-----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, S3849XbNQ44KNWIaWuM3ehYfQ5y8389xZaIJ3DUR+ceXe+LGUs/8MdKBffeL+xW/ rLtoTg0kk4Emotytg4meXA== 0000950135-98-002440.txt : 19980416 0000950135-98-002440.hdr.sgml : 19980416 ACCESSION NUMBER: 0000950135-98-002440 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11352 FILM NUMBER: 98594995 BUSINESS ADDRESS: STREET 1: RIVERSIDE TECHNOLOGY CENTER STREET 2: 840 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6174912527 MAIL ADDRESS: STREET 1: RIVERSIDE TECHNOLOGY CENTER STREET 2: 840 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-K405 1 FORM 10-K 1 ================================================================================ 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 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE 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) 840 MEMORIAL DRIVE, 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.[X] As of March 31, 1998, 14,667,951 shares of the registrant's common stock, $.01 par value ("Common Stock"), were issued and outstanding. The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 31, 1998, based upon the closing price of such stock on the Nasdaq Stock Market's SmallCap Market ("Nasdaq") on that date (approximately $0.53) was $7,613,034. ================================================================================ 2 SPECIAL CONSIDERATIONS During the year ended December 31, 1997, Dynagen, Inc. (Dynagen" or the "Company") experienced a substantial decrease in the Company's stock price and market capitalization, continued losses from operations including an unexpected loss of its Superior Pharmaceutical Company subsidiary and substantial and continuing dilution to existing stockholders due to the conversion features of convertible securities sold by the Company. The following special considerations should be carefully noted by the reader: Financial Condition of the Company For the year ended December 31, 1997, the Company incurred net losses of approximately $12,241,278. For the three months ended March 31, 1998, the Company expects to incur substantial net losses. As of December 31, 1997, the Company had approximately $697,045 in cash and cash equivalents and a net worth of $2,624,628. The Company's current liabilities, as of such date, aggregated approximately $25,644,392. The Company expects its cash needs for the next twelve months to be approximately $7,000,000. The Company does not presently have adequate cash from operations to meet these needs. In order to meet its needs for cash to fund its operations, the Company must obtain additional financing and renegotiate the terms of its current arrangements with creditors. The Company is presently in default under a number of its arrangements, agreements and instruments with creditors, with the result that the Company's obligations under such agreements and instruments may be accelerated. If the Company is unable to obtain significant additional financing or to renegotiate its arrangements with existing creditors, it may be obliged to seek protection from its creditors under the bankruptcy laws. See "Management's Discussion and Analysis -- Liquidity and Capital Resources"; the financial statements and notes thereto included as part of this Report; and "Risk Factors -- Financial Condition." Company's Ability to Continue As A Going Concern The Company's independent auditors have issued an opinion on the financial statements of the Company, as of December 31, 1997 and for the year then ended which includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. Among the reasons cited by the independent auditors as raising substantial doubt as to the Company's ability to continue as a going concern are the following: the Company has incurred recurring losses from operations resulting in an accumulated deficit and a working capital deficiency at December 31, 1997. In addition, the Company has debt obligations which are in default, and a liability in connection with its acquisition of Superior Pharmaceutical Company. The ability of the Company to use cash generated by its subsidiary of Superior Pharmaceutical Company is restricted under the terms of Superior's loan agreement. These circumstance raise substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to secure significant additional financing or to renegotiate its agreements with its existing creditors, it may be obliged to seek protection from its creditors under the bankruptcy laws. See "Management's Discussion and Analysis -- Liquidity and Capital Resources"; the financial statements and notes thereto included as part of this Report; and "Risk Factors -- Ability to Continue As A Going Concern." Company's Common Stock May Be Delisted From Nasdaq Stock Market On February 26, 1998, the Company received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that it does not meet the applicable listing requirements and that the Company's Common Stock is therefore subject to delisting. The Company has contested the delisting of its securities in accordance with Nasdaq's procedures. The Company does not meet the Nasdaq listing requirements. Although Nasdaq has the discretion to grant exceptions to the listing requirements, there is no assurance that it will do so in the Company's case. The Company anticipates that, if its Common Stock is delisted from the Nasdaq SmallCap Market, it will continue to trade on the Boston Stock Exchange and may also be quoted on the OTC Bulletin Board. However, delisting of the Company's Common Stock from the Nasdaq SmallCap Market could have a material adverse effect on the liquidity of the Common Stock and on the Company's ability to raise capital necessary for the Company's continued operations. See "Risk Factors -- Common Stock Subject to Delisting From Nasdaq SmallCap Market." 2 3 Subsequent Events Several initial events have occurred since the end of the Company's latest fiscal year, including the following: On August 20, 1997, the Company completed a placement of Series C and Series D Convertible Preferred Shares with an investor. Under the terms of the agreement, the Company was required to file registration of both Series C and D Preferred Shares within 45 days of the completion of the placement. The Company filed the registration statement in March 1998, but it has not been declared effective. In March 1998, the Company issued to the investor an 8% convertible debenture in the amount of $328,500 in settlement of penalties due to the late filing of the registration statement. This amount has been reflected as a liability in the December 31, 1997 Financial Statements. In addition, in March 1998 the Company issued a warrant to the investor to purchase, at any time in the next three (3) years, 1% of the fully diluted issued and outstanding shares at the time of the exercise for $150,000. On March 19, 1998, the investor purchased an additional $500,000 of Series D Preferred Shares from the Company and waived certain restrictions which limited the drawdown to $400,000 per month. On February 26, 1998, the Company received $500,000 from the placement of a 7% convertible debenture from another investor. On March 30, 1998, the investor exchanged this debenture for a $500,000 tranche of Series D Preferred Shares and also received an 8% convertible debentures in the amount of $87,500. This debenture is convertible into common stock at the market price of the common stock on the date of the conversion. On March 31, 1998, the Company sold another tranche of $500,000 of Series D Preferred Stock, along with an 8% convertible debenture in the amount of $87,500 convertible into common stock at the market price, to another investor. During the months of February and March of 1998, the Chairman and Executive Vice President and the President and Chief Executive Officer of the Company and their family members advanced the Company $265,000 towards general working capital purposes. The loans carry no interest, are unsecured, and subordinated and can only be repaid through conversion into equity. On March 2, 1998, the Company through its subsidiary, Generic Distributions, Incorporated ("GDI"), completed the acquisition of Generic Distributors Limited Partnership ("GDLP"), of Monroe, LA. In connection with the acquisition, the Company paid the limited partnership $1,200,000 in cash, and $1,050,000 in Series E Convertible Preferred Shares and 1,500 shares of Series F Convertible Preferred Stock valued at $100,000, for a total purchase price of $2,350,000. The Preferred Shares are convertible beginning 12 months from the closing into the Company's common shares at the then prevailing market prices. The Series F Preferred Stock is convertible into $100,000 in value of the Company's Common Stock commencing 120 days after the closing. In connection with this transaction, GDI received $1,200,000 in a five-year term loan from Fleet Bank. The loan carries an interest of LIBOR plus 3%, is payable in quarterly installments of principal and interest and matures on April 26, 2003. Fleet Bank also established a revolving line of credit for general working capital in the amount of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are secured by all of the assets of GDI and Able and a pledge of all of the common stock of GDI, and are guaranteed by the Company. In addition, the Company entered into employment and consulting agreements with the sellers which provide, among other things, for annual compensation and a signing bonus of 1400 shares of Series F Preferred Stock, convertible into $100,000 of the Company's Common Stock commencing 120 days after the closing. At a special meeting held on March 4, 1998, the stockholders approved a recapitalization effecting a one-for-ten reverse split of the Company's Common Stock. As a result of the stockholder vote, effective on the close of business March 10, 1998, the Company's authorized shares of Common Stock were 75,000,000 and the total number of shares of Common Stock outstanding were approximately 7,500,000. On March 24, 1998, the Company suspended conversions of its Series A and B Preferred Shares into the Company's common stock. The purpose of this suspension is to give the Company time to coordinate its efforts to negotiate orderly settlements of these outstanding convertible preferred shares. 3 4 On March 30, 1998, the Board of Directors unanimously voted to issue options, warrants and the Company's common stock to several individuals and entities for services rendered to date and for future considerations. The Board also authorized the issuance of 800,000 shares for product development and FDA related consulting services to various entities. The Company granted warrants to purchase 650,000 shares to two consulting firms in connection with the Company's investor relations program. All of the above grants of shares, options and warrants are subject to vesting and may be canceled by the Board at its option. In March 1998, the Company received a letter from NASDAQ advising that the Company did not meet the minimum listing criteria and will be subject to delisting. The Company has responded to NASDAQ. To date, the Company has not been informed of a decision from NASDAQ concerning its continued listing. These events could cause the Company's results of operations to be substantially different from those described in the financial statements as of December 31, 1997. See the financial statements and notes thereto, particularly Note 13 entitled "Subsequent Events," included as part of this Report. PART I ITEM 1. BUSINESS INTRODUCTION DynaGen, Inc. ("DynaGen" or the "Company") develops, manufactures and distributes generic pharmaceuticals. From its inception in 1988 until 1996, the Company was focused primarily on being a new drug development and licensing company. However, during 1996 DynaGen began expanding its business focus to building a generic pharmaceutical business while licensing its existing portfolio of therapeutic and diagnostic products to larger pharmaceutical companies for further development and commercialization in return for milestone payments and royalties. The Company has also contributed two technologies to its majority-owned subsidiaries for further development, licensing and commercialization. In August 1997, the Company completed a multicenter pivotal Phase 3 study of NicErase(R)-SL, a non-nicotine smoking cessation therapy. The study, conducted on 750 smokers in three centers, showed efficacy in one of three centers. While the study showed that higher compliance leads to statistically significant results on the product, DynaGen did not have the necessary resources to continue development and clinical testing. In December 1996, the Company licensed worldwide exclusive rights to develop a lobeline sulfate nasal delivery formulation to Nastech Pharmaceutical Company, Inc. 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. 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 entered into an agreement with Henry Schein, Inc., of Melville, NY. Henry Schein, the largest direct marketer of health care products and services to office-based health care practitioners, including dental practices and laboratories, plans to initiate the marketing of the product this spring. In 1996, 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. In March 1998, the Company completed a reverse split of its stock -- one share for every ten shares outstanding. Multisource Business The U.S. multisource 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 acceptance of generic drugs by physicians, pharmacists and consumers. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs. They are required to meet the same governmental 4 5 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 than those of their brand-name equivalents. To successfully participate in the multisource business, DynaGen intends to compete with other generic companies through vertical integration of two key elements of the multisource business, such as manufacturing and distribution. In August 1996, the Company acquired substantially all of the assets of Able Laboratories, Inc. ("Able"), including its 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 Able's manufacturing capability, validated several of the acquired products, retrained employees in quality assurance procedures, and 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 Company is currently marketing three of the acquired ANDA products. 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 several 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, providing an opportunity for competitors to introduce generic equivalents. Kali's management and its scientific staff have significant experience in developing and obtaining approvals on generic drugs. DynaGen believed that, by initially outsourcing such development and approval activities, it would have benefitted from the experience of a highly seasoned team of scientists. Under this agreement, Kali has developed its first formulation for labetalol hydrochloride (brand names: Normadyne(R)and Trandate(R)), a treatment for hypertension. DynaGen filed its first ANDA for labetalol HCl in January 1998. The patent on the drug expires in August 1998. There is no assurance that the filing will be approved by the FDA or if approved, that the Company will be able to generate sales for this drug. Kali is now developing formulations for other drugs which are at various stages of development and bioequivalency testing. To complement the acquisition of Able, in June 1997 the Company acquired Superior Pharmaceutical Company ("Superior") through a merger of Superior and a wholly-owned subsidiary of DynaGen. Superior has its primary operations in Cincinnati, OH where it employs approximately 65 people and has 4,000 square feet of office, warehouse and distribution space. Superior has additional sales people in Memphis, TN where the sales force operates under the name of Williams Generics. In 1997, Superior experienced a sharp decline in sales and earnings compared to 1996. This was due to the loss of sales of methylphenidate (brand name: Ritalin(R)) which was being manufactured and supplied to Superior under Superior label. This product resulted in sales of over $7.5 million for Superior in 1996 and $5.1 in 1997. The decline in sales and margins was also due to the loss of key personnel at Superior immediately after the acquisition, which resulted in a loss of business with certain federal and corporate accounts. There was further erosion in margins as price pressure continued in the generic industry. Recently, however, as marginal manufacturers have either shut down operations or discontinued production, the prices and margins are improving. There can be no assurance, however, that these actions will improve Superior's performance in the near future. In the past six months, Superior has hired and trained additional sales staff, upgraded its systems and instituted controls to improve margins. Superior is also aggressively bidding on federal and state contracts and has won supply agreements with the governments of the states of Florida, Ohio, Louisiana and Texas. In March 1998, the Company, through its wholly-owned subsidiary, Generic Distributors Incorporated ("GDI"), acquired substantially all of the assets of Generic Distributors Limited Partners, a distributor of generic drugs. GDI, based in Monroe, LA, employs 23 people and operates out of an 11,000 sq. ft. facility. DynaGen believes that GDI complements Superior by providing next-day delivery service to the south and southeastern United States. GDI's customer base is primarily independent pharmacies in the states of Louisiana, Texas, Arkansas, Alabama and Mississippi. Management believes that GDI has the potential to 5 6 grow its business through supply opportunities with institutional, hospital and nursing home pharmacies. There can be no assurance that such opportunities will arise, or that DynaGen will be able to exploit any such opportunities profitably. The purchase price of $2,350,000 for GDI was financed by a $1,200,000 five-year secured term loan from Fleet Bank and $1,050,000 in DynaGen convertible preferred shares. The preferred shares cannot be converted into DynaGen common stock until one year from the date of closing. After that, the preferred shares can only be converted at a rate of $40,000 per week at the prevailing market price. Fleet Bank has also provided $300,000 in a second working capital line of credit. Specialty Pharmaceutical Business DynaGen's specialty pharmaceutical business strategy is to create a business based on branded 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 the area of compliance enhancement packaging. DynaGen has identified near-term opportunities in compliance enhancement packaging in the areas of women's healthcare products. 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." Licensed Products Since its inception, DynaGen's business consisted of developing proprietary diagnostic and therapeutic products. These products included NicErase-SL, a sublingual tablet containing the non-nicotine ingredient lobeline for smoking cessation, and OrthoDyn(R), a bone-repair cement based on a family of bioresorbable and biocompatible polymers derived from compounds naturally occurring in the body. The Company has also developed a diagnostic product portfolio targeted for infectious disease markets. The Company has licensed the following products for further development, testing, manufacturing and marketing to other healthcare companies. NicErase-SL. In August 1997, the Company completed a Phase 3 trial with NicErase-SL conducted on 750 smokers at three sites. NicErase-SL is a sublingual tablet formulation that contains lobeline sulfate as the active ingredient. The results of the Phase 3 study demonstrated efficacy in one of three sites and also showed that higher compliance rates could significantly affect results. The Company decided that it did not have the resources to pursue further trials with this formulation. The Company has licensed the rights for lobeline to Nastech Pharmaceutical Company of Hauppage, NY, for the development of a lobeline nasal delivery formulation. Under the terms of the agreement, Nastech will be responsible for the development of nasal delivery formulation(s), all remaining preclinical animal studies and limited human studies and shall bear all the development costs. DynaGen and Nastech will cooperate in licensing the product to a third party, and will share equally in licensing fees and in royalties. There can be no assurance that Nastech will 6 7 successfully develop a nasal delivery formulation of the lobeline sulfate-based product, that such a formulation will lead to higher compliance that the Company believes is necessary to demonstrate its efficiency, or that higher compliance rates, if achieved, will in fact demonstrate that the nasal delivery formulation is effective for smoking cessation. See "Management's Discussion and Analysis -- Certain Factors That May Affect Future Results." Orthodyn Bioresorbable Bone Cement. OrthoDyn, a bone repair cement, 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 PLC entered into an agreement providing Smith & Nephew with an exclusive period of 12 months ending on May 1, 1998 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." Diagnostic Products The health care industry is shifting to a managed care approach which integrates prevention, diagnostic, therapeutic and compliance technologies into a panel of products for specific disease management. The Company has developed diagnostic products which may help in the prevention and diagnosis of disease and in the determination of compliance with smoking cessation programs. NicCheck(R) I. NicCheck I is an FDA-cleared 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. 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. In October 1997, DynaGen signed a non-exclusive distribution agreement for NicCheck I with Henry Schein, Inc., of Melville, NY. Henry Schein, the largest direct marketer of health care products and services to office-based health care practitioners, including dental practices and laboratories, intends to initiate the marketing of the product in the spring of 1998. Henry Schein serves more than 230,000 customers worldwide from its strategically located distribution centers in the U.S. and Europe. 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, the Pacific Rim countries, China, India, and Japan. DynaGen has received clearance under three premarket notification (510(k)) 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 7 8 rights for MycoAKT to a third party. The Company intends to continue 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. Apex Pharmaceuticals, Inc. Apex Pharmaceuticals, Inc., a wholly owned subsidiary of DynaGen, has been formed to further develop the Company's immune modulation drug technology for the treatment of autoimmune diseases, including a potentially life threatening autoimmune disorder known as immune thrombocytopenic purpura (ITP). ITP is caused when the immune system destroys platelets which are involved in the clotting process that prevents uncontrolled bleeding. In human clinical studies overseas, no significant adverse effects were noted due to administration of the drug. Furthermore, preliminary efficacy was demonstrated in ITP patients who had failed treatment with corticosteroids, the first line of treatment for ITP. The product has also shown preliminary efficacy in the treatment of HIV infection. The Company has obtained an orphan drug designation form the FDA for the use of the product in the treatment of ITP, and a notice of allowance from the U.S. patent office for its application in the treatment of HIV infection. Patent applications for its use in ITP have been filed. The Company has discontinued further R&D on this product and is seeking licensing opportunities. There is no assurance that the Company will successfully license this technology or receive any benefits (See "Risk Factors -- Dependence on Patents and Proprietary Technology" and "Products in Early Stage of Development"). Biotrack, Inc. BioTrack Inc., another DynaGen subsidiary, was formed in 1997 to further develop and commercialize a technology involving tumor localization and tracking, which will allow breast biopsies to be performed in a cost-effective and less invasive manner. In the United States, breast cancer is the leading cause of cancer death among women aged 40 to 55. The direct cost for screening, diagnosis and treatment of breast cancer in the U.S. is approximately $8.5 billion, of which more than $4 billion is for diagnostic procedures. Current breast biopsy procedures involve an initial mammogram, the insertion of wires (needles) in the breast to mark the location of the tumor and a second mammogram to confirm the location. The surgeon then uses the wires as guides to excise the lesion(s). This is an invasive and expensive procedure which can also be emotionally traumatic to the patient. The BioTrack technology uses an imaging and tracking system to locate the lesion and guide the surgeon's tool, such as a scalpel, to the lesion without the need for guide wires. This results in a much less intrusive procedure, greater accuracy of lesion localization, substantially reduced procedural costs, and improved patient comfort. In December 1997, the Company initiated bridge financing for BioTrack through a placement agent. To date, the Company has completed the sale of units consisting of promissory notes and shares of BioTrack common stock in the amount of $300,000. The proceeds are being utilized for research and development and general working capital purposes. 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. The Company is also marketing its generic therapeutic products under its own "Able Laboratories" name, as well as under its "Superior Pharmaceutical Company" name. The Company markets its diagnostic products under its own name primarily through distributors. Superior markets its product line to independent pharmacies, pharmacy chains (such as CVS, Walgreens), nursing homes and federal, state and county governments. Over 50% of its sales have been to independent pharmacies who purchase almost on a weekly or biweekly basis. Sales to other customers are under long term contracts which are either negotiated or bid by the sales staff. 8 9 Superior employs over 40 telemarketers who have been given training in products and sales techniques. Superior has developed a database of independent pharmacies with the relevant information. The pharmacies routinely purchase from several wholesalers and distributors. In addition to competitive price, service, delivery, accuracy of shipment, and selling technique of the telemarketers are factors in getting the business. Superior allocates territories and accounts to its telemarketers who develop a relationship with the pharmacists. Superior supports its sales staff through marketing and promotional events including mass mailings, price specials, and general advertising. All sales people are compensated based on their performance. GDI's marketing organization is similar to that of Superior. Almost 80% of GDI's sales are to independent pharmacies in the southern states with minimal sales to the chains and institutional pharmacies. Both Superior and GDI generate approximately 75% of their business with existing customers. 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." 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 Approximately 90% of the Company's sales are from its operations at Superior and GDI. Both Superior and GDI generally ship orders within 24 to 48 hours of receipt. Therefore, the Company's backlog does not bear a significant relationship to its overall sales. The dollar amount of backlog orders for the Company's manufacturing subsidiary as of December 31, 1997 was approximately $210,000. 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. Delays in revalidating the manufacturing process or in obtaining new materials 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." Superior Pharmaceutical Company stocks and sells over 2,000 different items (stock keeping units or SKUs) consisting of tablets, capsules, injectables, vaccines, over-the-counter products, vitamins and hospital supplies. A broad product line of this nature is necessary to service the customer base consisting of independent pharmacies, pharmacy chains and institutional pharmacies. Superior negotiates and issues purchase orders, normally in the beginning of each year, to vendors and manufacturers for these items. The supply agreements are complex, as they normally provide for volume discounts (rebates), shelf stock adjustments for lower prices, and returns of unsold goods. The competition in generic drug manufacturers is intense and the pressure has resulted in steadily declining prices. If multiple vendors are not available (i.e., if a sole generic approval is granted by the FDA), the prices generally remain high and the suppliers do not offer the traditional discounts. 9 10 In general, the nature of the multisource business is such that there are almost always multiple suppliers available for the products. Superior has traditionally enjoyed good relationships with its vendors and has been able to obtain preferential treatment due to its prominent sales force and its sales volume. GDI's agreements with its suppliers, most of whom are common to Superior, are similar in nature. The two companies are now combining their purchasing functions, wherever possible, and are issuing purchase orders to vendors to take advantage of higher volume. Both Superior and GDI consider their relationship with the vendors satisfactory. The Company's strategy with respect to its diagnostic products is to license such products for manufacture and distribution by third parties. The Company has license agreements for the manufacture and distribution of its MycoAKT and MycoDot products. MycoDot is produced by a single licensed manufacturer in India. NicCheck I is produced by a contract manufacturer in the United States. The Company is thus dependent upon third parties for the manufacture and distribution of its diagnostic products. The Company's inability to maintain satisfactory third party manufacturing and distribution arrangements could have a materially adverse effect on its ability to deliver its diagnostic products on a timely basis. The company's Cambridge, Massachusetts and South Plainfield, New Jersey facilities are registered with the FDA and are 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 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. Both Superior and GDI compete with other distributors and wholesalers of generic drugs. The wholesalers are much larger, have a national network of warehouse and distribution centers, and carry a full-line of products, including branded (non-generic) pharmaceuticals. The wholesalers are also better capitalized and obtain the best (or lowest) price from the vendors. Other distributors are small, privately-held companies that distribute generic drugs to regional pharmacies. Major wholesalers include Cardinal Health, Inc., McKesson Corp., and Andox Corporation. Superior and GDI believe that the size of the Company and the price are not the only factors in achieving sales. Superior and GDI employ a direct telemarketing force (comprising approximately 64 telemarketers 10 11 currently). The telemarketers call upon customers, assist them in providing critical product information, and supply almost on a "just in time" basis. Several customers, mostly the independent pharmacies, order product at least two or three times a week to minimize inventory cost. The telemarketing force and an efficient shipping operation provides a competitive advantage for Superior and GDI. Several other distributors, who are smaller, less automated, and have a smaller telemarketing force are not as efficient as Superior. 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." GOVERNMENT REGULATION The Company's therapeutic and diagnostic products are 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 governmental agencies of 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 abbreviated new drug applications ("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, 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 and 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" NDA -- 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 Application (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 processes both generally take a number of years and involve 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, pre-clinical animal testing first must be conducted to establish the safety and 11 12 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 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. The 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 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 provides market exclusivity of seven years for the first approved drug for certain rare diseases or conditions defined in the law. A grant of exclusivity under this statute 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 may 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 under certain circumstances also has authority to withdraw approval of an ANDA 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. 12 13 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 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, 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 (IDE) 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 required to meet mandated FDA manufacturing requirements. This would include 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 requisite approvals from the FDA will be granted for 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 13 14 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 operational 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 has also been provided to Able's employees. As generic drug distributors, Superior Pharmaceutical Company and GDI sell products in almost every state in the U.S. They are each required to have a wholesale distributor's license as well as a license for controlled substances for the states of Ohio and Louisiana, respectively. The licenses that a distributor is required to carry for other states varies from state to state. For example, Kentucky, Massachusetts, Nebraska, New York and New Jersey, among others, do not require that an out-of-state distributor obtain any licenses as a condition to conducting trade in their states. Other states, such as Idaho, Illinois, Maryland, Oregon and Montana, among others, require that an out-of-state distributor obtain a wholesale distribution license as well as a controlled substance license from that particular state in order to conduct business. Thus, the distributor is required to ascertain which licenses are required from each state and then obtain them accordingly. The licenses, once obtained, need to be renewed periodically including the payment of fees which vary from state to state. Furthermore, since several products carried by the Company's distribution subsidiaries are controlled substances, the distribution subsidiaries are each required to detail and hold a Federal license for controlled substances from the Drug Enforcement Agency. 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 presently maintains product liability insurance for those products in clinical investigations. 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 fiscal year ended December 31, 1997, the Company expended $3,220,283 on research and development activities. For the transition period ended December 31, 1996 the Company expended $1,092,253 on research and development activities. For the fiscal years ended June 30, 1996 and 1995, the Company expended $3,118,145 and $1,718,006, 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 14 15 product, bioresorbable bone cement product, its immunomodulator and tumor localization 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(R) 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. In January 1998, the company received a U.S. patent for its NicCheck(R) technology for the detection of nicotine and its metabolites in urine. 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 if challenged. 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 gain access to the Company's trade secrets or proprietary 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 for the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. The manufacture and sale of certain products 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 necessary, 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 such 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. Other trademarks included in this Report are the property of their respective owners. EMPLOYEES As of March 20, 1998, the Company and its subsidiaries had 133 full-time employees, of whom 115 were employed in selling, general and administrative activities and 18 were employed in research and development and manufacturing of its products. Three of the Company's employees hold doctoral degrees. None of the Company's employees are represented by a union. The Company believes its relationship with its employees is good. 15 16 ITEM 2. PROPERTIES The Company maintains its principal executive offices at 840 Memorial Drive in Cambridge, Massachusetts. The premises, which consist of approximately 12,262 square feet of space, are leased from an unaffiliated party, for a term expiring on September 19, 2002. 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. Superior is located in a 37,300 square foot facility in Cincinatti, Ohio. The property is leased from a partnership of three of Superior's former stockholders for a term expiring on March 31, 2015. GDI is located in a 11,000 square foot leased facility in Monroe, Louisiana. The property is leased from an unaffiliated party for a term expiring on August 31, 1998. 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 respective 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 year ended December 31, 1997. 16 17 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 "DYGND" and "DYGNW," respectively, and on the Boston Stock Exchange under the symbols "DYG" and "DYGW," respectively. 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.
