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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996.
COMMISSION FILE NUMBER 1-11352
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DYNAGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 04-3029787
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
99 ERIE STREET, CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(617) 491-2527
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- -------------------
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS BOSTON STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
--------------
COMMON STOCK, $.01 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III
OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
As of April 24, 1997, 30,114,206 shares of the registrant's Common Stock,
$.01 par value, were issued and outstanding. The aggregate market value of the
registrant's voting stock held by non-affiliates of the registrant as of April
24, 1997, based upon the closing price of such stock on the Nasdaq Stock
Market's SmallCap Market ("Nasdaq") on that date ($1.22) was $33,589,902.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
DynaGen, Inc. ("DynaGen" or the "Company") develops and markets proprietary
and generic therapeutic and diagnostic products for the human healthcare market.
During 1996, DynaGen began expanding its business focus from being a development
and licensing company to building a diversified healthcare company focused on
the manufacture and distribution of generic drug products and specialty
pharmaceuticals, as well as the continued development of therapeutic and
diagnostic products. The Company intends to implement this strategy through the
acquisition of businesses, technologies and products that the Company believes
are undervalued, as well as through continued internal product development. In
August 1996, the Company acquired the tablet business of Able Laboratories, Inc.
("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc.
Prior to the Able acquisition, DynaGen's business consisted of developing
proprietary diagnostic products and proprietary therapeutic and diagnostic
product candidates. The Company's lead therapeutic product candidate,
NicErase(r)-SL, is intended as an aid in smoking cessation and to provide relief
from nicotine withdrawal symptoms. The Company is currently conducting a
multi-center pivotal Phase 3 clinical trial of NicErase-SL. Results from this
trial are anticipated to be available in the second quarter of 1997. There can
be no assurance that the results of the Company's ongoing Phase 3 clinical trial
of NicErase-SL will be favorable for the Company. In addition, the Company is
also considering alternative delivery formats for its lobeline-based NicErase
technology and intends to seek strategic partners to further develop and market
these delivery formats. In December 1996, the Company licensed worldwide,
exclusive rights to develop a lobeline sulfate nasal delivery formulation,
NicErase-NS, to Nastech Pharmaceutical Company, Inc. ("Nastech").
DynaGen is also developing OrthoDyn(r), a bioresorbable bone cement system
for bone and joint repair which is currently in the preclinical development
stage. In April 1997, the Company entered into an agreement with Smith & Nephew,
plc ("Smith & Nephew") providing Smith & Nephew an exclusive period of 12 months
to evaluate the OrthoDyn product's human orthopaedic applications. Additionally,
the Company expanded its resorbable polymer technology patent base by obtaining
a patent for its Sleeper(tm) vaccine technology which enables vaccines to be
delivered in a single administration rather than in multiple vaccinations over a
period of time.
In December 1996, the Company obtained United States Food and Drug
Administration (the "FDA") clearance to market its proprietary NicCheck(r) I
product for detection of nicotine and/or its metabolites in urine as an aid in
indicating smoking status of individuals. The Company has recently commenced
marketing NicCheck to physicians, smoking cessation programs, HMOs, and
insurance companies.
In December 1996, the Company licensed technology from BioLoc, Inc.
("BioLoc") that is intended to improve the accuracy and efficiency, and reduce
the overall cost of, breast surgical biopsy procedures. The Company is also
conducting early stage research on a proprietary bacterial extract for the
treatment of infectious diseases.
The Company changed its year end from June 30 to December 31. Accordingly,
the Company began a new 12 month fiscal year on January 1, 1997. The six month
period resulting from this change, July 1, 1996 through December 31, 1996, is
referred to as the "Transition Period."
MULTISOURCE BUSINESS
The U.S. multisource or generic pharmaceutical market approximates $8
billion in annual sales. This sector has grown due to a number of factors
including the large number of drugs coming off patent, the growing importance
and impact of managed care organizations which prefer lower cost generics to
brand products, and the increasing physician, pharmacist and consumer acceptance
of generic drugs. Generic drugs are the chemical and therapeutic equivalents of
brand-name drugs. They are required to meet the same governmental standards as
the brand-name drugs and must receive FDA approval prior to manufacture and
sale. Generic drugs may be manufactured and marketed only if relevant patents
(and any additional government-mandated market exclusivity periods) have
expired. These drugs are typically sold under their generic chemical names at
prices significantly below those of their brand-name equivalents.
1
To successfully participate in the multisource business, DynaGen intends to
compete with other generic companies through vertical integration of key
elements of the multisource business including manufacturing, packaging and
distribution. In August 1996, the Company acquired Able, a 46,000 square foot
tablet and suppository manufacturing facility. As part of this acquisition, the
Company obtained rights to eleven approved Abbreviated New Drug Applications
("ANDAs") as well as other generic formulations. Since the acquisition, DynaGen
has updated and expanded the manufacturing capability, validated several of the
acquired products, retrained employees in quality assurance procedures, and has
successfully met FDA requirements and guidelines to manufacture these products.
The Company is increasing sales of its current generic products through the
expansion of its distribution networks and by providing contract manufacturing
services to various pharmaceutical companies. The following is a list of generic
products that the Company obtained in the Able acquisition:
<TABLE>
<CAPTION>
GENERIC PRODUCT THERAPEUTIC CATEGORY BRAND NAME(1)
--------------- -------------------- -------------
<S> <C> <C>
ANDA PRODUCTS:
Clorazepate tablets (three dosages) Anxiolytic Tranxene
Clorazepate capsules (three dosages)(2) Anxiolytic Tranxene
Loperamide tablets(2) Antidiarrheal Imodium
Acetaminophen suppositories (three dosages)(2) Analgesic Tylenol suppositories
Hydrocortisone acetate cream (1%)(2) Anti-inflammatory Anusol-HC cream
OTHER GENERIC FORMULATIONS:
Bisacodyl tablets Laxative Dulcolax
Choline magnesium trisalicylate tablets (three dosages) Anti-inflammatory Trilisate
Methenamine Mandelate tablets (two dosages) Urinary Antibacterial Mandelamine
Phenazopyridine HCL tablets (two dosages) Urinary Tract Analgesic Pyridium
Salsalate tablets (two dosages) Anti-inflammatory Disalcid
</TABLE>
- --------
(1) All brand names are registered trademarks of their respective
manufacturers.
(2) These products are not presently being marketed by the Company.
In April 1997, the Company signed an agreement with Kali Laboratories Inc.
("Kali"), a privately-held company specializing in the development of generic
drugs. The agreement provides for Kali to assist DynaGen in developing seven
specific generic drugs and obtaining FDA approval for these drugs. The patents
on these targeted drugs have expired or will expire over the next five years and
provide an opportunity for DynaGen to introduce generic equivalents. Kali's
management and its scientific staff have significant experience in developing
and obtaining approvals on generic drugs. DynaGen believes that by outsourcing
the development and approval activities it will benefit from the experience of a
highly seasoned team of scientists while reducing the requirement of major
investment in personnel and laboratory equipment.
To complement the acquisition of Able and pursue vertical integration, the
Company recently entered into an agreement to acquire all of the outstanding
shares of Superior Pharmaceutical Company ("Superior"), a privately-held
distributor of generic pharmaceutical products. Superior has its primary
operations in Cincinnati, Ohio, where it employs approximately 65 people, and
has 40,000 square feet of office, warehouse and distribution space. Superior
reported 1996 sales of approximately $32 million with pre-tax income of over $3
million. Under the terms of the agreement, DynaGen will pay Superior's
shareholders a total of $16.5 million, consisting of cash, three-year notes and
shares of DynaGen Common Stock. The shareholders may also receive certain cash
incentive payments based on Superior's performance during the three years
following the close of the transaction. The aquisition of Superior is subject to
customary closing conditions and the Company intends to close this acquisition
during the second quarter of 1997. There can be no assurance that the Superior
aquisition will close in the second quarter of 1997, or at all.
2
The Company plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently engaged in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
SPECIALTY PHARMACEUTICAL BUSINESS
DynaGen's specialty or emerging pharmaceutical business strategy is to
create a business based on branded generic products and multi-drug combinations
in convenient packaging for specific indications and treatments. Physicians
routinely prescribe two or more separate drugs for the treatment of several
common medical problems. These drugs are separately prescribed and dispensed but
are taken at various times during the course of the day as directed by the
physician. A major problem in such multi-drug therapies is lack of compliance by
the patient and therefore less than desirable therapeutic efficacy. For this
reason, the Company initially intends to focus its efforts in this area on
compliance enhancement packaging. DynaGen has identified near-term opportunities
in compliance enhancement packaging in the areas of women's healthcare and
respiratory infection. The Company is developing convenience packaging which it
believes will provide ease of prescription, dispensing, storage and
self-administration. Convenience packaging also provides cost advantages to the
consumer since there is only a single "co-pay" instead of multiple co-payments.
The Company's proposed specialty pharmaceutical products are in an early
stage of development and therefore are subject to the risks of unsuccessful
development, marketing and commercialization. These proposed products will
require substantial further development which may include clinical testing,
bio-equivalency studies and regulatory approval, all at a substantial cost to
the Company. The use of specialty pharmaceuticals will require the acceptance of
a new way of prescribing medication and there can be no assurance a market will
develop for such products. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
THERAPEUTIC PRODUCTS
OVERVIEW OF SMOKING CESSATION THERAPY
The rationale behind currently marketed nicotine based smoking cessation
products is that by gradually decreasing the concentration and daily dosage of
nicotine, one can overcome nicotine dependency without experiencing withdrawal
problems. Nicorette(r), a nicotine-containing gum currently marketed by
SmithKline Beecham Consumer Health Care, was the first prescription product
approved by the FDA as an aid to smoking cessation. Nicotine-containing
transdermal patches and nasal sprays have also been developed and initially
approved by the FDA for prescription use and marketed as such by pharmaceutical
companies. Beginning in 1996, the FDA granted approval for several nicotine
patch and gum products, including some of the products mentioned above, to be
sold over-the-counter ("OTC"), without prescription. The FDA approval of OTC
products has caused a shift in the smoking cessation marketplace from
prescription to OTC use.
Until December 1993, there was a variety of non-FDA approved
over-the-counter smoking cessation products. Several of these products contained
lobeline as their active ingredient because it was believed that lobeline could
temporarily replace nicotine and help to overcome nicotine dependency and
withdrawal problems. The majority of the lobeline products were taken orally
assuming that a sufficient quantity of lobeline would be absorbed from the
gastrointestinal ("GI") tract into the bloodstream. These formulations have not
been proven to be effective and they have not received FDA approval.
3
DynaGen's research is consistent with the hypothesis that lobeline relieves
nicotine withdrawal symptoms by binding to nicotine receptors in the brain
without activating the addiction mechanisms. Based on the belief that a lobeline
formulation which does not depend on absorption from the GI tract might be an
effective tobacco substitute, DynaGen has developed alternative delivery
formulations, focusing primarily on the sublingual tablet, NicErase-SL.
NICERASE-SL. DynaGen is developing NicErase-SL, a sublingual tablet that is
held under the tongue where it dissolves in one to three minutes and releases
lobeline, the active ingredient of the tablet. As the tablet dissolves, the
lobeline enters the bloodstream directly through blood vessels under the tongue
and in the mouth. NicErase-SL is designed for use by individuals who want to
stop smoking. It is expected that NicErase-SL will be used in a six-week program
that includes smoking cessation counseling, as is the case for other FDA
approved prescription smoking cessation products.
DynaGen has shown in clinical studies that NicErase-SL reduces symptoms of
tobacco withdrawal and is now evaluating its effectiveness as an aid in smoking
cessation in a 750 subject multi-center pivotal Phase 3 clinical trial. Results
from this first trial are anticipated to be available in the second quarter of
1997. At a minimum, a second similar trial would also be necessary before the
Company could file with the FDA a New Drug Application to market NicErase-SL as
a prescription product. The FDA currently requires that smoking cessation
products be initially marketed for prescription use with a possible switch to
OTC only after a positive history of prescription use has been established and
demonstrated to the FDA's satisfaction.
In light of the shift in the smoking cessation market from prescription to
OTC products and of the expanding availability of different dosage formats of
nicotine-based smoking cessation products such as the nicotine nasal spray, the
Company is refocusing its traditional development strategy by concentrating on
outlicensing its technology to one or more strategic partners. The Company
intends to minimize research and development expenditures on products which have
a long development and approval process. Since alternative drug delivery formats
have proven successful in the nicotine replacement therapy market, the Company
is considering the development of additional delivery formats for NicErase, such
as a transdermal patch and adhesive buccal wafer. The Company believes that a
product available in multiple delivery dosage formats may create more diverse
marketing opportunities.
In December 1996, DynaGen licensed its technology for the development of a
lobeline-containing nasal spray to Nastech. Under the terms of this agreement,
Nastech will be responsible for all remaining preclinical and clinical
development of the product. DynaGen and Nastech will divide equally all future
license and sales royalty revenues.
To date, the Company has not entered into any collaborative arrangements
with any third party with respect to the development and commercialization of
NicErase, except for the agreement with Nastech. The Company's future NicErase
development and commercialization activities will depend on a number of factors
including the results of the Company's current pivotal Phase 3 clinical trial
for NicErase-SL, the changing demands of the smoking cessation market and the
Company's ability to secure a suitable marketing and development partner. There
can be no assurance that the results of the current pivotal Phase 3 clinical
trial will be sufficient to support further clinical development of NicErase-SL
or a second pivotal Phase 3 clinical trial. Even if such results are promising,
there can be no assurance that such results will be repeated in future clinical
trials, or that the Company will receive the necessary regulatory approvals to
commercialize NicErase-SL or any other NicErase format. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
ORTHODYN BIORESORBABLE BONE CEMENT
The global orthopaedics market continues to expand, and the Company believes
that resorbable materials are one of the most rapidly growing sectors. With
significant growth projected in the elderly population comes an increased demand
for orthopaedic materials. Advances continue to be made in the design of total
joint prostheses and other fixation devices. The area of bioresorbable bone
substitutes is of prime interest to the major orthopaedics manufacturers, with
most having the goal of adding such materials to their product line.
4
OrthoDyn is based on a family of bioresorbable, biocompatible polyesters
derived from compounds naturally occurring in the body. It is a composite
polymer/filler system and has strength and stiffness more similar to human bone
than fully ceramic systems. It is initially moldable, forming a very cohesive
dough, cures fast (10 to 30 minutes) with little or no heat evolution, and has
strength, stiffness and toughness similar to human bone. Preclinical studies
have demonstrated acceptable specifications with regard to degradation time,
biocompatibility and strength. These studies also have provided early
indications that new bone effectively grows into and replaces the cement. The
polymer component also has potential use for formation of preformed
bioresorbable pins, plates and screws.
In line with DynaGen's goal to minimize development expenditures on products
which have long-term development and clinical approval programs, the Company and
Smith & Nephew have recently entered into an agreement providing Smith & Nephew
with an exclusive period of 12 months to evaluate the OrthoDyn product's human
orthopaedic applications. There can be no assurance that the Company will enter
into a definitive agreement with Smith & Nephew or that such an agreement will
prove successful for DynaGen. Furthermore, no assurance can be given that
continued preclinical development of OrthoDyn will be successful, that the
necessary regulatory approvals will be obtained or that the OrthoDyn products
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
ADDITIONAL BIORESORBABLE POLYMER TECHNOLOGIES
Vaccine delivery represents a potential area for the application of the
Company's controlled release delivery systems. DynaGen's patent application
covering its Sleeper(tm) technology has recently been granted notice of
allowance from the U.S. Patent and Trademark Office. This technology involves a
unique combination of a bioresorbable polymer and a vaccine such that, upon
injection, the Sleeper delivery system immediately releases the initial amount
of vaccine corresponding to the first shot and then, after a predetermined
period of time, will release in a "burst" the second load of vaccine
representing the "booster" shot.
DynaGen also has developed a polymer system that can be applied to the
controlled, sustained release of a wide variety of drugs. The Company is
pursuing both corporate alliances and outlicensing approaches for further
development of these resorbable polymer technologies. There can be no assurance
that the Company will be able to find a suitable development partner for these
bioresorbable polymer technologies, that development efforts for these
technologies will be successfully completed or that the products, if introduced,
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
OTHER THERAPEUTIC PRODUCTS
The Company is also conducting early stage research on a proprietary
bacterial extract for the treatment of infectious diseases and is currently
engaged in the characterization and partial purification of the extract prior to
filing an investigational new drug application. Management is also evaluating
potential clinical applications for this technology. These types of therapeutics
have been studied in the past and have had mixed results. There can be no
assurance that the Company can successfully develop, test and market products
based on this technology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
DIAGNOSTIC PRODUCTS
The health care industry has shifted to a managed care approach which
integrates prevention, diagnostic, therapeutic and compliance technologies into
a panel of products for specific disease management. In light of this structural
shift, the Company is developing diagnostic products which may help in the
prevention and diagnosis of disease and in the determination of compliance with
smoking cessation programs.
5
BREAST BIOPSY TECHNOLOGY
DynaGen recently licensed technology that is intended to improve the
accuracy and efficiency, and reduce the overall cost, of breast surgical biopsy
procedures from BioLoc, a privately held Boston-based company. The acquisition
of the BioLoc technology fits DynaGen's strategy of developing distinctive
healthcare products based on technologies acquired by the Company from outside
sources.
Core needle biopsy, the most commonly used non-surgical procedure for
diagnosis of suspicious lesions in breasts, is limited in its ability due to the
difficulty in capturing the targeted tissue and the need for multiple attempts
to obtain accurate and sufficient samples, resulting in unnecessary pain,
scarring and anxiety. The BioLoc technology is intended to overcome the
shortcomings of the core needle biopsy procedure by accurately guiding the
surgical biopsy instruments directly to the suspected tissue lesion identified
during mammography examination. Imaging and location tracking technologies are
combined to provide a three-dimensional view of the breast tissue which the
Company believes will allow the accurate depiction of the biopsy target and
guidance for its surgical removal. The Company is now completing its patent
application covering this technology and developing a prototype system.
The BioLoc technology is in an early stage of development and therefore is
subject to the risks of unsuccessful development, marketing and
commercialization. This proposed product will require substantial further
development and preclinical and clinical testing and regulatory approval, at a
substantial cost to the Company. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS
NICCHECK I. NicCheck I is a simple colorometric test for the detection of
nicotine and/or its metabolites in urine. The test distinguishes between smokers
and nonsmokers with 97% accuracy and is also able to distinguish between high
and low consumers of nicotine. NicCheck I can be used both as a companion
product for NicErase-SL or independently for clinical evaluation. The NicCheck I
result may be used to determine the appropriate level of nicotine replacement
therapy during smoking cessation efforts. Smokers who are trying to quit may
become more motivated by observing a decrease in color intensity of the NicCheck
I results as they reduce nicotine consumption. NicCheck I may also prove to be a
cost-effective means for insurance companies to employ risk assessment/risk
management strategies. The FDA recently granted the Company clearance to market
NicCheck I in the United States and the Company is now attempting to establish
multilevel sales and marketing approaches.
NICCHECK II. The Company is initiating preclinical studies for detecting
exposure to secondhand smoke. Secondhand smoke causes and exacerbates a number
of respiratory problems in nonsmokers. The Company believes that physicians
could use NicCheck II to promote early intervention.
TUBERCULOSIS DIAGNOSTIC PRODUCTS
DynaGen has also developed proprietary diagnostic tests for certain
infectious diseases including tuberculosis ("TB"). The Company is currently
selling MycoDot(r), a product to detect antibodies against mycobacteria in blood
or serum, through distributors primarily in Southeast Asia, Pacific Rim
countries, China, India, and Japan. DynaGen has received clearance under three
premarket notification 510(k)s from the FDA to market its MycoAKT(r) diagnostic
tests that identify three mycobacterial species in culture. The Company has
granted exclusive U.S. manufacturing and distribution rights and semi-exclusive
worldwide rights for MycoAKT to a third party. The Company continues to pursue
licensing arrangements for the promotion and distribution of these products, but
does not expect to generate material amounts of revenue from sales of these
products.
6
SALES AND MARKETING
The Company's generic therapeutic products are sold through private label
arrangements primarily through direct sales efforts to drug wholesalers,
distributors and retail drug chains and other pharmaceutical companies. In the
near future, the Company also intends to market its generic therapeutic products
under its own "Able Laboratories" name. The Company markets its diagnostic
products under its own name primarily through distributors.
The Company has relatively limited experience in sales, marketing and
distribution. There can be no assurance that the Company can successfully
implement its sales and marketing strategy or that it can successfully market or
sell any of its products or proposed products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results."
MAJOR CUSTOMERS
During the Transition Period, approximately 85% of total revenues were
derived from three major customers: Schein Pharmaceutical ("Schein") (53%),
Genelabs Diagnostic Pte LTD ("Genelabs") (18%) and Alpharma, Inc. (14%). For the
fiscal year ended June 30, 1996, approximately 79% of total revenues were
derived from three major customers: Bristol-Myers Products ("BMP") (45%), Hainan
OSROC Bio-Tech Co. Ltd. ("OSROC") (23%) and Remel LP ("Remel") (11%). For the
fiscal year ended June 30, 1995, approximately 77% of total revenues were
derived from two major customers: BMP (50%) and Genelabs (27%). There is no
assurance that the revenues from Schein and Genelabs will recur. The revenue
from BMP represents the recognition over two years of a one-time payment of
$500,000 and will not recur. In addition, the revenue from Alpharma, Inc. was
derived from a temporary supply agreement which ended in February 1997 and is
not expected to recur. The loss of any key customer and the inability of the
Company to replace revenues provided by a key customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
INDUSTRY SEGMENTS AND SALES BY GEOGRAPHIC AREA
Financial information with respect to the Company's business segments and
product sales by geographic area is presented in Note 11 of "Notes to
Consolidated Financial Statements."
BACKLOG
The dollar amount of backlog orders for the Company's products as of
December 31, 1996 was approximately $300,000. Although orders are subject to
cancellation without penalty, management expects to fill substantially all of
them in the near future.
MANUFACTURING AND SUPPLIERS
DynaGen's generic products are manufactured at its Able Laboratories
facility in South Plainfield, New Jersey. The principal components used in the
Company's generic products are active and inactive pharmaceutical ingredients
and certain packaging materials. Sources for certain materials for the Company's
products must be approved by the FDA, and in many instances only one source has
been approved. Active raw material ingredients are purchased primarily from
United States distributors of bulk pharmaceutical materials manufactured by
foreign companies. To date, the Company has experienced no significant
difficulty in obtaining raw materials. However, if raw materials from a
specified supplier were to become unavailable, the Company would be required to
file a supplement to its ANDA and revalidate the manufacturing process using the
new supplier's materials. If unexpected delays in obtaining new materials do
occur, it could result in the loss of revenues and have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results."
The Company's strategy is to license its diagnostic products for manufacture
and distribution by third parties. The Company has entered into license
agreements for the manufacture and distribution of its MycoAKT and MycoDot
products. MycoDot is produced by a single licensed manufacturer in India.
Nicheck I is produced by a contract manufacturer in the United States. The
Company's dependence upon third parties for the manufacture and distribution of
its diagnostic products could have a material adverse effect on its ability to
deliver its products on a timely basis.
7
Clinical supplies of the Company's proprietary NicErase-SL product candidate
are manufactured by a third-party contract manufacturer.
The Company's Cambridge, Massachusetts and South Plainfield, New Jersey
facilities are registered with the FDA and subject to current Good Manufacturing
Practices ("cGMP") as prescribed by the FDA.
COMPETITION
The Company competes with other generic manufacturers, specialized
biotechnology companies and major pharmaceutical companies. Many of these
competitors possess substantially greater financial and other resources, such as
expertise in clinical trials, FDA submissions and marketing, that are needed to
commercialize a pharmaceutical product.
In the generic pharmaceutical market, the Company competes with off-patent
drug manufacturers, brand-name pharmaceutical companies that manufacture
off-patent drugs, the original manufacturers of brand-name drugs and
manufacturers of new drugs that may be used for the same indications as the
Company's products. Revenues and gross profit derived from generic
pharmaceutical products tend to follow a pattern based on regulatory and
competitive factors unique to the generic pharmaceutical industry. As patents
for brand name products and related exclusivity periods mandated by regulatory
authorities expire, the first generic manufacturer to receive regulatory
approval for generic equivalents of such products is usually able to achieve
relatively high revenues and gross profit. As other generic manufacturers
receive regulatory approvals on competing products, prices and revenues
typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical market continues to intensify as the pharmaceutical industry
adjusts to increased pressures to contain health care costs. Brand name
companies are increasingly selling their products into the generic market
directly by acquiring or forming strategic alliances with generic pharmaceutical
companies. No regulatory approvals are required for a brand name manufacturer to
sell directly or through a third party to the generic market, nor do such
manufacturers face any other significant barriers to entry into such market.
These competitive factors may have a material adverse effect on the Company's
ability to sell its generic products.
In the field of nicotine addiction, the NicErase-SL product candidate will
compete with both prescription and OTC products. In particular, management
believes that the principal drug competition for its proposed NicErase product
is nicotine chewing gum, nicotine nasal spray and the nicotine patch which
several pharmaceutical companies, such as SmithKline Beecham, Hoechst Marion
Roussel, McNeil Consumer Products Co. and Ciba Self-Medication have developed
and are marketing in the United States and elsewhere. Competition has been
increasing due to the FDA approval of several nicotine patch and gum products to
be sold OTC, without prescription (see "Overview of Smoking Cessation Therapy").
These FDA approvals have caused a shift in the smoking cessation marketplace
from prescription to OTC use. Other programs that emphasize behavioral
modification approaches, such as hypnosis, will create additional competition in
the smoking cessation market. There can be no assurance that the results of
pivotal Phase 3 clinical trials will prove successful for the Company's
NicErase-SL product candidate or that it will receive the necessary regulatory
approvals and even if such approvals are obtained, that such product will be
commercially successful.
OrthoDyn, the Company's orthopedic product candidate, will compete with
products from a number of much larger companies in the bone repair market,
including, but not limited to, Johnson & Johnson Co., Pfizer (Howmedica) and
Bristol-Myers Squibb Co. (Zimmer). There can be no assurance that the Company's
OrthoDyn product candidate will receive the necessary regulatory approvals and
even if such approvals are obtained that such product will be commercially
successful.
Management believes that the Company's current and proposed diagnostic
products will compete on the basis of price, performance and technological
features such as speed of detection, absence of radioactive substance, accuracy
and reliability. Management believes that Gen-Probe, Inc. and Becton-Dickinson,
among others, are its immediate competitors and that other companies may
introduce competing products. There can be no assurance that the Company will be
able to successfully market any of its diagnostic products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
8
GOVERNMENT REGULATION
The Company's therapeutic and diagnostic products will be subject to
significant government regulation in the United States principally by the FDA,
and to a lesser extent, by the Drug Enforcement Administration, state
governments and other countries. Federal and state regulations and statutes
impose certain requirements on the testing, manufacture, labeling, storage,
recordkeeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable requirements can result in judicially and
administratively imposed sanctions including seizures of adulterated or
misbranded products, injunction actions, fines and criminal prosecutions.
Administrative enforcement measures can also involve product recalls and the
refusal of the government to approve new drug applications ("NDAs") or ANDAs. In
order to conduct clinical tests and produce and market products for human
diagnostic and therapeutic use, the Company must comply with mandatory
procedures and safety standards established by the FDA and comparable state and
foreign regulatory agencies. Typically, such standards require that products be
approved by the FDA as safe and effective for their intended use prior to being
marketed for human applications.
To obtain FDA approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA's cGMP regulations.
The FDA may inspect the manufacturer's facilities to assure such compliance
prior to approval or at any other reasonable time, and the Company must follow
cGMP regulations at all times during the manufacture and other processing of
drugs. To comply with the requirements set forth in these regulations, the
Company must continue to expend significant time to provide adequate resources
in the areas of development, production, quality control and quality assurance.
FDA approval is required before the Company can market any new drug,
including a generic equivalent of a previously approved drug or a new indication
or delivery method for a previously approved drug. There are three principal
ways to obtain FDA approval of a new drug:
1) New Drug Application (NDA) -- A prospective manufacturer must submit
to the FDA full reports of well-controlled clinical studies and other data
to prove that a drug is safe and effective and meets other requirements for
approval.
2) "Paper" NDAs -- Under certain circumstances, the FDA will permit
safety and efficacy to be demonstrated by submission of published literature
and journal articles.
3) Abbreviated New Drug Applications (ANDA) -- The Waxman-Hatch Act of
1984 established a statutory procedure for the submission and FDA review and
approval of ANDAs for generic versions of drugs previously approved by the
FDA. Under the ANDA procedure, the FDA waives the requirement of conducting
complete clinical studies of safety and efficacy, and instead typically
requires the applicant to submit data illustrating that the generic drug
formulation is bioequivalent to a previously approved drug. "Bioequivalence"
means that the rate of absorption and the levels of concentration of a
generic drug in the body needed to produce a therapeutic effect are
substantially equivalent to those of the previously approved drug. For some
drugs, the FDA may require other means of demonstrating that the generic
drug is bioequivalent to the original drug. The NDA and ANDA approval
process generally takes a number of years and involves the expenditure of
substantial resources.
FDA approval of an NDA dealing with a new pharmaceutical or biological
product for human use is a multistep process. Generally, preclinical animal
testing first must be conducted to establish the safety and potential efficacy
of the experimental product for treatment of a given disease or condition. Once
the product has been found to be reasonably safe in animals, suggesting that
human testing would be appropriate, an investigational new drug ("IND")
application is submitted to the FDA. FDA acceptance of the IND allows a company
to initiate clinical testing on human subjects. The initial phase of clinical
testing (Phase 1) is conducted to evaluate the safety and, if possible, to gain
early evidence of effectiveness of the experimental product in humans. If
acceptable product safety is demonstrated, then Phase 2 trials are initiated.
The Phase 2 trials involve studies in a small sample of the actual intended
patient population to assess the efficacy of the drug for a specific
application, to determine dose tolerance and the optimal dose range and to
gather additional information relating to safety and potential adverse side
effects. Phase 2 studies are also utilized to evaluate combinations of products
for therapeutic activity. Once an investigational drug is found to have some
efficacy and an acceptable safety profile in the targeted patient population,
Phase 3 trials may be initiated. Phase 3 trials are
9
expanded controlled trials that are intended to gather additional information
about safety and effectiveness in order to evaluate the overall risk-benefit
relationship of the experimental product and to provide an adequate basis for
product labeling. These trials also may compare the safety and activity of the
experimental product with currently available products. It is not possible to
estimate the time in which Phase 1, 2 and 3 studies will be completed with
respect to a given product, although the time period can be as long as several
years.
Upon completion of clinical testing, which demonstrates that the product is
safe and effective for a specific indication, an NDA or a Product License
Application ("PLA") for a biological product may be submitted to the FDA. This
application includes details of the manufacturing procedures, testing processes,
preclinical studies and clinical trials. FDA first determines whether to accept
the application for filing. If it does, FDA's review commences; if it does not,
the Company may need to obtain additional data before resubmitting the
application. FDA approval of the application is required before the applicant
may market the new product. In addition, the FDA may impose conditions on the
approval, such as post-marketing testing and surveillance programs to monitor a
product's safety and effectiveness.
The Waxman-Hatch Act establishes certain statutory protections for
FDA-approved drugs, which protections could preclude submission or delay the
approval of a competing ANDA. One such provision allows a five-year market
exclusivity period for NDAs involving new chemical compounds and a three-year
market exclusivity period for NDAs (including different dosage forms) containing
data from new clinical investigations essential to the approval of the
application. Both patented and non-patented drug products are subject to these
market exclusivity provisions. Another provision of the act extends patents for
up to five years as compensation for reduction of the effective market life of
the patent resulting from the time involved in the federal regulatory review
process.
The Orphan Drug Act also has market exclusivity provisions of seven years
for the first approved drug for a rare disease or condition. A grant of
exclusivity under this act can preclude the approval of both NDAs and ANDAs for
the orphan indication.
The Prescription Drug User Fee Act of 1992, enacted to expedite drug
approval by providing the FDA with resources to hire additional medical
reviewers, imposes three types of user fees on manufacturers of NDA-approved
prescription drugs. Applicants submitting only ANDAs and most other off-patent
drug manufacturers, including the Company, are not currently subject to any of
the three user fees. If the Company submits NDAs for non-ANDA products, the
Company will be subject to user fees.
Penalties for wrongdoing in connection with the development or submission of
an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA. They may also
temporarily deny approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct and also has authority to withdraw
approval of an ANDA under certain circumstances and to seek civil penalties. The
Company does not expect the law to have a material impact on the review or
approval of the Company's ANDAs.
Reimbursement legislation such as Medicaid, Medicare, Veterans
Administration and other programs govern reimbursement levels. All
pharmaceutical manufacturers rebate to individual states a percentage of their
revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers
currently rebate 11% of average net sales price for products marketed under
ANDAs. NDA manufacturers are required to rebate the greater of 15.2% of average
net sales price or the difference between average net sales price and the lowest
net sales price during a specified period. The Company believes that the federal
and/or state governments may continue to enact measures in the future aimed at
reducing the cost of drugs and devices to the public. The Company cannot predict
the nature of such measures or their impact on the Company's profitability.
The Company's manufacturing subsidiary, Able, currently manufactures several
products which are regulated as "old drugs" and subject to the requirements of
the Over-the-Counter Drug Review regulations promulgated by the FDA. This class
of drugs requires no prior approval from FDA before marketing, but such products
must comply with applicable FDA monographs which specify,
10
among other things, required ingredients, dosage levels, label contents and
permitted uses. These monographs may be changed from time to time, in which case
the Company may be required to change the formulation, packaging or labeling of
any affected product. Changes to monographs normally have a delayed effective
date, so while the Company may have to incur costs to comply with any such
changes, disruption of distribution is not likely.
There are two principal methods by which FDA authorization may be obtained
to market medical device products, such as the Company's diagnostic test kits.
One method is to seek FDA clearance through a premarket notification filing
under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Applicants
under the 510(k) procedure must prove that the device for which marketing
clearance is sought is substantially equivalent to a device on the market prior
to the Medical Device Amendments of 1976 or a device marketed thereafter
pursuant to the 510(k) procedure. The review period for a 510(k) submission is
generally shorter than that of a premarket approval ("PMA") procedure, however,
it cannot be estimated with any degree of certainty.
If the 510(k) procedure is not applicable, a PMA must be obtained from the
FDA. Under the PMA procedure, the applicant must conduct substantial clinical
testing that is required to determine the safety, effectiveness and potential
hazards of the product. Clinical testing requires prior review of the study
protocol by an institutional review board ("IRB") and patients informed consent,
and may require submission of an investigational device exemption application to
the FDA (for significant risk devices). Prior to human testing, animal testing
may be required to determine the safety of the product. The review period under
a PMA application is generally longer than review of a 510(k) and it may include
review of the application by an outside advisory committee of experts in the
field. In addition, the preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure and no assurance
can be given that the FDA will grant approval for the sale of the Company's
products for routine clinical applications or that the length of time the
approval process will require will not be extensive.
The FDA can also significantly delay the approval of a pending NDA, ANDA,
510(k) or PMA under its "Fraud, Untrue Statements of Material Facts, Bribery,
and Illegal Gratuities Policy." Manufacturers of drugs and devices must also
comply with the FDA's cGMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional applications.
In addition, if the Company elects to manufacture its drugs, devices or
biological products itself, it will be necessary to meet mandated FDA
manufacturing requirements by applying for appropriate FDA establishment
registration such as an Establishment License Application for biological
products, Drug Establishment Registration for its drug products and a Device
Establishment Registration for devices.
There can be no assurance that the appropriate approvals from the FDA will
be granted as to any of the Company's proposed products or processes, that the
process to obtain such approvals will not be excessively expensive or lengthy,
or that the Company will have sufficient funds to pursue such approvals. The
failure to receive the requisite approvals for the Company's products or
processes, when and if developed, or significant delays in obtaining such
approvals, would prevent the Company from commercializing its products as
anticipated and would have a materially adverse effect on the business,
financial condition and results of operations of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
Able is subject to a consent decree entered by the court on April 9, 1992 in
United States v. Able Laboratories, Inc., Civ. No. 91-4916 (D.N.J.) for failure
to comply with FDA cGMP and has been operating under this consent decree since
April 1992. The principals involved in the issuance of that order are no longer
employed by Able, DynaGen or any of its affiliates. Since the acquisition by
DynaGen, Able has made substantial commitments (both directed and financial) to
improve the plant, personnel, and equipment in order to effect an improvement in
its operations. Key management changes have been made with individuals who have
knowledge and commitment for cGMP in order to ensure continued cGMP compliance.
Ongoing cGMP training on a regularly scheduled basis will also be provided to
Able's employees.
11
Additionally, the latest Establishment Inspection, conducted on November 12,
13, 18, and 19, 1996 under the authority of an Order of Permanent Injunction did
not result in the issuance of an FDA Form 483, and the Establishment Inspection
Report (EIR) classified the inspection as "NN" -- no official action indicated.
The Company is in the process of initiating changes and plans to request the FDA
to join Able in a petition for relief from the consent decree.
PRODUCT LIABILITY AND INSURANCE COVERAGE
The Company presently maintains product liability insurance in the amount of
$3,000,000 for its products presently being marketed. The Company does not
presently maintain product liability insurance on any of its proposed products.
Although, the Company intends to obtain product liability insurance prior to the
commercialization of certain products which are not presently insured, there can
be no assurance that the Company will obtain such insurance at favorable rates
or, even if obtained, that any insurance will be adequate to cover potential
liabilities.
In the event of a successful suit against the Company, insufficiency of
insurance coverage could have a materially adverse impact on the Company's
operations and financial condition. Furthermore, the costs of defending or
settling a product liability claim and any attendant negative publicity may have
a materially adverse impact on the Company, even if the Company ultimately
prevails. Furthermore, certain food and drug retailers require minimum product
liability insurance coverage as a precondition to purchasing or accepting
products for commercial distribution. Failure to satisfy these insurance
requirements could impede the Company's ability to achieve broad commercial
distribution of its proposed products, which could have a materially adverse
effect upon the business and financial condition of the Company.
RESEARCH AND DEVELOPMENT
For the Transition Period, the Company expended $1,092,253 on research and
development activities. For the fiscal years ended June 30, 1996, 1995 and 1994,
the Company expended $3,118,145, $1,718,006 and $2,183,849, respectively, on
research and development activities.
PATENTS AND PROPRIETARY TECHNOLOGY
As part of its initial organization, the Company acquired several patents
related to the polymer technologies. In addition, the Company has filed several
U.S. and foreign patent applications for processes and products relating to its
controlled release delivery systems, smoking cessation technology, nicotine
detection product, bioresorbable bone cement product, immunological tests for
the diagnosis of mycobacterial disease, and other technologies. No assurance can
be given that existing patent applications will be granted or that any patents,
if issued, will provide the Company with adequate protection relating to the
covered products, technology or processes.
To date, the Company has received two U.S. patents related to its NicErase
smoking cessation technology covering: (i) the transdermal delivery system for
the administration of lobeline as an aid to smoking cessation and (ii)
sublingual tablet formulations. The Company has received a U.S. patent related
to a controlled release delivery system for drug dependency. In April 1997, the
Company received a notice of allowance from the U.S. patent office for the
Company's pulsed release vaccine delivery technology. Competitors may have filed
applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to, products or processes competitive
with those of the Company. Accordingly, there can be no assurance that the
Company's patent applications will result in patents being issued or that, if
issued, the patents will afford protection against competitors with similar
technology; nor can there be any assurance that any patents issued to the
Company will not be infringed or circumvented by others or that others will not
obtain patents that the Company would need to license or circumvent. There can
be no assurance that licenses that might be required for the Company's processes
or products would be available on reasonable terms, if at all. In addition,
there can be no assurance that the Company's patents, if issued, would be held
valid by a court.
The Company's generic and specialty pharmaceutical businesses rely upon
unpatented trade secrets and proprietary technologies and processes. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise
12
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its right to unpatented trade secrets. The
Company requires its employees, consultants and other advisors to execute
confidentiality agreements. However, there is no assurance that these agreements
will provide meaningful protection or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products developed by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
MycoDot(R), NicErase(R), MycoAKT(R), NicCheck(R) and OrthoDyn(R) are
registered trademarks of the Company. Sleeper(tm) is a trademark of the Company.
EMPLOYEES
As of April 24, 1997, the Company and its subsidiary had 67 full-time
employees, of whom 16 were employed in selling, general and administrative
activities and 51 were employed in research and development and manufacturing of
its products. Six of the Company's employees hold doctoral degrees including one
who holds a Doctorate in Medicine (M.D.). None of the Company's employees are
represented by a union. The Company believes its relationship with its employees
is good.
ITEM 2. PROPERTIES
The Company maintains its principal executive offices and laboratory
facilities at 99 Erie Street in Cambridge, Massachusetts. The premises, which
consist of approximately 27,000 square feet of space, are leased from an
unaffiliated party, for a term expiring on September 30, 1997.
The Able Laboratories subsidiary is located at a 46,000 square foot leased
manufacturing facility in South Plainfield, New Jersey. The premises are leased
from an unaffiliated party for a term expiring on March 31, 2000.
The Company believes that its present facilities are adequate to meet its
current needs. If new or additional space is required, the Company believes that
adequate facilities are available at competitive prices in the Boston,
Massachusetts and South Plainfield, New Jersey metropolitan
areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings incidental to its
normal business activities. While the outcome of any such proceedings cannot be
accurately predicted, the Company does not believe the ultimate resolution of
any existing matters should have a material adverse effect on its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, whether through the
solicitation of proxies or otherwise, during the Transition Period.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Redeemable Common Stock Purchase Warrants
("Public Warrants") are traded principally on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "DYGN" and "DYGNW," respectively, and on the Boston
Stock Exchange under the symbols "DYG" and "DYGW," respectively. The Company's
Class A Redeemable Common Stock Purchase Warrants ("Class A Public Warrants")
traded principally on Nasdaq under the symbol "DYGNZ" and on the Boston Stock
Exchange under the symbol "DYGZ" until they were redeemed on December 14, 1995.
The following table sets forth, for the periods indicated, the range of
quarterly high and low sale prices as reported on Nasdaq for the Company's
Common Stock, Public Warrants and Class A Public Warrants.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK PUBLIC WARRANTS PUBLIC WARRANTS(1)
------------ --------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
FISCAL 1995
<S> <C> <C> <C> <C> <C> <C>
July 1 to September 30, 1994 $1.44 $ .53 $ .44 $ .13 $ .56 $ .13
October 1 to December 31, 1994 2.75 1.19 .75 .34 1.69 .47
January 1 to March 31, 1995 3.13 1.63 1.38 .38 2.25 .88
April 1 to June 30, 1995 4.63 2.13 2.63 .75 3.81 1.25
FISCAL 1996
- -----------
July 1 to September 30, 1995 6.55 1.63 5.00 .50 5.19 1.00
October 1 to December 31, 1995 3.88 1.88 2.81 1.00 2.81 .56
January 1 to March 31, 1996 3.66 2.19 2.44 1.13 -- --
April 1 to June 30, 1996 3.19 2.13 2.50 1.13 -- --
TRANSITION PERIOD
- -----------------
July 1 to September 30, 1996 2.56 1.50 1.63 .88 -- --
October 1 to December 31, 1996 1.88 1.03 1.00 .16 -- --
</TABLE>
- --------
(1) Redeemed on December 14, 1995.
On April 24, 1997, the last reported sale prices of the Company's Common
Stock and Public Warrants as reported on Nasdaq were $1.22 and $.50,
respectively.
As of April 24, 1997, based upon information from the Company's transfer
agent, there were approximately 753 holders of record of the Company's Common
Stock. As of such date, the Company estimates that there are approximately
12,000 beneficial holders of the Company's Common Stock.
The Company has not declared or paid any cash dividends since its inception
and does not anticipate paying any cash dividends to its stockholders in the
foreseeable future. The Company currently intends to retain earnings, if any, to
fund the development and future growth of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
TRANSITION
PERIOD ENDED
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 359,908 $ 555,745 $ 497,553 $ 437,005 $ 883,910 $ 192,332
Costs and Expenses 4,687,745 5,899,650 3,836,295 4,264,141 4,388,575 2,837,862
Loss From Continuing
Operations (4,306,140) (5,097,419) (3,042,383) (3,645,804) (3,405,387) (2,660,040)
Loss From Discontinued
Operations -- -- -- (14,945) (48,095) (40,984)
Net Loss (4,306,140) (5,097,419) (3,042,383) (3,660,749) (3,453,482) (2,701,024)
Loss Per Share:
From Continuing
Operations (.15) (.21) (.14) (.22) (.26) (.23)
From discontinued
Operations -- -- -- -- -- (.01)
Net Loss (.15) (.21) (.14) (.22) (.26) (.24)
Weighted Average Number of
Shares Outstanding 28,794,118 24,433,949 21,179,703 16,517,117 13,070,565 11,471,849
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
AT
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $7,463,149 $11,576,666 $5,114,021 $7,834,706 $5,602,289 $ 1,942,367
Convertible Note Payable 1,600,000 2,000,000 -- -- -- --
Total Liabilities 2,409,133 2,733,032 587,207 420,964 441,171 604,238
Working Capital 5,502,295 10,203,693 4,102,747 6,967,894 4,584,747 739,465
Stockholders' Equity 5,054,016 8,843,634 4,526,814 7,413,742 5,161,118 1,338,129
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops and markets proprietary and generic therapeutic and
diagnostic products for the human healthcare market. The Company has begun
expanding its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products and specialty pharmaceuticals as well as
the continued development of therapeutic and diagnostic products. The Company
intends to implement this strategy through the acquisition of businesses,
technologies and products that the Company believes are undervalued as well as
through internal product development. In August 1996, the Company acquired the
tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical
product subsidiary of Alpharma, Inc. In addition, the Company has signed an
agreement to purchase all of the outstanding shares Superior Pharmaceutical
Company ("Superior"), a distributor of generic pharmaceuticals.
The Company has financed its operations primarily through the proceeds from
its public and private stock offerings, a convertible note and limited revenues
from product sales and technology license fees and royalties. Management
anticipates that revenues from product sales will not be sufficient to fund its
current operations or produce an operating profit until such
15
time as the Company is able to establish acceptance of its products in their
respective markets and expand its distribution channels. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
RESULTS OF OPERATIONS
TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THE SIX MONTH
PERIOD ENDED DECEMBER 31, 1995
REVENUES
Revenues for the six month period ended December 31, 1996 (the "Transition
Period") were $360,000 versus $333,000 for the six months ended December 31,
1995. This increase of $27,000 is a result of an increase in Able product sales
partially offset by a decrease in fee revenue which was due to one-time fees
from Bristol-Meyers Products recognized during the six months ended December 31,
1995. The increase in product sales resulted from the Company realizing sales
from its Able subsidiary since its acquisition on August 19, 1996. The Company's
product sales also increased due to improved diagnostic products sales.
COST OF SALES
Cost of sales was 99% of product sales for the Transition Period compared
with 50% for the six months ended December 31, 1995. Tablet and suppository
production at Able during the Transition Period did not support the minimum
level of fixed manufacturing costs required at the facility. Management expects
that the cost of product sales, as a percentage of sales, will decrease as sales
orders and production volumes increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the Transition Period were $1,092,000
versus $1,037,000 for the six months ended December 31, 1995, an increase of
$55,000. This increase is primarily attributable to costs associated with the
ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a
510(k) application with the U.S. Food and Drug Administration for its
NicCheck(R) product. The Company is also conducting early stage research on a
bacterial extract for the treatment of infectious diseases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the Transition Period were
$3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an
increase of $2,050,000. The increase in selling, general and administrative
expenses is primarily due to additional payroll and plant operating costs of
approximately $793,000 resulting from the acquisition of Able. In addition, the
Company incurred additional costs of approximately $865,000 for the use of
business consultants to develop, seek and obtain alliances for certain Company
products, potential products and financial development. The Company incurred
additional costs of approximately $80,000 towards patent applications for
several of its products. Legal expenses increased by approximately $106,000
primarily related to assistance with technology licensing, pending acquisitions
and corporate regulatory filings. The remainder is due to a net increase in
other operating expenses.
