parent. (f) REQUIRED CONSENTS. The holders of any note, guarantee or other evidence of indebtedness (whether for money borrowed or otherwise) of any of the Company, the lessors of any material real or personal property or assets leased by the Company, the parties to any commitment or agreement to which the Company is a party which is material to the conduct of the Company's business, and any other Person (other than Governmental Authorities) which owns or has authority to grant any material franchise, license, permit, easement, rights or other authorization necessary for the business or operations of the Company, to the extent that their consent or approval of the transactions contemplated by this Agreement is required under the pertinent lease, contract, commitment or agreement or other document or instrument or under applicable laws, rules or regulations for the consummation of the transactions contemplated shall have granted such consent or approval and no condition to such consent or approval shall exist which is materially adverse to the conduct of the Company's business or results in additional material obligations to Parent. (g) FINANCING OF PARENT. Parent shall have received or have a legally binding commitment to receive, not less than an aggregate of $6,500,000 of equity capital or debt financing, or a combination thereof. (h) FINANCING OF THE SURVIVING CORPORATION. Parent and the Surviving Corporation shall have secured, or have a legally binding commitment for, a line of credit or a similar arrangement for the Surviving Corporation in an amount equal to or exceeding $7,000,000. (i) TAX MATTERS. The Company shall have provided to Parent a clearance certificate or similar document that may be required by any state taxing authority and the Stockholders shall have provided to Parent a properly executed Form W-8 or W-9, as applicable. (j) DECEMBER 31, 1996 AUDITED FINANCIAL STATEMENTS. Parent shall have received the audited balance sheet as of December 31, 1996 and the related audited statement of earnings, retained earnings and cash flows for the year ended December 31, 1996 (together with the notes thereto, audited by, and accompanied by the report thereon, of Grant Thornton LLP) and such audited financial statements shall include an unqualified opinion with respect to the financial statements from Grant Thornton LLP and reveal no Material Adverse Change since the Balance Sheet Date. (k) GUARANTY OF THE COMPANY. The Company shall have delivered to Parent a termination, signed by The Huntington National Bank, of the Company's guaranty, in favor of The Huntington National Bank, relating to the loan to the Stockholders to fund payments required under the Stock Purchase and Separation Agreement and General Release of Claims dated January 13, 1995 among the Stockholders, Dennis Engel, the Company and certain other parties. (l) PLEDGE OF THE OUTSTANDING SHARES. The Company and the Stockholders shall have delivered to Parent a termination, signed by The Huntington National Bank, of the pledge of the Outstanding Shares to The Huntington National Bank. Agreement and Plan of Merger - Page 33 (m) CONSENT OF LANDLORD. The Company shall have delivered to Parent a consent of SPC Properties Limited to the Merger and the other transactions contemplated by this Agreement, which consent shall contain representations that no Event of Default, as defined in the Commercial Lease Agreement dated March 9, 1995 between SPC Properties Limited and the Company, has occurred or is continuing and that no condition exists that, with the passage of time, will become an Event of Default. SECTION 8.3. ADDITIONAL CONDITIONS APPLICABLE TO THE STOCKHOLDERS AND THE COMPANY. The obligations of the Stockholders and the Company (and/or the Stockholders) under this Agreement to consummate the Merger and the other transactions contemplated to be consummated at the Closing are subject to the satisfaction or waiver of the following conditions: (a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants and conditions of this Agreement to be complied with and performed by Parent and Sub on or before the Closing Date shall have been complied with and performed in all material respects. (b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Parent and Sub set forth in this Agreement shall have been true and correct as of the Closing Date with the same force and effect as if such representations and warranties were made anew at and as of the Closing Date, except: (i) to the extent such representations and warranties are by their express provisions made as of the date of this Agreement or another specified date; and (ii) for the effect of any activities or transactions which may have taken place after the date of this Agreement which are expressly contemplated by this Agreement in order to effect the transactions contemplated by this Agreement. (c) OFFICERS' CERTIFICATE. The Company shall have received a certificate dated the Closing Date, signed by the chief executive officer of Parent, to the effect that the conditions set forth in Sections 8.3(a) and (b) hereof have been satisfied. (d) OPINION OF PARENT COUNSEL. The Company shall have received from counsel to Parent and Sub an opinion dated the Closing Date with respect to matters reasonably requested by the Company, which shall be in form and substance reasonably satisfactory to the Company. (e) REQUIRED CONSENTS. Parent and Sub shall have received all material consents or approvals of the Merger or any other transactions contemplated by this Agreement required under any material commitment or evidence of indebtedness of Parent or any of its subsidiaries, or any lease of any material real property of Parent and its subsidiaries, or under applicable law for the consummation of the transactions contemplated hereby. (f) GUARANTIES OF THE STOCKHOLDERS. Parent shall have delivered to the Stockholders terminations of the Stockholders' guaranties in favor of The Huntington National Bank relating to the Credit Facility. Agreement and Plan of Merger - Page 34 ARTICLE IX TERMINATION SECTION 9.1. Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company: (a) by written mutual consent of Parent and the Company for any reason, or by mutual action of their respective Boards of Directors; (b) at the option of Parent, by written notice from Parent to the Company if (i) a material breach by the Company or the Stockholders of any of their respective representations, warranties or agreements contained in this Agreement occurs, (ii) Parent has notified the Company in writing of the existence of such breach, and (iii) the Company or the Stockholders have failed to cure such breach within 10 days after receiving such notice (or if such breach is not capable of being cured within such 10 day period, but is capable of being cured within 30 days, the breaching party shall have commenced good faith steps to promptly cure such breach); (c) at the option of the Company or the Stockholders, by written notice from the Company to Parent if (i) a material breach by Parent or Sub of any of their representations, warranties or agreements contained in this Agreement occurs, (ii) the Company has notified Parent and Sub in writing of the existence of such breach, and (iii) Parent and Sub have failed to cure such breach within 10 days after receiving such notice (or if such breach is not capable of being cured within such 10 day period, but is capable of being cured within 30 days, the breaching party shall have commenced good faith steps to promptly cure such breach); (d) at the option of Parent, by Parent if the Stockholders fail to approve any matter required to be approved by such Stockholders in order to consummate the transactions contemplated by this Agreement by April 30, 1997; (e) by either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administrative agency shall have issued a non-appealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; (f) at the option of Parent, by Parent if there shall have occurred a Material Adverse Change with respect to the Company; (g) by the Company if the Closing has not occurred by May 30, 1997 if the sole reason for the failure to close is due to Parent having failed to satisfy either condition to Closing set forth in Section 8.2(g) or (h); or (h) by Parent, if the results of Parent's due diligence investigation of the Company and its business (to be completed prior to February 28, 1997) prove unsatisfactory in any material respect. SECTION 9.2. CERTAIN REMEDIES UPON TERMINATION. If this Agreement is terminated: (i) pursuant to Section 9.1(a) (due to the mutual consent of the parties), no special expense Agreement and Plan of Merger - Page 35 reimbursement shall apply and all expenses will be paid as provided in Section 11.2; (ii) pursuant to Section 9.1(b), 9.1(d) or 9.1(f) [due to a breach of representations and warranties by the Company or the Stockholders, a failure by the Stockholders to approve the transactions contemplated herein, or a Material Adverse Change in the business of the Company], the Company shall pay to Parent within five days of such termination, an amount in cash sufficient to reimburse Parent and Sub for all reasonable expenses incurred in connection with attempting to consummate the Merger and the other transactions contemplated hereby (including without limitation reasonable legal, accounting and investment banking expenses) (the "TRANSACTION EXPENSES") up to a maximum amount of $50,000; provided that Parent shall provide reasonable evidence of the incurrence of such expenses. (b) If the Agreement is terminated pursuant to Section 9.1(c) or (g) [due to a breach of Parent's representations or warranties, or Parent's failure to obtain financing for this transaction], Parent shall pay to the Company within five days of such termination the Company's Transaction Expenses up to a maximum amount of $50,000; provided that the Company shall provide reasonable evidence of the incurrence of such expenses. (c) If the Agreement is terminated pursuant to Section 9.1(e), the party not principally the cause of any order decree or ruling shall pay the Transaction Expenses of the other party; provided that such party shall provide reasonable evidence of the incurrence of such expenses. SECTION 9.3. SURVIVAL UPON TERMINATION. If this Agreement is terminated, the agreements of the Company and Parent contained in Sections 5.3, 5.4, 9.1, 9.2, 9.3 and 11.2 shall survive such termination. SECTION 9.4. EFFECT OF TERMINATION. In the event of the termination of this Agreement, nothing shall relieve any party from liability for any material breach by any party hereof. ARTICLE X SURVIVAL; INDEMNIFICATION SECTION 10.1. SURVIVAL. The covenants, agreements, representations and warranties of the Parent, Company and the Stockholders contained in this Agreement shall survive the Closing until the earlier to occur of (i) the fifteenth calendar month anniversary of the Closing or (ii) the release by Parent of audited financial statements that include the combined operations of the Surviving Corporation and the Parent for the year ended December 31, 1997; provided, however, that the representations and warranties of the Company and the Stockholders set forth in Sections 3.22(d) and (e) and 3.28 shall survive until the third anniversary of the Closing. Notwithstanding the preceding sentences, any covenant, agreement, claim, representation or warranty in respect of which a claim of indemnity may be sought under Section 10.2 shall survive the time at which it would otherwise terminate pursuant to the preceding sentences, if notice of the inaccuracy or breach thereof giving rise to such right to a claim of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time, and any obligation of indemnity shall survive until such claim of indemnity is resolved. SECTION 10.2. MUTUAL INDEMNIFICATION. (a) By their approval of this Agreement, the Stockholders, severally (based on their ownership interest in the Company), agree to indemnify, defend, protect, and hold harmless each of Parent, Sub and the Surviving Corporation (each in its capacity as an indemnified party, and for purposes of this paragraph, an "INDEMNITEE"), and shall reimburse the Agreement and Plan of Merger - Page 36 Indemnitee for, at all times from and after the date of this Agreement from and against all claims, damages, losses, liabilities, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) (collectively "DAMAGES") incurred by such Indemnitee as a result of or incident to (i) any breach of any representation or warranty of the Company or any of the Stockholders set forth herein, or in any other document delivered in connection herewith or with respect to which a claim for indemnification is brought by an Indemnitee within the applicable survival period described in Section 10.1 (including any accounts receivable reflected (net of reserves) on the balance sheet of the Company dated December 31, 1996 which are not collected prior to April 30, 1997), (ii) any breach or nonfulfillment by the Company or any of the Stockholders, or any noncompliance by the Company or any of the Stockholders with, any covenant, agreement, or obligation contained herein or other document delivered in connection herewith, except to the extent waived by Parent, or (iii) any claim by a current or former stockholder of the Company or any other person, firm, corporation or entity, seeking to assert, or based upon: (A) ownership or rights of ownership to any shares of capital stock of the Company; (B) any rights of the stockholder (other than the right to receive the Merger consideration pursuant to this Agreement or appraisal rights under the applicable provisions of Ohio Law), including any option, preemptive rights, or rights to notice or to vote; (C) any rights under the charter or bylaws of the Company; (D) any claim that his, her or its shares were wrongfully repurchased by the Company, regardless of whether an action, suit or proceeding can or has been made against the Company; or (E) any Excess Expenses, as defined in Section 11.2 below. (b) Parent agrees to indemnify the Company and the Stockholders (for purposes of this paragraph, each in its capacity as an indemnified party, an "INDEMNITEE") and shall reimburse the Indemnitee for all Damages incurred by such Indemnitee as a result of or incident to (i) any breach of any representation or warranty of Parent set forth herein, or in any other document delivered in connection herewith or with respect to which a claim for indemnification is brought by the Company or the Stockholder as an Indemnitee within the applicable survival period described in Section 10.1, or (ii) any breach or nonfulfillment by Parent or any noncompliance by Parent with any covenant, agreement or obligation contained herein required to be performed or other document delivered in connection herewith, except to the extent waived by the Company or Stockholders holding a majority of the outstanding shares of Company Common Stock. SECTION 10.3. THIRD PERSON CLAIMS. Promptly after an Indemnitee has received notice of or has knowledge of any claim by a person not a party to this Agreement ("THIRD PERSON") or the commencement of any action or proceeding by a Third Person, the Indemnitee shall, as a condition precedent to a claim with respect thereto being made under this Agreement, give the Stockholders written notice of such claim or the commencement of such action or proceeding; provided, however that the failure to give such notice will not affect the Indemnitee's right to indemnification hereunder, except to the extent that the Stockholders have been actually prejudiced as a result of such failure. If the Stockholders notify the Indemnitee within 30 days from the receipt of the foregoing notice that the Stockholders wish to defend against the claim by the Third Person, then the Stockholders shall have the right to assume and control the defense of the claim by appropriate proceedings with counsel reasonably acceptable to the Indemnitee. The Indemnitee may participate in the defense, at its sole expense, of any such claim for which the Stockholders shall have assumed the defense pursuant to the preceding sentence, provided that counsel for the Stockholders shall act as lead counsel in all matters pertaining to the defense or settlement of such claims, suit or proceedings; provided, however, that Indemnitee shall control the defense of any claim or proceeding that in Indemnitee's reasonable judgment could reasonably be expected to have a material and adverse effect on Indemnitee's business apart from the payment of money damages. The Indemnitee shall be entitled to indemnification for the reasonable fees Agreement and Plan of Merger - Page 37 and expenses of its counsel for any period during which the Stockholders have not assumed the defense of any claim. Whether or not the Stockholders shall have assumed the defense of any claim, neither the Indemnitee nor the Stockholders shall make any settlement with respect to any such claim, suit or proceeding without the prior consent of the other, which consent shall not be unreasonably withheld or delayed. It is understood and agreed that in situations where failure to settle a claim expeditiously would reasonably be expected to have an adverse effect on the party wishing to settle, the failure of the other party to act upon a request for consent to such settlement within ten (10) business days of receipt of notice thereof shall be deemed to constitute consent to such settlement for purposes of this Article X. SECTION 10.4. LIMITATIONS ON INDEMNIFICATION. (a) No Indemnitee shall be entitled to indemnification for Damages pursuant to Sections 10.2(a)(i) or 10.2(a)(ii) until the aggregate amount of Damages incurred exceeds $100,000 (the "THRESHOLD"), and then shall be entitled only to the amount of Damages in excess of the Threshold. All claims for Damages shall be net of, and offset by, any insurance proceeds, reduction