COMMON PUBLIC CLASS A PUBLIC STOCK(1) WARRANTS(1) WARRANTS(2) --------------- --------------- --------------- HIGH LOW HIGH LOW HIGH LOW ------ ------ ------ ------ ------ ------ Fiscal 1996 July 1 to September 30, 1995................... $65.47 $16.25 $50.00 $ 5.00 $51.87 $10.00 October 1 to December 31, 1995................. 38.88 18.75 28.12 10.00 28.13 5.62 January 1 to March 31, 1996.................... 36.56 23.13 24.37 13.12 -- -- April 1 to June 30, 1996....................... 31.87 21.25 25.00 11.25 -- -- Transition Period 1996 July 1 to September 30, 1996................... $25.63 $15.00 $16.23 $ 8.74 -- -- October 1 to December 31, 1996................. 18.75 10.31 10.00 1.56 -- -- Fiscal 1997 January 1 to March 31, 1997.................... $24.69 $12.81 $15.00 $ 3.75 -- -- April 1 to June 30, 1997....................... 16.88 9.69 7.50 4.06 -- -- July 1 to September 30, 1997................... 10.63 3.75 5.94 0.63 -- -- October 1 to December 31, 1997................. 5.94 1.25 3.75 0.63 -- --
- --------------- (1) Prices have been adjusted to reflect a one-for-ten reverse split of the Company's outstanding shares of common stock effective March 10, 1998. (2) The Company's Class A Public Warrants in October 1995. On March 31, 1998, the last reported sale prices of the Company's Common Stock and Public Warrants as reported on Nasdaq were $0.56 and $.16, respectively. As of March 31, 1998, based upon information from the Company's transfer agent, there were approximately 739 holders of record of the Company's Common Stock. As of such date, the Company estimated that there are approximately 12,000 beneficial holders of the Company's Common Stock. SALES OF UNREGISTERED SECURITIES Between October 10, 1997 and December 5, 1997, the Company sold 2,500 shares of Series A Preferred Stock and Common Stock Purchase Warrants to purchase an aggregate of 20,000 shares of Common Stock to unaffiliated accredited investors in private placements in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. The firm of H.J. Meyers & Co., Inc. acted as placement agent for the sale of these securities. The Company received $250,000 in proceeds from the sale of the shares. The terms of the subscription provided that the shares of Series A Preferred Stock would be convertible into Common Stock at the lesser of (i) 120% of the average closing bid price of the Company's Common Stock as reported by the Nasdaq SmallCap Market (or such other exchange on which the Common Stock is then traded) for the five trading days immediately preceding the date on which the Securities and Exchange Commission (the "Commission") declared effective the registration statement to be filed registering the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the warrants or (ii) a discount on the average closing bid price of the Company's Common Stock as reported by the Nasdaq SmallCap Market (or such other exchange on which the Common Stock is then traded) for the five trading days immediately preceding the date on which the Series A Preferred Stock is converted. The terms of the warrants 17 18 provided that they would be exercisable at a price equal to 120% of the average closing bid price of the Company's Common Stock as reported by the Nasdaq SmallCap Market (or such other exchange on which the Common Stock is then traded) for the five trading days immediately preceding the date on which the Commission declared effective the registration statement to be filed registering the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the warrants. See Note 13 to the financial statements included in this Report, entitled "Subsequent Events," for information relating to sales of unregistered securities during the first quarter of 1998. 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.
TRANSITION YEAR ENDED PERIOD ENDED YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------------------------------------- 1997 1996 1996 1995 1994 1993 ------------ ------------ ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues................ $ 13,920,904 $ 359,908 $ 555,745 $ 497,553 $ 437,005 $ 883,910 Costs and Expenses...... 24,087,512 4,687,745 5,899,650 3,836,295 4,264,141 4,388,575 Loss From Continuing Operations............ (12,241,278) (4,306,140) (5,097,419) (3,042,383) (3,645,804) (3,405,387) Loss From Discontinued Operations............ -- -- -- -- (14,945) (48,095) Net Loss................ (12,241,278) (4,306,140) (5,097,419) (3,042,383) (3,660,749) (3,453,482) Loss Per Share: From Continuing Operations......... (3.82) (1.50) (2.09) (1.44) (2.21) (2.64) From discontinued Operations......... -- -- -- -- -- Net Loss.............. (3.82) (1.50) (2.09) (1.44) (2.21) (2.64) Weighted Average Number of Shares Outstanding........... 3,204,163 2,879,412 2,443,395 2,117,970 1,651,712 1,307,056
AT AT AT JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------------------------------------- 1997 1996 1996 1995 1994 1993 ------------ ------------ ---- ---- ---- ---- BALANCE SHEET DATA: Total Assets............ $ 30,145,300 $ 7,463,149 $11,576,666 $ 5,114,021 $ 7,834,706 $ 5,602,289 Convertible Note Paya- ble................... 535,000 1,600,000 2,000,000 -- -- -- Long term debt.......... 328,500 -- -- -- -- -- Warrant put liability... 750,594 -- -- -- -- -- Total Liabilities....... 26,723,486 2,409,133 2,733,032 587,207 420,964 441,171 Working Capital......... 11,711,296 5,502,295 10,203,693 4,102,747 6,967,894 4,584,747 Stockholders' Equity.... 2,624,628 5,054,016 8,843,634 4,526,814 7,413,742 5,161,118
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note: The information set forth below should be read in connection with the financial statements and notes thereto, as well as other information contained in this Report which could have a material adverse effect on the Company's financial condition and results of operations. The reader's attention is directed, in 18 19 particular, to the matters described under the headings "Special Considerations" and "Risk Factors" contained elsewhere in this Report. OVERVIEW The Company develops and markets proprietary and generic therapeutic and diagnostic products for the human health care market. The Company has begun expanding its business focus from being a development and licensing company to building a diversified health care 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 purchased all of the outstanding shares of 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 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 Year Ended December 31, 1997 as Compared with the Six-Month Period Ended December 31, 1996 Revenues for the year ended December 31, 1997 were $14,009,730 versus $359,908 for the six-month Transition Period ended December 31, 1996. This increase of $13,323,758 is primarily the result of product sales by the Company's wholly-owned generic pharmaceutical subsidiaries, Able (acquired in August 1996) and Superior (acquired in June 1997). During the six-month Transition Period ended December 31, 1996, the Company was primarily a research and development company with limited reserves. The Company's revenues for the Transition Period were derived primarily from the post-acquisition sales of Able. Cost of product sales was approximately 97% of product sales for the year ended December 31, 1997 due to low production and sales levels at Able which did not support the fixed manufacturing costs of the Able facility. Cost of product sales for Superior for the year was approximately 81%. During the six-month Transition Period ended December 31, 1996, the cost of sales was 99% of product sales, again reflecting extremely low utilization of Able's manufacturing capacity. Research and development expenses for the year ended December 31, 1997 were $3,220,283 versus $1,092,253 for the six-month Transition Period ended December 1996. 1997 R&D expenses were primarily the result of the NicErase-SL Phase 3 clinical trials now concluded, and the NicErase-SL development program which has been discontinued. The Company is also developing several generic versions of branded pharmaceuticals to support its generic drug business. Selling, general and administrative expenses for the year ended December 31, 1997 were $7,611,578 versus $3,239,180 for the six-month Transition Period ended December 31, 1996. 1997 expenses were primarily attributable to acquisition and business development costs, compensation expense of $663,130 recognized from the issuance of stock options and warrants, and the inclusion in 1997 of selling, general and administrative expenses of the Company's subsidiary operations at Able and Superior. Investment income was $120,359 for the year ended December 31, 1997 as compared to $157,788 for the six-month Transition Period ended December 31, 1996, as the Company had less funds available for investment. Interest and financing expenses of $2,283,855 for the year ended December 31, 1997, compared to 19 20 $136,091 for the six-month Transition Period ended December 31, 1996, relate primarily to private placements of equity as well as private debt financing for the Superior acquisition. Six-Month 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. 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 carry forwards of approximately $23,460,000 and 20 21 $19,270,000 respectively. In addition, the Company had Federal and state research tax credit carry forwards 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. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, the Company had a working capital deficit of $12,790,390, compared to working capital of $3,902,295 at December 31, 1996. Cash and investment securities were $697,045 at December 31, 1997 compared to $5,117,000 at December 31, 1996. Working capital was used primarily to 21 22 fund the Company's operating losses, including approximately $2,900,000 of operating losses of its Able subsidiary, as well as accounting charges in the amount of approximately $4,000,000 relating to contingent liabilities associated with the Superior acquisition and research and development costs of approximately $3,000,000. The Company expects its cash needs for the next 12 months to be approximately $7,000,000. Of this amount, approximately $3,000,000 is expected to be general and administrative and approximately $4,000,000 is expected to be for working capital. The Company expects to generate the needed cash through additional financing activities. If the Company is not able to raise the needed financing, it may need to seek the protection of the bankruptcy courts. See "Special Considerations -- Financial Condition of the Company" and "Risk Factors -- Financial Condition". In June 1997, the Company completed the acquisition of Superior Pharmaceutical Company, of Cincinnati, Ohio, for a purchase price of $6.5 million in cash, notes and stock. The Company guaranteed that the selling shareholders would receive at least $5,000,000 in the stock value as of June 1998. The agreement provides that the Company will make up any shortfall in this guaranteed stock value through the issuance of additional stock and cash. Superior markets and distributes generic prescription and over-the-counter pharmaceuticals to independent, chain and institutional pharmacies throughout the United States. The Company financed this acquisition by issuing Series A and Series B Preferred Shares which yielded $6,100,000 and subordinated debt of $3,000,000 obtained from two institutional lenders. The Company is currently trying to renegotiate its obligations to the selling shareholders of Superior. No assurance can be given that the Company will be successful in this effort. The Company also invested $1,500,000 in Superior towards working capital as required by the secured lender. Superior has a $9,000,000 secured revolving facility through Huntington National Bank, of Cincinnati, Ohio. Furthermore, subsequent to the acquisition of Superior in June 1997, Superior experienced loss of key personnel, declining revenues, erosion of margins and an overall decline in its business. These factors have resulted in the Company not meeting certain loan covenants stipulated by the secured and subordinated lenders. As a result, the secured lender has agreed to extend the credit line for the next 60 days and upon review of the Company's performance may consider further extension. The Company was unable to meet the third quarterly payment of $515,625 to the selling shareholders which was due on March 31, 1998. The agreement provides that the selling shareholders of Superior may draw this payment out of its operating cash flows provided that Superior and DynaGen meet the loan covenants. The Company is also in default of the $535,000 note which matured on February 2, 1998. The Company has begun initial discussions with the selling shareholders of Superior to renegotiate the payment of $5,000,000 in equity due in June 1998. While these discussions have been positive, there is no assurance that the parties will come to an agreement or that such an agreement, if reached, will be on terms favorable to the Company. Failure to reach an agreement will result in further defaults on the Company's loan covenants and may allow the selling shareholders certain rights under the purchase and sale agreement, including but not limited to the pledge of all of Superior's shares. While neither the selling shareholders and the secured lender or the subordinated lender have informed the Company of their intentions to exercise their rights under various agreements, there is no assurance that the Company will successfully renegotiate the covenants, come in compliance with the existing or proposed covenants and reclassify its obligations as either long-term debt or equity. In such circumstances, the Company will continue to show substantial working capital deficit and continue to be in default of its agreements. If the Company is not able to renegotiate the selling shareholders of Superior or renegotiate or meet its obligations to Huntington National Bank, the Company may need to seek the protection of the bankruptcy courts. The Company continues to operate its Able Laboratories, Inc. manufacturing facility for manufacture and distribution of generic drugs. In March 1997, the Company entered into an agreement with Kali Laboratories for development and clinical testing of certain prescription pharmaceuticals. Under this agreement, Kali would be reimbursed for its development efforts on a milestone basis and receive royalties from the sale of the products. Able has a working capital deficit and management expects Able will require approximately $4,000,000 in the next 12 months to continue operations. No assurance can be given that such financing will be available upon reasonable terms. If the Company cannot obtain sufficient financing or 22 23 otherwise meet Able's requirements, the Company may be required to close that operation or seek protection of the bankruptcy courts. The Company's private placement of Series A and Series B Preferred Shares allowed investors to convert into shares of common stock at a floating discount to the market of approximately 25%. This investment, along with the outlicensing of the Company's lead product, NicErase-SL, and continued losses at both DynaGen and Able resulted in a severe negative impact on the Company's stock price. The stock price was further depressed due to below market conversions and selling of common shares by the investors of Series A and Series B Preferred Shares. As a result, the Company reached its limit of 75,000,000 authorized shares. On March 4, 1998, the Company held a special meeting of stockholders and approved a one for ten reverse split of its outstanding share. As a result, at the effective date of the reverse split, March 10, 1998, 75,000,000 shares of common stock, $0.01 par value per share, were authorized, and approximately 7,500,000 were issued and outstanding. Management has initiated intensive reviews of its operations and is implementing plans to cure defaults, raise additional equity, and improve the liquidity and cash resources for general working capital purposes. Specifically, at the corporate level, the Company has discontinued all R&D activity either through terminating the programs or outlicensing the products to other companies. The Company's lead product to date, NicErase-SL, has been licensed to Nastech Pharmaceutical, of Hauppauge, NY. The Company has reduced its workforce by approximately 40 employees through termination and attrition. The Company is also negotiating to sublease all or part of its current facilities in Cambridge, MA to further reduce its overhead expenses. In 1998, management expects to maintain a skeleton staff of approximately seven full-time and four part-time employees to manage the corporate functions of the Company. Management is also actively reviewing every cost center for further optimization and cost reductions. In November 1997, the Company initiated the same measures at its Able manufacturing facility. The Company has reduced its workforce by 50 percent through terminations and attrition. Management has actively initiated programs to increase sales of its products to existing customers and is seeking to bring back customers it has lost over the past two years. The Company is also renegotiating its development agreement with Kali Laboratories to minimize further cash outlays for product development. The Company has also received offers from two service contractors for clinical testing in return for deferred compensation, warrants and royalty payments on new products. The Company has also initiated a modest internal R&D program at Able to develop prescription drugs which do not require FDA approval. These "grandfathered" products are expected to generate revenues by December 1998. Management expects that given the capital resources, the operations at Able Laboratories could increase sales and result in marginal losses beginning in the year 1999. Management in conjunction with key personnel at Superior has implemented a program to reverse the decline in the general business of the Company. Specific actions taken at Superior include recruitment of key personnel, optimization of the product line, reduction in the G&A expenses and an aggressive program to seek competitive business in both the government as well as corporate sectors. Superior is also negotiating with its primary vendors' supply agreements on favorable terms which will improve the gross margins and make Superior more competitive in the marketplace. To date, the Company has met substantially all of its requirements for capital through the sale of its securities. The negative impact of the events in 1997 has therefore severely limited the Company's ability to raise further capital in a conventional sale of its securities. The Company plans to raise capital in order to finance the working capital requirements. 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. Specifically, the Company is negotiating with an investment banker to provide the Company with intermediate financing. It is anticipated that this financing will be either repaid or converted into equity at the option of the Company at least 12 months from the closing. Management believes that any financing which will create short-term supply or additional common shares in the market would only result in further depression of the price, making it even further difficult to raise capital. Therefore, the Company intends to seek financing primarily from those sources who will be long-term investors. In view of the Company's current stock price and its financial condition, it is exceedingly difficult to find such investors. However, the Company has had limited and 23 24 preliminary discussions with investors and the above-referenced investment banker and believes that the short-term financing could become available over the next several weeks. The Company plans to use the interim financing for general working capital, partial payment to the creditors and the limited internal R&D program at Able. If the Company cannot raise such financing, it may be forced to seek the protection of the bankruptcy courts. See "Special Considerations" and "Risk Factors -- Financial Condition." The Company is also pursuing additional sources of capital for the long-term needs of the Company. The Company has engaged a merchant banking firm to seek direct investments into its subsidiaries, specifically Able Laboratories, in return for equity and royalties. There is no assurance that such financing will be available, and if available will be on terms favorable to the Company. Furthermore, management has evaluated proposals which may include raising additional capital through the sale of registered securities. The Company has filed a registration statement on Form S-3 for the sale of Series D Convertible Preferred Shares. The registration statement has not been declared effective. The Company expects to raise substantial additional capital through this arrangement. If the Company cannot raise such financing, it may be forced to seek the protection of the bankruptcy courts. See "Special Considerations" and "Risk Factors -- Financial Condition." The Company has also been working with its trade creditors to reduce its obligations. A substantial majority of the creditors have accepted the Company's payments plans, which include periodic payments, discounts of amounts outstanding, and acceptance of Company shares. RISK FACTORS 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. Financial Condition. For the year ended December 31, 1997, the Company incurred net losses of approximately $12,241,278. For the three months ended March 31, 1998, the Company expects to incur substantial net losses. As of December 31, 1997, the Company had approximately $698,045 in cash and cash equivalents and a net worth of $2,624,628. The Company's current liabilities, as of such date, aggregated approximately $25,644,392. The Company expects its cash needs for the next twelve months to be approximately $7,000,000. The Company does not presently have adequate cash from operations to meet these needs. In order to meet its needs for cash to fund its operations, the Company must obtain additional financing and renegotiate the terms of its current arrangements with creditors. The Company is presently in default under a number of its arrangements, agreements and instruments with creditors, with the result that the Company's obligations under such agreements and instruments may be accelerated. If the Company is unable to obtain significant additional financing or to renegotiate its arrangements with existing creditors, it may be 24 25 obliged to seek protection from its creditors under the bankruptcy laws. See "Special Considerations -- Company's Common Stock May Be Delisted From Nasdaq Stock Market; "Management's Discussion and Analysis -- Liquidity and Capital Resources"; and the financial statements and notes thereto included as part of this Report. Ability to Continue As A Going Concern. The Company's independent auditors have issued an opinion on the financial statements of the Company, as of December 31, 1997 and for the year then ended which includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. Among the reasons cited by the independent auditors as raising substantial doubt as to the Company's ability to continue as a going concern are the following: the Company has incurred recurring losses from operations resulting in an accumulated deficit and a working capital deficiency at December 31, 1997. In addition, the Company has debt obligations which are in default and a liability in connection with its acquisition of Superior Pharmaceutical Company, and the equity of Superior Pharmaceutical Company is restricted under the terms of Superior's loan agreement. These circumstance raise substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to secure significant additional financing or to renegotiate its agreements with its existing creditors, it may be obliged to seek protection from its creditors under the bankruptcy laws. See "Special Considerations -- Company's Ability to Continue As A Going Concern"; "Management's Discussion and Analysis -- Liquidity and Capital Resources"; and the financial statements and notes thereto included as part of this Report. Common Stock Subject to Delisting From Nasdaq SmallCap Market. The Company has received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that it does not meet the applicable listing requirements and that the Company's Common Stock is therefore subject to delisting. The Company has contested the delisting of its securities in accordance with Nasdaq's procedures. The Company does not meet the Nasdaq listing requirements. Although Nasdaq has the discretion to grant exceptions to the listing requirements, there is no assurance that it will do so in the Company's case. The Company anticipates that, if its Common Stock is delisted from the Nasdaq SmallCap Market, it will continue to trade on the Boston Stock Exchange and may also be quoted on the OTC Bulletin Board. However, delisting of the Company's Common Stock from the Nasdaq SmallCap Market could have a material adverse effect on the liquidity of the Common Stock and on the Company's ability to raise capital necessary for the Company's continued operations. See "Special Considerations -- Company's Common Stock May Be Delisted From Nasdaq Stock Market." History of Losses; Anticipation of Future Losses. The Company has incurred operating losses since its inception and has an accumulated deficit of $35,615,716 as of December 31, 1997. The Company incurred a net loss of $(11,300,137) for the twelve months ended December 1997, as compared with a net 7,593,741 for the same period ended December 31, 1996. The Company incurred a net loss of $4,306,140 for the six months 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. In addition, the Company's Able subsidiary has incurred operating losses resulting primarily from insufficient revenues. 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. 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 from its proprietary and generic products or achieve profitability. 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 25 26 generic pharmaceutical business and future acquisitions, if any. 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, Superior and GDI. 