OTHER INCOME (EXPENSE)
Investment income increased by $46,000 from $112,000 to $158,000 for the
Transition Period as compared to same period ended December 31, 1995. The
Company had greater funds available for investment during the Transition Period
compared to the six months ended December 31, 1995.
The Company incurred interest expense of $74,000 and amortized debt
financing costs of $62,000 during the Transition Period, both associated with
the $2,000,000 convertible note issued in 1996.
16
INCOME TAXES
There were no provisions for income taxes for the Transition Period and the
six months ended December 31, 1995 due to operating losses incurred by the
Company and valuation reserves applied against deferred tax assets. As of
December 31, 1996 and December 31, 1995, for Federal and state income tax
reporting purposes, the Company had net operating loss carryforwards of
approximately $23,460,000 and $19,270,000 respectively. In addition, the Company
had Federal and state research tax credit carryforwards of approximately
$583,000 and $120,000, respectively, available to reduce future tax liabilities.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
REVENUES
Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000
versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase
of $58,000 is a result of an increase in license fees of $85,000 offset by a
$27,000 decrease in product sales. The increase in license fee revenue is
attributable to one-time license fees received under distribution arrangements
for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec
product sales remained consistent between Fiscal 1996 and Fiscal 1995. The
decrease in total product sales resulted from lower shipments of other products
in Fiscal 1996.
COST OF SALES
Cost of product sales was 44% of net product sales in Fiscal 1996 compared
to 54% in Fiscal 1995. This decrease in the cost of sales percentage is
primarily attributable to a reallocation of certain manufacturing staff to
product marketing and support roles.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $3,118,000 for Fiscal 1996 versus
$1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is
primarily due to approximately $1,200,000 in additional therapeutic product
development costs and $285,000 in compensation expense resulting from stock
grants. The increase in therapeutic development is mainly attributable to the
initiation of the first of two planned pivotal Phase 3 clinical trials for the
Company's NicErase-SL smoking cessation product.
The increase in research and development expenses was partially offset by a
decrease in diagnostic product development costs of $74,000. The Company has
limited diagnostic product development primarily to NicCheck, a test to detect
the presence of nicotine.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Fiscal 1996 were $2,685,000
versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling, general and
administrative expenses increased in the following areas: staffing - $355,000,
investor relations - $165,000, consulting - $111,000 and legal - $62,000. The
increase in investor relations expenses is attributable to a new program
designed to inform investors on corporate developments and strategy. Legal
expenses increased primarily for assistance with certain licensing arrangements,
regulatory issues, stock grants and options. The increase in staffing expenses
is primarily due to the award of stock grants and options. Consulting expenses
relate to assistance provided towards developing a strategy for business
alliances for certain Company products.
OTHER INCOME (EXPENSE)
The increase in investment income is primarily due to greater funds
available for investment during Fiscal 1996. The increases in interest expense
and debt financing cost amortization are attributable to the $2,000,000
convertible note issued in 1996.
INCOME TAXES
There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995
due to operating losses incurred by the Company and valuation reserves applied
against deferred tax assets.
17
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES
Revenues for Fiscal 1995 were $498,000 versus $437,000 for the year ended
June 30, 1994 ("Fiscal 1994"). This increase of $61,000, or 14%, is a result of
an increase in diagnostic product sales of $248,000 offset by a decrease in
contract service revenue of $138,000 and a decrease in license fees and
royalties of $49,000. Product sales were realized primarily from sales of
MycoDot, a tuberculosis antibody detection product, to a distributor in Asia.
The Company also recognized fee revenue of $250,000 from Bristol-Myers Products
("BMP"). The Company granted BMP the right to evaluate its smoking cessation
technology for which the Company received a $500,000 payment, of which $250,000
was deferred as revenue until Fiscal 1996. In July 1995, BMP informed the
Company that it decided not to exercise its option to license the technology as
BMP's strategic interest was in developing an over-the-counter smoking cessation
product. The Company's NicErase-SL smoking cessation product is being developed
for prescription use. In Fiscal 1994, royalties were attributable to a one-time
payment under an agreement to license certain tuberculosis diagnostic
technology. Contract service revenues for Fiscal 1994 related to the Company's
development of a vaccine delivery system under a U.S. Army contract completed in
Fiscal 1994. The Company is no longer performing any contract development work.
COST OF SALES
Cost of product sales for Fiscal 1995 was 54% of net product sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1,718,000 for Fiscal 1995 versus
$2,184,000 for Fiscal 1994, a decrease of $466,000 or 21%. In Fiscal 1995, the
Company expended $1,476,000 on therapeutic product development and $242,000
towards diagnostic product development, compared to $1,500,000 and $684,000,
respectively, in Fiscal 1994. This is reflective of the Company's strategy
whereby resources were directed towards NicErase-SL development with limited
expenditures towards other therapeutic and diagnostic product development.
During Fiscal 1995, therapeutic product development focused primarily on
NicErase-SL, as the Company completed a multi-center pilot Phase 3 clinical
trial.
Diagnostic product development included limited development efforts for the
Company's NicCheck and MycoAKT products. In March 1995, the Company received
clearance from the FDA to market the MycoAKT products and is currently seeking
and evaluating strategic alliances with third parties. MycoAKT diagnostic test
kits are used to identify three mycobacterial species. The Company continued its
manufacturing development scale-up and regulatory approval efforts with respect
to NicCheck, a nicotine detection product.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Fiscal 1995 were $1,984,000
versus $1,997,000 for Fiscal 1994, a decrease of $13,000. Comparing Fiscal 1995
to Fiscal 1994, savings realized from decreases in salaries and related
benefits, public relations expenditures, use of outside business consultants and
travel expenses were offset by increases in product marketing and support costs
and business insurance. Product marketing and support efforts focused primarily
on the implementation of distribution arrangements (including sales and
marketing support in connection with such distribution arrangements) for the
Company's tuberculosis related diagnostic products and business development
efforts for NicCheck.
OTHER INCOME (EXPENSE)
Investment income increased by $113,000 from $183,000 to $296,000 when
comparing Fiscal 1994 to Fiscal 1995. The Company had greater funds available
for investment during Fiscal 1995 as a result of the Company's March 1994 public
offering.
INCOME TAXES
There were no provisions for income taxes for Fiscal 1995 and 1994 due to
operating losses incurred by the Company.
18
DISCONTINUED OPERATIONS
In May 1994, the Company sold certain assets of its contract research and
development business that related to the Company's fluid systems consulting
services ("FSD"). The Company sold accounts receivable, work in process and
certain furniture and equipment for $165,000, and assigned to the buyer all of
the outstanding consulting projects. In addition, the Company entered into a
sub-lease agreement whereby the buyer occupies the space used by the FSD
business. This transaction resulted in a loss on disposal of $13,000. In
management's opinion, these services did not fit the strategic direction of the
Company's core therapeutic and diagnostic business. Moreover, these services
were not expected to be a significant source of revenues, profit or cash flow to
the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had working capital of $5,502,000
versus working capital of $10,204,000 at June 30, 1996. Cash and investment
securities were $5,117,000 at December 31, 1996 as compared to $10,464,000 at
June 30, 1996. Working capital was used primarily for research and development
and to fund the purchase of Able and its operations during the Transition
Period.
As discussed in Note 2 to the financial statements, in August 1996, the
Company acquired certain assets of Able, a generic pharmaceutical products
subsidiary of Alpharma Inc., for $550,000 in cash and acquisition costs of
$150,000. Able manufactures and markets prescription and over-the-counter
pharmaceuticals from a 46,000 square foot leased manufacturing facility in South
Plainfield, New Jersey. DynaGen obtained the rights to several approved ANDA
products through this purchase. DynaGen plans to increase sales of its generic
product portfolio by expanding Able's distribution network, by reintroducing
discontinued products and by developing new ANDA products. The acquisition has
increased revenues, costs and expenses, capital expenditures and net cash used
for operating activities. DynaGen intends to fund Able's operations until it
becomes self-supporting. There can be no assurance that the Company will be
successful in assimilating this or any future acquisition or that Able will
generate sufficient revenues to become self-supporting.
Management anticipates that the available working capital will be sufficient
to fund the current level of operations, including the Able business, through
June 1997, but that the available working capital will not be sufficient to fund
the acquisition of Superior. The Company has realized limited revenues from
license fees and the sale of its diagnostic products. Its future prospects and
revenue potential from product sales cannot be determined with any certainty at
this time.
The Company plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
The Company also continues to pursue additional sources of capital in order
to fund the growth of the Able generic drug business and its product development
efforts. The Able financing may take the form of a line of credit or equipment
notes or leases. There can be no assurance that the Company will be able to
secure additional financing for the Able business or its continued product
development efforts or that financing will be available on favorable terms. If
the Company is unable to obtain such additional financing, the Company's ability
to maintain its current level of operations would be materially and adversely
affected and the Company will be required to reduce or eliminate certain
expenditures, including its research and development activity with respect to
certain proposed products.
ENVIRONMENTAL LIABILITY
The Company has no known material environmental violations or assessments.
19
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based
Compensation" in the Transition Period. As discussed in Note 1 to the financial
statements, the adoption of SFAS No. 121 and No. 123 did not have a material
effect on the Company's financial position, results of operations and cash
flows.
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per
Share," in February 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share, and is effective for financial statements issued
for periods ending after December 15, 1997. Earlier application is not
permitted. SFAS No. 128 requires the restatement of all prior-period earnings
per share data presented.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including, but not limited to, statements
contained in "Item 1. Business" relating to the Company's strategy with respect
to the development and marketing of the Company's products and to statements
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form 10-K,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
History of Losses; Anticipation of Future Losses. The Company has incurred
operating losses since its inception and has an accumulated deficit of
$24,315,191 as of December 31, 1996. The Company incurred a net loss of
$4,306,140 for the Transition Period ended December 31, 1996, as compared with a
net loss of $1,809,816 for the same period ended December 31, 1995. The Company
incurred a net loss of $5,097,419 for the fiscal year ended June 30, 1996,
compared with a net loss of $3,042,383 for the fiscal year ended June 30, 1995.
Such losses have resulted principally from expenses incurred in research and
development and from general and administrative costs associated with the
Company's development efforts. The continued development of the Company's
products will require the commitment of substantial resources to conduct further
development and preclinical and clinical trials, and to establish manufacturing,
sales, marketing, regulatory and administrative capabilities. In addition, the
Company's recently acquired subsidiary, Able, has incurred net operating losses
in the past. The Company expects to provide its Able subsidiary with working
capital during the foreseeable future until Able can become self-supporting. The
Company expects to incur substantial operating losses over the next several
years as its product programs expand, various clinical trials commence and
marketing efforts are launched. The amount of net losses and the time required
by the Company to reach sustained profitability are highly uncertain and to
achieve profitability, the Company must, among other things, successfully
complete development of its products, obtain regulatory approvals, and establish
manufacturing and marketing capabilities by itself or with third parties. There
is no assurance that the Company will ever generate substantial revenues or
achieve profitability.
20
Future Capital Needs; Uncertainty of Additional Funding. It is anticipated
that the Company will continue to expend significant amounts of capital to fund
its research and development, clinical trials and generic pharmaceutical
business and the proposed acquisition of Superior. The Company's available
working capital is inadequate for completion of the Company's development
programs, and additional financing will be necessary for the continued support
of the Company's proposed products and operations, including the establishment
of manufacturing, marketing and distribution capabilities for its proposed
products and the continued operations of Able. There can be no assurance that
the Company will be able to secure additional financing or that such financing
will be available on favorable terms. If the Company is unable to obtain such
additional financing, the Company's ability to maintain its current level of
operations would be materially and adversely affected and the Company will be
required to reduce its overall expenditures including its research and
development activity with respect to certain proposed products.
In addition, the Company will require additional financing to fund the
proposed Superior acquisition and a line of credit to fund Superior's
operations. There can be no assurance that the Company will be able to secure
such financing or line of credit or that such financing or line of credit will
be available on favorable terms. If the Company is unable to obtain such
financing or line of credit, it will be unable to close the Superior
acquisition.
Uncertainties Related to NicErase-SL. Under applicable law, the Company will
not be permitted to sell NicErase-SL, and thus generate any revenue from its
development of NicErase-SL, unless it obtains the necessary regulatory approvals
from the FDA for the commercial sale of that product. To obtain such regulatory
approvals, the Company must demonstrate to the satisfaction of the FDA, through
preclinical studies and clinical trials, that NicErase-SL is safe and effective.
Although the results of the Company's pilot Phase 3 clinical trials were
encouraging, they do not necessarily indicate, and they do not guarantee, that
the results of the ongoing multi-center Phase 3 clinical trial will be favorable
to the Company. Nor do the results obtained in the small-scale pilot tests
completed by the Company to date necessarily indicate that the Company will
ultimately succeed in obtaining FDA approval for the commercial sale of
NicErase-SL. The results from preclinical studies and early clinical trials may
not be predictive of results that will be obtained in large-scale testing, and
there can be no assurance that the Company's clinical trials will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in marketable products. A number of companies in the pharmaceutical
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. If NicErase-SL is not shown to be
safe and effective in either current ongoing, or any future clinical trials, and
if the Company is thus unable to commercialize NicErase-SL it would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Integration of Able and Superior Acquisitions. In August 1996, the Company
acquired certain assets of Able, and in March 1997, the Company signed an
agreement to purchase all of the outstanding shares of Superior. There can be no
assurance that the anticipated benefits from the Able acquisition or the
proposed Superior acquisition will be realized. Additionally, there can be no
assurance that the Company will be able to effectively market the existing Able
products, that it will obtain FDA approval to market additional generic drugs or
that it will be successful in managing the combined operations. The integration
of Able and Superior requires substantial attention from management, many of
whom have limited experience in integrating acquisitions. The diversion of
management's attention, the process of integrating the businesses and any
difficulties encountered in the transition process could cause an interruption
of business, and could have a material adverse effect on the Company's
operations and financial performance.
Risks Associated with Managing a Changing Business. The Company has begun to
expand its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products as well as the continued development of
therapeutic and diagnostic products. In order to achieve this expansion, the
Company must undergo substantial changes in its operations, which may
significantly strain the Company's limited administrative, operational and
financial resources. The ability of the Company to achieve its business
objectives will depend in large part on its ability to build and expand its
manufacturing operations and sales and marketing capabilities, to generally
expand its operational capabilities and its
21
financial and management information systems, to develop the management skills
of its managers and supervisors and to train, motivate and manage both its
existing employees and the additional employees that will be required if the
Company is to expand its business. There can be no assurance that the Company
will succeed in developing all or any of these capabilities, and any failure to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
Future Acquisitions. Management may from time to time consider other
acquisitions of assets, businesses or technologies that will enable the Company
to acquire complementary skills and capabilities, offer new products, expand its
customer base or obtain other competitive advantages. There can be no assurance
that the Company will be able to successfully identify suitable acquisition
candidates, obtain financing on satisfactory terms, complete acquisitions,
integrate acquired operations into its existing operations or expand into new
markets. Acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, and amortization
expense related to intangible assets acquired, any of which could materially
adversely affect the Company's business and results of operations. Acquisitions,
including the Company's recent acquisition of Able and the proposed purchase of
Superior, involve a number of potential risks, including difficulties in the
assimilation of the acquired company's operations and products, diversion of
management's resources, uncertainties associated with operating in new markets
and working with new employees and customers, and the potential loss of the
acquired company's key employees. There can also be no assurance that the Able
acquisition, the proposed Superior acquisition and future acquisitions, if any,
will not have a material adverse effect upon the Company's business and results
of operations. Once integrated, acquired operations may not achieve levels of
revenues, profitability or productivity comparable to those achieved by the
Company's existing operations, or otherwise perform as expected.
Limited Manufacturing Capability and Experience. The Company's NicCheck,
MycoDot and MycoAKT products are currently made by licensed manufacturers. The
Company intends to enter into licenses, joint venture and similar collaborative
arrangements with third parties for the manufacture of other proprietary
products and proposed products. There are no other such agreements and there can
be no assurance that the Company will be successful in securing manufacturing
agreements for its products or that such agreements will prove to be on terms
favorable to the Company. In addition, the Company's dependence upon third
parties for the manufacture of its products and proposed products could have an
adverse effect on the Company's profitability and its ability to deliver its
proposed products on a timely and competitive basis. To the extent that the
Company attempts to manufacture any of its products, there can be no assurance
that the Company will be able to attract and retain qualified manufacturing
personnel, or build or rent manufacturing facilities.
The Company's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. In order to maintain
compliance with FDA GMP standards, the Company will have to make significant
investments in its infrastructure and plant facility. The Company will need to
raise capital to finance these investments and there can be no assurance that
the Company will be able to obtain such financing or that such financing will be
available on favorable terms. There can be no assurance that such capital
expenditures and overhead costs will not have a material effect upon the
Company's ability to achieve profitability. There can be no assurance that the
Company will retain the key employees it acquired in the Able acquisition.
Limited Commercialization of Proprietary Products. The Company has
commercially introduced and is currently marketing through distributors only two
of its proprietary products, yielding limited revenues from the sale of these
products. Historically, substantially all of the Company's revenues had been
generated from research and development contracts and license fees. The
Company's ability to achieve profitability will depend on its ability to develop
and introduce commercially viable products, obtain regulatory approvals for
these products and either successfully manufacture, market and distribute such
products on its own or enter into collaborative agreements for product
manufacturing, marketing and distribution. Many of the Company's proposed
therapeutic and diagnostic products will require substantial further
development, preclinical and clinical testing, and investment by the Company or
third party licensees in manufacturing, marketing and sales infrastructures
prior to their commercialization. No assurance can be given that the Company's
development efforts will be successfully completed, that regulatory approvals
will be obtained, or that these products, once introduced, will be successfully
marketed.
22
Early Stage of Product Development. Several of the Company's proposed
products, including its specialty pharmeceuticals, OrthoDyn, the breast biopsy
technology being licensed from BioLoc and the bacterial extract for treatment of
infectious diseases, are at an early stage of development. The Company does not
expect that its early stage products will be available for a significant number
of years, if at all. The early stage products will require significant research
and development, and potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons.
Potential products may be found ineffective or cause harmful side effects during
preclinical testing or clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's or its collaborative partners' product development
efforts will be successfully completed, that required regulatory approvals will
be obtained or that any products, if introduced, will be successfully marketed
or achieve customer acceptance.
Lack of Marketing Experience. The Company currently does not plan to market
its proprietary products directly and does not have adequate resources or
expertise to develop a substantial marketing organization and internal sales
force for these products. Since the Company does not have the financial or other
resources to undertake extensive direct marketing activities, the Company
intends to enter into marketing arrangements with third parties, including
possible joint venture, license or distribution arrangements. While the Company
intends to license its products for manufacture and sale to established health
care or pharmaceutical companies, it has had very limited success in its efforts
to enter into such agreements to date. There can be no assurance that the
Company will be able to locate collaborative partners or that these strategic
alliances, if consummated, will prove successful.
With respect to the Company's generic therapeutic products, there can be no
assurance that present and potential customers of Able will continue their
recent buying patterns without regard to the Able acquisition, and any
significant delay or reduction in orders could have a material adverse effect on
the Company's near-term business and results of operations.
Regulation by Government Agencies. The Company's research, preclinical
development, clinical trials, manufacturing and marketing of its proposed
products are subject to extensive regulation by numerous governmental
authorities in the United States (including the FDA), and other equivalent
foreign regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing or marketing of its proposed products. Further,
additional governmental regulation may be established which could prevent or
delay regulatory approval of the Company's products. The regulatory process may
delay for long periods, and ultimately prevent, marketing of new products or
impose costly procedures that would have a material adverse effect on the
Company's business. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
The Company's success in the generic drug market depends, in part, on its
ability to obtain FDA approval of ANDAs for its new products, as well as its
ability to procure a continuous supply of raw materials and to validate the
manufacturing processes used to produce consistent test batches for FDA
approval. Sources for certain materials for the Company's products must be
approved by the FDA, and in many instances only one source has been approved. If
raw materials from a specified supplier were to become unavailable, the Company
would be required to file a supplement to its ANDA and revalidate the
manufacturing process using a new supplier's materials. This could cause a delay
of several months in the manufacture of the drug involved and the consequent
loss of potential revenue and market share. Additionally, there is often a time
lag, sometimes significant, between the receipt of ANDA approval and the actual
marketing of the approved product due to this validation process.
The Able Laboratories facility is subject to plant inspections by the FDA to
determine compliance with GMP standards. The Company could be subject to fines
and sanctions such as the suspension of manufacturing or the seizure of drug
products if it were found to be in non-compliance with GMP standards.
23
Rapid Technological Advances and Competition. The therapeutic and diagnostic
markets in which the Company competes have undergone and can be expected to
continue to undergo rapid and significant technological advances. There can be
no assurance that the technological developments of others will not render the
Company's technology or products incorporating such technology either
uneconomical or obsolete. The Company competes with a number of specialized
biotechnology companies and major pharmaceutical companies. Most of these
companies have substantially greater financial, technical and human resources
and research and development staffs and facilities, as well as substantially
greater experience in conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing products than does the Company. There
can be no assurance that the Company's products or proposed products will be
able to compete successfully.
In addition, with its newly acquired generic product line, the Company is
now competing in a new market with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture off-patent drugs, the original
manufacturers of brand-name drugs and manufacturers of new drugs that may be
used for the same indications as the Company's products. There is no assurance
that the Company will compete successfully in this market. Revenues and gross
profit derived from generic pharmaceutical products tend to follow a pattern
based on regulatory and competitive factors unique to the generic pharmaceutical
industry. As patents for brand name products and related exclusivity periods
mandated by regulatory authorities expire, the first generic manufacturer to
receive regulatory approval for generic equivalents of such products is usually
able to achieve relatively high revenues and gross profit. As other generic
manufacturers receive regulatory approvals on competing products, prices and
revenues typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand name companies are increasingly selling their products into the
generic market directly by acquiring or forming strategic alliances with generic
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to sell directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market. These competitive factors may have a material adverse effect on the
Company's ability to sell its generic products.
Dependence on Patents and Proprietary Technology. The Company owns certain
patents and has applied for other patents relating to its technology and
proposed products. No assurance can be given, however, whether pending patent
applications will be granted or whether any patents granted will be enforceable
or provide the Company with meaningful protection from competitors. Even if a
competitor were to infringe the Company's patents, the costs of enforcing its
patent rights may be substantial or even prohibitive. In addition, there can be
no assurance that the Company's proposed products will not infringe the patent
rights of others. The Company may be forced to expend substantial resources if
the Company is required to defend against any such infringement claims. The
Company also may desire or be required to obtain licenses from others in order
to further develop, produce and market commercially viable products effectively.
There can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses will be
valid and enforceable or that the proprietary nature of the unpatented
technology underlying such licenses will remain proprietary. The Company also
relies on unpatented proprietary know-how and trade secrets, and employs various
methods including confidentiality agreements with employees, consultants,
manufacturing and marketing partners to protect its trade secrets and know-how.
However, such methods may not afford complete protection and there can be no
assurance that others will not independently develop such trade secrets and
know-how or obtain access thereto.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain such processes, products and information, there can
be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop
24
alternatives to avoid infringing patents of others, potentially causing
increased costs and delays in product development and introduction, or
precluding the Company from developing, manufacturing or selling its proposed
products. Additionally, there can be no assurance that the patents underlying
any licenses will be valid and enforceable. To the extent any products developed
by the Company are based on licensed technology, royalty payments on the
licenses will reduce the Company's gross profit from such product sales and may
render the sales of such products uneconomical.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages. The financial statements
filed in this Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and
1995
Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and
1995 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity -- Six Months
Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Six Months Ended December 31,
1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
25
DYNAGEN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report ............................................................. 27
Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995 ........ 28
Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and 1995
and Years Ended June 30, 1996, 1995 and 1994 ........................................ 29
Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended
December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 ...................... 30
Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and
1995 and Years Ended June 30, 1996, 1995 and 1994 ................................... 31
Notes to Consolidated Financial Statements ........................................... 32
</TABLE>
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
DYNAGEN, INC.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of DynaGen,
Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995 and the
related consolidated statements of loss, changes in stockholders' equity and
cash flows for the six months ended December 31, 1996 and for each of the years
in the three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DynaGen,
Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995, and the
results of their operations and their cash flows for the six months ended
December 31, 1996 and for each of the years in the three-year period ended June
30, 1996 in conformity with generally accepted accounting principles.
As indicated in Note 1 to the consolidated financial statements, the Company
needs additional capital to fund its operations, its acquisition of Superior
Pharmaceutical Company and the continued support of its proposed products.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 14, 1997, except for Note 14
as to which the date is March 7, 1997
27
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including interest-bearing deposits
of $1,835,000, $154,000 and $142,000, respectively) $ 2,112,300 $ 375,948 $ 263,956
Investment securities available for sale at fair value (Note 3) 3,004,700 10,087,918 4,201,876
Accounts receivable 261,932 89,703 28,971
Inventory (Note 4) 451,883 -- --
Notes receivable (Note 8) 185,000 75,000 --
Accrued interest receivable 40,179 86,873 86,653
Prepaid expenses and other current assets 255,434 221,283 108,498
------- ------- -------
Total current assets 6,311,428 10,936,725 4,689,954
--------- ---------- ---------
Property and equipment, net (Notes 5 and 6) 673,969 143,350 153,280
- - ------- ------- -------
Other assets:
Patents and trademarks, net of accumulated amortization of
$65,639, $54,341 and $46,024, respectively 265,840 277,138 268,809
Deferred debt financing costs, net of accumulated amortization
of $119,039 and $57,230, respectively (Note 6) 119,039 217,475 --
Deposits and other assets 92,873 1,978 1,978
------ ----- -----
Total other assets 477,752 496,591 270,787
------- ------- -------
$ 7,463,149 $ 11,576,666 $ 5,114,021
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 712,239 $ 519,624 $ 263,786
Accrued payroll and payroll taxes 96,894 147,441 73,421
Deferred revenue -- 65,967 250,000
--------- --------- -------
Total current liabilities 809,133 733,032 587,207
Convertible note payable (Notes 6, 10 and 14) 1,600,000 2,000,000 --
--------- --------- -------
Total liabilities 2,409,133 2,733,032 587,207
--------- --------- -------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 10 and 14):
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none outstanding -- -- --
Common stock, $.01 par value, 75,000,000 shares authorized,
29,106,231, 28,559,999 and 21,448,487 shares, respectively,
issued and outstanding 291,062 285,600 214,485
Additional paid-in capital 29,076,838 28,567,068 19,236,300
Accumulated deficit (24,315,191) (20,009,051) (14,911,632)
------------ ------------ ------------
5,052,709 8,843,617 4,539,153
Unrealized gain (loss) on investment securities available for
sale (Note 3) 1,307 17 (12,339)
--------- --------- -------
Total stockholders' equity 5,054,016 8,843,634 4,526,814
--------- --------- ---------
$ 7,463,149 $ 11,576,666 $ 5,114,021
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
28
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30,
----------------------------- --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 11):
Net product sales $ 358,467 $ 57,855 $ 220,745 $ 247,553 -- $
Contract revenues -- -- -- -- 138,255
License fees and royalties 1,441 275,000 335,000 250,000 298,750
---------- ---------- ---------- ---------- ----------
Total revenues 359,908 332,855 555,745 497,553 437,005
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 356,312 28,837 96,680 134,392 --
Contract costs -- -- -- -- 82,903
Research and development 1,092,253 1,036,622 3,118,145 1,718,006 2,183,849
Selling, general and administrative 3,239,180 1,188,733 2,684,825 1,983,897 1,997,389
---------- ---------- ---------- ---------- ----------
Total costs and expenses 4,687,745 2,254,192 5,899,650 3,836,295 4,264,141
---------- ---------- ---------- ---------- ----------
Operating loss (4,327,837) (1,921,337) (5,343,905) (3,338,742) (3,827,136)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Investment income 157,788 111,521 367,715 296,555 183,082
Interest expense (Note 6) (74,282) -- (63,999) (196) (1,750)
Amortization of debt financing costs (Note 6) (61,809) -- (57,230) -- --
---------- ---------- ---------- ---------- ----------
Other income (expense), net 21,697 111,521 246,486 296,359 181,332
---------- ---------- ---------- ---------- ----------
Loss from continuing operations (4,306,140) (1,809,816) (5,097,419) (3,042,383) (3,645,804)
---------- ---------- ---------- ---------- ----------
Loss from operations of fluid systems
consulting services -- -- -- -- (1,538)
Loss on disposal of fluid systems consulting
services -- -- -- -- (13,407)
---------- ---------- ---------- ---------- ----------
-- -- -- -- (14,945)
---------- ---------- ---------- ---------- ----------
Net loss $(4,306,140) $(1,809,816) $(5,097,419) $(3,042,383) $(3,660,749)
=========== =========== =========== =========== ===========
Net loss per share $ (.15) $ (.08) $ (.21) $ (.14) $ (.22)
=========== =========== =========== ============ ============
Weighted average shares outstanding 28,794,118 22,217,645 24,433,949 21,179,703 16,517,117
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(NOTES 6, 9, 10 AND 14)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
SERIES A CONVERTIBLE ON INVESTMENT
PREFERRED STOCK COMMON STOCK ADDITIONAL SECURITIES
----------------------- --------------------- PAID-IN ACCUMULATED AVAILABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT FOR SALE TOTAL
------ ------ ------ ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 -- $ -- 14,544,297 $145,443 $13,224,175 $ (8,208,500) $ -- $5,161,118
Shares issued in 1994 public
offering -- -- 6,400,000 64,000 5,553,729 -- -- 5,617,729
Shares issued in private
placement -- -- 128,571 1,286 385,227 -- -- 386,513
Cancellation of stock options
issued for future services -- -- -- -- (72,540) -- -- (72,540)
Exercise of lenders' warrants -- -- 101,667 1,016 19,317 -- -- 20,333
Change in method of accounting
for investment securities -- -- -- -- -- -- (38,662) (38,662)
Net loss for the year ended June
30, 1994 -- -- -- -- -- (3,660,749) -- (3,660,749)
----- ------- --------- ------- ------- ---------- ------- ---------
Balance at June 30, 1994 -- -- 21,174,535 211,745 19,109,908 (11,869,249) (38,662) 7,413,742
Exercise of stock options -- -- 500 5 370 -- -- 375
Exercise of underwriters'
warrants -- -- 273,452 2,735 126,022 -- -- 128,757
Decrease in unrealized loss on
investment securities -- -- -- -- -- -- 26,323 26,323
Net loss for the year ended June
30, 1995 -- -- -- -- -- (3,042,383) -- (3,042,383)
----- ------- --------- ------- ------- ---------- ------- ---------
Balance at June 30, 1995 -- -- 21,448,487 214,485 19,236,300 (14,911,632) (12,339) 4,526,814
Exercise of underwriters'
warrants -- -- 503,982 5,040 32,085 -- -- 37,125
Exercise of public warrants -- -- 3,244,494 32,445 3,822,762 -- -- 3,855,207
Shares issued in private
placements 1,178,264 3,461,150 1,520,686 15,207 1,376,204 -- -- 4,852,561
Conversion of preferred stock (1,178,264) (3,461,150) 1,612,834 16,128 3,445,022 -- -- --
Exercise of stock options -- -- 95,855 959 4,616 -- -- 5,575
Employee stock and stock
option grants -- -- 117,250 1,172 557,685 -- -- 558,857
Stock options issued for
future services -- -- -- -- 55,225 -- -- 55,225
Stock issued for interest
obligation -- -- 16,411 164 37,169 -- -- 37,333
Change in unrealized gain
(loss) on investment
securities -- -- -- -- -- -- 12,356 12,356
Net loss for the year ended June
30, 1996 -- -- -- -- -- (5,097,419) -- (5,097,419)
----- ------- --------- ------- ------- ---------- ------- ---------
Balance at June 30, 1996 -- -- 28,559,999 285,600 28,567,068 (20,009,051) 17 8,843,634
Exercise of stock options -- -- 81,767 818 15,682 -- -- 16,500
Stock issued for interest
obligation -- -- 50,052 500 79,117 -- -- 79,617
Stock options issued for
services -- -- -- -- 55,742 -- -- 55,742
Conversion of note payable -- -- 414,413 4,144 359,229 -- -- 363,373
Increase in unrealized gain on
investment securities -- -- -- -- -- -- 1,290 1,290
Net loss for the six months
ended December 31, 1996 -- -- -- -- -- (4,306,140) -- (4,306,140)
----- ------- --------- ------- ------- ---------- ------- ---------
Balance at December 31, 1996 -- $ -- 29,106,231 $291,062 $29,076,838 $(24,315,191) $ 1,307 $5,054,016
========== ========= =========== ======== =========== ============= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,306,140) $(1,809,816) $ (5,097,419) $(3,042,383) $(3,660,749)
Adjustments to reconcile net loss to net cash used
for operating activities:
Stock and stock options issued for services 55,742 -- 558,857 -- --
Depreciation and amortization 129,558 32,440 125,610 64,195 91,163
Amortization and accretion of (discounts)
premiums on investment securities (31,497) (19,539) (134,474) 101,553 50,997
Stock issued for interest obligation 79,617 -- 37,333 -- --
Write-off of patent costs -- -- 41,852 40,893 --
Gain on sales of investment securities -- -- -- -- (4,424)
Loss on disposal of fluid systems consulting
services -- -- -- -- 13,407
(Increase) decrease in operating assets:
Accounts receivable (172,229) (23,621) (60,732) 30,518 (70,317)
Inventory (138,583) -- -- -- --
Prepaid expenses and other current assets 12,543 (47,227) (57,780) 24,121 (48,667)
Deposits and other assets (90,895) -- -- -- --
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 142,068 (3,770) 329,858 (77,933) (11,534)
Deferred revenue (65,967) (150,000) (184,033) 250,000 --
---------- ---------- ---------- ---------- ----------
Net cash used for operating activities (4,385,783) (2,021,533) (4,440,928) (2,609,036) (3,640,124)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of investment securities (2,567,445) (5,937,166) (29,913,212) (3,187,379) (7,198,023)
Proceeds from sales and maturities of investment
securities 9,683,450 5,600,000 24,174,000 5,500,000 4,136,330
Purchase of wholly-owned subsidiary (700,000) -- -- -- --
Purchase of property and equipment (200,370) (2,874) (36,020) (23,339) (32,522)
Patent and trademark costs -- (32,867) (72,611) (69,293) (63,911)
Decrease in deposits -- -- -- 9,325 2,971
Net proceeds from disposal of fluid systems
consulting services -- -- -- -- 153,752
(Increase) decrease in notes receivable (110,000) -- (75,000) -- 16,072
---------- ---------- ---------- ---------- ----------
Net cash provided by (used for)
investing activities 6,105,635 (372,907) (5,922,843) 2,229,314 (2,985,331)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from stock warrants and options 16,500 3,896,088 3,897,907 129,132 20,333
Net proceeds from private stock placements -- -- 4,852,561 -- 386,513
Net proceeds from convertible note payable -- -- 1,725,295 -- --
Net proceeds from public stock offerings -- -- -- -- 5,617,729
Decrease in deferred offering costs -- -- -- -- 50,000
Principal payments on capital lease -- -- -- (5,824) (8,673)
---------- ---------- ---------- ---------- ----------
Net cash provided by financing
activities 16,500 3,896,088 10,475,763 123,308 6,065,902
---------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents 1,736,352 1,501,648 111,992 (256,414) (559,553)
Cash and cash equivalents at beginning of period 375,948 263,956 263,956 520,370 1,079,923
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 2,112,300 $ 1,765,604 $ 375,948 $ 263,956 $ 520,370
=========== =========== ============ =========== ==========
Supplemental cash flow information:
Interest paid on capital lease $ -- $ -- $ -- $ 196 $ 1,750
Stock options issued (cancelled) in exchange for
future services -- -- 55,225 -- (72,540)
Conversion of preferred stock to common stock -- -- 3,461,150 -- --
Additional cash flow information is included in Notes 2 and 6.
</TABLE>
See accompanying notes to consolidated financial statements.
31
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The consolidated financial statements include the accounts of DynaGen, Inc.
(the "Company") which is developing and marketing therapeutic and diagnostic
products for the human health care market and its wholly-owned subsidiary, Able
Laboratories, Inc. ("Able"), which is engaged in the manufacture of generic
pharmaceuticals. (See Note 2.) All significant intercompany balances and
transactions have been eliminated in consolidation.
Future Capital Needs; Uncertainty of Additional Funding
It is anticipated that the Company will continue to expend significant
amounts of capital to fund its research and development, clinical trials, its
generic pharmaceutical business and the proposed acquisition of Superior. (See
Note 14.) The Company's available working capital is inadequate for completion
of the Company's development programs, and additional financing will be
necessary for the continued support of the Company's proposed products and
operations, including the establishment of manufacturing, marketing and
distribution capabilities for its proposed products. The Company plans to secure
financing for the Superior acquisition through the sale of equity and/or debt
securities. In addition, the Company plans to obtain lines of credit, equipment
notes or leases from financial institutions to support the operations of both
Superior and Able. There can be no assurance that the Company will be able to
secure additional financing or that such financing will be available on
favorable terms. If the Company is unable to obtain such additional financing,
the Company's ability to maintain its current level of operations would be
materially and adversely affected and the Company will be required to reduce its
overall expenditures including its research and development activity with
respect to certain proposed products.
Change in Year End
On January 30, 1997, the Company adopted December 31 as its fiscal year end. The
accompanying consolidated financial statements include audited financial
statements for the six month transition period ended December 31, 1996. Audited
financial statements are also presented for the three fiscal years ended June
30, 1996, 1995 and 1994. Unaudited financial statements and the related notes
thereto are presented for the six months ended December 31, 1995 for comparative
purposes only. All adjustments, consisting of only normal recurring adjustments,
which in the opinion of management are necessary for a fair presentation of the
unaudited financial information, have been made.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include interest-bearing deposits with original maturities
of three months or less.
Investment Securities
Effective June 30, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, investments in debt
securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and
carried at amortized cost. Investments that are
32
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
purchased and held principally for the purpose of selling them in the near term
are classified as "trading securities" and carried at fair value, with
unrealized gains and losses included in earnings. Investments not classified as
either of the above are classified as "available for sale" and carried at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity. The cumulative effect of the change in accounting
principle at June 30, 1994 was to decrease stockholders' equity by $38,662.
There was no effect on the net loss for the year ended June 30, 1994.
Prior to June 30, 1994, investment securities were carried at amortized cost
which approximated fair value. Gains and losses on disposition of investment
securities are computed by the specific identification method.
Inventory
Inventory is valued at the lower of cost or market on a first-in first-out
(FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is provided
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful life of the asset or the life of the related
lease term.
Goodwill, Organization Expenses, Patents, Trademarks and Deferred Debt
Financing Costs
Goodwill and organization expenses were amortized over a five-year period on
a straight-line basis and were fully amortized as of June 30, 1994. Patent and
trademark costs are amortized over a five-year period on a straight-line basis
commencing on the earlier of the date placed in service or the date the patent
or trademark is granted. Deferred debt financing costs are being amortized on a
straight-line basis over the two-year term of the convertible note payable. The
related amortization expense for the six months ended December 31, 1996 and 1995
was $73,107 and $10,792, respectively, and for the years ended June 30, 1996,
1995 and 1994 was $79,660, $11,385 and $21,388, respectively.
Deferred Offering Costs
Deferred offering costs represent costs incurred in connection with raising
capital. Upon completion of an offering, the amount credited to additional
paid-in capital is reduced by the deferred offering costs.
Revenue Recognition
Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met. Revenues earned under long-term contracts are recognized
using the percentage-of-completion method. Anticipated losses on uncompleted
contracts are charged to operations when incurred.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss, capital loss and tax credit carryforwards to the extent their
realization is more likely than not. The deferred tax expense for the period
represents the change in the deferred tax asset or liability from the beginning
to the end of the period.
33
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options
issued under the Company's stock option plans generally have no intrinsic value
at the grant date, and under Opinion No. 25 no compensation cost is recognized
for them. The Company has elected to remain with the accounting in Opinion No.
25 and, as a result, must make pro forma disclosures of net income and earnings
per share and other disclosures, as if the fair value based method of accounting
had been applied. The disclosure requirements of this Statement are effective
for the Company's consolidated financial statements for the six months ended
December 31, 1996. The pro forma disclosures include the effects of all awards
granted on or after July 1, 1995. (See Note 10.)
Net Loss Per Share
Net loss per share is calculated based on the weighted average number of
common shares outstanding during the year. The effect of all common stock
equivalents has been excluded from the calculation since its inclusion would be
anti-dilutive.
New Accounting Pronouncements
The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" in March 1995. SFAS No. 121
requires the Company to review for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In certain situations, an impairment loss would be recognized.
SFAS No. 121 is effective for the six months ended December 31, 1996. The impact
of adoption of the new standard was not material to the Company's financial
position, results of operations and cash flows.
The FASB issued SFAS No. 128, "Earnings per Share," in February 1997. SFAS
No. 128 establishes standards for computing and presenting earnings per share,
and is effective for financial statements issued for periods ending after
December 15, 1997, earlier application is not permitted. SFAS No. 128 requires
the restatement of all prior period earnings per share data presented.
2. ACQUISITION OF ABLE LABORATORIES, INC.
On August 19, 1996, the Company acquired certain assets of Able consisting
primarily of machinery and equipment, raw materials and finished goods
inventory, and other assets of the tablet business. The assets were transferred
by the Company to a newly formed and wholly-owned subsidiary named Able
Laboratories, Inc. The purchase price consisted of $550,000 in cash and
acquisition costs of $150,000. The acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16. The
Company allocated $313,300 of the purchase price to inventory and $386,700 to
property and equipment. The results of operations related to Able have been
included with those of the Company since August 19, 1996.
34
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
2. ACQUISITION OF ABLE LABORATORIES, INC. -- (CONTINUED)
Unaudited pro forma consolidated operating results for the Company, assuming
the acquisition of Able had been made as of July 1, 1995 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
YEAR ENDED
1996 1995 JUNE 30, 1996
---- ---- -------------
<S> <C> <C> <C>
Revenues ................................. $ 378,733 $ 2,406,200 $ 4,875,562
Net loss ................................. $(4,415,080) $(1,755,997) $(6,598,550)
Net loss per share ....................... $ (.15) $ (.08) $ (.27)
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the purchase been made on
July 1, 1995 or of future results of operations of the combined companies.
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
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
========== ====== ==== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government obligations ..................... $ 187,301 $ -- $ (100) $ 187,201
U.S. Government agency obligations .............. 4,295,274 3,445 (1,252) 4,297,467
Corporate obligations ........................... 5,605,326 2 (2,078) 5,603,250
--------- ------ ------ ---------
$10,087,901 $3,447 $(3,430) $10,087,918
=========== ====== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agency obligations .............. $1,702,408 $ 97 $ (8,209) $1,694,296
Corporate obligations ........................... 2,511,807 -- (4,227) 2,507,580
--------- ------ ------ ---------
$4,214,215 $ 97 $(12,436) $4,201,876
=========== ====== ======= ===========
</TABLE>
At December 31, 1996, all debt securities mature within one year. There were
no sales of securities available for sale during the six months ended December
31, 1996 and the years ended June 30, 1996 and 1995.
35
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
4. INVENTORY
Inventory consists of the following at December 31, 1996:
Raw materials ...................... $259,330
Work-in-progress ................... 163,847
Finished goods ..................... 28,706
--------
$451,883
========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------ ESTIMATED
1996 1996 1995 USEFUL LIVES
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Laboratory equipment .............. $ 702,141 $ 220,164 $220,164 7 years
Furniture and fixtures ............ 270,353 173,572 143,091 3-7 years
Leasehold improvements ............ 39,288 30,976 25,437 1-2 years
------ ------ ------
1,011,782 424,712 388,692
Less accumulated depreciation and
amortization .................... (337,813) (281,362) (235,412)
-------- -------- --------
$ 673,969 $ 143,350 $153,280
========= ========= ========
</TABLE>
Depreciation and amortization expense for the six months ended December 31,
1996 and 1995 was $56,451 and $21,648, respectively. Depreciation and
amortization expense for the years ended June 30, 1996, 1995 and 1994 was
$45,950, $52,810 and $69,775, respectively.
6. DEBT
Convertible Note Payable
On February 7, 1996, the Company issued a $2,000,000 convertible note
payable in connection with a private placement. Deferred debt financing costs
were $274,705. (See Note 10.) The note matures on February 7, 1998 and bears
interest at 8% per annum, with interest payable quarterly in cash or the
Company's common stock. The note is convertible into shares of common stock at
any time at the option of the investor at a rate of 67% of the five-day average
of the closing bid price per share of the Company's common stock one trading day
prior to the date the notice of conversion is received by the Company. The
Company may require conversion of the note under certain circumstances. During
the six months ended December 31, 1996, $400,000 of the note payable was
converted for 414,413 shares of the Company's common stock and $36,627 of
related deferred debt financing costs were charged to additional paid-in
capital. (See Note 14.)
Interest expense on the convertible note payable for the six months ended
December 31, 1996 was $74,282 and for the year ended June 30, 1996 was $63,999.
Amortization expense on deferred debt financing costs for the six months ended
December 31, 1996 was $61,809 and for the year ended June 30, 1996 was $57,230.
Capital Lease
In December 1991, the Company entered into a lease agreement for telephone
equipment with a cost of $25,329. During the year ended June 30, 1995, the
Company made the final payment due under the lease and acquired title to the
equipment. Interest expense on the lease for the years ended June 30, 1995 and
1994 was $196 and $1,750, respectively.
36
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
7. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective July
1, 1993. There was no provision for income taxes for the six months ended
December 31, 1996 and 1995 and for the years ended June 30, 1996, 1995 and 1994
due to the Company's net operating losses. The difference between the statutory
Federal income tax rate of 34% and the Company's effective tax rate is primarily
due to net operating losses incurred by the Company and the valuation reserve
against the Company's deferred tax asset.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax asset:
Federal .............................. $ 8,008,000 $ 6,523,000 $ 4,929,000
State ................................ 1,986,000 1,793,000 1,433,000
--------- --------- ---------
9,994,000 8,316,000 6,362,000
Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000)
---------- ---------- ----------
Net deferred tax asset .................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The following differences give rise to deferred income taxes:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------------------
1996 1996 1995
<S> <C> <C> <C>
Net operating loss carryforward ......... $ 9,185,000 $ 7,533,000 $ 5,496,000
Research tax credit carryforward ........ 662,000 657,000 672,000
Other ................................... 147,000 126,000 194,000
------- ------- -------
9,994,000 8,316,000 6,362,000
Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000)
---------- ---------- ----------
Net deferred tax asset .................. $ -- $ -- $ --
============ =========== ===========
</TABLE>
The change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ......... $8,316,000 $6,362,000 $6,362,000 $5,084,000 $ --
Adoption of SFAS No. 109 ............... -- -- -- -- 3,525,000
Increase due to current period net
operating loss ....................... 1,678,000 688,000 1,954,000 1,278,000 1,559,000
--------- ------- --------- --------- ---------
Balance at end of period ............... $9,994,000 $7,050,000 $8,316,000 $6,362,000 $5,084,000
========== ========== ========== ========== ==========
</TABLE>
As of December 31, 1996, the Company has Federal and state net operating
loss carryforwards of approximately $23,460,000 and $19,270,000, respectively.
The Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1997, respectively. In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$120,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2003 and 2006, respectively.
Use of net operating loss and tax credit carryforwards is subject to annual
limitations based on ownership changes in the Company's common stock as defined
by the Internal Revenue Code.
37
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
8. RELATED PARTY TRANSACTIONS
Notes Receivable
During the year ended June 30, 1996, the Company loaned $75,000 in the
aggregate to an officer/director and an officer under notes which bear interest
at 5.05% per annum and have an extended due date of August 1, 1997. These notes
are secured by common stock of the Company issuable on exercise of stock options
held by the officers.