of tax liabilities or receipt of tax benefit actually received by Parent or the Surviving Corporation that are attributable to such Damages. Any liability for indemnification under this Article X shall be reduced to the extent any Damages are reduced by such a recovery or reduction. (b) The Stockholders' maximum aggregate liability for claims made pursuant to Section 10.2(a)(i) and (ii) shall not exceed $4,000,000 in the aggregate; provided, however, that such maximum aggregate liability shall be increased, to not more than $6,500,000 in the aggregate, to the extent of each claim representing a breach or non-fulfillment pursuant to Section 10.2(a)(i) or 10.2(a)(ii) which the Stockholders had knowledge of prior to the Closing (or after reasonable inquiry and investigation, should have had knowledge of prior to the Closing). The Parent's maximum aggregate liability for claims made pursuant to Section 10.2(b) shall not exceed $4,000,000 in the aggregate. (c) The limitations provided in Section 10.4(a) on the Threshold and Section 10.4(b) regarding maximum aggregate liability and on an Indemnitee's right to indemnification under this Article X shall not apply to Damages for any matters set forth in Section 10.2(a)(iii) or any claim for Damages under Sections 3.20, 3.22 and 3.28, or for Excess Expenses under Section 11.2. SECTION 10.5. METHOD OF PAYMENT. Subject to the limitations on the amount of Damages set forth in Section 10.4, and subject to the provisions of Section 10.6, any claims for indemnification pursuant to this Article X shall be satisfied by withholding the amount of the claim from any remaining payment obligation on the then outstanding principal amount of the Notes in inverse order of maturity; provided, however, that no Stockholder shall be liable for an amount in excess of the value of the sum of the Merger Consideration and the additional consideration, if any, paid pursuant to Section 2.5 received by such Stockholder in the Merger. SECTION 10.6. RESOLUTIONS OF CONFLICTS; ARBITRATION. The following provisions shall apply with respect to the assertion of claims and the indemnification provisions of this Article X. (a) The Stockholders and Parent shall attempt promptly and in good faith to agree upon the rights of the parties with respect to any disputed claims. If the Stockholders and the Parent should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and the Stockholders shall satisfy the claim in accordance with the terms thereof. (b) Any dispute or controversy concerning the indemnity obligations of this Article X not agreed to by the parties pursuant to Section 10.6(a) shall be resolved in good faith by mediation among the Stockholders and the senior executive officers of Parent. If such dispute can not be Agreement and Plan of Merger - Page 38 resolved by mediation within 30 days, then except for the right of either party to apply to a court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other equitable relief to preserve the status quo or prevent irreparable harm pending the selection and confirmation of an arbitrator, any continuing dispute, controversy or claim arising out of, in connection with, or in relation to the indemnity obligations under this Article X shall be settled by arbitration in accordance with Section 10.6(c) below. (c) If no agreement can be reached after good faith attempts pursuant to Section 10.6(a) and 10.6(b) within 90 days from the commencement of any dispute or controversy, either Parent or the Stockholders may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in any such event the matter shall be settled by arbitration conducted by a single arbitrator mutually agreeable to the Stockholders and the Parent, or if a single arbitrator cannot be agreed to by the parties within thirty (30) days, then by three arbitrators. In the event of three arbitrators, Parent and the Stockholders shall each select one arbitrator, and the two arbitrators so elected shall select a third arbitrator. The decision of the arbitrators so selected as to the validity and amount of any claim in dispute shall be binding and conclusive upon the parties to this Agreement, and the parties shall act in accordance with such decision and satisfy any such claim in accordance therewith. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any mediation or arbitration shall be held in Cincinnati, Ohio. Any arbitration shall be conducted under the rules then in effect of the American Arbitration Association, and shall be based on the provisions and limitations of this Article X. The arbitrators shall have relevant experience in the industry of the Company and, to the extent possible, familiarity with acquisitions and business combinations. The parties agree to compel the arbitrator(s) to resolve the arbitration within 120 days of the commencement of arbitration. Notwithstanding anything contained herein to the contrary, no claim for Damages, nor ability of Parent to settle any claim against the Parent Common Stock or payment obligations on the Notes under Section 10.5, may be made until such claim is finally resolved pursuant to the process and procedures set forth above in this Section. SECTION 10.7 REMEDIES. The indemnification provisions of this Article X are the sole and exclusive remedy of any party to this Agreement for a breach of any representation, warranty or covenant contained herein, except with respect to any claim based on intentional misrepresentation, fraud in the inducement, or a similar theory. Notwithstanding the preceding sentence, from and after the execution and delivery of this Agreement and until the Closing, each of the parties acknowledges and agrees that the other parties hereto would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties hereto agrees the other parties hereto shall be entitled to an injunction to prevent breaches of the provisions of this Article X and to enforce specifically this Agreement and the terms and provisions of Article X in any competent court having jurisdiction over the parties, in addition to any other remedy to which they may be entitled at law or in equity. Agreement and Plan of Merger - Page 39 ARTICLE XI MISCELLANEOUS SECTION 11.1. SPECIFIC PERFORMANCE. Each of the parties to this Agreement hereby acknowledges that the other parties will have no adequate remedy at law if it fails to perform any of its obligations under this Agreement. In such event, each of the parties agrees that the other parties shall have the right, in addition to any other rights it may have (whether at law or in equity), to specific performance of this Agreement, except as set forth to the contrary herein. SECTION 11.2. EXPENSES. Except as set forth in Section 9.2, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense; provided, however that if this Agreement is not terminated and the Closing shall occur, all such costs and expenses incurred directly on behalf of the Company and which are customarily incurred by and on behalf of the Company (including without limitation accounting, legal and other professional services of a routine and recurring nature (for example, annual auditing expenses)) shall be paid or reimbursed by the Parent. The Parent will reimburse the Company following the Closing for all reasonable and itemized fees and expenses incurred by the Company to Taft, Stettinius & Hollister relating to the resolution of tax issues of this transaction beneficial to the Stockholders (including, for example, subchapter S distributions, depreciation recapture, Section 338(h)(10) Election, 401-K distributions and similar tax issues) if the transactions contemplated by this Agreement are consummated. All other costs and expenses incurred by the Company for the benefit of the Stockholders or the Company, or by the Stockholders directly (including without limitation legal and professional fees incurred by the Company or the Stockholders in connection with the negotiation of the transactions contemplated by this Agreement), shall be paid or reimbursed by the Stockholders from the Merger Consideration to be delivered at Closing (the "EXCESS EXPENSES"). SECTION 11.3. FURTHER ASSURANCES. If at any time after the Closing, Parent or Sub shall consider it advisable that any further conveyance, agreements, documents or instruments or any other things are necessary or desirable to vest, perfect, confirm or record in the Surviving Corporation, the title to any property, rights, privileges, powers and franchises of the Company, the officers of the Company last in office and such other Persons, if any, as the Board of Directors of the Company last in office may authorize, shall execute and deliver, upon Parent's reasonable request, any and all proper conveyances, agreements, documents and instruments, and do all things necessary or proper to vest, perfect, confirm or record title to such property, rights, privileges, powers and franchises in the Surviving Corporation, and otherwise to carry out the provisions of this Agreement. SECTION 11.4. PARTIES IN INTEREST. All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective successors and permitted assigns of the parties hereto. Except as set forth in Section 7.8(e), nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any Person other than the parties hereto, their permitted successors or assigns, and their respective stockholders any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby or thereby. SECTION 11.5. ENTIRE AGREEMENT. This Agreement and the other Operative Documents, together with the Exhibits and Schedules hereto and thereto, supersede any other agreement, whether written or oral, that may have been made or entered into by Parent, Sub and the Company (or by any officers, directors, stockholders or partners of any of such parties) relating to the matters contemplated hereby. This Agreement and the other Operative Documents, together with the Exhibits and Schedules Agreement and Plan of Merger - Page 40 hereto and thereto, constitute the entire agreement by the parties, and there are no agreements or commitments except as set forth herein or therein. SECTION 11.6 AMENDMENT OR MODIFICATION. This Agreement may be amended only with the written consent of Parent, Sub, the Stockholders and the Company. SECTION 11.7. WAIVER. Any party to this Agreement may, by written notice to the other parties to this Agreement, (a) extend the time for the performance of any of the obligations or other actions of the other parties for its benefit under this Agreement; (b) waive any inaccuracies in the representations or warranties of the other parties made to it contained in this Agreement; (c) waive compliance with any of the conditions or covenants of the other parties for its benefit contained in this Agreement; or (d) waive or modify performance of any of the obligations of the other parties for its benefit under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement including any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants, conditions or agreements contained in this Agreement. The failure of any party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part hereof or thereof or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of or non-compliance with this Agreement shall be held to be a waiver of any other or subsequent breach or non-compliance. SECTION 11.8. ASSIGNABILITY. Neither this Agreement nor any rights hereunder shall be assignable, except (i) by the Company with the prior written consent of Parent, or (ii) by Parent or by Sub with the prior written consent of the Company. SECTION 11.9. HEADINGS AND INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Terms such as "herein", "hereof", "hereinafter" refer to this Agreement in which they appear as a whole and not to the particular sentence or paragraph where they appear, unless the context otherwise requires. Unless the context otherwise requires, (i) terms used in the plural include the singular, and vice versa, and (ii) words in the masculine gender include the feminine, and vice versa. References in this Agreement to Articles, Sections, Exhibits or the Schedules shall be to Articles, Sections, Exhibits or the Schedules in this Agreement, unless otherwise indicated. SECTION 11.10. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by graphic scanning or other telegraphic communications equipment of the sending party, as follows: If to Parent or Sub: c/o DynaGen, Inc. 99 Erie Street Cambridge, MA 02139 Attention: Indu A. Muni Telecopy No.: (617) 354-3902 Agreement and Plan of Merger - Page 41 with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, MA 02110 Attention: John Hession, Esq. Telecopy: (617) 248-7100 If to the Company: Superior Pharmaceutical Company 1385 Kemper Meadow Drive Cincinnati, Ohio 45240-1635 Attention: Eric C. Hagerstrand Telecopy No.: (513) 742-6474 with a copy to: Taft, Stettinius & Hollister 1800 Star Bank Center 425 Walnut Street Cincinnati, OH 45202-3957 Attention: Phil Schultz Telecopy No.: (513) 381-0205 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall only be effective upon receipt. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by facsimile, or on the date five business days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 11.10 or in accordance with the latest unrevised direction from such party given in accordance with this Section 11.10. SECTION 11.11. LAW GOVERNING. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. SECTION 11.12. INVALIDITY OF PROVISIONS. Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof or thereof. SECTION 11.13. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement and Plan of Merger has been duly executed and delivered by the parties on the date first above written. DYNAGEN, INC. Attest: /s/ Cynthia Kiley /s/ Dhananjay G. Wadekar ______________________________ By: _______________________________ Name: Dhananjay G. Wadekar Title: Executive Vice President DYNAGEN ACQUISITION CORP. Attest: /s/ Cynthia Kiley /s/ Dhananjay G. Wadekar ______________________________ By: _______________________________ Name: Dhananjay G. Wadekar Title: Executive Vice President SUPERIOR PHARMACEUTICAL COMPANY Attest: /s/ Thomas Canning /s/ Eric Hagerstrand ______________________________ By: _______________________________ Name: Eric Hagerstrand Title: Vice President and CFO STOCKHOLDERS: /s/ Eric C. Hagerstrand ------------------------------------ Eric C. Hagerstrand /s/ Dennis Smith ------------------------------------ Dennis Smith /s/ Thomas Canning ------------------------------------ Thomas Canning EX-3.A 3 CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION OF DYNAGEN, INC. 1. The name of the corporation is DynaGen, Inc. 2. The address of its registered office in the State of Delaware is 5 Fairway Road, No. 2C, City of Newark, County of New Castle. The name of its registered agent at such address is Shekhar G. Wadekar. 3. The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of stock which the corporation shall have authority to issue is fifteen million (15,000,000) shares, consisting of fourteen million (14,000,000) shares of Common Stock, $.01 par value per share, and one million (1,000,000) shares of Preferred Stock, $.01 par value per share, amounting in the aggregate to One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00). The designations and powers, the rights and preferences and the qualifications, limitations or restrictions with respect to each class of stock of the corporation shall be as determined by the Board of Directors from time to time. 5. The name and mailing address of the corporation's incorporator is Dhananjay G. Wadekar, 1404 LaGrange Street, Chestnut Hill, Massachusetts 02167. -2- 6. The names of the persons who are to serve as the directors until the first annual meeting of the stockholders or until their successors are elected and qualified are: Dhananjay G. Wadekar Indu A. Muni 1404 LaGrange Street 5 Westwood Circle Chestnut Hill, MA 02167 North Reading, MA 01864 7. The corporation is to have perpetual existence. 8. In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: To make, alter or repeal the bylaws of the corporation. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such agent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business -3- and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease, or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or bylaws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. 9. To the maximum extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware, a director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. 10. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class -4- of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directors. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement to any reorganization of this corporation as consequences of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this corporation, as the case may be, and also on this corporation. 