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 or eliminate its expenditures relating to its business. Risks Associated with Subsidiary Operations. The Company's results of operations depend to a large degree upon the performance of its subsidiaries, including its recently acquired subsidiaries Able, Superior and GDI. In its role as a holding company with respect to these subsidiaries, the Company is dependent on dividends or other intercompany transfers for funds from the subsidiaries to meet the Company's obligations. Agreements between the Company and certain of its creditors restrict the Company's ability to cause its subsidiaries to make such dividends or other intercompany transfers. Claims of creditors of the Company's subsidiaries, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of the Company and the holders of the Company's indebtedness. Contingent Obligations with Respect to Superior Acquisition. The Company used a combination of cash, a note and 166,667 shares of Common Stock (after giving effect to a one-for-ten reverse split of the common stock outstanding) to acquire Superior in June 1997. The Agreement and Plan of Merger for the Superior acquisition provides that the Company is also obligated to issue to the former stockholders of Superior up to an additional 1,666,667 shares of Common Stock if on June 18, 1998 the Common Stock has not had an average closing bid price of at least $3.00 per share for the 10 previous trading days. The merger agreement provides further that if the Common Stock is not trading at least $1.50 per share, DynaGen shall pay to the former Superior stockholders in immediately available funds the difference between $1.50 and the then current trading price of its Common Stock for each of the 3,333,334 shares then held by the former Superior stockholders. If the Common Stock continued to trade at its present price of approximately $0.71 per share, the Company would become obligated to pay approximately $4,800,000 in cash to the former stockholders of Superior. There can be no assurance that the Common Stock will be traded at a price of $1.50 or greater as of June 18, 1998 or that the Company will have the ability to meet any future obligation to pay cash to the former Superior stockholders. The Company's inability to meet any such obligation or other fixed or contingent obligations of the Company as they become due could have a material adverse effect on the Company's ability to continue its operations. Uncertainties Related to NicErase. Under applicable law, the Company's current or future licensees will not be permitted to sell NicErase, and thus generate any revenue from their development of NicErase, unless they obtain the necessary regulatory approvals from the FDA for the commercial sale of that product. To obtain such regulatory approvals, the Company's current or future licensees must demonstrate to the satisfaction of the FDA, through preclinical studies and clinical trials, that NicErase is safe and effective. In light of the Company's recently completed pivotal Phase 3 clinical trial of NicErase-SL, which did not show statistically significant efficacy, the Company is unable to predict whether delivery formulations of lobeline other than sublingual will demonstrate acceptable safety and efficacy to obtain FDA approval. There can be no assurance that the Company's current or future licensees will be able to successfully formulate new delivery systems for lobeline, that such licensees will have sufficient technological or financial resources to initiate and complete the required clinical trials, or that such trials will demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or develop 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 any future clinical trials do not show NicErase to be safe and effective in any alternative delivery format, and if the Company's licensees are thus unable to commercialize NicErase, the Company will not realize any revenues from the NicErase product. Integration of Acquisitions. In August 1996, the Company acquired substantially all of assets of Able, in June 1997, the Company purchased all of the outstanding shares of Superior and in March 1998, the 26 27 Company acquired substantially all of the assets of GDI. There can be no assurance that the anticipated benefits from the acquisitions 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 operations of the Company's subsidiaries 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. Loss of key employees. The Company and its subsidiaries have in the past year experienced loss of key personnel due to layoffs and attrition. While the management believes that the remaining employees have adequately performed routine tasks, it will be necessary to fill several of these positions in the near term. There is no assurance that the Company will be able to attract and retain qualified employees and that the remaining employees will continue to perform these functions satisfactorily. The Company's inability to attract and retain qualified employees may result in further decline in Company's business and its financial condition. 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 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. Limited Manufacturing Capability and Experience. The Company's NicCheck(R), MycoDot(R) and MycoAKT(R) 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 Good Manufacturing Practices ("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 adverse 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 three 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 27 28 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. Potential Product Liability; Limited Insurance Coverage. The testing, marketing and sale of pharmaceutical products for human use entail inherent risks. Liability might result from claims made directly by consumers or by pharmaceutical companies or others selling the Company's products. The Company's Superior and Able subsidiaries presently carry product liability insurance in amounts that the Company believes to be adequate, but there can be no assurance that such insurance will remain available at a reasonable cost or that any insurance policy would offer coverage sufficient to meet any liability arising as a result of a claim. The Company intends to seek to obtain insurance coverage if and when its proposed products are commercialized but can give no assurance that it will be able to obtain such insurance on reasonable terms or that, if obtained, such insurance will be sufficient to protect the Company against such potential liability or at a reasonable cost. The obligation to pay any product liability claim or a recall of a product could have a material adverse affect on the business, financial condition and future prospects of the Company. 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 and Superior will continue their recent buying patterns, 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 materially 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 28 29 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. 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 29 30 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 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. Early Stage of Product Development. Several of the Company's proposed products, including its specialty pharmaceuticals, 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. Uncertainty of Availability of Health Care Reimbursements. The ability of the Company to maintain profitability in Superior's generic distribution business or to commercialize its product candidates depends in part on the extent to which reimbursement for the cost of such products will be available from government health administration authorities, private health insurers and other organizations. Third party payors are attempting to control costs by limiting the level of reimbursement for medical products, including pharmaceuticals, which may adversely effect the pricing of the Company's product candidates. Moreover, health care reform has been, and may continue to be, an area of national and state focus, which could result in the adoption of measures which could adversely affect the pricing of pharmaceuticals or the amount of reimbursement available from third party payors. There can be no assurance that health care reimbursement laws or policies will not materially adversely affect the Company's ability to sell its products profitably or prevent the Company from realizing an appropriate return on its investment in product development. Uncertainties Related to Product Suppliers. Superior purchases its products from several pharmaceutical manufacturers. If a manufacturer is unable to supply a product or is unable to supply a product at a competitive price, Superior may lose revenues or experience significantly reduced gross profit margins. One or more of Superior's products could be subject to a manufacturer's product recall due to manufacturing defects or other reasons. Such recalls would result in lost revenues and additional costs to Superior. There can be no assurance that Superior can maintain a continuous and uninterrupted supply of products. Customer Concentration; Consolidation of Distribution Network. The distribution network for pharmaceutical products has in recent years been subject to increasing consolidation. As a result, a few large wholesale distributors control a significant share of the market. In addition, the number of independent drug stores and small chains has decreased as retail pharmacy consolidation has occurred. Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses, thereby stimulating product returns to Superior. Consolidation or financial difficulties could cause customers to reduce their inventory levels, or otherwise reduce purchases of Superior's products, which could have a materially adverse effect on the Company's business, results of operations and financial condition. 30 31 Volatility of Stock Price. The market for securities of technology companies, including those of the Company, has been highly volatile. The market price of the Company's Common Stock has fluctuated between $7.00 and $0.13 from January 1, 1993 to December 31, 1997 and was approximately $0.71 on March 24, and it is likely that the price of the Common Stock will continue to fluctuate widely in the future. Announcements of technical innovations, new commercial products, results of clinical trials, regulatory approvals, patent or proprietary rights or other developments by the Company or its competitors could have a significant impact on the Company's business and the market price of the Common Stock. Adverse Consequences Associated with the Obligation to Issue Substantial Shares of Common Stock Upon Conversion of Convertible Securities. As of March 24, 1998 the Company was obligated to issue approximately 101,935,000 shares of Common Stock for issuance upon the conversion or exercise of its outstanding warrants, rights, convertible preferred stock and a convertible note and 16,860,718 shares of Common Stock have been reserved for issuance to employees, officers, directors and consultants. The price which the Company may receive for the Common Stock issuable upon exercise of such options and warrants will, in all likelihood, be less than the market price of the Common Stock at the time of such exercise. Consequently, for the life of such options and warrants the holders thereof may have been given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. The exercise of all of the aforementioned securities may also adversely affect the terms under which the Company could obtain additional equity capital. In all likelihood, the Company would be able to obtain additional equity capital on terms more favorable to the Company at the time the holders of such securities choose to exercise them. In addition, should a significant number of these securities be exercised, the resulting increase in the amount of the Common Stock in the public market could have a substantial dilutive effect on the Company's outstanding Common Stock. 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, 1997 and 1996 Consolidated Statements of Loss -- Year Ended December 31, 1997, Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity -- Year Ended December 31, 1997, Six Months Ended December 31, 1996 and Years Ended June 30, 1996 and 1995 Consolidated Statements of Cash Flows -- Year Ended December 31, 1997, Six Months Ended December 31, 1996 and 1995 and Years Ended June 30, 1996 and 1995 Notes to Consolidated Financial Statements Consolidated Financial Statements and Financial Statement Schedules as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 are filed as exhibits hereto and listed in Items 14(a)(1) and (2), and are incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 31 32 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 March 30, 1998. 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 and Dr. Indu A. Muni, 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 15, 1998 - --------------------------------------------------- Vice President and Director Dhananjay G. Wadekar /s/ DR. INDU A. MUNI President, Chief Executive April 15, 1998 - --------------------------------------------------- Officer, Treasurer, (Principal Dr. Indu A. Muni Executive, Financial and Accounting Officer) and Director /s/ DR. F. HOWARD SCHNEIDER Director April 15, 1998 - --------------------------------------------------- Dr. F. Howard Schneider /s/ STEVEN GEORGIEV Director April 15, 1998 - --------------------------------------------------- Steven Georgiev /s/ DR. MICHAEL SORELL Director April 15, 1998 - --------------------------------------------------- Dr. Michael Sorell
32 33 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 subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of loss, changes in stockholders' equity and cash flows for the year ended December 31, 1997, the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995. 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 consolidated financial position of DynaGen, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the year ended December 31, 1997, the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit and a working capital deficiency at December 31, 1997. In addition, the Company has debt obligations which are in default, a significant acquisition obligation in connection with its acquisition of a subsidiary, Superior Pharmaceutical Company ("Superior"), and restricted access to the cash and equity of Superior under the terms of Superior's loan agreement. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. WOLF & COMPANY, P.C. Boston, Massachusetts April 14, 1998 33 34 DYNAGEN, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1997 1996 ------------ ------------ ASSETS (NOTE 6) Current assets: Cash and cash equivalents (including interest-bearing deposits of $1,835,000 at December 31, 1996)........... $ 697,045 $ 2,112,300 Investment securities available for sale at fair value (Note 3)............................................... -- 3,004,700 Accounts receivable, net of allowance for doubtful accounts of $43,118 at December 31, 1997............... 3,152,779 261,932 Rebates................................................... 713,976 -- Inventory (Note 4)........................................ 9,111,324 451,883 Notes receivable (Note 8)................................. 110,000 185,000 Prepaid expenses and other current assets................. 147,972 295,613 ----------- ----------- Total current assets................................... 13,933,096 6,311,428 ----------- ----------- Property and equipment, net (Note 5)...................... 1,772,878 673,969 ----------- ----------- Other assets: Customer lists, net of accumulated amortization of $1,361,200 (Note 2).................................... 12,250,800 -- Goodwill, net of accumulated amortization of $22,751 (Note 2)..................................................... 363,468 -- Patents and trademarks, net of accumulated amortization of $89,164 and $65,639.................................... 345,381 265,840 Deferred debt financing costs, net of accumulated amortization (Note 6).................................. 359,621 119,039 Deposits and other assets................................. 322,870 92,873 ----------- ----------- Total other assets..................................... 13,642,140 477,752 ----------- ----------- $29,348,114 $ 7,463,149 =========== ===========
34 35 DYNAGEN, INC. CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, --------------------------- 1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft............................................ $ 142,616 $ -- Notes payable (Note 6).................................... 8,348,333 -- Loan payable -- bank (Note 6)............................. 6,584,710 -- Accounts payable.......................................... 6,390,421 712,239 Accrued payroll and payroll taxes......................... 95,312 96,894 Acquisition obligation (Note 2)........................... 4,083,000 -- ----------- ----------- Total current liabilities.............................. 25,644,392 809,133 Warrant put liability (Note 6)............................ 750,594 -- Long term debt (Notes 6 and 13)........................... 328,500 1,600,000 ----------- ----------- Total liabilities...................................... 26,723,486 2,409,133 ----------- ----------- Commitments and contingencies (Note 9).................... Stockholders' equity (Notes 1, 2, 6, 9, 10 and 13): Preferred stock, $.01 par value, 10,000,000 shares authorized, 63,522 shares of Series A, B, C and G outstanding, (liquidation value $6,348,417):........... 635 -- Common stock, $.01 par value, 75,000,000 shares authorized, 4,315,137, and 2,910,623 shares issued and outstanding............................................ 43,151 29,106 Additional paid-in capital................................ 39,137,311 29,338,794 Accumulated deficit....................................... (36,556,469) (24,315,191) ----------- ----------- 2,624,628 5,052,709 Unrealized gain on investment securities available for sale (Note 3).......................................... -- 1,307 ----------- ----------- Total stockholders' equity............................. 2,624,628 5,054,016 ----------- ----------- $29,348,114 $ 7,463,149 =========== ===========
See accompanying notes to consolidated financial statements. 35 36 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF LOSS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, ------------ ------------------------- ------------------------- 1997 1996 1995 1996 1995 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) REVENUES (NOTE 11): Product sales......................... $ 13,920,904 $ 358,467 $ 57,855 $ 220,745 $ 247,553 Fees and royalties.................... 88,826 1,441 275,000 335,000 250,000 ------------ ----------- ----------- ----------- ----------- Total revenues........................ 14,009,730 359,908 332,855 555,745 497,553 ------------ ----------- ----------- ----------- ----------- Costs and expenses: Cost of sales......................... 13,255,651 356,312 28,837 96,680 134,392 Research and development.............. 3,220,283 1,092,253 1,036,622 3,118,145 1,718,006 Selling, general and administrative... 7,611,578 3,239,180 1,188,733 2,684,825 1,983,897 ------------ ----------- ----------- ----------- ----------- Total costs and expenses.............. 24,087,512 4,687,745 2,254,192 5,899,650 3,836,295 ------------ ----------- ----------- ----------- ----------- Operating loss........................ (10,077,782) (4,327,837) (1,921,337) (5,343,905) (3,338,742) ------------ ----------- ----------- ----------- ----------- Other income (expense): Investment income, net................ 120,359 157,788 111,521 367,715 296,555 Interest and financing expense (Note 6)................................. (2,283,855) (136,091) -- (121,229) (196) ------------ ----------- ----------- ----------- ----------- Other income (expense), net........... (2,163,496) 21,697 111,521 246,486 296,359 ------------ ----------- ----------- ----------- ----------- Net loss.............................. $(12,241,278) $(4,306,140) $(1,809,816) $(5,097,419) $(3,042,383) ============ =========== =========== =========== =========== Net loss per share-basic (Note 1)....... $ 4.48 $ 2.44 $ (0.81) $ (2.09) $ (1.44) ============ =========== =========== =========== =========== Weighted average shares outstanding..... 3,204,163 2,879,412 2,221,765.. 2,443,395 2,117,970 ============ =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 36 37 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NOTES 1, 2, 6, 9, 10 AND 13)
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------- -------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ---------- ---------- ---------- ------- ----------- ------------ Balance at June 30, 1994............... -- $ -- 2,117,454 $21,174 $19,300,479 $(11,869,249) Exercise of stock options.............. -- -- 50 1 374 -- Exercise of underwriters' warrants..... -- -- 27,345 274 128,483 -- Decrease in unrealized loss on investment securities................ -- -- -- -- -- -- Net loss for the year ended June 30, 1995................................. -- -- -- -- -- (3,042,383) ---------- ---------- ---------- ------- ----------- ------------ Balance at June 30, 1995............... -- -- 2,144,849 21,449 19,429,336 (14,911,632) Exercise of underwriters' warrants..... -- -- 50,398 504 36,621 -- Exercise of public warrants............ -- -- 324,449 3,244 3,851,963 -- Shares issued in private placements.... 1,178,264 3,461,150 152,069 1,521 1,389,890 -- Conversion of preferred stock.......... (1,178,264) (3,461,150) 161,283 1,613 3,459,537 -- Exercise of stock options.............. -- -- 9,586 96 5,479 -- Employee stock and stock option grants............................... -- -- 11,725 117 558,740 -- Stock options issued for future services............................. -- -- -- -- 55,225 -- Stock issued for interest obligation... -- -- 1,641 16 37,317 -- Change in unrealized gain (loss) on investment securities................ -- -- -- -- -- -- Net loss for the year ended June 30, 1996................................. -- -- -- -- -- (5,097,419) ---------- ---------- ---------- ------- ----------- ------------ Balance at June 30, 1996............... -- -- 2,856,000 28,560 28,824,108 (20,009,051) Exercise of stock options.............. -- -- 8,177 82 16,418 -- Stock issued for interest obligation... -- -- 5,005 50 79,567 -- Stock options issued for services...... -- -- -- -- 55,742 -- Conversion of note payable............. -- -- 41,441 414 362,959 -- Increase in unrealized gain on investment securities................ -- -- -- -- -- -- Net loss for the six months ended December 31, 1996.................... -- -- -- -- -- (4,306,140) ---------- ---------- ---------- ------- ----------- ------------ Balance at December 31, 1996 -- -- 2,910,623 29,106 29,338,794 (24,315,191) Shares issued in private placements.... 69,950 699 147,500 1,475 6,672,473 -- Stock issued for Superior acquisition.......................... -- -- 166,667 1,667 915,333 -- Exercise of stock options.............. -- -- 150 2 1,123 -- Issuance of common stock purchase warrants............................. -- -- -- -- 450 -- Delayed registration penalty........... -- -- -- -- (328,500) -- Stock options and warrants issued for service.............................. -- -- -- -- 801,034 -- Stock issued for interest obligation... -- -- 6,418 64 59,774 -- Conversions of notes payable........... 5,015 50 113,959 1,140 1,495,163 -- Conversion of preferred stock.......... (11,443) (114) 757,320 7,573 (7,459) -- Stock issued for services.............. -- -- 212,500 2,124 189,126 -- Decrease in unrealized gain on investment securities................ -- -- -- -- -- -- Net loss for the year ended December 31, 1997............................. -- -- -- -- -- (12,241,278) ---------- ---------- ---------- ------- ----------- ------------ Balance at December 31, 1997........... 63,522 $ 635 4,315,137 $43,151 $39,137,311 $(36,556,469) ========== ========== ========== ======= =========== ============ UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AVAILABLE FOR SALE TOTAL -------------------- ------------ Balance at June 30, 1994............... $(38,662) $ 7,413,742 Exercise of stock options.............. -- 375 Exercise of underwriters' warrants..... -- 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) -------- ------------ Balance at June 30, 1995............... (12,339) 4,526,814 Exercise of underwriters' warrants..... -- 37,125 Exercise of public warrants............ -- 3,855,207 Shares issued in private placements.... -- 4,852,561 Conversion of preferred stock.......... -- -- Exercise of stock options.............. -- 5,575 Employee stock and stock option grants............................... -- 558,857 Stock options issued for future services............................. -- 55,225 Stock issued for interest obligation... -- 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) -------- ------------ Balance at June 30, 1996............... 17 8,843,634 Exercise of stock options.............. -- 16,500 Stock issued for interest obligation... -- 79,617 Stock options issued for services...... -- 55,742 Conversion of note payable............. -- 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) -------- ------------ Balance at December 31, 1996 1,307 5,054,016 Shares issued in private placements.... -- 6,674,647 Stock issued for Superior acquisition.......................... -- 917,000 Exercise of stock options.............. -- 1,125 Issuance of common stock purchase warrants............................. -- 450 Delayed registration penalty........... -- (328,500) Stock options and warrants issued for service.............................. -- 801,034 Stock issued for interest obligation... -- 59,838 Conversions of notes payable........... -- 1,496,353 Conversion of preferred stock.......... -- -- Stock issued for services.............. -- 191,250 Decrease in unrealized gain on investment securities................ (1,307) (1,307) Net loss for the year ended December 31, 1997............................. -- (12,241,278) -------- ------------ Balance at December 31, 1997........... $ -- $ 2,624,628 ======== ============
See accompanying notes to consolidated financial statements. 37 38 DYNAGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, ------------ ------------------------- ------------------------- 1997 1996 1995 1996 1995 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss..................................... $(12,241,278) $(4,306,140) $(1,809,816) $(5,097,419) $(3,042,383) Adjustments to reconcile net loss to net cash used for operating activities: Stock and stock options issued for services................................. 992,284 55,742 -- 558,857 -- Depreciation and amortization.............. 1,714,250 129,558 32,440 125,610 64,195 Amortization and accretion of (discounts) premiums on investment securities........ (10,152) (31,497) (19,539) (134,474) 101,553 Stock issued for interest obligation....... 59,838 79,617 -- 37,333 -- Write-off of patent costs.................. -- -- -- 41,852 40,893 (Increase) decrease in operating assets: Accounts receivable...................... (428,612) (172,229) (23,621) (60,732) 30,518 Rebates.................................. (215,672) -- -- -- -- Inventory................................ (1,268,351) (138,583) -- -- -- Prepaid expenses and other current assets................................. 170,149 12,543 (947,227) (57,780) 24,121 Deposits and other assets................ (211,250) (90,895) -- -- -- Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.... 4,521,843 142,068 (3,770) 329,858 (77,933) Deferred revenue......................... -- (65,967) (150,000) (184,033) 250,000 ------------ ----------- ----------- ----------- ----------- Net cash used for operating activities........................... (6,916,951) (4,385,783) (2,021,533) (4,440,928) (2,609,036) ------------ ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of investment securities.......... (1,186,455) (2,567,445) (5,937,166) (29,913,212) (3,187,379) Proceeds from sales and maturities of investment securities.................... 4,200,000 9,683,450 5,600,000 24,174,000 5,500,000 Purchase of wholly-owned subsidiary........ (6,878,463) (700,000) -- -- -- Purchase of property and equipment......... (959,224) (200,370) (2,874) (36,020) (23,339) Patent and trademark costs................. (103,067) -- (32,867) (72,611) (69,293) Decrease in deposits....................... -- -- -- -- 9,325 (Increase) decrease in notes receivable.... 75,000 (110,000) -- (75,000) -- ------------ ----------- ----------- ----------- ----------- Net cash provided by (used for) investing activities................. (4,852,209) 6,105,635 (372,907) (5,922,843) 2,229,314 ------------ ----------- ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from stock warrants and options.................................... 1,125 16,500 3,896,088 3,897,907 129,132 Net proceeds from private stock placements... 6,775,920 -- -- 4,852,561 -- Net proceeds from debt placement............. 3,326,898 -- -- 1,725,295 -- Net repayments -- loan payable to bank....... 524,013 -- -- -- -- Increase in bank overdraft................... 142,616 -- -- -- -- Repayment of Superior notes payable.......... (416,667) -- -- -- -- Principal payments on capital lease.......... -- -- -- -- (5,824) ------------ ----------- ----------- ----------- ----------- Net cash provided by financing activities........................... 10,353,905 16,500 3,896,088 10,475,763 123,308 ------------ ----------- ----------- ----------- ----------- Net change in cash and cash equivalents........ (1,415,255) 1,736,352 1,501,648 111,992 (256,414) Cash and cash equivalents at beginning of period....................................... 2,112,300 375,948 263,956 263,956 520,370 ------------ ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period..... $ 697,045 $ 2,112,300 $ 1,765,604 $ 375,948 $ 263,956 ============ =========== =========== =========== =========== Supplemental cash flow information: Interest paid................................ $ 574,300 $ -- $ -- $ -- $ 196 Schedule of non cash investing and financing activities: On June 18, 1997, the Company purchased all of the common stock of Superior Pharmaceutical Company, Inc. for $16,250,000. In connection with the acquisition, non cash financing activities, liabilities assumed and goodwill were as follows: Fair value of assets acquired.............. $ 10,810,660 Cash paid for common stock................. (6,250,000) Common stock issued and acquisition obligation............................... (5,000,000) Note payable issued, net of adjustment..... (4,600,000) Liabilities assumed........................ (8,263,478) ------------ Goodwill and customer lists (exclusive of other acquisition costs of $694,890)..... $ 13,302,818 ============ =========== =========== =========== =========== Additional cash flow information is included in Notes 2 and 6.