In October 1996, the Company granted a $250,000 line-of-credit to each of
two officer/directors which bear interest at 6.07% per annum and mature on
October 4, 1997. These lines-of-credit are secured by common stock of the
Company held by the officer/directors. At December 31, 1996, borrowings of
$110,000 were outstanding under the lines-of-credit.
The Company recognized interest income on notes receivable of $4,562 during
the six months ended December 31, 1996. At December 31, 1996, accrued interest
receivable of $4,562 is included in the consolidated balance sheet.
During the year ended June 30, 1994, an officer/director repaid $900 of a
note receivable and the Company forgave the balance of $15,172.
Consulting Fees
During 1996, the Company retained a consulting company for strategic
marketing and business development. The chief executive officer of the
consulting firm is also a director of the Company. During the six months ended
December 31, 1996 the Company paid the consulting firm $56,800 in fees.
The Company also entered into a marketing and business development agreement
for some of its technologies with another consulting firm. A principal of this
consulting firm is a director of the Company. During the six months ended
December 31, 1996, fees of $12,500 were paid to this consulting firm.
The Company retained a director as a consultant to assist with certain
public and investor relations matters. During the years ended June 30, 1996 and
1995, the director was paid fees of $31,000 and $49,000, respectively.
During the years ended June 30, 1996 and 1995, the Company paid consulting
fees of $11,550 and $18,188, respectively, to the spouse of an officer/director
for research and development services.
9. COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company's current lease agreement for its corporate headquarters
provides for a monthly rental of $15,188 plus real estate taxes and operating
expenses through September 30, 1997. The lease agreement for Able provides for a
monthly rental of $21,965 plus real estate taxes and certain operating expenses
through March 31, 2000. At December 31, 1996, the aggregate future minimum
rental expense (excluding real estate taxes and operating expenses) payable
under the lease agreements amounts to approximately $400,000, $264,000, $264,000
and $66,000, respectively, for the years ending December 31, 1997, 1998, 1999
and 2000. Future minimum rentals to be received in 1997 under a noncancelable
sublease are $70,000.
Rent expense, net of subleases, for the six months ended December 31, 1996
and 1995 was $130,463 and $31,000, respectively, and for the years ended June
30, 1996, 1995 and 1994 was $61,366, $71,031 and $142,917, respectively. Real
estate tax expense for the six months ended December 31, 1996 and 1995 was
$53,976 and $44,000, respectively, and for the years ended June 30, 1996, 1995
and 1994 was $90,637, $91,307 and $70,479, respectively.
38
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES -- (Continued)
Employment Agreements
As of December 31, 1996, the Company has employment agreements with three
officer/directors that provide for minimum annual salaries, reimbursement of
business related expenses and participation in other employee benefit programs.
The agreements also include confidentiality, non-disclosure, severance,
automatic renewal and non-competition provisions. Salary levels are subject to
periodic review by the Board of Directors.
Consulting Agreements
In May 1993, the Company entered into a two-year consulting agreement for
public relations services. As part of the compensation for the services to be
rendered, the consultant was granted an option under the 1991 Stock Plan (see
Note 10) to purchase 37,200 shares of common stock at $.60 per share exercisable
through May 1, 2000. The Company valued the option at $145,080 and was
amortizing this expense over the term of the consulting agreement. In May 1994,
the consulting agreement was terminated and options to purchase 18,600 shares of
common stock valued at $72,540 were cancelled.
In February 1996, the Company entered into a six-month public and investor
relations services agreement with a public relations firm. As compensation for
these services, the firm was granted an option under the 1991 Stock Plan (see
Note 10) to purchase 20,000 shares of the Company's common stock at $.01 per
share exercisable through February 1, 2003 as long as the firm maintains a
business relationship with the Company. The Company valued the option at $55,225
and amortized the expense over the six month term of the agreement.
Demand Registration Rights
The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws certain shares of common stock issued in
connection with private placements and certain shares of common stock issuable
in connection with warrants issued to the Company's investment banker and agents
for the private placements. The Company will bear the cost of registering these
securities. (See Note 10).
Contingencies
Legal claims arise from time to time in the normal course of business which,
in the opinion of management, will have no material effect on the Company's
financial position.
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
1992 Public Offering Warrants
In October 1992, the Company completed a public offering of 920,000 units at
$5.00 per unit, each unit consisted of one share of common stock and one
redeemable common stock purchase warrant. The warrant originally allowed the
holder to purchase one share of common stock at a price of $6.50, subject to
adjustment in certain instances, through September 24, 1995. As a result of
subsequent debt and equity financings, the 917,800 warrants that remain
outstanding have been adjusted to allow the holder to purchase 1.7 shares with
each warrant at an exercise price of $3.90 per warrant. Furthermore, on August
7, 1995, the Company extended the expiration date of the warrants to September
24, 1997. During the year ended June 30, 1996, 2,200 warrants were exercised to
purchase 3,300 shares of common stock. Net proceeds were $9,438.
39
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
1994 Public Offering
On March 23, 1994, the Company completed a public offering of 1,600,000
units at $4.50 per unit. Each unit consisted of four shares of common stock and
two Class A redeemable common stock purchase warrants. Each warrant allowed the
holder to purchase one share of common stock at a price of $1.20, subject to
adjustment in certain instances, through March 16, 1999. Net proceeds of the
offering after deduction of all expenses were $5,617,729.
The underwriting agreement granted the underwriters warrants to purchase
160,000 units at $7.425 per unit, subject to adjustment in certain instances,
during the period March 16, 1995 to March 16, 1999. The warrants contain, among
other things, a net exercise feature.
Public Offering Warrants
In May 1995, the Company filed a registration statement to register the
shares issuable upon the exercise of the warrants issued in the 1992 and 1994
public offerings and the shares issuable upon the exercise of the warrants
issued to the underwriters of the 1994 public offering. Registration costs of
$34,593 were deducted from net proceeds of warrant exercises during the year
ended June 30, 1995.
1994 Public Offering Warrants
In June 1995, 22,000 warrants issued to the underwriters of the 1994 public
offering were exercised at $7.425 per warrant. The Company received proceeds of
$163,350 and issued the warrant holder 88,000 shares of common stock and 44,000
Class A redeemable common stock purchase warrants. In addition, in June 1995,
35,000 warrants issued to the underwriters of the 1994 public offering were
exercised, using their net exercise feature, in exchange for 185,452 shares of
common stock.
During the period from July 1995 to November 1995, 103,000 warrants issued
to the underwriters of the 1994 public offering were exercised to acquire
503,982 shares of common stock and 10,000 Class A redeemable common stock
purchase warrants using their net exercise feature and payment to the Company of
$37,125.
In December 1995, the Company completed the redemption of the Class A
redeemable common stock purchase warrants resulting in the purchase of 3,241,194
shares of common stock yielding net proceeds of $3,845,769 after deducting
expenses. The remaining 12,806 unexercised warrants were redeemed by the Company
for $.01 per warrant.
Private Placements
During the year ended June 30, 1993, the Company entered into two common
stock private placement agreements. In July 1993, the Company sold 128,571
shares of common stock at $3.50 per share. Net proceeds were $386,513 after
deducting commissions and expenses of $63,486.
The Company issued warrants to the placement agents to purchase 68,328
shares of common stock at $4.75 per share and 47,400 shares of common stock at
$5.53 per share. During the year ended June 30, 1995, the warrant to purchase
47,400 shares was cancelled. The agents' warrants are exercisable over a
four-year period commencing one year from the closing date and carry certain
demand registration rights. The exercise price is subject to adjustment in
certain instances. As a result of subsequent debt and equity financings, the
warrant exercise price has been adjusted to $4.37 per share.
On February 7, 1996, the Company raised $3 million in a private placement,
from the sale to a single investor of 579,626 shares of common stock at a price
of approximately $1.73 per share and the issuance of a $2 million convertible
note. (See Note 6.) Placement costs for this transaction were $421,157 of
40
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
which $146,452 was charged to additional paid-in capital and $274,705 was
capitalized as deferred debt financing costs. During the six months ended
December 31, 1996, $400,000 of the note was converted for 414,413 shares of
common stock and $36,627 of related deferred debt financing costs were charged
to additional paid-in capital. (See Note 14.)
On February 21, 1996 and March 4, 1996, the Company issued, in private
placements, an aggregate of 388,500 shares of common stock and 1,178,264 shares
of Series A preferred stock for aggregate consideration of $3,500,000. Placement
costs of $487,461 were charged to additional paid-in capital. The Series A
preferred stock was convertible into common stock 100 days after initial
issuance into that number of shares obtained by dividing the consideration paid
for the preferred stock by 80% of the five-day average of the closing bid price
per share of the common stock at the date of the conversion. Each share of
preferred stock had a liquidation value equal to $2.9375, the consideration paid
per share. In June 1996, the 1,178,264 shares of Series A preferred stock were
converted into 1,612,834 shares of common stock based on the above formula.
In February 1996, the Company issued, in a private placement, 552,560 shares
of common stock for aggregate consideration of $1,000,000. Placement costs of
$13,526 were charged to additional paid-in capital.
Bonus Compensation
In February 1996, the Company granted to certain employees and a consultant,
bonus compensation paid in the form of (1) 117,250 shares of common stock
outside of the 1991 Stock Plan and the 1989 Stock Option Plan and (2) stock
options under the 1991 Stock Plan for 65,000 shares of common stock at an
exercise price of $.01 per share. The Company recognized $558,857 in
compensation expense associated with the grants.
Stock Option Plans
The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and
reserved 600,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1989 Plan, the Board of Directors will
grant options and establish the terms of the options in accordance with plan
provisions. The 1989 Plan options are exercisable for a period of ten years from
the date of issuance. The following table summarizes the activity of options
granted under the 1989 plan:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED JUNE 30,
ENDED --------------------------------------------------------
DECEMBER 31,
1996 1996 1995 1994
----------------- ------------------- ------------------ --------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period ...................... 220,000 $.87 270,000 $.71 270,000 $.71 270,000 $1.98
Granted ....................... -- -- -- -- -- -- 83,000 .75
Cancelled ..................... -- -- -- -- -- -- (83,000) 4.87
Exercised ..................... (12,000) .75 (50,000) .05 -- -- -- --
Outstanding at end of period .. 208,000 .88 220,000 .87 270,000 .71 270,000 .71
======= ======= ======= =======
Exercisable at end of period .. 200,500 .89 197,500 .89 228,500 .72 187,000 .71
======= ======= ======= =======
Reserved for future grants at
end of period ............... -- -- -- --
======== ======== ======= ======
</TABLE>
41
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
Information pertaining to options outstanding under the 1989 Plan at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.75-$.88 ............... 206,000 4.6 Years $ .83 198,500 $ .84
$5.87 ................... 2,000 4.7 Years 5.87 2,000 5.87
------- -------
208,000 4.6 Years .88 200,500 .89
======= =======
</TABLE>
The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved
1,200,000 shares of common stock for issuance to employees, officers, directors
and consultants. (See Note 14.) Under the 1991 Plan, the Board of Directors may
grant options, stock awards and purchase rights, and establish the terms of the
grant in accordance with the provisions of the plan. The 1991 Plan options are
exercisable for a period of seven years from the date of issuance and certain
options contain a net exercise provision. As of December 31, 1996, no stock
awards or purchase rights have been granted under the 1991 Plan. The following
table summarizes the activity of options granted under the 1991 Plan:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
SIX MONTHS ------------------------------------------------------
ENDED
DECEMBER 31,
1996 1996 1995 1994
---- ---- ---- ----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period ....................... 640,900 $1.04 609,100 $1.26 586,600 $1.18 597,200 $5.14
Granted ........................ 326,000 1.01 105,000 .29 50,000 1.94 589,000 1.09
Cancelled ...................... (56,000) 1.81 (21,500) 5.29 (27,000) .75 (599,600) 5.05
Exercised ...................... (113,000) .75 (51,700) .32 (500) .75 -- --
Outstanding at end of period ... 797,900 1.02 640,900 1.04 609,100 1.26 586,600 1.18
======= ======= ======= =======
Exercisable at end of period ... 343,992 1.18 418,300 1.09 201,826 1.87 58,600 4.18
======= ======= ======= =======
Reserved for future grants at end
of period .................... 236,900 506,900 590,400 613,400
======= ======= ======= =======
Weighted average fair value of
options granted during the
period ....................... $1.23 $2.94 N/A N/A
</TABLE>
42
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
Information pertaining to options outstanding under the 1991 Plan at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.01-$.75 ........ 587,900 5.1 Years $ .61 276,300 $ .59
$1.31-$1.94 ...... 180,000 6.8 Years 1.54 37,692 1.71
$5.25-$6.25 ...... 30,000 2.1 Years 5.92 30,000 5.92
------- -------
797,900 5.0 Years 1.02 343,992 1.18
======= =======
</TABLE>
Other Stock Options and Warrants
On September 6, 1990, the Company's Board of Directors granted non-qualified
stock options to purchase 450,000 shares of common stock at a price of $.875 per
share through September 2000, all of which are currently exercisable by a former
director of the Company. In January 1993, the Company granted an option to
purchase 20,000 shares of common stock at a price of $5.25 per share exercisable
through January 15, 1999.
On November 20, 1995, the Company entered into a one-year investment banking
agreement with the underwriter of the Company's prior public offerings. As
compensation for services, the Company granted a warrant to purchase 400,000
shares of common stock at an exercise price of $2.50 per share. The warrant is
exercisable through November 20, 2000. The shares underlying the warrant were
registered on a Form S-3 registration statement declared effective on March 29,
1996. In September 1996, the Company and the underwriter amended the agreement,
and the Company paid the underwriter $500,000 in consulting fees for services
rendered.
On July 24, 1996, the Company's Board of Directors granted non-qualified
stock options to two directors of the Company to purchase an aggregate of
660,000 shares of common stock at an exercise price of $1.94 per share. These
options are exercisable by the directors until July 24, 2003. On October 28,
1996, the Company's Board of Directors granted a non-qualified stock option to a
director of the Company to purchase 330,000 shares of common stock at an
exercise price of $1.31 per share. This option is exercisable by the director
until October 28, 2003. The weighted average fair value of these options,
estimated using the Black-Scholes option-pricing model, on the date of grant was
$1.20 per share.
On December 10, 1996, the Company granted warrants to purchase an aggregate
of 100,000 shares of common stock at an exercise price of $1.44 per share. These
warrants are exercisable through December 31, 2003. The Company valued the
warrants at $99,000 and is expensing the warrants over their vesting period.
Expense for the six months ended December 31, 1996 was $19,800.
Stock-Based Compensation
At December 31, 1996, the Company has two stock-based compensation plans and
stock options issued outside of the plans, which are described above. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
stock options issued to employees and directors. Had
43
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
compensation cost for the Company's stock options issued to employees and
directors been determined based on the fair value at the grant dates consistent
with SFAS No. 123, the Company's net loss and net loss per share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Net loss:
As reported ..................... $(4,306,140) $(5,097,419)
Pro forma ....................... $(4,489,433) $(5,146,869)
Net loss per share:
As reported ..................... $ (.15) $ (.21)
Pro forma ....................... $ (.16) $ (.21)
</TABLE>
Common stock equivalents have been excluded from all calculations of net
loss per share because the effect of including them would be anti-dilutive.
The fair value of each option grant under the 1991 Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants during the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively; dividend yield
of 0%; risk-free interest rates of 6.5% and 6.4%; expected volatility of 80% and
80% and expected lives of 3.8 and 3.9 years.
Weighted average assumptions used in valuing stock options issued outside of
the plans during the six months ended December 31, 1996 were dividend yield of
0%; risk free interest rate of 6.8%; expected volatility of 81% and an expected
life of 5 years.
Common Stock Reserved
The Company has reserved common stock at December 31, 1996 as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
<S> <C>
Convertible note payable .................................... 2,122,000
1992 public offering warrants ............................... 1,560,260
Private placement agents' warrants .......................... 68,328
Stock option plans .......................................... 1,242,800
Other stock options and warrants ............................ 1,960,000
---------
Total .................................................... 6,953,388
=========
</TABLE>
The number of shares of common stock reserved in connection with the
convertible note payable is subject to adjustment (see Notes 6 and 14.)
11. REVENUES AND SEGMENT INFORMATION
Product Sales
During the six months ended December 31, 1996 and 1995, the Company's sales
to foreign customers amounted to 21% and 16% of total revenues, respectively.
During the years ended June 30, 1996 and 1995, the Company's sales to foreign
customers amounted to 36% and 42% of total revenues,
44
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)
respectively. Sales to two domestic customers amounted to 53% and 14% of total
revenues, and sales to one foreign customer amounted to 18% of total revenues
during the six months ended December 31, 1996. Sales to one foreign customer
amounted to 23% of total revenues during the year ended June 30, 1996 and sales
to a different foreign customer amounted to 27% of total revenues during the
year ended June 30, 1995. A summary of sales by geographic area is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Far East and Asia ........................... $ 68,815 $39,812 $183,706 $185,997
United States ............................... 281,934 4,693 18,877 39,860
Europe ...................................... 7,403 5,622 8,466 16,462
Other ....................................... 315 7,728 9,696 5,234
-------- ------- -------- --------
$358,467 $57,855 $220,745 $247,553
======== ======= ======== ========
</TABLE>
A summary of sales by product is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diagnostic tests ............................ $ 86,781 $57,855 $220,745 $247,553
Generic pharmaceuticals ..................... 271,686 -- -- --
-------- ------- -------- --------
$358,467 $57,855 $220,745 $247,553
======== ======= ======== ========
</TABLE>
Contract Revenues
The Company had a contract with the U.S. Government which amounted to
approximately 32% of total revenues during the year ended June 30, 1994.
License Fees and Royalties
During the year ended June 30, 1994, the Company received $273,750 in full
satisfaction of all minimum royalties due under an agreement in which it granted
world-wide licenses to manufacture and sell certain diagnostic tests. Revenue
under this agreement was 63% of total revenues for the year ended June 30, 1994.
In May 1994, the Company received a non-refundable payment of $25,000 for
entering into a letter of intent relating to a distribution agreement for its
MycoDot diagnostic test.
During the year ended June 30, 1995, the Company entered into an agreement
where it granted a third party the right to evaluate licensing the Company's
smoking cessation technology for a $500,000 fee, $250,000 of which was
refundable should the Company license its smoking cessation technology to a
different party prior to October 15, 1995. On July 13, 1995, the third party
informed the Company that it would not exercise its right to license the
technology at this time. Revenues earned under this agreement were approximately
45% and 50% of total revenues for the years ended June 30, 1996 and 1995,
respectively.
License fee revenue for the year ended June 30, 1996 includes $250,000
related to the smoking cessation technology mentioned above, $60,000 for certain
rights to manufacture and sell the Company's MycoAKT latex agglutination
products, and $25,000 for exclusive MycoDot distribution rights in Japan.
45
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)
Segment Information
The Company has two principal operating segments: the development and
marketing of therapeutic and diagnostic products for the human health care
market and the manufacture and distribution of generic pharmaceuticals through
its recently acquired subsidiary, Able Laboratories, Inc. During the years ended
June 30, 1996, 1995 and 1994, the Company's continuing operations consisted of
the development and marketing of therapeutic and diagnostic products for the
human health care market. Segment information for the six months ended December
31, 1996 is as follows:
<TABLE>
<CAPTION>
THERAPEUTICS AND GENERIC
DIAGNOSTIC PRODUCTS PHARMACEUTICALS
------------------- ---------------
<S> <C> <C>
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
</TABLE>
Operating loss represents net sales less operating expenses for each
segment, and excludes general corporate expenses and other income and expenses
of a general corporate nature. Identifiable assets by segment are those assets
that are used in the Company's operations within that segment. General corporate
assets consist principally of cash, investment securities, notes receivables,
accrued interest receivable, certain office furniture and equipment and deferred
debt financing costs.
12. EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan").
Employees who have attained the age of 21 may elect to reduce their current
compensation, subject to certain limitations, and have that amount contributed
to the 401(k) Plan. The Company may make discretionary contributions to the
401(k) Plan up to 25% of employee compensation, subject to certain limitations.
Employee contributions to the 401(k) Plan are fully vested at all times and all
Company contributions become vested over a period of six years. The Company has
made no contributions to the 401(k) Plan as of December 31, 1996.
13. DISCONTINUED OPERATIONS
The Company sold the assets of its fluid systems consulting business on May
6, 1994. A summary of the loss on disposal is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net proceeds on sale .................................................. $153,752
Book values of assets sold:
Accounts receivable ................................................. (92,373)
Recoverable amounts on long-term contracts .......................... (45,871)
Property and equipment .............................................. (28,915)
-------
Loss on disposal ...................................................... $(13,407)
========
</TABLE>
46
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
13. DISCONTINUED OPERATIONS -- (Continued)
A summary of the loss from operations of the fluid systems consulting
business for the year ended June 30, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Contract revenues ..................................................... $502,057
Contract costs ........................................................ 288,480
Selling, general and administrative expenses .......................... 215,115
-------
Loss from operations .................................................. $ (1,538)
========
</TABLE>
14. SUBSEQUENT EVENTS
On January 13, 1997, $1,065,000 of the convertible note (see Note 6) was
exchanged for 989,594 shares of common stock of the Company.
On January 15, 1997 the Company granted warrants to a public relations
consultant to purchase 50,000 shares of common stock at an exercise price of
$1.97. These warrants are exercisable through January 15, 2002.
On January 30, 1997, the stockholders approved an increase in the number of
authorized shares of common stock from 40,000,000 to 75,000,000 shares. The
stockholders also voted to amend the 1991 Stock Plan to increase the number of
shares of common stock authorized for issuance thereunder from 1,200,000 to
2,600,000 shares.
On March 7, 1997, the Company entered into an agreement to acquire the stock
of Superior Pharmaceutical Company ("Superior") of Cincinnati, Ohio. Superior, a
privately-held company, markets and distributes generic pharmaceutical products
to independent, retail chain and institutional pharmacies. Superior reported
1996 sales of $32 million with pre-tax income of over $3.0 million.
Under the terms of the agreement, DynaGen will pay Superior's shareholders a
total of $16.5 million, consisting of $6.5 million in cash to be paid at the
closing, $5 million in three-year notes and 1,666,666 shares of DynaGen common
stock. The agreement provides that the aggregate value of the DynaGen common
stock to be issued is to be equal to $5,000,000. If at the first twelve-month
anniversary of the closing, the value of the common stock issued is less than
$5,000,000, then DynaGen shall deliver to the selling stockholders additional
shares (and cash, if average closing bid price is less than $1.50) to satisfy
the deficiency. The shareholders may also receive certain incentive payments
based on Superior's performance during the three years following the close of
the transaction. The successful completion of the transaction is subject to,
among other closing conditions, obtaining satisfactory equity and debt
financing.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and June 30, 1996, the Company's financial instruments
include investment securities which are carried at fair value (see Note 3),
notes receivable (see Note 8) and a convertible note payable (see Note 6). The
carrying value of the notes receivable approximate their fair value as these
instruments bear interest and mature in less than one year. The fair value of
the outstanding balance of the convertible note payable is approximately
$2,786,000 and $2,985,000 at December 31, 1996 and June 30, 1996, respectively,
based on the fair value of the common stock issuable on conversion of the note.
47
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
16. QUARTERLY DATA (UNAUDITED)
Summaries of operating results on a quarterly basis are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1996 1995
---- ---- ----
SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net product sales ..... $ 299 $ 59 $ 70 $ 93 $ 39 $ 19 $ 25 $ 154 $ 41 $ 28
License fees and
royalties ........... 1 -- 25 35 25 250 -- 250 -- --
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Total revenues ..... 300 59 95 128 64 269 25 404 41 28
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Cost of sales ......... 331 25 22 46 21 8 14 76 24 20
Research and
development ......... 332 760 1,230 852 566 470 420 340 434 524
Selling, general and
administrative ...... 2,166 1,073 616 880 618 571 462 499 588 435
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Total costs and
expenses ......... 2,829 1,858 1,868 1,778 1,205 1,049 896 915 1,046 979
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Operating loss ........ (2,529) (1,799) (1,773) (1,650) (1,141) (780) (871) (511) (1,005) (951)
Other income, net ..... 1 21 74 62 57 54 70 69 75 82
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Net loss ........... $(2,528) $(1,778) $(1,699) $(1,588) $(1,084) $ (726) $ (801) $ (442) $ (930) $ (869)
======= ======= ======= ======= ======= ======== ======= ======= ====== =======
Net loss per share .... $ (.09) $ (.06) $ (.06) $ (.06) $ (.05) $ (.03) $ (.04) $ (.02) $ (.04) $ (.04)
======= ======= ======= ======= ======= ======= ======= ======= ======== =======
Weighted average
shares outstanding .. 28,972 28,616 27,288 26,062 22,628 21,808 21,195 21,175 21,175 21,175
======= ======= ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dhananjay G. Wadekar 43 Chairman of the Board, Executive Vice
President and Director
Dr. Indu A. Muni 54 President, Chief Executive Officer, Treasurer
and Director
Dr. F. Howard Schneider 57 Senior Vice President -- Technology and
Director
Dr. Ian R. Ferrier(1)(2) 54 Director
Steven Georgiev(1)(2) 63 Director
Dr. Michael Sorell 49 Director
Peter J. Mione 50 Vice President -- Clinical and
Regulatory Affairs
Theodore A. Olsson 43 Vice President -- Corporate Development
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Executive Compensation Committee, which was established on
July 24, 1996.
The By-laws of the Company provide for the annual election of the Board of
Directors. All Directors of the Company are elected to hold office until the
next annual meeting of Stockholders, and until their successors have been duly
elected and qualified. Officers are elected by, and serve at the discretion of,
the Board of Directors.
DHANANJAY G. WADEKAR. Mr. Wadekar is a co-founder of the Company and has
served as a director of the Company since inception and as Chairman of the Board
and Executive Vice President of the Company since November 1991. In addition, he
served as the Chairman, Chief Executive Officer and Treasurer of the Company
from its inception until July 1990 and as a consultant to the Company during the
period July 1990 to October 1991. Since April 1996, Mr. Wadekar has served as a
director of CSL Lighting Manufacturing, Inc., a publicly traded manufacturer of
high-end lighting fixtures. Mr. Wadekar was a director of Holometrix, Inc., a
publicly traded thermal instrumentation company which he founded, from 1985
until November 1994.
DR. INDU A. MUNI. Dr. Muni is a co-founder of the Company and has served as
President and a director of the Company since inception and as Chief Executive
Officer and Treasurer since July 1990. From May 1988 to November 1988, Dr. Muni
served as Vice President of Biomaterial and Environmental Science and
Engineering for Holometrix, Inc., a publicly traded thermal instrumentation
company. Between July 1987 and May 1988, Dr. Muni provided biological consulting
services to pharmaceutical and biotechnology companies as an independent
consultant. From February 1981 to July 1987, Dr. Muni served as Executive Vice
President of Bioassay Systems Corporation, a publicly traded provider of
contract research and development services in the areas of pharmaceutical and
diagnostic systems.
DR. F. HOWARD SCHNEIDER. Dr. Schneider has served as a director of
the Company since September 1989, was Chairman of the Board of the Company
from July 1990 until February 1991 and became Senior Vice President --
Technology effective June 1991. Dr. Schneider was previously a partner and
Senior Vice President of Bogart Delafield Ferrier, Inc. ("Bogart Delafield
Ferrier"), a healthcare consulting firm that provides strategic consulting
services to pharmaceutical and biotechnology companies. Dr. Schneider
participated in the management buyout of Bogart Delafield Ferrier from its
parent corporation, McCann Healthcare Group, a subsidiary of Inter Public
Group.
49
DR. IAN R. FERRIER. Dr. Ferrier has served as a director of the Company
since July 1996. In 1982, he founded Bogart Delafield Ferrier. Dr. Ferrier has
served as Chief Executive Officer of Bogart Delafield Ferrier since 1982 and as
Chairman since 1989. He earned a medical degree from Edinburgh University and
specialized in clinical pharmacology during postgraduate training. Prior to
founding Bogart Delafield Ferrier, he held various clinical research and
management positions with ICI Pharmaceuticals, Kalipharma Inc., and the Tech
America Group. He serves as a director on the board of Nastech Pharmaceuticals
Co., Inc., a publicly traded company, and on the boards of several privately
held biotechnology and pharmaceutical companies.
STEVEN GEORGIEV. Mr. Georgiev has served as a director of the Company since
July 1996. Since November 1993, he has been Chief Executive Officer of Palomar
Medical Technologies, Inc. ("Palomar"), a publicly traded Massachusetts firm
specializing in medical applications of lasers, and from November 1993 until
August 1994 he was also President of Palomar. Mr. Georgiev was a consultant to
Palomar's predecessor, Dymed Corporation, from June 1991 until Palomar's
September 1991 merger with Dymed Corporation, at which time he became Palomar's
Chairman of the Board of Directors. Mr. Georgiev has been a director of Excel
Technology, Inc., a publicly traded laser system and electro-optical component
company, since October 1992, and of XXsys Technology, Inc. since June 1994. Mr.
Georgiev earned a B.S. degree in Engineering Physics from Cornell University and
a M.S. in Management from the Massachusetts Institute of Technology.
DR. MICHAEL SORELL. Dr. Sorell has served as a director of the Corporation
since October 1996. Since February 1996, he has served as the Principal of MS
Capital, LLC, which provides strategic consulting in the areas of medical
technology and financial management to emerging biotech and healthcare
companies. From August 1994 to February 1996, Dr. Sorell was an emerging growth
strategist for Morgan Stanley & Co. Sciences Fund, a joint venture with Essex
Investment Management of Boston, MA. Dr. Sorell originally joined Morgan Stanley
in July 1986 as a Research Analyst covering pharmaceutical and biotechnology
companies, was promoted to Vice President in January 1990 and became a Principal
in January 1992. Prior to Morgan Stanley, Dr. Sorell was on the attending staff
of Memorial Sloan-Kettering Cancer Center as a pediatric oncologist and later
joined Schering-Plough Corporation in clinical research. Dr. Sorell earned an
M.D. degree from the Albert Einstein College of Medicine in 1972.
PETER J. MIONE. Mr. Mione has served the Company as Vice President --
Clinical and Regulatory Affairs since November 1991 and initially as Manager of
Regulatory Affairs from May 1989 to October 1991. Mr. Mione is responsible for
monitoring clinical studies, preparation of protocols, and submission of data on
the Company's proposed products to the FDA for approval. Prior to joining the
Company, Mr. Mione was an independent consultant from October 1988 to April 1989
and served as Administrative Coordinator at Toxikon Corp. (from 1987 to 1988), a
company providing toxicology study services. Prior thereto, Mr. Mione was
Director of Regulatory Compliance at Genus Diagnostics, a manufacturer of
diagnostic kits.
THEODORE A. OLSSON. Mr. Olsson has served as Vice President -- Corporate
Development since August 1996, and initially served as Director, Polymer
Products from November 1993 to August 1996. Prior to joining the Company, Mr.
Olsson served as Senior Consultant and Unit Manager for Arthur D. Little, Inc.
from July 1990 to November 1993. Mr. Olsson has a Bachelor of Science degree in
Biochemistry from the University of Massachusetts, Amherst.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market. Officers, directors and greater-than-ten percent
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with all Section 16(a) forms they file.
50
Based solely on its review of the copies of such forms received by it, the
Company believes that during the Transition Period all of its officers,
directors and greater-than-ten percent stockholders complied with all Section
16(a) filing requirements except for Theodore Olsson. Mr. Olsson, an officer of
the Company, was late in filing his Initial Statement of Beneficial Ownership of
Securities of the Corporation on Form 3, which was due on August 30, 1996, and
subsequently filed it on November 6, 1996.
SIGNIFICANT EMPLOYEES
The Company also relies on the services of the following significant
employees:
SUSAN BARRETT, age 41, has served as General Manager of the Company's
subsidiary Able Laboratories, since November 1996. Ms. Barrett has over 15 years
of operations, quality, and sales and marketing experience in the multisource
pharmaceutical industry. From November 1995 to November 1996, Ms. Barrett was a
consultant to pharmaceutical wholesalers and manufacturers in the areas of
quality, regulatory, sales and marketing and strategic planning. She was
Director of Sales at Qualitest Products, Inc., a privately held generic
pharmaceutical distributor and manufacturer, from May 1995 to November 1995 and
at Alpharma, Inc., a publicly traded generic pharmaceutical company, from
January 1993 to April 1995. From March 1991 to December 1992, Ms. Barrett worked
for Zenith Laboratories and was responsible for development of sales strategies.
Ms. Barrett has a Bachelor of Science Degree from New York Institute of
Technology in Industrial Management.
DR. NICOLAE ISTRATE, age 53, has served as Section Leader, Immunology since
September 1991 and as Senior Research Immunologist for the Company since April
1990, and as a Consultant to the Company for six months prior to that time. From
December 1988 to October 1989, Dr. Istrate was the Director of the Hybridoma
Laboratory for Cambridge Medical Technology Corporation of Billerica,
Massachusetts where his responsibilities included the establishment of a
monoclonal antibody laboratory and research in diagnostic methods and testing.
From March 1987 to September 1988, Dr. Istrate was Manager of the Departmental
Laboratory for Swine and Bovine Viral Vaccines in Timisoara, Romania, where he
developed methods for viral diagnosis and viral vaccines. Dr. Istrate holds a
Doctorate Degree in Veterinary Medicine and a Ph.D. in Microbiology from the
Faculty of Veterinary Medicine in Bucharest, Romania.
DR. SARASWATHY V. NOCHUR, age 37, became Director -- Diagnostic Products in
February 1994 and previously served the Company as Product Manager -- Diagnostic
Reagents from July 1991 to February 1994 and as Research Scientist from July
1989 to June 1991. Dr. Nochur initially served the Company as a consultant from
March 1989 to July 1989. From October 1983 to December 1988, Dr. Nochur
conducted research in connection with her doctoral dissertation at the
Massachusetts Institute of Technology on the deregulation of cellulase and the
optimization of ethanol production from cellulose. From 1982 to 1983, she was
employed by Hoechst Pharmaceuticals where her work involved the development of
immunodiagnostic products based on polyclonal antibody detection systems.
DENNIS R. BILODEAU, CPA, age 39, has served as Controller for the Company
since July 1992. Prior to joining the Company, Mr. Bilodeau was a self employed
CPA from January 1992 to July 1992. From May 1990 to December 1991, Mr. Bilodeau
was a senior supervisor at Siegfried and Associates, Certified Public
Accountants. Mr. Bilodeau's prior experience included positions in financial
management and public accounting. Mr Bilodeau received a Bachelor Degree in
accounting from the University of Massachusetts, Amherst.
CYNTHIA A. KILEY, age 36, has served the Company since inception, most
recently as Director, Human Resources. She was Manager of Administrations from
May 1992 to September 1993 and prior to that served as Office Manager. Ms. Kiley
was Manager of Publications for Holometrix, Inc. from May 1988 to February 1989.
From 1984 to May 1988, Ms. Kiley was responsible for publications management for
Dynatech Scientific, Inc. Ms. Kiley received her Bachelor of Arts Degree in
Biology from Emmanuel College.
51
SCIENTIFIC ADVISORY BOARD
To provide scientific guidance to the Company's product development
programs, as well as assistance in recruiting employees and collaborators, the
Company works with a network of experts who serve as consultants to the Company.
Each consultant has entered into a consulting agreement with the Company. These
consulting agreements typically specify the compensation to be paid to the
consultant and require that all information about the Company's products and
technology be kept confidential. Most of the consultants are employed by
employers other than the Company and may have commitments to or consulting or
advisory agreements with other entities that may limit their availability to the
Company. The consultants have agreed, however, not to provide any services to
any other entities that might conflict with the services that they provide the
Company. Members of the Company's Scientific Advisory Board offer consultation
on specific issues encountered by the Company.
The current members of the Scientific Advisory Board are:
DR. F. HOWARD SCHNEIDER, Chairman of the Scientific Advisory Board, Senior
Vice President -- Technology and Director.
DR. JUDITH K. OCKENE, Professor of Medicine and Director of the Division of
Preventive and Behavioral Medicine at the University of Massachusetts Medical
School in Worcester, MA. Dr. Ockene has served as a member of the Advisory
Committee and Scientific Editor of Surgeon General's Reports on Smoking and
Health.
DR. LEE B. REICHMAN, Director of the New Jersey Medical School National
Tuberculosis Center and Professor of Medicine, Preventive Medicine and Community
Health at the University of Medicine and Dentistry of New Jersey. Dr. Reichman
is a leading expert on tuberculosis.
DR. THOMAS J. RYAN, Professor of Medicine and former Chief of Cardiology at
The University Hospital in Boston. Dr. Ryan is a past President of the American
Heart Association.
DR. SAUL TZIPORI, Professor and Division Head in Infectious Diseases at
Tufts University School of Veterinary Medicine and Professor of Medicine at New
England Medical Center in Boston. Dr. Tzipori is a past Associate Director of
the International Center for Diarrheal Disease Research in Bangladesh.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive a participation fee
of $1,000 for each meeting of the Board of Directors attended and for each
committee meeting attended, up to a maximum of $1,000 per calendar day,
regardless of how may meetings occur on one day. All directors are also
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings and other services as directors. Directors are entitled to receive
stock options under the 1991 Stock Plan and the 1989 Stock Option Plan. To date,
Mr. Wadekar and Dr. Muni have received no options, and Dr. Schneider has
received options to purchase a total of 310,000 shares of the Company's Common
Stock under the 1991 Stock Plan and 1989 Stock Option Plan. In addition, the
Board of Directors granted to Dr. Ferrier, Mr. Georgiev and Dr. Sorell options
to purchase 330,000 shares each, which options were granted outside of the 1991
Stock Plan and 1989 Stock Option Plan. The Board of Directors, which administers
the Company's 1989 Stock Option Plan and 1991 Stock Plan, has a general policy
of awarding stock options at not less than fair market value at the date of
grant, and options generally vest over 2, 3 or 4 years. During the fiscal year
ended June 30, 1996, however, stock options were awarded to Dr. Schneider and
certain other employees of the Company at an exercise price of $.01, which
options were fully vested on the date of grant.
52
EXECUTIVE COMPENSATION COMMITTEE
On July 24, 1996, the Board established an Executive Compensation Committee,
of which Dr. Ferrier and Mr. Georgiev are the members. The Executive
Compensation Committee reviews and sets cash and non-cash compensation for Dr.
Muni and Mr. Wadekar and provides guidance to the Board of Directors on the cash
and non-cash compensation payable to other officers and employees of the
Company.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
Transition Period and for the fiscal years ended June 30, 1996, 1995 and 1994,
of those persons who were at December 31, 1996 (i) the chief executive officer
and (ii) each other executive officer of the Company whose annual compensation
exceeded $100,000 (the "Named Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(3)
----------------
AWARDS
ANNUAL COMPENSATION(2) ----------------
---------------------- NUMBER OF
FISCAL SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) COMPENSATION ($) SARS (#) COMPENSATION ($)(4)
--------------------------- ------- --- --- ---------------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
DR. INDU A. MUNI ............... 1996A 72,500 -- -- -- 297
President, Chief Executive 1996 115,500 -- -- -- 304
Officer and Treasurer
1995 115,500 -- -- -- 304
1994 112,875 -- -- -- 304
DHANANJAY G. WADEKAR ........... 1996A 72,500 -- -- -- 297
Chairman of the Board and 1996 115,500 -- -- -- 304
Executive Vice President
1995 115,500 -- -- -- 304
1994 112,875 -- -- -- 304
DR. F. HOWARD SCHNEIDER ......... 1996A 62,833 -- -- -- 297
Senior Vice President -- 1996 115,500 -- -- 10,000 304
Technology
1995 115,500 -- -- -- 304
1994 112,875 -- -- 150,000(5) 15,476
</TABLE>
- ---------
(1) Information regarding the Transition Period is set forth in the row headed
"1996A".
(2) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or 10%
of the total salary and bonus reported.
(3) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARs") or make any long-term incentive plan payouts during the
Transition Period or the fiscal years ended June 30, 1996, 1995 and 1994.
(4) Amount represents the dollar value of group-term life insurance premiums
paid by the Company for the benefit of the Named Officer except with respect
to Dr. Schneider in the fiscal year ended 1994 for which the amount is
comprised of: (i) $15,172 representing forgiveness from repayment of a loan
owed to the Company by Dr. Schneider and (ii) $304 representing the dollar
value of group-term life insurance premiums paid by the Company.
(5) The Company repriced certain of Dr. Schneider's outstanding options in
Fiscal 1994 as follows: Options to purchase 150,000 shares granted in July
1992 at an exercise price of $5.25 were canceled in exchange for options to
purchase 150,000 shares at an exercise price of $.75 per share, the fair
market value of the Company's Common Stock on the date of exchange, April
27, 1994.
OPTIONS/SAR GRANTS TABLE
There were no grants of stock options or SARs made to the Named Officers
during the Transition Period.
53
OPTION EXERCISES AND FISCAL YEAR END VALUES
Presented below is further information with respect to unexercised stock
options to purchase the Company's Common Stock held by each Named Officer as of
December 31, 1996. None of the Named Officers exercised any stock options during
the Transition Period.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)
--------------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dr. Indu A. Muni ..................... -- -- -- --
Dhananjay G. Wadekar ................. -- -- -- --
Dr. F. Howard Schneider .............. 200,000 60,000 107,400 33,750
</TABLE>
Stock Plans. The Company currently maintains two employee stock plans: the
1989 Stock Option Plan and the 1991 Stock Plan. Each plan is administered by the
Board of Directors. The 1991 Stock Plan currently provides for the grant of
incentive stock options, non-qualified options, awards and authorizations to
purchase up to 2,600,000 shares of Common Stock. The terms of options issued
under the 1991 Stock Plan, including number of shares, exercise price, duration
and vesting, are generally determined by the Board of Directors. As of April 24,
1997, options to purchase a total of 786,400 shares of Common Stock were
outstanding under the 1991 Stock Plan, of which options for 342,492 shares were
then exercisable, and 1,636,900 shares of Common Stock were reserved for future
option grants.
The 1989 Stock Option Plan provides for the grant of incentive stock options
and non-qualified options to purchase up to an aggregate of 600,000 shares of
Common Stock to the Company's employees, officers, directors and consultants.
The terms of such options, including number of shares, exercise price, duration
and vesting, are generally determined by the Board of Directors. As of April 24,
1997, options to purchase a total of 208,000 shares of Common Stock were
exercisable and outstanding under the 1989 Stock Option Plan and no shares of
Common Stock were reserved for future option grants.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements with Dr. Muni, the
Company's President, Chief Executive Officer and Treasurer, Mr. Wadekar, the
Company's Chairman of the Board and Executive Vice President, and Dr. Schneider,
the Company's Senior Vice President -- Technology. Dr. Muni's agreement expires
in August 1997, and Mr. Wadekar's and Dr. Schneider's agreements expire in
October 1997. Under the agreements, Dr. Muni, Mr. Wadekar and Dr. Schneider were
paid annual base salaries of $115,500, effective October 1, 1993.
Effective July 1, 1996, the Executive Compensation Committee increased Dr.
Muni and Mr. Wadekar's annual base salaries to $145,000 and approved an
arrangement whereby Dr. Schneider is paid an annual base salary of $116,000 for
a four-day work week.
In addition, Dr. Muni, Mr. Wadekar and Dr. Schneider have each agreed that
(i) during his respective period of employment with the Company and for a period
of one year thereafter, he will not engage in any business activity engaged in
or under development by the Company and (ii) for a period of three years
following his respective period of employment, he will not engage in any
activities for any direct competitor similar or related to those activities
engaged in during the preceding two years of employment with the Company. In the
event the Company terminates Dr. Muni's, Mr. Wadekar's or Dr. Schneider's
employment without cause, the Company is obligated to pay to him an amount equal
to three months base salary.
54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee and the Board of Directors are
responsible for determining compensation for executive officers of the Company.
Drs. Muni and Schneider and Mr. Wadekar serve on the Board of Directors. None of
these three officers was present during discussion of and abstained from voting
with respect to his own compensation as an executive officer of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 24, 1997, certain information
concerning the ownership of the Company's Common Stock by: (i) each person who
is known by the Company to own beneficially five percent or more of the
outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each Named Officer; and (iv) all directors and executive
officers as a group. Except as otherwise indicated, to the knowledge of the
Company, the persons listed in the table have sole voting and investment powers
with respect to the shares indicated.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME OF BENEFICIAL OWNER OWNED COMMON STOCK(1)
------------------------ ----- ---------------
<S> <C> <C>
Dhananjay G. Wadekar ................................................. 1,351,250 4.5%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. Indu A. Muni ..................................................... 1,137,250 3.8%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. F. Howard Schneider(2) ........................................... 330,000 1.1%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. Ian R. Ferrier ................................................... 0 0%
c/o Bogart Delafield Ferrier, Inc.
North Tower, 5th Floor
49 Headquarters Plaza
Morristown, New Jersey 07960
Steven Georgiev ...................................................... 0 0%
c/o Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
Dr. Michael Sorell ................................................... 0 0%
115 East 42nd Street
New York, NY 10128
All Directors and Executive Officers as a group (8 persons)(3) 2,946,500 9.7%
</TABLE>
- ----------
(1) As of April 24, 1997, there were 30,114,206 shares of the Company's Common
Stock outstanding. Pursuant to the rules of the Securities and Exchange
Commission (the "Commission"), shares of Common Stock that an individual or
group has a right to acquire on or before June 23, 1997 (i.e., within 60
days after April 24, 1997) pursuant to the exercise of presently exercisable
or outstanding options, warrants or conversion privileges are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
Information with respect to beneficial ownership is based upon information
furnished by such stockholder.
55
(2) Includes 260,000 shares issuable to Dr. Schneider pursuant to immediately
exercisable stock options. Does not include 100 shares owned by Dr.
Schneider's wife, of which he disclaims any beneficial interest or control.
(3) Includes 365,000 shares issuable pursuant to immediately exercisable stock
options. Does not include 100 shares owned by Dr. Schneider's wife of which
he disclaims any beneficial interest or control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1996, the Company entered into a strategic marketing relationship
for certain of the Company's technologies with Bogart Delafield Ferrier. In
connection with this relationship, the Company paid to Bogart Delafield Ferrier
during the calender year 1996 $80,000 in fees plus $12,388 for expenses. Bogart
Delafield Ferrier is also entitled to royalties of 1 1/2 % of the dollar value
of any transaction with respect to certain of the Company's technologies
initiated with a pharmaceutical or managed care company between March 12, 1996
and December 31, 1996. No such transaction was initiated during this time
period. Dr. Ferrier, who became a director of the Company in July 1996, is Chief
Executive Officer and Chairman of Bogart Delafield Ferrier.
The Company also entered into a consulting agreement with M.S. Capital, LLC.
to provide marketing and business development services with respect to certain
of the Company's technologies. Dr. Michael Sorell, a director of the
Corporation, is the principal of M.S. Capital, LLC. Pursuant to the consulting
agreement, the Company paid M.S. Capital, LLC $12,500 during the Transition
Period.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements are filed as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 1996 and June 30,
1996 and 1995
Consolidated Statements of Loss -- Six Months Ended December 31, 1996
and 1995 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity --
Six Months Ended December 31, 1996 and Years Ended June 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Six Months Ended December
31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is otherwise
included.
3. List of Exhibits:
The following exhibits, required by Item 601 of Regulation S-K, are filed
as a part of this Annual Report on Form 10-K. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
<S> <C>
2a -- Asset Purchase Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp., Able Laboratories, Inc. and Alpharma USPD Inc. (filed as Exhibit 2.1 to
Registrant's Form 8-K dated August 19, 1996 and incorporated by reference).
2b -- Product Supply Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp. and Able Laboratories, Inc. (filed as Exhibit 2.2 to Registrant's Form 8-K
dated August 19, 1996 and incorporated by reference).
2c -- Agreement and Plan of Merger among the Registrant, DynaGen Acquisition Corporation,
Superior Pharmaceutical Company and the stockholders of Superior Pharmaceutical
Company dated March 7, 1997 (filed herewith).
3a -- Certificate of Incorporation, as amended (filed herewith).