11. Meetings of the stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the corporation may be kept (subject to any provision contained in the statues) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the corporation. Elections of directors need not be by written ballot unless the bylaws of the corporation shall so provide. -5- 12. The corporation reserves the right to amend, alter, change, or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THE UNDERSIGNED, being the incorporator named hereinbefore, for the purposes of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and, accordingly, has hereunto set his hand this 7th day of November, 1988. /s/ Dhananjay G. Wadekar --------------------------- Dhananjay G. Wadekar COMMONWEALTH OF MASSACHUSETTS ) ) ss.: COUNTY OF MIDDLESEX ) BE IT REMEMBERED that on this 7th day of November, 1988, personally came before me, a Notary Public for the Commonwealth of Massachusetts, Dhananjay G. Wadekar, the party to the foregoing certificate of incorporation, known to me personally to be such, and acknowledged the said certificate to be his act and deed and that the facts stated therein are true. GIVEN under my hand and seal of office the day and year aforesaid. /s/ Janet M. Davenport --------------------------- Janet M. Davenport Notary Public My commission expires: March 4, 1994 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF DYNAGEN, INC. DynaGen, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That by unanimous written consent of the Board of Directors of DynaGen, Inc., dated November 6, 1989, the following resolution which sets forth a proposed amendment of the Certificate of Incorporation of said Corporation, was duly adopted and declared to be advisable. The resolution setting forth the proposed amendment is as follows: RESOLVED: That the Certificate of Incorporation of the Corporation be amended by changing Article IV thereof so that, as amended, said Article IV shall be and read as follows: "4. The total number of shares of stock which the Corporation shall have authority to issue is twenty-one million (21,000,000) shares, of which twenty million (20,000,000) shares will be Common Stock, of the par value of One Cent ($.01) per share, and one million (1,000,000) shares will be Preferred Stock, of the par value of One Cent ($.01) per share, amounting in the total aggregate to Two Hundred Ten Thousand and 00/100 Dollars ($210,000.00)." SECOND: That said amendment was duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware. -2- IN WITNESS WHEREOF, said DynaGen, Inc. has caused its corporate seal to be hereunto affixed and this Certificate of Amendment to be signed by Indu A. Muni its President and Secretary this ____ day of November, 1989. DYNAGEN, INC. By: /s/ Indu A. Muni ----------------------- Indu A. Muni, President /s/ Indu A. Muni - ------------------------ Indu A. Muni, Secretary DYNAGEN, INC. CERTIFICATE OF CHANGE OF LOCATION OF REGISTERED OFFICE AND REGISTERED AGENT The Board of Directors of DYNAGEN, INC., a Corporation of Delaware, on this 1st day of February, 1991, do hereby resolve and order that the location of the Registered Office of this Corporation within this State be, and the same hereby is changed to Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle 19801. The name of the Registered Agent therein and in charge thereof upon whom process against this Corporation may be served be, and hereby is changed to: The Corporation Trust Company. DYNAGEN, INC., a Corporation of Delaware, does hereby certify that the foregoing is a true copy of a resolution adopted by the Board of Directors by unanimous written Consent dated February 25, 1991. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by its President and Attested by its Secretary, the 28th day of February, 1991. /s/ Indu A. Muni ------------------------- Indu A. Muni President ATTEST: /s/ John A. Piccione - ----------------------------- John A. Piccione Secretary CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF DYNAGEN, INC. DynaGen, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of DynaGen, Inc., by the unanimous written consent of its members, filed with the minutes of the meetings of the Board, duly adopted resolutions setting forth a proposed amendment of the certificate of incorporation of the Corporation, declaring said amendment to be advisable and approving the submission of said amendment to the stockholders of the Corporation for their approval by vote at the 1991 Special Meeting in Lieu of Annual Meeting held on June 30, 1992. The resolution setting forth the proposed amendment is as follows: RESOLVED: That Article 4 of the Corporation's Certificate of Incorporation be and is hereby amended to authorize an additional 20,000,000 shares of Common Stock of the Corporation, so that as so amended said Article 4 shall read in its entirety as follows: "4. The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is forty-one million (41,000,000) shares, consisting of forty million (40,000,000) shares of Common Stock with a par value of One Cent ($.01) per share, and one million (1,000,000) shares of Preferred Stock with a par value of One Cent ($.01) per share. The designations and powers, the rights and preferences and the qualifications, limitations or restrictions with respect to each class of stock of the Corporation shall be as determined by the Board of Directors from time to time." SECOND: That thereafter the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. -2- IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Dhananjay G. Wadekar, its Executive Vice President, and attested to by Mitchell S. Bloom, its Assistant Secretary, this 9th day of July, 1992. DYNAGEN, INC. By: /s/ Dhananjay G. Wadekar ------------------------- Dhananjay G. Wadekar Executive Vice President ATTEST: /s/ Mitchell S. Bloom - ---------------------- Mitchell S. Bloom Assistant Secretary CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF DYNAGEN, INC. DynaGen, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of DynaGen, Inc., by the unanimous written consent of its members, filed with the minutes of the meetings of the Board, duly adopted resolutions setting forth a proposed amendment of the certificate of incorporation of the Corporation, declaring said amendment to be advisable and approving the submission of said amendment to the stockholders of the Corporation for their approval by vote at the 1992 Annual Meeting of Stockholders held on December 17, 1992. The resolution setting forth the proposed amendment is as follows: RESOLVED: That Article 4 of the Corporation's Certificate of Incorporation be and is hereby amended to authorize an additional 9,000,000 shares of Preferred Stock of the Corporation, so that as so amended said Article 4 shall read in its entirety as follows: "4. The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is fifty million (50,000,000) shares, consisting of forty million (40,000,000) shares of Common Stock with a par value of One Cent ($.01) per share, and ten million (10,000,000) shares of Preferred Stock with a par value of One Cent ($.01) per share. The designations and powers, the rights and preferences and the qualifications, limitations or restrictions with respect to each class of stock of the Corporation shall be as determined by the Board of Directors from time to time." SECOND: That thereafter the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. -2- IN WITNESS WHEREOF, said Corporation has caused this Certificate of Amendment to be signed by Indu A. Muni, its President, and attested to by Mitchell S. Bloom, its Assistant Secretary, this 22nd day of December, 1992. DYNAGEN, INC. By: /s/ Indu A. Muni ----------------------- Indu A. Muni President ATTEST: /s/ Mitchell S. Bloom - ------------------------------------- Mitchell S. Bloom, Assistant Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF DYNAGEN, INC. DynaGen, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows, pursuant to Section 242 of the General Corporation Law of Delaware: FIRST: That the Board of Directors of said Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, duly adopted resolutions in accordance with Section 242 of the General Corporation Law of the State of Delaware, (i) proposing amendment to the Certificate of Incorporation of the Corporation, (ii) declaring such amendment to be advisable and in the best interests of the Corporation, (iii) directing that such amendment be submitted to the stockholders of the Corporation for approval thereby. The resolutions setting forth the amendment and directing that such amendment be submitted to the stockholders are as follows: RESOLVED: That the Board of Directors of the Corporation deems it advisable and in the best interests of the Corporation and its stockholders that Article 4 of the Certificate of Incorporation of the Corporation be amended to increase the authorized shares of the Corporation's Common Stock, par value $.01 per share (the "Common Stock"), from 40,000,000 shares to 75,000,000 shares so that, as so amended, said Article 4 shall read in its entirety as follows: "4. The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is eighty-five million (85,000,000) shares, consisting of seventy-five million (75,000,000) shares of Common Stock, with a par value of One Cent ($.01) per shares, and ten million (10,000,000) shares of Preferred Stock, with a par value of One Cent ($.01) per share. The designations and powers, the rights and preferences and the qualifications, limitations or restrictions with respect to each class of stock of the corporation shall be as determined by the Board of Directors from time to time." -2- and that such amendment be adopted and approved, which approval shall be effective immediately upon approval of the amendment by the stockholders of the Corporation. RESOLVED: That the foregoing amendment to the Corporation's Certificate of Incorporation be submitted to the stockholders of the Corporation for their consideration and approval at the Corporation's Annual Meeting of Stockholders. SECOND: That, at the Annual Meeting of Stockholders of the Corporation held on January 30, 1997, the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, DynaGen, Inc., has caused this certificate to be signed by Indu A. Muni, its President, as of this 30th day of January, 1997. DynaGen, Inc. By: /s/ Indu A. Muni ------------------------ President EX-4.M 4 INVESTMENT BANKING AGREEMENT AMENDMENT NO. 1 TO INVESTMENT BANKING AGREEMENT This Amendment No. 1 to Investment Banking Agreement is made as of this 23rd day of September, 1996 by and between DynaGen, Inc., having its business offices at 99 Erie Street, Cambridge, MA 02139 (the "Company") and H.J. Meyers & Co., Inc., having its business offices at 1895 Mt. Hope Avenue, Rochester, New York 14620 (the "Consultant"). WHEREAS, the Company and the Consultant have entered into an Investment Banking Agreement dated November 20, 1995 (the "Agreement"); and WHEREAS, the parties desire to supplement and amend the Agreement as set forth below. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, it is agreed as follows: 1. Paragraph 1 is hereby deleted and replaced in its entirety with the following: "1. RETENTION. The Company hereby retains the Consultant to perform non-exclusive consulting services related to corporate finance and other matters, and the Consultant hereby accepts such retention and shall undertake reasonable efforts to perform for the Company the duties described herein. In this regard, subject to paragraph 7 hereof, the Consultant shall devote such time and attention to the business of the Company, as shall be determined by the Consultant, in its sole discretion, subject to the direction of the Chairman of the Company. a) The Consultant agrees, to the extent reasonably required in the conduct of the business of the Company, and at the Company's request, to place at the disposal of the Company its judgment and experience and to provide business development services to the Company including the following: (i) review the Company's managerial and financial requirements; (ii) review budgets and business plans; (iii) analyze and assess alternatives for the Company, presented by the Company for raising capital, including public or private offerings of the Company's securities; and (iv) prepare and disseminate a "Corporate Profile" report in compliance with applicable state and federal securities laws. -2- b) In addition, the Consultant agrees, to the extent reasonably required in the conduct of the business of the Company, and at the Company's request, to place at the disposal of the Company its judgment and experience and to provide a broad array of merger and acquisition services as requested by the Company including: (i) identifying opportunities for a transaction involving the Company including, without limitation, the purchasing by the Company of other companies, or any of their businesses, assets, or properties, or the sale of the Company, or any of its businesses, assets or properties, more specifically, in connection with the Company's acquisition of certain assets of Able Laboratories, Inc. (ii) advising the Company concerning such transactions with respect to structure; (iii) providing detailed valuation analyses for such transactions including formal fairness opinions if required. c) At the Consultant's request, the Company will provide "due diligence" presentations to Registered Representatives of the Consultant and other brokerage firms." 2. Paragraph 3(a) of the Agreement is hereby deleted and replaced in its entirety with the following: "3. Compensation. a) The Consultant shall be paid the sum of $500,000.00 payable upon the signing of this Agreement. In addition, for its consulting services hereunder, the Company shall grant to the Consultant a warrant (the "Warrant") to purchase 400,000 shares of the Common Stock of the Company (the "Registerable Shares") exercisable for five (5) years from the date hereof at a price of $2.50 per share. Registerable Shares will not include any shares of Common Stock which are eligible for sale pursuant to Rule 144, as so opined by the Company's outside legal counsel. The Warrant shall be in a form to be mutually agreed upon by the parties. All compensation is non-refundable." 3. All other terms and provisions of the Agreement shall remain in full force and effect. -3- IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. DYNAGEN, INC. By: /s/ Dhananjay G. Wadekar -------------------------- Title: Chairman and Executive V.P. ----------------------------- H.J. MEYERS & CO., INC. /s/ Michael S. Smith ------------------------------------ Michael S. Smith Managing Director, Corporate Finance EX-4.P 5 COMMON STOCK PURCHASE WARRANT THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. WARRANT NO. : W-CS-3 RIGHT TO PURCHASE 41,000 SHARES OF COMMON STOCK OF DECEMBER 10, 1996 DYNAGEN, INC. VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING TIME ON DECEMBER 31, 2003. DYNAGEN, INC. COMMON STOCK PURCHASE WARRANT DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies that, in consideration of the payment of $100 (receipt of which is hereby acknowledged), ZACK SPIGELMAN is entitled, subject to the terms set forth below, to purchase from the Company, commencing December 10, 1996, at any time or from time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before December 31, 2003, 41,000 fully paid and non-assessable shares of Common Stock, $.01 par value, of the Company, at an exercise price per share equal to $1.44. Such exercise price per share as adjusted from time to time as herein provided is referred to herein as the "EXERCISE PRICE". The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "COMPANY" shall include DynaGen, Inc., a Delaware corporation, and any corporation which shall succeed or assume the obligations of the Company hereunder. (b) The term "COMMON STOCK" includes (a) the Company's Common Stock, $.01 par value per share, as authorized, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the -2- right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise, or the conversion of promissory notes or other obligations of the Company. (c) The term "OTHER SECURITIES" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Sections 3 or 4 or otherwise. 1. EXERCISE OF WARRANT. 1.1. FULL EXERCISE. This Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Exercise Price then in effect. 1.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Section 1.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Exercise Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this Warrant are exercisable only upon the satisfaction of certain conditions, and unlesss such conditions are satisfied, only that portion of this Warrant for which the conditions have been previously satisfied may be exercised at any time. The Warrant will vest and become exercisable in the following installments: 20% of the shares of Common Stock under this Warrant are vested and exercisable upon delivery of the Warrant, 40% will become exercisable upon filing a 510(k) or other application for the BioLoc Technology or DynaGen Technology with the FDA, and the remaining 40% will become exercisable upon approval of such application by the FDA; provided, however, that the holder continues to work on the BioLoc Technology or DynaGen Technology and is engaged by the Company as a consultant at the times of each of the foregoing milestones. If the -3- services of the holder of the warrant as a consultant to the Company are terminated without cause, then this Warrant shall become fully vested and immediately exercisable at the time of any FDA application. The BioLoc Technology and DynaGen Technology is defined in a certain Exclusive License Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996. DynaGen shall use commercially reasonable efforts to file and prosecute such application with the FDA. 1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO COMMON STOCK. (a) In addition to and without limiting the rights of the Warrantholder under the terms of this Warrant, the Warrantholder shall have the right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this Section at any time or from time to time prior to its expiration, subject to the restrictions set forth in paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder may elect to surrender this warrant for conversion and to receive shares of Common Stock equal to the value of this Warrant (or the portion being cancelled, surrendered and converted) by surrender of this Warrant to the Company together with notice of such election. Upon such event, the Company shall issue to the holder a number of shares of the Company's Common Stock computed by using the following formula: X MINUS Y (A MINUS B) A Where: X = The number of shares of Common Stock to be issued to the holder; Y = The number of shares of Common Stock purchasable under this Warrant; A = The "Fair Market Value" of one share of the Common Stock; and B = The Exercise Price of the Warrant (as adjusted to the date of the calculation). Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant, the Company shall deliver to the Warrantholder, without payment by the Warrantholder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number computed using the above formula. Notwithstanding anything in this Section to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a value below $1,000. No fractional shares shall be issuable upon exercised of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Warrantholder an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the Warrantholder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Warrantholder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock or authorized Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "CONVERSION DATE"), but not later than the expiration date of this Warrant. -4- (c) In the event the Conversion Right would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to give rise to a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the Warrantholder of such adverse accounting treatment. (d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of Common Stock or authorized Common Stock as of a particular date (the "DETERMINATION DATE") shall mean: (i) if the Company's Common Stock is then traded on any nationally-recognized stock exchange or quoted on the NASDAQ National Market System or Small-Cap Market, the average of the closing sale prices for the 20 trading days preceding the Determination Date, as reported by such exchange or system, as reported in The Wall Street Journal or any other publication, including the NASD; (ii) if the Company's Common Stock is then traded on the over-the-counter market, the average of the closing bid and closing asked prices for the 30 trading days preceding the Determination Date, as reported in The Wall Street Journal or by any market maker; or (iii) if quotations for the Company's Common Stock or authorized Common Stock is not readily available as set forth in (i) or (ii) above, then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors, including, without limitation, the price at which shares of the Company's Common Stock or authorized Common Stock could reasonably be expected to be sold in an arms-length transaction, for cash, other than on an installment basis, to a person not employed by, controlled by, in control of or under common control with the Company, which determination by the Board of Directors shall give due consideration to recent transactions involving shares of the Common Stock or authorized Common Stock, if any, revenues and earnings of the Company to the date of such determination (if any), projected revenues and earnings of the Company, the effect of the transfer restrictions to which the shares are subject under law, the absence of a public market for the Common Stock or authorized Common Stock, and such other matters as the Board of Directors deems pertinent. Such determination by the Board of Directors shall be conclusive and binding. 2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within thirty (30) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. -5- 3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER. 3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or entity, or (c) transfer all or substantially all of its capital stock, properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, upon the proper and rightful exercise of this Warrant, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 4 and 5. 3.2. CONTINUATION OF TERMS. Upon any corporate event referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger, as the case may be, and shall be binding upon the issuer of any such stock or other securities. 4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then prevailing Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock) and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock), and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 4) be issuable on such exercise, by a fraction of which (i) the numerator is the Exercise Price which would otherwise (but for the provisions of this Section 4) be in effect, and (ii) the denominator is the Exercise Price in effect on the date of such exercise. -6- 5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND RECLASSIFICATIONS. In case at any time or from time to time, the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which, in the case of Common Stock, are provided for in Section 4), then and in each such case the holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) which such holder would hold on the date of such exercise if on the date of distribution of such other or additional stock or other securities and property, or on the record date fixed for determining the shareholders entitled to receive such other or additional stock or other securities and property, such holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date thereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) receivable by such holder as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 3 and 4. 6. NOTICES OF RECORD DATE. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, -7- recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date specified in such notice on which any such action is to be taken. 7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, all shares of Common Stock from time to time issuable on the exercise of the Warrant; the shares of Common Stock which the holder of this Warrant shall receive upon exercise of the Warrant will be duly authorized, validly issued, fully paid and non-assessable. 8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) No holder of this Warrant shall, as such, be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon such holder, as such, any of the rights of a stockholder of the Company until such holder shall have delivered formal notice to the Company of an intention to exercise this Warrant, tendered promptly the consideration required for exercise (whether cash or securities), exercised the Warrant, and been issued shares of Common Stock in accordance with the provisions hereof. (b) Neither this Warrant nor any shares of Common Stock purchased pursuant to this Warrant shall be registered under the Securities Act of 1933 (the "SECURITIES ACT") and applicable state securities laws. Therefore, the Company may require, as a condition of allowing the transfer or exchange of this Warrant or such shares, that the holder or transferee of this Warrant or such shares, as the case may be, furnish to the Company an opinion of -8- counsel acceptable to the Company to the effect that such transfer or exchange may be made without registration under the Securities Act and applicable state securities laws. The certificates evidencing the shares of Common Stock issued on the exercise of the Warrant shall bear a legend to the effect that the shares evidenced by such certificates have not been registered under the Securities Act and applicable state securities laws. (c) This Warrant is not transferable or assignable to any party without the prior written consent of the Company, and accompanied by an opinion of counsel satisfactory to the Company that such transfer is permissible under applicable law. 11. NOTICES. All notices and other communications from the Company to the holder of this Warrant shall be mailed by (i) first class mail, postage prepaid, (ii) electronic facsimile transmission, or (iii) express overnight courier service, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 12. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant and the shares of Common Stock underlying this Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Delaware. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. REGISTRATION RIGHTS. 13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a 510(k) or other application has been filed for the BioLoc Technology or DynaGen Technology and this Warrant is at least sixty percent (60%) vested in accordance with Section 1.3, at the request of the holders of at least seventy percent (70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE SHARES"), the Company shall use its best efforts to file a registration statement on Form S-3 (to the extent such form is available to the Company) covering the resale of the Shares underlying this Warrant (the "REGISTRABLE SHARES"). The Company will so notify each holder of Registrable Shares, including each holder who has a right to acquire Registrable Shares, and then shall, as expeditiously as possible (using commercially reasonable efforts), effect qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify, and shall thereafter maintain the effectiveness of such Registration Statement until such shares have been sold or until the registration obligation terminates under Section 13.3. The Company shall not be required to effect more than one (1) registration on Form S-3. The Company's obligations under this Section shall expire three (3) years after the issuance date of this Warrant. The Company agrees to qualify or register the Shares under applicable state law, list the shares wherever the Common Stock is then listed and supplement the prospectus as necessary from time to time to keep it current. -9- 13.2 EXPENSES. In the case of a registration under Section 13.1, the Company shall bear the expenses of any filing of any registration, including but not limited to printing legal and accounting expenses, Securities and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' commissions or discounts attributable to the securities being offered and sold by the holder of this Warrant, or the fees and expenses of any counsel, tax advisor or accountant selected by such holder in connection with the registration of the securities. 13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the Company under this Section 13 to register the securities shall expire and terminate at such time as the holder of this Warrant shall be entitled or eligible to sell the shares of Common Stock underlying this Warrant without restriction and without a need for the filing of a registration statement under the Securities Act of 1933, including without limitation, for any resales of restricted securities made pursuant to Rule 144 as promulgated by the Securities and Exchange Commission. 13.4 DELAY OF REGISTRATION. For a period not to exceed 120 days, the Company shall not be obligated to prepare and file, or be prevented from delaying or abandoning, a registration statement pursuant to this Section 13 at any time when the Company, in its good faith judgment by the management of the Company, with the advice of counsel, reasonably believes: (I) that the filing thereof at the time requested, or the offering of Registrable Shares pursuant thereto, would materially and adversely affect (a) a pending or scheduled public offering or private placement of the Company's securities, (b) an acquisition, merger, consolidation or similar transaction by or of the Company, (c) pre-existing and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (d) the financial condition of the Company in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which may be required thereby; and (II) that the failure to disclose any material information with respect to the foregoing would cause a violation of the Securities Act or the Securities Exchange Act of 1934. 13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the event that the Company registers any of the Registrable Shares under the Securities Act, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, as incurred, and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, -10- for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Securities were registered under the Securities Act, in any filing with any state securities commission in any preliminary or amended preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration. Notwithstanding the foregoing, the Company shall have no obligation to indemnify any holder, underwriter or controlling person if: (i) such untrue statement or omission was made in such registration statement, preliminary or amended preliminary prospectus or final prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares (in the case of indemnification of such holder), such underwriter (in the case of indemnification of such underwriter) or such controlling person (in the case of indemnification of such controlling person) expressly for use therein, or (ii) in the case of a sale directly by such holder of Registrable Shares (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution solely on behalf of such holder of Registrable Shares), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus copies of which were delivered to such holder of Registrable Shares or such underwriter on a timely basis, and such holder of Registrable Shares failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. 14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., Eastern Daylight Saving Time, on December 31, 2003. Dated: December 12, 1996 DYNAGEN, INC. ATTEST: By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar Title: Secretary Title: Executive Vice President FORM OF SUBSCRIPTION (TO BE SIGNED ONLY ON EXERCISE OF WARRANT) TO DynaGen, Inc. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, ........ shares of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes payment of $........ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to .............., whose address is ................................ Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) -------------------- FORM OF ASSIGNMENT (TO BE SIGNED ONLY ON TRANSFER OF WARRANT) For value received, the undersigned hereby sells, assigns, and transfers unto .................. the right represented by the within Warrant to purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware corporation, to which the within Warrant relates, and appoints .......................... Attorney to transfer such right on the books of DynaGen, Inc., a Delaware corporation, with full power of substitution in the premises. Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) Signed in the presence of: ............................. EX-4.Q 6 COMMON STOCK PURCHASE WARRANT THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. WARRANT NO. : W-CS-4 RIGHT TO PURCHASE 41,000 SHARES OF COMMON STOCK OF DECEMBER 10, 1996 DYNAGEN, INC. VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING TIME ON DECEMBER 31, 2003. DYNAGEN, INC. COMMON STOCK PURCHASE WARRANT DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies that, in consideration of the payment of $100 (receipt of which is hereby acknowledged), RICH THERIAULT is entitled, subject to the terms set forth below, to purchase from the Company, commencing December 10, 1996, at any time or from time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before December 31, 2003, 41,000 fully paid and non-assessable shares of Common Stock, $.01 par value, of the Company, at an exercise price per share equal to $1.44. Such exercise price per share as adjusted from time to time as herein provided is referred to herein as the "EXERCISE PRICE". The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "COMPANY" shall include DynaGen, Inc., a Delaware corporation, and any corporation which shall succeed or assume the obligations of the Company hereunder. (b) The term "COMMON STOCK" includes (a) the Company's Common Stock, $.01 par value per share, as authorized, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the -2- right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise, or the conversion of promissory notes or other obligations of the Company. (c) The term "OTHER SECURITIES" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Sections 3 or 4 or otherwise. 1. EXERCISE OF WARRANT. 1.1. FULL EXERCISE. This Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Exercise Price then in effect. 1.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Section 1.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Exercise Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this Warrant are exercisable only upon the satisfaction of certain conditions, and unlesss such conditions are satisfied, only that portion of this Warrant for which the conditions have been previously satisfied may be exercised at any time. The Warrant will vest and become exercisable in the following installments: 20% of the shares of Common Stock under this Warrant are vested and exercisable upon delivery of the Warrant, 40% will become exercisable upon filing a 510(k) or other application for the BioLoc Technology or DynaGen Technology with the FDA, and the remaining 40% will become exercisable upon approval of such application by the FDA; provided, however, that the holder continues to work on the BioLoc Technology or DynaGen Technology and is engaged by the Company as a consultant at the times of each of the foregoing milestones. If the -3- services of the holder of the warrant as a consultant to the Company are terminated without cause, then this Warrant shall become fully vested and immediately exercisable at the time of any FDA application. The BioLoc Technology and DynaGen Technology is defined in a certain Exclusive License Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996. DynaGen shall use commercially reasonable efforts to file and prosecute such application with the FDA. 1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO COMMON STOCK. (a) In addition to and without limiting the rights of the Warrantholder under the terms of this Warrant, the Warrantholder shall have the right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this Section at any time or from time to time prior to its expiration, subject to the restrictions set forth in paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder may elect to surrender this warrant for conversion and to receive shares of Common Stock equal to the value of this Warrant (or the portion being cancelled, surrendered and converted) by surrender of this Warrant to the Company together with notice of such election. Upon such event, the Company shall issue to the holder a number of shares of the Company's Common Stock computed by using the following formula: X MINUS Y (A MINUS B) A Where: X = The number of shares of Common Stock to be issued to the holder; Y = The number of shares of Common Stock purchasable under this Warrant; A = The "Fair Market Value" of one share of the Common Stock; and B = The Exercise Price of the Warrant (as adjusted to the date of the calculation). Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant, the Company shall deliver to the Warrantholder, without payment by the Warrantholder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number computed using the above formula. Notwithstanding anything in this Section to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a value below $1,000. No fractional shares shall be issuable upon exercised of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Warrantholder an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the Warrantholder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Warrantholder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock or authorized Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "CONVERSION DATE"), but not later than the expiration date of this Warrant. -4- (c) In the event the Conversion Right would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to give rise to a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the Warrantholder of such adverse accounting treatment. (d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of Common Stock or authorized Common Stock as of a particular date (the "DETERMINATION DATE") shall mean: (i) if the Company's Common Stock is then traded on any nationally-recognized stock exchange or quoted on the NASDAQ National Market System or Small-Cap Market, the average of the closing sale prices for the 20 trading days preceding the Determination Date, as reported by such exchange or system, as reported in The Wall Street Journal or any other publication, including the NASD; (ii) if the Company's Common Stock is then traded on the over-the-counter market, the average of the closing bid and closing asked prices for the 30 trading days preceding the Determination Date, as reported in The Wall Street Journal or by any market maker; or (iii) if quotations for the Company's Common Stock or authorized Common Stock is not readily available as set forth in (i) or (ii) above, then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors, including, without limitation, the price at which shares of the Company's Common Stock or authorized Common Stock could reasonably be expected to be sold in an arms-length transaction, for cash, other than on an installment basis, to a person not employed by, controlled by, in control of or under common control with the Company, which determination by the Board of Directors shall give due consideration to recent transactions involving shares of the Common Stock or authorized Common Stock, if any, revenues and earnings of the Company to the date of such determination (if any), projected revenues and earnings of the Company, the effect of the transfer restrictions to which the shares are subject under law, the absence of a public market for the Common Stock or authorized Common Stock, and such other matters as the Board of Directors deems pertinent. Such determination by the Board of Directors shall be conclusive and binding. 2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within thirty (30) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. -5- 3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER. 3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or entity, or (c) transfer all or substantially all of its capital stock, properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, upon the proper and rightful exercise of this Warrant, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 4 and 5. 3.2. CONTINUATION OF TERMS. Upon any corporate event referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger, as the case may be, and shall be binding upon the issuer of any such stock or other securities. 4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then prevailing Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock) and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock), and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 4) be issuable on such exercise, by a fraction of which (i) the numerator is the Exercise Price which would otherwise (but for the provisions of this Section 4) be in effect, and (ii) the denominator is the Exercise Price in effect on the date of such exercise. -6- 5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND RECLASSIFICATIONS. In case at any time or from time to time, the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which, in the case of Common Stock, are provided for in Section 4), then and in each such case the holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) which such holder would hold on the date of such exercise if on the date of distribution of such other or additional stock or other securities and property, or on the record date fixed for determining the shareholders entitled to receive such other or additional stock or other securities and property, such holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date thereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) receivable by such holder as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 3 and 4. 6. NOTICES OF RECORD DATE. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, -7- recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date specified in such notice on which any such action is to be taken. 7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, all shares of Common Stock from time to time issuable on the exercise of the Warrant; the shares of Common Stock which the holder of this Warrant shall receive upon exercise of the Warrant will be duly authorized, validly issued, fully paid and non-assessable. 8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) No holder of this Warrant shall, as such, be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon such holder, as such, any of the rights of a stockholder of the Company until such holder shall have delivered formal notice to the Company of an intention to exercise this Warrant, tendered promptly the consideration required for exercise (whether cash or securities), exercised the Warrant, and been issued shares of Common Stock in accordance with the provisions hereof. (b) Neither this Warrant nor any shares of Common Stock purchased pursuant to this Warrant shall be registered under the Securities Act of 1933 (the "SECURITIES ACT") and applicable state securities laws. Therefore, the Company may require, as a condition of allowing the transfer or exchange of this Warrant or such shares, that the holder or transferee of this Warrant or such shares, as the case may be, furnish to the Company an opinion of -8- counsel acceptable to the Company to the effect that such transfer or exchange may be made without registration under the Securities Act and applicable state securities laws. The certificates evidencing the shares of Common Stock issued on the exercise of the Warrant shall bear a legend to the effect that the shares evidenced by such certificates have not been registered under the Securities Act and applicable state securities laws. (c) This Warrant is not transferable or assignable to any party without the prior written consent of the Company, and accompanied by an opinion of counsel satisfactory to the Company that such transfer is permissible under applicable law. 11. NOTICES. All notices and other communications from the Company to the holder of this Warrant shall be mailed by (i) first class mail, postage prepaid, (ii) electronic facsimile transmission, or (iii) express overnight courier service, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 12. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant and the shares of Common Stock underlying this Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Delaware. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. REGISTRATION RIGHTS. 13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a 510(k) or other application has been filed for the BioLoc Technology or DynaGen Technology and this Warrant is at least sixty percent (60%) vested in accordance with Section 1.3, at the request of the holders of at least seventy percent (70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE SHARES"), the Company shall use its best efforts to file a registration statement on Form S-3 (to the extent such form is available to the Company) covering the resale of the Shares underlying this Warrant (the "REGISTRABLE SHARES"). The Company will so notify each holder of Registrable Shares, including each holder who has a right to acquire Registrable Shares, and then shall, as expeditiously as possible (using commercially reasonable efforts), effect qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify, and shall thereafter maintain the effectiveness of such Registration Statement until such shares have been sold or until the registration obligation terminates under Section 13.3. The Company shall not be required to effect more than one (1) registration on Form S-3. The Company's obligations under this Section shall expire three (3) years after the issuance date of this Warrant. The Company agrees to qualify or register the Shares under applicable state law, list the shares wherever the Common Stock is then listed and supplement the prospectus as necessary from time to time to keep it current. -9- 13.2 EXPENSES. In the case of a registration under Section 13.1, the Company shall bear the expenses of any filing of any registration, including but not limited to printing legal and accounting expenses, Securities and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' commissions or discounts attributable to the securities being offered and sold by the holder of this Warrant, or the fees and expenses of any counsel, tax advisor or accountant selected by such holder in connection with the registration of the securities. 13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the Company under this Section 13 to register the securities shall expire and terminate at such time as the holder of this Warrant shall be entitled or eligible to sell the shares of Common Stock underlying this Warrant without restriction and without a need for the filing of a registration statement under the Securities Act of 1933, including without limitation, for any resales of restricted securities made pursuant to Rule 144 as promulgated by the Securities and Exchange Commission. 13.4 DELAY OF REGISTRATION. For a period not to exceed 120 days, the Company shall not be obligated to prepare and file, or be prevented from delaying or abandoning, a registration statement pursuant to this Section 13 at any time when the Company, in its good faith judgment by the management of the Company, with the advice of counsel, reasonably believes: (I) that the filing thereof at the time requested, or the offering of Registrable Shares pursuant thereto, would materially and adversely affect (a) a pending or scheduled public offering or private placement of the Company's securities, (b) an acquisition, merger, consolidation or similar transaction by or of the Company, (c) pre-existing and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (d) the financial condition of the Company in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which may be required thereby; and (II) that the failure to disclose any material information with respect to the foregoing would cause a violation of the Securities Act or the Securities Exchange Act of 1934. 13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the event that the Company registers any of the Registrable Shares under the Securities Act, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, as incurred, and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, -10- for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Securities were registered under the Securities Act, in any filing with any state securities commission in any preliminary or amended preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration. Notwithstanding the foregoing, the Company shall have no obligation to indemnify any holder, underwriter or controlling person if: (i) such untrue statement or omission was made in such registration statement, preliminary or amended preliminary prospectus or final prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares (in the case of indemnification of such holder), such underwriter (in the case of indemnification of such underwriter) or such controlling person (in the case of indemnification of such controlling person) expressly for use therein, or (ii) in the case of a sale directly by such holder of Registrable Shares (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution solely on behalf of such holder of Registrable Shares), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus copies of which were delivered to such holder of Registrable Shares or such underwriter on a timely basis, and such holder of Registrable Shares failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. 14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., Eastern Daylight Saving Time, on December 31, 2003. Dated: December 12, 1996 DYNAGEN, INC. ATTEST: By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar Title: Secretary Title: Executive Vice President FORM OF SUBSCRIPTION (TO BE SIGNED ONLY ON EXERCISE OF WARRANT) TO DynaGen, Inc. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, ........ shares of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes payment of $........ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to .............., whose address is ................................ Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) -------------------- FORM OF ASSIGNMENT (TO BE SIGNED ONLY ON TRANSFER OF WARRANT) For value received, the undersigned hereby sells, assigns, and transfers unto .................. the right represented by the within Warrant to purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware corporation, to which the within Warrant relates, and appoints .......................... Attorney to transfer such right on the books of DynaGen, Inc., a Delaware corporation, with full power of substitution in the premises. Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) Signed in the presence of: ............................. EX-4.R 7 COMMON STOCK PURCHASE WARRANT THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. WARRANT NO. : W-CS-5 RIGHT TO PURCHASE 18,000 SHARES OF COMMON STOCK OF DECEMBER 10, 1996 DYNAGEN, INC. VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING TIME ON DECEMBER 31, 2003. DYNAGEN, INC. COMMON STOCK PURCHASE WARRANT DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies that, in consideration of the payment of $100 (receipt of which is hereby acknowledged), SHAWN BASU is entitled, subject to the terms set forth below, to purchase from the Company, commencing December 10, 1996, at any time or from time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before December 31, 2003, 18,000 fully paid and non-assessable shares of Common Stock, $.01 par value, of the Company, at an exercise price per share equal to $1.44. Such exercise price per share as adjusted from time to time as herein provided is referred to herein as the "EXERCISE PRICE". The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "COMPANY" shall include DynaGen, Inc., a Delaware corporation, and any corporation which shall succeed or assume the obligations of the Company hereunder. (b) The term "COMMON STOCK" includes (a) the Company's Common Stock, $.01 par value per share, as authorized, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the -2- right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise, or the conversion of promissory notes or other obligations of the Company. (c) The term "OTHER SECURITIES" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Sections 3 or 4 or otherwise. 1. EXERCISE OF WARRANT. 1.1. FULL EXERCISE. This Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Exercise Price then in effect. 1.2. PARTIAL EXERCISE. This Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Section 1.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Exercise Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this Warrant are exercisable only upon the satisfaction of certain conditions, and unlesss such conditions are satisfied, only that portion of this Warrant for which the conditions have been previously satisfied may be exercised at any time. The Warrant will vest and become exercisable in the following installments: 20% of the shares of Common Stock under this Warrant are vested and exercisable upon delivery of the Warrant, 40% will become exercisable upon filing a 510(k) or other application for the BioLoc Technology or DynaGen Technology with the FDA, and the remaining 40% will become exercisable upon approval of such application by the FDA; provided, however, that the holder continues to work on the BioLoc Technology or DynaGen Technology and is engaged by the Company as a consultant at the times of each of the foregoing milestones. If the -3- services of the holder of the warrant as a consultant to the Company are terminated without cause, then this Warrant shall become fully vested and immediately exercisable at the time of any FDA application. The BioLoc Technology and DynaGen Technology is defined in a certain Exclusive License Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996. DynaGen shall use commercially reasonable efforts to file and prosecute such application with the FDA. 1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO COMMON STOCK. (a) In addition to and without limiting the rights of the Warrantholder under the terms of this Warrant, the Warrantholder shall have the right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this Section at any time or from time to time prior to its expiration, subject to the restrictions set forth in paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder may elect to surrender this warrant for conversion and to receive shares of Common Stock equal to the value of this Warrant (or the portion being cancelled, surrendered and converted) by surrender of this Warrant to the Company together with notice of such election. Upon such event, the Company shall issue to the holder a number of shares of the Company's Common Stock computed by using the following formula: X MINUS Y (A MINUS B) A Where: X = The number of shares of Common Stock to be issued to the holder; Y = The number of shares of Common Stock purchasable under this Warrant; A = The "Fair Market Value" of one share of the Common Stock; and B = The Exercise Price of the Warrant (as adjusted to the date of the calculation). Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant, the Company shall deliver to the Warrantholder, without payment by the Warrantholder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the number computed using the above formula. Notwithstanding anything in this Section to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a value below $1,000. No fractional shares shall be issuable upon exercised of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Warrantholder an amount in cash equal to the Fair Market Value of the resulting fractional share. (b) The Conversion Right may be exercised by the Warrantholder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Warrantholder thereby intends to exercise the Conversion Right and indicating the number of shares of Common Stock or authorized Common Stock subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "CONVERSION DATE"), but not later than the expiration date of this Warrant. -4- (c) In the event the Conversion Right would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to give rise to a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the Warrantholder of such adverse accounting treatment. (d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of Common Stock or authorized Common Stock as of a particular date (the "DETERMINATION DATE") shall mean: (i) if the Company's Common Stock is then traded on any nationally-recognized stock exchange or quoted on the NASDAQ National Market System or Small-Cap Market, the average of the closing sale prices for the 20 trading days preceding the Determination Date, as reported by such exchange or system, as reported in The Wall Street Journal or any other publication, including the NASD; (ii) if the Company's Common Stock is then traded on the over-the-counter market, the average of the closing bid and closing asked prices for the 30 trading days preceding the Determination Date, as reported in The Wall Street Journal or by any market maker; or (iii) if quotations for the Company's Common Stock or authorized Common Stock is not readily available as set forth in (i) or (ii) above, then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors, including, without limitation, the price at which shares of the Company's Common Stock or authorized Common Stock could reasonably be expected to be sold in an arms-length transaction, for cash, other than on an installment basis, to a person not employed by, controlled by, in control of or under common control with the Company, which determination by the Board of Directors shall give due consideration to recent transactions involving shares of the Common Stock or authorized Common Stock, if any, revenues and earnings of the Company to the date of such determination (if any), projected revenues and earnings of the Company, the effect of the transfer restrictions to which the shares are subject under law, the absence of a public market for the Common Stock or authorized Common Stock, and such other matters as the Board of Directors deems pertinent. Such determination by the Board of Directors shall be conclusive and binding. 2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within thirty (30) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. -5- 3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER. 3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or entity, or (c) transfer all or substantially all of its capital stock, properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, upon the proper and rightful exercise of this Warrant, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 4 and 5. 3.2. CONTINUATION OF TERMS. Upon any corporate event referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger, as the case may be, and shall be binding upon the issuer of any such stock or other securities. 4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then prevailing Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock) and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event (calculated assuming the conversion or exchange of all outstanding shares of convertible or exchangeable securities of the Company which are convertible or exchangeable into, or exercisable for, shares of Common Stock), and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 4) be issuable on such exercise, by a fraction of which (i) the numerator is the Exercise Price which would otherwise (but for the provisions of this Section 4) be in effect, and (ii) the denominator is the Exercise Price in effect on the date of such exercise. -6- 5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND RECLASSIFICATIONS. In case at any time or from time to time, the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which, in the case of Common Stock, are provided for in Section 4), then and in each such case the holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) which such holder would hold on the date of such exercise if on the date of distribution of such other or additional stock or other securities and property, or on the record date fixed for determining the shareholders entitled to receive such other or additional stock or other securities and property, such holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date thereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivision (b) of this Section 5) receivable by such holder as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 3 and 4. 6. NOTICES OF RECORD DATE. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, -7- recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date specified in such notice on which any such action is to be taken. 7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, all shares of Common Stock from time to time issuable on the exercise of the Warrant; the shares of Common Stock which the holder of this Warrant shall receive upon exercise of the Warrant will be duly authorized, validly issued, fully paid and non-assessable. 8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) No holder of this Warrant shall, as such, be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon such holder, as such, any of the rights of a stockholder of the Company until such holder shall have delivered formal notice to the Company of an intention to exercise this Warrant, tendered promptly the consideration required for exercise (whether cash or securities), exercised the Warrant, and been issued shares of Common Stock in accordance with the provisions hereof. (b) Neither this Warrant nor any shares of Common Stock purchased pursuant to this Warrant shall be registered under the Securities Act of 1933 (the "SECURITIES ACT") and applicable state securities laws. Therefore, the Company may require, as a condition of allowing the transfer or exchange of this Warrant or such shares, that the holder or transferee of this Warrant or such shares, as the case may be, furnish to the Company an opinion of -8- counsel acceptable to the Company to the effect that such transfer or exchange may be made without registration under the Securities Act and applicable state securities laws. The certificates evidencing the shares of Common Stock issued on the exercise of the Warrant shall bear a legend to the effect that the shares evidenced by such certificates have not been registered under the Securities Act and applicable state securities laws. (c) This Warrant is not transferable or assignable to any party without the prior written consent of the Company, and accompanied by an opinion of counsel satisfactory to the Company that such transfer is permissible under applicable law. 11. NOTICES. All notices and other communications from the Company to the holder of this Warrant shall be mailed by (i) first class mail, postage prepaid, (ii) electronic facsimile transmission, or (iii) express overnight courier service, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 12. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant and the shares of Common Stock underlying this Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Delaware. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. REGISTRATION RIGHTS. 13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a 510(k) or other application has been filed for the BioLoc Technology or DynaGen Technology and this Warrant is at least sixty percent (60%) vested in accordance with Section 1.3, at the request of the holders of at least seventy percent (70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE SHARES"), the Company shall use its best efforts to file a registration statement on Form S-3 (to the extent such form is available to the Company) covering the resale of the Shares underlying this Warrant (the "REGISTRABLE SHARES"). The Company will so notify each holder of Registrable Shares, including each holder who has a right to acquire Registrable Shares, and then shall, as expeditiously as possible (using commercially reasonable efforts), effect qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify, and shall thereafter maintain the effectiveness of such Registration Statement until such shares have been sold or until the registration obligation terminates under Section 13.3. The Company shall not be required to effect more than one (1) registration on Form S-3. The Company's obligations under this Section shall expire three (3) years after the issuance date of this Warrant. The Company agrees to qualify or register the Shares under applicable state law, list the shares wherever the Common Stock is then listed and supplement the prospectus as necessary from time to time to keep it current. -9- 13.2 EXPENSES. In the case of a registration under Section 13.1, the Company shall bear the expenses of any filing of any registration, including but not limited to printing legal and accounting expenses, Securities and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' commissions or discounts attributable to the securities being offered and sold by the holder of this Warrant, or the fees and expenses of any counsel, tax advisor or accountant selected by such holder in connection with the registration of the securities. 13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the Company under this Section 13 to register the securities shall expire and terminate at such time as the holder of this Warrant shall be entitled or eligible to sell the shares of Common Stock underlying this Warrant without restriction and without a need for the filing of a registration statement under the Securities Act of 1933, including without limitation, for any resales of restricted securities made pursuant to Rule 144 as promulgated by the Securities and Exchange Commission. 13.4 DELAY OF REGISTRATION. For a period not to exceed 120 days, the Company shall not be obligated to prepare and file, or be prevented from delaying or abandoning, a registration statement pursuant to this Section 13 at any time when the Company, in its good faith judgment by the management of the Company, with the advice of counsel, reasonably believes: (I) that the filing thereof at the time requested, or the offering of Registrable Shares pursuant thereto, would materially and adversely affect (a) a pending or scheduled public offering or private placement of the Company's securities, (b) an acquisition, merger, consolidation or similar transaction by or of the Company, (c) pre-existing and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (d) the financial condition of the Company in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which may be required thereby; and (II) that the failure to disclose any material information with respect to the foregoing would cause a violation of the Securities Act or the Securities Exchange Act of 1934. 13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the event that the Company registers any of the Registrable Shares under the Securities Act, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, as incurred, and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, -10- for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Securities were registered under the Securities Act, in any filing with any state securities commission in any preliminary or amended preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration. Notwithstanding the foregoing, the Company shall have no obligation to indemnify any holder, underwriter or controlling person if: (i) such untrue statement or omission was made in such registration statement, preliminary or amended preliminary prospectus or final prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares (in the case of indemnification of such holder), such underwriter (in the case of indemnification of such underwriter) or such controlling person (in the case of indemnification of such controlling person) expressly for use therein, or (ii) in the case of a sale directly by such holder of Registrable Shares (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution solely on behalf of such holder of Registrable Shares), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus copies of which were delivered to such holder of Registrable Shares or such underwriter on a timely basis, and such holder of Registrable Shares failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. 14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., Eastern Daylight Saving Time, on December 31, 2003. Dated: December 12, 1996 DYNAGEN, INC. ATTEST: By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar Title: Secretary Title: Executive Vice President FORM OF SUBSCRIPTION (TO BE SIGNED ONLY ON EXERCISE OF WARRANT) TO DynaGen, Inc. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, ........ shares of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes payment of $........ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to .............., whose address is ................................ Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) -------------------- FORM OF ASSIGNMENT (TO BE SIGNED ONLY ON TRANSFER OF WARRANT) For value received, the undersigned hereby sells, assigns, and transfers unto .................. the right represented by the within Warrant to purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware corporation, to which the within Warrant relates, and appoints .......................... Attorney to transfer such right on the books of DynaGen, Inc., a Delaware corporation, with full power of substitution in the premises. Dated: (Signature must conform to name of holder as specified on the face of the Warrant) (Address) Signed in the presence of: EX-4.S 8 COMMON STOCK PURCHASE WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO. COMMON STOCK PURCHASE WARRANT Warrant No. W-CS-6 Number of Shares: 50,000 DynaGen, Inc. Void after January 15, 2002 (except as otherwise set forth in Section 2 below) 1. Issuance. This Warrant is issued to Leonardo G. Zangani by DynaGen, Inc., a Delaware corporation (hereinafter with its successors called the "Company"). THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 2 BELOW. NO PORTION OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY. 2. Purchase Price; Number of Shares. Subject to the terms and conditions hereinafter set forth, the registered holder of this Warrant (the "Holder") is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the office of the Company, 99 Erie Street, Cambridge, Massachusetts 02139, or such other office as the Company shall notify the Holder of in writing, to purchase from the Company at a price per share (the "Purchase Price") of $1.97 an aggregate of fifty thousand (50,000) fully paid and nonassessable shares of Common Stock, $.01 par value, of the Company (the "Common Stock"), subject to the conditions stated immediately below. Commencing on the date hereof, the Holder may exercise this Warrant for 25,000 of such shares. If, within six months of the date hereof, the Company renews or extends the original term of the Consulting Agreement between the Company and L.G. Zangani, Inc. (the "Agreement"), then, commencing on the date that is six months from the date hereof, the Holder may exercise this Warrant for the remaining shares of Common Stock subject hereto. If the Company does not renew or extend the original term of the Agreement within six months of the date hereof, such remaining shares shall not be exercisable, and the portion of the Warrant relating to such remaining shares shall be automatically canceled and extinguished and shall be without further effect. Furthermore, if the Company does not renew or extend the original term of the Agreement within six months hereof, notwithstanding anything to the contrary herein, this Warrant shall expire at the close of business on December 31, 1999 and shall be void thereafter. Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. -2- 3. Payment of Purchase Price. Except as set forth in Section 4 below, the Purchase Price shall be paid in cash or by check. 4. Net Issue Election. The Holder may elect to receive, without the payment by the Holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issue election notice annexed hereto duly executed, at the office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) A where X = the number of shares to be issued to the Holder pursuant to this Section 4. Y = the number of shares covered by this Warrant, subject to Section 2 hereof, in respect of which the net issue election is made pursuant to this Section 4. A = The "Fair Market Value" of one share of Common Stock. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 4. For purposes of this Section 4, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") means: (i) if the Company's Common Stock is then traded on any nationally recognized stock exchange or quoted on the Nasdaq National Market System or SmallCap Market, the average of the closing sale prices for the 10 trading days preceding the Determination Date, as reported by such exchange or system, as reported in The Wall Street Journal or any other publication, including the NASD; (ii) if the Company's Common Stock is then traded on the over-the-counter market, the average of the closing bid and closing asked prices for the 15 trading days preceding the Determination Date, as reported in The Wall Street Journal or by any market maker; or (iii) if quotations for the Company's Common Stock are not readily available as set forth in (i) or (ii) above, then as determined in good faith by the Company's Board of Directors upon a review of all relevant factors, including, without limitation, the price at which shares of the Company's Common Stock could reasonably be expected to be sold in an arms-length transaction, for cash, other than on an installment basis, to a person not employed by, controlled by, in control of or under common control with the Company, which determination by the Board of Directors shall give due consideration to recent transactions involving shares of -3- the Common Stock, if any, revenues and earnings of the Company to the date of such determination, if any, projected revenues and earnings of the Company, the effect of the transfer restrictions to which the shares are subject under law, the absence of a public market for the Common Stock, and such other matters as the Board of Directors deems pertinent. Such determination by the Board of Directors shall be conclusive and binding. 5. Partial Exercise. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 6. Issuance Date. The person or persons in whose name or names any certificate representing shares of Common Stock is issued hereunder shall be deemed to have become the holder of record of the shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed. 7. Expiration Date. This Warrant shall expire at the close of business on January 15, 2002 (unless it expires earlier under Section 2 hereof) and shall be void thereafter. 8. Reserved Shares; Valid Issuance. The Company covenants that it will at all times from and after the date hereof reserve and keep available such number of its authorized shares of Common Stock, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 9. Registration Rights. The Company hereby grants the following registration rights with respect to the shares covered by this Warrant (subject to Section 2 hereof): 9.1 "Piggy-Back" Registrations. If at any time the Company shall determine to register in a public offering for the account of selling stockholders (and not for its own account) under the Securities Act of 1933, as amended, any of its Common Stock, it shall send to the Holder written notice of such determination and, if within 15 days after receipt of such notice, the Holder shall so request in writing, the Company shall use its best efforts to include in such registration statement all or any part of the shares covered by this Warrant that the Holder requests to be registered. This right shall not apply to a registration of shares of Common Stock on Form S-8 or Form S-4 (or their then equivalents) relating to shares of Common Stock to be issued by the Company in connection with any acquisition of any entity or business or shares of Common Stock issuable in connection with any stock option, stock purchase or other employee benefit plan. Notwithstanding anything to the contrary in this Section 9, the Company shall not be required to effect a registration pursuant to this Section 9 for fewer than the total number of shares issuable or issued pursuant to this Warrant (as set forth in Section 2 hereof) at the time of filing of such registration statement. -4- If, in connection with any offering of Common Stock to be sold by selling stockholders, the managing underwriter or the Company shall impose a limitation on the number of shares of Common Stock that may be included in any such registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution of the Common Stock and to maintain a stable market for the equity securities of the Company, then the Company shall be obligated to include in such registration statement only such limited portion of the shares covered by this Warrant with respect to which the Holder has requested inclusion hereunder. 9.2 Expenses. In the case of a registration under this Section 9, the Company shall bear all costs and expenses of each such registration, including, but not limited to, printing, legal and accounting expenses, Securities and Exchange Commission and National Association of Securities Dealers filing fees and all related "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' commissions or discounts attributable to the shares covered by this Warrant being offered and sold by the Holder, or the fees and expenses of any counsel for the Holder in connection with the registration of such shares. 9.3 Expiration of Registration Rights. The obligations of the Company under this Section 9 shall expire on the earlier of (i) the date on which the shares covered by this Warrant shall have become transferable (whether or not so transferred) in accordance with the resale provisions of Rule 144, or any successor rule or provision, under the Securities Act of 1933, as amended, and (ii) the date that this Warrant terminates. 10. Dividends. If after the date hereof the Company shall subdivide the Common Stock, by split-up or otherwise, or combine the Common Stock, or issue additional shares of Common Stock in payment of a stock dividend on the Common Stock, the number of shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, and the Purchase Price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in the case of a combination. 11. Mergers and Reclassifications. If after the date hereof there shall be any reclassification, capital reorganization or change of the Common Stock (other than as a result of a subdivision, combination or stock dividend provided for in Section 10 hereof), or any consolidation of the Company with, or merger of the Company into, another corporation or other business organization (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Common Stock), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company (each an "Acquisition Event"), then, as a condition of such Acquisition Event, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right to purchase, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such Acquisition Event by a holder of the -5- number of shares of Common Stock which might have been purchased by the Holder immediately prior to such Acquisition Event, and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. Notwithstanding anything to the contrary herein, the Holder must exercise this Warrant prior to the consummation of the Acquisition Event, and if this Warrant is not so exercised, it shall terminate upon the consummation of such Acquisition Event. 12. Fractional Shares. In no event shall any fractional share of Common Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this Section 12, be entitled to receive a fractional share of Common Stock, then the Company shall issue the next higher number of full shares of Common Stock, issuing a full share with respect to such fractional share. 13. Certificate of Adjustment. Whenever the Purchase Price is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of the principal financial or accounting officer of the Company setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 14. Notices of Record Date, Etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, (b) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which any such reclassification, reorganization, consolidation, merger, sale or conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record in respect of such event are to be determined. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken. -6- 15. Amendment. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company. 16. Warrant Register; Transfers, Etc.; Warrantholder Not Deemed Stockholder. A. The Company will maintain a register containing the name and address of the Holder and its assignees, if applicable. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at its address as shown on the warrant register. B. Without the prior written consent of the Company, this Warrant may not be transferred by the Holder. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction) and of indemnity reasonably satisfactory to the Company. D. No holder of this Warrant shall, as such, be deemed the holder of the Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon such holder, as such, any of the rights of a stockholder of the Company until such holder has delivered formal notice to the Company of an intention to exercise this Warrant, tendered promptly the consideration required for exercise (whether cash or securities), exercised the Warrant, and been issued shares of Common Stock in accordance with the provisions hereof. 17. Governing Law. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts. 18. Business Days. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or Sunday or a legal holiday in Massachusetts, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday or Sunday or such a legal holiday. Dated: January 15, 1997 DYNAGEN, INC. (Corporate Seal) By: /s/ Dhananjay G. Wadekar Attest: Title: Executive Vice President /s/ Dennis R. Bilodeau - --------------------------- -7- Form of Subscription To:____________________ Date:_________________________ The undersigned hereby subscribes for __________ shares of Common Stock covered by this Warrant. The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below: ------------------------------ Signature Form of Net Issue Election Notice To:____________________ Date:_________________________ The undersigned hereby elects under Section 4 to surrender the right to purchase _______ shares of Common Stock pursuant to this Warrant. The certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. ------------------------------ Signature EX-10.D 9 1991 STOCK PLAN DYNAGEN, INC. 1991 STOCK PLAN 1. PURPOSE. This 1991 Stock Plan (the "Plan") is intended to provide incentives: (a) to the officers and other employees of DynaGen, Inc., a Delaware corporation (the "Company"), its parent (if any) and any present or future subsidiaries of the Company (collectively, "Related Corporations") by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO" or "ISOs"); (b) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"); (c) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with awards of stock in the Company ("Awards"); and (d) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") or by a committee appointed by the Board (the "Committee"); provided, that, to the extent required by Rule 16b-3, or any successor provision ("Rule 16b-3"), of the Securities Exchange Act of 1934, with respect to specific grants of Stock Rights, the Plan shall be administered by a disinterested administrator or administrators within the meaning of Rule 16b-3. Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine the employees of the Company and Related Corporations (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) to whom Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards may be granted or Purchases made; (iii) determine the option price of shares subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase 2 price of shares subject to each Purchase; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any, and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted to members of the Board consistent with the provisions of the first sentence of paragraph 2(A) above, if applicable. All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who are either (i) eligible for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to him of Stock Rights. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee of the Company or any Related Corporation. Those officers and directors of the Company who are not employees may not be granted ISOs under the Plan. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a Purchase. Granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 3 4. STOCK. The stock subject to Options, Awards and Purchases shall be authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 2,600,000, subject to adjustment as provided in paragraph 13. Any such shares may be issued as ISOs, Non-Qualified Options or Awards, or to persons or entities making Purchases, so long as the number of shares so issued does not exceed such number, as adjusted. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject to such Options shall again be available for grants of Stock Rights under the Plan. No person may be granted Options to acquire, in the aggregate, more than 750,000 of shares of Common Stock under the Plan during any one fiscal year. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such person under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time after October 14, 1991 and prior to October 14, 2001. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to paragraph 16. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share specified in the agreement relating to each Non-Qualified Option granted under the Plan shall in no event be less than the minimum legal consideration required therefor under the laws of the State of Delaware or the laws of any jurisdiction in which the Company or its successors in interest may be organized. B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. C. $100,000 ANNUAL LIMITATION ON ISOS. Each eligible employee may be granted ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, the value of Common Stock 4 (determined at the time ISOs were granted) which is subject to ISOs that become exercisable for the first time by such employee during any calendar year does not exceed $100,000. Any options granted to an employee in excess of such amount will be granted as Non-Qualified Options. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the NASDAQ National Market List, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the NASDAQ National Market List. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10, each Option shall expire on the date specified by the Committee, but not more than (i) ten years and one day from the date of grant in the case of Non-Qualified Options, (ii) ten years from the date of grant in the case of ISOs generally, and (iii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. 5 D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). E. EXTENSION OF EXERCISE PERIOD. Notwithstanding any provision herein to the contrary, the Committee may, in its discretion, extend the exercise period with respect to any Non-Qualified Option. 9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the termination of 6 the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or successor statute. 11. ASSIGNABILITY. No Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or, with respect to Non-qualified Options only, pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. During the lifetime of the optionee each ISO shall be exercisable only by him. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to him hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such 7 Options any equity securities of the successor corporation; or (iii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iv) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof; or (v) accelerate the date of exercise of such Options or of any installment of such Options; or (vi) terminate all Options in exchange for the right to participate in any stock option or other employee benefit plan of any successor corporation. C. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he would have received if he had exercised his Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments. E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall 8 determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. If any person or entity owning restricted Common Stock obtained by exercise of a Stock Right made hereunder receives shares or securities or cash in connection with a corporate transaction described in subparagraphs A, B or C above as a result of owning such restricted Common Stock, such shares or securities or cash shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board. 14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, or (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Stock Right, (c) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Stock Right and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (d) at the discretion of the Committee, by any combination of (a), (b) and (c) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c) or (d) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on October 14, 1991, subject (with respect to the validation of ISOs granted under the Plan) to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to October 14, 1992, any grants of ISOs under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on October 14, 2001 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Stock Rights may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be materially increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (c) the provisions of paragraph 6(B) regarding 9 the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without his consent, under any Stock Right previously granted to him. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS. The Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 20) or the vesting of restricted Common Stock acquired on the exercise of a Stock Right hereunder, the Company, in accordance with Section 3402(a) of the Code, may require the optionee, Award recipient or purchaser to pay additional withholding taxes in respect of the amount that is considered compensation includible in such person's gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for less than its fair market value, or (iv) the vesting of restricted Common Stock acquired by exercising a Stock Right, on the grantee's payment of such additional withholding taxes. 20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. A 10 Disqualifying Disposition is any disposition (including any sale) of such Common Stock before the later of (a) two years after the date the employee was granted the ISO, or (b) one year after the date the employee acquired Common Stock by exercising the ISO. If the employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of the State of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 11 AMENDMENTS BOARD STOCKHOLDER APPROVAL DATE APPROVAL DATE AMENDMENT December 9, 1996 January 30, 1997 Section 4: Change number of shares authorized to be issued under the Plan from 1,200,000 shares to 2,600,000 shares and add the following paragraph: No person may be granted Options to acquire, in the aggregate, more than 750,000 of shares of Common Stock under the Plan during any one fiscal year. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such person under the Plan. EX-10.AA 10 NON-QUALIFIED STOCK OPTION AGREEMENT DYNAGEN, INC. Non-Qualified Stock Option Agreement DYNAGEN, INC., a Delaware corporation (the "Company"), hereby grants this 28th day of October, 1996, to Michael Sorell (the "Optionee"), an option to purchase a maximum of 330,000 shares (the "Option Shares") of Common Stock, $.01 par value (the "Common Stock"), at the price of $1.31 per share, on the following terms and conditions: 1. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This Option is intended to be a Non-Qualified Option (rather than an incentive stock option), and the Board of Directors or any committee appointed by the Board to administer the Company's options (hereinafter, all references to the "Committee" mean the committee so appointed or the Board if no such committee has been appointed) intends to take appropriate action, if necessary, to achieve this result. This Option is in addition to any other options heretofore or hereafter granted to the Optionee by the Company, but a duplicate original of this instrument shall not affect the grant of another option. 2. EXTENT OF OPTION IF BUSINESS RELATIONSHIP CONTINUES. If the Optionee has continued to serve the Company in the capacity of an employee, officer, director, agent, advisor, or consultant (such service is described herein as maintaining or being involved in a "Business Relationship" with the Company), on the following dates, the Optionee may exercise this Option for the number of Option Shares set opposite the applicable date: Less than one year from the date hereof - No shares One year but less than two years from - 25% of the Option Shares the date hereof Two years but less than three years from - An additional 35% of the the date hereof Option Shares Three years from the date hereof - An additional 40% of the Option Shares The foregoing rights are cumulative and, while the Optionee continues to maintain a Business Relationship with the Company, may be exercised up to and including the date which is seven (7) years from the date this Option is granted. All of the foregoing rights are subject to Sections 3 and 4, as appropriate, if the Optionee ceases to maintain a Business Relationship with the Company or dies, becomes disabled or undergoes dissolution while involved in a Business Relationship with the Company. 3. TERMINATION OF BUSINESS RELATIONSHIP. If the Optionee ceases to maintain a Business Relationship with the Company, other than by reason of death or disability as defined in Section 4, no further installments of this Option shall become exercisable and this Option shall terminate after the passage of thirty (30) days from the date the Business Relationship ceases, but in no event later than the scheduled expiration date. In such a case, the Optionee's only rights hereunder shall be those which are properly exercised before the termination of this Option. 4. DEATH; DISABILITY. If the Optionee dies while involved in a Business Relationship with the Company, this Option may be exercised, to the extent of the number of Option Shares with respect to which the Optionee could have exercised it on the date of his death, by his estate, personal representative or beneficiary to whom this Option has been assigned pursuant to Section 9, at any time within 180 days after the date of death, but not later than the scheduled expiration date. If the Optionee's Business Relationship with the Company is terminated by reason of disability, this Option may be exercised, to the extent of the number of Option Shares with respect to which the Optionee could have exercised it on the date the Business Relationship was terminated, at any time within 180 days after the date of such termination, but not later than the scheduled expiration date. At the expiration of such 180-day period or the scheduled expiration date, whichever is the earlier, this Option shall terminate and the only rights hereunder shall be those as to which the Option was properly exercised before such termination. If the Optionee is a corporation, partnership, trust or other entity that is dissolved, liquidated, becomes insolvent or enters into a merger or acquisition with respect to which such Optionee is not the surviving entity at the time when such entity is involved in a Business Relationship with the Company, this Option shall immediately terminate as of the date of such event, and the only rights hereunder shall be those as to which this Option shall immediately terminate as of the date of such event, and the only rights hereunder shall be those as to which this Option was properly exercised before such dissolution or other event. 5. PARTIAL EXERCISE. Exercise of this Option up to the extent above stated may be made in part at any time and from time to time within the above limits, except that this Option may not be exercised for a fraction of a share unless such exercise is with respect to the final installment of stock subject to this Option and a fractional share (or cash in lieu thereof) must be issued to permit the Optionee to exercise completely such final installment. Any fractional share with respect to which an installment of this Option cannot be exercised because of the limitation contained in the preceding sentence shall remain subject to this Option and shall be available for later purchase by the Optionee in accordance with the terms hereof. 6. PAYMENT OF PRICE. The option exercise price is payable in United States dollars and may be paid: (a) in cash or by check, or any combination of the foregoing, equal in amount to the option exercise price; or (b) in the discretion of the Committee, in cash, by check, by delivery of shares of the Company's Common Stock having a fair market value (as determined by the Committee) equal as of the date of exercise to the option exercise price, or by any combination of the foregoing, equal in amount to the option exercise price. -2- If the Optionee delivers shares of Common Stock held by the Optionee (the "Old Stock") to the Company in full or partial payment of the option exercise price, and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Optionee and the Company, the Common Stock received by the Optionee on the exercise of this Option shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Optionee paid for such Common Stock by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. 7. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option, the Optionee agrees that a purchase of Option Shares under this Option will not be made with a view of their distribution, as that term is used in the Securities Act of 1993, as amended (the "Securities Act"), unless in the opinion of counsel to the Company such distribution is in compliance with or exempt from the registration and prospectus requirements of the Securities Act and applicable state securities laws, and the Optionee agrees to sign a certificate to such effect at the time of exercising this Option and agrees that the certificate for the Option Shares so purchased shall be inscribed with a legend to ensure compliance with the Securities Act and applicable state securities laws. 8. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this Agreement, this Option may be exercised by written notice to the Company, at the principal executive office of the Company, or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this Option and the number of Option Shares in respect of which it is being exercised and shall be signed by the person so exercising this Option. Such notice shall be accompanied by payment of the full exercise price of such Option Shares, and the Company shall deliver a certificate representing such Option Shares as soon as practicable after the notice shall be received. The certificate for the Option Shares as to which this Option shall have been so exercised shall be registered in the name of the person so exercising this Option (or, if this Option shall be exercised by the Optionee and if the Optionee shall so request in the notice exercising this Option, shall be registered in the name of the Optionee and another person jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person exercising this Option. In the event this Option shall be exercised, pursuant to Section 4 hereof, by any person other than the Optionee, such notice shall be accompanied by appropriate proof of the right of such person to exercise this Option. All Option Shares that shall be purchased upon the exercise of this Option as provided herein shall be fully paid and nonassessable. 9. OPTION NOT TRANSFERABLE. This Option is not transferable or assignable except by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder. 10. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this Option imposes no obligation on the Optionee to exercise it. -3- 11. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. The Company and any related corporations are not by this Option obligated in any manner to continue to maintain a Business Relationship with the Optionee in any capacity whatsoever. 12. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Optionee shall have no rights as a stockholder with respect to Option Shares subject to this Agreement until a stock certificate therefore has been issued to the Optionee and is fully paid for by the Optionee. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, the Optionee's rights with respect to this Option shall be adjusted as follows: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the Option Shares shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than an Acquisition as defined in Section 16) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, the Optionee upon exercising this Option shall be entitled to receive for the purchase price paid upon such exercise the securities he would have received if he had exercised the Option prior to such recapitalization or reorganization. C. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, this Option shall terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. D. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of price of shares subject to this Option. No adjustments shall be made for dividends paid cash or in property other than securities of the Company. E. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. In the event of any stock dividend, stock split, combination, recapitalization or other similar change in the capital structure of the Company, this Option and the Option price shall be equitably adjusted and, in lieu of issuing fractional shares upon exercise thereof, this Option (and the corresponding Option Shares) shall be rounded upward or downward to the nearest whole share (rounding upward for all amounts equal to or in excess of .51). In particular, without affecting the generality of the foregoing, it is understood that for the purposes of Sections 2 through 4 hereof, inclusive, maintaining or being involved in a Business -4- Relationship with the Company includes maintaining or being involved in a Business Relationship with its parent (if any) and any present or future subsidiaries of the Company. 14. WITHHOLDING TAXES. The Optionee hereby agrees that the Company may withhold from the Optionee's wages or other remuneration the appropriate amount of federal, state and local taxes attributable to the Optionee's exercise of any installment of this Option. At the Company's discretion, the amount required to be withheld may be withheld in cash from such wages or other remuneration, or in kind from the Common Stock otherwise deliverable to the Optionee on exercise of this Option. The Optionee further agrees that, if the Company does not withhold an amount from the Optionee's wages or other remuneration sufficient to satisfy the Company's withholding obligation, the Optionee will reimburse the Company on demand, in cash, for the amount underwithheld. 15. NO EXERCISE OF OPTION IF BUSINESS RELATIONSHIP TERMINATED FOR MISCONDUCT. If the Business Relationship of the Optionee is terminated for "Misconduct," this Option shall terminate on the date of such termination and this Option shall thereupon not be exercisable to any extent whatsoever. "Misconduct" is conduct, as determined by the Board of Directors, involving one or more of the following: (i) disloyalty, gross negligence, dishonesty or breach of fiduciary duty to the Company; or (ii) the commission of an act of embezzlement, fraud or deliberate disregard of the rules or policies of the Company which results in loss, damage or injury to the Company; or (iii) the unauthorized disclosure of any trade secret or confidential information of the Company; or (iv) the commission of an act which constitutes unfair competition with the Company or which induces any customer of the Company to break a contract with the Company. In making such determination, the Board of Directors shall act fairly and in utmost good faith. 16. ACCELERATION AND VESTING OF OPTION FOR BUSINESS COMBINATIONS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), then this Option shall, if the Committee so designates, become fully vested and exercisable by the Optionee immediately prior to the consummation of such Acquisition. 17. GOVERNING LAW; SUCCESSORS AND ASSIGNS. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of Delaware and shall be binding upon the heirs, personal representatives, executors, administrators, successors and assigns of the parties. 18. EXPRESS CONSIDERATION FOR OPTION GRANT. This Option is being granted to the Optionee on the express condition and for the express consideration that the Optionee has previously executed, or will immediately execute and deliver in connection with this Option grant, a form of nondisclosure, assignment of inventions and/or noncompetition agreement (or any combination thereof) satisfactory to the Company. If such agreement has not been executed, or if the Optionee refuses to execute such agreement, this Option may be canceled by the Company in its sole and absolute discretion. -5- 19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof. -6- IN WITNESS WHEREOF, the Company and the Optionee have caused this instrument to be executed, and the Optionee whose signature appears below acknowledges acceptance of an original copy of this Agreement. /s/ Michael Sorell _____________________________ DYNAGEN, INC. SIGNATURE OF OPTIONEE Michael Sorell /s/ Indu A. Muni _____________________________ By:_____________________________ Print Name of Optionee President _____________________________ Title: ___________________________ Street Address - ----------------------------- City State Zip Code - ----------------------------- Social Security Number -7- EX-21 11 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 ---------- SUBSIDIARY OF THE COMPANY NAME JURISDICTION ---- ------------ Able Laboratories, Inc. Delaware EX-23.A 12 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23a INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Number 33-66826 (dated August 2, 1993 on Form S-8 ), Number 33-78546 (dated May 2, 1994 on Form S-8), Number 33-71416 (Post-Effective Amendment No.3 to Form S-1 on Form S-3 dated May 16, 1995), Number 33-95432 (dated August 4, 1995 on Form S-8), Number 333-1748 (dated March 28, 1996 on Form S-3) and Number 333-19471 (dated January 9, 1997 on Form S-3) of DynaGen, Inc. of our report dated February 14, 1997, except for Note 14 as to which the date is March 7, 1997, appearing in DynaGen, Inc.'s Transition Report on Form 10-K for the six months ended December 31, 1996. WOLF & COMPANY, P.C. Boston, Massachusetts April 29, 1997 EX-27 13 FINANCIAL DATA SCHEDULE EXHIBIT 27
5 6-Mos Dec-31-1996 Dec-31-1996 2,112,300 3,004,700 261,932 0 451,883 6,311,428 1,011,782 (337,813) 7,463,149 809,133 1,600,000 0 0 291,062 4,762,954 7,463,149 358,467 359,908 356,312 4,687,745 (157,788) 0 136,091 (4,306,140) 0 (4,306,140) 0 0 0 (4,306,140) (.15) 0
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