See accompanying notes to consolidated financial statements. 38 39 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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") and its wholly-owned subsidiaries, Able Laboratories, Inc. ("Able"), which is engaged in the manufacture of generic pharmaceuticals, Superior Pharmaceutical Company ("Superior"), which is engaged in the distribution of generic pharmaceuticals BioTrack, Inc. and Apex Pharmaceuticals, Inc. which are developing diagnostic and therapeutic products. All significant intercompany balances and transactions have been eliminated in consolidation. In March 1998, the Company acquired Generic Distributors Limited Partnership which is engaged in the distribution of generic pharmaceuticals. (see Note ) Going Concern The Company has incurred recurring losses from operations resulting in an accumulated deficit of $36,556,469 and a working capital deficiency of $12,711,276 at December 31, 1997. In addition, the Company is in default with respect to certain covenants in its debt agreements as follows: GFL Performance Fund Limited -- The Company issued a 8% Convertible Note to GFL Performance Fund in the amount of $2,000,000 in February, 1996. The balance of this note, $535,000 was due on February 7, 1998, however ,the lender granted an extension on the payment of this note. In connection with this extension the Company agreed to increase the principal amount due to $789,755. The Note and the increased amount are reflected as current liabilities in the balance sheet at December 31, 1997. (see Note 6) Sirrom Capital Corporation ("Sirrom") and Odyssey Investment Partners, L.P. ("Odyssey") -- The Company issued secured promissory notes in the aggregate principal amount of $3,000,000 on June 18, 1997 and were due June 17, 2002. In addition, the Company issued stock warrants to purchase in the aggregate 400,000 shares of the Company's common stock and granted Sirrom and Odyssey the right to sell to the Company the warrants (put warrants) under a put and substitution agreement. At the time of issuance, $702,000 of the proceeds was allocated to the put warrants, resulting in a discount on the promissory notes. The discount on the notes was being amortized to expense over the term of the promissory notes. The Company is in default of certain covenants in the loan agreement and has not obtained a waiver of the defaults from the lender. Accordingly, the total principal amount of the loan, $3,000,000, has been classified as a current liability and the unamortized discount on the loan has been charged to expense at December 31, 1997. (see Note 6) Superior Pharmaceutical Company -- The Company acquired Superior on June 18, 1997 for $16,500,000. The purchase price was paid as follows: $6,500,000 in cash, $5,000,000 of 9.5% secured promissory notes to the former Superior stockholders due in quarterly installments through June 30, 2000 and common stock of the Company with a guaranteed value of $5,000,000. The secured promissory notes were due on March 31, 1998 and the Company received a waiver and extension from the former stockholders of Superior. The full payment of principal and interest was extended to May 16, 1998. As a result, the total unpaid amount of the secured promissory notes $4,183,333 has been classified as a current liability. 39 40 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) The Company issued 1,666,667 shares of common stock to the former Superior stockholders on the closing date. The Agreement and plan of merger with the Superior stockholders provided that at the first anniversary of the closing, June 18, 1998, the Superior stockholders would receive an additional 1,666,667 40 41 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) shares of common stock, if the Company's stock price was equal to or greater than $1.50. Any difference between the value of the stock received and the $5,000,000 guaranteed value is to be paid in cash. The market price of the Company's common stock at was $ per share. The Company does not anticipate that the common stock price will reach the specified level of $1.50 by June 18, 1998. Accordingly, the Company has accrued a liability to the former Superior Shareholders in the amount of $ at December 31, 1997 and reduced the amount originally added to additional paid-in capital at the time of acquisition. The Huntington National Bank -- The Company's subsidiary, Superior has a line of credit with the Huntington National Bank in the amount of $9,000,000. At December 31, 1997, Superior is in default of certain loan covenants in the loan and security agreement with the bank. Superior is in negotiations with the bank with respect to the defaults, but has not received a waiver of the defaults at the present time. The Company has guaranteed the loan to the bank. The loan and security agreement with the bank requires the Company to achieve a tangible net worth, exclusive of the tangible net worth of Superior, of $4,000,000 which the Company has not achieved at December 31, 1997. The loan and security agreement with the bank allowed Superior to make distributions to the Company in amounts sufficient to enable the Company to pay the debt service due to the former shareholders of Superior, provided, however, that such permitted payments cannot be made by Superior in the event of a default. MANAGEMENT PLANS Following are management's plans to improve the financial condition of the Company and cure defaults, obtain waivers wherever applicable and improve the overall financial condition of the Company. These plans are targeted to the specific areas listed below. GFL Performance Fund Limited -- The Company has received a waiver from GFL waiving the Company's payment obligation on February 7, 1996 (the maturity date) and extending the Note to February 7, 1999. The Company is negotiating with GFL to retire this debt through conversion into the common stock over the next several months. This will reduce or eliminate the cash payment obligation and reduce the total liabilities of the Company. Sirrom Capital Corporation -- The Company continues to make monthly payments of its obligations to Sirrom and Odyssey. The defaults under the loan agreements include the late filing of the Form 10-K and certain financial covenants which require the Company to be current on all of its other obligations. Management plans to improve upon its filing requirements by dedicating additional personnel to meet the reporting requirements. In addition, the Company is negotiating with the Selling Shareholders of Superior to extend the guaranteed stock payment due on June 17, 1998 which would require approximately $4,000,000 in cash. The Company has had preliminary discussions with Sirrom and Odyssey regarding the overall decline in Company's stock price and the effect on the Lenders Warrants. Management intends to discuss and negotiate with the Lenders opportunities for participation in the Company's overall plan which could restore the economic benefits and obtain to continued cooperation of the Sirrom and Odyssey. Superior Pharmaceutical Company -- The Company has obtained a waiver from the Selling Shareholders of Superior, waiving the payment obligation on the Note due on March 31, 1998. The Company is negotiating with the Selling Shareholders, alternate ways in which it can meet its obligation of generated stock payment on June 17, 1998. These proposed alternatives include, extension of the obligation, reduction or elimination of the cash payment in lieu of additional stock payment and converting the common stock 41 42 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) payment to convertible Preferred Stock. The Selling Shareholders have indicated their willingness to entertain the alternative offers and work with the management to come up with a comprehensive solution to the payment obligations which secures their benefits while allowing the Company to expand. The Huntington National Bank The Company is in discussions with investment bankers to raise additional equity for its ongoing operations. The networth of the Company as per the financial statements is less than $4,000,000 as required in the Loan Agreement with Huntington. However, as per the Loan Agreement, in the part Huntington has considered subordinated debt, selling shareholder debt and the Equity line available to the Company under its Series D preferred shares as equity capital and therefore applicable towards the networth calculations. Assuming that Huntington Bank continues to allow this and that the Company is successful in obtaining additional financing, the networth deficiency will be corrected. In addition, the waiver of Superior Shareholders will, in managements view, eliminate the defaults of the covenants. 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 year ended December 31, 1997, the six month transition period ended December 31, 1996 the years ended June 30, 1996 and 1995. 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. Reverse Stock Split On March 4, 1998 the Company's Stockholders approved a 1 for 10 a reverse stock split of the common shares. All common stock information presented has been retroactively adjusted to reflect the reverse stock split. 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. Material estimates that are particularly susceptible to significant change in the near term relate to the carrying values of rebates receivable and intangible assets and the valuation of equity instruments issued by the Company. Actual results could differ from those estimates. Cash Equivalents Cash equivalents include interest-bearing deposits with original maturities of three months or less. 42 43 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Investment Securities 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 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. Gains and losses on disposition of investment securities are computed by the specific identification method. Rebates Rebates represent incentives provided by pharmaceutical suppliers based on purchases. Management has estimated its rebates based upon agreements and purchases during the year. Actual rebates could be different due to market volatility and whether the Company continues to use these suppliers. Inventory Inventory is valued at the lower of average 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. Customer Lists and Goodwill Customer lists and goodwill are being amortized over estimated lives of five and fifteen years, respectively. (See Note 2.) Patents, Trademarks and Deferred Debt Financing Costs 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 year ended December 31, 1997 was $99,888. 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 and 1995 was $79,660 and $11,385, respectively. 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. Advertising Costs Advertising costs are charged to expense when incurred. 47 44 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 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 carry forwards 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. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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.) Earnings Per Share In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which requires that earnings per share be calculated on a basic and a dilutive basis. Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. The Statement is effective for interim and annual periods ending after December 15, 1997, and requires the restatement of all prior-period earnings per share data presented. Accordingly, the Company has restated all earnings per share data presented herein. For the year ended December 31, 1997, the six months ended December 31, 1996 and 1995, and the years ended June 30, 1996 and 1995, options applicable to , , , and shares, respectively, were anti-dilutive and excluded from the diluted earnings per share computations. Recent Accounting Pronouncements In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain FASB statements, however, require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of the equity section of the balance sheet. Such items, along with net 48 45 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company will adopt these disclosure requirements beginning in the first quarter of 1998. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Statement also requires descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used by the enterprise in its general-purpose financial statements, and changes in the measurement of segment amounts from period to period. Management has not yet determined how the adoption of SFAS No. 131 will impact the Company's financial reporting. 2. BUSINESS ACQUISITIONS On August 19, 1996, the Company acquired certain assets of Able Laboratories, Inc. ("Able"). The purchase price consisted of $550,000 in cash and acquisition costs of $150,000. The acquisition has been accounted for as a purchase. 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. On June 18, 1997, the Company acquired all of the outstanding stock of Superior Pharmaceutical Company ("Superior"), a distributor of generic pharmaceutical products. The Company paid the shareholders of Superior $6,250,000 in cash, $5,000,000 in three year notes and 166,667 shares of DynaGen's common stock with a guaranteed value of $5,000,000. DynaGen is obligated to issue to the shareholders up to an additional 1,666,667 shares of its common stock after twelve months if its common stock is not trading at an average of at least $3.00 per share for 10 consecutive trading days. If, immediately following the issuance of the additional 1,666,667 shares, DynaGen's common stock is not trading for at least $1.50 per share, DynaGen shall pay to the shareholders the difference between $1.50 and the then current trading price of its common stock for each of the shares issued. DynaGen is obligated to register the shares within eleven months after the closing of the acquisition. The Company recorded a $4,083,000 acquisition obligation at December 31, 1997 based on the difference between the current estimated fair value of the 1,833,334 shares of common stock issued and issuable and the guaranteed value of $5,000,000. The former shareholders of Superior, who remain as senior management at Superior, may also receive certain incentive payments based on Superior's performance during the three years following the closing of the acquisition. Dynagen contributed $1,750,000 in additional capital to Superior immediately following the closing. The Superior acquisition has been accounted for as a purchase. The results of operations of Superior have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price allocation was based on the estimated fair values at the date of acquisition. The Company allocated $13,612,000 of the purchase price to customer lists, which is being amortized on a straight-line basis over five years. Amortization of customer lists amounted to $1,361,700 for the year ended December 31, 1997. In 49 46 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) addition, the Company recorded goodwill of $386,219, which is being amortized on a straight-line basis over 15 years. Amortization expense for the year ended December 31, 1997 was $22,751. Unaudited proforma consolidated operating results for the Company, assuming the acquisitions of Able and Superior had been made as of the beginning of the fiscal year for each of the periods presented, are as follows:
TWELVE MONTHS ENDED DECEMBER 31, --------------------------- 1997 1996 ------------ ----------- Revenues............................................... $ 26,019,467 $35,069,879 Net loss............................................... (10,528,395) (6,167,586) Net loss per share.....................................
The unaudited proforma information is not necessarily indicative either of the actual results of operations that would have occurred had the purchases been made as of the beginning of each of the fiscal periods presented 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 =========== ====== ======== ===========
There were no sales of securities available for sale during the year ended December 31, 1997, the six months ended December 31, 1996 and the years ended June 30, 1996 and 1995. 4. INVENTORY Inventory consists of the following:
DECEMBER 31, ---------------------- 1997 1996 ---------- -------- Raw materials............................................... $ 311,166 $259,330 Work-in-progress............................................ 136,240 163,847 Finished goods.............................................. 8,663,918 28,706 ---------- -------- $9,111,324 $451,883 ========== ========
50 47 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 5. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, ------------------------ ESTIMATED 1997 1996 USEFUL LIVES ---------- ---------- ------------ Machinery and equipment........................... $1,347,683 $ 702,141 7 years Furniture, fixtures and computers................. 1,027,228 270,353 3-7 years Leasehold improvements............................ 235,904 39,288 1-2 years ---------- ---------- 2,610,815 1,011,782 Less accumulated depreciation and amortization.... (837,937) (337,813) ---------- ---------- $1,772,878 $ 673,969 ========== ==========
Depreciation and amortization expense for the year ended December 31, 1997 was $230,411. Depreciation and amortization expense for the six months ended December 1996 and 1995 was $56,451 and $21,648, respectively and for the years ended June 30, 1996 and 1995 was $45,950 and $52,810 respectively. 6. DEBT Notes payable consist of the following: Convertible note payable.................................... $ 535,000 Bridge loans................................................ 630,000 Notes payable -- Superior Acquisition....................... 4,183,333 Senior subordinated debt.................................... 3,000,000 ---------- $8,348,333 ==========
Convertible Note Payable On February 7, 1996, the Company issued a $2,000,000 convertible note payable in connection with a private placement. The note matured 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 41,441 shares of the Company's common stock and $36,627 of related deferred debt financing costs were charged to additional paid-in capital. During the year ended December 31, 1997, $1,065,000 of the note payable was converted for 98,959 shares of the Company's common stock and $79,235 of related deferred debt financing costs were charged to additional paid-in capital. Interest expense on the convertible note payable for the year ended December 31, 1997 was $45,640, 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 year ended December 31, 1997 was $36,744, for the six months ended December 31, 1996 was $61,809, and for the year ended June 30, 1996 was $57,230. 51 48 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Bridge Loans On December 19,1997 DynaGen sold a subordinated note in the principal amount of $155,000 to a lender with an interest rate of 7% per annum. This unsecured note was payable in full with interest on January 18, 1998. In connection with this bridge loan, 150,000 shares of common stock of DynaGen were issued to the investor. This note was converted into common stock on March 25, 1998. On October 3, 1997, BioTrack, Inc. received $250,000 in a subordinated note from an employee of Superior at an interest rate of 18% per annum due on November 30, 1997. The due date on this note was extended to June 30, 1998. The proceeds were used as bridge-financing for BioTrack, Inc. and the investor has the option of converting the note into mezzanine financing for BioTrack or to be paid in full. This investor also received 10,000 shares of BioTrack common stock. In addition, four investors invested $175,000 in BioTrack in December 1997 at 10% interest due on February 12, 1998. In February 1998, $75,000 of these short-term loans were repaid in full with interest. These investors purchased 35,000 shares of BioTrack common stock for $1,750. In October 1997, Apex Pharmaceuticals Inc., received a $50,000 bridge loan at an interest rate of 12% per annum from a consultant, this loan is to be repaid by December 31, 1998, with interest. DynaGen obtained debt financing in the form of a bridge loan of $500,000, from a private investor at an interest rate of 7% per annum and due September 30, 1997 related to its Superior acquisition. In connection with this bridge loan, the Company has issued 150,000 shares of its unregistered common stock to the investor. On October 10, 1997, the bridge loan and all accrued interest was converted into 5,015 shares of Series B Preferred Stock in full satisfaction of the debt. An additional 150,000 shares of common stock was issued to the investor in connection with the conversion. Proceeds of $150,000 from the debt financing were allocated to the common stock based on the fair value of the common stock at June 18, 1997. The balance of the proceeds was allocated to the bridge loan. The debt discount of $150,000 on the bridge loan was fully amortized through December 31, 1997. Notes Payable -- Superior Acquisition In connection with the acquisition of Superior, the Company issued $5,000,000 in secured promissory notes payable to the former Superior stockholders. The notes are payable in quarterly installments of principal and interest over three years at an interest rate of 9.5% and are secured by a pledge of the Superior common stock. During the year ended December 31, 1997, the Company made principal payments of $416,667 on the notes. In addition, the notes were reduced by $400,000, due to a shortfall in the required net worth of Superior as of the acquisition date. The Company has classified the notes payable as a current liability on December 31, 1997 as it is currently unable to make the payments due on the notes and is therefore in default. As of December 31, 1997, amounts payable on the notes over the next three fiscal years are as follows:
YEAR ENDED DECEMBER 31, AMOUNT ----------------------- ---------- 1997........................................................ $ 433,333 1998........................................................ 1,666,667 1999........................................................ 1,666,667 2000........................................................ 416,666 ---------- $4,183,333 ==========
52 49 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Senior Subordinated Debt DynaGen obtained senior subordinated debt financing of $3,000,000 from two private investors bearing interest at 13.5% payable in monthly installments. The principal is payable upon maturity at the end of five years. The loan is secured by a first-lien security interest on the assets of DynaGen, a second-lien security interest on the assets of Superior and a second-lien interest in the pledge of the Superior common stock. DynaGen also issued to the investors warrants to purchase 400,000 shares of common stock of DynaGen at an exercise price of $.01 exercisable for five years. Under certain circumstances, the two investors may exchange the warrants to buy DynaGen common stock for warrants to purchase 15% of Superior's common stock at an exercise price per share of $0.1. In addition, these warrants are subject to put features under certain circumstances. Proceeds of $702,000 from this financing were allocated to the DynaGen stock warrants, based on their estimated fair value. This amount is reflected in the accompanying financial statements as a warrant put liability because the warrants are subject to a put which gives the holders the choice of a cash settlement under certain conditions. The put allows the holders to sell two-thirds of the warrants to the Company after three years for $667,000, and all of the warrants after five years for $1,500,000 unless the market value of the shares issuable pursuant to the warrant is equal to or greater than the put value. The remaining proceeds from this offering $2,298,000 were allocated to the subordinated debt. The debt discount of $702,000 was being amortized, using the interest method, over the term of the debt. At December 31, 1997, the Company amortized the entire debt discount as the Company is in default under the terms of the debt agreement and the debt has been classified as a current liability. Loan Payable -- Bank Superior obtained a secured revolving line of credit of up to $7,500,000 from a bank to provide working capital for its general operations. Advances under the line of credit are subject to a borrowing base consisting of the sum of (I) 80% of Superior's eligible accounts receivable, plus (ii) 60% of Superior's eligible inventory. The advances under the line are secured by a first-lien security interest in all of the assets of Superior and are guaranteed by DynaGen. Superior may draw on the line of credit until April 5, 1998. Interest on the line of credit is based on the lower of the prime lending rate or LIBOR plus 2% (7.625% at December 31, 1997). 7. INCOME TAXES There was no provision for income taxes for the year ended December 31, 1997, for the six months ended December 31, 1996 and 1995 and for the years ended June 30, 1996 and 1995 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:
DECEMBER 31, --------------------------- 1997 1996 ------------ ----------- Deferred tax asset: Federal.................................................... 11,477,000 $ 8,008,000 State...................................................... 2,634,000 1,986,000 ------------ ----------- 14,111,000 9,994,000 Valuation reserve.......................................... (14,111,000) (9,994,000) ------------ ----------- Net deferred tax asset..................................... $ -- $ -- ============ ===========
53 50 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) The following differences give rise to deferred income taxes:
DECEMBER 31, --------------------------- 1997 1996 ------------ ----------- Net operating loss carry forward........................... $ 12,714,000 $ 9,185,000 Research tax credit carryforward........................... 620,000 662,000 Other...................................................... 777,000 147,000 ------------ ----------- 14,111,000 9,994,000 Valuation reserve.......................................... (14,111,000) (9,994,000) ------------ ----------- Net deferred tax asset..................................... $ -- $ -- ============ ===========
The increases in the valuation reserve are due to the Company's net operating losses. As of December 31, 1997, the Company has Federal and state net operating loss carryforwards of approximately $32,750,000 and $25,200,000, respectively. The Federal and state net operating loss carryforwards expire in varying amounts beginning in 2003 and 1998, respectively. In addition, the Company has Federal and state research tax credit carryforwards of approximately $583,000 and $56,000, 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. 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. These notes were secured by common stock of the Company issuable on exercise of stock options held by the officers. In December 1997, the entire amount, including accrued interest of $6,676, was forgiven and the stock options were returned to the Company. 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, 1998. These lines-of-credit are secured by common stock of the Company held by the officer/directors. At December 31, 1997 and 1996, borrowings of $110,000 were outstanding under the lines-of-credit. The Company recognized interest income on notes receivable of $10,464 during the year ended December 31, 1997 and $4,562 during the six months ended December 31, 1996. At December 31, 1997 and 1996, accrued interest receivable of $8,346 and $4,562, respectively, is included in the consolidated balance sheet. Accounts Payable In 1997, these officers/directors advanced an aggregate of $62,000 to the Company, towards working capital requirements. These advances do not bear any interest. 54 51 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Consulting Fees During 1996, the Company retained a consulting company for strategic marketing and business development. The chief executive officer of the consulting firm was also a director of the Company. During the 55 52 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) six months ended December 31, 1996 the Company paid the consulting firm $56,800 in fees. The consulting fees for the year ended December 31, 1997 were $15,678. The Company paid $495,000 towards finder's fees to a consulting firm relating to the acquisition of Superior. A former director of the Company was also a minority shareholder of this consulting firm at the time of the acquisition. 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 year ended December 31, 1997, fees of $20,833 were paid to this consulting firm and during the six months ended December 31, 1996 the fees paid were $12,500. 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. In the year ended December 31, 1997, the Company paid fees of $20,050 and for the years ended June 30, 1996 and 1995, $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 leases offices and warehouse facilities under operating leases expiring in various years through 2014 that require the Company to pay certain costs such as maintenance and insurance. The main facility at Superior is rented from a related party. The related party rent was $162,000 for 1997. The following is a schedule of future minimum lease payments for all operating leases (with initial or remaining terms in excess of one year) as of December 31, 1997:
YEAR AMOUNT ---- ----------- 1998........................................................ $ 996,000 1999........................................................ 1,003,000 2000........................................................ 1,052,000 2001........................................................ 1,054,000 2002........................................................ 986,000 Thereafter.................................................. 5,608,000 ----------- Total minimum future lease payments............... $10,699,000 ===========
Rent expense, net of subleases for the year ended December 31, 1997 was $643,564 and for the six months ended December 31, 1996 and 1995 was $130,463 and $31,000 respectively. Rent expense for the years ended June 30, 1996 and 1995 was $61,366 and $71,031, respectively. Employment Agreements As of December 31, 1997, the Company has employment agreements with six officers 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. 56 53 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Consulting Agreements 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 which included redeemable common stock purchase warrants. Each warrant originally allowed the holder to purchase one share of common stock at a price of $65, subject to adjustment in certain instances, through September 24, 1995. As a result of subsequent debt and equity financings, the 91,780 warrants that remain outstanding have been adjusted to allow the holder to purchase 1.7 shares with each warrant at an exercise price of $39 per warrant. The Company has extended the expiration date of the warrants to September 24, 1998. During the year ended June 30, 1996, 220 warrants were exercised to purchase 330 shares of common stock. Net proceeds were $9,438. 1994 Public Offering On March 23, 1994, the Company completed a public offering of 160,000 units at $45 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 $12, 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 16,000 units at $74.25 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. 57 54 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 1994 Public Offering Warrants In June 1995, 2,200 warrants issued to the underwriters of the 1994 public offerings were exercised at $74.25 per warrant. The Company received proceeds of $163,350 and issued the warrant holder 8,800 shares of common stock and 4,400 Class A redeemable common stock purchase warrants. In addition, in June 1995, 3,500 warrants issued to the underwriters of the 1994 public offering were exercised, using their net exercise feature, in exchange for 18,545 shares of common stock. During the period from July 1995 to November 1995, 10,300 warrants issued to the underwriters of the 1994 public offering were exercised to acquire 50,398 shares of common stock and 1,000 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 324,119 shares of common stock yielding net proceeds of $3,845,769 after deducting expenses. The remaining 1,280 unexercised warrants were redeemed by the Company for $.10 per warrant. Private Placements During the year ended June 30, 1993, the Company entered into two common stock private placement agreements and issued warrants to the placement agents to purchase 6,833 shares of common stock. 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 $43.70 per share. On February 7, 1996, the Company raised $3 million in a private placement, from the sale to a single investor of 57,963 shares of common stock at a price of approximately $17.30 per share and the issuance of a $2 million convertible note. (See Note 6). Placement costs for this transaction were $421,157 of which $146,452 was charged to additional paid-in capital and $274,705 was capitalized as deferred debt financing costs. During the year ended December 31, 1997, $1,065,000 of this note was converted for 98,959 shares of common stock and $79,235 of related debt financing costs charged to additional paid-in-capital. During the six months ended December 31, 1996, $400,000 of the note was converted for 41,441 shares of common stock and $36,627 of related deferred debt financing costs were charged to additional paid-in capital. On February 21, 1996 and March 4, 1996, the Company issued, in private placements, an aggregate of 38,850 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 161,283 shares of common stock based on the above formula. In February 1996, the Company issued, in a private placement, 55,256 shares of common stock for aggregate consideration of $1,000,000. Placement costs of $13,526 were charged to additional paid-in capital. During 1997, the Company sold 48,450 shares of Series A Preferred Stock and warrants to purchase 38,760 shares of Common Stock for $4,845,000. The Series A Preferred Stock has a stated dividend of $5.00 per share per annum. DynaGen is obligated to register the shares of common stock issuable upon conversion of the Series A Preferred Stock and exercise of the warrants within 90 days after the issuance of the Preferred Stock. The exercise price of the warrants will be $3.87 per share based on the five trading days immediately 57 55 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) preceding December 4, 1997 on which date the registration statement is declared effective. The holders of Series A Preferred Stock have certain rights of first refusal on future equity financings. The Series A preferred stock may be converted into common stock at a conversion price equal to the lesser of 120% of the average closing bid price, as defined (the Series A Effective Price) or discounted percentages of the Series A Effective Price decreasing from 80% to 74% over time. During 1997, 11,443 shares of Series A Preferred Stock with accumulated dividends was converted into 757,320 shares of common stock. Any outstanding shares of the Series A Preferred Stock will be automatically converted to common stock two years from the issue date. The Company issued 100,000 shares to a placement agent in connection with placement fees for Series A Preferred Stock. In June 1997, the Company sold 7,500 shares of Series B Preferred Stock and 22,500 shares of common stock for $750,000 to a private investor. The Series B Preferred Stock has a stated dividend of $7.00 per share per annum. Additionally, a $500,000 bridge loan provided in June 1997 and accrued interest was converted to 5,015 shares of Series B Preferred Stock and 15,000 shares of common stock in October 1997 per the terms of the bridge loan. Upon liquidation, the Series B Preferred Stock ranks junior to the Series A Preferred Stock. DynaGen is obligated to register the 22,500 shares of common stock issued and the shares of common stock issuable upon conversion of the series B Preferred Stock within 50 days after the closing of the acquisition. The Series B preferred stock may be converted into Common Stock at a conversion price equal to the lesser of 125% of the average closing bid price, as defined (the "Series B Effective Price") or discounted percentages of the Series B Effective Price decreasing from 80% to 75% over time. Any outstanding shares of the Series B Preferred Stock will be automatically converted to common stock two years from the issue date. During 1997, the Company issued 7,500 shares, $.01 par value, of Series C Preferred Stock and a Common Stock and a Common Stock Purchase Warrant to purchase 25,000 shares of common stock to a private investor for a purchase price of $750,000. The Series C Preferred Stock may be converted into common stock at a conversion price equal to the average trading value at the lesser of 125% of average closing bid of common stock as discounted percentages of Series C effective price of 80%. Effective December 31, 1997, the Company issued an 8% Debenture due April 19, 2009 for $328,500 to settle certain penalties related to delayed registration of the Series C Preferred Stock. The Debenture is repayable solely in common stock and may be converted at the trading value of company's stock, for five trading days preceeding the Conversion date. The Company issued 6,500 shares, $.01 par value, of Series C Preferred Stock in settlement of $650,000 of accrued expenses. These shares may be converted into common stock at market prices beginning in 90 days from issue date. The Series A, B and C Convertible Preferred Stock have conversion features that were "in the money" at the date of issue ("beneficial conversion feature"). These securities may be convertible into common stock at the discount percentages specified above. The beneficial conversion was recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital. The intrinsic value was calculated at the date of issue of the Convertible Preferred Stock as the difference between the conversion price and the face value of the Common Stock into which the securities are convertible, multiplied by the number of shares 58 56 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) into which the security is convertible. A summary of the amounts allocated to the beneficial conversion feature as follows:
DECEMBER 31, ---------------------- CONVERTIBLE PREFERRED STOCK 1997 1996 --------------------------- ---------- -------- Series A.................................................... $1,366,000 $865,000 Series B.................................................... 374,000 -- Series C.................................................... 178,000 -- ---------- -------- $1,918,000 $865,000 ========== ========
The discount resulting from the allocation of proceeds to the beneficial conversion feature is analogous to a dividend and has been recognized as a return to the preferred shareholders from the date of issuance through the date the security is first convertible. The discounts of $1,918,000 and $865,000 were fully amortized at December 31, 1997 and 1996 by a charge against additional paid-in capital because the company had no accumulated earnings at those dates. The amortization of the discount has been reflected as a return to the preferred shareholders in the calculation of basic earnings per share. Bonus Compensation In February 1996, the Company granted to certain employees and a consultant, bonus compensation paid in the form of (1) 11,725 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 6,500 shares of common stock at an exercise price of $.10 per share. The Company recognized $558,857 in compensation expense associated with the grants. 59 57 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) Stock Option Plans The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and reserved 60,000 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:
YEARS ENDED JUNE 30, YEAR ENDED SIX MONTHS ENDED ------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 1996 1995 ----------------- ----------------- ----------------- ----------------- 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............. 20,800 $8.80 22,000 $8.70 27,000 $7.10 27,000 $7.10 Granted.............. -- -- -- -- -- -- -- -- Canceled............. -- -- -- -- -- -- -- -- Exercised............ -- -- (1,200) 7.50 (5,000) .50 -- -- ------ ------ ------ ------ Outstanding at end of period............. 20,800 8.80 20,800 8.80 22,000 8.70 27,000 7.10 ====== ====== ====== ====== Exercisable at end of period............. 20,800 8.80 20,050 8.90 19,750 8.90 22,850 7.20 ====== ====== Reserved for future grants at end of period............. -- -- -- -- ====== ====== ====== ======
Information pertaining to options outstanding under the 1989 Plan at December 31, 1997 is as follows:
OPTIONS EXERCISABLE OPTIONS OUTSTANDING ---------------------- ------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE --------------- ----------- ---------------- -------- ----------- -------- $7.50-$8.80............ 20,600 4.0 Years $ 8.30 20,600 $ 8.30 $58.70................. 200 3.6 Years 58.70 200 58.70 ------ 20,800 4.0 Years 8.80 20,800 8.80 ====== ======
60 58 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved 260,000 shares of common stock for issuance to employees, officers, directors and consultants. 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, 1997, 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, YEAR ENDED SIX MONTHS ENDED ------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 1996 1995 ------------------ ------------------ ----------------- ----------------- 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...... 79,790 $10.20 64,090 $10.40 60,910 $12.60 58,660 $11.80 Granted................................. 21,000 2.31 32,600 10.10 10,500 2.90 5,000 19.40 Canceled................................ (22,394) 10.00 (5,600) 18.10 (2,150) 52.90 (2,700) 8.50 ------ ------ Exercised............................... (150) 7.50 (11,300) 7.50 (5,170) 3.20 (50) 7.50 ------- ------- ------ ------ Outstanding at end of period............ 78,246 5.80 79,790 10.20 64,090 10.40 60,910 12.60 ======= ======= ====== ====== Exercisable at end of period............ 52,800 8.70 34,399 11.80 41,830 10.90 20,183 18.70 ======= ======= ====== ====== Reserved for future grants at end of period................................ 165,084 23,690 50,690 59,040 ======= ======= ====== ====== Weighted average fair value of options granted during the period............. $ 2.30 $12.30 $29.40 N/A
Information pertaining to options outstanding under the 1991 Plan at December 31, 1997 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.............. 40,000 4.0 Years $ 3.25 27,200 $ 2.80 $1.31-$1.94............ 18,246 5.3 Years 6.20 5,600 6.95 $5.25-$6.25............ 20,000 1 Years 25.60 20,000 25.60 ------ ------ 78,246 3.8 Years 5.80 52,800 8.70 ====== ======
Other Stock Options and Warrants On September 6, 1990, the Company's Board of Directors granted non-qualified stock options to purchase 45,000 shares of common stock at a price of $8.75 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 2,000 shares of common stock at a price of $52.50 per share exercisable through January 15, 1999. 61 59 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 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 40,000 shares of common stock at an exercise price of $25 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 66,000 shares of common stock at an exercise price of $19.40 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 33,000 shares of common stock at an exercise price of $13.10 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 $12 per share. On December 10, 1996, the Company granted warrants to purchase an aggregate of 10,000 shares of common stock at an exercise price of $14.40 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 year ended December 31, 1997 and the six months ended December 31, 1996 was $39,598 and $19,800, respectively. On August 28, 1997, the Company issued a warrant to purchase 1,000,000 shares of Common Stock at an exercise price of $0.15 per share as consideration of investment banking services rendered to the Company by an investment banker. The Company recognized compensation expense of $452,000 in the third quarter of Fiscal 1997 based on the fair value of the warrant. Stock-Based Compensation At December 31, 1997, 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 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, YEAR ENDED DECEMBER 31, 1997 1996 JUNE 30, 1996 ----------------- ---------------- ------------- Net loss: As reported................................. $(12,241,278) $(4,306,140) $(5,097,419) Pro forma................................... (12,555,111) $(4,489,433) $(5,146,869) Net loss per share: As reported................................. $ (4.48) $ (2.44) $ (2.09) Pro forma................................... $ (4.58) $ (2.60) $ (2.11)
Common stock equivalents have been excluded from all calculations of net loss per share because the effect of including them would be anti-dilutive. 62 60 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 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 year ended December 31, 1997, 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%, 6.5% and 6.4%; expected volatility of 80%, 80% and 80% and expected lives of 1.0, 3.8 and 3.9 years. 63 61 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 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, 1997 as follows:
NUMBER OF SHARES ---------------- Convertible note payable.................................... 1,539,143 1992 public offering warrants............................... 256,984 Private placement agents' warrants.......................... 6,833 Stock option plans.......................................... 112,446 Superior Acquisition........................................ 1,833,334 Preferred Stock Conversion.................................. 10,745,916 Other stock options and warrants............................ 2,366,062 ---------- Total..................................................... 16,860,718 ==========
The number of shares of common stock reserved in connection with the convertible note payable and convertible preferred stock 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, 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:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, ------------ ------------------------- ------------------------- 1997 1996 1995 1996 1995 ------------ ----------- ----------- ----------- ----------- Far East and Asia............... $ 31,970 $ 68,815 $ 39,812 $ 183,706 $ 185,997 United States................... 13,747,429 281,934 4,693 18,877 39,860 Europe.......................... 11,542 7,403 5,622 8,466 16,462 Other........................... 129,963 315 7,728 9,696 5,234 ----------- ----------- ----------- ----------- ----------- $13,920,904 $ 358,467 $ 57,855 $ 220,745 $ 247,553 =========== =========== =========== =========== ===========
64 62 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) A summary of sales by product is as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, ------------ ------------------------- ------------------------- 1997 1996 1995 1996 1995 ------------ ----------- ----------- ----------- ----------- Diagnostic tests................ $ 110,395 $ 86,781 $ 57,855 $ 220,745 $ 247,553 Generic pharmaceuticals......... 13,810,509 271,686 -- -- -- ----------- ----------- ----------- ----------- ----------- $13,920,904 $ 358,467 $ 57,855 $ 220,745 $ 247,553 =========== =========== =========== =========== ===========
License Fees and Royalties 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. 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 subsidiaries, Able Laboratories, Inc. and Superior Pharmaceutical Company. During the years ended June 30, 1996 and 1995, the Company's continuing operations consisted of the development and marketing of therapeutic and diagnostic products for the human health care market. Segment information is as follows:
THERAPEUTICS AND GENERIC DIAGNOSTIC PRODUCTS PHARMACEUTICALS ------------------- --------------- YEAR ENDED DECEMBER 31, 1997 Operating revenues......................... $ 110,395 $13,810,509 Operating loss............................. (5,964,823) (2,658,370) Identifiable assets........................ 435,570 16,091,669 Depreciation and amortization.............. 37,539 192,872 Capital expenditures....................... 41,765 929,964 SIX MONTHS ENDED DECEMBER 31, 1996 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
65 63 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 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, certain intangible assets and deferred debt financing costs. 12. EMPLOYEE BENEFIT PLAN The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan") for the DynaGen and Able employees. 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, 1997. Superior provides its employees with a Section 401(k) profit sharing plan. Eligible participants must be twenty-one years old and have worked for one year. Employer matching and profit sharing contributions are discretionary. At December 30, 1997, Superior matched $5,919 and contributed $18,208 in profit sharing. 13. SUBSEQUENT EVENTS On August 20, 1997, the Company completed a placement of Series C and Series D Convertible Preferred Shares with an investor. At the time of the closing, the investor purchased 7,500 shares of Series C Preferred for $750,000. The purchase agreement provided that the Company may require the investor to purchase on a monthly basis tranches of Series D Preferred Shares in the amount of no less than $200,000 per month and on an optional basis no more than an additional $200,000 per month with certain exceptions. The Company is obligated to register for resale the shares of common stock issuable upon conversion of the Series C and D Preferred Stock. The Company also issued a stock purchase warrant to purchase 25,000 shares of its common stock in connection with this offering. Under the registration rights agreement, the Company was required to file registration of both Series C and D Preferred Shares within 45 days of the completion of the placement. The Company filed the registration statement in March 1998, but it has not been declared effective. In March 1998 the Company issued a warrant to the investor to purchase at any time in the next three (3) years 1% of the fully diluted issued and outstanding shares at the time of the exercise for $150,000. On March 19, 1998, the investor purchased an additional $500,000 of Series D Preferred Shares from the Company and waived certain restrictions which limited the drawdown to $400,000 per month. On February 26, 1998, the Company received $500,000 from the placement of a 7% convertible debenture from another investor. On March 30, 1998, the investor exchanged this debenture for a $500,000 tranche of Series D Preferred Shares and also received an 8% convertible debentures in the amount of $87,500. This debenture is convertible into common stock at the market price of the common stock on the date of the conversion. 66 64 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) On March 31, 1998, the Company sold another tranche of $500,000 of Series D Preferred Stock, along with an 8% convertible debenture in the amount of $87,500 convertible into common stock at the market price, to another investor. During the months of February and March of 1998, the Chairman and Executive Vice President and the President and Chief Executive Officer of the Company and their family members advanced the Company $265,000 towards general working capital purposes. The loans carry no interest, are unsecured, and subordinated and can only be repaid through conversion into equity. On March 2, 1998, the Company through its subsidiary, Generic Distributions, Incorporated ("GDI"), completed the acquisition of Generic Distributors Limited Partnership ("GDLP"), of Monroe, LA. In connection with the acquisition, the Company paid the limited partnership $1,200,000 in cash, and $1,050,000 in Series E Convertible Preferred Shares and 1,500 shares of Series F Convertible Preferred Stock valued at $100,000, for a total purchase price of $2,350,000. The Preferred Shares are convertible beginning 12 months from the closing into the Company's common shares at the then prevailing market prices. The Series F Preferred Stock is convertible into $100,000 in value of the Company's Common Stock commencing 120 days after the closing. In connection with this transaction, GDI received $1,200,000 in a five-year term loan from Fleet Bank. The loan carries an interest of LIBOR plus 3%, is payable in quarterly installments of principal and interest and matures on April 26, 2003. Fleet Bank also established a revolving line of credit for general working capital in the amount of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are secured by all of the assets of GDI and Able and a pledge of all of the common stock of GDI, and are guaranteed by the Company. In addition, the Company entered into employment and consulting agreements with the sellers which provide, among other things, for annual compensation and a signing bonus of 1400 shares of Series F Preferred Stock, convertible into $100,000 of the Company's Common Stock commencing 120 days after the closing. At a special meeting held on March 4, 1998, the stockholders approved a recapitalization effecting a one-for-ten reverse split of the Company's Common Stock. As a result of the stockholder vote, effective on the close of business March 10, 1998, the Company's authorized shares of Common Stock were 75,000,000 and the total number of shares of Common Stock outstanding were approximately 7,500,000. On March 24, 1998, the Company suspended conversions of its Series A and B Preferred Shares into the Company's common stock. The purpose of this suspension is to give the Company time to coordinate its efforts to negotiate orderly settlements of these outstanding convertible preferred shares. On March 30, 1998, the Board of Directors unanimously voted to issue options, warrants and the Company's common stock to several individuals and entities for services rendered to date and for future considerations. The Board also authorized the issuance of 800,000 shares for product development and FDA related consulting services to various entities. The Company granted warrants to purchase 650,000 shares to two consulting firms in connection with the Company's investor relations program. All of the above grants of shares, options and warrants are subject to vesting and may be canceled by the Board at its option. In March 1998, the Company received a letter from NASDAQ advising that the Company did not meet the minimum listing criteria and will be subject to delisting. The Company has responded to NASDAQ. To date, the Company has not been informed of a decision from NASDAQ concerning its continued listing. These events could cause the Company's results of operations to be substantially different from those described in the financial statements as of December 31, 1997. See the financial statements and notes thereto, particularly Note 13 entitled "Subsequent Events," included as part of this Report. 67 65 DYNAGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED.) 14. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1997 and 1996, the Company's financial instruments include investment securities which are carried at fair value (see Note 3), notes receivable (see Note 8) and debt obligations (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 $799,000 and $2,786,000 at December 31, 1997 and 1996, respectively, based on the fair value of the common stock issuable on conversion of the note. The carrying value of other debt obligations approximate fair values based on their maturities and interest rates. 15. QUARTERLY DATA (UNAUDITED) Summaries of operating results on a quarterly basis are as follows:
SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30, YEAR ENDED ----------------- ------------------------------------- DECEMBER 31, 1997 1996 1996 ------------------------------------- ----------------- ------------------------------------- FOURTH THIRD SECOND FIRST 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............ $6,662 5,572 $1,230 $ 457 $ 299 $ 59 $ 70 $ 93 $ 39 $ 19 License fees and royalties... -- 38 50 1 1 -- 25 35 25 250 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenues........... 6,662 5,610 1,280 458 300 59 95 128 64 269 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Cost of sales................ 6,402 4,645 1,255 454 331 25 22 46 21 8 Research and development..... 851 723 1,159 487 332 760 1,230 852 566 470 Selling, general and administrative............. 2,525 2,546 1,066 1,475 2,166 1,073 616 880 618 571 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............... 9,778 7,914 3,980 2,416 2,829 1,858 1,868 1,778 1,205 1,049 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating loss............... (3,116) (2,304) (2,700) (1,958) (2,529) (1,799) (1,773) (1,650) (1,141) (780) Other income, net............ (1,623) (514) (95) 69 1 21 74 62 57 54 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss................. $(4,739) $(2,818) $(2,795) $(1,889) $(2,528) $(1,778) $(1,699) $(1,588) $(1,084) $ (726) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Net loss per share........... $(1.35) $ (.87) $ (.92) $ (.63) $ (.88) $ (.62) $ (.63) $ (.61) $ (.48) $ (.34) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding................ 3,525 3,246 3,041 2,998 2,897 2,862 2,729 2,606 2,263 2,180 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
68 66 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......................... 44 Chairman of the Board, Executive Vice President and Director Dr. Indu A. Muni............................. 55 President, Chief Executive Officer, Treasurer and Director Dr. F. Howard Schneider(1)(2)................ 58 Director Steven Georgiev(1)(2)........................ 64 Director Dr. Michael Sorell........................... 51 Director Peter J. Mione............................... 51 Vice President -- Clinical and Regulatory Affairs
- --------------- (1) Member of the Audit Committee. (2) Member of the Executive Compensation Committee. 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. 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 until his resignation in November 1997. 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. 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 68 67 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 a 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. 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. Based solely on its review of the copies of such forms received by it, the Company believes that during the fiscal year all of its officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements. SIGNIFICANT EMPLOYEES The Company also relies on the services of the following significant employees: Dennis B. Smith, age 42, has served as President and Chief Executive Officer of Superior Pharmaceutical Company since 1989. Prior to 1989, Mr. Smith was Business Development Vice President for Bioline Laboratories in 1988-1989. He was Director of Sales at Bioline Laboratories in 1987-1988. Prior to joining Bioline, Mr. Smith served as Midwest Region Sales Manager for Goldline Laboratories in 1985-1987. He was Field Sales Representative for Generix Drug Corporation in 1982-1985; Generix Drug was the precursor company to Goldline Laboratories. He served as a field sales representative for Cooper Drug Company in 1980-1982. Mr. Smith studied business management at Southern State College and at the University of Cincinnati. Eric C. Hagerstrand, age 50, founded Superior Pharmaceutical Company in 1986 and has served as Chairman, Director, and Chief Financial Officer since that time. He assumed the position of Chief of Operations in 1984. Mr. Hagerstrand was engaged in the private practice of law for twenty years prior to devoting his full time to Superior in 1994. He maintains full licensing and membership in the Ohio State Bar Association and the Cincinnati Bar Association. Mr. Hagerstrand graduated from Wittenberg University in 1969 with a major in economics and earned his law degree from the University of Cincinnati College of Law in 1974. 69 68 Don Couvillon, age 50, founded Generic Distributors Incorporated, of Monroe, LA, in August 1985. From 1978 until 1989 he was the sole owner of a retail pharmacy, Don's Pharmasave. Prior to that, he worked in Eli Lilly and Company from 1976 to 1977. Mr. Couvillon obtained his degree in pharmacy from the NLU Pharmacy School in 1991. Dr. Saraswathy V. Nochur, age 37, became Director -- Diagnostic Products in February 1994 and previously served DynaGen 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. Cynthia A. Kiley, age 37, has served DynaGen 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. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors who are also employees of the Company are not compensated for attending meetings of the Board of Directors. The Company has instituted a policy of paying directors who are not employees of the Company 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 many 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 1998 Stock Option Plan, the 1991 Stock Plan and the 1989 Stock Option Plan. EXECUTIVE COMPENSATION COMMITTEE On July 24, 1996, the Board established an Executive Compensation Committee, of which Dr. Schneider and Mr. Georgiev are the current 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. 70 69 SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning the compensation for services rendered in all capacities to the Company for the fiscal years ended December 31, 1997, June 30, 1996 and June 30, 1995 of (i) the Chief Executive Officer of the Company during 1997 and (ii) the other executive officers of the Company serving on December 31, 1997 whose salary and bonus for 1997 exceeded $100,000 (the "Named Executive Officers"):
LONG-TERM COMPENSATION AWARDS COMPENSATION ------------ ----------------- SECURITIES ALL OTHER NAME AND FISCAL SALARY(1) BONUS UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR ($) ($) OPTIONS(#) ($) ------------------ ------ --------- ----- ---------- ------------ Dr. Indu A. Muni.......................... 1997 $124,300 -- -- 252(2) President, Chief Executive Officer 1996 115,500 -- -- 304(2) and Treasurer 1995 115,500 -- -- 304(2) Dhananjay G. Wadekar...................... 1997 $124,300 -- -- 252(2) Executive Vice President 1996 115,500 -- -- 304(2) 1995 115,500 -- -- 304(2) Dr. F. Howard Schneider................... 1997 $ 98,898 -- -- 252(2) Senior Vice President -- Technology 1996 115,500 -- 10,000 304(2) 1995 115,500 -- -- 304(2)
- --------------- (1) Other than salary described herein, the Company did not pay any Named Executive Officer any compensation, including incidental personal benefits, in excess of 10% of such Named Executive Officer's salary. (2) Amount represents the dollar value of group-term life insurance premiums paid by the Company for the benefit of the Named Executive Officer. (3) Dr. Schneider resigned his position as Senior Vice President -- Technology on November 7, 1997. Dr. Schneider continues to serve on the Company's Board of Directors. OPTION GRANTS No options were granted to any Named Executive Officer during fiscal 1997. OPTION EXERCISES AND FISCAL YEAR END VALUES The following table sets forth certain information concerning the number and value of unexercised stock options held by the Named Executive Officers as of December 31, 1997. None of the Named Executive Officers exercised any stock options during fiscal 1997.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS HELD DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Dr. Indu A. Muni........................... -- -- -- -- Dhananjay G. Wadekar....................... -- -- -- -- Dr. F. Howard Schneider.................... 202,859 -- $ 1,100 --
- --------------- (1) Value is based on the December 31, 1997 closing price on the Nasdaq SmallCap Market of $0.13 per share. Actual gains, if any, on exercise will depend on the value of the Common Stock on the date of the sale of shares. 71 70 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, Dr. Schneider, the Company's Senior Vice President--Technology, also had a similar agreement until his resignation from his position on November 7, 1997. Dr. Muni's agreement expires in August 1998 and Mr. Wadekar's agreement expires in October 1998. For 1997, the Board of Directors and the Compensation Committee set Dr. Muni and Mr. Wadekar's annual base salaries at $145,000 and approved an arrangement whereby Dr. Schneider was paid an annual base salary of $116,000 for a four-day work week. In addition, each of Dr. Muni, Mr. Wadekar and Dr. Schneider have 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 or Mr. Wadekar's employment without cause, the Company is obligated to pay to him an amount equal to three months base salary. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors and the Compensation Committee were responsible for determining compensation of executive officers of the Company. During fiscal 1997, Drs. Muni and Schneider and Mr. Wadekar served 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. The Board of Directors did not grant any options to Drs. Muni or Schneider or Mr. Wadekar during fiscal 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the company's voting securities as of March 31, 1998, by (i) each person or entity known to the Company to own beneficially five percent or more of the Company's Series A Stock, Series B Stock, Series C Stock and Common Stock, (ii) each of the Company's directors, (iii) the Company's Principal Executive Officer and each of the other Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. Except as otherwise noted, each beneficial owner has sole voting and investment power with respect to the shares shown. 72 71
SHARES BENEFICIALLY OWNED(1) --------------------------------------------------------------- SERIES A SERIES B SERIES C COMMON STOCK STOCK STOCK STOCK ----------------------- ----------------- ----------------- ----------------- PERCENT(2) PERCENT PERCENT PERCENT NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS ------ ---------- ------ -------- ------ -------- ------ -------- Dhananjay G. Wadekar.............. 1,351,251 0.9% -- -- -- -- -- -- c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. Indu A. Muni.................. 1,137,252 0.7% -- -- -- -- -- -- c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. F. Howard Schneider........... 272,859(3) * -- -- -- -- -- -- c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Steven Georgiev................... 82,500(4) * -- -- -- -- -- -- c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. Michael Sorell................ 82,500(4) * -- -- -- -- -- -- 115 East 92nd Street New York, NY 10128 Sovereign Partners L.P............ 1,133,947(9) 7.2% -- -- -- -- Executive Pavilion 90 Grove Street Ridgewood, Ct 06878 The Endeavor Capital Fund S.A..... 2,896,700(6) 16.5% -- -- 7,500 100% c/o Endeavor Management 14/14 Divrei Chaim St. Jerusalem 94479, Israel Julius Baer Securities, Inc....... 2,002,610(7) 12.0% -- -- 7,500 100% -- -- As agent for certain non-U.S. persons 330 Madison Ave. New York, NY 10017 GDLP.............................. -- -- -- -- Mowrane 2A All directors and executive....... 303,736(8) 2.0% -- -- -- -- -- -- officers as group (6 persons) SERIES D SERIES E STOCK STOCK ----------------- COMMON STOCK ----------------- PERCENT -------------------- PERCENT NUMBER OF CLASS NUMBER PERCENT NUMBER OF CLASS ------ -------- ------ ------- ------ -------- Dhananjay G. Wadekar.............. c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. Indu A. Muni.................. c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. F. Howard Schneider........... c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Steven Georgiev................... c/o DynaGen, Inc. 840 Memorial Drive Cambridge, MA 02139 Dr. Michael Sorell................ 115 East 92nd Street New York, NY 10128 Sovereign Partners L.P............ 5,000 50% Executive Pavilion 90 Grove Street Ridgewood, Ct 06878 The Endeavor Capital Fund S.A..... 5,000 50% c/o Endeavor Management 14/14 Divrei Chaim St. Jerusalem 94479, Israel Julius Baer Securities, Inc....... As agent for certain non-U.S. persons 330 Madison Ave. New York, NY 10017 GDLP.............................. 2,024,096(10) 12.1% 10,500 100% Mowrane 2A All directors and executive....... officers as group (6 persons)
73 72 - --------------- * Less than one percent. (1) To the Company's knowledge, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. (2) Percentage ownership is based on 14,667,951 shares of Common Stock outstanding, plus securities deemed to be outstanding, with respect to individual stockholders, pursuant to Rule 13d-3(d)(1) under the Exchange Act. (3) Includes 202,859 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. (4) Consists of 82,500 shares issuable pursuant to immediately exercisable stock options. (5) Represents shares issuable upon conversion of shares of Series A Stock. The terms of the Series A Stock prohibit the holder from converting shares of Series A Stock if such conversion would result in beneficial ownership of more than 4.9% of the outstanding Common Stock. (6) Represents shares issuable upon conversion of Series C and Series D Stock. The terms of the Series C and Series D Stock prohibit the holder from converting shares of Series A or Series C Stock if such conversion would result in beneficial ownership of more than 4.9% of the outstanding Common Stock. (7) Represents shares issuable upon an assumed conversion of Series B Stock. The terms of the Series B Stock prohibit the holder from converting shares of Series B Stock if such conversion would result in beneficial ownership of more than 4.9% of the outstanding Common Stock. (8) Includes 457,859 shares issuable pursuant to immediately exercisable stock options. (9) Represents shares issuable upon conversion of Series D Stock. The terms of Series D Stock prohibit the holder from converting shares of Series D Stock if such conversion would result in beneficial ownership of more than 4.9% of the outstanding Common Stock. (10) Represents shares issuable upon conversion of Series E Stock. 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 calendar 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. 74 73 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, 1997 and 1996 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. Index to Exhibits The following exhibits are filed as part of this report:
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 herein 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 From S-3 (File No. 333-1748) and incorporated herein by reference).