3b -- By-laws, as amended (filed as Exhibit 3b to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4a -- Specimen Common Stock Certificate (filed as Exhibit 4a to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
4b -- Specimen Warrant Certificate (filed as Exhibit 4b to Registrant's Registration
Statement on Form S-1, No. 33-46445, and incorporated by reference).
4c -- Form of Warrant Agreement (filed as Exhibit 1d to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4d -- Subscription Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4b to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4e -- Note Purchase Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4c to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4f -- Convertible Note issued by the Registrant to GFL Performance Fund Limited, dated
February 7, 1996 (filed as Exhibit 4d to Registrant's Registration Statement on
Form S-3 (File No. 333-1748) and incorporated herein by reference).
</TABLE>
57
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
<S> <C>
4g -- Registration Rights Agreement between the Registrant and GFL Performance Fund
Limited, dated February 7, 1996 (filed as Exhibit 4e to Registrant's Registration
Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4h -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 16, 1996 (filed as Exhibit 4e to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4i -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 29, 1996 (filed as Exhibit 4f to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4j -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 16, 1996 (filed as Exhibit 4g to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4k -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 29, 1996 (filed as Exhibit 4h to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4l -- Investment Banking Agreement between the Registrant and H. J. Meyers & Co., Inc.,
dated November 20, 1995 (filed as Exhibit 4f to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
4m -- Amendment No. 1 to Investment Banking Agreement between Registrant and H.J. Meyers
& Co., Inc. dated September 23, 1996 (filed herewith).
4n -- Common Stock Purchase Warrant issued by the Registrant to H. J. Meyers & Co.,
Inc., dated November 20, 1995 (filed as Exhibit 4g to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
4o -- Form of Warrant Agent Agreement (filed as Exhibit 4g to Registrant's Registration
Statement on Form S-1, No. 33-71416, and incorporated by reference).
4p -- Common Stock Purchase Warrant issued by Registrant to Zach Spigelman dated December
10, 1996 (filed herewith).
4q -- Common Stock Purchase Warrant issued by Registrant to Rich Theriault dated December
10, 1996 (filed herewith).
4r -- Common Stock Purchase Warrant issued by Registrant to Shawn Basu dated December
10, 1996 (filed herewith).
4s -- Common Stock Purchase Warrant issued to Leonardo G. Zangani dated January 15,
1997 (filed herewith).
10a* -- 1989 Stock Option Plan, as amended (filed as Exhibit 10c to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
10b* -- Form of Incentive Stock Option Agreement under 1989 Stock Option Plan of the Registrant
(filed as Exhibit 4.6 to Registrant's Registration Statement on Form S-8, No. 33-66826,
and incorporated by reference).
10c* -- Form of Non-Qualified Stock Option Agreement under 1989 Stock Option Plan of the
Registrant (filed as Exhibit 4.7 to Registrant's Registration Statement on Form
S-8, No. 33-66826, and incorporated by reference).
10d* -- 1991 Stock Plan, as amended (filed herewith).
10e* -- Form of Incentive Stock Option Agreement under 1991 Plan (filed as Exhibit 10aa
to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated
by reference).
</TABLE>
58
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
<S> <C>
10f* -- Form of Non-Qualified Stock Option Agreement under 1991 Plan (filed as Exhibit
10bb to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and
incorporated by reference).
10g* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Dr. Ian Ferrier (filed as Exhibit 10g to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10h* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Steven Georgiev (filed as Exhibit 10h to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10i* -- Employment Agreement dated September 1, 1989 by and between the Company and Dr.
Indu A. Muni (filed as Exhibit 10a to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
10j* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Indu
A. Muni (filed as Exhibit 10bb to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10k* -- Employment Agreement dated October 1, 1991 by and between the Company and Dr.
F. Howard Schneider (filed as Exhibit 10w to Registrant's Registration Statement
on Form S-18, No. 33-31836-B, and incorporated by reference).
10l* -- Employment Agreement dated November 1, 1991 by and between the Company and Dhananjay
G. Wadekar (filed as Exhibit 10x to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
10m* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Dhananjay
G. Wadekar (filed as Exhibit 10cc to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10n -- Lease Agreement dated September 26, 1991 by and between the Company and The 99
Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its
facility at 99 Erie Street, Cambridge, Massachusetts (previously filed as the
only Exhibit to Registrant's Form 10-Q for the quarter ended September 30, 1991).
10o -- Amendment to Lease Agreement dated May 15, 1992 by and between the Company and
The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10o to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, and incorporated by reference).
10p -- Second Amendment to Lease Agreement dated May 31, 1993 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10w to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1993, and incorporated by reference).
10q -- Third Amendment to Lease Agreement dated April 1, 1995 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10r to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1995, and incorporated by reference).
10r -- Exercise of Option to Extend Lease Term dated May 3, 1996, from the Company to
Meredith & Grew, Incorporated with respect to its facility at 99 Erie Street,
Cambridge, Massachusetts (filed as Exhibit 10r to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10s -- Lease Agreement dated November 29, 1984 between Hollywood Court Associates and
Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood
Court, South Plainfield, New Jersey (filed as Exhibit 10s to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated
by reference).
</TABLE>
59
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
<S> <C>
10t -- Space Expansion and Term Extension Agreement dated April 1988 between Hollywood
Court Associates and Able Laboratories, Inc. with respect to the Company's facility
at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit 10t to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated
by reference).
10u -- Assignment of Lease dated April 1989 between Hollywood Court Associates and CVN
Associates L.P. with respect to the Company's facility at 6 Hollywood Court, South
Plainfield, New Jersey (filed as Exhibit 10u to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10v -- Space Expansion Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed as Exhibit 10v to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10w -- Term Extension Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed as Exhibit 10w to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10x -- Assignment of Lease dated August 19, 1996 between Able Laboratories, Inc. and
Able Acquisition Corp. (predecessor corporation to Able) with respect to the Company's
facility at 6 Hollywood Court, South Plainfield, New Jersey (filed as Exhibit
10 w to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, and incorporated by reference).
10y -- Landlord's Consent to Assignment of Lease dated August 19, 1996 among CVN Associates,
L.P., Able Acquisition Corp. (predecessor corporation to Able), Able Laboratories,
Inc. and the Company with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed as Exhibit 10y to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10z -- Guaranty of Lease dated August 19, 1996 between the Company and Able Laboratories,
Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield,
New Jersey (filed as Exhibit 10z to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996, and incorporated by reference).
10aa* -- Non Qualified Stock Option Agreement dated October 28, 1996 granting a stock option
to Dr. Michael Sorell (filed herewith).
21 -- Subsidiary of the Registrant (filed herewith).
23a -- Consent of Wolf & Company, P.C. dated April 29, 1997 (filed herewith).
24a -- Power of Attorney is contained on page 61 of this Annual Report on Form 10-K.
27 -- Financial Data Schedule (filed herewith in electronic format only).
</TABLE>
- --------
* Indicates a management contract or any compensatory plan, contract
or arrangement.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
(c) Exhibits:
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above.
(d) Financial Statement Schedules:
No financial statement schedules are filed as part of this Form 10-K.
60
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE
CITY OF CAMBRIDGE, COMMONWEALTH OF MASSACHUSETTS ON APRIL 30, 1997.
DYNAGEN, INC.
By: /s/ INDU A. MUNI
----------------------------------
INDU A. MUNI
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE
UNDERSIGNED OFFICERS AND DIRECTORS OF DYNAGEN, INC. HEREBY SEVERALLY CONSTITUTES
AND APPOINTS DHANANJAY G. WADEKAR, DR. INDU A. MUNI AND JOHN M. HESSION, AND
EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER TO THEM, AND EACH OF THEM SINGLY, TO SIGN FOR HIM, IN HIS NAME IN THE
CAPACITY INDICATED BELOW, ALL AMENDMENTS TO SUCH REPORT ON FORM 10-K, HEREBY
RATIFYING AND CONFIRMING HIS SIGNATURE AS IT MAY BE SIGNED BY HIS ATTORNEYS TO
SUCH REPORT AND ANY AND ALL AMENDMENTS THERETO.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ DHANANJAY G. WADEKAR Chairman of the Board, Executive April 30, 1997
- --------------------------------------- Vice President and Director
DHANANJAY G. WADEKAR
/s/ DR. INDU A. MUNI President, Chief Executive Officer, April 30, 1997
- --------------------------------------- Treasurer, (Principal Executive,
DR. INDU A. MUNI Financial and Accounting Officer)
and Director
/s/ DR. F. HOWARD SCHNEIDER Senior Vice President -- Technology April 30, 1997
- --------------------------------------- and Director
DR. F. HOWARD SCHNEIDER
Director April 30, 1997
- ---------------------------------------
STEVEN GEORGIEV
/s/ DR. IAN R. FERRIER Director April 30, 1997
- ----------------------------------------
DR. IAN R. FERRIER
Director April 30, 1997
- ----------------------------------------
DR. MICHAEL SORELL
</TABLE>
61
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DYNAGEN, INC.,
DYNAGEN ACQUISITION CORP.,
SUPERIOR PHARMACEUTICAL COMPANY
AND
THE STOCKHOLDERS OF SUPERIOR PHARMACEUTICAL COMPANY
DATED AS OF MARCH 7, 1997
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AGREEMENT AND PLAN OF MERGER
Table of Contents
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ARTICLE I - THE MERGER............................................................................................1
SECTION 1.1. The Merger.......................................................................................1
SECTION 1.2. Effective Time...................................................................................1
SECTION 1.3. Effect of the Merger.............................................................................2
SECTION 1.4. Certificate of Incorporation; By-Laws............................................................2
SECTION 1.5. Directors and Officers...........................................................................2
SECTION 1.6. (Intentionally Omitted)..........................................................................2
SECTION 1.7. Certain Other Agreements.........................................................................2
SECTION 1.8. Taking of Necessary Action; Further Action.......................................................2
ARTICLE II - CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES...................................................3
SECTION 2.1. Definitions......................................................................................3
SECTION 2.2. Merger Consideration; Conversion or Cancellation of Company Common Stock.........................3
SECTION 2.3. Exchange of Certificates.........................................................................3
SECTION 2.4. Tangible Net Worth Requirement...................................................................4
SECTION 2.5. Additional Consideration.........................................................................5
SECTION 2.6. Incentive Payments...............................................................................6
SECTION 2.7. No Fractional Shares.............................................................................6
SECTION 2.8. Checks or Certificates in Other Names............................................................7
SECTION 2.9. Distributions with Respect to Unexchanged Shares of Parent Common Stock..........................7
SECTION 2.10. Stock Transfer Books.............................................................................7
SECTION 2.11. Lost, Stolen or Destroyed Certificates...........................................................7
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................8
SECTION 3.1. Corporate Existence and Power....................................................................8
SECTION 3.2. Corporate Authorization..........................................................................8
SECTION 3.3. Governmental Authorization.......................................................................8
SECTION 3.4. Non-Contravention................................................................................8
SECTION 3.5. Capitalization...................................................................................9
SECTION 3.6. Subsidiaries.....................................................................................9
SECTION 3.7. Financial Statements.............................................................................9
SECTION 3.8. Absence of Undisclosed Liabilities..............................................................10
SECTION 3.9. Title and Condition of Assets...................................................................10
SECTION 3.10. Real Property...................................................................................11
SECTION 3.11. Condition of Tangible Assets....................................................................11
SECTION 3.12. Subsequent Events...............................................................................11
SECTION 3.13. Legal Proceedings...............................................................................13
SECTION 3.14. Material Contracts..............................................................................13
SECTION 3.15. Employees.......................................................................................14
SECTION 3.16. Transactions with Affiliates....................................................................15
SECTION 3.17. Insurance Coverage..............................................................................15
SECTION 3.18. Compliance with Laws............................................................................15
SECTION 3.19. Accounts Receivable; Inventories................................................................15
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SECTION 3.20. Finders' Fees..................................................................................16
SECTION 3.21. Employee Benefit Plans.........................................................................16
SECTION 3.22. Taxes..........................................................................................17
SECTION 3.23. Environmental Matters..........................................................................19
SECTION 3.24. Intellectual Property..........................................................................19
SECTION 3.25. (Intentionally Omitted)........................................................................19
SECTION 3.26. Certain FDA Matters............................................................................19
SECTION 3.27. Stockholder Representations....................................................................20
SECTION 3.28. Title..........................................................................................21
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB....................................................21
SECTION 4.1. Corporate Existence and Power...................................................................21
SECTION 4.2. Corporate Authorization.........................................................................21
SECTION 4.3. Governmental Authorization......................................................................22
SECTION 4.4. Non-Contravention...............................................................................22
SECTION 4.5. Capitalization..................................................................................22
SECTION 4.6. Legal Proceedings...............................................................................23
SECTION 4.7. Compliance with Laws............................................................................23
SECTION 4.8. SEC Documents...................................................................................23
SECTION 4.9. Board Recommendation............................................................................24
SECTION 4.10. Finders' Fees...................................................................................24
SECTION 4.11 (Intentionally Omitted).........................................................................24
SECTION 4.12. Interim Operations of Sub.......................................................................24
ARTICLE V - COVENANTS OF ALL PARTIES.............................................................................24
SECTION 5.1. Cooperation.....................................................................................24
SECTION 5.2. Other Required Information......................................................................24
SECTION 5.3. Confidentiality.................................................................................25
SECTION 5.4. Public Announcements............................................................................25
SECTION 5.5. Miscellaneous Agreements and Consents...........................................................25
SECTION 5.6. Board Representation............................................................................26
SECTION 5.7. Best Efforts and Further Assurances.............................................................26
SECTION 5.8. Operations Following Closing....................................................................26
SECTION 5.9. Guaranties of the Company.......................................................................26
ARTICLE VI - COVENANTS OF THE COMPANY............................................................................27
SECTION 6.1. Preservation of Business Organization...........................................................27
SECTION 6.2. Carry on in Regular Course......................................................................27
SECTION 6.3. Consents........................................................................................27
SECTION 6.4. Company Stockholders Meeting....................................................................28
SECTION 6.5. Access..........................................................................................28
SECTION 6.6. Documents and Information to be Furnished.......................................................28
SECTION 6.7. Notices of Certain Events.......................................................................28
SECTION 6.8. Accuracy of Representations and Warranties......................................................28
SECTION 6.9. No Solicitation.................................................................................28
SECTION 6.10. Non-Disturbance Agreement.......................................................................29
ARTICLE VII - COVENANTS OF PARENT AND SUB........................................................................29
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SECTION 7.1. Preservation of Business Organization...........................................................29
SECTION 7.2. Consents........................................................................................29
SECTION 7.3. Notices of Certain Events.......................................................................29
SECTION 7.4. Nasdaq SmallCap Market Listing..................................................................30
SECTION 7.5. Accuracy of Representations and Warranties......................................................30
SECTION 7.6. Documents and Information to be Furnished.......................................................30
SECTION 7.7. Indemnification.................................................................................30
SECTION 7.8. Non-Solicitation................................................................................30
SECTION 7.9. Compliance with Lease Terms.....................................................................30
ARTICLE VIII - CONDITIONS OF CLOSING.............................................................................30
SECTION 8.1. Conditions to Obligations of Parent, Sub, Stockholders and the Company..........................30
SECTION 8.2. Additional Conditions Applicable to Parent and Sub..............................................31
SECTION 8.3. Additional Conditions Applicable to the Stockholders and Company................................33
ARTICLE IX - TERMINATION.........................................................................................34
SECTION 9.1. Termination.....................................................................................34
SECTION 9.2. Certain Remedies Upon Termination...............................................................34
SECTION 9.3. Survival Upon Termination.......................................................................35
SECTION 9.4. Effect of Termination...........................................................................35
ARTICLE X -- SURVIVAL; INDEMNIFICATION...........................................................................35
SECTION 10.1. Survival.......................................................................................35
SECTION 10.2. Mutual Indemnification.........................................................................35
SECTION 10.3. Third Person Claims............................................................................36
SECTION 10.4. Limitations on Indemnification.................................................................37
SECTION 10.5. Method of Payment..............................................................................37
SECTION 10.6. Resolutions of Conflicts; Arbitration..........................................................37
SECTION 10.7. Remedies.......................................................................................38
ARTICLE XI - MISCELLANEOUS.......................................................................................39
SECTION 11.1. Specific Performance...........................................................................39
SECTION 11.2. Expenses.......................................................................................39
SECTION 11.3. Further Assurances.............................................................................39
SECTION 11.4. Parties in Interest............................................................................39
SECTION 11.5. Entire Agreement...............................................................................39
SECTION 11.6 Amendment or Modification......................................................................40
SECTION 11.7. Waiver.........................................................................................40
SECTION 11.8. Assignability..................................................................................40
SECTION 11.9. Headings and Interpretation....................................................................40
SECTION 11.10. Notices........................................................................................40
SECTION 11.11. Law Governing..................................................................................41
SECTION 11.12. Invalidity of Provisions.......................................................................41
SECTION 11.13. Counterparts...................................................................................41
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EXHIBITS
EXHIBIT A FORM OF SECURED PROMISSORY NOTE
EXHIBIT B FORM OF PLEDGE AGREEMENT
EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT D FORM OF EMPLOYMENT AGREEMENT, ERIC HAGERSTRAND AND DENNIS SMITH
EXHIBIT E FORM OF EMPLOYMENT AGREEMENT, THOMAS CANNING
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AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger dated as of March 7, 1997 (this
"AGREEMENT") by and among DynaGen, Inc., a Delaware corporation ("PARENT");
DynaGen Acquisition Corp., a Delaware corporation and a direct, wholly-owned
subsidiary of Parent ("SUB"); Superior Pharmaceutical Company, an Ohio
corporation (the "COMPANY"); and Eric C. Hagerstrand ("HAGERSTRAND"), Dennis
Smith ("SMITH") and Thomas Canning ("CANNING"), the stockholders of the Company.
Each of Hagerstrand, Smith and Canning are hereinafter collectively referred to
as the "STOCKHOLDERS".
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Sub and the
Company have each determined that it is advisable and in the best interests of
each company and its respective stockholders for Parent to enter into a business
combination with the Company upon the terms and subject to the conditions set
forth herein; and
WHEREAS, in furtherance of such combination, the respective Boards of
Directors of Parent, Sub and the Company have each approved the merger (THE
"MERGER") of Sub with and into the Company in accordance with the applicable
provisions of the General Corporation Law of the State of Delaware ("DELAWARE
LAW") and the Ohio General Corporation Law ("OHIO LAW") upon the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with Delaware Law and Ohio Law,
at the Effective Time (as defined in Section 1.2), Sub shall be merged with and
into the Company. As a result of the Merger, the separate corporate existence of
Sub shall cease and the Company shall continue as the surviving corporation of
the Merger (the "SURVIVING CORPORATION"). The name of the Surviving Corporation
shall be Superior Pharmaceutical Company.
SECTION 1.2. EFFECTIVE TIME. Unless this Agreement shall have earlier
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 9.1 hereof, the closing of the Merger (the "CLOSING") will
take place as promptly as practicable (and in any event within two business
days) after the satisfaction or, if permissible, waiver of the conditions set
forth in Article VIII hereof, at the offices of Taft, Stettinius & Hollister,
1800 Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, unless another
date, time or place is agreed to in writing by the parties hereto. The date upon
which the Closing occurs is herein referred to as the "CLOSING DATE." On the
Closing Date, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the "CERTIFICATE OF MERGER") with the Secretary
of State of the State of Delaware and the Secretary of State of the State of
Ohio, in such form as required by Delaware Law and Ohio Law (the date and time
of such filings being the "EFFECTIVE TIME").
Agreement and Plan of Merger - Page 2
SECTION 1.3. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the Certificate of Merger and applicable
provisions of Ohio Law. At the Effective Time, all the property, rights,
privileges, powers and franchises of Sub and the Company shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Sub and the
Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.4. CERTIFICATE OF INCORPORATION; BY-LAWS. Unless otherwise
determined by Parent prior to the Effective Time, at the Effective Time, the
Articles of Incorporation and the Regulations of the Company, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
and the Regulations of the Surviving Corporation.
SECTION 1.5. DIRECTORS AND OFFICERS. Effective as of the Closing,
Parent shall appoint a total of five (5) directors to the board of directors of
the Surviving Corporation to hold office for one year and until their successors
shall have been duly elected and qualified. Two of the directors shall be
Hagerstrand and Smith. Parent shall select the remaining directors in its sole
discretion. Effective as of the Closing, Hagerstrand and Smith shall also be
appointed officers of the Surviving Corporation.
SECTION 1.6. [INTENTIONALLY OMITTED.]
SECTION 1.7. CERTAIN OTHER AGREEMENTS. Concurrently with the execution
and delivery of this Agreement or prior to the Closing, the following agreements
(collectively, the "Operative Documents") shall be executed and delivered by
Stockholders and Parent, as the case may be:
(i) a Secured Promissory Note in the form of Exhibit A
(the "NOTE"), duly executed by Parent and delivered
to each of the Stockholders;
(ii) a Pledge Agreement in the form of Exhibit B (the
"PLEDGE AGREEMENT"), duly executed and delivered by
each of the Stockholders and Parent;
(iii) a Registration Rights Agreement in the form of
Exhibit C (the "REGISTRATION RIGHTS AGREEMENT") duly
executed and delivered by each of the Stockholders
and Parent;
(iv) Employment Agreements with each of Hagerstrand and
Smith in the form of Exhibit D (the "EMPLOYMENT
AGREEMENTS"), duly executed and delivered by the
Company and each of Hagerstrand and Smith; and
(v) an Employment Agreement with Canning in the form of
Exhibit E (the "CANNING AGREEMENT"), duly executed
and delivered by the Company and Canning.
SECTION 1.8. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of
Parent, Sub and the Company will take all such reasonable and lawful action as
may be necessary or appropriate in order to effectuate the Merger in accordance
with this Agreement as promptly as possible. If, at any time after the Effective
Time, any such further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the Company
and Sub immediately prior to the Effective Time are fully authorized in the name
of their respective corporations or otherwise to take, and will take, all such
lawful and necessary action.
Agreement and Plan of Merger - Page 3
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.1. DEFINITIONS.
"COMPANY COMMON STOCK" shall mean the Common Stock, no par
value, of the Company.
"MERGER CONSIDERATION" shall mean (i) $6,500,000 in cash, (ii)
Notes in the aggregate principal amount of $5,000,000 and (iii) 1,666,667 shares
of Parent Common Stock.
"OUTSTANDING SHARES" shall mean the aggregate number of shares
of Company Common Stock outstanding immediately prior to the Effective Time.
"PARENT COMMON STOCK" shall mean the Common Stock, par value
$.01 per share, of Parent.
SECTION 2.2. MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
COMPANY COMMON STOCK. (a) At the Effective Time, by virtue of the Merger and
without any action on the part of Parent, Sub, the Company or the holders of any
shares of Company Common Stock, each of the Outstanding Shares shall be
converted into the right to receive a pro rata amount of the Merger
Consideration, based on each Stockholder's equity interest in the Company.
(b) If between the date of this Agreement and the Effective
Time, the outstanding shares of Parent Common Stock shall have been changed into
a different number of shares or a different class by reason of a stock dividend,
subdivision, reclassification, recapitalization, split-up or combination, the
number of shares of Parent Common Stock included in the Merger Consideration
shall be appropriately adjusted.
(c) At the Effective Time, each share of Company Common Stock
issued and outstanding and owned by Parent or any of its subsidiaries (including
Sub) or held in the treasury of the Company immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, cease to be outstanding, be canceled and retired without payment
of any consideration therefor and cease to exist.
(d) At the Effective Time, each share of Sub Common Stock, par
value $.01 per share, issued and outstanding immediately prior to the Effective
Time shall thereupon be converted into and become one (1) share of Common Stock
of the Surviving Corporation.
SECTION 2.3. EXCHANGE OF CERTIFICATES. (a) Prior to the Effective Time,
Parent will appoint its transfer agent (the "Exchange Agent") to effectuate the
delivery of the consideration provided for in Section 2.2 to holders of Company
Common Stock upon surrender of certificates which immediately prior to the
Effective Time represented all Outstanding Shares of Company Common Stock
("Certificates").
Agreement and Plan of Merger - Page 4
(b) Upon surrender of a Certificate to the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration provided for in Section 2.2(a), and the Certificate so
surrendered shall forthwith be canceled.
(c) Subject to Sections 2.4, 2.5 and 2.6, all Merger
Consideration issued upon conversion of the shares of Company Common Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Common Stock.
(d) Neither Parent, Sub nor the Company shall be liable to any
holder of shares of Company Common Stock for any Merger Consideration delivered
to a public official pursuant to any abandoned property, escheat or similar law.
From and after the Effective Time, and until surrendered in accordance with the
provisions of Section 2.3, each Certificate representing Outstanding Shares
shall represent, for all purposes, only the right to receive the Merger
Consideration.
(e) Parent shall be entitled to deduct and withhold from the
consideration otherwise payable to any holder of shares of Company Common Stock
such amounts as Parent is required to deduct and withhold with respect to the
making of any such payment under the Internal Revenue Code of 1986, as amended
(the "CODE"), or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by Parent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Company Common Stock in respect of which such deduction and
withholding was made by Parent.
SECTION 2.4 TANGIBLE NET WORTH REQUIREMENT
(a) As of the Closing Date, the Company shall have Tangible
Net Worth (as defined in this Section 2.4) of at least $2,750,000. If the
Tangible Net Worth of the Company as set forth on the balance sheet contained in
the Closing Financial Statements (as defined in this Section 2.4) is less than
$2,750,000 as of the Closing Date, Parent shall withhold the amount of such
shortfall, pro rata from the Stockholders, from the first payment of principal
under the Notes. If the Tangible Net Worth of the Company as set forth on the
balance sheet contained in the Closing Financial Statements is greater than
$2,750,000 as of the Closing Date, Parent shall distribute the amount of such
excess, pro rata among the Stockholders, at the time of the first payment of
principal under the Notes.
(b) For purposes hereof, the term "Tangible Net Worth" shall
mean the net worth of the Company as determined in the audited balance sheets of
the Company as of December 31, 1996 (under the caption "Stockholders' Equity"),
as adjusted for transactions through the Closing Date, in all cases of the type
which would be set forth on a balance sheet of the Company in accordance with
generally accepted accounting principles consistently applied.
(c) As promptly as practicable after the Closing Date but in
no event later than forty-five (45) days thereafter, Parent shall oversee and
cause to be prepared by the Company's auditors (Grant Thornton LLP) and
delivered to Parent and the Stockholders a reviewed balance sheet of the Company
as at the close of business on the Closing Date and a reviewed statement of
earnings and cash flows from January 1, 1997 to the Closing Date, together with
the review report of the Company's auditors, addressed to Parent and the
Stockholders, stating that its review of the Closing Financial Statements was
made in accordance with statements on standards for accounting and review
services issued by the American Institute of Certified Public Accountants. The
reviewed Closing Statements will be presented in accordance with generally
accepted accounting principles and applied on a basis consistent with such U.S.
generally
Agreement and Plan of Merger - Page 5
accepted accounting principles and the financial statements of the Company for
the fiscal years December 31, 1994, 1995 and 1996, previously furnished to
Parent. Such financial statements, as so reviewed, are referred to herein as the
"Closing Financial Statements." The cost of such review and the preparation of
the Closing Financial Statements by the Company's auditors shall be borne by
Parent.
(d) The calculation of Tangible Net Worth set forth in the
balance sheet contained in the Closing Financial Statements shall be deemed to
be conclusive and binding upon the parties, unless at or prior to the fifth
business day following the completion of the Closing Financial Statements and
their delivery to Parent and the Stockholders, Parent or the Stockholders shall
give written notice to the other that it objects to the valuation, inclusion or
omission of any item. Such notice shall specify Parent's or the Stockholders'
objections to the computation of Tangible Net Worth, citing the items or
principles disputed. In the event that Parent and the Stockholders are unable to
mutually agree upon the valuation or amount of any disputed item set forth in
such notice within twenty (20) days after the receipt thereof by the
non-objecting party, the parties shall submit the unresolved items to
arbitration by a firm of independent public accountants to be selected jointly
by Parent and the Stockholders. Such accounting firm shall be requested to
consider the respective positions of the parties and render an opinion as to the
valuation or amount of the disputed items. The determination of such jointly
selected accounting firm shall be conclusive and binding upon the parties
hereto. The cost of such accounting firm shall be paid by the non-prevailing
party. A party shall be deemed to have prevailed with regard to disputed matters
if its last offer or demand immediately prior to submission to such accounting
firm is closer to the final resolution of the disputed matters than the other
party's offer or demand.
SECTION 2.5.ADDITIONAL CONSIDERATION. If at the first twelve-month
anniversary of the Closing, the average closing bid price of Parent Common Stock
for the ten (10) trading days immediately preceding such anniversary (the "FAIR
MARKET VALUE") multiplied by the aggregate number of shares of Parent Common
Stock delivered at the Closing equals an amount less than $5,000,000 (the
"DEFICIENCY"), then Parent, within forty-five (45) days of such anniversary
shall deliver to the Stockholders, pro rata based on the Outstanding Shares,
that number of shares of Parent Common Stock equal to the Deficiency divided by
the Fair Market Value, if the Fair Market Value is a trading price equal to or
greater than $1.50 per share of DynaGen Common Stock. To the extent the Fair
Market Value is less than $1.50 per share of DynaGen Common Stock, Parent shall
also pay to the Stockholders in immediately available funds the extent of the
additional Deficiency below the $1.50 trading price. By way of illustration and
example: (a) if the Fair Market Value as determined above is $2.00, the
aggregate number of shares of DynaGen Common Stock to be issued shall be the
product obtained by dividing the Deficiency of $1,666,666 [$5,000,000 less
1,666,667 x $2.00 (FMV) = $5,000,000 less $3,333,334 = $1,666,666 of Deficiency]
by the Fair Market Value of $2.00 ($1,666,666 (184) $2.00 = 833,333 additional
shares of DynaGen Common Stock); under such example, Parent shall issue 833,333
additional shares of DynaGen Common Stock.
(b) If the Fair Market Value is under $1.50 per share of DynaGen Common
Stock, Parent will then issue (in the aggregate to all Stockholders) an
additional 1,666,667 shares of DynaGen Common Stock. The remaining amount of the
Deficiency, calculated following the issuance of the additional 1,666,667 shares
of DynaGen Common Stock, shall be an amount equal to $5,000,000 less 3,333,334
shares of DynaGen Common Stock multiplied by the Fair Market Value. Such
remaining Deficiency amount shall be then paid to the Stockholders in
immediately available funds.
The shares of Parent Common Stock which may be issued pursuant to the
foregoing provisions are referred to as the "ADJUSTMENT SHARES."
Agreement and Plan of Merger - Page 6
SECTION 2.6. INCENTIVE PAYMENTS. (a) Subject to Section 2.6(b) below,
if the Surviving Corporation achieves Net Sales (as defined below) for the years
ending December 31, 1997, 1998 and 1999 equal to or greater than $32 million,
$35 million, and $39 million respectively (the "NET SALES TARGETS"), then Parent
or the Surviving Corporation shall pay to the Stockholders, pro rata based on
the Outstanding Shares, an aggregate of $550,000 for each such year that these
Net Sales Targets have been achieved ("TARGET PAYMENTS"). Any such payment shall
be paid to the Stockholders within forty-five (45) days after Parent's
independent accountants have issued their report on the Parent's audited
financial statements for such period. "NET SALES" means the net sales of the
Surviving Corporation determined in accordance with generally accepted
accounting principles ("GAAP") applied on the basis consistent with the
Company's audited statements of earnings for the year ended December 31, 1996
attached hereto as part of Schedule 3.7.
(b) Upon a Change in Control (as hereinafter defined) which
occurs prior to December 31, 1999, the Target Payments and all unpaid principal
and interest on the Notes shall, immediately prior to consummation of the Change
in Control, accelerate and become fully vested and payable to the Stockholders;
provided, however, that the Parent or Surviving Corporation shall not be
required to pay any Target Payment with respect to any year which was completed
prior to the Change in Control and for which the Net Sales Targets were not
achieved. For purposes of the foregoing, "CHANGE IN CONTROL" shall mean the
acquisition of the Parent or the Surviving Corporation by (i) the sale,
issuance, exchange or transfer, in a single transaction or a series of related
transactions, of greater than fifty percent (50%) of the outstanding capital
stock of the Parent or the Surviving Corporation to a third party in connection
with any business combination or other acquisition and in which such third party
has the right to elect, and does elect, a majority of the Parent's Board of
Directors, (ii) the sale of all or substantially all of the assets of the Parent
or the Surviving Corporation to a third party, or (iii) a merger, consolidation
or other reorganization involving the Parent and one or more other entities in
which the shares of the Parent's or Surviving Corporation's outstanding capital
stock immediately prior to such transaction are converted into, exchanged for or
represent less than a majority of the voting power of the surviving or resulting
entity.
(c) In the event any of Hagerstrand or Smith is terminated without
"cause" under such Stockholder's Employment Agreement (as defined in the
Stockholder's Employment Agreement), then the Target Payments shall, immediately
upon such termination, accelerate and become fully vested and payable to all
Stockholders; provided, however, that the Parent or Surviving Corporation shall
not be required to pay any Target Payment with respect to any year which was
completed prior to the date of termination and for which the Net Sales Targets
were not achieved. In the event of any termination of Hagerstrand or Smith for
cause (as defined in such Stockholder's Employment Agreement), such Stockholder
shall continue to be entitled to receive his pro rata share of any Target
Payment otherwise payable in the absence of any such termination; provided,
however, that the Parent or Surviving Corporation shall not be required to pay
any Target Payment with respect to any year which was completed prior to the
date of termination and for which the Net Sales Targets were not achieved. In
the event of any voluntary termination of employment by any Stockholder, such
Stockholder shall not receive his pro rata share of any Target Payment otherwise
payable in the absence of any such termination.
SECTION 2.7. NO FRACTIONAL SHARES. No certificates or scrip for
fractional shares of Parent Common Stock will be issued, no Parent stock split
or dividend shall relate to any fractional share interest, and no such
fractional share interest shall entitle the owner thereof to vote or to any
rights of or as a stockholder of Parent. In lieu of such fractional shares
(after taking into account all shares of Company Common Stock then held by any
such holder), any holder of Company Common Stock who
Agreement and Plan of Merger - Page 7
would otherwise be entitled to a fraction of a share of Parent Common Stock (or
any other Person who is the record holder of certificates for shares of Parent
Common Stock into which such shares of Company Common Stock have been converted)
will, upon surrender of his Certificate or Certificates, be paid the cash value
of such fraction (without interest and rounded to the nearest cent), which shall
be equal to the fraction multiplied by the closing bid price per share of Parent
Common Stock on the day preceding the Closing.
SECTION 2.8.CHECKS OR CERTIFICATES IN OTHER NAMES. If any check or any
certificate evidencing shares of Parent Common Stock is to be issued in a name
other than that in which the Certificate surrendered in exchange therefore is
registered, it shall be a condition of the issuance thereof that the Certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer and that the Person requesting such exchange establish to the
satisfaction of the Exchange Agent or of Parent acting solely in its corporate
capacity, as the case may be, that any transfer or other taxes required by
reason of the issuance of a check or a certificate for shares of Parent Common
Stock in any name other than that of the registered holder of the Certificate
surrendered or otherwise required has been paid or is not payable.
SECTION 2.9. DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES OF PARENT
COMMON STOCK. No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock evidenced thereby, and no other
part of the Merger Consideration shall be paid to any such holder, until the
holder of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates evidencing whole shares of
Parent Common Stock issued in exchange therefor, without interest, (i) promptly,
the amount of any cash payable with respect to a fractional share of Parent
Common Stock to which such holder is entitled pursuant to Section 2.7 and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole share of Parent Common Stock.
SECTION 2.10. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company or the Surviving Company. On or after the Effective Time,
any Certificates presented to the Exchange Agent or Parent for any reason shall
be converted into the Merger Consideration.
SECTION 2.11. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
make payment in exchange for such lost, stolen or destroyed Certificates, upon
the making of an affidavit of that fact by the holder thereof, for the pro rata
amount of the Merger Consideration; provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of any such lost, stolen or destroyed Certificate or Certificates having
an aggregate value of $100,000 or more to deliver a bond in such sum as Parent
may reasonably direct as indemnity against any claim that may be made against
Parent or the Exchange Agent with respect to the Certificates alleged to have
been lost, stolen or destroyed.
Agreement and Plan of Merger - Page 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
With the exceptions of the representations and warranties set forth in
Section 3.22(d) and (e), 3.27 and 3.28, which are expressly stated to be made in
the respective Stockholder's individual capacity only, each of the Company and
the Stockholders hereby severally, but not jointly, represent and warrant to
each of Parent and Sub that except as set forth in the written disclosure
schedule previously delivered by the Company to Parent (the "Company Disclosure
Schedule"):
SECTION 3.1. CORPORATE EXISTENCE AND POWER. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Ohio and has all requisite corporate power and authority to
own, lease or operate its properties and assets and to carry on its business as
now being conducted, and is duly qualified to do business and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
other than in such jurisdictions where the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect (as defined
below) on the Company. The Company has heretofore delivered to Parent and Sub
true and complete copies of its Articles of Incorporation and Code of
Regulations, as amended to date and as currently in effect. For purposes of this
Agreement, a "MATERIAL ADVERSE CHANGE" or a "MATERIAL ADVERSE EFFECT" shall
mean, with respect to Parent on the one hand and the Company on the other hand,
the result of one or more events, changes or effects which, individually or in
the aggregate, would have a material adverse effect or impact on the business,
assets, results of operations, prospects or financial condition of such party
and its subsidiaries, taken as a whole, or is reasonably likely to delay
substantially or prevent the consummation of the transactions contemplated
hereby.
SECTION 3.2. CORPORATE AUTHORIZATION. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the Merger are within the Company's corporate power and authority and,
subject to the approval of the Merger by the Company's stockholders (the
"COMPANY STOCKHOLDER APPROVAL"), have been duly authorized by all necessary
corporate action of the Company. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to the Company Stockholder Approval.
SECTION 3.3. GOVERNMENTAL AUTHORIZATION. Except as set forth on
Schedule 3.3, the execution, delivery and performance by the Company of this
Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement by the Company, do not and will not require any
consent, approval or action by or in respect of, or any declaration, filing or
registration with, any governmental or regulatory authority (each, a
"GOVERNMENTAL AUTHORITY"), other than (i) routine filings with the Secretary of
State of Ohio and the Secretary of State of Delaware necessary to consummate the
Merger and (ii) such filings or notifications which would not prevent or delay
consummation of any of the transactions contemplated hereby in any material
respect, or otherwise prevent the Company from performing its obligations under
this Agreement in any material respect.
SECTION 3.4. NON-CONTRAVENTION. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
Merger and other transactions contemplated by this Agreement, do not and will
not, with or without the giving of notice, the lapse of time or both: (i)
contravene or conflict with the Articles of Incorporation or Code of
Agreement and Plan of Merger - Page 9
Regulations of the Company, (ii) assuming compliance with the matters referred
to in Section 3.3, contravene or conflict with or constitute a violation of any
provision of any law, rule, regulation, judgment, injunction, order or decree
currently in effect and binding upon or applicable to the Company, (iii) except
as set forth on Schedule 3.4, require any consent, approval or other action by
any individual, corporation, partnership, joint venture, limited liability
company, limited liability partnership, association, trust or other entity or
organization, including a Governmental Authority (a "PERSON"), contravene or
conflict with or constitute a violation of or a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of the Company or to a loss of any benefit to which the Company is
entitled under any material provision of (A) any agreement binding upon the
Company, or (B) assuming compliance with the matters referred to in Section 3.3,
any material license, franchise, permit or other similar authorization held by
the Company, or (iv) create or result in any mortgage, lien, pledge, claim,
charge, security interest, easement, assessment, restrictive covenant,
reservation, restriction or encumbrance of any kind ("LIEN") on any asset of the
Company, except in the case of clauses (ii), (iii) and (iv), for such matters as
would not have a Material Adverse Effect on the Company.
SECTION 3.5. CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 750 shares of Company Common Stock, no par value, of
which 200 shares are issued and outstanding as of the date hereof. Schedule 3.5
sets forth the name and address of all stockholders of the Company and the
number of shares of Common Stock held by each stockholder of the Company. All
issued and outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid and nonassessable, and have not been issued in
violation of any preemptive, first refusal or other rights of any stockholder of
the Company or any other Person. Except as set forth in Schedule 3.5, there are
no outstanding (i) shares of capital stock or other voting securities of the
Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company or (iii) options,
warrants, exchange rights, subscription rights or other agreements, commitments
or rights to purchase or otherwise acquire from the Company, or agreements,
commitments or obligations of the Company to issue or sell, any capital stock or
securities convertible into or exchangeable for capital stock of the Company
(the items in clauses (i), (ii) and (iii) being referred to collectively as the
"COMPANY SECURITIES"). Except as set forth in Schedule 3.5 or as contemplated by
this Agreement, there are no outstanding obligations of the Company to sell,
issue or deliver, or to repurchase, redeem or otherwise acquire, any of the
Company Securities. Schedule 3.5 sets forth a complete and correct list
(including number of shares and exercise price) of all Company Securities
described in clauses (ii) and (iii) of the definition of Company Securities.
SECTION 3.6. SUBSIDIARIES. The Company does not hold or own, directly
or indirectly, any equity or ownership interest in any corporation, association,
partnership, joint venture or other Person.
SECTION 3.7. FINANCIAL STATEMENTS. Attached hereto as Schedule 3.7 are
the following financial statements of the Company (collectively, the "Financial
Statements"):
(i) the audited balance sheet as of December 31, 1994 and
the related audited statements of earnings, retained
earnings and cash flows for the year ended December
31, 1994 (together with the notes thereto, audited
by, and accompanied by the report thereon, of Grant
Thornton LLP);
(ii) the audited balance sheet as of December 31, 1995 and
the related audited statement of earnings, retained
earnings and cash flows for the year ended
Agreement and Plan of Merger - Page 10
December 31, 1995 (together with the notes thereto,
audited by, and accompanied by the report thereon, of
Grant Thornton LLP); and
(iii) the audited balance sheet as of December 31, 1996
(the "BALANCE SHEET") and the related audited
statements of earnings, retained earnings and cash
flows for the year ended December 31, 1996 (together
with the notes thereto, audited by, and accompanied
by the report thereon, of Grant Thornton LLP).
Each of the Financial Statements has been prepared in accordance with GAAP
applied on a consistent basis and fairly presents the financial position of the
Company as of its date or the results of operations or changes in financial
position of the Company for the periods then ended. Except as may be set forth
in the Financial Statements, all of the revenues and expenses of the Company
reflected in the Financial Statements were derived or incurred in the ordinary
course of business of the Company. The account records underlying the Financial
Statements accurately and fairly reflect, in reasonable detail and in all
material respects, the transactions of the Company, and the Company's books of
account have been maintained in accordance with GAAP applied on a consistent
basis. All accounts, notes and other receivables of the Company are valid and
enforceable, are not subject to any valid defense, set off, counterclaim or
claim for returns or refunds, and are collectible in full in accordance with
their terms in the ordinary course of business of the Company, except to the
extent of any reserves therefor reflected on the Balance Sheet or taken in the
ordinary course of business consistent with past practice which, in the
aggregate, are not materially adverse to the Company.
SECTION 3.8. ABSENCE OF UNDISCLOSED LIABILITIES. To the best knowledge
of the Company and the Stockholders, the Company has no liabilities or
obligations which are, or reasonably could be expected to be, in the aggregate,
material to the business, assets, results of operation, prospects or financial
condition of the Company, except those liabilities or obligations which are (a)
fully reflected or adequately reserved against in the Balance Sheet, (b)
disclosed in this Agreement or in Schedule 3.8 or (c) incurred in the ordinary
course of business consistent with past practice since December 31, 1996 (the
"BALANCE SHEET DATE"). For the purposes of this Agreement, the phrase
"LIABILITIES OR OBLIGATIONS" shall include any direct or indirect indebtedness,
claim, loss, damage, deficiency (including deferred income tax and other net tax
deficiencies), cost, expense, obligation, guarantee, or responsibility, whether
accrued, absolute or contingent, fixed or unfixed, liquidated or unliquidated,
secured or unsecured.
SECTION 3.9. TITLE AND CONDITION OF ASSETS. The assets and properties
owned, leased or subleased by the Company constitute, and on the Closing Date
will constitute, all of the assets and properties used or held for use in the
conduct of the business of the Company, and are, and on the Closing Date will
be, generally adequate to conduct the business of the Company as currently
conducted. The Company has, and on the Closing Date will have record and
marketable title to, or valid leasehold interests in, all of its assets and
properties, whether real, personal or mixed, tangible or intangible, and whether
now owned, leased or subleased or acquired after the date of this Agreement,
including all assets and properties identified on the Balance Sheet, except for
assets and properties sold since the Balance Sheet Date in the ordinary course
of business consistent with past practices and as permitted by this Agreement.
Except as disclosed in the Financial Statements or in Schedule 3.9, none of such
assets and properties is, or on the Closing Date will be, subject to any Liens,
except for (i) Liens incurred in the ordinary course of business which are not
yet due and payable, (ii) Liens which do not materially detract from the value
of or interfere with the present use of the property affected thereby and which
do not, individually or in the aggregate, have a Material Adverse Effect on the
Company and (iii) liens securing the repayment of the Credit Facility of the
Company (the "PERMITTED LIENS").
Agreement and Plan of Merger - Page 11
SECTION 3.10. REAL PROPERTY. Set forth on Schedule 3.10 is an accurate
and complete list and summary description of all real property currently owned
or leased by the Company and, except as set forth on Schedule 3.10, none of the
described leases require any consent to the transactions contemplated by this
Agreement. The Company has previously delivered to Parent and Sub accurate and
complete copies of all leases listed and described on Schedule 3.10. The Company
has possession of each of the aforementioned properties and, to the knowledge of
the Company, no event has occurred which, with the lapse of time or notice or
both, could reasonably be expected to result in a material default under any of
the described leases. All rents or other material payment obligations which have
become due in respect of each of such leased properties have been paid, the
Company has complied in all material respects with its obligations under the
said leases and the Company has not received any notice of any breach of its
obligations under any covenants, agreements, statutory requirements, planning
consents, by-laws, orders and regulations affecting any of such properties
(whether owned or leased), their use and any business of the Company there
carried on.
SECTION 3.11. CONDITION OF TANGIBLE ASSETS. Except as set forth on
Schedule 3.11, all material tangible property, including the real property and
structures thereon, of the Company is in good operating condition, reasonable
wear and tear excepted, and the operation and use of such property in the
business of the Company conforms in all material respects to all applicable
laws, ordinances, regulations, permits, licenses and certificates.
SECTION 3.12. SUBSEQUENT EVENTS. Except as disclosed in Schedule 3.12,
since the Balance Sheet Date, the business of the Company has been conducted in
the ordinary course of business consistent with past practices and the Company
has not:
(a) Incurred any Material Adverse Change.
(b) Amended or otherwise changed its Articles of Incorporation
or Code of Regulations in any manner which would reasonably be expected to
result in a Material Adverse Change.
(c) Declared, set aside or paid any dividend or other
distribution with respect to any of the Company Securities, or repurchased,
redeemed or otherwise acquired any outstanding shares of capital stock or other
securities of, or other equity or ownership interests in, the Company (including
the Company Securities) or issued or sold any Company Securities.
(d) Amended the term of any outstanding security of the
Company.
(e) Incurred any indebtedness for borrowed money or guaranteed
any such indebtedness of another Person, issued or sold any debt securities or
warrants or other rights to acquire any debt securities of the Company,
guaranteed any debt securities of another Person, entered into any "keep well"
or other agreement to maintain any financial statement condition of another
Person or entered into any arrangement having the economic effect of any of the
foregoing, except for borrowings under its existing credit facility with The
Huntington Bank for secured indebtedness, whether a term loan or line of credit
(the "CREDIT FACILITY"), the endorsement of checks in the normal course of
business, and the extension of credit to the Company by suppliers in the normal
course of business.