75 74
EXHIBIT NO. ITEM AND 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. 33-1748) 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). 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 as Exhibit 4m to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 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 as Exhibit 4p to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 4q -- Common Stock Purchase Warrant issued by Registrant to Rich Theriault dated December 10, 1996 (filed as Exhibit 4q to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 4r -- Common Stock Purchase Warrant issued by Registrant to Shawn Basu dated December 10, 1996 (filed as Exhibit 4r to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 4s -- Common Stock Purchase Warrant issued to Leonardo G. Zangani dated January 15, 1997 (filed as Exhibit 4s to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 4t -- Registration Rights Agreement dated June 18, 1997 among DynaGen and Eric Hagerstrand, Dennis Smith and Thomas Canning (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference).
76 75
EXHIBIT NO. ITEM AND REFERENCE - ------- ------------------ 4u -- Secured Promissory Note dated June 18, 1997 issued by DynaGen to Eric C. Hagerstrand (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4v -- Secured Promissory Note dated June 18, 1997 issued by DynaGen to Dennis B. Smith (filed as Exhibit 4.3 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4w -- Secured Promissory Note dated June 18, 1997 issued by DynaGen to Thomas L. Canning (filed as Exhibit 4.4 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4x -- Pledge Agreement dated June 18, 1997 among DynaGen and Eric Hagerstrand, Dennis Smith and Thomas Canning (filed as Exhibit 4.5 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4y -- Secured Promissory Note dated June 18, 1997 issued by DynaGen to Sirrom (filed as Exhibit 4.6 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4z -- Secured Promissory Note dated June 18, 1997 issued by DynaGen to Odyssey (filed as Exhibit 4.7 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4aa -- Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to Sirrom (filed as Exhibit 4.8 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4bb -- Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to Odyssey (filed as Exhibit 4.9 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4cc -- Pledge and Security Agreement dated June 18, 1997 issued by DynaGen to Sirrom (filed as Exhibit 4.10 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4dd -- Subordinated Note dated June 18, 1997 issued by DynaGen to Coutts & Co. AG (filed as Exhibit 4.11 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4ee -- Bridge Financing Purchase Agreement dated June 16, 1997 between DynaGen and Coutts & Co. AG (filed as Exhibit 4.12 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4ff -- Securities Purchase Agreement dated June 16, 1997 among DynaGen and the purchasers of Series A Preferred Stock (filed as Exhibit 4.14 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4gg -- Registration Rights Agreement dated June 16, 1997 among DynaGen and the purchasers of Series A Preferred Stock (filed as Exhibit 4.15 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4hh -- Form of Common Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to the purchasers of Series A Preferred Stock (filed as Exhibit 4.16 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4ii -- Securities Purchase Agreement dated June 17, 1997 between DynaGen and Julius Baer Securities Inc. as agent for certain non-U.S. persons (filed as Exhibit 4.18 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4jj -- Registration Rights Agreement dated June 17, 1997 between DynaGen and Julius Baer Securities Inc. as agent for certain non-U.S. persons (filed as Exhibit 4.19 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4kk -- Stock Purchase Warrant dated June 18, 1997 issued by Superior to Sirrom (filed as Exhibit 4.20 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference).
77 76
EXHIBIT NO. ITEM AND REFERENCE - ------- ------------------ 4ll -- Stock Purchase Warrant dated June 18, 1997 issued by Superior to Odyssey (filed as Exhibit 4.21 to Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4mm -- Revolving Note dated June 18, 1997 issued by Superior to Huntington National Bank (filed as Exhibit 4.22 to DynaGen's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4nn -- Common Stock Purchase Warrant dated April 29, 1997 issued by DynaGen to Kali Laboratories, Inc. (filed as Exhibit 4u to Registrant's Report on Form 10-Q for the period ended June 30, 1997 and, incorporated by reference). 4oo -- Form of Securities Purchase Agreement among the Company and the purchasers of Series A Preferred Stock filed as Exhibit 4a to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4pp -- Master Registration Rights Agreement dated August 6, 1997 among the Company and the purchasers of Series A Preferred Stock filed as Exhibit 4b to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4qq -- Form of Common Stock Purchase Warrant issued by the Company to the purchasers of Series A Preferred Stock (filed as Exhibit 4.16 to the Registrant's Current Report on Form 8-K dated June 18, 1997, and incorporated by reference). 4rr -- Stock Purchase Agreement dated August 21, 1997 between the Company and Endeavour Capital Fund S.A. filed as Exhibit 4d to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4ss -- Registration Rights Agreement dated August 21, 1997 between the Company and Endeavour Capital Fund S.A. filed as Exhibit 4e to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4tt -- Common Stock Purchase Warrant dated August 21, 1997 issued by the Company to Endeavour Capital Fund S.A. filed as Exhibit 4f to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4uu -- Common Stock Purchase Warrant dated August 28, 1997 issued by the Company to H.J. Meyers & Co., Inc. filed as Exhibit 4g to the Company's Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference). 4vv -- Subordinated Notes dated December 19, 1997 issued by the Company to Sovereign Partners LP (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 as Exhibit 10d* to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 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). 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).
78 77
EXHIBIT NO. ITEM AND 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). 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).
79 78
EXHIBIT NO. ITEM AND 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 10w 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 as Exhibit 10aa* to Registrant's Transition Report on Form 10-K for the period ended December 31, 1996, and incorporated by reference). 10bb -- Loan Agreement dated June 18, 1997 among DynaGen, Sirrom and Odyssey (filed as Exhibit 99.1 to Registrant's Current Report on Form 8-K dated June 17, 1997, and incorporated by reference). 10cc -- Security Agreement dated June 18, 1997 among DynaGen, Sirrom and Odyssey (filed as Exhibit 99.2 to Registrant's Current Report on Form 8-K dated June 17, 1997, and incorporated by reference). 10dd -- Amended and Restated Loan and Security Agreement dated June 18, 1997 among Huntington National Bank, Superior and DynaGen (filed as Exhibit 99.3 to Registrant's Current Report on Form 8-K dated June 17, 1997, and incorporated by reference). 10ee -- Continuing Guaranty Unlimited dated June 18, 1997 from DynaGen to Huntington National Bank (filed as Exhibit 99.4 to Registrant's Current Report on Form 8-K dated June 17, 1997, and incorporated by reference). 10ff -- Commercial Lease Agreement dated March 9, 1995 between SPC Properties Limited and Superior (filed as Exhibit 10e to Registrant's Report on Form 10-Q for the period ended June 30, 1997, and incorporated by reference). 10gg -- Amendment, Estoppel and Consent Agreement dated June 18, 1997 between SPC Properties Limited and Superior (filed as Exhibit 10f to Registrant's Report on Form 10-Q for the period ended June 30, 1997, and incorporated by reference).
80 79
EXHIBIT NO. ITEM AND REFERENCE - ------- ------------------ 10hh -- Indenture of Lease dated July 1, 1997 between Rivertech Associates LLC and the Company (filed as Exhibit 10a to Registrant's Report on Form 10-Q for the period ended September 30, 1997, and incorporated by reference). 10ii -- Term Extension Agreement dated August 28, 1997 between CVN Associates, Inc. and Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield, New Jersey (filed herewith). 10jj -- Agreement dated October 31, 1997 between the Company and M. Lee Hibbs together with Exhibits thereto (filed herewith). 21 -- Subsidiaries of the Registrant (filed herewith). 23a -- Consent of Wolf & Company, P.C. dated April 15, 1998 (filed herewith). 24a -- Power of Attorney is contained on page 31 of this Annual Report on Form 10-K. 27 -- Financial Data Schedules (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, 1997. (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. 81 EX-4.VV 2 SUBORDINATED NOTES TO SOVEREIGN PARTNERS 1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH ACT AND STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE DEBTOR THAT SUCH REGISTRATION IS NOT REQUIRED. DYNAGEN, INC. SUBORDINATED NOTE $155,000.00 December 19, 1997 FOR VALUE RECEIVED, DYNAGEN, INC., a Delaware corporation (the "DEBTOR"), hereby promises to pay on or before January 18, 1998, to the order of Sovereign Partners LP (the "LENDER"), the principal sum of ONE HUNDRED THOUSAND FIFTY-FIVE DOLLARS ($155,000.00) or such lesser principal amount then outstanding, together with all accrued and unpaid interest thereon. Interest on the principal amount of this Note will accrue from and including the date hereof until and including the date such principal amount is paid, at a rate equal to seven percent (7.0%) per annum. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Lender or at such other place as the legal holder may designate from time to time in writing to the Debtor. Interest shall be computed on the basis of a 360-day year and a 30-day month. At the option of the Lender, the principal amount of this Note may be satisfied in full by exchanging this Note on January 18, 1998 for conversion into shares of the Debtor's Series A Preferred Stock, $.01 par value per share. This Note is being issued in connection with a certain Bridge Financing Purchase Agreement dated the date hereof. The outstanding balance of this Note shall be immediately due and payable upon an Event of Default as defined in such Bridge Financing Purchase Agreement. The Lender and any holder of this Note acknowledge and agree that the principal and interest on this Note are unsecured and the rights and obligations represented by this Note are subordinated in right of payment to secured indebtedness of the Debtor for money borrowed from commercial bank lenders or other institutional lenders or other holders of Senior Debt, whether now existing or hereafter arising, as further defined in the Bridge Financing Purchase Agreement. This Note applies to, inures to the benefit of, and binds the successors and assigns of the parties hereto. This Note is made under and shall be governed by and construed in accordance with the internal laws of, and enforced by the courts located within, the Commonwealth of Massachusetts. 2 - 2 - IN WITNESS WHEREOF, the Debtor has executed this Note as an instrument under seal as of the date first written above. DYNAGEN, INC. By:____________________________ Title:_________________________ ATTEST:___________________________ Title:____________________________ EX-10.II 3 TERM EXTENSION AGREEMENT 1 TERM EXTENSION AGREEMENT DATE: AUGUST, 1997 LANDLORD: CVN ASSOCIATES, INC. A New Jersey Limited Partnership 300 Raritan Center Parkway P. O. Box 7815 Edison, New Jersey 08818-7815 TENANT: ABLE LABORATORIES, INC. A Delaware Corporation 6 Hollywood Court South Plainfield, New Jersey 07080 PREMISES: Approximately 42,000 square feet of gross space, plus Approximately 3,840 square feet of gross area of mezzanine located within Lot 5C, Block 390 6 Hollywood Court South Plainfield, New Jersey 07080 TERM EXTENSION PERIOD: Five (5) years Beginning Date: April 1, 2000 Ending Date: March 31, 2005 BASE NET RENT FOR THE TERM EXTENSION PERIOD: $21,965.00 per month net, subject to adjustment beginning April 1, 2000, per Clause 3 of this Agreement PERCENTAGE OF ADDITIONAL RENT FOR THE TERM EXTENSION PERIOD: 100% of the total additional rent expenses for the Building which contains the Premises as defined in the Prior Agreements PRIOR AGREEMENTS IN EFFECT: Lease dated November 29, 1984 Space Expansion and Term Extension Agreement dated April, 1988 Space Expansion Agreement dated June, 1993 Term Extension Agreement dated June, 1993 Term Extension Agreement dated May, 1995 The Landlord and the Tenant hereby agree to the terms of this Agreement. 1. The Tenant is presently occupying the Premises under the terms of the Lease and the above referenced supplemental Agreements. 2. The Term of the Lease shall be extended for the Term Extension Period set forth above. 1 of 3 2 3. Beginning April 1, 2000, and continuing through March 31, 2005, the Tenant shall pay the Base Net Rent per the terms of this Clause. Beginning as of April 1, 2003, and thereafter as of the first day of April of each successive year of the Term Extension Period, the Base Net Rent shall be adjusted by multiplying $21,965.00 by a factor, the denominator of which shall be the "Consumers Price Index FOR All Urban Consumers" (1982-1984 = 100), specifically for "All Items", relating to the United States published by the Bureau of Labor Statistics for April, 2000, and the numerator of which shall be the CPI for the month of the Term Extension Period in which the adjustments as are required hereunder occur. In the event the compilation or publication, or both, of the CPI is revised, discontinued, or transferred to any other governmental department, bureau or agency, the Landlord may select a comparable, alternative index for the purposes of the above adjustment. 4. Beginning April 1, 2000, and continuing through the end of the Term Extension Period on March 21, 2005, the Tenant shall pay the Additional Rent as set forth above for the Term Extension Period. 5. The Landlord grants the Tenant an option to extend the Term of the Lease for the Premises for an additional five (5) year extension period. To exercise this option, the Tenant must strictly comply with the following conditions: (a) be in strict compliance with all of its obligations under the terms of the Prior Agreements on the date of exercising this option and on the date of the beginning of the extension period, and (b) give written notice to the Landlord no later than twelve (12) months in advance of the beginning of the extension period, indicating the Tenant's unequivocal and unconditional intention to exercise this option. If the Tenant does not strictly comply with the aforesaid conditions, then the Tenant shall not have exercised this option. If either party rightfully terminates the Lease, or if the notice deadline passes before the Tenant exercises this option, then this option shall automatically and immediately be void and shall have no further effect. If the Tenant exercises this option to extend the Term, then the extension period shall begin on April 1, 2005, and shall end on March 31, 2010. The monthly base rent for the extension period shall be determined per the terms of this Clause. Beginning as of April 1, 2005, and thereafter as of the first day of April of each successive year of the Term Extension Period, the Base Net Rent shall be adjusted by multiplying $21,965.00 by a factor, the denominator of which shall be the "Consumers Price Index for All Urban Consumers" (1982-1984 = 100), specifically for "All Items", relating to the United States published by the Bureau of Labor Statistics for April, 2000, and the numerator of which shall be the CPI for the month of the Term Extension Period in which the adjustments as are required hereunder occur. In the event the compilation or publications, or both, of the CPI is revised, discontinued, or transferred to any other governmental department, bureau agency, the Landlord may select a comparable, alternative index for the purposes of the above adjustment. During the extension period, the Landlord and the Tenant shall comply with all of the terms of the Lease and any supplemental agreements, in effect, except that the terms related to base net rent and the Term of the Lease shall be deemed to be amended to be consistent with the exercise of this option. 6. Landlord shall be responsible for any commission or fee due to any broker in connection with this Term Extension Agreement. 7. Tenant shall have the exclusive right to use all of the parking spaces located on Lot 5C. Block 390, having an address of 6 Hollywood Court, South Plainfield, New Jersey. 2 of 3 3 8. All of the other terms of the Prior Agreements shall remain in effect, except as specifically amended herein. 9. This Agreement binds the Landlord and all parties which rightfully succeed to its rights or take its place. This Agreement binds the Tenant and all parties which rightfully succeed to its rights or take its place with the Landlord's consent in accordance with the terms of the Lease. 10. This Agreement contains the entire agreement made by the Landlord and the Tenant. The terms of this Agreement shall not be changed or amended, except by the terms of a subsequent written agreement signed by the Landlord and the Tenant. WITNESS/ATTEST: LANDLORD/CVN ASSOCIATES, L. P. By: CVN Associates, Inc. Corporate General Partner - ------------------------------ ------------------------------------- By: By: Gilbert H. Nelson, Vice President WITNESS/ATTEST: TENABLE LABORATORIES, INC. - ------------------------------ ------------------------------------- By: By: Indu A. Muni, Ph.D. President and CEO 3 of 3 EX-10.JJ 4 AGREEMENT BETWEEN DYNAGEN AND LEE HOBBS 1 AGREEMENT AGREEMENT made as of this 31st day of October, 1997, by and between Mr. M. Lee Hibbs ("Mr. Hibbs" or "Hibbs") and BioTrack, Inc., a Delaware corporation with a principal place of business at Riverside Technology Center, 840 Memorial Drive, 4th Floor, Cambridge, MA 02139 (the "Company"), a subsidiary of DynaGen, Inc. ("DynaGen"). WHEREAS, the Company believes it to be to its advantage to ensure that Mr. Hibbs renders services to the Company as hereinafter provided; and WHEREAS, Mr. Hibbs' senior managerial position requires that he be trusted with extensive confidential information and trade secrets of the Company and that he develop a thorough and comprehensive knowledge of all details of the Company's business, including, but not limited to, information relating to research, development, inventions, manufacturing, purchasing, accounting, engineering, marketing, distribution and licensing of the Company's products and services; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and obligations herein contained, the parties hereto agree as follows: 1. Position and Responsibilities. (A) Consulting Agreement. From the date of execution of this Agreement until December 22, 1997, Mr. Hibbs agrees to serve as a consultant to DynaGen pursuant to the terms and conditions of the Consulting Agreement attached hereto as Exhibit A. (B) Chief Executive Officer. Effective December 23, 1997, Mr. Hibbs agrees to serve as Chief Executive Officer of the Company. Mr. Hibbs shall at all times report to, and his activities shall at all times be subject to the direction and control of, the Board of Directors of the Company, and Mr. Hibbs shall exercise such powers and comply with and perform, faithfully and to the best of his ability, such directions and duties in relation to the business and affairs of the Company as may from time to time be vested in or requested of him by the Board and shall use his best efforts to improve and extend the business of the Company. Mr. Hibbs agrees to devote all of his business time, attention and services to the diligent, faithful and competent discharge of such duties for the successful operation of the Company's business. Mr. Hibbs will have authority over the hiring and firing of all employees, consultants, agents, and other parties working for the Company. (C) Director Nomination. (i) The Board of Directors of the Company shall nominate and appoint Mr. Hibbs as a director of the Company. Thereafter, during the term of this Agreement, the Board of Directors of the Company shall designate and nominate Mr. Hibbs as a director of the Company and, if elected by the stockholders of the Company, Mr. Hibbs shall accept such position and diligently perform the duties arising from such position. The Board of Directors of the Company will use its best efforts to cause Mr. Hibbs to be elected as a director after nomination. 2 - 2 - (ii) The Board of Directors of the Company shall nominate and appoint an individual designated by Mr. Hibbs as a director of the Company. Thereafter, during the term of this Agreement, the Board of Directors of the Company shall designate and nominate the individual designated by Mr. Hibbs as a director of the Company and, if elected by the stockholders of the Company, the individual designated by Mr. Hibbs shall accept such position and diligently perform the duties arising from such position. The Board of Directors of the Company will use its best efforts to cause the individual designated by Mr. Hibbs to be elected as a director after such nomination. Mr. Hibbs' right to designate a director shall expire upon the closing of the initial public offering of the Company's stock. 2. Compensation: Salary and Other Benefits. As of December 23, 1997, the Company shall pay Mr. Hibbs the following compensation, including the following salary and fringe benefits: (A) Salary. In consideration of the services to be rendered by Mr. Hibbs to the Company, the Company will pay to Mr. Hibbs the monthly salary rate of $2,083.33 (Mr. Hibbs' "base rate"). Mr. Hibbs shall receive a bonus equivalent to $10,000.00 for each full month employed from the date of this Agreement to the time the Company receives $250,000 in seed capital within 30 days of the Company's receipt of such seed capital. Thereafter, Mr. Hibbs shall be paid at the monthly salary rate of $12,083.37 in conformity with customary practices for executive compensation as such practices shall be established or modified from time to time by the Compensation Committee of the Board of Directors. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. (B) Fringe Benefits. Mr. Hibbs shall be reimbursed for all reasonable business related expenses. Mr. Hibbs shall accrue four (4) weeks vacation per year. Mr. Hibbs will also be entitled to participate on the same basis with all other senior management employees of DynaGen in DynaGen's standard benefits package generally available to such senior management employees of DynaGen with respect to group health, dental, disability, 401(K) plan (to the extent such participation is allowed under the terms of the plan and applicable law) and life insurance programs. 3. Equity Participation. (A) Restricted Shares. Simultaneously, with the execution of this Agreement, Mr. Hibbs and the Company shall enter into the Stock Purchase and Restriction Agreement in the form of Exhibit B hereto (the "Stock Purchase and Restriction Agreement") providing for the purchase by Mr. Hibbs of an aggregate of 360,000 shares of Common Stock of the Company at a purchase price of $.05 per share, subject to vesting as set forth therein (the "Restricted Shares"). (B) Option Shares. As of December 23, 1997, Mr. Hibbs and the Company shall enter into the Incentive Stock Option Agreement in the form of Exhibit C hereto (the "Option Agreement") providing for the grant of an incentive stock option to Mr. Hibbs to purchase an aggregate of 60,000 shares of Common Stock of the Company at an exercise price per share to be equal to the per share fair market value of the Company's Common Stock on the date of grant as determined by the Company's Board of Directors, subject to vesting as set forth therein (the "Option Shares"). 3 - 3 - (C) Escrow and Lock-Up of Shares. Mr. Hibbs acknowledges and agrees to be bound by the terms of any escrow and lock-up agreement in connection with the Company's initial public offering to the same extent as other stockholders of the Company. 4. Annual Performance Review. On or about each November 1, while this Agreement may be in effect, the Compensation Committee of the Board of Directors and Mr. Hibbs shall review the performance by, and the compensation to, Mr. Hibbs for the prior year and the proposed performance by, and compensation to, Mr. Hibbs for the then forthcoming year. Any future agreements regarding salary, equity participation, fringe benefits and other material benefits and terms of this Agreement shall be subject to approval by the Compensation Committee of the Board of Directors and agreed to by Mr. Hibbs. 5. Term. The term of this Agreement shall commence on the date first above written and shall terminate on the earlier to occur of (i) three (3) years, (ii) the death, physical incapacity or mental incompetence of Mr. Hibbs, or (iii) the occurrence of any of the circumstances described in Section 6 hereof (the "Expiration Date"). For purposes of this Agreement, physical incapacity and mental incompetence shall be defined as such terms are defined under the Company's standard disability insurance policy in effect from time to time for management employees of the Company. Such employment may be extended upon approval by the Board of Directors and Mr. Hibbs, subject to earlier termination as provided herein. 6. Termination. Mr. Hibbs' term of employment under this Agreement may be terminated pursuant to clause (iii) of the first sentence of Section 5 as follows: (A) At Mr. Hibbs' Option: Mr. Hibbs may terminate his employment, with or without cause, at any time upon at least sixty (60) days' advance written notice to the Company. Upon receipt of such advance notice of termination at Mr. Hibbs' option, the Company may accelerate Mr. Hibbs' departure date at its discretion. In the event of termination at Mr. Hibbs' option, Mr. Hibbs shall be entitled to no severance or other termination benefits subsequent to Mr. Hibbs' departure date. Mr. Hibbs' termination of his employment pursuant to this Section 6(A) will not be deemed a termination at the election of the Company for reasons other than for cause. (B) At the election of the Company for Cause. The Company may, immediately and unilaterally, terminate Mr. Hibbs' employment hereunder "for cause" at any time during the term of this Agreement without any prior written notice to Mr. Hibbs. Termination of Mr. Hibbs' employment by the Company shall constitute a termination "for cause" under this Section 6(B) if such termination is for one or more of the following causes, as found by the Board of Directors of the Company by a resolution duly adopted by a majority of its members, excluding Mr. Hibbs and the Hibbs-designated director: (i) refusal to perform or discharge the duties or responsibilities assigned by the Board of Directors, provided the same are not illegal or would not result in a breach of Mr. Hibbs' fiduciary duties to the Company; (ii) gross negligence in the performance of his duties; (iii) conviction of a felony; or 4 -4 - (iv) falseness of any warranty or representation by Mr. Hibbs or breach of Mr. Hibbs' obligations under this Agreement to the material detriment of the Company; In the event of a termination "for cause" pursuant to the provisions of clauses (i) through (iv) above, inclusive, Mr. Hibbs shall be entitled to no severance or other termination benefits except as required by law. In the event of any termination of employment, the Company shall have a right to repurchase the Restricted Shares upon the terms set forth in the Stock Purchase and Restriction Agreement. In the event of any termination of employment "for cause," no further vesting of the Option Shares shall occur from the date of termination. (C) At the Election of the Company for Reasons Other than for Cause. The Company may, immediately and unilaterally, terminate Mr. Hibbs' employment hereunder at any time during the term of this Agreement without cause by giving written notice to Mr. Hibbs of the Company's election to terminate. In the event the Company exercises its right to terminate Mr. Hibbs under this Section 6(C), the Company agrees to pay Mr. Hibbs a severance or termination payment of: (i) if termination occurs prior to six (6) months of employment, six (6) months' salary continuation at Mr. Hibbs' then current base rate, (ii) if termination occurs after six (6) months of employment, twelve (12) months' salary continuation at Mr. Hibbs' then current base rate, (iii) if termination occurs after twenty-four (24) months of employment, in addition to the twelve months' salary continuation referenced in Section 6(C)(ii), the immediate vesting of all unvested shares of stock to which Mr. Hibbs would be entitled under the Stock Purchase and Restriction Agreement, and (iv) the cost of Mr. Hibbs' health and dental insurance coverage for such applicable salary continuation period. Such severance payments shall be payable on a monthly basis for such months following Mr. Hibbs' termination and shall be subject to all applicable federal and state withholding, payroll and other taxes. In the event of any termination under this Section 6(C) prior to December 22, 1999, the next regularly scheduled quarterly installment of Restricted Shares immediately following the date on which Mr. Hibbs is notified of such termination to which Mr. Hibbs would be entitled under the Stock Purchase and Restriction Agreement shall hereby be accelerated and deemed to have vested as of the date of notice of such intent to terminate, and all remaining vesting of such Restricted Shares shall cease and all Mr. Hibbs' rights and obligations concerning the Restricted Shares shall accordingly be governed by the terms of the Stock Purchase and Restriction Agreement. In the event of Mr. Hibbs' death, the Company shall pay Mr. Hibbs' current base salary to Mr. Hibbs' legal representative as salary continuation payments for a period of one (1) year and for a period of one (1) year following Mr. Hibbs' death, the Company shall pay the cost of health and dental insurance coverage continuation for Mr. Hibbs' surviving spouse. (D) Termination Because of Change in Control. In the event of a Change in Control (as hereinafter defined) of the Company, and Mr. Hibbs is either not employed by the acquiring 5 -5- corporation in a comparable position at a comparable salary or Mr. Hibbs' the Company's principal place of business is relocated more than fifty (50) miles from its present location, then (i) the Company or the acquiring corporation, as the case may be, shall be obligated to pay to Mr. Hibbs a severance payment of 299% of Mr. Hibbs' salary at Mr. Hibbs' then current base rate, and (ii) the time at which all non-vested Restricted Shares vests shall be accelerated automatically to immediately prior to the time the Change of Control occurs. Such change in control severance payments shall be the exclusive severance payments or obligations owed to Mr. Hibbs under such circumstances and shall supersede any severance payments or obligation specified in Section 6(C). For purposes of this Agreement, a "Change in Control" shall have occurred if at any time any of the following events shall occur: (i) The Company is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such surviving, resulting or reorganized corporation or person immediately after such transaction is held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors of the Company (the "Voting Stock") immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of the Voting Stock of the Company immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-I (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), disclosing that any "person" (as such term is used in Section 13(d)(3) or Section 14(d)(2) of the 1934 Act) has become the "beneficial owner" (as such term is used in Rule 13d-3 under the 1934 Act) of securities representing 35% or more of the Voting Stock of the Company; (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the 1934 Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred; or (v) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least a majority of the directors then still in office who were directors of the Company at the beginning of any such period; provided, however, that notwithstanding the foregoing provisions of this Section 6(D), a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because the Company, an entity in which the Company directly or indirectly 6 -6- beneficially owns 50% or more of the voting securities, or any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report) under the 1934 Act, disclosing beneficial ownership by it of shares of the Voting Stock or because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership. (E) Benefits if Agreement Terminated Due to Disability. In the event this Agreement shall terminate pursuant to clause (ii) of the first sentence of Section 5 due to the physical incapacity or mental incompetence of Mr. Hibbs, the Company shall pay Mr. Hibbs an amount equal to three (3) months salary at the then current base rate, less any amounts recovered by Mr. Hibbs under any health and disability insurance programs available through the Company. The provisions of this Section 6(E) shall survive the termination of this Agreement by reason of the physical incapacity or mental incompetence of Mr. Hibbs. 7. Insurance. The Company may, for its own benefit, maintain "keyman" life and disability insurance policies covering Mr. Hibbs. Mr. Hibbs will cooperate with the Company and provide such information or other assistance as the Company may reasonably request in connection with the Company obtaining and maintaining such policies. 8. Noncompetition Agreement. (A) Non-Competition. While employed by the Company and for a period of one year after any cessation of employment with the Company for any reason, Mr. Hibbs shall not (i) on behalf of any person, firm or corporation, or on Mr. Hibbs' own account, engage in any business activity or become interested in any business, which is competitive with any product or services being developed, marketed, planned, sold, or otherwise provided by the Company during the two (2) years immediately prior to Mr. Hibbs' termination; or (ii) hire, entice away or in any manner persuade or attempt to persuade any officer, employee or agent of the Company, or any of such subsidiaries and affiliates, to discontinue his, her or its relationship with the Company, such subsidiaries or affiliates. Nothing contained in this Section 8(A) shall be deemed to prohibit Mr. Hibbs from acquiring, solely as an investment, up to 4% of the shares of the capital stock of any publicly held corporation. (B) Enforceability. If any of the covenants contained in Section 8(A), or any part thereof, is held to be unenforceable because of the duration of such provision or scope or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or scope and/or area of such provision, and, in its reduced form, said provision shall then be enforceable. The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 8(A) and 8(B) upon the state and federal courts within the Commonwealth of Massachusetts. 9. Nondisclosure and Assignment of Inventions Agreement. In connection with his employment by the Company pursuant to the terms of this Agreement, Mr. Hibbs shall execute, prior to the execution hereof by the Company, the Nondisclosure and Assignment of Inventions Agreement attached hereto as Exhibit D, the terms and conditions of which are incorporated herein by reference. 7 -7- 10. Consent and Waiver by Third Parties. Mr. Hibbs hereby represents and warrants that he has obtained all waivers and/or consents from third parties which are necessary to enable him to enjoy employment with the Company on the terms and conditions set forth herein and to execute and perform this Agrement without being in conflict with any other agreement, obligation or understanding with any such third party. Mr. Hibbs represents that he is not bound by an agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder or prevent the full performance of his duties and obligations hereunder. 11. Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts without reference to its conflicts of laws provisions. 12. Severability. In case any one or more of the provisions contained in this Agreement, or the other agreements executed in connection with the transactions contemplated hereby, for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or such other agreements, but this Agreement or such other agreements, as the case may be, shall be construed and reformed to the maximum extent permitted by law. 13. Waivers and Modifications. This Agreement may be modified, and the rights, remedies and obligations contained in any provision hereof may be waived, only in accordance with this Section 13. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all of the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. No modification or waiver by the Company shall be effective without the consent of at least a majority of the members of the Board of Directors (excluding Mr. Hibbs and the Hibbs-designated director) then in office at the time of such modification or waiver. 14. Assignment. Mr. Hibbs acknowledges that the services to be rendered by him hereunder are unique and personal in nature. Accordingly, Mr. Hibbs may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. 15. Entire Agreement. This Agreement, along with the Consulting Agreement, the Stock Purchase and Restriction Agreement, the Option Agreement, and the Nondisclosure and Assignment of Inventions Agreement, attached hereto as Exhibit A, Exhibit B, Exhibit C and Exhibit D, respectively, constitute the entire understanding of the parties relating to the subject matter hereof and supersedes and cancels all agreements, written or oral, made prior to the date hereof between Mr. Hibbs and the Company relating to employment, salary, bonus, or other compensation of any description, equity participation, pension, post-retirement benefits, severance or other remuneration. 16. Construction. The language of all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for or against any of the parties. 17. Notices. All notices hereunder shall be in writing and shall be delivered in person or mailed by certified or registered mail, return receipt requested, addressed as follows: 8 - 8 - If to the Company, to: BioTrack, Inc. Riverside Technology Center 840 Memorial Drive, 4th Floor Cambridge, MA 02139 Attention: Chairman of the Board With a copy to: Mitchell S. Bloom, Esq. Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, MA 02110; and If to Mr. Hibbs, at Mr. Hibbs' address set forth on the signature page hereto. With a copy to: Stephen Wald, Esq. Craig and Macauley Professional Corporation 600 Atlantic Avenue Boston, MA 02210 18. Counterparts. This Agreement may be executed in two 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. 19. Section Headings. The descriptive section headings herein have been inserted for convenience only and shall not be deemed to define, limit, or otherwise affect the construction of any provision hereof. 20. Attorneys Fees. In the event of any legal actions concerning the rights or responsibilities of the parties under this Agreement, the prevailing party shall be entitled to reimbursement of legal costs and expenses from the other party. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 9 - 9 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written as an instrument under seal. BIOTRACK, INC. M. Lee Hibbs ______________________________ Print Name By: /s/ Guy * /s/ M. Lee Hibbs ____________________________ ______________________________ Signature Title: Director 88 Nason Hill Rd. _________________________ ______________________________ Street Address Sterborn, MA 01770 ______________________________ City State Zip Code 10 EXHIBIT A CONSULTING AGREEMENT This Consulting Agreement, dated October 31, 1997 (the "Effective Date"), is between M. Lee Hibbs (the "Consultant") and DynaGen, Inc. ("DynaGen"), a Delaware corporation with a principal place of business at Riverside Technology Center, 840 Memorial Drive, 4th Floor, Cambridge, MA 02139. WHEREAS, DynaGen desires to engage the Consultant to perform business development services regarding the BioLocator technology for BioTrack, Inc. ("BioTrack"), a subsidiary of DynaGen with a principal place of business at Riverside Technology Center, 840 Memorial Drive, 4th Floor, Cambridge, MA 02139; and WHEREAS, the Consultant desires to engage in a consultancy relationship with the Company and would benefit from such an engagement; NOW, THEREFORE, in consideration of the promises and covenants contained herein, it is agreed as follows: 1. CONSULTANT'S SERVICES. The Consultant shall act as a consultant to DynaGen commencing on October 31, 1997 until December 22, 1997. The Consultant shall provide consulting services and advice at such times and such places as BioTrack or DynaGen may reasonably request and shall include, without limitation, preparation and delivery of such reports as to the Consultant's progress in performing the services which BioTrack or DynaGen may request from time to time. 2. COMPENSATION. In exchange for the full, prompt and satisfactory performance of such consulting services, DynaGen shall pay the Consultant a monthly rate of $2,083.33 (the Consultant's "base rate"), to be paid on a bi-weekly pro-rata basis. At the time BioTrack receives $250,000 in seed capital, the Consultant shall receive on a pro-rata basis a bonus from either BioTrack or DynaGen equivalent to $10,000.00 for each month retained under this Consulting Agreement. 3. RESTRICTIONS ON THE DISCLOSURE OR USE OF PROPRIETARY INFORMATION. To protect and secure to BioTrack and DynaGen its competitive market position, goodwill, know-how, trade secrets, confidential information and customer relationships, which the Consultant may acquire as a result of, or in connection with, his relationship with BioTrack or DynaGen (or their predecessors, successors, or assigns), the Consultant agrees as follows: (A) ASSIGNMENT OF INVENTIONS. If at any time or times during the term of the Consultant's consultancy with DynaGen, the Consultant shall (either alone or with others) make, conceive, create, discover, invent or reduce to practice any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, trade secret or intellectual property right whatsoever or any interest therein (whether or not patentable or registrable under copyright, trademark or similar statutes (including but not limited to the Semiconductor Chip Protection Act) or subject to analogous protection) (herein called "Developments") that (a) relates to the business of BioTrack or DynaGen or any customer of or supplier to BioTrack or DynaGen or any of the products or services being developed, manufactured or sold by BioTrack or DynaGen or which may be used in relation therewith, (b) results from tasks assigned to the Consultant by 11 - 2 - BioTrack or DynaGen or (c) results from the Consultant's use of premises or personal property (whether tangible or intangible) owned, leased or contracted for by BioTrack or DynaGen, such Developments and the benefits thereof are and shall immediately become the sole and absolute property of BioTrack and its assigns, as works made for hire or otherwise, and the Consultant shall promptly disclose to BioTrack (or any persons designated by it) each such Development and, as may be necessary to ensure BioTrack's ownership of such Developments, the Consultant hereby assigns any rights (including, but not limited to, any copyrights and trademarks) the Consultant may have or acquire in the Developments and benefits and/or rights resulting therefrom to BioTrack's and its assigns without further compensation and shall communicate, without cost or delay, and without disclosing to others the same, all available information relating thereto (with all necessary plans and models) to BioTrack. The Consultant will, during the term of this Consultant Agreement, and at any time thereafter at the request and cost (including a reasonable per diem consulting fee) of BioTrack or DynaGen and at the Consultant's convenience, promptly sign, execute, make and do all such deeds, documents, acts and things as BioTrack or DynaGen and their duly authorized agents may reasonably require: (i) to apply for, obtain, register and vest in the name of BioTrack alone (unless BioTrack otherwise directs) letters patent, copyrights, trademarks or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and (ii) to defend any judicial, opposition or other proceedings in respect of such applications and any judicial, opposition or other proceedings or petitions or applications for revocation of such letters patent, copyright, trademark or other analogous protection. In the event BioTrack or DynaGen is unable, after reasonable effort, to secure the Consultant's signature on any application for letters patent, copyright or trademark registration or other documents regarding any legal protection relating to a Development, whether because of the Consultant's physical or mental incapacity or for any other reason whatsoever, the Consultant hereby irrevocably designates and appoints BioTrack and its duly authorized officers and agents as its agent and attorney-in-fact, to act for and in his behalf and stead to execute and file any such application or applications or other documents and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyright or trademark registrations or any other legal protection thereon with the same legal force and effect as if executed by the Consultant. (B) NONDISCLOSURE AND NON-USE OF CONFIDENTIAL INFORMATION. The Consultant shall not, either during the consultancy or at any time thereafter, for any reason whatsoever, reveal to any person or entity (both commercial and non-commercial) any of the trade secrets or confidential business information concerning BioTrack or DynaGen: including its research and development activities; product designs, prototypes and technical specifications; show-how and know-how; marketing plans and strategies; pricing and costing policies; customer and supplier lists and accounts; or nonpublic financial information of BioTrack or DynaGen so far as they have come or may come to the Consultant's knowledge, except as may be required in the ordinary course of performing the Consultant's obligations to promote and advance the business of BioTrack. This restriction shall not apply to: (i) information that is in the public domain 12 -3 - through no fault of the Consultant; (ii) information approved for release by written authorization of BioTrack or DynaGen; or (iii) information that may be required by law or an order of any court, agency or proceeding to be disclosed. The Consultant shall keep secret all matters of such nature entrusted to him and shall not use or disclose any such information for the benefit of any third party in any manner which may injure or cause loss to BioTrack or DynaGen, whether directly or indirectly. 4. NONCOMPETITION AGREEMENTS. (a) NON-COMPETITION. During the term of this Consulting Agreement and for a period of one year thereafter, the Consultant shall not (i) on behalf of any person, firm or corporation, or on the Consultant's own account, engage in any business activity or become interested in any business, which is competitive with any product or services being developed, marketed, planned, sold, or otherwise provided by BioTrack or DynaGen during the two (2) years immediately prior to the commencement of the term of this Consulting Agreement; or (ii) hire, entice away or in any manner persuade or attempt to persuade any officer, employee or agent of BioTrack or DynaGen, or any of such subsidiaries and affiliates, to discontinue his, her or its relationship with BioTrack or DynaGen, such subsidiaries or affiliates. Nothing contained in this Section 4(a) shall be deemed to prohibit the Consultant from acquiring, solely as an investment, up to 4% of the shares of capital stock of any publicly held corporation. (B) ENFORCEABILITY. If any of the covenants contained in Section 4(a), or any part thereof, is held to be unenforceable because of the duration of such provision or scope or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or scope and/or area of such provision, and, in its reduced form, said provision shall then be enforceable. The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 4(a) and 4(b) upon the state and federal courts within the Commonwealth of Massachusetts. 5. INDEPENDENT CONTRACTOR. It is expressly understood and agreed that during the term of this Agreement the Consultant's relationship to DynaGen will be that of an independent contractor and that neither this Agreement nor the services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship with either BioTrack or DynaGen. Accordingly, the Consultant shall have sole and exclusive responsibility for the payment of all federal, state and local income taxes, for all employment and disability insurance and for Social Security and other similar taxes with respect to any compensation or benefits provided by DynaGen hereunder. The Consultant further agrees that if DynaGen pays or becomes liable for such taxes or related civil penalties or interest as a result of the Consultant's failure to pay taxes or report same, or due to DynaGen's failure to withhold taxes, the Consultant shall indemnify and hold DynaGen harmless for any such liability. The Consultant shall assume and accept all responsibilities which are imposed on independent contractors by any statute, regulation, rule of law or otherwise. The Consultant is not authorized to bind BioTrack or DynaGen, or to incur any obligation or liability on behalf of BioTrack or DynaGen, except as expressly authorized by BioTrack or DynaGen in writing. 13 --4 - 6. MISCELLANEOUS. (a) This Consulting Agreement contains, and is intended as, a complete statement of all of the terms of the arrangement between the parties with respect to its subject matter, supersedes all previous negotiations, promises, agreements and understanding with respect to those matters, and cannot be changed or terminated except by an agreement in writing signed by the parties. (b) The Consultant represents that his performance of all the terms of this Consulting Agreement does not and will not breach any noncompetition agreement and/or agreement to keep in confidence proprietary information, knowledge or data acquired by the Consultant in confidence or in trust prior to his retention by DynaGen, and the Consultant will not disclose to BioTrack or DynaGen or induce BioTrack or DynaGen to use any confidential or proprietary information or material belonging to any previous employer, client or others. (c) No provision of this Consulting Agreement shall be waived, amended, modified, superseded, canceled, terminated, renewed or extended except in a written instrument signed by the party against whom any of the foregoing actions is asserted. Any waiver shall be limited to the particular instance and for the particular purpose when and for which it is given. (d) The invalidity, illegality or unenforceability of any provision of this Consulting Agreement shall in no way effect the validity, legality or enforceability of any other provision of this Consulting Agreement. (e) This Consulting Agreement, the Services to be performed and all rights hereunder are personal to the Consultant and may not be transferred or assigned by the Consultant at any time. (f) This Consulting Agreement shall be construed and enforced in accordance with the internal laws of the Commonwealth of Massachusetts without reference to its conflicts of laws provisions. (g) This Consulting Agreement may be executed in duplicate counterparts, which, when taken together, shall constitute one instrument and each of which shall be deemed to be an original instrument. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] 14 The parties have executed this Consulting Agreement as an agreement under seal as of the date set forth below. DYNAGEN, INC. /s/ Indu Muni By:___________________________________ President and Chief Executive Officer ______________________________________ Title /s/ Lee Hibbs ______________________________________ Lee Hibbs Date:_____________________________ 15 EXHIBIT B STOCK PURCHASE AND RESTRICTION AGREEMENT AGREEMENT, made as of the 31st day of October, 1997 by and between BioTrack, Inc., a Delaware corporation (the "Company"), and M. Lee Hibbs (the "Stockholder"). WHEREAS, the Stockholder is purchasing common stock, $.01 par value per share, of the Company (the "Common Stock") pursuant to this Agreement; WHEREAS, the Company desires to place certain restrictions on the disposition of the Common Stock held by the Stockholder, and the parties are willing to execute this Agreement and to be bound by the provisions hereof; NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, and the parties' desire to provide for continuity of ownership of the Company to further the interests of the Company and its present and future stockholders, the parties hereby agree with each other as follows: 1. PURCHASE PRICE AND PAYMENT. The Company agrees to sell to the Stockholder and the Stockholder agrees to purchase from the Company 360,000 shares of Common Stock, (the "Shares"), at a price of $.05 per share (the "Original Purchase Price"). Participant's payment for the Shares shall be made by cash or by check in the aggregate amount of $18,000.00. As used in this Agreement, the term "Shares" shall also include all other securities of the Company which may be issued in exchange for or in respect of the Shares (whether by way of stock split, stock dividend, combination, reclassification, reorganization, or any other means). 2. REPRESENTATIONS OF THE STOCKHOLDER. (a) The Stockholder is acquiring the Shares for his own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same. The Stockholder understands that the purchase of the Shares involves a high degree of risk in view of a number of considerations, including that there may never be an established market for the Shares. The Stockholder understands that the Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), nor any state securities laws and that the Shares must be held indefinitely unless they are subsequently registered under the Act and relevant state securities laws or an exemption from such registration is available. The Stockholder further acknowledges that the Company is under no obligation to register the Shares under the Act or relevant state securities laws or to insure the availability of an exemption from registration to permit resale or other disposition of the Shares. (b) The Stockholder has adequate net worth and means of providing for his current needs and contingencies to sustain a complete loss of his investment in the Company. The Stockholder has such knowledge and experience in financial and business matters such that he or she is capable of evaluating the merits and risks of the purchase of the Shares. (c) The Stockholder is fully familiar with the business, organization, financial condition and operations of the Company, and has all such information which the Stockholder deems necessary and appropriate to make the investment decision with respect to the purchase of the Shares. The Stockholder has had the opportunity to ask questions of and receive answers 16 - 2 - from the management of the Company concerning the terms and conditions of the offering of the Shares and any additional information, documents, records and books relative to its business, assets, financial condition, results of operations and liabilities (contingent or otherwise) of the Company. The Stockholder is familiar with this Agreement and confirms that all documents, records and books pertaining to such Stockholder's investment in the Company and requested by such Stockholder have been made available or delivered to him. 3. REPRESENTATION OF THE COMPANY. The authorized capital stock of the Company consists of (i) 1,000,000 shares of Preferred Stock, $.01 par value per share (the "PREFERRED STOCK"), and (ii) 25,000,000 shares of Common Stock. Immediately prior to the execution of this Agreement, 5,640,000 shares of Common Stock will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof and no shares of Preferred Stock will have been issued. The stockholders of record are as set forth in EXHIBIT A hereto. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Company's Restated Certificate of Incorporation (the "CHARTER"), a copy of which is attached as EXHIBIT B. Except as set forth in EXHIBIT A hereto and this Agreement (i) no person owns of record or is known to the Company to own beneficially any share of Common Stock and (ii) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding. Except as provided for in the Charter or as set forth in EXHIBIT A hereto and this Agreement, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. 4. PROHIBITED TRANSFERS. (a) The Stockholder shall not sell, assign, transfer, pledge, hypothecate, mortgage, encumber or dispose of all or any of his Shares except (a) Vested Shares, as defined in Section 5(a), provided that the disposition of any such shares shall be subject to any limitations imposed by this Agreement or (b) to the Company. Notwithstanding the foregoing, the Stockholder may transfer any of his Shares (i) by way of gift to any member of his family or to any trust for the benefit of any such family member or the Stockholder; provided, however, that any such transferee shall agree in writing with the Company, as a condition precedent to such transfer, to be bound by all of the provisions of this Agreement to the same extent as if such transferee were the Stockholder, or (ii) by will or the laws of descent and distribution, in which event each such transferee shall be bound by all of the provisions of this Agreement to the same extent as if such transferee were the Stockholder. As used herein, the word "family" shall include any spouse, lineal ancestor or descendant, brother or sister. (b) In addition to the foregoing, if requested by the underwriters for the initial underwritten public offering of securities of the Company, the Stockholder shall agree not to sell, assign, transfer, pledge, hypothecate, mortgage, encumber or otherwise dispose of all or any of his Shares, without the written consent of such underwriters, for a period of not more than 180 days following the effective date of the registration statement relating to such offering. 