(f) Created or assumed or permitted to exist any Lien on any
asset, other than Permitted Liens .
(g) Made any loan or capital contribution to or investment in
any Person.
Agreement and Plan of Merger - Page 12
(h) Entered into any lease or acquisition of any capital asset
or made any other investment for aggregate consideration in excess of $10,000.
(i) Sold, leased, pledged, transferred or otherwise disposed
of any capital asset with an aggregate fair market value in excess of $10,000.
(j) Entered into any agreement or transaction, or made any
commitment, relating to its assets or business (including the acquisition or
disposition of any assets or business) or relinquished any contract or other
right, other than transactions, commitments and relinquishments in the ordinary
course of business consistent with past practices and those contemplated by this
Agreement.
(k) Changed any method or practice of financial or tax
accounting or any method of maintaining books and records.
(l) (i) Granted any severance or termination pay to any
director or officer of the Company or, except in the ordinary course of business
consistent with past practice, to any employee of the Company, (ii) entered into
any employment, severance, consulting, deferred compensation or other similar
agreement (or any amendment to any agreement) with any director or officer of
the Company or, except in the ordinary course of business consistent with past
practice, with any employee of the Company, (iii) changed any benefits payable
under existing severance or termination pay policies or employment, severance,
consulting or other similar agreements, or (iv) changed the compensation, bonus
or other benefits payable to directors, officers or employees of the Company
other than periodic increases in the ordinary course of business consistent with
past practice.
(m) Paid, discharged, settled or satisfied any claim, Lien or
liability, other than those (i) which were reflected or reserved against in the
Balance Sheet and in the ordinary course of business consistent with past
practice, or (ii) which were incurred since the Balance Sheet Date in the
ordinary course of business consistent with past practice.
(n) Written down the value of any inventory or written off as
uncollectible any notes, accounts or other receivables or any portion thereof
other than in the ordinary course of business consistent with past practice.
(o) Entered into any transaction with any affiliates of the
Company, other than in the ordinary course of, and pursuant to the reasonable
requirements of, the business of the Company and upon terms that were no less
favorable to the Company than it could have obtained in a comparable transaction
with a Person who was not an affiliate.
(p) Entered into any agreement, undertaking or commitment to
do any of the foregoing.
(q) Suffered any damage, destruction or other casualty loss
not covered by insurance affecting the business or assets of the Company which
has had or would reasonably be expected to result in or have a Material Adverse
Effect on the Company.
SECTION 3.13. LEGAL PROCEEDINGS. Except as set forth on Schedule 3.13,
there is no action, suit, litigation, governmental investigation or other
proceeding pending or, to the knowledge of the Company, threatened against or
relating to the Company or any of its properties or businesses, or the
Agreement and Plan of Merger - Page 13
transactions contemplated by the Agreement which could reasonably be expected to
have a Material Adverse Effect and, to the knowledge of the Company, no basis
for any such action exists.
SECTION 3.14. MATERIAL CONTRACTS. (a) Except for agreements, contracts,
plans, leases, arrangements or commitments disclosed in Schedule 3.14 or any
other Schedule to this Agreement, the Company is not a party to or subject to:
(i) any collective bargaining agreement;
(ii) any agreements that contain any material unpaid
severance liabilities or obligations;
(iii) any bonus, deferred compensation, incentive
compensation, pension, profit-sharing or retirement
plans, or any other employee benefit plans or
arrangements;
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant
or salesperson or consulting or sales agreement,
contract or commitment with a firm or other
organization not terminable by the Company on 90
days' notice without liability except to the extent
applicable local law and/or general principles of
wrongful termination law may limit the Company's
ability to terminate such agreements, contracts or
commitments;
(v) agreement or plan, including, without limitation, any
stock option plan, stock appreciation right plan or
stock purchase plan, any of the benefits of which
will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be
calculated on the basis of any of the transactions
contemplated by this Agreement;
(vi) any fidelity or surety bond or completion bond;
(vii) any lease of personal property having a remaining
value individually in excess of $10,000;
(viii) any agreement of indemnification or guaranty;
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to
engage in any line of business or compete with any
Person;
(x) any agreement, contract or commitment relating to
capital expenditures and involving future obligations
in excess of $10,000;
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets not in the
ordinary course of business or any ownership interest
in any corporation, partnership, joint venture or
other business enterprise;
Agreement and Plan of Merger - Page 14
(xii) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements
or instruments relating to the borrowing of money or
extension of credit, including guaranties referred to
in clause (viii) hereof;
(xiii) any purchase order or contract for the purchase of
raw materials or acquisition of assets involving
$50,000 or more;
(xiv) any distribution, joint marketing, supply or
development agreement; or
(xv) any other agreement, contract or commitment which
involves payment by the Company of $25,000 or more
and is not cancelable without penalty within thirty
(30) days.
The Company has not breached, or received in writing any claim or threat
that it has breached, any of the terms or conditions of any other agreement,
contract or commitment in such a manner as would permit any other party to
cancel or terminate the same or would permit any other party to seek damages
from the Company that could reasonably be expected to have a Material Adverse
Effect. Each agreement, contract or commitment set forth in any of the Company's
schedules is in full force and effect and, except as otherwise disclosed in such
schedule, to the knowledge of the Company and the Stockholders, each such
agreement, contract or commitment is not subject to any material default
thereunder by any party obligated to the Company pursuant thereto. The Company
has obtained, or will obtain prior to the Effective Time, all necessary
consents, waivers and approvals as are required in connection with the Merger
under any of the Company's material agreements.
(b) There is no contract, agreement, commitment or obligation to
which the Company is a party or is bound that, at the time it was entered into
or made was, or is currently, known or expected by the Company to result in any
material loss to the Company upon completion or performance thereof, or any bid,
offer or proposal which, if accepted would result in such a contract, agreement,
commitment or obligation.
(c) Except as disclosed in Schedule 3.14, the Company is not a
party to any agreement with any of its securityholders or optionholders, or any
affiliate thereof, nor, to the knowledge of the Company, without inquiry by the
Company, is any securityholder or optionholder of the Company a party to any
agreement with any other such securityholder or optionholder relating to the
Company or any of its securities.
SECTION 3.15. EMPLOYEES. Schedule 3.15 sets forth a true and complete
list of (a) the names, titles, annual salaries and other compensation of all
employees of the Company (the "EMPLOYEES") and the location at which such
Employees regularly perform services for the Company and (b) the wage rates for
non-salaried Employees of the Company (by classification). Any agreements,
commitments or understandings between the Company and any Employee concerning
such Employee's future salary, compensation or terms of employment are described
in Schedule 3.15. Except as set forth on Schedule 3.15, none of such Employees
has indicated to the Company that he or she intends to resign or retire as a
result of the transactions contemplated by this Agreement or otherwise. The
Company is in compliance with all currently applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and is not engaged in any unfair labor practice, failure to
comply with which or engagement in which, as the case may be, has had, or could
reasonably be expected to have, a Material Adverse Effect on the Company. There
is no unfair labor practice
Agreement and Plan of Merger - Page 15
complaint pending or, to the knowledge of the Company, threatened against the
Company before the National Labor Relations Board.
SECTION 3.16. TRANSACTIONS WITH AFFILIATES. Except as set forth in
Schedule 3.16, since January 1, 1993, there have been and are no agreements or
other continuing transactions between the Company, on the one hand, and any
affiliate of the Company, any of the stockholders of the Company, any affiliate
of any stockholder of the Company, or any member of any such stockholder's
family, on the other hand. Except as set forth in Schedule 3.16, to the
knowledge of the Company, none of the officers or directors of the Company (a)
has any material direct or indirect interest in any entity which does business
with the Company or any property, asset or right which is used by the Company;
or (b) has any contractual relationship with the Company.
SECTION 3.17. INSURANCE COVERAGE. The Company has furnished to Parent a
list of, and true and complete copies of, all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company (including without limitation
any policies pertaining to product liability). There is no claim by the Company
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums payable under all such policies and bonds have been paid and the
Company is otherwise in compliance in all material respects with the terms and
conditions of all such policies and bonds. Such policies of insurance and bonds
(or other policies and bonds providing substantially similar insurance coverage)
have been in effect since January 1, 1995 and remain in full force and effect.
SECTION 3.18. COMPLIANCE WITH LAWS. The Company is not in violation of
any applicable provisions of any law, statute, ordinance, regulation, judgment,
order, injunction, permit, license, certificate or other authorization, or its
governing instruments, except for violations that have not had and could not
reasonably be expected to have a Material Adverse Effect on the Company.
SECTION 3.19. ACCOUNTS RECEIVABLE; INVENTORIES. (a) Except as set forth
on Schedule 3.19(a), the accounts receivable of the Company, including the
accounts receivable reflected on the Balance Sheet and accounts receivable
acquired by the Company between the Balance Sheet Date and the Closing Date, are
valid and existing and represent bona fide claims against debtors for sales and
other charges, and were acquired in the ordinary course of business and have
been collected, or are expected to be collected in the ordinary course of
business within a period not exceeding 90 days from invoice date, in full and in
accordance with their terms at their recorded amounts, subject only to the
reserve for receivables as reflected on the face of the Balance Sheet, and
(subject to the aforesaid reserves) are subject to no refunds, discounts (except
for normal cash and immaterial trade discounts) or other adjustments and, to the
best knowledge of the Company, to no defenses, rights of setoff, counterclaims,
encumbrances or conditions affecting any thereof. The accounts receivable have
been accrued on the books of the Company in the ordinary course of business
consistent with past practices in accordance with GAAP, and the amount reserved
for doubtful accounts and allowances disclosed in the Balance Sheet or accrued
on such books is consistent with past practices.
(b) Schedule 3.19(b) sets forth a detailed list of all inventory
of the Company. All of the inventories that are reflected in Schedule 3.19(b)
(i) were purchased or acquired in the ordinary course of the Company's business
and in a manner consistent with the regular inventory practices of the Company,
(ii) have been or will be used or sold in the ordinary course of business and in
a manner consistent with its regular inventory practices, (iii) are not in
excess of the Company's reasonable requirements, and (iv) are or will be
reflected in the Company's financial statements in accordance with GAAP
consistently
Agreement and Plan of Merger - Page 16
applied. Since the Balance Sheet Date, due provision was made on the books of
the Company in the ordinary course of business consistent with past practices to
provide for all slow-moving, obsolete or unusable inventories to their estimated
useful or scrap values and such inventory reserves are adequate to provide for
such slow-moving, obsolete or unusable inventory and inventory shrinkage.
(c) Except as disclosed on Schedule 3.19(b), the inventory does
not consist of any damaged or obsolete inventory or inventory not fit for use in
the ordinary course of business, including without limitation (i) raw materials
or work-in-process that are not used in current formulations of the Company's
products, (ii) any raw materials or work-in-process that, according to the
production schedule of the business, would not reasonably be expected to be used
within six months after the Closing Date or, if earlier, the end of such raw
material's or work-in-process' useful life, (iii) any finished goods that
represent products returned prior to November 1, 1996, (iv) any finished goods
for which no sales are forecast in the Company's sales plan, (v) any finished
goods not salable in the ordinary course of business at the Company's published
prices without additional manufacturing or packaging cost, (vi) any finished
goods that are "remnant", and (vii) any raw materials, work-in-process or
finished goods that, as a result of any judgment, order, decree or settlement
relating to product labeling or otherwise, may not be used in current product
formulation. All inventory has been stored, shipped and otherwise handled in
compliance in all material respects with all applicable federal and state law,
rules and regulations (including, without limitation those promulgated by the
U.S. Food and Drug Administration ("FDA")).
SECTION 3.20. FINDERS' FEES. There is no investment banker, broker,
finder or other intermediary that has been retained by or is authorized to act
on behalf of the Company who might be entitled to any fee or commission from
Parent or any of its subsidiaries or the Company upon consummation of the Merger
and the transactions contemplated by the Operative Documents.
SECTION 3.21. EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule
3.21 neither the Company nor any Person that together with the Company would be
treated as a single employer under Section 414 of the Code (an "ERISA
AFFILIATE") has established or maintains or is obligated to make contributions
to or under or otherwise participate in (a) any bonus or other type of incentive
compensation plan, program, agreement, policy, commitment, contract or
arrangement (whether or not set forth in a written document), (b) any pension,
profit-sharing, retirement or other plan, program or arrangement, or (c) any
other employee benefit plan, fund or program, including, but not limited to,
those described in Section 3(3) of the Employment Retirement Income Security Act
of 1974, as amended ("ERISA"). All such plans (individually, a "PLAN" and
collectively, the "PLANS") have been operated and administered in all material
respects in accordance with, as applicable, ERISA, and the Code, and the related
rules and regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by the Company has
resulted in, nor does the Company have knowledge of a "prohibited transaction"
(as defined in ERISA) with respect to the Plans that is not subject to a
statutory or regulatory exception. No "reportable event" (as defined in ERISA)
has occurred with respect to any of the Plans which is subject to Title IV of
ERISA. At the Effective Time, the fair market value of the assets of any Plan
which is subject to Title IV of ERISA will exceed the present value of all
benefits accrued under such Title IV Plan, determined on a termination basis
using assumptions established by the Pension Benefit Guaranty Commission as in
effect on that date. Neither the Company nor any ERISA Affiliate has (i) engaged
in, or is a successor or parent corporation to an entity that has engaged in, a
transaction described in Section 4069 of ERISA, or (ii) incurred, or reasonably
expects to incur prior to the Effective Time, any liability under Title IV of
ERISA arising in connection with the termination of, or complete or partial
withdrawal from, any Plan covered or previously covered by Title IV or ERISA
that could become a liability of the Parent or Sub or any of their ERISA
Affiliates after the
Agreement and Plan of Merger - Page 17
Effective Time. The Company has not previously made, is not currently making,
and is not obligated in any way to make, any contributions to any multi-employer
plan within the meaning of the Multi-Employer Pension Plan Amendments Act of
1980.
SECTION 3.22. TAXES. (a) The term "TAXES" as used herein means all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs duties, or other
taxes, fees, assessments or other charges of any kind whatever, together with
any interest and any penalties, additions to tax or additional amounts with
respect thereto. The term "Returns" as used herein, means all returns,
declarations, reports, statements and other documents required to be filed in
respect of Taxes, and "RETURN" means any one of the foregoing returns. All
citations to the Code, or the Treasury regulations promulgated thereunder, shall
include any amendments or any substitute or successor provisions thereto.
(b) The Company has filed all Returns required to be filed and
has paid all Taxes owed (whether or not shown as due on such Returns),
including, without limitation, all Taxes which the Company is obligated to
withhold for amounts owing to employees, creditors and third parties. All such
Returns were complete and correct in all material respects. All Taxes with
respect to which the Company has become obligated have been paid and adequate
reserves have been established for all Taxes accrued but not yet payable
(including any Taxes arising out of the transactions contemplated by this
Agreement). To the knowledge of the Company and the Stockholders, no issues have
been raised (and are currently pending) by any taxing authority in connection
with any of the Returns. No waivers of statutes of limitation with respect to
any of the Returns have been given by or requested from the Company. All
deficiencies asserted or assessments made as a result of any examinations have
been fully paid, or are fully reflected as a liability in the financial
statements of the Company, or are being contested and an adequate reserve
therefor has been established and is fully reflected in the financial statements
of the Company. There are no liens for Taxes (other than for current Taxes not
yet due and payable) upon the assets of the Company. All material elections with
respect to Taxes affecting the Company, as of the date hereof, are set forth in
the financial statements of the Company, or are annexed hereto in Schedule 3.22.
The Company is not a party to any agreement, contract, arrangement or plan that
has resulted or would result, separately or in the aggregate, (i) in the payment
of any "excess parachute payments" within the meaning of Section 280G of the
Code (without regard to the exception in Sections 280G(b)(4) and 280G(b)(5) of
the Code) or (ii) in any payment which would not be deductible under Sections
162 and 404 of the Code. The Company has not agreed to make any adjustment under
Section 481(a) of the Code (or any similar provision of law or regulations) by
reason of a change in accounting method or otherwise, and the Company will not
be required to make any such adjustment as a result of the transactions set
forth in this Agreement. The Company does not have and has not had a permanent
establishment in any foreign country, as defined in any applicable Tax treaty or
convention between the United States of America and such foreign country. The
Company does not own any interest in any entity which is characterized as a
partnership for federal, state, local, foreign or other Tax purposes. The
Company is not and has not been a United States real property holding
corporation during the applicable period specified in Section 897(c)(1)(A)(ii).
The Company has not participated in or cooperated with any international
boycott, within the meaning of Section 999 of the Code.
(c) Set forth on Schedule 3.22 is a complete and accurate
description of the Company's (i) tax basis in its assets, (ii) tax elections,
(iii) methods of accounting, and (iv) agreements with respect to Taxes.
Agreement and Plan of Merger - Page 18
(d) The Company has never filed a consent pursuant to Section
341(f) of the Code, relating to collapsible corporations. The Company and its
stockholders made (i) a valid election for the Company to be treated as an "S
corporation", as that term is defined in Section 1361(a) of the Code and (ii) a
similar valid election under the laws of the State of Ohio or any other
applicable governmental authority, and all of such elections will be in effect
at the Effective Time. An election under Section 1362(a) of the Code (and any
similar election under the laws of the State of Ohio or any other applicable
Governmental Authority) has been in effect with respect to the Company (and any
predecessor corporation) for each of its taxable years (within the meaning of
Section 1374(c) of the Code). Schedule 3.22 lists each such election and a true
copy of each such election is attached thereto; there are no grounds for the
revocation of any such election and no such election will be revoked
retroactively or otherwise except at the Effective Time by reason of the Merger.
The Company has not taken any action that would cause, or would result in, the
termination of the S corporation status of the Company, other than pursuant to
this Agreement. Each of the Stockholders hereby individually represents that he
has not taken any action that has caused, would cause, or would result in, the
termination of the S Corporation status of the Company prior to the date hereof,
other than pursuant to this Agreement. Neither the Company nor any predecessor
has ever (i) been a party to any merger or consolidation nor acquired
substantially all of the assets of any Person, (ii) adopted a plan of
liquidation, or (iii) made any election under Section 936 or 992 of the Code.
There will be no tax imposed by Section 1374 of the Code and any corresponding
provisions of the laws of the State of Ohio or any other applicable Governmental
Authority in connection with the Merger.
(e) Each of the Stockholders hereby individually represents
that he has timely filed all Returns with respect to Taxes required to be paid
by a Stockholder attributable to items of income, gain, deductions, losses and
credits of the Company, and has timely paid all such Taxes (whether or not shown
on such Returns); there has not been any audit of any Return filed by such
Stockholder, or to the Company's knowledge, any previous shareholder of the
Company, with respect to, or which may relate to, items of income, gain,
deduction, loss or credit of the Company; no such audit of any such Stockholder
is in progress and such Stockholder has not been notified by any Governmental
Authority that any such audit is contemplated or pending.
(f) In the event that it is determined, either (i) by a
finding or order in connection with any government or judicial audit or
proceeding to which the Company or the Stockholders are a party or (ii) by the
Company's independent accountants, that the Company's S election pursuant to
Section 1362 of the Code (or any corresponding election under the laws of the
State of Ohio or any other applicable governmental authority) was not validly in
effect for any period after such election was purportedly made, then the
Stockholders of the Company shall promptly remit to the Company in cash, any
foreign, federal, state and/or local Tax liability (including any penalties,
additions to Tax or interest assessed with respect thereto) of the Company in
connection with any Taxes which may be imposed on the Company as a result of
such invalid election. To the extent Tax deductions or losses, which were
originally treated as Company "S" corporation Tax deductions or losses, become
Company Tax deductions or losses as a result of such invalid election and, under
the applicable Tax laws, are disallowed to the Company (but otherwise would have
been allowed if the Company had never made an S election), the Stockholders
agree to pay to the Company in cash an amount equal to the difference between
the Company's actual Tax liability and the Company's Tax liability had such
amounts not been so disallowed. Such payment shall be made within 15 days of the
date the Company's Tax liability has been determined by the Company's
accountants.
SECTION 3.23. ENVIRONMENTAL MATTERS. Except as set forth in Schedule
3.23, and except in all cases as, in the aggregate, have not had and could not
reasonably be expected to have a Material
Agreement and Plan of Merger - Page 19
Adverse Effect, the Company: (i) has obtained all approvals which are required
to be obtained under all applicable federal, state, foreign or local laws or any
regulation, code, plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder relating to pollution or protection
of the environment, including laws relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants, or hazardous or toxic
materials or wastes into ambient air, surface water, ground water, or land or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of pollutants, contaminants or
hazardous or toxic materials or wastes by the Company or its agents
("ENVIRONMENTAL LAWS"); (ii) are in compliance in all material respects with all
terms and conditions of such required approvals, and also are in compliance in
all material respects with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in applicable Environmental Laws; (iii) as of the date hereof, is not
aware of nor has received notice of any past or present violations of
Environmental Laws or any event, condition, circumstance, activity, practice,
incident, action or plan which is reasonably likely to interfere with or prevent
continued compliance with or which would give rise to any material common law or
statutory liability, or otherwise form the basis of any material claim, action,
suit or proceeding, against the Company based on or resulting from the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge or release into the
environment, of any pollutant, contaminant or hazardous or toxic material or
waste; and (iv) has taken all actions necessary under applicable Environmental
Laws to register any products or materials required to be registered by the
Company (or any of their respective agents) thereunder.
SECTION 3.24. INTELLECTUAL PROPERTY. Schedule 3.24 lists all Intellectual
Property Rights owned and/or used by the Company in the conduct of its business.
The Company owns or has a valid license to use from third parties such
Intellectual Property Rights. To the best knowledge of the Company and the
Stockholders, the Company's Intellectual Property Rights do not violate,
infringe upon or misappropriate the Intellectual Property Rights of any Person
where such violation or infringement would have a Material Adverse Effect.
"INTELLECTUAL PROPERTY RIGHT" means any trademark, service mark, registration
thereof or application for registration therefor, trade name, invention, patent,
patent application, trade secret, know-how, copyright, copyright registration,
application for copyright registration, or any other similar type of proprietary
intellectual property right, in each case which is owned or licensed by the
Company and used or held for use by the Company.
SECTION 3.25 (INTENTIONALLY OMITTED).
SECTION 3.26. CERTAIN FDA MATTERS. (a) The Company has not made any untrue
statement of a material fact or fraudulent statement to the FDA, failed to
disclose a fact required to be disclosed to FDA, or committed any act, made any
statement, or failed to make any statement that could provide a basis for FDA to
invoke its policy respecting "Fraud, Untrue Statements of Material Facts,
Bribery, and Illegal Gratuities," set forth in 56 Fed.
Reg 46191 (September 10, 1991).
(b) The Company has provided to Parent for review, all
correspondence to or from FDA, the U.S. Drug Enforcement Agency ("DEA") and any
other state agency regulating the affairs of the Company (the "LOCAL AGENCIES"),
minutes of meetings with FDA, the DEA and any Local Agency, any existing written
reports of phone conversations, visits or other contracts with FDA, the DEA, and
any Local Agency, notices of inspectional observations, establishment inspection
reports, and all other documents in its possession concerning communications to
or from FDA, the DEA and any Local Agency, (including without limitation any
Form 482's issued by the FDA), or prepared by FDA, the DEA and any Local Agency
which bear in any way on the Company's compliance with FDA, DEA and state
regulatory requirements.
Agreement and Plan of Merger - Page 20
(c) The Company has provided to Parent for review of all documents
reflecting conclusions, opinions, or suggestions of Company officers, employees,
or agents, in-house or outside attorneys, or outside consultants, which bear in
any way on the Company's compliance with FDA, DEA and state regulatory
requirements.
(d) The Company is not aware of any information, whether or not in
written form, that it has not provided in the course of the review, which bears
in any way on the Company's compliance with FDA, DEA and state regulatory
requirements.
SECTION 3.27. STOCKHOLDER REPRESENTATIONS. (a) Each Stockholder hereby
individually represents and warrants that (i) it is his original, present
intention to acquire the Parent Common Stock for his own account and that the
Parent Common Stock is being and will be acquired for the purpose of investment
and not with a view to distribution or resale except as provided herein; (ii)
due to his business and financial experience and his status as an "accredited
investor" under Regulation D of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), each Stockholder has the ability to protect his own interests
in connection with the transactions contemplated hereby and is generally
familiar with the business, operations and financial condition of the Parent,
and (iii) he understands that the shares of Parent Common Stock being acquired
hereunder may only be resold in compliance with applicable federal and state
securities laws, including Rule 144 of the Securities Act.
(b) Each Stockholder individually understands and agrees that,
until registered under the Securities Act or transferred pursuant to the
provisions of Rule 144 as promulgated by the Securities and Exchange Commission,
the Parent Common Stock issuable pursuant to this Agreement shall bear a legend,
prominently stamped or printed thereon, reading substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and any applicable state
securities laws. These securities have been acquired for investment and
not with a view to distribution or resale. These securities may not be
offered for sale, sold, delivered after sale or transferred in the
absence of an effective registration statement covering such securities
under the Act and any applicable state securities laws, or the
availability, in the opinion of counsel reasonably satisfactory to the
Company, of an exemption from registration thereunder."
(c) Each Stockholder, in his individual capacity, has had access
to information relative to the Parent's business, financial condition, and
results of operations prior to the purchase of the Parent Common Stock. Each
Stockholder, in his individual capacity, has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits and
risks of the acquisition of the Parent Common Stock. Each Stockholder, in his
individual capacity, can bear the economic risks of this investment and can
afford a complete loss of this investment.
(d) Each Stockholder, in his individual capacity, understands
that: the Parent Common Stock has not been registered under the Securities Act
and applicable state securities laws, and, therefore, cannot be resold unless
they are subsequently registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration is available; and
no state or governmental authority has made any finding or determination
relating to the fairness of the terms of the acquisition of the Parent Common
Stock. Each Stockholder, in his individual capacity, agrees not to resell or
otherwise dispose of all or any part of the Parent Common Stock purchased by
such Stockholder, except as permitted by law, including, without limitation, any
regulations under the Securities Act and applicable
Agreement and Plan of Merger - Page 21
state securities laws. Each Stockholder, in his individual capacity, also
understands that any routine sales of the Parent Common Stock in reliance upon
Rule 144 under the Act, if the provisions of Rule 144 should then be available
as to the Parent Common Stock, can be made only after the holding period
specified in Rule 144, in limited amounts, and in accordance with all the terms
and conditions of Rule 144.
(e) Each Stockholder hereby individually represents and warrants
that he has no present need for liquidity in connection with the purchase of the
Parent Common Stock. The acquisition of the Parent Common Stock by each
Stockholder is consistent with the general investment objectives of each
Stockholder. Each Stockholder hereby individually represents and warrants that
he understands that the purchase of the Parent Common Stock involves a high
degree of risk.
SECTION 3.28. TITLE. Except as set forth on Schedule 3.28, each
Stockholder hereby individually represents and warrants that he is the sole
record and beneficial owner of, and has good, valid and marketable title to, the
shares of Company Common Stock to be sold by him, free and clear of any and all
liens, security interests, pledges, encumbrances, claims, equities, defects in
title, rights and other restrictions of any nature on transfer or voting held by
any third party (collectively "ENCUMBRANCES"). Each Stockholder individually
represents and warrants that the performance by him of his obligations hereunder
will be effective to transfer good, valid and marketable title to the shares to
be sold by him hereunder, free and clear of any and all Encumbrances, other than
those that may be imposed under federal or state securities laws, and that the
consummation of the transactions herein contemplated will not result in a breach
or default of the terms and provisions of any stockholder agreement, stock
pledge, guaranty, loan or other agreement to which the Stockholder is a party,
or of any order, rule or regulation of any court, regulation body or
administrative agency applicable to the Stockholder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub hereby jointly and severally represent and warrant to
the Company as follows:
SECTION 4.1. CORPORATE EXISTENCE AND POWER. Each of Parent and Sub is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite power and authority to own,
lease or operate its properties and assets and to carry on its business as now
being conducted. Each of Parent and Sub is duly qualified to do business and is
in good standing in each jurisdiction where the character of the property owned
or leased by it or the nature of its activities makes such qualification
necessary, other than in such jurisdictions where the failure to be so qualified
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent. Each of Parent and Sub has heretofore made available to the Company true
and complete copies its Certificate of Incorporation and By-Laws, as amended to
date and as currently in effect.
SECTION 4.2. CORPORATE AUTHORIZATION. The execution, delivery and
performance by Parent and Sub of this Agreement and the Operative Documents to
which they are parties and the consummation by Parent and Sub of the Merger and
the other transactions contemplated by this Agreement and the Operative
Documents are within the corporate power and authority of Parent and Sub and
have been duly authorized by all necessary corporate action. Each of the
Operative Documents has been duly authorized, executed and delivered by each of
Parent and Sub (to the extent a party thereto)
Agreement and Plan of Merger - Page 22
and constitutes a valid and binding obligation of Parent and Sub, enforceable
against each of Parent and Sub in accordance with its terms.
SECTION 4.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Parent and Sub of this Agreement and the Operative Documents (to
the extent a party thereto) and the consummation by Parent and Sub of the Merger
and the other transactions contemplated by this Agreement and Operative
Documents, do not and will not require any consent, approval or action by or in
respect of, or any declaration, filing or registration with a Governmental
Authority, other than (i) routine filings with the Secretary of State of
Delaware and the Secretary of State of Ohio necessary to consummate the Merger,
(ii) compliance with the applicable requirements of the Securities Act, the
Securities Exchange Act of 1934 (the "EXCHANGE ACT") and any applicable Blue Sky
Laws in connection with the offering, sale and delivery of the shares of Parent
Common Stock to be issued in the Merger and filings with the NASD and the Nasdaq
SmallCap Market in connection with listing the shares of Parent Common Stock to
be issued in the Merger on the Nasdaq SmallCap Market, and (iii) such filings or
notifications which would not prevent or delay consummation of any of the
transactions contemplated hereby in any material respect, or otherwise prevent
Parent or Sub from performing its obligations under this Agreement in any
material respect.
SECTION 4.4. NON-CONTRAVENTION. The execution, delivery and performance
by Parent and Sub of this Agreement and the Operative Documents (to the extent a
party thereto) and the consummation by Parent and Sub of the Merger and other
transactions contemplated by this Agreement and the Operative Documents do not
and will not, with or without the giving of notice, the lapse of time or both:
(i) contravene or conflict with the Certificate of Incorporation or By-Laws of
Parent or any of its subsidiaries, (ii) assuming compliance with the matters
referred to in Section 4.3, contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment, injunction,
order or decree currently in effect and binding upon or applicable to Parent or
any of its subsidiaries or any of their respective properties, (iii) require any
consent, approval or other action by any Person, contravene or conflict with or
constitute a violation of or a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of Parent
or any of its subsidiaries or to a loss of any benefit to which Parent or any of
its subsidiaries is entitled, under any material provision of (A) any agreement
binding upon Parent or any of its subsidiaries, or (B) assuming compliance with
the matters referred to in Section 4.3, any license, franchise, permit or other
similar authorization held by Parent or any of its subsidiaries, or (iv) create
or result in any Lien on any asset of Parent or any of its subsidiaries, except
in the case of clauses (ii), (iii) and (iv), for such matters as would not have
a Material Adverse Effect on Parent.
SECTION 4.5. CAPITALIZATION. (a) (i) As of January 31, 1997, the
authorized capital stock of Parent consisted of (i) 10,000,000 shares of
preferred stock, par value $.01 per share, although no shares of preferred stock
were issued and outstanding or held in the treasury of Parent as of such date,
and (ii) 75,000,000 shares of Common Stock, of which 30,112,706 shares were
issued and outstanding and no shares were held in the treasury of Parent. As of
January 31, 1997, there were reserved for issuance pursuant to (a) Parent's
various stock plans and option agreements (the "PARENT PLANS") an aggregate of
up to 4,102,800 shares of Common Stock, (b) warrants issued by Parent for an
aggregate of up to 2,178,588 shares of Common Stock, and (c) a note issued by
Parent which is convertible into approximately 465,000 shares of Common Stock.
Except as provided in the immediately preceding sentence of this Section 4.5, as
of January 31, 1997, there were no outstanding options, warrants, calls, rights,
commitments or agreements to which Parent is a party or by which Parent is bound
obligating Parent to (x) issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital
Agreement and Plan of Merger - Page 23
stock of Parent or (y) grant, extend or enter into any such option, warrant,
call, right, commitment or agreement.
(b) All outstanding shares of Parent Common Stock are duly
authorized, validly issued, fully paid and nonassessable, and are not subject to
preemptive rights. The shares of Parent Common Stock to be issued and exchanged
for shares of Company Common Stock in the Merger pursuant to this Agreement
will, at the Effective Time, be (i) duly authorized, validly issued, fully paid
and nonassessable and will not be subject to preemptive rights, and (ii)
authorized for listing on the Nasdaq SmallCap Market.
(c) The authorized capital stock of Sub consists of 100 shares
of Common Stock, par value $.01 per share, all of which shares are issued and
outstanding and owned of record by Parent. All issued and outstanding shares of
Common Stock, par value $.01 per share, of Sub are validly issued, fully paid
and nonassessable, and have not been issued in violation of any preemptive,
first refusal or other subscription rights of any stockholder of Sub or any
other Person.
SECTION 4.6. LEGAL PROCEEDINGS. There is no action, suit, investigation
or other proceeding pending or, to the knowledge of Parent, threatened against
or relating to Parent or any of its subsidiaries or any of their respective
properties or businesses, or the transactions contemplated by this Agreement
which may have a Material Adverse Effect, and, to the knowledge of the Parent,
no basis for any action exists.
SECTION 4.7. COMPLIANCE WITH LAWS. Except as disclosed in the Parent
SEC Documents (as defined in Section 4.8 below), neither Parent nor any of its
subsidiaries has violated, or is in violation of, any applicable laws,
regulations and ordinances relating to its business and operations, or any
judgment, order or injunction, and to Parent's knowledge, there is no pending
inspection or investigation relating to any violation thereof, except for
violations which have not had, and (if determined adversely to Parent and its
subsidiaries) could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
SECTION 4.8. SEC DOCUMENTS. Parent has made available to the Company a
true and complete copy of the following Parent documents: (i) its annual report
on Form 10-K for the fiscal year ended June 30, 1996; (ii) its quarterly report
on Form 10-Q for the fiscal quarter ended September 30, 1996; (iii) its current
reports on Form 8-K dated (i) August 19, 1996, as amended, and (ii) January 15,
1997; (iv) the proxy statement dated December 27, 1996; and (v) each report,
schedule, registration statement and definitive proxy filed by Parent with the
U.S. Securities and Exchange Commission (the "SEC") since June 30, 1996 and
publicly available prior to the Effective Date (collectively, the "PARENT SEC
DOCUMENTS"), which are all of the documents (other than preliminary material)
that Parent was required to file with the SEC since such date. As of their
respective dates, the Parent SEC Documents complied in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Documents, and none of the Parent SEC Documents, as of their
respective dates, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of Parent's subsidiaries is required to file any forms,
reports or other documents with the SEC. The consolidated financial statements
of Parent and its subsidiaries included in the Parent SEC Documents complied as
to form in all material respects with the published rules and regulations of the
SEC with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of the unaudited
Agreement and Plan of Merger - Page 24
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly
present in accordance with applicable requirements of GAAP (subject, in the case
of the unaudited statements, to normal recurring adjustments, none of which will
be material) the consolidated financial position of Parent and its subsidiaries
as of their respective dates and the consolidated results of operations and the
consolidated cash flows of Parent and its subsidiaries for the periods presented
therein.
SECTION 4.9. BOARD RECOMMENDATION. The Board of Directors of each of
Parent and Sub, at a meeting duly called and held, has by the vote of those
directors present determined that this Agreement and the transactions
contemplated hereby, including the Merger, the execution and delivery of the
Operative Documents and the other agreements and arrangements contemplated
hereby and thereby, taken together, are fair to and in the best interests of the
stockholders of Parent and Sub and has approved the same.
SECTION 4.10. FINDERS' FEES. Except for fees payable by Parent to
Mazier Partners, there is no investment banker, broker, finder or other
intermediary that has been retained by or is authorized to act on behalf of
Parent or Sub who might be entitled to any fee or commission from the Parent or
any of its subsidiaries upon consummation of the Merger and the other
transactions contemplated by the Operative Documents.
SECTION 4.11. (INTENTIONALLY OMITTED).
SECTION 4.12. INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby and has not engaged
in any business activities or conducted any operations other than in connection
with the transactions contemplated hereby.
ARTICLE V
COVENANTS OF ALL PARTIES
Each of the parties hereto hereby covenants and agrees with the other
parties as follows:
SECTION 5.1. COOPERATION. It shall cooperate fully with the other
parties hereto in furnishing any information or performing any action reasonably
requested by any such party, which information or action is necessary to the
speedy and successful consummation of the transactions contemplated by this
Agreement or is necessary, appropriate or desirable for the respective corporate
purposes of Parent, Sub and the Company.
SECTION 5.2. OTHER REQUIRED INFORMATION. It shall furnish to the other
parties hereto any application or statement, and all information concerning
itself and its Affiliates as is required to be set forth in any application or
statement to be filed with any Governmental Authority in connection with the
transactions contemplated by this Agreement. "AFFILIATE" means, with respect to
a specified Person, any Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
Person specified.
SECTION 5.3. CONFIDENTIALITY. (a) All information furnished by one
party (the "DISCLOSING PARTY") to any other party (the "RECEIVING PARTY") in
connection with this Agreement and the Operative Documents and the transactions
contemplated hereby and thereby shall be kept confidential by the receiving
party (and shall be used by it only in connection with this Agreement and the
transactions
Agreement and Plan of Merger - Page 25
contemplated hereby), except to the extent that such information (i) is or
becomes generally available to the public other than as a direct or indirect
result of disclosure by the receiving party (or any of its directors, officers,
employees, agents, advisors or Affiliates (the "AGENTS")), (ii) was within the
possession of the receiving party prior to its being furnished to the receiving
party by or on behalf of the disclosing party (provided that the source of such
information is not known by the receiving party to be bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the disclosing party or any other Person with respect to such
information), (iii) becomes available to the receiving party on a
non-confidential basis from a source other than the disclosing party or any of
its Agents (provided that such source is not known by the receiving party to be
bound by a confidentiality agreement with or other contractual, legal or
fiduciary obligation of confidentiality to the disclosing party or any other
Person with respect to such information), or (iv) is required to be disclosed in
any document filed with the SEC or any other Governmental Authority.
(b) If the receiving party or any of its Agents is requested
or required (by oral questions, interrogatories, requests for information or
documents in legal proceedings, subpoena, civil investigative demand or other
similar process) to disclose any of the confidential information, the receiving
party shall use all reasonable efforts to provide the disclosing party with
prompt written notice of any such request or requirement so that the disclosing
party may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. If, in the absence of a
protective order or other remedy or the receipt of a waiver by the disclosing
party, the receiving party or any of its Agents are nonetheless, based on the
advice of counsel, required to disclose confidential information to any tribunal
or else stand liable for contempt or suffer other censure or penalty, the
receiving party or its Agents may, without liability hereunder, disclose to such
tribunal only that portion of the confidential information which such counsel
advises the receiving party is legally required to be disclosed. The receiving
party shall exercise its best efforts to preserve the confidentiality of the
confidential information, including by cooperating with the disclosing party to
obtain an appropriate protective order or other reliable assurance that
confidential treatment will be accorded the confidential information by such
tribunal.
(c) If the transactions contemplated by this Agreement shall
fail to be consummated, the receiving party shall promptly cause all copies of
documents or extracts thereof containing information and data as to the
disclosing party to be returned to the disclosing party.
SECTION 5.4. PUBLIC ANNOUNCEMENTS. Parent and Sub, on the one hand, and
the Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions contemplated by this
Agreement, and shall not issue any such press release or make any such public
statement prior to such consultation, except upon the advice of counsel that
such a release is required by or is appropriate under applicable law, policy or
regulation of the SEC, court process or by obligations pursuant to any listing
agreement with any national securities exchange or national securities quotation
system.
SECTION 5.5. MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the
terms and conditions provided in this Agreement, each party shall use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, appropriate or desirable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement. Each party shall, and shall cause each of its Affiliates to, use
their respective reasonable efforts to obtain consents of all third parties and
Governmental Authorities necessary, appropriate or desirable for the
consummation of the transactions contemplated by this Agreement.
Agreement and Plan of Merger - Page 26
SECTION 5.6. BOARD REPRESENTATION. Effective as of the Closing, Parent
shall appoint to Parent's board of directors one (1) individual designated by
the Stockholders and reasonably acceptable to Parent to hold office for one year
or until the next annual meeting of stockholders of Parent. Any appointments for
a succeeding term for the designee of the Stockholders shall be made in
accordance with Parent's By-Laws.
SECTION 5.7. BEST EFFORTS AND FURTHER ASSURANCES. Each of the parties
to this Agreement shall use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby. Subject to its further rights under this Agreement, each
party shall use all reasonable efforts to cause the Closing to occur at the
earliest practicable time.
SECTION 5.8. OPERATIONS FOLLOWING CLOSING. From and after the Closing,
Parent agrees to establish a separate working capital account for the benefit of
the operations of the Surviving Corporation. Such account will be managed by
Dennis Smith and Eric Hagerstrand; provided such individuals will inform
Parent's management of the status of such working capital account as requested
from time to time by Parent. All cash flow from the operations of the Surviving
Corporation will be used to finance the continuing operations of the Surviving
Corporation, including accounts receivable, accounts payable and payroll. Any
capital expenditures and extraordinary expenses (excluding purchases of
inventory) not already budgeted for or approved by the board of the Surviving
Corporation shall require the prior written consent of the Parent, which shall
not be unreasonably withheld or delayed. At the end of each calendar quarter,
and subject in all instances to compliance at all times with the financial and
other required covenants of any holder of indebtedness for borrowed money, and
the prior payment of principal and interest on such indebtedness, the Surviving
Corporation shall pay to the Stockholders all required payments of principal and
interest on the Notes then payable to the Stockholders. To the extent there is
surplus cash flow from operations following payment of all required principal
and interest on outstanding indebtedness (including the Notes), the surplus cash
flow from operations shall, at Parent's option, be transferred to Parent. To the
extent there is any working capital deficit, including any deficit regarding
payments of outstanding indebtedness for borrowed money and the Notes of the
Stockholders, Parent shall advance funds to the Surviving Corporation from time
to time necessary to fund such working capital deficit.
SECTION 5.9. GUARANTIES OF THE COMPANY. The parties hereto shall use
their best efforts to obtain terminations, signed by the respective lender, of
the Company's guaranties, other than in connection with the Credit Facility, in
favor of The Huntington National Bank and Hamilton County Development Co., Inc.
In addition, the parties shall use their best efforts to obtain amendments to
the 504 Loan Documents (as defined in Schedule 3.3 to this Agreement) which will
provide that the Surviving Corporation shall have no liability to Hamilton
County Development Co., Inc. as a result of such loan. If the parties are
unsuccessful in obtaining such terminations and amendments, the Stockholders
shall cause SPC Properties Limited ("SPC") to enter into an amendment as of the
Closing (the "Lease Amendment") to the Commercial Lease Agreement dated March 9,
1995 (the "Lease") regarding the payment of the Surviving Corporation's monthly
rental obligation. The Lease Amendment shall provide that the Surviving
Corporation shall pay directly to the mortgagees of the leased property the
Surviving Corporation's rental obligation. To the extent the rental obligation
exceeds the monthly obligations of SPC to the mortgagees, the Surviving
Corporation shall pay such excess to SPC.
Agreement and Plan of Merger - Page 27
Notwithstanding the foregoing, SPC must ensure that by March 31, 2000, the
Surviving Corporation shall have no obligation to the Huntington National Bank
and Hamilton County Development Co. in connection with the loans to SPC
regarding the land associated with the Lease.
ARTICLE VI
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees with Parent and Sub that, from
and after the date hereof to the Closing Date:
SECTION 6.1. PRESERVATION OF BUSINESS ORGANIZATION. The Company shall
use all reasonable efforts to preserve without material impairment its business
organization and its goodwill as to suppliers, distributors, clients and others
having business relations with the Company.
SECTION 6.2. CARRY ON IN REGULAR COURSE. (a) The Company shall carry on
its business in the ordinary and usual course in a manner consistent with its
past practices. Notwithstanding the foregoing, the Company shall not, directly
or indirectly, do, or propose to do or make any commitment or obligation, with
respect to (i) any act or activity referenced in Section 3.12(a) - (p), or (ii)
enter into any agreement, undertaking or commitment to do any of the foregoing
without the prior written consent of Parent, which shall not be unreasonably
withheld or delayed, or except as specifically provided for in Section 6.2(b).
(b) Between the date hereof and the Closing, the Company may make the
following distributions to the Stockholders: (i) compensatory bonuses to the
Stockholders consistent with past practice; (ii) contributions to the 401(k)
accounts of the Company's employees consistent with its 401(k) plan and past
practice; (iii) dividends to the Stockholders in order to pay tax obligations
with respect to the subchapter S corporation earnings of the Company for the
year ended December 31, 1996 and the stub period ending immediately prior to the
Closing Date; and (iv) any payments otherwise required to be paid (consistent
with past practice) to a former stockholder of the Company, Dennis Engel.
In no event shall the Company payout any extraordinary or additional
bonuses nor shall the Company incur any indebtedness to satisfy the payouts
pursuant to this Section 6.2(b), except as set forth on Schedule 6.2(b).
SECTION 6.3. CONSENTS. The Company shall use all reasonable efforts to
obtain consents in writing to the transactions contemplated by this Agreement
and/or such amendments, assignments or modifications of such documents or
instruments as may be required so that the transactions contemplated by this
Agreement shall not result in any default with respect to any law, rule,
regulation, order, decree, license, agreement or commitment to which the Company
is a party or its assets is bound. Without limiting the foregoing, the Company
shall use its commercially reasonable efforts to assist Parent and Sub to
transfer the rights and obligations of the Revolving Line of Credit to the
Surviving Corporation and to assist Parent and Sub in securing any replacement
or additional line of credit which Parent and Sub believes is required to fund
adequately the business of the Surviving Corporation.
SECTION 6.4. COMPANY STOCKHOLDERS MEETING. The Company shall, as soon
as practicable, duly call, give notice of, convene and hold a meeting of its
stockholders for purposes of approving this Agreement, the Merger and the
transactions contemplated hereby and thereby, or, if permitted under Ohio Law,
the Stockholders shall approve this Agreement and the Merger by unanimous
written consent.
Agreement and Plan of Merger - Page 28
SECTION 6.5. ACCESS. The Company shall (i) permit officers, employees,
agents, attorneys and accountants and other Persons designated by Parent full
access (after reasonable notice to the Company) during normal business hours to
the properties, books, contracts, commitments, tax returns, examination reports
and surveys of Governmental Authorities (including the IRS) and other records of
the Company, and (ii) furnish to such designees of Parent such financial and
operating data and other information relating to the assets and business of the
Company as such designees may reasonably request. Unless prohibited by law or
contract, such designees of Parent shall be furnished with accurate and complete
copies of such contracts, commitments and other books and records and all other
information with respect to the assets and business of the Company as such
designees may reasonably request. The Company shall cause its respective
employees, accountants, attorneys, financial advisors and other agents or
representatives to cooperate with Parent in its due diligence investigation.
From the date hereof until the Effective Time, Parent and the Company shall
confer on a regular and frequent basis with one or more representatives of the
other party to report operational matters of materiality and the general status
of ongoing operations.
SECTION 6.6. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the
Closing, the Company shall deliver to Parent promptly after such documents are
available its unaudited monthly financial reports and all other documents,
financial statements, budgets, proxy or information statements, reports,
correspondence, notices and other items it delivers, or is required to deliver,
to any of its stockholders or directors.
SECTION 6.7. NOTICES OF CERTAIN EVENTS. The Company shall promptly
notify Parent of: (i) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement, which consent has not otherwise
been disclosed to Parent pursuant to this Agreement; (ii) any notice or other
communication from any Governmental Authority in connection with the
transactions contemplated by this Agreement; (iii) any action, suit, claim,
investigation or proceeding commenced relating to or involving or otherwise
affecting the Company that, if it had existed on the date of this Agreement,
would have been required to have been disclosed pursuant to this Agreement, or
that relates to the consummation of the transactions contemplated by this
Agreement; or (iv) any matter arising or discovered after the date of this
Agreement that, if existing or known on the date of this Agreement, would have
been required to be disclosed pursuant to this Agreement, or that constitutes a
breach or prospective breach of this Agreement by the Company.
SECTION 6.8. ACCURACY OF REPRESENTATIONS AND WARRANTIES. The Company
shall not take or agree or commit to take any action (or omit to take any
action) that would make any representation and warranty of the Company in this
Agreement inaccurate in any material respect as of the Closing Date.
SECTION 6.9. NO SOLICITATION. From and after the date of this Agreement
until the earlier of the Effective Time or termination of this Agreement
pursuant to its terms, the Company and the Stockholders shall not, and will
instruct their respective directors, officers, employees, representatives,
investment bankers, agents and Affiliates not to, directly or indirectly,
initiate, solicit, encourage or participate in discussions with, provide
information to, or approve transactions with, any Person or group concerning any
merger, purchase or sale of business combination assets, sale of shares of
capital stock (or securities convertible or exchangeable or otherwise
evidencing, or any agreement or instrument evidencing, the right to acquire
capital stock) or similar business combination involving the Company (all such
transactions being referred to herein as "ACQUISITION PROPOSALS"). The Company
will
Agreement and Plan of Merger - Page 29
immediately cease any and all existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing. The
Company will (i) notify Parent as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in writing in
connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable, notify Parent of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the other
provisions of this Section 6.9, from and after the date of this Agreement until
the earlier of the Effective Time and termination of this Agreement pursuant to
its terms, the Company will not, and will instruct their respective directors,
officers, employees, investment bankers, agents and Affiliates not to, directly
or indirectly, make or authorize any public statement, recommendation or
solicitation in support of any Acquisition Proposal made by any Person or group.
SECTION 6.10 NON-DISTURBANCE AGREEMENT. The Company shall use its best
efforts to obtain and deliver to Parent an agreement from each holder of any
mortgage or deed of trust affecting the properties in which the Company has a
leasehold interest, which provides that if such holder forecloses such mortgage
or deed of trust (or takes a deed in lieu of foreclosure or otherwise succeeds
to the rights of the landlord thereunder) or otherwise exercises its rights,
such holder shall (i) not disturb the Surviving Corporation's occupancy under
its Lease, (ii) shall not join the Surviving Corporation in any foreclosure
actions, and (iii) shall be bound by the obligations of the landlord under the
Lease between the Surviving Corporation and the landlord, in each case for so
long as the Surviving Corporation continues to honor and fulfill in all material
respects its obligations under the Lease.
ARTICLE VII
COVENANTS OF PARENT AND SUB
Parent and Sub hereby covenant and agree with the Company as follows:
SECTION 7.1. PRESERVATION OF BUSINESS ORGANIZATION. Prior to the
Closing, Parent and Sub shall use all reasonable efforts to cause to preserve
without material impairment the business organization of Parent, Sub and
Parent's subsidiaries and their goodwill as to payors, providers, suppliers,
distributors, clients and others having business relations with Parent, Sub and
Parent's subsidiaries.
SECTION 7.2. CONSENTS. Parent and Sub shall use all reasonable efforts
to obtain consents in writing to the transactions contemplated by this Agreement
and/or such amendments, assignments or modifications of such agreements as may
be required so that the transactions contemplated by this Agreement shall not
result in any default with respect to any law, rule, regulation, order, decree,
license, agreement or commitment to which Parent or Sub is a party or by which
any of their respective assets is bound.
SECTION 7.3. NOTICES OF CERTAIN EVENTS. Prior to Closing, Parent shall
promptly notify the Company of: (i) any notice or other communication from any
Person alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement, which consent
has not otherwise been obtained or disclosed to the Company pursuant to this
Agreement; (ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this Agreement;
(iii) any action, suit, claim, investigation or proceeding commenced relating to
or involving or otherwise affecting Parent or any of its subsidiaries that, if
it had existed on the date of this Agreement, would have been required to have
been disclosed pursuant to this Agreement, or that relates to the consummation
of the transactions contemplated by this Agreement; or
Agreement and Plan of Merger - Page 30
(iv) any matter arising or discovered after the date hereof that, if existing or
known on the date of this Agreement, would have been required to be disclosed
pursuant to this Agreement, or that constitutes a breach or prospective breach
of this Agreement by Parent or Sub.
SECTION 7.4. NASDAQ SMALLCAP MARKET LISTING. Parent shall use all
reasonable efforts to have the shares of Parent Common Stock to be issued in the
Merger accepted for listing on the Nasdaq SmallCap Market within forty-five (45)
days following the Merger.
SECTION 7.5. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Parent and Sub
shall not (a) take or agree or commit to take any action (or omit to take any
action) that would make any representation and warranty of Parent or Sub in this
Agreement inaccurate in any material respect as of the Closing Date.
SECTION 7.6. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the
Closing, Parent shall deliver to the Company promptly after such documents are
available all documents, financial statements, proxy or information statements,
reports, correspondence, notices and other items it delivers, or is required to
deliver, to its stockholders as a group.
SECTION 7.7. INDEMNIFICATION. Subject to applicable law, Parent shall
and shall cause the Surviving Corporation to honor and fulfill in all respects
the obligations of the Company pursuant to indemnification agreements with the
Company's directors and officers existing at or before the Effective Time.
SECTION 7.8. NON-SOLICITATION. If the transactions contemplated by this
Agreement are not consummated, Parent and its Affiliates shall not, for a period
of one year from the date of this Agreement, directly or indirectly solicit any
employee of the Company to terminate such employee's employment with the
Company. Nothing herein shall prevent Parent from hiring any such employee
provided Parent has not violated the first sentence of this Section 7.8.
SECTION 7.9. COMPLIANCE WITH LEASE TERMS. Parent shall cause the
Surviving Corporation to honor and fulfill in all respects the obligations of
the Surviving Corporation pursuant to the Lease.
ARTICLE VIII
CONDITIONS OF CLOSING
SECTION 8.1. CONDITIONS TO OBLIGATIONS OF PARENT, SUB, STOCKHOLDERS AND
THE COMPANY. The obligations of each of the parties hereto under this Agreement
to consummate the Merger and the other transactions to be consummated at the
Closing are subject to the satisfaction or waiver of the following conditions:
(a) COMPANY STOCKHOLDER APPROVAL. This Agreement and the
Merger shall have been adopted and approved by the Stockholders as required by
Ohio Law.
(b) GOVERNMENTAL APPROVALS. Parent, Sub and the Company shall
have received all approvals or requirements of Governmental Authorities to
permit the consummation of the transactions contemplated by this Agreement and
the Operative Documents and to permit Parent and Sub to own the assets of, and
to operate the businesses of, the Company after the Closing. Each such
Agreement and Plan of Merger - Page 31
approval shall be in form and substance reasonably satisfactory to Parent and
shall remain in full force and effect at the Closing Date.
(c) LITIGATION; INJUNCTIONS. No action, suit, litigation,
injunction, restraining order, proceeding or investigation shall (i) have been
instituted and be pending, or (ii) be threatened by any Person or Governmental
Authority, which would materially and adversely affect the Merger and the other
transactions contemplated by this Agreement and the Operative Documents. On the
Closing Date, there shall not be in force any proceeding, order or decree
restraining or enjoining consummation of the Merger or the other transactions
contemplated by this Agreement or the Operative Documents, or placing any
limitation upon such consummation or to invalidate, suspend or require
modification of any provision of this Agreement or the Operative Documents.
(d) PLEDGE AGREEMENT. Parent and the Stockholders shall have
executed and delivered the Pledge Agreement.
(e) REGISTRATION RIGHTS AGREEMENT. Parent and the Stockholders
shall have executed and delivered the Registration Rights Agreement.
(f) EMPLOYMENT AGREEMENTS. The Company shall have entered into
the Employment Agreements with each of Dennis Smith and Eric Hagerstrand.
(g) CANNING AGREEMENT. The Company shall have entered into the
Employment Agreement with Thomas Canning.
SECTION 8.2. ADDITIONAL CONDITIONS APPLICABLE TO PARENT AND SUB. The
obligations of Parent and Sub under this Agreement to consummate the Merger and
the other transactions contemplated by this Agreement and the Operative
Documents are subject to the satisfaction or waiver of the following conditions:
(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants
and conditions of this Agreement to be complied with and performed by the
Company (and/or the Stockholders) on or before the Closing Date shall have been
complied with and performed in all material respects.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company (and/or the Stockholders) set
forth in this Agreement shall be true and correct in all material respects as of
the Closing Date with the same force and effect as if such representations and
warranties were made anew at and as of the Closing Date, except: (i) to the
extent such representations and warranties are by their express provisions made
as of the date of this Agreement or another specified date; and (ii) for the
effect of any activities or transactions which may have taken place after the
date of this Agreement which are expressly contemplated by this Agreement in
order to effect the transactions contemplated by this Agreement.
(c) NO MATERIAL ADVERSE CHANGE. Since the date of this
Agreement, there shall have been no material adverse change in the business,
assets, results of operations, prospects or financial condition of the Company,
other than as a result of events or conditions affecting the generic drug
industry generally or general economic conditions.
Agreement and Plan of Merger - Page 32
(d) CLOSING CERTIFICATES. Parent shall have received
certificates dated the Closing Date, signed by the chief executive officer and
the chief financial officer of the Company, to the effect that the conditions
set forth in Sections 8.2(a) through 8.2(c) have been satisfied.
(e) OPINION OF COMPANY COUNSEL. Parent and Sub shall have
received from counsel to the Company an opinion dated the Closing Date with
respect to matters reasonably requested by Parent, which shall be in form and
substance reasonably satisfactory to Parent.
(f) REQUIRED CONSENTS. The holders of any note, guarantee or
other evidence of indebtedness (whether for money borrowed or otherwise) of any
of the Company, the lessors of any material real or personal property or assets
leased by the Company, the parties to any commitment or agreement to which the
Company is a party which is material to the conduct of the Company's business,
and any other Person (other than Governmental Authorities) which owns or has
authority to grant any material franchise, license, permit, easement, rights or
other authorization necessary for the business or operations of the Company, to
the extent that their consent or approval of the transactions contemplated by
this Agreement is required under the pertinent lease, contract, commitment or
agreement or other document or instrument or under applicable laws, rules or
regulations for the consummation of the transactions contemplated shall have
granted such consent or approval and no condition to such consent or approval
shall exist which is materially adverse to the conduct of the Company's business
or results in additional material obligations to Parent.
(g) FINANCING OF PARENT. Parent shall have received or have a
legally binding commitment to receive, not less than an aggregate of $6,500,000
of equity capital or debt financing, or a combination thereof.
(h) FINANCING OF THE SURVIVING CORPORATION. Parent and the
Surviving Corporation shall have secured, or have a legally binding commitment
for, a line of credit or a similar arrangement for the Surviving Corporation in
an amount equal to or exceeding $7,000,000.
(i) TAX MATTERS. The Company shall have provided to Parent a
clearance certificate or similar document that may be required by any state
taxing authority and the Stockholders shall have provided to Parent a properly
executed Form W-8 or W-9, as applicable.
(j) DECEMBER 31, 1996 AUDITED FINANCIAL STATEMENTS. Parent
shall have received the audited balance sheet as of December 31, 1996 and the
related audited statement of earnings, retained earnings and cash flows for the
year ended December 31, 1996 (together with the notes thereto, audited by, and
accompanied by the report thereon, of Grant Thornton LLP) and such audited
financial statements shall include an unqualified opinion with respect to the
financial statements from Grant Thornton LLP and reveal no Material Adverse
Change since the Balance Sheet Date.
(k) GUARANTY OF THE COMPANY. The Company shall have delivered
to Parent a termination, signed by The Huntington National Bank, of the
Company's guaranty, in favor of The Huntington National Bank, relating to the
loan to the Stockholders to fund payments required under the Stock Purchase and
Separation Agreement and General Release of Claims dated January 13, 1995 among
the Stockholders, Dennis Engel, the Company and certain other parties.
(l) PLEDGE OF THE OUTSTANDING SHARES. The Company and the
Stockholders shall have delivered to Parent a termination, signed by The
Huntington National Bank, of the pledge of the Outstanding Shares to The
Huntington National Bank.
Agreement and Plan of Merger - Page 33
(m) CONSENT OF LANDLORD. The Company shall have delivered to
Parent a consent of SPC Properties Limited to the Merger and the other
transactions contemplated by this Agreement, which consent shall contain
representations that no Event of Default, as defined in the Commercial Lease
Agreement dated March 9, 1995 between SPC Properties Limited and the Company,
has occurred or is continuing and that no condition exists that, with the
passage of time, will become an Event of Default.
SECTION 8.3. ADDITIONAL CONDITIONS APPLICABLE TO THE STOCKHOLDERS AND
THE COMPANY. The obligations of the Stockholders and the Company (and/or the
Stockholders) under this Agreement to consummate the Merger and the other
transactions contemplated to be consummated at the Closing are subject to the
satisfaction or waiver of the following conditions:
(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants
and conditions of this Agreement to be complied with and performed by Parent and
Sub on or before the Closing Date shall have been complied with and performed in
all material respects.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Parent and Sub set forth in this Agreement
shall have been true and correct as of the Closing Date with the same force and
effect as if such representations and warranties were made anew at and as of the
Closing Date, except: (i) to the extent such representations and warranties are
by their express provisions made as of the date of this Agreement or another
specified date; and (ii) for the effect of any activities or transactions which
may have taken place after the date of this Agreement which are expressly
contemplated by this Agreement in order to effect the transactions contemplated
by this Agreement.
(c) OFFICERS' CERTIFICATE. The Company shall have received a
certificate dated the Closing Date, signed by the chief executive officer of
Parent, to the effect that the conditions set forth in Sections 8.3(a) and (b)
hereof have been satisfied.
(d) OPINION OF PARENT COUNSEL. The Company shall have received
from counsel to Parent and Sub an opinion dated the Closing Date with respect to
matters reasonably requested by the Company, which shall be in form and
substance reasonably satisfactory to the Company.
(e) REQUIRED CONSENTS. Parent and Sub shall have received all
material consents or approvals of the Merger or any other transactions
contemplated by this Agreement required under any material commitment or
evidence of indebtedness of Parent or any of its subsidiaries, or any lease of
any material real property of Parent and its subsidiaries, or under applicable
law for the consummation of the transactions contemplated hereby.
(f) GUARANTIES OF THE STOCKHOLDERS. Parent shall have
delivered to the Stockholders terminations of the Stockholders' guaranties in
favor of The Huntington National Bank relating to the Credit Facility.
Agreement and Plan of Merger - Page 34
ARTICLE IX
TERMINATION
SECTION 9.1. Termination. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of the Company:
(a) by written mutual consent of Parent and the Company for
any reason, or by mutual action of their respective Boards of Directors;
(b) at the option of Parent, by written notice from Parent to
the Company if (i) a material breach by the Company or the Stockholders of any
of their respective representations, warranties or agreements contained in this
Agreement occurs, (ii) Parent has notified the Company in writing of the
existence of such breach, and (iii) the Company or the Stockholders have failed
to cure such breach within 10 days after receiving such notice (or if such
breach is not capable of being cured within such 10 day period, but is capable
of being cured within 30 days, the breaching party shall have commenced good
faith steps to promptly cure such breach);
(c) at the option of the Company or the Stockholders, by
written notice from the Company to Parent if (i) a material breach by Parent or
Sub of any of their representations, warranties or agreements contained in this
Agreement occurs, (ii) the Company has notified Parent and Sub in writing of the
existence of such breach, and (iii) Parent and Sub have failed to cure such
breach within 10 days after receiving such notice (or if such breach is not
capable of being cured within such 10 day period, but is capable of being cured
within 30 days, the breaching party shall have commenced good faith steps to
promptly cure such breach);
(d) at the option of Parent, by Parent if the Stockholders
fail to approve any matter required to be approved by such Stockholders in order
to consummate the transactions contemplated by this Agreement by April 30, 1997;
(e) by either Parent or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency shall have
issued a non-appealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(f) at the option of Parent, by Parent if there shall have
occurred a Material Adverse Change with respect to the Company;
(g) by the Company if the Closing has not occurred by May 30,
1997 if the sole reason for the failure to close is due to Parent having failed
to satisfy either condition to Closing set forth in Section 8.2(g) or (h); or
(h) by Parent, if the results of Parent's due diligence
investigation of the Company and its business (to be completed prior to February
28, 1997) prove unsatisfactory in any material respect.
SECTION 9.2. CERTAIN REMEDIES UPON TERMINATION. If this Agreement is
terminated: (i) pursuant to Section 9.1(a) (due to the mutual consent of the
parties), no special expense
Agreement and Plan of Merger - Page 35
reimbursement shall apply and all expenses will be paid as provided in Section
11.2; (ii) pursuant to Section 9.1(b), 9.1(d) or 9.1(f) [due to a breach of
representations and warranties by the Company or the Stockholders, a failure by
the Stockholders to approve the transactions contemplated herein, or a Material
Adverse Change in the business of the Company], the Company shall pay to Parent
within five days of such termination, an amount in cash sufficient to reimburse
Parent and Sub for all reasonable expenses incurred in connection with
attempting to consummate the Merger and the other transactions contemplated
hereby (including without limitation reasonable legal, accounting and investment
banking expenses) (the "TRANSACTION EXPENSES") up to a maximum amount of
$50,000; provided that Parent shall provide reasonable evidence of the
incurrence of such expenses.
(b) If the Agreement is terminated pursuant to Section 9.1(c) or
(g) [due to a breach of Parent's representations or warranties, or Parent's
failure to obtain financing for this transaction], Parent shall pay to the
Company within five days of such termination the Company's Transaction Expenses
up to a maximum amount of $50,000; provided that the Company shall provide
reasonable evidence of the incurrence of such expenses.
(c) If the Agreement is terminated pursuant to Section 9.1(e), the
party not principally the cause of any order decree or ruling shall pay the
Transaction Expenses of the other party; provided that such party shall provide
reasonable evidence of the incurrence of such expenses.
SECTION 9.3. SURVIVAL UPON TERMINATION. If this Agreement is
terminated, the agreements of the Company and Parent contained in Sections 5.3,
5.4, 9.1, 9.2, 9.3 and 11.2 shall survive such termination.
SECTION 9.4. EFFECT OF TERMINATION. In the event of the termination of
this Agreement, nothing shall relieve any party from liability for any material
breach by any party hereof.
ARTICLE X
SURVIVAL; INDEMNIFICATION
SECTION 10.1. SURVIVAL. The covenants, agreements, representations and
warranties of the Parent, Company and the Stockholders contained in this
Agreement shall survive the Closing until the earlier to occur of (i) the
fifteenth calendar month anniversary of the Closing or (ii) the release by
Parent of audited financial statements that include the combined operations of
the Surviving Corporation and the Parent for the year ended December 31, 1997;
provided, however, that the representations and warranties of the Company and
the Stockholders set forth in Sections 3.22(d) and (e) and 3.28 shall survive
until the third anniversary of the Closing. Notwithstanding the preceding
sentences, any covenant, agreement, claim, representation or warranty in respect
of which a claim of indemnity may be sought under Section 10.2 shall survive the
time at which it would otherwise terminate pursuant to the preceding sentences,
if notice of the inaccuracy or breach thereof giving rise to such right to a
claim of indemnity shall have been given to the party against whom such
indemnity may be sought prior to such time, and any obligation of indemnity
shall survive until such claim of indemnity is resolved.
SECTION 10.2. MUTUAL INDEMNIFICATION. (a) By their approval of this
Agreement, the Stockholders, severally (based on their ownership interest in the
Company), agree to indemnify, defend, protect, and hold harmless each of Parent,
Sub and the Surviving Corporation (each in its capacity as an indemnified party,
and for purposes of this paragraph, an "INDEMNITEE"), and shall reimburse the
Agreement and Plan of Merger - Page 36
Indemnitee for, at all times from and after the date of this Agreement from and
against all claims, damages, losses, liabilities, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) (collectively "DAMAGES") incurred by such Indemnitee as a result
of or incident to (i) any breach of any representation or warranty of the
Company or any of the Stockholders set forth herein, or in any other document
delivered in connection herewith or with respect to which a claim for
indemnification is brought by an Indemnitee within the applicable survival
period described in Section 10.1 (including any accounts receivable reflected
(net of reserves) on the balance sheet of the Company dated December 31, 1996
which are not collected prior to April 30, 1997), (ii) any breach or
nonfulfillment by the Company or any of the Stockholders, or any noncompliance
by the Company or any of the Stockholders with, any covenant, agreement, or
obligation contained herein or other document delivered in connection herewith,
except to the extent waived by Parent, or (iii) any claim by a current or former
stockholder of the Company or any other person, firm, corporation or entity,
seeking to assert, or based upon: (A) ownership or rights of ownership to any
shares of capital stock of the Company; (B) any rights of the stockholder (other
than the right to receive the Merger consideration pursuant to this Agreement or
appraisal rights under the applicable provisions of Ohio Law), including any
option, preemptive rights, or rights to notice or to vote; (C) any rights under
the charter or bylaws of the Company; (D) any claim that his, her or its shares
were wrongfully repurchased by the Company, regardless of whether an action,
suit or proceeding can or has been made against the Company; or (E) any Excess
Expenses, as defined in Section 11.2 below.
(b) Parent agrees to indemnify the Company and the
Stockholders (for purposes of this paragraph, each in its capacity as an
indemnified party, an "INDEMNITEE") and shall reimburse the Indemnitee for all
Damages incurred by such Indemnitee as a result of or incident to (i) any breach
of any representation or warranty of Parent set forth herein, or in any other
document delivered in connection herewith or with respect to which a claim for
indemnification is brought by the Company or the Stockholder as an Indemnitee
within the applicable survival period described in Section 10.1, or (ii) any
breach or nonfulfillment by Parent or any noncompliance by Parent with any
covenant, agreement or obligation contained herein required to be performed or
other document delivered in connection herewith, except to the extent waived by
the Company or Stockholders holding a majority of the outstanding shares of
Company Common Stock.
SECTION 10.3. THIRD PERSON CLAIMS. Promptly after an Indemnitee has
received notice of or has knowledge of any claim by a person not a party to this
Agreement ("THIRD PERSON") or the commencement of any action or proceeding by a
Third Person, the Indemnitee shall, as a condition precedent to a claim with
respect thereto being made under this Agreement, give the Stockholders written
notice of such claim or the commencement of such action or proceeding; provided,
however that the failure to give such notice will not affect the Indemnitee's
right to indemnification hereunder, except to the extent that the Stockholders
have been actually prejudiced as a result of such failure. If the Stockholders
notify the Indemnitee within 30 days from the receipt of the foregoing notice
that the Stockholders wish to defend against the claim by the Third Person, then
the Stockholders shall have the right to assume and control the defense of the
claim by appropriate proceedings with counsel reasonably acceptable to the
Indemnitee. The Indemnitee may participate in the defense, at its sole expense,
of any such claim for which the Stockholders shall have assumed the defense
pursuant to the preceding sentence, provided that counsel for the Stockholders
shall act as lead counsel in all matters pertaining to the defense or settlement
of such claims, suit or proceedings; provided, however, that Indemnitee shall
control the defense of any claim or proceeding that in Indemnitee's reasonable
judgment could reasonably be expected to have a material and adverse effect on
Indemnitee's business apart from the payment of money damages. The Indemnitee
shall be entitled to indemnification for the reasonable fees
Agreement and Plan of Merger - Page 37
and expenses of its counsel for any period during which the Stockholders have
not assumed the defense of any claim. Whether or not the Stockholders shall have
assumed the defense of any claim, neither the Indemnitee nor the Stockholders
shall make any settlement with respect to any such claim, suit or proceeding
without the prior consent of the other, which consent shall not be unreasonably
withheld or delayed. It is understood and agreed that in situations where
failure to settle a claim expeditiously would reasonably be expected to have an
adverse effect on the party wishing to settle, the failure of the other party to
act upon a request for consent to such settlement within ten (10) business days
of receipt of notice thereof shall be deemed to constitute consent to such
settlement for purposes of this Article X.
SECTION 10.4. LIMITATIONS ON INDEMNIFICATION. (a) No Indemnitee shall
be entitled to indemnification for Damages pursuant to Sections 10.2(a)(i) or
10.2(a)(ii) until the aggregate amount of Damages incurred exceeds $100,000 (the
"THRESHOLD"), and then shall be entitled only to the amount of Damages in excess
of the Threshold. All claims for Damages shall be net of, and offset by, any
insurance proceeds, reduction of tax liabilities or receipt of tax benefit
actually received by Parent or the Surviving Corporation that are attributable
to such Damages. Any liability for indemnification under this Article X shall be
reduced to the extent any Damages are reduced by such a recovery or reduction.
(b) The Stockholders' maximum aggregate liability for claims
made pursuant to Section 10.2(a)(i) and (ii) shall not exceed $4,000,000 in the
aggregate; provided, however, that such maximum aggregate liability shall be
increased, to not more than $6,500,000 in the aggregate, to the extent of each
claim representing a breach or non-fulfillment pursuant to Section 10.2(a)(i) or
10.2(a)(ii) which the Stockholders had knowledge of prior to the Closing (or
after reasonable inquiry and investigation, should have had knowledge of prior
to the Closing). The Parent's maximum aggregate liability for claims made
pursuant to Section 10.2(b) shall not exceed $4,000,000 in the aggregate.
(c) The limitations provided in Section 10.4(a) on the
Threshold and Section 10.4(b) regarding maximum aggregate liability and on an
Indemnitee's right to indemnification under this Article X shall not apply to
Damages for any matters set forth in Section 10.2(a)(iii) or any claim for
Damages under Sections 3.20, 3.22 and 3.28, or for Excess Expenses under Section
11.2.
SECTION 10.5. METHOD OF PAYMENT. Subject to the limitations on the
amount of Damages set forth in Section 10.4, and subject to the provisions of
Section 10.6, any claims for indemnification pursuant to this Article X shall be
satisfied by withholding the amount of the claim from any remaining payment
obligation on the then outstanding principal amount of the Notes in inverse
order of maturity; provided, however, that no Stockholder shall be liable for an
amount in excess of the value of the sum of the Merger Consideration and the
additional consideration, if any, paid pursuant to Section 2.5 received by such
Stockholder in the Merger.
SECTION 10.6. RESOLUTIONS OF CONFLICTS; ARBITRATION. The following
provisions shall apply with respect to the assertion of claims and the
indemnification provisions of this Article X.
(a) The Stockholders and Parent shall attempt promptly and in
good faith to agree upon the rights of the parties with respect to any disputed
claims. If the Stockholders and the Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and the
Stockholders shall satisfy the claim in accordance with the terms thereof.
(b) Any dispute or controversy concerning the indemnity
obligations of this Article X not agreed to by the parties pursuant to Section
10.6(a) shall be resolved in good faith by mediation among the Stockholders and
the senior executive officers of Parent. If such dispute can not be
Agreement and Plan of Merger - Page 38
resolved by mediation within 30 days, then except for the right of either party
to apply to a court of competent jurisdiction for a temporary restraining order,
preliminary injunction, or other equitable relief to preserve the status quo or
prevent irreparable harm pending the selection and confirmation of an
arbitrator, any continuing dispute, controversy or claim arising out of, in
connection with, or in relation to the indemnity obligations under this Article
X shall be settled by arbitration in accordance with Section 10.6(c) below.
(c) If no agreement can be reached after good faith attempts
pursuant to Section 10.6(a) and 10.6(b) within 90 days from the commencement of
any dispute or controversy, either Parent or the Stockholders may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in any such event the matter shall be settled by arbitration conducted by a
single arbitrator mutually agreeable to the Stockholders and the Parent, or if a
single arbitrator cannot be agreed to by the parties within thirty (30) days,
then by three arbitrators. In the event of three arbitrators, Parent and the
Stockholders shall each select one arbitrator, and the two arbitrators so
elected shall select a third arbitrator. The decision of the arbitrators so
selected as to the validity and amount of any claim in dispute shall be binding
and conclusive upon the parties to this Agreement, and the parties shall act in
accordance with such decision and satisfy any such claim in accordance
therewith. Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any mediation or arbitration shall be held in
Cincinnati, Ohio. Any arbitration shall be conducted under the rules then in
effect of the American Arbitration Association, and shall be based on the
provisions and limitations of this Article X. The arbitrators shall have
relevant experience in the industry of the Company and, to the extent possible,
familiarity with acquisitions and business combinations. The parties agree to
compel the arbitrator(s) to resolve the arbitration within 120 days of the
commencement of arbitration.
Notwithstanding anything contained herein to the contrary, no claim for
Damages, nor ability of Parent to settle any claim against the Parent Common
Stock or payment obligations on the Notes under Section 10.5, may be made until
such claim is finally resolved pursuant to the process and procedures set forth
above in this Section.
SECTION 10.7 REMEDIES. The indemnification provisions of this Article X
are the sole and exclusive remedy of any party to this Agreement for a breach of
any representation, warranty or covenant contained herein, except with respect
to any claim based on intentional misrepresentation, fraud in the inducement, or
a similar theory. Notwithstanding the preceding sentence, from and after the
execution and delivery of this Agreement and until the Closing, each of the
parties acknowledges and agrees that the other parties hereto would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties hereto agrees the other parties hereto shall be
entitled to an injunction to prevent breaches of the provisions of this Article
X and to enforce specifically this Agreement and the terms and provisions of
Article X in any competent court having jurisdiction over the parties, in
addition to any other remedy to which they may be entitled at law or in equity.
Agreement and Plan of Merger - Page 39
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. SPECIFIC PERFORMANCE. Each of the parties to this
Agreement hereby acknowledges that the other parties will have no adequate
remedy at law if it fails to perform any of its obligations under this
Agreement. In such event, each of the parties agrees that the other parties
shall have the right, in addition to any other rights it may have (whether at
law or in equity), to specific performance of this Agreement, except as set
forth to the contrary herein.
SECTION 11.2. EXPENSES. Except as set forth in Section 9.2, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense; provided,
however that if this Agreement is not terminated and the Closing shall occur,
all such costs and expenses incurred directly on behalf of the Company and which
are customarily incurred by and on behalf of the Company (including without
limitation accounting, legal and other professional services of a routine and
recurring nature (for example, annual auditing expenses)) shall be paid or
reimbursed by the Parent. The Parent will reimburse the Company following the
Closing for all reasonable and itemized fees and expenses incurred by the
Company to Taft, Stettinius & Hollister relating to the resolution of tax issues
of this transaction beneficial to the Stockholders (including, for example,
subchapter S distributions, depreciation recapture, Section 338(h)(10) Election,
401-K distributions and similar tax issues) if the transactions contemplated by
this Agreement are consummated. All other costs and expenses incurred by the
Company for the benefit of the Stockholders or the Company, or by the
Stockholders directly (including without limitation legal and professional fees
incurred by the Company or the Stockholders in connection with the negotiation
of the transactions contemplated by this Agreement), shall be paid or reimbursed
by the Stockholders from the Merger Consideration to be delivered at Closing
(the "EXCESS EXPENSES").
SECTION 11.3. FURTHER ASSURANCES. If at any time after the Closing,
Parent or Sub shall consider it advisable that any further conveyance,
agreements, documents or instruments or any other things are necessary or
desirable to vest, perfect, confirm or record in the Surviving Corporation, the
title to any property, rights, privileges, powers and franchises of the Company,
the officers of the Company last in office and such other Persons, if any, as
the Board of Directors of the Company last in office may authorize, shall
execute and deliver, upon Parent's reasonable request, any and all proper
conveyances, agreements, documents and instruments, and do all things necessary
or proper to vest, perfect, confirm or record title to such property, rights,
privileges, powers and franchises in the Surviving Corporation, and otherwise to
carry out the provisions of this Agreement.
SECTION 11.4. PARTIES IN INTEREST. All the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of and shall be
enforceable by the respective successors and permitted assigns of the parties
hereto. Except as set forth in Section 7.8(e), nothing expressed or implied in
this Agreement is intended or shall be construed to confer upon or give any
Person other than the parties hereto, their permitted successors or assigns, and
their respective stockholders any rights or remedies under or by reason of this
Agreement or any transaction contemplated hereby or thereby.
SECTION 11.5. ENTIRE AGREEMENT. This Agreement and the other Operative
Documents, together with the Exhibits and Schedules hereto and thereto,
supersede any other agreement, whether written or oral, that may have been made
or entered into by Parent, Sub and the Company (or by any officers, directors,
stockholders or partners of any of such parties) relating to the matters
contemplated hereby. This Agreement and the other Operative Documents, together
with the Exhibits and Schedules
Agreement and Plan of Merger - Page 40
hereto and thereto, constitute the entire agreement by the parties, and there
are no agreements or commitments except as set forth herein or therein.
SECTION 11.6 AMENDMENT OR MODIFICATION. This Agreement may be amended
only with the written consent of Parent, Sub, the Stockholders and the Company.
SECTION 11.7. WAIVER. Any party to this Agreement may, by written
notice to the other parties to this Agreement, (a) extend the time for the
performance of any of the obligations or other actions of the other parties for
its benefit under this Agreement; (b) waive any inaccuracies in the
representations or warranties of the other parties made to it contained in this
Agreement; (c) waive compliance with any of the conditions or covenants of the
other parties for its benefit contained in this Agreement; or (d) waive or
modify performance of any of the obligations of the other parties for its
benefit under this Agreement. Except as provided in the preceding sentence, no
action taken pursuant to this Agreement including any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants,
conditions or agreements contained in this Agreement. The failure of any party
hereto to enforce at any time any of the provisions of this Agreement shall in
no way be construed to be a waiver of any such provision, nor in any way to
affect the validity of this Agreement or any part hereof or thereof or the right
of such party thereafter to enforce each and every such provision. No waiver of
any breach of or non-compliance with this Agreement shall be held to be a waiver
of any other or subsequent breach or non-compliance.
SECTION 11.8. ASSIGNABILITY. Neither this Agreement nor any rights
hereunder shall be assignable, except (i) by the Company with the prior written
consent of Parent, or (ii) by Parent or by Sub with the prior written consent of
the Company.
SECTION 11.9. HEADINGS AND INTERPRETATION. The headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement. Terms such as "herein", "hereof",
"hereinafter" refer to this Agreement in which they appear as a whole and not to
the particular sentence or paragraph where they appear, unless the context
otherwise requires. Unless the context otherwise requires, (i) terms used in the
plural include the singular, and vice versa, and (ii) words in the masculine
gender include the feminine, and vice versa. References in this Agreement to
Articles, Sections, Exhibits or the Schedules shall be to Articles, Sections,
Exhibits or the Schedules in this Agreement, unless otherwise indicated.
SECTION 11.10. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be delivered by hand or overnight
courier service, mailed or sent by graphic scanning or other telegraphic
communications equipment of the sending party, as follows:
If to Parent or Sub:
c/o DynaGen, Inc.
99 Erie Street
Cambridge, MA 02139
Attention: Indu A. Muni
Telecopy No.: (617) 354-3902
Agreement and Plan of Merger - Page 41
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: John Hession, Esq.
Telecopy: (617) 248-7100
If to the Company:
Superior Pharmaceutical Company
1385 Kemper Meadow Drive
Cincinnati, Ohio 45240-1635
Attention: Eric C. Hagerstrand
Telecopy No.: (513) 742-6474
with a copy to:
Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, OH 45202-3957
Attention: Phil Schultz
Telecopy No.: (513) 381-0205
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt. All notices and other communications given to
any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt if delivered by hand or
overnight courier service or sent by facsimile, or on the date five business
days after dispatch by certified or registered mail if mailed, in each case
delivered, sent or mailed (properly addressed) to such party as provided in this
Section 11.10 or in accordance with the latest unrevised direction from such
party given in accordance with this Section 11.10.
SECTION 11.11. LAW GOVERNING. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without giving effect to the principles of conflicts of law thereof.
SECTION 11.12. INVALIDITY OF PROVISIONS. Each of the provisions
contained in this Agreement is distinct and severable and a declaration of
invalidity or unenforceability of any such provision or part thereof by a court
of competent jurisdiction shall not affect the validity or enforceability of any
other provision hereof or thereof.
SECTION 11.13. COUNTERPARTS. This Agreement may be executed
simultaneously in one or more counterparts, each of which shall be deemed to be
an original but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, this Agreement and Plan of Merger has been duly
executed and delivered by the parties on the date first above written.
DYNAGEN, INC.
Attest:
/s/ Cynthia Kiley /s/ Dhananjay G. Wadekar
______________________________ By: _______________________________
Name: Dhananjay G. Wadekar
Title: Executive Vice President
DYNAGEN ACQUISITION CORP.
Attest:
/s/ Cynthia Kiley /s/ Dhananjay G. Wadekar
______________________________ By: _______________________________
Name: Dhananjay G. Wadekar
Title: Executive Vice President
SUPERIOR PHARMACEUTICAL COMPANY
Attest:
/s/ Thomas Canning /s/ Eric Hagerstrand
______________________________ By: _______________________________
Name: Eric Hagerstrand
Title: Vice President and CFO
STOCKHOLDERS:
/s/ Eric C. Hagerstrand
------------------------------------
Eric C. Hagerstrand
/s/ Dennis Smith
------------------------------------
Dennis Smith
/s/ Thomas Canning
------------------------------------
Thomas Canning
CERTIFICATE OF INCORPORATION
OF
DYNAGEN, INC.
1. The name of the corporation is DynaGen, Inc.
2. The address of its registered office in the State of Delaware is 5
Fairway Road, No. 2C, City of Newark, County of New Castle. The name of its
registered agent at such address is Shekhar G. Wadekar.
3. The nature of the business or purposes to be conducted or promoted
is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall
have authority to issue is fifteen million (15,000,000) shares, consisting of
fourteen million (14,000,000) shares of Common Stock, $.01 par value per share,
and one million (1,000,000) shares of Preferred Stock, $.01 par value per share,
amounting in the aggregate to One Hundred Fifty Thousand and 00/100 Dollars
($150,000.00).
The designations and powers, the rights and preferences and the
qualifications, limitations or restrictions with respect to each class of stock
of the corporation shall be as determined by the Board of Directors from time to
time.
5. The name and mailing address of the corporation's incorporator is
Dhananjay G. Wadekar, 1404 LaGrange Street, Chestnut Hill, Massachusetts 02167.
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6. The names of the persons who are to serve as the directors until
the first annual meeting of the stockholders or until their successors are
elected and qualified are:
Dhananjay G. Wadekar Indu A. Muni
1404 LaGrange Street 5 Westwood Circle
Chestnut Hill, MA 02167 North Reading, MA 01864
7. The corporation is to have perpetual existence.
8. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
To make, alter or repeal the bylaws of the corporation.
To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
By a majority of the whole board, to designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. The bylaws may provide that in the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such agent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors, or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business
-3-
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the certificate of
incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease, or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation; and, unless the resolution or bylaws expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
When and as authorized by the stockholders in accordance with
statute, to sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its goodwill and its corporate franchises,
upon such terms and conditions and for such consideration, which may consist in
whole or in part of money or property, including shares of stock in, and/or
other securities of, any other corporation or corporations, as its board of
directors shall deem expedient and for the best interests of the corporation.
9. To the maximum extent permitted by Section 102(b)(7) of the
General Corporation Law of Delaware, a director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
10. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class
-4-
of them, any court of equitable jurisdiction within the State of Delaware may,
on the application in a summary way of this corporation or of any creditor or
stockholder thereof, or on the application of any receiver or receivers
appointed for this corporation under the provisions of Section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this corporation under the provisions of
Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directors. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement to any reorganization of this corporation as consequences of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders of this corporation, as the case
may be, and also on this corporation.
11. Meetings of the stockholders may be held within or without the
State of Delaware, as the bylaws may provide. The books of the corporation may
be kept (subject to any provision contained in the statues) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the corporation. Elections of directors
need not be by written ballot unless the bylaws of the corporation shall so
provide.
-5-
12. The corporation reserves the right to amend, alter, change, or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
THE UNDERSIGNED, being the incorporator named hereinbefore, for the
purposes of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and certifying
that this is his act and deed and the facts herein stated are true, and,
accordingly, has hereunto set his hand this 7th day of November, 1988.
/s/ Dhananjay G. Wadekar
---------------------------
Dhananjay G. Wadekar
COMMONWEALTH OF MASSACHUSETTS )
) ss.:
COUNTY OF MIDDLESEX )
BE IT REMEMBERED that on this 7th day of November, 1988, personally
came before me, a Notary Public for the Commonwealth of Massachusetts, Dhananjay
G. Wadekar, the party to the foregoing certificate of incorporation, known to me
personally to be such, and acknowledged the said certificate to be his act and
deed and that the facts stated therein are true.
GIVEN under my hand and seal of office the day and year aforesaid.
/s/ Janet M. Davenport
---------------------------
Janet M. Davenport
Notary Public
My commission expires: March 4, 1994
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DYNAGEN, INC.
DynaGen, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That by unanimous written consent of the Board of Directors of
DynaGen, Inc., dated November 6, 1989, the following resolution which sets forth
a proposed amendment of the Certificate of Incorporation of said Corporation,
was duly adopted and declared to be advisable. The resolution setting forth the
proposed amendment is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation be amended
by changing Article IV thereof so that, as amended, said Article IV
shall be and read as follows:
"4. The total number of shares of stock which the Corporation shall
have authority to issue is twenty-one million (21,000,000) shares,
of which twenty million (20,000,000) shares will be Common Stock, of
the par value of One Cent ($.01) per share, and one million
(1,000,000) shares will be Preferred Stock, of the par value of One
Cent ($.01) per share, amounting in the total aggregate to Two
Hundred Ten Thousand and 00/100 Dollars ($210,000.00)."
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 241 of the General Corporation Law of the State of
Delaware.
-2-
IN WITNESS WHEREOF, said DynaGen, Inc. has caused its corporate seal to
be hereunto affixed and this Certificate of Amendment to be signed by Indu A.
Muni its President and Secretary this ____ day of November, 1989.
DYNAGEN, INC.
By: /s/ Indu A. Muni
-----------------------
Indu A. Muni, President
/s/ Indu A. Muni
- ------------------------
Indu A. Muni, Secretary
DYNAGEN, INC.
CERTIFICATE OF CHANGE OF LOCATION
OF REGISTERED OFFICE
AND
REGISTERED AGENT
The Board of Directors of DYNAGEN, INC., a Corporation of Delaware, on
this 1st day of February, 1991, do hereby resolve and order that the location of
the Registered Office of this Corporation within this State be, and the same
hereby is changed to Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle 19801.
The name of the Registered Agent therein and in charge thereof upon
whom process against this Corporation may be served be, and hereby is changed
to: The Corporation Trust Company.
DYNAGEN, INC., a Corporation of Delaware, does hereby certify that the
foregoing is a true copy of a resolution adopted by the Board of Directors by
unanimous written Consent dated February 25, 1991.
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by its President and Attested by its Secretary, the 28th day of February,
1991.
/s/ Indu A. Muni
-------------------------
Indu A. Muni
President
ATTEST:
/s/ John A. Piccione
- -----------------------------
John A. Piccione
Secretary
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
DYNAGEN, INC.
DynaGen, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of DynaGen, Inc., by the unanimous
written consent of its members, filed with the minutes of the meetings of the
Board, duly adopted resolutions setting forth a proposed amendment of the
certificate of incorporation of the Corporation, declaring said amendment to be
advisable and approving the submission of said amendment to the stockholders of
the Corporation for their approval by vote at the 1991 Special Meeting in Lieu
of Annual Meeting held on June 30, 1992. The resolution setting forth the
proposed amendment is as follows:
RESOLVED: That Article 4 of the Corporation's Certificate of Incorporation be
and is hereby amended to authorize an additional 20,000,000 shares
of Common Stock of the Corporation, so that as so amended said
Article 4 shall read in its entirety as follows:
"4. The total number of shares of all classes of capital stock which
the Corporation shall have the authority to issue is forty-one
million (41,000,000) shares, consisting of forty million
(40,000,000) shares of Common Stock with a par value of One Cent
($.01) per share, and one million (1,000,000) shares of Preferred
Stock with a par value of One Cent ($.01) per share.
The designations and powers, the rights and preferences and the
qualifications, limitations or restrictions with respect to each
class of stock of the Corporation shall be as determined by the
Board of Directors from time to time."
SECOND: That thereafter the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
-2-
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by Dhananjay G. Wadekar, its Executive Vice President, and attested to by
Mitchell S. Bloom, its Assistant Secretary, this 9th day of July, 1992.
DYNAGEN, INC.
By: /s/ Dhananjay G. Wadekar
-------------------------
Dhananjay G. Wadekar
Executive Vice President
ATTEST:
/s/ Mitchell S. Bloom
- ----------------------
Mitchell S. Bloom
Assistant Secretary
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
DYNAGEN, INC.
DynaGen, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of DynaGen, Inc., by the unanimous
written consent of its members, filed with the minutes of the meetings of the
Board, duly adopted resolutions setting forth a proposed amendment of the
certificate of incorporation of the Corporation, declaring said amendment to be
advisable and approving the submission of said amendment to the stockholders of
the Corporation for their approval by vote at the 1992 Annual Meeting of
Stockholders held on December 17, 1992. The resolution setting forth the
proposed amendment is as follows:
RESOLVED: That Article 4 of the Corporation's Certificate of Incorporation be
and is hereby amended to authorize an additional 9,000,000 shares of
Preferred Stock of the Corporation, so that as so amended said
Article 4 shall read in its entirety as follows:
"4. The total number of shares of all classes of capital stock which
the Corporation shall have the authority to issue is fifty million
(50,000,000) shares, consisting of forty million (40,000,000) shares
of Common Stock with a par value of One Cent ($.01) per share, and
ten million (10,000,000) shares of Preferred Stock with a par value
of One Cent ($.01) per share.
The designations and powers, the rights and preferences and the
qualifications, limitations or restrictions with respect to each
class of stock of the Corporation shall be as determined by the
Board of Directors from time to time."
SECOND: That thereafter the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
-2-
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Amendment to be signed by Indu A. Muni, its President, and attested to by
Mitchell S. Bloom, its Assistant Secretary, this 22nd day of December, 1992.
DYNAGEN, INC.
By: /s/ Indu A. Muni
-----------------------
Indu A. Muni
President
ATTEST:
/s/ Mitchell S. Bloom
- -------------------------------------
Mitchell S. Bloom, Assistant Secretary
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DYNAGEN, INC.
DynaGen, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify as follows, pursuant to Section 242 of the General
Corporation Law of Delaware:
FIRST: That the Board of Directors of said Corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
duly adopted resolutions in accordance with Section 242 of the General
Corporation Law of the State of Delaware, (i) proposing amendment to the
Certificate of Incorporation of the Corporation, (ii) declaring such amendment
to be advisable and in the best interests of the Corporation, (iii) directing
that such amendment be submitted to the stockholders of the Corporation for
approval thereby. The resolutions setting forth the amendment and directing that
such amendment be submitted to the stockholders are as follows:
RESOLVED: That the Board of Directors of the Corporation deems it advisable
and in the best interests of the Corporation and its stockholders
that Article 4 of the Certificate of Incorporation of the
Corporation be amended to increase the authorized shares of the
Corporation's Common Stock, par value $.01 per share (the "Common
Stock"), from 40,000,000 shares to 75,000,000 shares so that, as so
amended, said Article 4 shall read in its entirety as follows:
"4. The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is
eighty-five million (85,000,000) shares, consisting of
seventy-five million (75,000,000) shares of Common Stock, with
a par value of One Cent ($.01) per shares, and ten million
(10,000,000) shares of Preferred Stock, with a par value of
One Cent ($.01) per share.
The designations and powers, the rights and preferences and
the qualifications, limitations or restrictions with respect
to each class of stock of the corporation shall be as
determined by the Board of Directors from time to time."