5. VESTING; OPTION OF COMPANY. (a) If the Stockholder has continued to serve the Company or any of its subsidiaries or affiliates in the capacity of a consultant, employee, of ricer or director (such service is 17 - 3 - described herein as maintaining or being involved in a "Business Relationship" with the Company) on the following dates, the following number of Shares shall be deemed "Vested Shares" (and all other shares shall be "Non-Vested Shares"): On April 30, 1998 _ 60,000 Shares On July 31, 1998 _ an additional 30,000 Shares On October 31, 1998 _ an additional 30,000 Shares On January 31, 1999 _ an additional 30,000 Shares On April 30, 1999 _ an additional 30,000 Shares On July 31, 1999 _ an additional 30,000 Shares On October 31, 1999 _ an additional 30,000 Shares On January 31, 2000 _ an additional 30,000 Shares On April 30, 2000 _ an additional 30,000 Shares On July 31, 2000 _ an additional 30,000 Shares On October 31, 2000 _ an additional 30,000 Shares (b) In the event of any termination pursuant to Section 6(C) of that certain Agreement between the Company and the Stockholder dated the date hereof, which among other provisions, provides the terms of the Stockholder's employment with the Company (the "Employment Agreement"), the next quarterly vesting pursuant to Section 5(a) of this Agreement immediately following the date on which the Stockholder is notified of such termination shall be accelerated and the number of Non-Vested Shares so scheduled to vest shall be deemed to have vested as of the date of notice of such intent to terminate, provided, however, that if the Stockholder's employment is terminated after December 22, 1999 pursuant to Section 6(C) of the Employment Agreement, then all Non-Vested Shares shall be deemed to have vested as of the date of notice of such intent to terminate. (c) In the event of a Change in Control (as defined in Section 6(D) of the Employment Agreement) in which the Stockholder is not employed by the acquiring Corporation in a comparable position at a comparable salary or the Company's principal place of business is relocated more than fifty (50) miles from its present location, then all Non-Vested Shares shall be deemed to have vested immediately prior to the time the Change in Control occurs. (d) The Company shall have the right (the "Repurchase Right") to repurchase all, or any lesser number, of the Non-Vested Shares from the Stockholder, upon the occurrence of any of the events specified in Section 4(e) below (a "Repurchase Event"). The Repurchase Right may be exercised by the Company within sixty days following the date the Company receives actual knowledge of such event (the "Repurchase Period"). The Repurchase Right shall be exercised by the Company by giving the Stockholder written notice on or before the last day of the Repurchase Period of its intention to exercise the Repurchase Right, and, together with such notice, tendering to the Stockholder an amount equal to $.05 per Share. The Company may assign the Repurchase Right to one or more persons. Upon timely exercise of the Repurchase Right in the manner provided in this Section 4(d), the Stockholder shall deliver to the Company the stock certificate or certificates representing the shares being repurchased, duly endorsed and free and clear of any and all liens, charges and encumbrances. If shares are not purchased under the Repurchase Right, the Stockholder and his successor in interest, if any, will hold any such shares in his possession subject to all of the provisions of this Agreement. 18 -4- (e) The Company shall have the Repurchase Right in the event of the termination of the Stockholder's Business Relationship with the Company or any of its subsidiaries or affiliates, voluntarily or involuntarily, for any reason whatsoever. 6. RIGHT OF FIRST OFFER. (a) If the Stockholder desires to transfer all or any part of the Vested Shares to any person other than the Company (an "Offeror"), the Stockholder shall: (i) obtain in writing an irrevocable and unconditional bona fide offer (the "Offer") for the purchase thereof from the Offeror; and (ii) give written notice (the "Option Notice") to the Company setting forth the Stockholder's desire to transfer such shares, which Option Notice shall be accompanied by a photocopy of the Offer and shall set forth at least the name and address of the Offeror and the price and terms of the Offer. Upon receipt of the Option Notice, the Company shall have an assignable option to purchase any or all of such Vested Shares (the "Company Vested Shares") specified in the Option Notice, such option to be exercisable by giving, within thirty days after receipt of the Option Notice, a written counter-notice to the Stockholder. If the Company elects to purchase any or all of such Company Vested Shares, it shall be obligated to purchase, and the Stockholder shall be obligated to sell to the Company, such Company Vested Shares at the price and terms indicated in the Offer within thirty days from the date of delivery by the Company of such counter-notice. (b) The Stockholder may, for sixty days after the expiration of the sixty day option period set forth in Section 5(d), sell to the Offeror, pursuant to the terms of the Offer, any or all of such Company Vested Shares not purchased or agreed to be purchased by the Company or its assignees of; provided, however, that the Stockholder shall not sell such Company Vested Shares to such Offeror if such Offeror is a competitor of the Company and the Company gives written notice to the Stockholder, within thirty days of its receipt of the Option Notice, stating that the Stockholder shall not sell his Company Vested Shares to such Offeror. If any or all of such Company Vested Shares are not sold pursuant to an Offer within the time permitted above, the unsold Company Vested Shares shall remain subject to the terms of this Section 6. 7. FURTHER RESTRICTIONS. Any attempted transfer in violation of the terms of this Agreement shall be ineffective to vest any legal or beneficial interest in the Shares in any transferee and shall be null and void. Without limiting the foregoing, any purported transfer in violation hereof shall be ineffective as against the Company, and the Company shall have a continuing right and option (but not an obligation) until this Agreement terminates to purchase the Shares purported to be transferred by or for the Stockholder for a price and on terms the same as those at which such Shares could have been purchased hereunder at the time of the transfer. In addition to any other legal or equitable rights that they may have, the Company or the Stockholder may enforce their rights hereunder by specific performance to the extent permitted by law. Nevertheless, the Company may in any particular circumstances waive these restrictions on transfer. 8. REGISTRATION OF SHARES. If the Company at any time proposes to register any of its securities under the Act for sale to the public for the account of DynaGen, Inc. (except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Vested Shares for sale to the public), each such time it will give written notice to the Stockholder of its intention so to do. Upon the written request of the Stockholder, received by the Company within 15 days after the giving of any such notice by the Company to register any of the Vested Shares, the Company will use its 19 -5- best efforts to cause the Vested Shares as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Stockholder (by the same method of disposition as that which DynaGen, Inc. intends to use) of the Vested Shares so registered; provided, however, that the Vested Shares eligible for such registration will be equal to the product of all such Vested Shares and a ratio, the numerator of which is the number of shares of Common Stock held by DynaGen, Inc. to be so registered by the Company and the denominator of which is the total number of shares of Common Stock held by DynaGen, Inc. In the event that any registration pursuant to this Section 8 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of Vested Shares to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein by DynaGen, Inc.; provided, however, that such reduction in the number of Vested Shares to be included in an underwritten public offering shall be proportional to any such reduction required in the number of shares of Common Stock to be sold by DynaGen, Inc. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 8 without thereby incurring any liability to the Stockholder. 9. LOCK-UP. The Stockholder acknowledges and agrees to be bound by the terms of any escrow and lock-up agreement in connection with the Company's initial public offering to the same extent as other stockholders of the Company. 10. STOCK TRANSFER RECORD. The Company shall not effect or record any transfer of Shares in its stock transfer records unless such transfer is in compliance with the provisions of this Agreement. If the Stockholder desires to make a transfer, he shall furnish to the Company such evidence of compliance with this Agreement as may be reasonably required by the Board of Directors of, or counsel for, the Company. 11. TERM. The Company's right of first offer contained in Section 6 hereof shall terminate immediately prior to the consummation of the first firm commitment underwritten public offering of equity securities of the Company pursuant to an effective registration statement under the Act. 12. REMEDIES OF THE COMPANY. (a) FAILURE TO DELIVER SHARES TO THE COMPANY. If the Stockholder becomes obligated to sell any Shares to the Company under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, the Company, may, at its option, in addition to all other remedies it may have, send to the Stockholder the purchase price for such Shares as is herein specified. Thereupon, the Company, upon written notice to the Stockholder, shall cancel on its books the certificate or certificates representing the Shares to be sold (and may issue, in lieu thereof, in the name of the Company a new certificate or certificates representing such Shares) and upon such cancellation all of the Stockholder's rights in and to such Shares shall terminate. (b) SPECIFIC ENFORCEMENT. The Stockholder expressly agrees that the Company will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by the Stockholder, the Company shall, in addition to all other remedies, be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions hereof. 20 - 6 - 13. LEGENDS. Each certificate evidencing any of the Shares shall bear each of the legends substantially as follows: "The Shares represented by this certificate are subject to restrictions on transfer and may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with and subject to all the terms and conditions of a certain Stock Purchase and Restriction Agreement dated as of October 31, 1997, a copy of which the Company will furnish to the holder of this certificate upon request and without charge." "The Shares represented by this certificate have not been registered under the Securities Act of 1933, as amended. These shares have been acquired for investment and not with a view to distribution or resale and may not be offered, sold, mortgaged, pledged, hypothecated, or otherwise transferred unless and until such shares are registered under the Securities Act of 1933, as amended, or an opinion of counsel satisfactory to the Company is obtained to the effect that registration is not required under such Act." 14. DELIVERY OF STOCK AND DOCUMENTS. Upon the closing of any purchase of Shares from the Stockholder pursuant to this Agreement, the Stockholder shall deliver to the purchaser the certificate or certificates representing the Shares being sold, duly endorsed for transfer and bearing such documentary stamps, if any, as are necessary, and such assignments, certificates of authority, tax releases, consents to transfer, instruments and evidences of title of the Stockholder and of such Stockholder's compliance with this Agreement as may be reasonably required by the purchaser or by counsel for the purchaser. 15. GENERAL. (a) NOTICES. Any and all notices, requests or other communications hereunder shall be given in writing and delivered in person or sent by registered or certified mail, return receipt requested, postage prepaid; and such notices shall be addressed: (i) if to the Company, to Indu Muni the President of the Company at its principal office; and (ii) if to the Stockholder, to the address of the Stockholder as reflected on the signature page to this Agreement, unless notice of a change of address is furnished to the Company in the manner provided in this Section 15(a). Any notice which is required to be made within a stated period of time shall be considered timely if delivered or mailed as provided above before midnight of the last day of such period. (b) SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 21 - 7 - (c) Benefit and Burden; Assigns. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their legatees, distributees, estates, executors, administrators, personal representatives, successors and assigns, and other legal representatives. The Company may assign its rights under the Agreement, in whole or in part, to any person or persons designated by the Board of Directors of the Company. (d) Headings. The headings, subheadings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. (e) Entire Agreement; Amendments; Conflicts. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and neither this Agreement nor any provision hereof may be waived, modified, amended or terminated except by a written agreement signed by the parties hereto. To the extent any term or other provision of any other indenture, agreement or instrument by which any party hereto is bound conflicts with this Agreement, this Agreement shall have precedence over such conflicting term or provision. (f) Governing Law. This Agreement, and any claims relating to the relationship of the parties contemplated herein, whether or not arising directly under this Agreement, shall be governed by the laws of the Commonwealth of Massachusetts without reference to its conflicts of laws provisions. (g) Waivers. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. (h) Continuation of Business Relationship. Nothing in this Agreement shall create an obligation on the Company to continue the Stockholder's Business Relationship with the Company. (i) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 22 - 8 - IN WITNESS WHEREOF, this Stock Purchase and Restriction Agreement has been executed as of the date and year first above written. COMPANY: BIOTRACK, INC. /s/ Indu Muni By:_____________________________________ Indu Muni, President Riverside Technology Center 840 Memorial Drive, 4th Floor Cambridge, MA 02139 STOCKHOLDER: /s/ M. Lee Hibbs _____________________________________ M. Lee Hibbs Address: 88 Nason Hill Road _____________________________ Sterborn, MA 01770 _____________________________ 23 EXHIBIT A Stockholders of record of BioTrack, Inc.
Number of Shares Name of Common Stock ---- ---------------- DynaGen, Inc. 5,630,000 Anna Laura Smith 10,000 --------- TOTAL 5,640,000
24 EXHIBIT B RESTATED CERTIFICATE OF INCORPORATION OF DYNAGEN OF MASSACHUSETTS, INC. A DELAWARE CORPORATION DynaGen of Massachusetts, Inc., a corporation organized and existing under the laws of the State of Delaware, does hereby certify that: 1. The name of the corporation is DynaGen of Massachusetts, Inc. (the "Corporation"). The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on July 23, 1997. 2. The amendment and restatement herein set forth has been duly approved by the Board of Directors of the Corporation and consented to in writing by the sole stockholder of the Corporation pursuant to Sections 141, 228 and 242 of the General Corporation Law of the State of Delaware ("Delaware Law"). 3. The restatement herein set forth has been duly adopted pursuant to Section 245 of the Delaware Law. This Restated Certificate of Incorporation restates and integrates and amends the provisions of the Corporation's Certificate of Incorporation. 4. The text of the Certificate of Incorporation is hereby amended and restated to read in its entirety as follows: "FIRST. The name of the corporation is BioTrack, Inc. (the "Corporation"). SECOND. The address of the registered office of the Corporation in the State of Delaware is 1201 Orange Street, in the city of Wilmington, New Castle County, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 26,000,000 shares, consisting of 25,000,Q00 shares of Common Stock with 25 - 2 - a par value of one cent ($.01) per share (the "Common Stock") and 1,000,000 shares of Preferred Stock with a par value of one cent ($.01) per share (the "Preferred Stock"). A description of the respective classes of stock and a statement of the designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and the qualifications, limitations and restrictions of the Preferred Stock and Common Stock are as follows: A. PREFERRED STOCK The Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the Corporation's Board of Directors may determine. Each series of Preferred Stock shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. Except as otherwise provided in this Restated Certificate of Incorporation, different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more series, each with such designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the Board of Directors to create such series, and a certificate of said resolution or resolutions shall be filed in accordance with the General Corporation Law of the State of Delaware. The authority of the Board of Directors with respect to each such series shall include, without limitation of the foregoing, the right to provide that the shares of each such series may: (i) have such distinctive designation and consist of such number of shares; (ii) be subject to redemption at such time or times and at such price or prices; (iii) be entitled to the benefit of a retirement or sinking fund for the redemption of such series on such terms and in such amounts; (iv) be entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series of stock; (v) be entitled to such rights upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs, or upon any 26 - 3 - distribution of the assets of the Corporation in preference to, or in such relation to, any other class or classes or any other series of stock: (vi) be convertible into, or exchangeable for, shares of any other class or classes or any other series of stock at such price or prices or at such rates of exchange and with such adjustments, if any; (vii) be entitled to the benefit of such conditions, limitations or restrictions, if any, on the creation of indebtedness, the issuance of additional shares of such series or shares of any other series of Preferred Stock, the amendment of this Restated Certificate of Incorporation or the Corporation's By-laws, the payment of dividends or the making of other distributions on, or the purchase, redemption or other acquisition by the Corporation of, any other class or classes or series of stock, or any other corporate action; or (viii) be entitled to such other preferences, powers, qualifications, rights and privileges, all as the Board of Directors may deem advisable and as are not inconsistent with law and the provisions of this Restated Certificate of Incorporation. B. COMMON STOCK 1. RELATIVE RIGHTS OF PREFERRED STOCK AND COMMON STOCK. All preferences, voting powers, relative, participating, optional or other special rights and privileges, and qualifications, limitations, or restrictions of the Common Stock are expressly made subject and subordinate to those that may be fixed with respect to any shares of the Preferred Stock. 2. VOTING RIGHTS. Except as otherwise required by law or this Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by him of record on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. 3. DIVIDENDS. Subject to the preferential rights of the Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property or in shares of capital stock. 4. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, after distribution in full of the preferential 27 - 4 - amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of Common Stock, shall be entitled, unless otherwise provided by law or this Restated Certificate of Incorporation, to receive all of the remaining assets of the Corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. FIFTH. The Corporation is to have perpetual existence. SIXTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware: A. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation. B. Elections of directors of the Corporation need not be by written ballot unless the By-laws of the Corporation shall so provide. C. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. SEVENTH. The Corporation eliminates the personal liability of each member of its Board of Directors to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that, to the extent provided by applicable law, the foregoing shall not eliminate the liability of a director (i) for any breach of such 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 Title 8 of the Delaware Code or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 28 - 5 - EIGHTH. The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. NINTH. 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 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 directs. 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 and to any reorganization of this Corporation as consequence 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." 29 - 6 - IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Restated Certificate of Incorporation to be signed by its President and attested by its Secretary this 28th day of October, 1997. DYNAGEN OF MASSACHUSETTS, INC. /s/ Indu Muni By:_____________________________________ Indu Muni President ATTEST: /s/ Dennis Bilodeau By:_______________________________ Dennis Bilodeau Secretary 30 EXHIBIT D BIOTRACK, INC. NONDISCLOSURE AND ASSIGNMENT OF INVENTIONS AGREEMENT In consideration for and as a condition of my initial employment as an employee (the "Employee") of BioTrack, Inc. (the "Company"), and in consideration of the receipt by me of shares of the Company's Common Stock, $.01 par value per share, pursuant to that certain Stock Purchase and Restriction Agreement of even date herewith, I hereby agree with the Company as follows: 1. I will not at any time, whether during or after the termination of my employment, for any reason whatsoever, reveal to any person or entity (both commercial and non-commercial) any of the trade secrets or confidential business information concerning the Company: including its research and development activities; product designs, prototypes and technical specifications; show-how and know-how; marketing plans and strategies; pricing and costing policies; customer and supplier lists and accounts; or nonpublic financial information of the Company so far as they have come or may come to my knowledge, except as may be required in the ordinary course of performing my duties as an employee of the Company to promote and advance the business of the Company. This restriction shall not apply to: (i) information that is in the public domain through no fault of my own; (ii) information approved for release by written authorization of the Company; or (iii) information that may be required by law or an order of any court, agency or proceeding to be disclosed. I shall keep secret all matters of such nature entrusted to me and shall not use or disclose any such information for the benefit of any third party in any manner which may injure or cause loss to the Company, whether directly or indirectly. 2. If at any time or times during the term of my employment with the Company (which term shall include my employment on a part-time or consulting basis), I shall (either alone or with others) make, conceive, create, discover, invent or reduce to practice any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, trade secret or intellectual property right whatsoever or any interest therein (whether or not patentable or registrable under copyright, trademark or similar statutes (including but not limited to the Semiconductor Chip Protection Act) or subject to analogous protection) (herein called "Developments") that (a) relates to the business of the Company or any customer of or supplier to the Company or any of the products or services being developed, manufactured or sold by the Company or which may be used in relation therewith, (b) results from tasks assigned to me by the Company or (c) results from the use of premises or personal property (whether tangible or intangible) owned, leased or contracted for by the Company, such Developments and the benefits thereof are and shall immediately become the sole and absolute property of the Company and its assigns, as works made for hire or otherwise, and I shall promptly disclose to the Company (or any persons designated by it) each such Development and, as may be necessary to ensure the Company's ownership of such Developments, I hereby assign any rights (including, but not limited to, any copyrights and trademarks) I may have or acquire in the Developments and benefits and/or rights resulting therefrom to the Company and its assigns without further compensation and shall communicate, without cost or delay, and without disclosing to others the same, all available information relating thereto (with all necessary plans and models) to the Company. 31 - 2 - I will, during my employment and at any time thereafter, at the request and cost of the Company, promptly sign, execute, make and do all such deeds, documents, acts and things as the Company and its duly authorized agents may reasonably require: (a) to apply for, obtain, register and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights, trademarks or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and (b) to defend any judicial, opposition or other proceedings in respect of such applications and any judicial, opposition or other proceedings or petitions or applications for revocation of such letters patent, copyright, trademark or other analogous protection. In the event the Company is unable, after reasonable effort, to secure my signature on any application for letters patent, copyright or trademark registration or other documents regarding any legal protection relating to a Development, whether because of my physical or mental incapacity or for any other reason whatsoever, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and in my behalf and stead to execute and file any such application or applications or other documents and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyright or trademark registrations or any other legal protection thereon with the same legal force and effect as if executed by me. 3. I hereby consent to the use of my name, picture, signature, voice, image, and/or likeness by the Company during my employment by the Company and for a reasonable time thereafter (and at all times to the extent required by law or as necessary to safeguard the Company's intellectual property rights). Further, I waive all claims I may now have or may ever have against the Company and its officers, employees, and agents arising out of the Company's use, adaptation, reproduction, modification, distribution, exhibition or other commercial exploitation of my name, picture, signature, voice, image and/or likeness, including but not limited to right of privacy, right of publicity and celebrity, use of voice, name or likeness, defamation and copyright infringement. I represent and warrant that I have not made any contract or commitment in conflict with this consent and waiver. 4. I hereby waive any and all rights of integrity, paternity, disclosure and withdrawal in and to any copyrighted works created by me in the course of my employment with the Company, that may exist in such works under the laws of the United States or any foreign country, or under the Berne Convention for the Protection of Literary and Artistic Works. 5. I agree that any breach of this Agreement by me will cause irreparable damage to the Company and that in the event of such breach the Company shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of my obligations hereunder. 6. I understand that this Agreement does not create an obligation on the Company or any other person or entity to continue my employment. 32 -3- 7. I represent that the Developments identified in the pages, if any, attached hereto comprise all the unpatented and unregistered copyrightable Developments which I have made, conceived or created prior to my employment by the Company, which Developments are excluded from this Agreement. I understand that it is only necessary to list the title and purpose of such Developments but not details thereof. I further represent that my performance of all of the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 8. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof. 9. I hereby agree that each provision herein, shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses herein. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity, subject or otherwise so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear. 10. My obligations under this Agreement shall survive the termination of my employment regardless of the manner of such termination and shall be binding upon my heirs, executors, administrators and legal representatives. 11. The tend "Company" shall include BioTrack, Inc. and any of its subsidiaries, subdivisions or affiliates including, without limitation, DynaGen, Inc. The Company shall have the right to assign this Agreement to its successors and assigns, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by said successors or assigns. 12. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of laws of such state. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] 33 - 4 - IN WITNESS WHEREOF, the undersigned and the Company have executed this Agreement as of this 31st day of October, 1997. BIOTRACK, INC. M. LEE HIBBS /s/ Guy * /s/ M. Lee Hibbs By:_____________________________ ________________________________ Signature Director Title:__________________________ EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION ---- ------------ Able Laboratories, Inc. Delaware Superior Pharmaceutical Company Ohio Generic Distributors Incorporated Louisiana Bio Track, Inc. Delaware Apex Pharmaceuticals, Inc. Delaware
2 EX-23.1 6 CONSENT 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTS We consent to the incorporation by reference in the 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), Number 333-19471 (dated January 9, 1997 on Form S-3), and File No. 333-33321 (dated August 8, 1997 on Form S-3), of DynaGen, Inc., of our report dated April 14, 1998, which included an explanatory paragraph about the Company's ability to continue as a going concern, appearing in this Annual Report on Form 10-K of DynaGen, Inc. for the year ended December 31, 1997. /s/ Wolf & Company, P.C. Boston, Massachusetts April 15, 1998 2 EX-27 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 1996, DECEMBER 31, 1996 AND DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 6-MOS 12-MOS DEC-31-1997 DEC-31-1996 JUN-30-1996 DEC-31-1997 DEC-31-1996 JUN-30-1996 697,045 2,112,300 375,948 0 3,004,700 10,087,918 3,195,897 261,932 89,703 43,118 0 0 9,111,324 451,883 13,933,096 6,311,428 10,938,703 2,610,815 1,011,782 424,712 (837,937) (337,813) (281,362) 29,348,114 7,463,149 11,576,666 25,644,392 809,133 783,032 328,500 1,600,000 2,000,000 0 0 0 635 0 0 43,151 29,106 28,560 2,580,842 5,024,910 8,815,074 29,348,114 7,463,149 11,576,666 13,920,904 358,467 220,745 14,009,730 359,908 555,745 13,255,651 356,312 96,680 24,087,512 4,687,745 5,899,650 (120,359) (157,788) (367,715) 0 0 0 2,283,855 136,091 121,229 (12,241,278) (4,306,140) (5,097,419) 0 0 0 (12,241,278) (4,306,140) (5,097,419) 0 0 0 0 0 0 0 0 0 (12,241,278) (4,306,140) (5,097,419) (4.48) (1.50) (2.44) (4.48) (1.50) (2.44)
-----END PRIVACY-ENHANCED MESSAGE-----