-2-
and that such amendment be adopted and approved, which
approval shall be effective immediately upon approval of the
amendment by the stockholders of the Corporation.
RESOLVED: That the foregoing amendment to the Corporation's Certificate
of Incorporation be submitted to the stockholders of the
Corporation for their consideration and approval at the
Corporation's Annual Meeting of Stockholders.
SECOND: That, at the Annual Meeting of Stockholders of the Corporation
held on January 30, 1997, the necessary number of shares as required by statute
were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, DynaGen, Inc., has caused this certificate to be
signed by Indu A. Muni, its President, as of this 30th day of January, 1997.
DynaGen, Inc.
By: /s/ Indu A. Muni
------------------------
President
AMENDMENT NO. 1 TO
INVESTMENT BANKING AGREEMENT
This Amendment No. 1 to Investment Banking Agreement is made as of this
23rd day of September, 1996 by and between DynaGen, Inc., having its business
offices at 99 Erie Street, Cambridge, MA 02139 (the "Company") and H.J. Meyers &
Co., Inc., having its business offices at 1895 Mt. Hope Avenue, Rochester, New
York 14620 (the "Consultant").
WHEREAS, the Company and the Consultant have entered into an Investment
Banking Agreement dated November 20, 1995 (the "Agreement"); and
WHEREAS, the parties desire to supplement and amend the Agreement as
set forth below.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants contained herein, it is agreed as follows:
1. Paragraph 1 is hereby deleted and replaced in its entirety with the
following:
"1. RETENTION. The Company hereby retains the Consultant to
perform non-exclusive consulting services related to corporate finance and other
matters, and the Consultant hereby accepts such retention and shall undertake
reasonable efforts to perform for the Company the duties described herein. In
this regard, subject to paragraph 7 hereof, the Consultant shall devote such
time and attention to the business of the Company, as shall be determined by the
Consultant, in its sole discretion, subject to the direction of the Chairman of
the Company.
a) The Consultant agrees, to the extent reasonably
required in the conduct of the business of the Company, and at the Company's
request, to place at the disposal of the Company its judgment and experience and
to provide business development services to the Company including the following:
(i) review the Company's managerial and financial
requirements;
(ii) review budgets and business plans;
(iii) analyze and assess alternatives for the
Company, presented by the Company for raising capital, including public or
private offerings of the Company's securities; and
(iv) prepare and disseminate a "Corporate Profile"
report in compliance with applicable state and federal securities laws.
-2-
b) In addition, the Consultant agrees, to the extent
reasonably required in the conduct of the business of the Company, and at the
Company's request, to place at the disposal of the Company its judgment and
experience and to provide a broad array of merger and acquisition services as
requested by the Company including:
(i) identifying opportunities for a transaction
involving the Company including, without limitation, the purchasing by the
Company of other companies, or any of their businesses, assets, or properties,
or the sale of the Company, or any of its businesses, assets or properties, more
specifically, in connection with the Company's acquisition of certain assets of
Able Laboratories, Inc.
(ii) advising the Company concerning such
transactions with respect to structure;
(iii) providing detailed valuation analyses for such
transactions including formal fairness opinions if required.
c) At the Consultant's request, the Company will provide
"due diligence" presentations to Registered Representatives of the Consultant
and other brokerage firms."
2. Paragraph 3(a) of the Agreement is hereby deleted and replaced in
its entirety with the following:
"3. Compensation.
a) The Consultant shall be paid the sum of $500,000.00
payable upon the signing of this Agreement. In addition, for its consulting
services hereunder, the Company shall grant to the Consultant a warrant (the
"Warrant") to purchase 400,000 shares of the Common Stock of the Company (the
"Registerable Shares") exercisable for five (5) years from the date hereof at a
price of $2.50 per share. Registerable Shares will not include any shares of
Common Stock which are eligible for sale pursuant to Rule 144, as so opined by
the Company's outside legal counsel. The Warrant shall be in a form to be
mutually agreed upon by the parties. All compensation is non-refundable."
3. All other terms and provisions of the Agreement shall remain in full
force and effect.
-3-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
DYNAGEN, INC.
By: /s/ Dhananjay G. Wadekar
--------------------------
Title: Chairman and Executive V.P.
-----------------------------
H.J. MEYERS & CO., INC.
/s/ Michael S. Smith
------------------------------------
Michael S. Smith
Managing Director, Corporate Finance
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED
THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE,
ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF
SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.
WARRANT NO. : W-CS-3 RIGHT TO PURCHASE 41,000
SHARES OF COMMON STOCK OF
DECEMBER 10, 1996 DYNAGEN, INC.
VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING
TIME ON DECEMBER 31, 2003.
DYNAGEN, INC.
COMMON STOCK PURCHASE WARRANT
DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies
that, in consideration of the payment of $100 (receipt of which is hereby
acknowledged), ZACK SPIGELMAN is entitled, subject to the terms set forth below,
to purchase from the Company, commencing December 10, 1996, at any time or from
time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before
December 31, 2003, 41,000 fully paid and non-assessable shares of Common Stock,
$.01 par value, of the Company, at an exercise price per share equal to $1.44.
Such exercise price per share as adjusted from time to time as herein provided
is referred to herein as the "EXERCISE PRICE". The number and character of such
shares of Common Stock and the Exercise Price are subject to adjustment as
provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION
OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH
RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "COMPANY" shall include DynaGen, Inc., a Delaware
corporation, and any corporation which shall succeed or assume the obligations
of the Company hereunder.
(b) The term "COMMON STOCK" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after
such date, the holders of which shall have the
-2-
right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of a majority of directors of the Company (even though
the right so to vote has been suspended by the happening of such a contingency),
(c) any other securities into which or for which any of the securities described
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise, or the
conversion of promissory notes or other obligations of the Company.
(c) The term "OTHER SECURITIES" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of this Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Sections 3 or 4 or otherwise.
1. EXERCISE OF WARRANT.
1.1. FULL EXERCISE. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company, in the amount obtained by multiplying the
number of shares of Common Stock for which this Warrant is then exercisable by
the Exercise Price then in effect.
1.2. PARTIAL EXERCISE. This Warrant may be exercised in part
by surrender of this Warrant in the manner and at the place provided in Section
1.1 except that the amount payable by the holder on such partial exercise shall
be the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by (b) the
Exercise Price then in effect. On any such partial exercise the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this
Warrant are exercisable only upon the satisfaction of certain conditions, and
unlesss such conditions are satisfied, only that portion of this Warrant for
which the conditions have been previously satisfied may be exercised at any
time. The Warrant will vest and become exercisable in the following
installments: 20% of the shares of Common Stock under this Warrant are vested
and exercisable upon delivery of the Warrant, 40% will become exercisable upon
filing a 510(k) or other application for the BioLoc Technology or DynaGen
Technology with the FDA, and the remaining 40% will become exercisable upon
approval of such application by the FDA; provided, however, that the holder
continues to work on the BioLoc Technology or DynaGen Technology and is engaged
by the Company as a consultant at the times of each of the foregoing milestones.
If the
-3-
services of the holder of the warrant as a consultant to the Company are
terminated without cause, then this Warrant shall become fully vested and
immediately exercisable at the time of any FDA application. The BioLoc
Technology and DynaGen Technology is defined in a certain Exclusive License
Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996.
DynaGen shall use commercially reasonable efforts to file and prosecute such
application with the FDA.
1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO
COMMON STOCK. (a) In addition to and without limiting the rights of the
Warrantholder under the terms of this Warrant, the Warrantholder shall have the
right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof
into shares of Common Stock as provided in this Section at any time or from time
to time prior to its expiration, subject to the restrictions set forth in
paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder
may elect to surrender this warrant for conversion and to receive shares of
Common Stock equal to the value of this Warrant (or the portion being cancelled,
surrendered and converted) by surrender of this Warrant to the Company together
with notice of such election. Upon such event, the Company shall issue to the
holder a number of shares of the Company's Common Stock computed by using the
following formula:
X MINUS Y (A MINUS B)
A
Where: X = The number of shares of Common Stock to be issued to the
holder;
Y = The number of shares of Common Stock purchasable
under this Warrant;
A = The "Fair Market Value" of one share of the Common Stock;
and
B = The Exercise Price of the Warrant (as adjusted to the date
of the calculation).
Upon exercise of the Conversion Right with respect to a particular
number of shares subject to this Warrant, the Company shall deliver to the
Warrantholder, without payment by the Warrantholder of any exercise price or any
cash or other consideration, that number of shares of Common Stock equal to the
number computed using the above formula. Notwithstanding anything in this
Section to the contrary, the Conversion Right cannot be exercised with respect
to a number of Converted Warrant Shares having a value below $1,000. No
fractional shares shall be issuable upon exercised of the Conversion Right, and
if the number of shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the Warrantholder an amount
in cash equal to the Fair Market Value of the resulting fractional share.
(b) The Conversion Right may be exercised by the Warrantholder by the
surrender of this Warrant at the principal office of the Company together with a
written statement specifying that the Warrantholder thereby intends to exercise
the Conversion Right and indicating the number of shares of Common Stock or
authorized Common Stock subject to this Warrant which are being surrendered in
exercise of the Conversion Right. Such conversion shall be effective upon
receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "CONVERSION
DATE"), but not later than the expiration date of this Warrant.
-4-
(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a charge to the Company's earnings for financial
reporting purposes, then the Conversion Right shall automatically terminate upon
the Company's written notice to the Warrantholder of such adverse accounting
treatment.
(d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of
Common Stock or authorized Common Stock as of a particular date (the
"DETERMINATION DATE") shall mean:
(i) if the Company's Common Stock is then traded on any
nationally-recognized stock exchange or quoted on the NASDAQ National Market
System or Small-Cap Market, the average of the closing sale prices for the 20
trading days preceding the Determination Date, as reported by such exchange or
system, as reported in The Wall Street Journal or any other publication,
including the NASD;
(ii) if the Company's Common Stock is then traded on the
over-the-counter market, the average of the closing bid and closing asked prices
for the 30 trading days preceding the Determination Date, as reported in The
Wall Street Journal or by any market maker; or
(iii) if quotations for the Company's Common Stock or
authorized Common Stock is not readily available as set forth in (i) or (ii)
above, then as determined in good faith by the Company's Board of Directors upon
a review of all relevant factors, including, without limitation, the price at
which shares of the Company's Common Stock or authorized Common Stock could
reasonably be expected to be sold in an arms-length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the Company, which determination by the
Board of Directors shall give due consideration to recent transactions involving
shares of the Common Stock or authorized Common Stock, if any, revenues and
earnings of the Company to the date of such determination (if any), projected
revenues and earnings of the Company, the effect of the transfer restrictions to
which the shares are subject under law, the absence of a public market for the
Common Stock or authorized Common Stock, and such other matters as the Board of
Directors deems pertinent. Such determination by the Board of Directors shall be
conclusive and binding.
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
thirty (30) days thereafter, the Company at its expense (including the payment
by it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and non-assessable shares of Common Stock (or Other
Securities) to which such holder shall be entitled on such exercise, plus, in
lieu of any fractional share to which such holder would otherwise be entitled,
cash equal to such fraction multiplied by the then current market value of one
full share.
-5-
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER.
3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or entity, or (c) transfer all
or substantially all of its capital stock, properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, the holder of this Warrant, on the exercise
hereof as provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, upon the proper and rightful
exercise of this Warrant, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which such holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if such holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in Sections 4 and 5.
3.2. CONTINUATION OF TERMS. Upon any corporate event referred
to in this Section 3, this Warrant shall continue in full force and effect and
the terms hereof shall be applicable to the shares of stock and Other Securities
and property receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger, as the case may be, and shall
be binding upon the issuer of any such stock or other securities.
4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that
the Company shall (i) issue additional shares of the Common Stock as a dividend
or other distribution on outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
the Common Stock into a smaller number of shares of the Common Stock, then, in
each such event, the Exercise Price shall, simultaneously with the happening of
such event, be adjusted by multiplying the then prevailing Exercise Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event (calculated assuming the conversion
or exchange of all outstanding shares of convertible or exchangeable securities
of the Company which are convertible or exchangeable into, or exercisable for,
shares of Common Stock) and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after such event (calculated
assuming the conversion or exchange of all outstanding shares of convertible or
exchangeable securities of the Company which are convertible or exchangeable
into, or exercisable for, shares of Common Stock), and the product so obtained
shall thereafter be the Exercise Price then in effect. The Exercise Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4. The holder of
this Warrant shall thereafter, on the exercise hereof as provided in Section 1,
be entitled to receive that number of shares of Common Stock determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of this Section 4) be issuable on such exercise, by a fraction of
which (i) the numerator is the Exercise Price which would otherwise (but for the
provisions of this Section 4) be in effect, and (ii) the denominator is the
Exercise Price in effect on the date of such exercise.
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5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND
RECLASSIFICATIONS. In case at any time or from time to time, the holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which, in the case
of Common Stock, are provided for in Section 4), then and in each such case the
holder of this Warrant, on the exercise hereof as provided in Section 1, shall
be entitled to receive the amount of other or additional stock and other
securities and property (including cash in the cases referred to in subdivision
(b) of this Section 5) which such holder would hold on the date of such exercise
if on the date of distribution of such other or additional stock or other
securities and property, or on the record date fixed for determining the
shareholders entitled to receive such other or additional stock or other
securities and property, such holder had been the holder of record of the number
of shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date thereof to and including the date of
such exercise, retained such shares and all such other or additional stock and
other securities and property (including cash in the cases referred to in
subdivision (b) of this Section 5) receivable by such holder as aforesaid during
such period, giving effect to all adjustments called for during such period by
Sections 3 and 4.
6. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any class
or securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
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recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which any such action is to be taken.
7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, all shares of Common Stock from time to time
issuable on the exercise of the Warrant; the shares of Common Stock which the
holder of this Warrant shall receive upon exercise of the Warrant will be duly
authorized, validly issued, fully paid and non-assessable.
8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant or Warrants of
like tenor, in the name of such holder or as such holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER.
This Warrant is issued upon the following terms, to all of which each holder or
owner hereof by the taking hereof consents and agrees:
(a) No holder of this Warrant shall, as such, be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this
Warrant for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon such holder, as such, any of the rights of a
stockholder of the Company until such holder shall have delivered formal
notice to the Company of an intention to exercise this Warrant, tendered
promptly the consideration required for exercise (whether cash or
securities), exercised the Warrant, and been issued shares of Common Stock
in accordance with the provisions hereof.
(b) Neither this Warrant nor any shares of Common Stock purchased
pursuant to this Warrant shall be registered under the Securities Act of
1933 (the "SECURITIES ACT") and applicable state securities laws.
Therefore, the Company may require, as a condition of allowing the
transfer or exchange of this Warrant or such shares, that the holder or
transferee of this Warrant or such shares, as the case may be, furnish to
the Company an opinion of
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counsel acceptable to the Company to the effect that such transfer or
exchange may be made without registration under the Securities Act and
applicable state securities laws. The certificates evidencing the shares
of Common Stock issued on the exercise of the Warrant shall bear a legend
to the effect that the shares evidenced by such certificates have not been
registered under the Securities Act and applicable state securities laws.
(c) This Warrant is not transferable or assignable to any party without
the prior written consent of the Company, and accompanied by an opinion of
counsel satisfactory to the Company that such transfer is permissible
under applicable law.
11. NOTICES. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by (i) first class mail, postage
prepaid, (ii) electronic facsimile transmission, or (iii) express overnight
courier service, at such address as may have been furnished to the Company in
writing by such holder or, until any such holder furnishes to the Company an
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
12. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant and the shares of Common Stock underlying this Warrant
shall be construed and enforced in accordance with and governed by the laws of
the State of Delaware. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
13. REGISTRATION RIGHTS.
13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a
510(k) or other application has been filed for the BioLoc Technology or DynaGen
Technology and this Warrant is at least sixty percent (60%) vested in accordance
with Section 1.3, at the request of the holders of at least seventy percent
(70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE
SHARES"), the Company shall use its best efforts to file a registration
statement on Form S-3 (to the extent such form is available to the Company)
covering the resale of the Shares underlying this Warrant (the "REGISTRABLE
SHARES"). The Company will so notify each holder of Registrable Shares,
including each holder who has a right to acquire Registrable Shares, and then
shall, as expeditiously as possible (using commercially reasonable efforts),
effect qualification and registration under the Securities Act on Form S-3 of
all or such portion of the Registrable Shares as the holder or holders shall
specify, and shall thereafter maintain the effectiveness of such Registration
Statement until such shares have been sold or until the registration obligation
terminates under Section 13.3.
The Company shall not be required to effect more than one (1)
registration on Form S-3. The Company's obligations under this Section shall
expire three (3) years after the issuance date of this Warrant. The Company
agrees to qualify or register the Shares under applicable state law, list the
shares wherever the Common Stock is then listed and supplement the prospectus as
necessary from time to time to keep it current.
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13.2 EXPENSES. In the case of a registration under Section
13.1, the Company shall bear the expenses of any filing of any registration,
including but not limited to printing legal and accounting expenses, Securities
and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and
expenses; provided, however, that the Company shall have no obligation to pay or
otherwise bear any portion of the underwriters' commissions or discounts
attributable to the securities being offered and sold by the holder of this
Warrant, or the fees and expenses of any counsel, tax advisor or accountant
selected by such holder in connection with the registration of the securities.
13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the
Company under this Section 13 to register the securities shall expire and
terminate at such time as the holder of this Warrant shall be entitled or
eligible to sell the shares of Common Stock underlying this Warrant without
restriction and without a need for the filing of a registration statement under
the Securities Act of 1933, including without limitation, for any resales of
restricted securities made pursuant to Rule 144 as promulgated by the Securities
and Exchange Commission.
13.4 DELAY OF REGISTRATION. For a period not to exceed 120
days, the Company shall not be obligated to prepare and file, or be prevented
from delaying or abandoning, a registration statement pursuant to this Section
13 at any time when the Company, in its good faith judgment by the management of
the Company, with the advice of counsel, reasonably believes:
(I) that the filing thereof at the time requested, or
the offering of Registrable Shares pursuant thereto, would materially and
adversely affect (a) a pending or scheduled public offering or private placement
of the Company's securities, (b) an acquisition, merger, consolidation or
similar transaction by or of the Company, (c) pre-existing and continuing
negotiations, discussions or pending proposals with respect to any of the
foregoing transactions, or (d) the financial condition of the Company in view of
the disclosure of any pending or threatened litigation, claim, assessment or
governmental investigation which may be required thereby; and
(II) that the failure to disclose any material
information with respect to the foregoing would cause a violation of the
Securities Act or the Securities Exchange Act of 1934.
13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the
event that the Company registers any of the Registrable Shares under the
Securities Act, the Company will indemnify and hold harmless each holder and
each underwriter of the Registrable Shares (including their officers, directors,
affiliates and partners) so registered (including any broker or dealer through
whom such shares may be sold) and each person, if any, who controls such holder
or any such underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages, expenses or liabilities,
joint or several, to which they or any of them become subject under the
Securities Act, applicable state securities laws or under any other statute or
at common law or otherwise, as incurred, and, except as hereinafter provided,
will reimburse each such holder, each such underwriter and each such controlling
person, if any,
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for any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Securities were registered under the Securities Act, in any filing with any
state securities commission in any preliminary or amended preliminary prospectus
or in the final prospectus (or the registration statement or prospectus as from
time to time amended or supplemented by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances in which they were made, not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act or any state securities laws applicable to
the Company and relating to action or inaction required of the Company in
connection with such registration.
Notwithstanding the foregoing, the Company shall have no obligation to
indemnify any holder, underwriter or controlling person if: (i) such untrue
statement or omission was made in such registration statement, preliminary or
amended preliminary prospectus or final prospectus in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such holder of Registrable Shares (in the case of indemnification
of such holder), such underwriter (in the case of indemnification of such
underwriter) or such controlling person (in the case of indemnification of such
controlling person) expressly for use therein, or (ii) in the case of a sale
directly by such holder of Registrable Shares (including a sale of such
Registrable Shares through any underwriter retained by such holder of
Registrable Shares to engage in a distribution solely on behalf of such holder
of Registrable Shares), such untrue statement or alleged untrue statement or
omission or alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus copies of which were delivered to
such holder of Registrable Shares or such underwriter on a timely basis, and
such holder of Registrable Shares failed to deliver a copy of the final or
amended prospectus at or prior to the confirmation of the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00
p.m., Eastern Daylight Saving Time, on December 31, 2003.
Dated: December 12, 1996 DYNAGEN, INC.
ATTEST:
By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar
Title: Secretary Title: Executive Vice President
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO DynaGen, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ........ shares
of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes
payment of $........ therefor, and requests that the certificates for such
shares be issued in the name of, and delivered to .............., whose address
is ................................
Dated:
(Signature must conform to name of holder
as specified on the face of the Warrant)
(Address)
--------------------
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and
transfers unto .................. the right represented by the within Warrant to
purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware
corporation, to which the within Warrant relates, and appoints
.......................... Attorney to transfer such right on the books of
DynaGen, Inc., a Delaware corporation, with full power of substitution in the
premises.
Dated:
(Signature must conform to name of holder
as specified on the face of the Warrant)
(Address)
Signed in the presence of:
.............................
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED
THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE,
ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF
SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.
WARRANT NO. : W-CS-4 RIGHT TO PURCHASE 41,000
SHARES OF COMMON STOCK OF
DECEMBER 10, 1996 DYNAGEN, INC.
VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING
TIME ON DECEMBER 31, 2003.
DYNAGEN, INC.
COMMON STOCK PURCHASE WARRANT
DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies
that, in consideration of the payment of $100 (receipt of which is hereby
acknowledged), RICH THERIAULT is entitled, subject to the terms set forth below,
to purchase from the Company, commencing December 10, 1996, at any time or from
time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before
December 31, 2003, 41,000 fully paid and non-assessable shares of Common Stock,
$.01 par value, of the Company, at an exercise price per share equal to $1.44.
Such exercise price per share as adjusted from time to time as herein provided
is referred to herein as the "EXERCISE PRICE". The number and character of such
shares of Common Stock and the Exercise Price are subject to adjustment as
provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION
OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH
RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "COMPANY" shall include DynaGen, Inc., a Delaware
corporation, and any corporation which shall succeed or assume the obligations
of the Company hereunder.
(b) The term "COMMON STOCK" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after
such date, the holders of which shall have the
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right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of a majority of directors of the Company (even though
the right so to vote has been suspended by the happening of such a contingency),
(c) any other securities into which or for which any of the securities described
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise, or the
conversion of promissory notes or other obligations of the Company.
(c) The term "OTHER SECURITIES" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of this Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Sections 3 or 4 or otherwise.
1. EXERCISE OF WARRANT.
1.1. FULL EXERCISE. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company, in the amount obtained by multiplying the
number of shares of Common Stock for which this Warrant is then exercisable by
the Exercise Price then in effect.
1.2. PARTIAL EXERCISE. This Warrant may be exercised in part
by surrender of this Warrant in the manner and at the place provided in Section
1.1 except that the amount payable by the holder on such partial exercise shall
be the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by (b) the
Exercise Price then in effect. On any such partial exercise the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this
Warrant are exercisable only upon the satisfaction of certain conditions, and
unlesss such conditions are satisfied, only that portion of this Warrant for
which the conditions have been previously satisfied may be exercised at any
time. The Warrant will vest and become exercisable in the following
installments: 20% of the shares of Common Stock under this Warrant are vested
and exercisable upon delivery of the Warrant, 40% will become exercisable upon
filing a 510(k) or other application for the BioLoc Technology or DynaGen
Technology with the FDA, and the remaining 40% will become exercisable upon
approval of such application by the FDA; provided, however, that the holder
continues to work on the BioLoc Technology or DynaGen Technology and is engaged
by the Company as a consultant at the times of each of the foregoing milestones.
If the
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services of the holder of the warrant as a consultant to the Company are
terminated without cause, then this Warrant shall become fully vested and
immediately exercisable at the time of any FDA application. The BioLoc
Technology and DynaGen Technology is defined in a certain Exclusive License
Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996.
DynaGen shall use commercially reasonable efforts to file and prosecute such
application with the FDA.
1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO
COMMON STOCK. (a) In addition to and without limiting the rights of the
Warrantholder under the terms of this Warrant, the Warrantholder shall have the
right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof
into shares of Common Stock as provided in this Section at any time or from time
to time prior to its expiration, subject to the restrictions set forth in
paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder
may elect to surrender this warrant for conversion and to receive shares of
Common Stock equal to the value of this Warrant (or the portion being cancelled,
surrendered and converted) by surrender of this Warrant to the Company together
with notice of such election. Upon such event, the Company shall issue to the
holder a number of shares of the Company's Common Stock computed by using the
following formula:
X MINUS Y (A MINUS B)
A
Where: X = The number of shares of Common Stock to be issued to the
holder;
Y = The number of shares of Common Stock purchasable under
this Warrant;
A = The "Fair Market Value" of one share of the Common Stock;
and
B = The Exercise Price of the Warrant (as adjusted to the date
of the calculation).
Upon exercise of the Conversion Right with respect to a particular
number of shares subject to this Warrant, the Company shall deliver to the
Warrantholder, without payment by the Warrantholder of any exercise price or any
cash or other consideration, that number of shares of Common Stock equal to the
number computed using the above formula. Notwithstanding anything in this
Section to the contrary, the Conversion Right cannot be exercised with respect
to a number of Converted Warrant Shares having a value below $1,000. No
fractional shares shall be issuable upon exercised of the Conversion Right, and
if the number of shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the Warrantholder an amount
in cash equal to the Fair Market Value of the resulting fractional share.
(b) The Conversion Right may be exercised by the Warrantholder by the
surrender of this Warrant at the principal office of the Company together with a
written statement specifying that the Warrantholder thereby intends to exercise
the Conversion Right and indicating the number of shares of Common Stock or
authorized Common Stock subject to this Warrant which are being surrendered in
exercise of the Conversion Right. Such conversion shall be effective upon
receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "CONVERSION
DATE"), but not later than the expiration date of this Warrant.
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(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a charge to the Company's earnings for financial
reporting purposes, then the Conversion Right shall automatically terminate upon
the Company's written notice to the Warrantholder of such adverse accounting
treatment.
(d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of
Common Stock or authorized Common Stock as of a particular date (the
"DETERMINATION DATE") shall mean:
(i) if the Company's Common Stock is then traded on any
nationally-recognized stock exchange or quoted on the NASDAQ National Market
System or Small-Cap Market, the average of the closing sale prices for the 20
trading days preceding the Determination Date, as reported by such exchange or
system, as reported in The Wall Street Journal or any other publication,
including the NASD;
(ii) if the Company's Common Stock is then traded on the
over-the-counter market, the average of the closing bid and closing asked prices
for the 30 trading days preceding the Determination Date, as reported in The
Wall Street Journal or by any market maker; or
(iii) if quotations for the Company's Common Stock or
authorized Common Stock is not readily available as set forth in (i) or (ii)
above, then as determined in good faith by the Company's Board of Directors upon
a review of all relevant factors, including, without limitation, the price at
which shares of the Company's Common Stock or authorized Common Stock could
reasonably be expected to be sold in an arms-length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the Company, which determination by the
Board of Directors shall give due consideration to recent transactions involving
shares of the Common Stock or authorized Common Stock, if any, revenues and
earnings of the Company to the date of such determination (if any), projected
revenues and earnings of the Company, the effect of the transfer restrictions to
which the shares are subject under law, the absence of a public market for the
Common Stock or authorized Common Stock, and such other matters as the Board of
Directors deems pertinent. Such determination by the Board of Directors shall be
conclusive and binding.
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
thirty (30) days thereafter, the Company at its expense (including the payment
by it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and non-assessable shares of Common Stock (or Other
Securities) to which such holder shall be entitled on such exercise, plus, in
lieu of any fractional share to which such holder would otherwise be entitled,
cash equal to such fraction multiplied by the then current market value of one
full share.
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3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER.
3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or entity, or (c) transfer all
or substantially all of its capital stock, properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, the holder of this Warrant, on the exercise
hereof as provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, upon the proper and rightful
exercise of this Warrant, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which such holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if such holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in Sections 4 and 5.
3.2. CONTINUATION OF TERMS. Upon any corporate event referred
to in this Section 3, this Warrant shall continue in full force and effect and
the terms hereof shall be applicable to the shares of stock and Other Securities
and property receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger, as the case may be, and shall
be binding upon the issuer of any such stock or other securities.
4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that
the Company shall (i) issue additional shares of the Common Stock as a dividend
or other distribution on outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
the Common Stock into a smaller number of shares of the Common Stock, then, in
each such event, the Exercise Price shall, simultaneously with the happening of
such event, be adjusted by multiplying the then prevailing Exercise Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event (calculated assuming the conversion
or exchange of all outstanding shares of convertible or exchangeable securities
of the Company which are convertible or exchangeable into, or exercisable for,
shares of Common Stock) and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after such event (calculated
assuming the conversion or exchange of all outstanding shares of convertible or
exchangeable securities of the Company which are convertible or exchangeable
into, or exercisable for, shares of Common Stock), and the product so obtained
shall thereafter be the Exercise Price then in effect. The Exercise Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4. The holder of
this Warrant shall thereafter, on the exercise hereof as provided in Section 1,
be entitled to receive that number of shares of Common Stock determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of this Section 4) be issuable on such exercise, by a fraction of
which (i) the numerator is the Exercise Price which would otherwise (but for the
provisions of this Section 4) be in effect, and (ii) the denominator is the
Exercise Price in effect on the date of such exercise.
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5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND
RECLASSIFICATIONS. In case at any time or from time to time, the holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which, in the case
of Common Stock, are provided for in Section 4), then and in each such case the
holder of this Warrant, on the exercise hereof as provided in Section 1, shall
be entitled to receive the amount of other or additional stock and other
securities and property (including cash in the cases referred to in subdivision
(b) of this Section 5) which such holder would hold on the date of such exercise
if on the date of distribution of such other or additional stock or other
securities and property, or on the record date fixed for determining the
shareholders entitled to receive such other or additional stock or other
securities and property, such holder had been the holder of record of the number
of shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date thereof to and including the date of
such exercise, retained such shares and all such other or additional stock and
other securities and property (including cash in the cases referred to in
subdivision (b) of this Section 5) receivable by such holder as aforesaid during
such period, giving effect to all adjustments called for during such period by
Sections 3 and 4.
6. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any class
or securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
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recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which any such action is to be taken.
7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, all shares of Common Stock from time to time
issuable on the exercise of the Warrant; the shares of Common Stock which the
holder of this Warrant shall receive upon exercise of the Warrant will be duly
authorized, validly issued, fully paid and non-assessable.
8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant or Warrants of
like tenor, in the name of such holder or as such holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER.
This Warrant is issued upon the following terms, to all of which each holder or
owner hereof by the taking hereof consents and agrees:
(a) No holder of this Warrant shall, as such, be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this
Warrant for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon such holder, as such, any of the rights of a
stockholder of the Company until such holder shall have delivered formal
notice to the Company of an intention to exercise this Warrant, tendered
promptly the consideration required for exercise (whether cash or
securities), exercised the Warrant, and been issued shares of Common Stock
in accordance with the provisions hereof.
(b) Neither this Warrant nor any shares of Common Stock purchased
pursuant to this Warrant shall be registered under the Securities Act of
1933 (the "SECURITIES ACT") and applicable state securities laws.
Therefore, the Company may require, as a condition of allowing the
transfer or exchange of this Warrant or such shares, that the holder or
transferee of this Warrant or such shares, as the case may be, furnish to
the Company an opinion of
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counsel acceptable to the Company to the effect that such transfer or
exchange may be made without registration under the Securities Act and
applicable state securities laws. The certificates evidencing the shares
of Common Stock issued on the exercise of the Warrant shall bear a legend
to the effect that the shares evidenced by such certificates have not been
registered under the Securities Act and applicable state securities laws.
(c) This Warrant is not transferable or assignable to any party without
the prior written consent of the Company, and accompanied by an opinion of
counsel satisfactory to the Company that such transfer is permissible
under applicable law.
11. NOTICES. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by (i) first class mail, postage
prepaid, (ii) electronic facsimile transmission, or (iii) express overnight
courier service, at such address as may have been furnished to the Company in
writing by such holder or, until any such holder furnishes to the Company an
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
12. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant and the shares of Common Stock underlying this Warrant
shall be construed and enforced in accordance with and governed by the laws of
the State of Delaware. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
13. REGISTRATION RIGHTS.
13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a
510(k) or other application has been filed for the BioLoc Technology or DynaGen
Technology and this Warrant is at least sixty percent (60%) vested in accordance
with Section 1.3, at the request of the holders of at least seventy percent
(70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE
SHARES"), the Company shall use its best efforts to file a registration
statement on Form S-3 (to the extent such form is available to the Company)
covering the resale of the Shares underlying this Warrant (the "REGISTRABLE
SHARES"). The Company will so notify each holder of Registrable Shares,
including each holder who has a right to acquire Registrable Shares, and then
shall, as expeditiously as possible (using commercially reasonable efforts),
effect qualification and registration under the Securities Act on Form S-3 of
all or such portion of the Registrable Shares as the holder or holders shall
specify, and shall thereafter maintain the effectiveness of such Registration
Statement until such shares have been sold or until the registration obligation
terminates under Section 13.3.
The Company shall not be required to effect more than one (1)
registration on Form S-3. The Company's obligations under this Section shall
expire three (3) years after the issuance date of this Warrant. The Company
agrees to qualify or register the Shares under applicable state law, list the
shares wherever the Common Stock is then listed and supplement the prospectus as
necessary from time to time to keep it current.
-9-
13.2 EXPENSES. In the case of a registration under Section
13.1, the Company shall bear the expenses of any filing of any registration,
including but not limited to printing legal and accounting expenses, Securities
and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and
expenses; provided, however, that the Company shall have no obligation to pay or
otherwise bear any portion of the underwriters' commissions or discounts
attributable to the securities being offered and sold by the holder of this
Warrant, or the fees and expenses of any counsel, tax advisor or accountant
selected by such holder in connection with the registration of the securities.
13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the
Company under this Section 13 to register the securities shall expire and
terminate at such time as the holder of this Warrant shall be entitled or
eligible to sell the shares of Common Stock underlying this Warrant without
restriction and without a need for the filing of a registration statement under
the Securities Act of 1933, including without limitation, for any resales of
restricted securities made pursuant to Rule 144 as promulgated by the Securities
and Exchange Commission.
13.4 DELAY OF REGISTRATION. For a period not to exceed 120
days, the Company shall not be obligated to prepare and file, or be prevented
from delaying or abandoning, a registration statement pursuant to this Section
13 at any time when the Company, in its good faith judgment by the management of
the Company, with the advice of counsel, reasonably believes:
(I) that the filing thereof at the time requested, or
the offering of Registrable Shares pursuant thereto, would materially and
adversely affect (a) a pending or scheduled public offering or private placement
of the Company's securities, (b) an acquisition, merger, consolidation or
similar transaction by or of the Company, (c) pre-existing and continuing
negotiations, discussions or pending proposals with respect to any of the
foregoing transactions, or (d) the financial condition of the Company in view of
the disclosure of any pending or threatened litigation, claim, assessment or
governmental investigation which may be required thereby; and
(II) that the failure to disclose any material
information with respect to the foregoing would cause a violation of the
Securities Act or the Securities Exchange Act of 1934.
13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the
event that the Company registers any of the Registrable Shares under the
Securities Act, the Company will indemnify and hold harmless each holder and
each underwriter of the Registrable Shares (including their officers, directors,
affiliates and partners) so registered (including any broker or dealer through
whom such shares may be sold) and each person, if any, who controls such holder
or any such underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages, expenses or liabilities,
joint or several, to which they or any of them become subject under the
Securities Act, applicable state securities laws or under any other statute or
at common law or otherwise, as incurred, and, except as hereinafter provided,
will reimburse each such holder, each such underwriter and each such controlling
person, if any,
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for any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Securities were registered under the Securities Act, in any filing with any
state securities commission in any preliminary or amended preliminary prospectus
or in the final prospectus (or the registration statement or prospectus as from
time to time amended or supplemented by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances in which they were made, not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act or any state securities laws applicable to
the Company and relating to action or inaction required of the Company in
connection with such registration.
Notwithstanding the foregoing, the Company shall have no obligation to
indemnify any holder, underwriter or controlling person if: (i) such untrue
statement or omission was made in such registration statement, preliminary or
amended preliminary prospectus or final prospectus in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such holder of Registrable Shares (in the case of indemnification
of such holder), such underwriter (in the case of indemnification of such
underwriter) or such controlling person (in the case of indemnification of such
controlling person) expressly for use therein, or (ii) in the case of a sale
directly by such holder of Registrable Shares (including a sale of such
Registrable Shares through any underwriter retained by such holder of
Registrable Shares to engage in a distribution solely on behalf of such holder
of Registrable Shares), such untrue statement or alleged untrue statement or
omission or alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus copies of which were delivered to
such holder of Registrable Shares or such underwriter on a timely basis, and
such holder of Registrable Shares failed to deliver a copy of the final or
amended prospectus at or prior to the confirmation of the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00
p.m., Eastern Daylight Saving Time, on December 31, 2003.
Dated: December 12, 1996 DYNAGEN, INC.
ATTEST:
By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar
Title: Secretary Title: Executive Vice President
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO DynaGen, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ........ shares
of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes
payment of $........ therefor, and requests that the certificates for such
shares be issued in the name of, and delivered to .............., whose address
is ................................
Dated:
(Signature must conform to name of holder
as specified on the face of the Warrant)
(Address)
--------------------
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and
transfers unto .................. the right represented by the within Warrant to
purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware
corporation, to which the within Warrant relates, and appoints
.......................... Attorney to transfer such right on the books of
DynaGen, Inc., a Delaware corporation, with full power of substitution in the
premises.
Dated:
(Signature must conform to name of holder
as specified on the face of the Warrant)
(Address)
Signed in the presence of:
.............................
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
SECURITY MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS THE COMPANY HAS RECEIVED
THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE,
ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF
SUCH SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.
WARRANT NO. : W-CS-5 RIGHT TO PURCHASE 18,000
SHARES OF COMMON STOCK OF
DECEMBER 10, 1996 DYNAGEN, INC.
VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN DAYLIGHT SAVING
TIME ON DECEMBER 31, 2003.
DYNAGEN, INC.
COMMON STOCK PURCHASE WARRANT
DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies
that, in consideration of the payment of $100 (receipt of which is hereby
acknowledged), SHAWN BASU is entitled, subject to the terms set forth below, to
purchase from the Company, commencing December 10, 1996, at any time or from
time to time before 5:00 p.m., Eastern Daylight Saving Time, on or before
December 31, 2003, 18,000 fully paid and non-assessable shares of Common Stock,
$.01 par value, of the Company, at an exercise price per share equal to $1.44.
Such exercise price per share as adjusted from time to time as herein provided
is referred to herein as the "EXERCISE PRICE". The number and character of such
shares of Common Stock and the Exercise Price are subject to adjustment as
provided herein. THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 1.3 BELOW. NO PORTION
OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH
RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "COMPANY" shall include DynaGen, Inc., a Delaware
corporation, and any corporation which shall succeed or assume the obligations
of the Company hereunder.
(b) The term "COMMON STOCK" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after
such date, the holders of which shall have the
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right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of a majority of directors of the Company (even though
the right so to vote has been suspended by the happening of such a contingency),
(c) any other securities into which or for which any of the securities described
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise, or the
conversion of promissory notes or other obligations of the Company.
(c) The term "OTHER SECURITIES" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of this Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Sections 3 or 4 or otherwise.
1. EXERCISE OF WARRANT.
1.1. FULL EXERCISE. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company, in the amount obtained by multiplying the
number of shares of Common Stock for which this Warrant is then exercisable by
the Exercise Price then in effect.
1.2. PARTIAL EXERCISE. This Warrant may be exercised in part
by surrender of this Warrant in the manner and at the place provided in Section
1.1 except that the amount payable by the holder on such partial exercise shall
be the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by (b) the
Exercise Price then in effect. On any such partial exercise the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.3 CONDITIONS REGARDING EXERCISABILITY. Portions of this
Warrant are exercisable only upon the satisfaction of certain conditions, and
unlesss such conditions are satisfied, only that portion of this Warrant for
which the conditions have been previously satisfied may be exercised at any
time. The Warrant will vest and become exercisable in the following
installments: 20% of the shares of Common Stock under this Warrant are vested
and exercisable upon delivery of the Warrant, 40% will become exercisable upon
filing a 510(k) or other application for the BioLoc Technology or DynaGen
Technology with the FDA, and the remaining 40% will become exercisable upon
approval of such application by the FDA; provided, however, that the holder
continues to work on the BioLoc Technology or DynaGen Technology and is engaged
by the Company as a consultant at the times of each of the foregoing milestones.
If the
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services of the holder of the warrant as a consultant to the Company are
terminated without cause, then this Warrant shall become fully vested and
immediately exercisable at the time of any FDA application. The BioLoc
Technology and DynaGen Technology is defined in a certain Exclusive License
Agreement between the Company and BioLoc, Inc. dated as of December 6, 1996.
DynaGen shall use commercially reasonable efforts to file and prosecute such
application with the FDA.
1.4 CASHLESS EXERCISE FEATURE -- RIGHT TO CONVERT WARRANT INTO
COMMON STOCK. (a) In addition to and without limiting the rights of the
Warrantholder under the terms of this Warrant, the Warrantholder shall have the
right (the "CONVERSION RIGHT") to convert this Warrant or any portion thereof
into shares of Common Stock as provided in this Section at any time or from time
to time prior to its expiration, subject to the restrictions set forth in
paragraph (c) hereof. In lieu of exercising this warrant for cash, the holder
may elect to surrender this warrant for conversion and to receive shares of
Common Stock equal to the value of this Warrant (or the portion being cancelled,
surrendered and converted) by surrender of this Warrant to the Company together
with notice of such election. Upon such event, the Company shall issue to the
holder a number of shares of the Company's Common Stock computed by using the
following formula:
X MINUS Y (A MINUS B)
A
Where: X = The number of shares of Common Stock to be issued to the
holder;
Y = The number of shares of Common Stock purchasable under
this Warrant;
A = The "Fair Market Value" of one share of the Common Stock;
and
B = The Exercise Price of the Warrant (as adjusted to the date
of the calculation).
Upon exercise of the Conversion Right with respect to a particular
number of shares subject to this Warrant, the Company shall deliver to the
Warrantholder, without payment by the Warrantholder of any exercise price or any
cash or other consideration, that number of shares of Common Stock equal to the
number computed using the above formula. Notwithstanding anything in this
Section to the contrary, the Conversion Right cannot be exercised with respect
to a number of Converted Warrant Shares having a value below $1,000. No
fractional shares shall be issuable upon exercised of the Conversion Right, and
if the number of shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the Warrantholder an amount
in cash equal to the Fair Market Value of the resulting fractional share.
(b) The Conversion Right may be exercised by the Warrantholder by the
surrender of this Warrant at the principal office of the Company together with a
written statement specifying that the Warrantholder thereby intends to exercise
the Conversion Right and indicating the number of shares of Common Stock or
authorized Common Stock subject to this Warrant which are being surrendered in
exercise of the Conversion Right. Such conversion shall be effective upon
receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "CONVERSION
DATE"), but not later than the expiration date of this Warrant.
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(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a charge to the Company's earnings for financial
reporting purposes, then the Conversion Right shall automatically terminate upon
the Company's written notice to the Warrantholder of such adverse accounting
treatment.
(d) For purposes of this Section, the "FAIR MARKET VALUE" of a share of
Common Stock or authorized Common Stock as of a particular date (the
"DETERMINATION DATE") shall mean:
(i) if the Company's Common Stock is then traded on any
nationally-recognized stock exchange or quoted on the NASDAQ National Market
System or Small-Cap Market, the average of the closing sale prices for the 20
trading days preceding the Determination Date, as reported by such exchange or
system, as reported in The Wall Street Journal or any other publication,
including the NASD;
(ii) if the Company's Common Stock is then traded on the
over-the-counter market, the average of the closing bid and closing asked prices
for the 30 trading days preceding the Determination Date, as reported in The
Wall Street Journal or by any market maker; or
(iii) if quotations for the Company's Common Stock or
authorized Common Stock is not readily available as set forth in (i) or (ii)
above, then as determined in good faith by the Company's Board of Directors upon
a review of all relevant factors, including, without limitation, the price at
which shares of the Company's Common Stock or authorized Common Stock could
reasonably be expected to be sold in an arms-length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the Company, which determination by the
Board of Directors shall give due consideration to recent transactions involving
shares of the Common Stock or authorized Common Stock, if any, revenues and
earnings of the Company to the date of such determination (if any), projected
revenues and earnings of the Company, the effect of the transfer restrictions to
which the shares are subject under law, the absence of a public market for the
Common Stock or authorized Common Stock, and such other matters as the Board of
Directors deems pertinent. Such determination by the Board of Directors shall be
conclusive and binding.
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
thirty (30) days thereafter, the Company at its expense (including the payment
by it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and non-assessable shares of Common Stock (or Other
Securities) to which such holder shall be entitled on such exercise, plus, in
lieu of any fractional share to which such holder would otherwise be entitled,
cash equal to such fraction multiplied by the then current market value of one
full share.
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3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION OR MERGER.
3.1. REORGANIZATION, CONSOLIDATION OR MERGER. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or entity, or (c) transfer all
or substantially all of its capital stock, properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, the holder of this Warrant, on the exercise
hereof as provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, upon the proper and rightful
exercise of this Warrant, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which such holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if such holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in Sections 4 and 5.
3.2. CONTINUATION OF TERMS. Upon any corporate event referred
to in this Section 3, this Warrant shall continue in full force and effect and
the terms hereof shall be applicable to the shares of stock and Other Securities
and property receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger, as the case may be, and shall
be binding upon the issuer of any such stock or other securities.
4. ADJUSTMENTS FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that
the Company shall (i) issue additional shares of the Common Stock as a dividend
or other distribution on outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
the Common Stock into a smaller number of shares of the Common Stock, then, in
each such event, the Exercise Price shall, simultaneously with the happening of
such event, be adjusted by multiplying the then prevailing Exercise Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event (calculated assuming the conversion
or exchange of all outstanding shares of convertible or exchangeable securities
of the Company which are convertible or exchangeable into, or exercisable for,
shares of Common Stock) and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after such event (calculated
assuming the conversion or exchange of all outstanding shares of convertible or
exchangeable securities of the Company which are convertible or exchangeable
into, or exercisable for, shares of Common Stock), and the product so obtained
shall thereafter be the Exercise Price then in effect. The Exercise Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4. The holder of
this Warrant shall thereafter, on the exercise hereof as provided in Section 1,
be entitled to receive that number of shares of Common Stock determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of this Section 4) be issuable on such exercise, by a fraction of
which (i) the numerator is the Exercise Price which would otherwise (but for the
provisions of this Section 4) be in effect, and (ii) the denominator is the
Exercise Price in effect on the date of such exercise.
-6-
5. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY AND
RECLASSIFICATIONS. In case at any time or from time to time, the holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which, in the case
of Common Stock, are provided for in Section 4), then and in each such case the
holder of this Warrant, on the exercise hereof as provided in Section 1, shall
be entitled to receive the amount of other or additional stock and other
securities and property (including cash in the cases referred to in subdivision
(b) of this Section 5) which such holder would hold on the date of such exercise
if on the date of distribution of such other or additional stock or other
securities and property, or on the record date fixed for determining the
shareholders entitled to receive such other or additional stock or other
securities and property, such holder had been the holder of record of the number
of shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date thereof to and including the date of
such exercise, retained such shares and all such other or additional stock and
other securities and property (including cash in the cases referred to in
subdivision (b) of this Section 5) receivable by such holder as aforesaid during
such period, giving effect to all adjustments called for during such period by
Sections 3 and 4.
6. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any class
or securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
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recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or Other Securities) shall be entitled to
exchange their shares of Common Stock (or Other Securities) for securities or
other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be mailed at least twenty (20) days prior to the
date specified in such notice on which any such action is to be taken.
7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrant, all shares of Common Stock from time to time
issuable on the exercise of the Warrant; the shares of Common Stock which the
holder of this Warrant shall receive upon exercise of the Warrant will be duly
authorized, validly issued, fully paid and non-assessable.
8. EXCHANGE OF WARRANT. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant or Warrants of
like tenor, in the name of such holder or as such holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. WARRANTHOLDER NOT DEEMED STOCKHOLDER; RESTRICTIONS ON TRANSFER.
This Warrant is issued upon the following terms, to all of which each holder or
owner hereof by the taking hereof consents and agrees:
(a) No holder of this Warrant shall, as such, be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this
Warrant for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon such holder, as such, any of the rights of a
stockholder of the Company until such holder shall have delivered formal
notice to the Company of an intention to exercise this Warrant, tendered
promptly the consideration required for exercise (whether cash or
securities), exercised the Warrant, and been issued shares of Common Stock
in accordance with the provisions hereof.
(b) Neither this Warrant nor any shares of Common Stock purchased
pursuant to this Warrant shall be registered under the Securities Act of
1933 (the "SECURITIES ACT") and applicable state securities laws.
Therefore, the Company may require, as a condition of allowing the
transfer or exchange of this Warrant or such shares, that the holder or
transferee of this Warrant or such shares, as the case may be, furnish to
the Company an opinion of
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counsel acceptable to the Company to the effect that such transfer or
exchange may be made without registration under the Securities Act and
applicable state securities laws. The certificates evidencing the shares
of Common Stock issued on the exercise of the Warrant shall bear a legend
to the effect that the shares evidenced by such certificates have not been
registered under the Securities Act and applicable state securities laws.
(c) This Warrant is not transferable or assignable to any party without
the prior written consent of the Company, and accompanied by an opinion of
counsel satisfactory to the Company that such transfer is permissible
under applicable law.
11. NOTICES. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by (i) first class mail, postage
prepaid, (ii) electronic facsimile transmission, or (iii) express overnight
courier service, at such address as may have been furnished to the Company in
writing by such holder or, until any such holder furnishes to the Company an
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
12. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant and the shares of Common Stock underlying this Warrant
shall be construed and enforced in accordance with and governed by the laws of
the State of Delaware. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
13. REGISTRATION RIGHTS.
13.1 SHORT-FORM REGISTRATIONS ON FORM S-3. At such time when a
510(k) or other application has been filed for the BioLoc Technology or DynaGen
Technology and this Warrant is at least sixty percent (60%) vested in accordance
with Section 1.3, at the request of the holders of at least seventy percent
(70%) of the shares of Common Stock underlying this Warrant (the "REGISTRABLE
SHARES"), the Company shall use its best efforts to file a registration
statement on Form S-3 (to the extent such form is available to the Company)
covering the resale of the Shares underlying this Warrant (the "REGISTRABLE
SHARES"). The Company will so notify each holder of Registrable Shares,
including each holder who has a right to acquire Registrable Shares, and then
shall, as expeditiously as possible (using commercially reasonable efforts),
effect qualification and registration under the Securities Act on Form S-3 of
all or such portion of the Registrable Shares as the holder or holders shall
specify, and shall thereafter maintain the effectiveness of such Registration
Statement until such shares have been sold or until the registration obligation
terminates under Section 13.3.
The Company shall not be required to effect more than one (1)
registration on Form S-3. The Company's obligations under this Section shall
expire three (3) years after the issuance date of this Warrant. The Company
agrees to qualify or register the Shares under applicable state law, list the
shares wherever the Common Stock is then listed and supplement the prospectus as
necessary from time to time to keep it current.
-9-
13.2 EXPENSES. In the case of a registration under Section
13.1, the Company shall bear the expenses of any filing of any registration,
including but not limited to printing legal and accounting expenses, Securities
and Exchange Commission and NASD filing fees and all related "Blue Sky" fees and
expenses; provided, however, that the Company shall have no obligation to pay or
otherwise bear any portion of the underwriters' commissions or discounts
attributable to the securities being offered and sold by the holder of this
Warrant, or the fees and expenses of any counsel, tax advisor or accountant
selected by such holder in connection with the registration of the securities.
13.3 EXPIRATION OF REGISTRATION RIGHTS. The obligations of the
Company under this Section 13 to register the securities shall expire and
terminate at such time as the holder of this Warrant shall be entitled or
eligible to sell the shares of Common Stock underlying this Warrant without
restriction and without a need for the filing of a registration statement under
the Securities Act of 1933, including without limitation, for any resales of
restricted securities made pursuant to Rule 144 as promulgated by the Securities
and Exchange Commission.
13.4 DELAY OF REGISTRATION. For a period not to exceed 120
days, the Company shall not be obligated to prepare and file, or be prevented
from delaying or abandoning, a registration statement pursuant to this Section
13 at any time when the Company, in its good faith judgment by the management of
the Company, with the advice of counsel, reasonably believes:
(I) that the filing thereof at the time requested, or
the offering of Registrable Shares pursuant thereto, would materially and
adversely affect (a) a pending or scheduled public offering or private placement
of the Company's securities, (b) an acquisition, merger, consolidation or
similar transaction by or of the Company, (c) pre-existing and continuing
negotiations, discussions or pending proposals with respect to any of the
foregoing transactions, or (d) the financial condition of the Company in view of
the disclosure of any pending or threatened litigation, claim, assessment or
governmental investigation which may be required thereby; and
(II) that the failure to disclose any material
information with respect to the foregoing would cause a violation of the
Securities Act or the Securities Exchange Act of 1934.
13.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the
event that the Company registers any of the Registrable Shares under the
Securities Act, the Company will indemnify and hold harmless each holder and
each underwriter of the Registrable Shares (including their officers, directors,
affiliates and partners) so registered (including any broker or dealer through
whom such shares may be sold) and each person, if any, who controls such holder
or any such underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages, expenses or liabilities,
joint or several, to which they or any of them become subject under the
Securities Act, applicable state securities laws or under any other statute or
at common law or otherwise, as incurred, and, except as hereinafter provided,
will reimburse each such holder, each such underwriter and each such controlling
person, if any,
-10-
for any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Securities were registered under the Securities Act, in any filing with any
state securities commission in any preliminary or amended preliminary prospectus
or in the final prospectus (or the registration statement or prospectus as from
time to time amended or supplemented by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances in which they were made, not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act or any state securities laws applicable to
the Company and relating to action or inaction required of the Company in
connection with such registration.
Notwithstanding the foregoing, the Company shall have no obligation to
indemnify any holder, underwriter or controlling person if: (i) such untrue
statement or omission was made in such registration statement, preliminary or
amended preliminary prospectus or final prospectus in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such holder of Registrable Shares (in the case of indemnification
of such holder), such underwriter (in the case of indemnification of such
underwriter) or such controlling person (in the case of indemnification of such
controlling person) expressly for use therein, or (ii) in the case of a sale
directly by such holder of Registrable Shares (including a sale of such
Registrable Shares through any underwriter retained by such holder of
Registrable Shares to engage in a distribution solely on behalf of such holder
of Registrable Shares), such untrue statement or alleged untrue statement or
omission or alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus copies of which were delivered to
such holder of Registrable Shares or such underwriter on a timely basis, and
such holder of Registrable Shares failed to deliver a copy of the final or
amended prospectus at or prior to the confirmation of the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
14. EXPIRATION. The right to exercise this Warrant shall expire at 5:00
p.m., Eastern Daylight Saving Time, on December 31, 2003.
Dated: December 12, 1996 DYNAGEN, INC.
ATTEST:
By: /s/ John M. Hession By: /s/ Dhananjay G. Wadekar
Title: Secretary Title: Executive Vice President
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO DynaGen, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ........ shares
of Common Stock of DynaGen, Inc., a Delaware corporation, and herewith makes
payment of $........ therefor, and requests that the certificates for such
shares be issued in the name of, and delivered to .............., whose address
is ................................
Dated:
(Signature must conform to name of holder as
specified on the face of the Warrant)
(Address)
--------------------
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and
transfers unto .................. the right represented by the within Warrant to
purchase ............. shares of Common Stock of DynaGen, Inc., a Delaware
corporation, to which the within Warrant relates, and appoints
.......................... Attorney to transfer such right on the books of
DynaGen, Inc., a Delaware corporation, with full power of substitution in the
premises.
Dated:
(Signature must conform to name of holder as
specified on the face of the Warrant)
(Address)
Signed in the presence of:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH
RESPECT THERETO.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-CS-6 Number of Shares: 50,000
DynaGen, Inc.
Void after January 15, 2002
(except as otherwise set forth in Section 2 below)
1. Issuance. This Warrant is issued to Leonardo G. Zangani by DynaGen,
Inc., a Delaware corporation (hereinafter with its successors called the
"Company"). THIS WARRANT IS EXERCISABLE IN INSTALLMENTS, SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS AS SET FORTH IN SECTION 2 BELOW. NO PORTION
OF THIS WARRANT MAY BE EXERCISED UNLESS SUCH CONDITIONS HAVE BEEN SATISFIED WITH
RESPECT TO THE CONDITIONS REGARDING EXERCISABILITY.
2. Purchase Price; Number of Shares. Subject to the terms and
conditions hereinafter set forth, the registered holder of this Warrant (the
"Holder") is entitled upon surrender of this Warrant with the subscription form
annexed hereto duly executed, at the office of the Company, 99 Erie Street,
Cambridge, Massachusetts 02139, or such other office as the Company shall notify
the Holder of in writing, to purchase from the Company at a price per share (the
"Purchase Price") of $1.97 an aggregate of fifty thousand (50,000) fully paid
and nonassessable shares of Common Stock, $.01 par value, of the Company (the
"Common Stock"), subject to the conditions stated immediately below. Commencing
on the date hereof, the Holder may exercise this Warrant for 25,000 of such
shares. If, within six months of the date hereof, the Company renews or extends
the original term of the Consulting Agreement between the Company and L.G.
Zangani, Inc. (the "Agreement"), then, commencing on the date that is six months
from the date hereof, the Holder may exercise this Warrant for the remaining
shares of Common Stock subject hereto. If the Company does not renew or extend
the original term of the Agreement within six months of the date hereof, such
remaining shares shall not be exercisable, and the portion of the Warrant
relating to such remaining shares shall be automatically canceled and
extinguished and shall be without further effect. Furthermore, if the Company
does not renew or extend the original term of the Agreement within six months
hereof, notwithstanding anything to the contrary herein, this Warrant shall
expire at the close of business on December 31, 1999 and shall be void
thereafter. Until such time as this Warrant is exercised in full or expires, the
Purchase Price and the securities issuable upon exercise of this Warrant are
subject to adjustment as hereinafter provided.
-2-
3. Payment of Purchase Price. Except as set forth in Section 4 below,
the Purchase Price shall be paid in cash or by check.
4. Net Issue Election. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
A
where X = the number of shares to be issued to the Holder
pursuant to this Section 4.
Y = the number of shares covered by this Warrant, subject
to Section 2 hereof, in respect of which the net
issue election is made pursuant to this Section 4.
A = The "Fair Market Value" of one share of Common Stock.
B = the Purchase Price in effect under this Warrant at
the time the net issue election is made pursuant to
this Section 4.
For purposes of this Section 4, the "Fair Market Value" of a share of
Common Stock as of a particular date (the "Determination Date") means:
(i) if the Company's Common Stock is then traded on any
nationally recognized stock exchange or quoted on the Nasdaq National Market
System or SmallCap Market, the average of the closing sale prices for the 10
trading days preceding the Determination Date, as reported by such exchange or
system, as reported in The Wall Street Journal or any other publication,
including the NASD;
(ii) if the Company's Common Stock is then traded on the
over-the-counter market, the average of the closing bid and closing asked prices
for the 15 trading days preceding the Determination Date, as reported in The
Wall Street Journal or by any market maker; or
(iii) if quotations for the Company's Common Stock are not
readily available as set forth in (i) or (ii) above, then as determined in good
faith by the Company's Board of Directors upon a review of all relevant factors,
including, without limitation, the price at which shares of the Company's Common
Stock could reasonably be expected to be sold in an arms-length transaction, for
cash, other than on an installment basis, to a person not employed by,
controlled by, in control of or under common control with the Company, which
determination by the Board of Directors shall give due consideration to recent
transactions involving shares of
-3-
the Common Stock, if any, revenues and earnings of the Company to the date of
such determination, if any, projected revenues and earnings of the Company, the
effect of the transfer restrictions to which the shares are subject under law,
the absence of a public market for the Common Stock, and such other matters as
the Board of Directors deems pertinent. Such determination by the Board of
Directors shall be conclusive and binding.
5. Partial Exercise. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
6. Issuance Date. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. Expiration Date. This Warrant shall expire at the close of business
on January 15, 2002 (unless it expires earlier under Section 2 hereof) and shall
be void thereafter.
8. Reserved Shares; Valid Issuance. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be issued
pursuant to the exercise of this Warrant will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. Registration Rights. The Company hereby grants the following
registration rights with respect to the shares covered by this Warrant (subject
to Section 2 hereof):
9.1 "Piggy-Back" Registrations. If at any time the Company
shall determine to register in a public offering for the account of selling
stockholders (and not for its own account) under the Securities Act of 1933, as
amended, any of its Common Stock, it shall send to the Holder written notice of
such determination and, if within 15 days after receipt of such notice, the
Holder shall so request in writing, the Company shall use its best efforts to
include in such registration statement all or any part of the shares covered by
this Warrant that the Holder requests to be registered. This right shall not
apply to a registration of shares of Common Stock on Form S-8 or Form S-4 (or
their then equivalents) relating to shares of Common Stock to be issued by the
Company in connection with any acquisition of any entity or business or shares
of Common Stock issuable in connection with any stock option, stock purchase or
other employee benefit plan. Notwithstanding anything to the contrary in this
Section 9, the Company shall not be required to effect a registration pursuant
to this Section 9 for fewer than the total number of shares issuable or issued
pursuant to this Warrant (as set forth in Section 2 hereof) at the time of
filing of such registration statement.
-4-
If, in connection with any offering of Common Stock
to be sold by selling stockholders, the managing underwriter or the Company
shall impose a limitation on the number of shares of Common Stock that may be
included in any such registration statement because, in its judgment, such
limitation is necessary to effect an orderly public distribution of the Common
Stock and to maintain a stable market for the equity securities of the Company,
then the Company shall be obligated to include in such registration statement
only such limited portion of the shares covered by this Warrant with respect to
which the Holder has requested inclusion hereunder.
9.2 Expenses. In the case of a registration under this Section
9, the Company shall bear all costs and expenses of each such registration,
including, but not limited to, printing, legal and accounting expenses,
Securities and Exchange Commission and National Association of Securities
Dealers filing fees and all related "Blue Sky" fees and expenses; provided,
however, that the Company shall have no obligation to pay or otherwise bear any
portion of the underwriters' commissions or discounts attributable to the shares
covered by this Warrant being offered and sold by the Holder, or the fees and
expenses of any counsel for the Holder in connection with the registration of
such shares.
9.3 Expiration of Registration Rights. The obligations of the
Company under this Section 9 shall expire on the earlier of (i) the date on
which the shares covered by this Warrant shall have become transferable (whether
or not so transferred) in accordance with the resale provisions of Rule 144, or
any successor rule or provision, under the Securities Act of 1933, as amended,
and (ii) the date that this Warrant terminates.
10. Dividends. If after the date hereof the Company shall subdivide the
Common Stock, by split-up or otherwise, or combine the Common Stock, or issue
additional shares of Common Stock in payment of a stock dividend on the Common
Stock, the number of shares issuable on the exercise of this Warrant shall
forthwith be proportionately increased in the case of a subdivision or stock
dividend, or proportionately decreased in the case of a combination, and the
Purchase Price shall forthwith be proportionately decreased in the case of a
subdivision or stock dividend, or proportionately increased in the case of a
combination.
11. Mergers and Reclassifications. If after the date hereof there shall
be any reclassification, capital reorganization or change of the Common Stock
(other than as a result of a subdivision, combination or stock dividend provided
for in Section 10 hereof), or any consolidation of the Company with, or merger
of the Company into, another corporation or other business organization (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or change of the
outstanding Common Stock), or any sale or conveyance to another corporation or
other business organization of all or substantially all of the assets of the
Company (each an "Acquisition Event"), then, as a condition of such Acquisition
Event, lawful provisions shall be made, and duly executed documents evidencing
the same from the Company or its successor shall be delivered to the Holder, so
that the Holder shall have the right to purchase, at a total price not to exceed
that payable upon the exercise of this Warrant in full, the kind and amount of
shares of stock and other securities and property receivable upon such
Acquisition Event by a holder of the
-5-
number of shares of Common Stock which might have been purchased by the Holder
immediately prior to such Acquisition Event, and in any such case appropriate
provisions shall be made with respect to the rights and interest of the Holder
to the end that the provisions hereof (including without limitation, provisions
for the adjustment of the Purchase Price and the number of shares issuable
hereunder) shall thereafter be applicable in relation to any shares of stock or
other securities and property thereafter deliverable upon exercise hereof.
Notwithstanding anything to the contrary herein, the Holder must
exercise this Warrant prior to the consummation of the Acquisition Event, and if
this Warrant is not so exercised, it shall terminate upon the consummation of
such Acquisition Event.
12. Fractional Shares. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant as an entirety, the Holder would, except as provided in this Section 12,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
13. Certificate of Adjustment. Whenever the Purchase Price is adjusted,
as herein provided, the Company shall promptly deliver to the Holder a
certificate of the principal financial or accounting officer of the Company
setting forth the Purchase Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
14. Notices of Record Date, Etc. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right,
(b) any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger involving the
Company, or sale or conveyance of all or substantially all of its assets, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
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15. Amendment. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company.
16. Warrant Register; Transfers, Etc.; Warrantholder Not Deemed
Stockholder.
A. The Company will maintain a register containing the name
and address of the Holder and its assignees, if applicable. The Holder may
change its address as shown on the warrant register by written notice to the
Company requesting such change. Any notice or written communication required or
permitted to be given to the Holder may be given by certified mail or delivered
to the Holder at its address as shown on the warrant register.
B. Without the prior written consent of the Company, this
Warrant may not be transferred by the Holder.
C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and denomination
and deliver the same (i) in exchange and substitution for and upon surrender and
cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost,
stolen or destroyed, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft or destruction of such Warrant (including a
reasonably detailed affidavit with respect to the circumstances of any loss,
theft or destruction) and of indemnity reasonably satisfactory to the Company.
D. No holder of this Warrant shall, as such, be deemed the
holder of the Common Stock that may at any time be issuable upon exercise of
this Warrant for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon such holder, as such, any of the rights of a
stockholder of the Company until such holder has delivered formal notice to the
Company of an intention to exercise this Warrant, tendered promptly the
consideration required for exercise (whether cash or securities), exercised the
Warrant, and been issued shares of Common Stock in accordance with the
provisions hereof.
17. Governing Law. The provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the
Commonwealth of Massachusetts.
18. Business Days. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday in Massachusetts, then such action may be
taken or right may be exercised on the next succeeding day which is not a
Saturday or Sunday or such a legal holiday.
Dated: January 15, 1997 DYNAGEN, INC.
(Corporate Seal) By: /s/ Dhananjay G. Wadekar
Attest: Title: Executive Vice President
/s/ Dennis R. Bilodeau
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Form of Subscription
To:____________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
------------------------------
Signature
Form of Net Issue Election Notice
To:____________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the right to
purchase _______ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
------------------------------
Signature
DYNAGEN, INC.
1991 STOCK PLAN
1. PURPOSE. This 1991 Stock Plan (the "Plan") is intended to provide
incentives: (a) to the officers and other employees of DynaGen, Inc., a Delaware
corporation (the "Company"), its parent (if any) and any present or future
subsidiaries of the Company (collectively, "Related Corporations") by providing
them with opportunities to purchase stock in the Company pursuant to options
granted hereunder which qualify as "incentive stock options" under Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO" or
"ISOs"); (b) to directors, officers, employees and consultants of the Company
and Related Corporations by providing them with opportunities to purchase stock
in the Company pursuant to options granted hereunder which do not qualify as
ISOs ("Non-Qualified Option" or "Non-Qualified Options"); (c) to directors,
officers, employees and consultants of the Company and Related Corporations by
providing them with awards of stock in the Company ("Awards"); and (d) to
directors, officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to make direct purchases of
stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are
referred to hereafter individually as an "Option" and collectively as "Options."
Options, Awards and authorizations to make Purchases are referred to hereafter
collectively as "Stock Rights." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by
the Board of Directors of the Company (the "Board") or by a committee
appointed by the Board (the "Committee"); provided, that, to the extent
required by Rule 16b-3, or any successor provision ("Rule 16b-3"), of the
Securities Exchange Act of 1934, with respect to specific grants of Stock
Rights, the Plan shall be administered by a disinterested administrator or
administrators within the meaning of Rule 16b-3. Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to (i) determine the employees of the Company and
Related Corporations (from among the class of employees eligible under
paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine
(from among the class of individuals and entities eligible under paragraph
3 to receive Non-Qualified Options and Awards and to make Purchases) to
whom Non-Qualified Options, Awards and authorizations to make Purchases
may be granted; (ii) determine the time or times at which Options or
Awards may be granted or Purchases made; (iii) determine the option price
of shares subject to each Option, which price shall not be less than the
minimum price specified in paragraph 6, and the purchase
2
price of shares subject to each Purchase; (iv) determine whether each
Option granted shall be an ISO or a Non-Qualified Option; (v) determine
(subject to paragraph 7) the time or times when each Option shall become
exercisable and the duration of the exercise period; (vi) determine
whether restrictions such as repurchase options are to be imposed on
shares subject to Options, Awards and Purchases and the nature of such
restrictions, if any, and (vii) interpret the Plan and prescribe and
rescind rules and regulations relating to it. If the Committee determines
to issue a Non-Qualified Option, it shall take whatever actions it deems
necessary, under Section 422 of the Code and the regulations promulgated
thereunder, to ensure that such Option is not treated as an ISO. The
interpretation and construction by the Committee of any provisions of the
Plan or of any Stock Right granted under it shall be final unless
otherwise determined by the Board. The Committee may from time to time
adopt such rules and regulations for carrying out the Plan as it may deem
best. No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Stock Right granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee (if
consistent with applicable state law), shall be the valid acts of the
Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted
to members of the Board consistent with the provisions of the first
sentence of paragraph 2(A) above, if applicable. All grants of Stock
Rights to members of the Board shall in all other respects be made in
accordance with the provisions of this Plan applicable to other eligible
persons. Members of the Board who are either (i) eligible for Stock Rights
pursuant to the Plan or (ii) have been granted Stock Rights may vote on
any matters affecting the administration of the Plan or the grant of any
Stock Rights pursuant to the Plan, except that no such member shall act
upon the granting to himself of Stock Rights, but any such member may be
counted in determining the existence of a quorum at any meeting of the
Board during which action is taken with respect to the granting to him of
Stock Rights.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee
of the Company or any Related Corporation. Those officers and directors of the
Company who are not employees may not be granted ISOs under the Plan.
Non-Qualified Options, Awards and authorizations to make Purchases may be
granted to any employee, officer or director (whether or not also an employee)
or consultant of the Company or any Related Corporation. The Committee may take
into consideration a recipient's individual circumstances in determining whether
to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a
Purchase. Granting of any Stock Right to any individual or entity shall neither
entitle that individual or entity to, nor disqualify him from, participation in
any other grant of Stock Rights.
3
4. STOCK. The stock subject to Options, Awards and Purchases shall be
authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 2,600,000, subject to adjustment as provided in
paragraph 13. Any such shares may be issued as ISOs, Non-Qualified Options or
Awards, or to persons or entities making Purchases, so long as the number of
shares so issued does not exceed such number, as adjusted. If any Option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full or shall cease for any reason to be exercisable in whole or in
part, the unpurchased shares subject to such Options shall again be available
for grants of Stock Rights under the Plan.
No person may be granted Options to acquire, in the aggregate, more
than 750,000 of shares of Common Stock under the Plan during any one fiscal
year. If any Option granted under the Plan shall expire or terminate for any
reason without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part or shall be repurchased by the Company, the
shares subject to such Option shall be included in the determination of the
aggregate number of shares of Common Stock deemed to have been granted to such
person under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time after October 14, 1991 and prior to October 14, 2001. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant. The Committee shall have the right, with the consent of the optionee, to
convert an ISO granted under the Plan to a Non-Qualified Option pursuant to
paragraph 16.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share
specified in the agreement relating to each Non-Qualified Option granted
under the Plan shall in no event be less than the minimum legal
consideration required therefor under the laws of the State of Delaware or
the laws of any jurisdiction in which the Company or its successors in
interest may be organized.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant.
C. $100,000 ANNUAL LIMITATION ON ISOS. Each eligible employee may be
granted ISOs only to the extent that, in the aggregate under this Plan and
all incentive stock option plans of the Company and any Related
Corporation, the value of Common Stock
4
(determined at the time ISOs were granted) which is subject to ISOs that
become exercisable for the first time by such employee during any calendar
year does not exceed $100,000. Any options granted to an employee in
excess of such amount will be granted as Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are available prior
to the date such Option is granted and shall mean (i) the average (on that
date) of the high and low prices of the Common Stock on the principal
national securities exchange on which the Common Stock is traded, if the
Common Stock is then traded on a national securities exchange; or (ii) the
last reported sale price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the
NASDAQ National Market List. However, if the Common Stock is not publicly
traded at the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Common Stock as
determined by the Committee after taking into consideration all factors
which it deems appropriate, including, without limitation, recent sale and
offer prices of the Common Stock in private transactions negotiated at
arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10, each Option shall expire on the date specified by the
Committee, but not more than (i) ten years and one day from the date of grant in
the case of Non-Qualified Options, (ii) ten years from the date of grant in the
case of ISOs generally, and (iii) five years from the date of grant in the case
of ISOs granted to an employee owning stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any Related Corporation. Subject to earlier termination as provided in
paragraphs 9 and 10, the term of each ISO shall be the term set forth in the
original instrument granting such ISO, except with respect to any part of such
ISO that is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the date of
grant or shall become exercisable thereafter in such installments as the
Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at any
time or from time to time, in whole or in part, for up to the total number
of shares with respect to which it is then exercisable.
5
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date of exercise of any installment of any Option; provided
that the Committee shall not, without the consent of an optionee,
accelerate the exercise date of any installment of any Option granted to
any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the
annual vesting limitation contained in Section 422(d) of the Code, as
described in paragraph 6(C).
E. EXTENSION OF EXERCISE PERIOD. Notwithstanding any provision herein
to the contrary, the Committee may, in its discretion, extend the exercise
period with respect to any Non-Qualified Option.
9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed
by the Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his ISOs shall
become exercisable, and his ISOs shall terminate after the passage of ninety
(90) days from the date of termination of his employment, but in no event later
than on their specified expiration dates, except to the extent that such ISOs
(or unexercised installments thereof) have been converted into Non-Qualified
Options pursuant to paragraph 16. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those attributable
to illness, military obligations or governmental service) provided that the
period of such leave does not exceed 90 days or, if longer, any period during
which such optionee's right to reemployment is guaranteed by statute. A bona
fide leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the optionee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long as the optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in the Plan shall be deemed to give any grantee of any Stock Right the right to
be retained in employment or other service by the Company or any Related
Corporation for any period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his death, any ISO of his may be
exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by the
laws of descent and distribution, at any time prior to the earlier of the
specified expiration date of the ISO or 180 days from the date of the
optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his disability, he shall have
the right to exercise any ISO held by him on the date of termination of
employment, to the extent of the number of shares with respect to which he
could have exercised it on that date, at any time prior to the earlier of
the specified expiration date of the ISO or 180 days from the date of the
termination of
6
the optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or successor statute.
11. ASSIGNABILITY. No Option shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution or, with
respect to Non-qualified Options only, pursuant to a qualified domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder. During the lifetime of the
optionee each ISO shall be exercisable only by him.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other termination
and cancellation provisions as the Committee may determine. The Committee may
from time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company relating to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with
or acquired by another entity in a merger, sale of all or substantially
all of the Company's assets or otherwise (an "Acquisition"), the Committee
or the board of directors of any entity assuming the obligations of the
Company hereunder (the "Successor Board"), shall, as to outstanding
Options, either (i) make appropriate provision for the continuation of
such Options by substituting on an equitable basis for the shares then
subject to such Options the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Acquisition; or
(ii) make appropriate provision for the continuation of such Options by
substituting on an equitable basis for the shares then subject to such
7
Options any equity securities of the successor corporation; or (iii) upon
written notice to the optionees, provide that all Options must be
exercised, to the extent then exercisable, within a specified number of
days of the date of such notice, at the end of which period the Options
shall terminate; or (iv) terminate all Options in exchange for a cash
payment equal to the excess of the fair market value of the shares subject
to such Options (to the extent then exercisable) over the exercise price
thereof; or (v) accelerate the date of exercise of such Options or of any
installment of such Options; or (vi) terminate all Options in exchange for
the right to participate in any stock option or other employee benefit
plan of any successor corporation.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to receive for the purchase price
paid upon such exercise the securities he would have received if he had
exercised his Option prior to such recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments
made pursuant to subparagraphs A, B or C with respect to ISOs shall be
made only after the Committee, after consulting with counsel for the
Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs, it may refrain from
making such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, each Option will terminate immediately
prior to the consummation of such proposed action or at such other time
and subject to such other conditions as shall be determined by the
Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B or C above, the class and aggregate number of shares
set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall
8
determine the specific adjustments to be made under this paragraph 13 and,
subject to paragraph 2, its determination shall be conclusive.
If any person or entity owning restricted Common Stock obtained by
exercise of a Stock Right made hereunder receives shares or securities or cash
in connection with a corporate transaction described in subparagraphs A, B or C
above as a result of owning such restricted Common Stock, such shares or
securities or cash shall be subject to all of the conditions and restrictions
applicable to the restricted Common Stock with respect to which such shares or
securities or cash were issued, unless otherwise determined by the Committee or
the Successor Board.
14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, or (b) at the
discretion of the Committee, through delivery of shares of Common Stock having a
fair market value equal as of the date of the exercise to the cash exercise
price of the Stock Right, (c) at the discretion of the Committee and consistent
with applicable law, through the delivery of an assignment to the Company of a
sufficient amount of the proceeds from the sale of the Common Stock acquired
upon exercise of the Stock Right and an authorization to the broker or selling
agent to pay that amount to the Company, which sale shall be at the
participant's direction at the time of exercise, or (d) at the discretion of the
Committee, by any combination of (a), (b) and (c) above. If the Committee
exercises its discretion to permit payment of the exercise price of an ISO by
means of the methods set forth in clauses (b), (c) or (d) of the preceding
sentence, such discretion shall be exercised in writing at the time of the grant
of the ISO in question. The holder of a Stock Right shall not have the rights of
a shareholder with respect to the shares covered by his Stock Right until the
date of issuance of a stock certificate to him for such shares. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
October 14, 1991, subject (with respect to the validation of ISOs granted under
the Plan) to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained prior to October 14, 1992, any grants of ISOs
under the Plan made prior to that date will be rescinded. The Plan shall expire
at the end of the day on October 14, 2001 (except as to Options outstanding on
that date). Subject to the provisions of paragraph 5 above, Stock Rights may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
materially increased (except by adjustment pursuant to paragraph 13); (b) the
provisions of paragraph 3 regarding eligibility for grants of ISOs may not be
modified; (c) the provisions of paragraph 6(B) regarding
9
the exercise price at which shares may be offered pursuant to ISOs may not be
modified (except by adjustment pursuant to paragraph 13); and (d) the expiration
date of the Plan may not be extended. Except as otherwise provided in this
paragraph 15, in no event may action of the Board or stockholders alter or
impair the rights of a grantee, without his consent, under any Stock Right
previously granted to him.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS.
The Committee, at the written request of any optionee, may in its discretion
take such actions as may be necessary to convert such optionee's ISOs (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such ISOs, regardless of whether the optionee is an employee of
the Company or a Related Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such ISOs. At the
time of such conversion, the Committee (with the consent of the optionee) may
impose such conditions on the exercise of the resulting Non-Qualified Options as
the Committee in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any optionee the right to have such optionee's ISOs converted into
Non-Qualified Options, and no such conversion shall occur until and unless the
Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any ISO that has not been exercised
at the time of such termination.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 20) or the vesting of restricted Common
Stock acquired on the exercise of a Stock Right hereunder, the Company, in
accordance with Section 3402(a) of the Code, may require the optionee, Award
recipient or purchaser to pay additional withholding taxes in respect of the
amount that is considered compensation includible in such person's gross income.
The Committee in its discretion may condition (i) the exercise of an Option,
(ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for
less than its fair market value, or (iv) the vesting of restricted Common Stock
acquired by exercising a Stock Right, on the grantee's payment of such
additional withholding taxes.
20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who
receives an ISO must agree to notify the Company in writing immediately after
the employee makes a Disqualifying Disposition of any Common Stock acquired
pursuant to the exercise of an ISO. A
10
Disqualifying Disposition is any disposition (including any sale) of such Common
Stock before the later of (a) two years after the date the employee was granted
the ISO, or (b) one year after the date the employee acquired Common Stock by
exercising the ISO. If the employee has died before such stock is sold, these
holding period requirements do not apply and no Disqualifying Disposition can
occur thereafter.
21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the State of Delaware, or the laws of any jurisdiction in which the Company
or its successors in interest may be organized. In construing this Plan, the
singular shall include the plural and the masculine gender shall include the
feminine and neuter, unless the context otherwise requires.
11
AMENDMENTS
BOARD STOCKHOLDER
APPROVAL DATE APPROVAL DATE AMENDMENT
December 9, 1996 January 30, 1997 Section 4: Change number of
shares authorized to be issued
under the Plan from 1,200,000
shares to 2,600,000 shares and
add the following paragraph:
No person may be
granted Options to acquire, in
the aggregate, more than
750,000 of shares of Common
Stock under the Plan during any
one fiscal year. If any Option
granted under the Plan shall
expire or terminate for any
reason without having been
exercised in full or shall
cease for any reason to be
exercisable in whole or in part
or shall be repurchased by the
Company, the shares subject to
such Option shall be included
in the determination of the
aggregate number of shares of
Common Stock deemed to have
been granted to such person
under the Plan.
DYNAGEN, INC.
Non-Qualified Stock Option Agreement
DYNAGEN, INC., a Delaware corporation (the "Company"), hereby grants
this 28th day of October, 1996, to Michael Sorell (the "Optionee"), an option to
purchase a maximum of 330,000 shares (the "Option Shares") of Common Stock, $.01
par value (the "Common Stock"), at the price of $1.31 per share, on the
following terms and conditions:
1. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This Option is
intended to be a Non-Qualified Option (rather than an incentive stock option),
and the Board of Directors or any committee appointed by the Board to administer
the Company's options (hereinafter, all references to the "Committee" mean the
committee so appointed or the Board if no such committee has been appointed)
intends to take appropriate action, if necessary, to achieve this result. This
Option is in addition to any other options heretofore or hereafter granted to
the Optionee by the Company, but a duplicate original of this instrument shall
not affect the grant of another option.
2. EXTENT OF OPTION IF BUSINESS RELATIONSHIP CONTINUES. If the Optionee
has continued to serve the Company in the capacity of an employee, officer,
director, agent, advisor, or consultant (such service is described herein as
maintaining or being involved in a "Business Relationship" with the Company), on
the following dates, the Optionee may exercise this Option for the number of
Option Shares set opposite the applicable date:
Less than one year from the date hereof - No shares
One year but less than two years from - 25% of the Option Shares
the date hereof
Two years but less than three years from - An additional 35% of the
the date hereof Option Shares
Three years from the date hereof - An additional 40% of the
Option Shares
The foregoing rights are cumulative and, while the Optionee continues to
maintain a Business Relationship with the Company, may be exercised up to and
including the date which is seven (7) years from the date this Option is
granted. All of the foregoing rights are subject to Sections 3 and 4, as
appropriate, if the Optionee ceases to maintain a Business Relationship with the
Company or dies, becomes disabled or undergoes dissolution while involved in a
Business Relationship with the Company.
3. TERMINATION OF BUSINESS RELATIONSHIP. If the Optionee ceases to
maintain a Business Relationship with the Company, other than by reason of death
or disability as defined
in Section 4, no further installments of this Option shall become exercisable
and this Option shall terminate after the passage of thirty (30) days from the
date the Business Relationship ceases, but in no event later than the scheduled
expiration date. In such a case, the Optionee's only rights hereunder shall be
those which are properly exercised before the termination of this Option.
4. DEATH; DISABILITY. If the Optionee dies while involved in a Business
Relationship with the Company, this Option may be exercised, to the extent of
the number of Option Shares with respect to which the Optionee could have
exercised it on the date of his death, by his estate, personal representative or
beneficiary to whom this Option has been assigned pursuant to Section 9, at any
time within 180 days after the date of death, but not later than the scheduled
expiration date. If the Optionee's Business Relationship with the Company is
terminated by reason of disability, this Option may be exercised, to the extent
of the number of Option Shares with respect to which the Optionee could have
exercised it on the date the Business Relationship was terminated, at any time
within 180 days after the date of such termination, but not later than the
scheduled expiration date. At the expiration of such 180-day period or the
scheduled expiration date, whichever is the earlier, this Option shall terminate
and the only rights hereunder shall be those as to which the Option was properly
exercised before such termination. If the Optionee is a corporation,
partnership, trust or other entity that is dissolved, liquidated, becomes
insolvent or enters into a merger or acquisition with respect to which such
Optionee is not the surviving entity at the time when such entity is involved in
a Business Relationship with the Company, this Option shall immediately
terminate as of the date of such event, and the only rights hereunder shall be
those as to which this Option shall immediately terminate as of the date of such
event, and the only rights hereunder shall be those as to which this Option was
properly exercised before such dissolution or other event.
5. PARTIAL EXERCISE. Exercise of this Option up to the extent above
stated may be made in part at any time and from time to time within the above
limits, except that this Option may not be exercised for a fraction of a share
unless such exercise is with respect to the final installment of stock subject
to this Option and a fractional share (or cash in lieu thereof) must be issued
to permit the Optionee to exercise completely such final installment. Any
fractional share with respect to which an installment of this Option cannot be
exercised because of the limitation contained in the preceding sentence shall
remain subject to this Option and shall be available for later purchase by the
Optionee in accordance with the terms hereof.
6. PAYMENT OF PRICE. The option exercise price is payable in United
States dollars and may be paid:
(a) in cash or by check, or any combination of the foregoing,
equal in amount to the option exercise price; or
(b) in the discretion of the Committee, in cash, by check, by
delivery of shares of the Company's Common Stock having a fair market value (as
determined by the Committee) equal as of the date of exercise to the option
exercise price, or by any combination of the foregoing, equal in amount to the
option exercise price.
-2-
If the Optionee delivers shares of Common Stock held by the Optionee
(the "Old Stock") to the Company in full or partial payment of the option
exercise price, and the Old Stock so delivered is subject to restrictions or
limitations imposed by agreement between the Optionee and the Company, the
Common Stock received by the Optionee on the exercise of this Option shall be
subject to all restrictions and limitations applicable to the Old Stock to the
extent that the Optionee paid for such Common Stock by delivery of Old Stock, in
addition to any restrictions or limitations imposed by this Agreement.
7. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option,
the Optionee agrees that a purchase of Option Shares under this Option will not
be made with a view of their distribution, as that term is used in the
Securities Act of 1993, as amended (the "Securities Act"), unless in the opinion
of counsel to the Company such distribution is in compliance with or exempt from
the registration and prospectus requirements of the Securities Act and
applicable state securities laws, and the Optionee agrees to sign a certificate
to such effect at the time of exercising this Option and agrees that the
certificate for the Option Shares so purchased shall be inscribed with a legend
to ensure compliance with the Securities Act and applicable state securities
laws.
8. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, this Option may be exercised by written notice to the Company,
at the principal executive office of the Company, or to such transfer agent as
the Company shall designate. Such notice shall state the election to exercise
this Option and the number of Option Shares in respect of which it is being
exercised and shall be signed by the person so exercising this Option. Such
notice shall be accompanied by payment of the full exercise price of such Option
Shares, and the Company shall deliver a certificate representing such Option
Shares as soon as practicable after the notice shall be received. The
certificate for the Option Shares as to which this Option shall have been so
exercised shall be registered in the name of the person so exercising this
Option (or, if this Option shall be exercised by the Optionee and if the
Optionee shall so request in the notice exercising this Option, shall be
registered in the name of the Optionee and another person jointly, with right of
survivorship) and shall be delivered as provided above to or upon the written
order of the person exercising this Option. In the event this Option shall be
exercised, pursuant to Section 4 hereof, by any person other than the Optionee,
such notice shall be accompanied by appropriate proof of the right of such
person to exercise this Option. All Option Shares that shall be purchased upon
the exercise of this Option as provided herein shall be fully paid and
nonassessable.
9. OPTION NOT TRANSFERABLE. This Option is not transferable or
assignable except by will, by the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined in the Internal Revenue Code
of 1986, as amended, or Title I of the Employee Retirement Income Security Act,
or the rules thereunder.
10. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
Option imposes no obligation on the Optionee to exercise it.
-3-
11. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. The Company and
any related corporations are not by this Option obligated in any manner to
continue to maintain a Business Relationship with the Optionee in any capacity
whatsoever.
12. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Optionee shall have no
rights as a stockholder with respect to Option Shares subject to this Agreement
until a stock certificate therefore has been issued to the Optionee and is fully
paid for by the Optionee.
13. ADJUSTMENTS. Upon the occurrence of any of the following events,
the Optionee's rights with respect to this Option shall be adjusted as follows:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number
of shares or if the Company shall issue any shares of Common Stock as a
stock dividend on its outstanding Common Stock, the Option Shares shall
be appropriately increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share
to reflect such subdivision, combination or stock dividend.
B. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than an
Acquisition as defined in Section 16) pursuant to which securities of
the Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, the Optionee upon exercising this
Option shall be entitled to receive for the purchase price paid upon
such exercise the securities he would have received if he had exercised
the Option prior to such recapitalization or reorganization.
C. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, this Option shall terminate
immediately prior to the consummation of such proposed action or at
such other time and subject to such other conditions as shall be
determined by the Committee.
D. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect,
and no adjustment by reason thereof shall be made with respect to, the
number of price of shares subject to this Option. No adjustments shall
be made for dividends paid cash or in property other than securities of
the Company.
E. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. In the event of
any stock dividend, stock split, combination, recapitalization or other
similar change in the capital structure of the Company, this Option and
the Option price shall be equitably adjusted and, in lieu of issuing
fractional shares upon exercise thereof, this Option (and the
corresponding Option Shares) shall be rounded upward or downward to the
nearest whole share (rounding upward for all amounts equal to or in
excess of .51). In particular, without affecting the generality of the
foregoing, it is understood that for the purposes of Sections 2 through
4 hereof, inclusive, maintaining or being involved in a Business
-4-
Relationship with the Company includes maintaining or being involved in
a Business Relationship with its parent (if any) and any present or
future subsidiaries of the Company.
14. WITHHOLDING TAXES. The Optionee hereby agrees that the Company may
withhold from the Optionee's wages or other remuneration the appropriate amount
of federal, state and local taxes attributable to the Optionee's exercise of any
installment of this Option. At the Company's discretion, the amount required to
be withheld may be withheld in cash from such wages or other remuneration, or in
kind from the Common Stock otherwise deliverable to the Optionee on exercise of
this Option. The Optionee further agrees that, if the Company does not withhold
an amount from the Optionee's wages or other remuneration sufficient to satisfy
the Company's withholding obligation, the Optionee will reimburse the Company on
demand, in cash, for the amount underwithheld.
15. NO EXERCISE OF OPTION IF BUSINESS RELATIONSHIP TERMINATED FOR
MISCONDUCT. If the Business Relationship of the Optionee is terminated for
"Misconduct," this Option shall terminate on the date of such termination and
this Option shall thereupon not be exercisable to any extent whatsoever.
"Misconduct" is conduct, as determined by the Board of Directors, involving one
or more of the following: (i) disloyalty, gross negligence, dishonesty or breach
of fiduciary duty to the Company; or (ii) the commission of an act of
embezzlement, fraud or deliberate disregard of the rules or policies of the
Company which results in loss, damage or injury to the Company; or (iii) the
unauthorized disclosure of any trade secret or confidential information of the
Company; or (iv) the commission of an act which constitutes unfair competition
with the Company or which induces any customer of the Company to break a
contract with the Company. In making such determination, the Board of Directors
shall act fairly and in utmost good faith.
16. ACCELERATION AND VESTING OF OPTION FOR BUSINESS COMBINATIONS. If
the Company is to be consolidated with or acquired by another entity in a
merger, sale of all or substantially all of the Company's assets or otherwise
(an "Acquisition"), then this Option shall, if the Committee so designates,
become fully vested and exercisable by the Optionee immediately prior to the
consummation of such Acquisition.
17. GOVERNING LAW; SUCCESSORS AND ASSIGNS. This Agreement shall be
governed by and interpreted in accordance with the internal laws of the State of
Delaware and shall be binding upon the heirs, personal representatives,
executors, administrators, successors and assigns of the parties.
18. EXPRESS CONSIDERATION FOR OPTION GRANT. This Option is being
granted to the Optionee on the express condition and for the express
consideration that the Optionee has previously executed, or will immediately
execute and deliver in connection with this Option grant, a form of
nondisclosure, assignment of inventions and/or noncompetition agreement (or any
combination thereof) satisfactory to the Company. If such agreement has not been
executed, or if the Optionee refuses to execute such agreement, this Option may
be canceled by the Company in its sole and absolute discretion.
-5-
19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof.
-6-
IN WITNESS WHEREOF, the Company and the Optionee have caused this
instrument to be executed, and the Optionee whose signature appears below
acknowledges acceptance of an original copy of this Agreement.
/s/ Michael Sorell
_____________________________ DYNAGEN, INC.
SIGNATURE OF OPTIONEE
Michael Sorell /s/ Indu A. Muni
_____________________________ By:_____________________________
Print Name of Optionee
President
_____________________________ Title: ___________________________
Street Address
- -----------------------------
City State Zip Code
- -----------------------------
Social Security Number
-7-
EXHIBIT 21
----------
SUBSIDIARY OF THE COMPANY
NAME JURISDICTION
---- ------------
Able Laboratories, Inc. Delaware
EXHIBIT 23a
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Number
33-66826 (dated August 2, 1993 on Form S-8 ), Number 33-78546 (dated May 2, 1994
on Form S-8), Number 33-71416 (Post-Effective Amendment No.3 to Form S-1 on Form
S-3 dated May 16, 1995), Number 33-95432 (dated August 4, 1995 on Form S-8),
Number 333-1748 (dated March 28, 1996 on Form S-3) and Number 333-19471 (dated
January 9, 1997 on Form S-3) of DynaGen, Inc. of our report dated February 14,
1997, except for Note 14 as to which the date is March 7, 1997, appearing in
DynaGen, Inc.'s Transition Report on Form 10-K for the six months ended December
31, 1996.
WOLF & COMPANY, P.C.
Boston, Massachusetts
April 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 2,112,300
<SECURITIES> 3,004,700
<RECEIVABLES> 261,932
<ALLOWANCES> 0
<INVENTORY> 451,883
<CURRENT-ASSETS> 6,311,428
<PP&E> 1,011,782
<DEPRECIATION> (337,813)
<TOTAL-ASSETS> 7,463,149
<CURRENT-LIABILITIES> 809,133
<BONDS> 1,600,000
0
0
<COMMON> 291,062
<OTHER-SE> 4,762,954
<TOTAL-LIABILITY-AND-EQUITY> 7,463,149
<SALES> 358,467
<TOTAL-REVENUES> 359,908
<CGS> 356,312
<TOTAL-COSTS> 4,687,745
<OTHER-EXPENSES> (157,788)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,091
<INCOME-PRETAX> (4,306,140)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,306,140)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,306,140)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
